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Subject : Financial Services

Unit – I

S.No Question Answer

1. A merchant banking is in the control of

a) Financial system b. RBI. C) Finance Ministry d. BSE
2. Short Term funds are trade in A
a) Money market b) capital market c) IDBI. D) UTI.
3 In capital market the ____ term funds are trade B
a) Short b) long c) medium term fund d) all funds
4 Which of the following is not a regulatory institution in Indian financial
system? B
5 ___________ allocates saving efficiently in an economy to ultimate users
either for investment in real assets or for consumption C
a. Economic system b. Banking system
c. Financial system d. Market system
CO16 National Housing bank is a fully owned subsidiary of —————. C
7 —————Committee was constituted by SEBI for deciding about
derivatives trading. A
a. L.C.Gupta b. R. L. Gupta c. Vaghul d. Malhotra
8 Development banks are institutions which _____.
A. give development loans B. provide emergency loans of banks B
C. are subsidiaries of RBI D. provide term finance to industries
9 RBI is the lender of last resort for —————. D
a. Central Government b. State Governments

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Subject : Financial Services

c. Stock markets d. Commercial Banks

10 The market regulator of Indian Capital Market is …………… C
a. DFHI b. RBI c. SEBI d. STCI
11 …………………… facilitate the transfer of funds from savers to the
borrowers. C
a. goods market b. money market
c. financial market d. consumer market
12 ……………………… market is a market for old issues.
a. Money marketb. Primary market C
c. Secondary marketd. All the above
13 SEBI was established in _____. B
A. 1990 B. 1988 C. 1992 D. 1993
14 Merchant banking deals with underwriting A
a) Yes b) No
15 ..................... acts as an intermediary between Govt. and money market A
a. RBI b. SEBI c. Commercial banks d. All the above
16 The bill which doesn’t require acceptance is called..................... A
a. Treasury bills b. supply bill c. bill of lading d. documentary bill
17 ..................... are short term deposits of specific maturity similar to fixed
deposits. D
a. Commercial paper b. Interbank participation certificate
c. Repo d. Certificate of deposit
18 A bill of exchange is drawn for a maximum period of ____. C
A. 90 days. B. 120 days. C. 180 days. D. 360 days.
19 ..................... is an unsecured short term promissory note issued by A
creditworthy companies?

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Subject : Financial Services

a. Commercial paper b. Interbank participation certificate

c. Repod. Certificate of deposit
20 Which of the following is a cash asset?
a. deposit created out of loans b. share A
c. bond d. Post office certificate.

Unit – II

S.No Question

21. Discount and Finance House of India was set up in....................

a. 1982 b. 1988 c. 1992 d. 1969
22. In ----------leasing, the risk of obsolescence is assumed by the lessee
a. Financial lease b. Operating lease A
c. Both the above d. None the above
23 ----------- is a tripartite lease arrangement
a. Financial lease b. Operating lease C
c. Leverage lease d. Sale and lease back
24 In hire purchase depreciation can be claimed by the _________
a. Hirer b. Vendor c. Financiers d. All of these
25 Which of the following is not a fee‐based financial service? B
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Subject : Financial Services

(a) Corporate counselling (b) Lease financing (c) Profit management (d) Issue
26 I _______ leasing, the risk obsolescence is assumed by the lessee A
a) Financial Lease b)Operating Lease
c) Both the above d) None of the above
27 ___________ is the regulator of mutual funds in India. B
28 __________ is a tripartite lease arrangement.
a) Financial Lease b)Operating Lease C
c) Both the above d) None of the above
29 In hire purchase depreciation can be claimed by the ________ A
a) Hirer b)Financiers c)Vendor d) All of these
30 Installment system is governed by ________.
A. Hire Purchase Act. B. Sale of Goods Act. B
C. Installment Act. D. Properties Registration Act.
31 In which case ownership is immediately transferred in favour of user / purchaser C
a) Lease b) Higher Purchases c) Instalment Sale d)None of these
32 Cash price plus interest is ________.
A. installment price. B. hire purchase price. B
C. maximum retail price.D. retail price
33 The advance amount under hire purchase system is called ________. D
A. cash price. B. retail price. C. interest. D. down payment.
34 Under hire purchase system, each installment is treated as ________.
A. interest . B. cash price. C. hire charges. D. advance.
35 Which of the following is a fee based service _________ C
a. hire purchase b. Leasing c. capital issue management d.

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Subject : Financial Services


36 Hire purchase system is governed by ________. A

A. Hire Purchase Act 1972. B. Hire Purchase Act 1973.
C. Hire Purchase Act 1974. D. Hire Purchase Act 1975.
37 Under hire purchase system the buyer is called ________. B
A. buyer. B. hirer. C. hire vendor. D. debtor.
38 Under hire purchase system the seller is called ________. B
A. buyer. B. hirer. C. hire vendor. D. debtor.
39 Under instalment system the relationship between the buyer and seller is that of a
________. A. buyer and seller. B. bailor and bailee. C. pawner and pawnee. D. D
debtor and creditor.

40 Under hire purchase system, the risk of loss is borne by ________

A. buyer. B. hirer. C. hire vendor. D. debtor

Unit – III

S.No Question

41. Money Market mutual fund is also known as---------------

a. Growth fund b. Balanced fund c. Income fund d. Cash fundc

42. The idea of providing factoring services in India was first thought by ———
a. Vaghul committee b. Malhotra Committee A
c. Tanden Committee d. None of these
43. The market for extremely short period loan is called __________ A

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Subject : Financial Services

a. Call loan market b. short notice market

c. treasury bill market d. commercial bill market
44. ---------- is also known as ‘Industrial Paper”
a. Treasury bills b. Commercial bills D
c. Financial accommodation bills d. Commercial paper
45. --------- variety of mutual fund is known as “Nest Eggs”
a. Balanced Funds b. Fund of funds B
c. Money Market Mutual fund d. Growth oriented funds
46. Generally mutual funds are of ________ C
a. High risk b. Risk free c. Low risk d. Any of the above
47. The corpus of funds and its duration is fixed in case of ------- fund C
a. Open ended b. Balanced c. Close ended d. Income fund
48. ----------- is the regulator of mutual funds in India D
a. RBI b. IRDA c. SEBI d. Both SEBI and GOI
49. Generally mutual funds are _____________ C
a) High Risk b)Risk Free c) Low Risk d) Any of the above.
50. The Corpus of funds and its duration is fixed in case of ______ fund. C
a) Open ended b)Balanced c)Close ended d)Income Fund

51. ___________ is a financial service which pooling risks of people

a) Mutual Fund c)Insurance C
b) Venture Capital d) All of these
52. SEBI was established in _____________ A
a) 1988 b) 1991 c) 1985 d) 1990
53. RBI Started functioning on ___________ A
a) 1-4-1935 b) 1-4-1882 c) 1-4-1948 d) 1-4-1945

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Subject : Financial Services

54. SEBI stands for _________

(a) Securities & Exchange Board Institute
(b) Securities & Exchanges Board of India B
(c) Securities & Exchange Board of India
(d) Securities & Exchanges Board of Institute
55. If a scheme issues more units, its NAV will __________ A
(a) Have no impact (b) Fall (c) Rise (d) Can’t say
56. The investment in mutual fund portfolio are valued at _______
a) Face value of portfolio c) Cost of Investment C
b) Market value of Portfolio d) Book value of portfolio
57. A high turnover in a stock is an indicator of which of the following
_________ B
a. Higher price b. Higher liquidity c. Lower volatility d. Lower returns
58. A nomination made in a mutual fund folio __________
a. Can be changed by the PoAb. Cannot be cancelled D
c. Can be cancelled by the first holder in a jointly held account
d. Can be changed by all the holders signing for the change
59. The proportion of a public issue of shares allocated to various categories of A
investors is decided by ___________
a. SEBI b. Issuer c. Stock exchange d. Registrar and Transfer agent
60 The difference between total assets minus liabilities is ________. A
A. Net assets. B. Gross assets. C. Net liabilities. D. Gross liabilities

Unit – IV

S.No Question

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Subject : Financial Services

61. ------ is the venture capital assistance at the stage where the project started to
fetch profit but not reached in its full efficiency B
a. Start up capital b. Mezzanine capital
c. Bridge capital d. Seed capital
62. Which of the following is not a quantitative credit control tool of RBI?
a. Bank rate
b. Open market operation D
c. SLR
d. Margin requirements
63. Which of the following is a selective (qualitative) credit control method?
a. Bank rate b. Open market operation D
c. Variable reserve ratio d. Credit rationing
64. The term ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ refers financial investment in a highly risky and
growth oriented venture with the objective of earning a high rate of return. A
(a)Venture capital (b) Merchant banking (c) Leasing (d) none of these.
65. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ is a road towards a high growth economy. A
(a)Venture capital (b) Merchant banking (c) Leasing (d) None of these
66. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ act as an intermediary to link up the sources of ideas and the sources
of fund. A
(a)Venture capital (b) Merchant banking (c) Leasing (d) None of these.
67. V C Fs of specialized financial institution promoted by ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ A
(a) Central government (b) RBI (c) state government (d) None of these
68. Off shore VCFs are promoted by ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ & financial institution. A
(a) Foreign banks (b)Private banks (c) State banks (d) None of these.
69 High risk is an outstanding feature of ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐. B
(a) Mutual fund (b) venture capital (c) Debenture finance (d) govt. bonds.
70. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐ is needed for developing a product in the initial stages. A
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Subject : Financial Services

(a) Seed capital (b) Startup capital (c) Second round financing (d) None
of these.
71. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ Capital is needed for product development and initial
marketing. B
(a) Seed capital (b) Startup capital (c) first round financing (d) None of
72. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐ provided at a stage when product has been launched in the market B
but has not earned enough profits to meet future capital needs.
(a) first round financing (b) Second round financing
(c) Startup capital (d) None of these.
73. ‐‐‐‐‐‐‐‐‐‐‐‐‐ Capital is provided for early manufacturing and marketing
expense. C
(a) Startup capital (b) seed capital
(c) first round financing (d) Second round financing
74. ‐‐‐‐‐‐‐ Stage is called fledging stage.
(a) ) first round financing (b) Second round financing (c) Startup capital (d) B
None of these.
75. Venture capital organized in ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐. D
(a) 1995 (b) 1954 (c) 1952 (d) 1950.
76. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ is used to estimate the value of venture capital investment.
(a) Revenue multiplier (b) Dual structuring (c) first chieago method A
(d) None of these.
77. The purpose of valuation is to assess the profitability & ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ of the
venture. (a) Accessibility (b) Marketability (c) Viability (d) None of C
78. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐ types of valuation method can be adopted by VCFs. C
(a) 1 (b) 2 (c) 3 (d)4.
79. ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ is a combination of conventional and conditional loans. A
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Subject : Financial Services

(a) Income notes (b) Debt instrument (c) Equity instrument (d) None of
80. ‐‐‐‐‐‐‐‐‐ refers to transfer of management control. B
(a)Bridging (b) Buyout (c) Buyin (d) None of these

Unit – V

S.No Question

81. Merger means _______

a) Amalgamation b) Absorption D
b) Forming new company d)All these points
82. Amalgamation means _______
a) Absorption b) Forming New company B
c) Both are ok d) Both are not ok
83. Horizontal merger means ________
a) Merging with competing company
b) Merging two different company A
c) Two company with various products range
d) None of the above
84. Vertical Merger ponds _________
a) Backward Integration b) Forward Integration D
c) Both are not correct d) Both are correct
85. Demerger means ________
a) Segration of business entity
b) Merging of business entity A
c) Both are correct
d) Bothe are not correct

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Subject : Financial Services

86. During Reverse merger company having _________ A

a) Opportunity to become Public Limited company
b) Opportunity to become Private limited company
c) Opportunity to become partnership firm
d) Opportunity to become Proprietary company
87. Take over or Acquisition may be _________
a) Friendly
b) Hostile C
c) Both are correct
d) Non of these
88. Differential managerial efficiency theory helps to improve the admin capacity
of the another company. A
a) True b) False
89. Disinvestment means ________
a) Liquidating the asset b) Acquiring the asset A
b) Merging assets d) Demerging the assets
90. Reduction of average cost with increasing in volume or production is called
_________ A
a) Economies of Scale c) Economies of scope
b) Financial Synergy d) Non of the above
91. Conglomerative merger happens between the firms involving the _____
a) Similar activities of Business c) Unrelated activities of Business C
b) Partially related activities of Business d) None of the above
92. Initiation for amalgamation generally starts from a third person. A
a) True b) False
93. During Merger a new company must be formed _______ B
a) True b) False
94. Process of acquiring the majority of shares of public company by a private B

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Subject : Financial Services

company with its name is called ________

b) De merger b) Reverse merger
c) Amalgamation d) Take over
95 The ratio in which an acquiring company will offer its own status in exchange
for the Target Company shares during merger and Amalgamation
___________ B
a) Quick ratio b) Liquidity ratio
b) Swap ratio d) None of the above
96. Validity of Observation letter or No Objective letter of stock exchange shall
be _________
a) 1 Year c) 6 Months
b) 3 Months d) 1 Month
97. Every person who holds more than 10% shares or voting rights in any
company shall writing ___________ days
a) 30 days c) 21 days
b) 14 days d) 7 days
98. The regulatory framework of Merger and Amalgamation covers The company
act of year ________ B
a) 1956 c) 1961
b) 2013 d)2002
99. The regulatory framework of Merger and Amalgamation covers The company
act of year ___________ C
a) 1956 c) 1961
b) 2013 d) 2002
100. The regulatory framework of Merger and Amalgamation covers SEBI
Regulations act of year _________
a) 2015 c) 1961 A
b) 2013 d) 2002

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Subject : Financial Services

PART – B (6 Marks)
(Minimum 10 Question from Each unit, no maximum limit)
Unit – I

S.No Questions

1. What is a financial system?

A 'financial system' is a system that allows the exchange of funds between lenders,
investors, and borrowers. Financial systems operate at national and global levels. They
consist of complex, closely related services, markets, and institutions intended to provide
an efficient and regular linkage between investors and depositors

2. What are the Characteristics of Financial Services :

1. Intangibility :The basic characteristics of financial services are that they are
intangible in nature. For financial services to be successfully created and marketed, the
institutions providing them must have a good image and enjoy the confidence of their

2. Customer Orientation : The institutions providing financial services study the needs
of the customers in detail. Based on the results of the study, they come out with
innovative financial strategies that give due regard to costs, liquidity, and maturity
considerations for various financial products and services. This way, financial services
are customer oriented.

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Subject : Financial Services

3. Inseparability : The functions of production and supply of financial services have to

be carried out simultaneously. This cause for a project understanding between the
financial services firms and their clients.

4. Perishability : Financial Services have to be created and delivered to the target

clients instantaneously. They cannot be started. They have to be supplied according to
the requirements of customers. Hence it is imperative that the providers of financial
services ensure a match between demand and supply.

3 Explain the features of financial services market.

Answer:The market for the exchange of financial services products and instruments
through a wide variety of players, each one offerings a unique type of service, may be
designated as the ‘financial services market’.

1. Market Players : Financial Services are offered by a host of institutions and agencies
that understand and meet the requirements of a wide spectrum of customers. The players
include banks, financial institutions, mutual funds, merchant bankers, stock brokers,
consultants, underwriters, market makers, corporate bodies, FIIS, custodians, vendute
capital funds etc.

2. Instruments : Financial Instruments constitute an important part of the financial

services market. The instruments include equity instruments, debt instruments, hybrid
and exotic instruments. It is characteristic of a financial services market that a number of
innovative instruments, such as zero-coupons bonds, etc. are floated on a continuous
basis. The purpose is to keep the financial markets vibrant.

3. Specialized Institutions : A financial services market is characterized by the

dynamic presence of specialized institutions. These include acceptance house, discount

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Subject : Financial Services

houses, factors, depositories, credit rating agencies, venture capital institutions, etc

4. Regulatory Bodies : The financial service market is regulated by a host of institutions

and agencies. The regulatory bodies include the department of banking and insurance of
the Central Government, Reserve Bank of India, Securities and the exchange board of
India, board of industrial and financial reconstruction, etc.

4 Write a short notes on recent developments in Merchant Banking?

Answer:The recent developments in Merchant banking are due to certain contributory
factors in India. They are
 The Merchant Banking was at its best during 1985-1992 being when there were
 Many new issues. It is expected that 2010 that it is going to be party time for
 Merchant banks, as many new issues are coming up.
 The foreign investors – both in the form of portfolio investment and through foreign
 Direct investments are venturing in Indian Economy. It is increasing the scope of
 Merchant bankers in many ways.
 Disinvestment in the government sector in the country gives a big scope to the
 Merchant banks to function as consultants.
 New financial instruments are introduced in the market time and again.
 Provides more and more opportunity to the merchant banks.

5 What is mean by Merchant Banking?

Merchant Banking : A merchant banker is one who underwrites corporate securities and
advise clients on issues like corporate mergers. The merchant banker may be in the form
of a bank, a company firm (or) even a proprietary concern. It is basically service banking
which provides nonfinancial services such as arranging for funds rather than providing
them. The merchant banker understands the requirements of the business concern and
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Subject : Financial Services

arranges finances with the help of financial institutions, banks, stock exchanges and
6 List out the Importance of Capital Market?

It is only with the help of capital market, long-term funds are raised by the business
It provides opportunity for the public to invest their savings in attractive securities
which provide a higher return.
A well developed capital market is capable of attracting funds even from foreign
country. Thus, foreign capital flows into the country through foreign investments capital
market provides and opportunity for the investing public to know the trend of different
securities and the conditions prevailing in the economy.
It enables the country to achieve economic growth as capital formation is promoted
through the capital market.
Existing companies, because of their performance will be able expand their industries
and also go in for diversification of their activities due to the capital market.
Capital market is the barouceter of the economy by which you are able to study the
economic conditions of the country and it enables the government to take suitable action

Write a short notes on Classification of capital Market
A.Gilt-edge Market:- The gilt-edge market refers to government securities. They are
called gilt-edged because the documents will have yellow border on the sides, so that
they can be distinguished as government securities. These are preferred as they are
guaranteed by the government, both for the principal and interest. It is called sovereign
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Subject : Financial Services

b. Industrial Security Market:-This refers to the securities of the companies consisting

of shares and debentures of old and new companies. The industrial security market is
divided into new issue market and old capital market. (1) Primary market and (2)
secondary market. A primary market is one in which new securities are offered to the
investing public for the first time. Hence it is also called new issue market.
8 Who is a merchant banker?
Merchant banker means any person who is engaged in th e business of issue
management either by making arrangements regarding selling, buying or subscribing to
securities as manager -consultant, advisor or rendering corporate advisory services in
relation to such issue management.

9 Explain the Functions of Money Market.


Money market performs the following functions:

1. Facilitating adjustment of liquidity position of commercial banks, business

undertakings and other non-banking financial institutions.
2. Enabling the central bank to influence and regulate liquidity in the economy
through its intervention in the market.
3. Providing a reasonable access to users of short term funds to meet their
requirements quickly at reasonable costs.
4. Providing short term funds to govt. institutions.
5. Enabling businessmen to invest their temporary surplus funds for short period.
6. Facilitating flow of funds to the most important uses.
7. Serving as a coordinator between borrowers and lender of short term funds.

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Subject : Financial Services

8. Helping in promoting liquidity and safety of financial assets.

10 List out the participants in Foreign Exchange Markets?

List out the participants in Foreign Exchange Markets?
i)Corporates (ii) Commercial banks (iii) Exchange brokers (iv) Central banks
i) Corporates: The business houses, international investors, and
multinational corporations may operate in the market to meet their
genuine trade or investment requirements.
ii) Commercial Banks are the major players in the market. They buy and
sell currencies for their clients. They may also operate on their own.
Exchange brokers facilitate deal between banks. In the absence of exchange brokers,
banks have to contact each other for quotes. If there are 150 banks at a centre, for
obtaining the best quote for a single currency, a dealer may have to contact 149 banks.

Unit – II

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Subject : Financial Services

S.No Questions

11. Define hire purchase and discuss its features.

Answer:Hire purchase is a method of selling goods. In a hire purchase
transaction the goods are let out on hire by a finance company(creditor) to the hire
purchase customer(hirer). The buyer is required to pay an agreed amount in periodical
installments during a given period. The ownership of the property remains with creditor
and passes on to hirer on the payment of last installment.
Features of Hire Purchase Agreement
1. Under hire purchase system, the buyer takes possession of goods immediately and
agrees to pay the total hire purchase price in installments.
2. Each installment is treated as hire charges.
3. The ownership of the goods passes on the hirer on the payment of last installment.
4. In case the buyer makes any default in the payment of any installment the seller has
right to repossess the goods from the buyer and forfeit the amount already received
treating it as hire charge.
5. The hirer has the right to terminate the agreement any time before the property passes.
He has the option to return the goods in which case he need not pay installments falling
due thereafter. However, he can not recover the sums already paid as such sums legally
represent hire charge on the goods in question.
12. Describe the problem of leasing.
Answer:Leasing has great potential in India. However, leasing in India faces serious
handicaps which may mar its growth in future. The following are some of the problem :
1. Unhealthy Competition
The market for leasing has not grown with the same pace as the number of lessors. As a
result, there is over supply of lessors leading to competition. With the leasing business
becoming more competitive, the margin of profit for lessors has dropped from four to
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Subject : Financial Services

five per cent to the present 2.5 to 3 per cent. Bank subsidiaries and financial institutions
have the competitive edge over the private sector concerns because of cheap source of
2. Lack of Qualified Personnel
Leasing requires qualified and experienced people at the helm of its affairs. Leasing is a
specialised business and persons constituting its top management should have expertise
in accounting, finance, legal and decision areas. In India, the concept of leasing business
is of recent one and hence it is difficult to get right man to deal with leasing business. On
account of this, operations of leasing business are bound to suffer.
3. Tax Considerations
Most people believe that lessees prefer leasing because of the tax benefits it offers. In
reality, it only transfers, the benefit i.e. the lessee's tax shelter is lessor's burden. The
lease becomes economically viable only when the transfer's effective tax rate is low. In
addition, taxes like sales tax, wealth tax, additional tax, surcharge etc. add to the cost of
leasing. Thus leasing becomes more expensive from of financing than conventional
mode of finance such as hire purchase.
4. Stamp Duty
The States treat a leasing transaction as a sale for the purpose of making them eligible to
sales tax. On the contrary, for stamp duty, the transaction is treated as a pure lease
transaction. Accordingly a heavy stamp duty is levid on lease documents. This adds to
the burden of leasing industry.
5. Delayed Payment and Bad Debts
The problem of delayed payment of rents and bad debts add to the costs of lease. The
lessor does not take into consideration this aspect while fixing the rentals at the time of
lease agreement. These problems would disturb prospects of leasing business.
13. What are the concepts of Hire Purchase?

Answer:Purchase and sale of goods under a hire purchase system is different from cash
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Subject : Financial Services

sale and credit sale. In case of cash sale, the buyer pays the lump sum to the seller and
immediately ownership is passed along with the goods. While in credit sale the payment
is made in future. In these both cases the ownership and possession of goods pass on the
buyer. However, hire purchase system is a special system of purchase and sale.
In hire purchase system, the buyer acquires the property by promising to pay necessary
instalment payment of monthly, quarterly, half yearly or any other period. The period of
payment has to be fixed while, signing the hire sell agreement. Though, the buyer
acquires the asset under hire purchase system after signing the agreement, the title of
ownership remains with vendor until the buyer squares up his/her entire liability. When
the buyer pays the final instalment and any other obligation according to hire purchase
agreement, only then the title of ownership of the goods would be transferred to hirer. If
the hirer makes default in the payment of any instalment, the hire vendor has the right to
re-possess the goods. When the vendor re-possesses the goods due to the default of
payment of instalment, in this case the amount already paid so far by the hirer will be
14 Define Leasing.
Answer:It is a contract by which one party conveys land, property, services etc.,
to another for a specified time.
Definitions: The Transfer of Property Act, 1882 (as amended in 1952) describes Lease
as follows ―A Lease of the movable property is a transfer of a right to enjoy such
property, made for a certain time, express of implied, or in perpetuity, inconsideration of
a price paid or promised or of money, a share of crops, service or any other things of
value, to be rendered periodically or on specified occasions to the transferor by the
transferee, who accepts the transfer on such terms.
 The transferor is called the Lessor
 The transferee is called the Lessee.
 The price is called the Premium

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Subject : Financial Services

 The money, share, service or other thing to be rendered is called the Rent.
15 Describe the procedure for leasing.
Answer:A contract of lease provides a person an opportunity to use an asset which
belongs to another person. The following steps are involved in a leasing transaction:
➢The lessee identifies the need for the equipment and selects the supplier.
➢The lessee approaches a leasing company or Lessor to lease the equipment needed.
➢The lessee has to furnish the following information:
➢ Name and address of lessee
➢ Details about his business
➢ Name and address of guarantor, if any
➢ Description of the equipment
➢ Name and address of the supplier and the quoted price
➢ Place of installation
➢ Duration of the lease.
16 Write the entities of Direct Lease.
Answer:In direct lease, the lessee and the owner of the equipment are two different
entities. A direct lease can be of two types:
 Bipartite and
 Tripartite Lease
Bipartite Lease:
There are two parties to the transaction,
1. Equipment supplier cum lessor
2. The lessee.
It functions like an operating lease with built-in facilities like up gradation of the
equipment’s called as Upgrade Lease. The lessor undertakes to maintain the equipment
and even replaces the equipment that is in need of major repair with the similar
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functioning equipment called as Swap Lease‖.

Tripartite Lease: It involves three different parties
1. The equipment supplier
2. The lessor
3. The lessee. Most of the equipment lease transactions fall under this category. In this
form of lease
1. The equipment supplier may provide a reference about the customer to the leasing
2. The equipment supplier can negotiate the terms of the lease with the customer and
complete the necessary paper work on behalf of the leasing company.
3. The supplier can take the lease on his own account and discount the lease receivables
with the designated leasing company. So the leasing company owns the equipment and
obtains an assignment of the lease rentals. This form of lease has recourse to the supplier
in case of default by the lessee, either to buy back the equipment from the lessor on
default or providing a guarantee on behalf of lessee.
17 Write any four advantages of lease financing.
To the Lessee : Lease financing has the following advantages to the lessee:
• Financing of Capital goods :- Lease financing enables the lessee to have finance for
huge investments in land, building, plant, machinery, heavy equipments, etc., up to 100
per cent, without requiring any immediate down payment. Thus, the lessee is able to
commence his business virtually without making any initial investment (of course, he
may have to invest the minimal sum of working capital needs).
• Additional Source of Finance :- Leasing facilitates the acquisition of equipment, plant
and machinery, without the necessary capital outlay, and, thus, has a competitive
advantage of mobilizing the scarce financial resources of the business enterprise. It
enhances the working capital position and makes available the internal accruals for

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business operations.
• Less Costly :- Leasing as a method of financing is less costly than other alternatives
• Avoid Conditionalities:- Lease finance is considered preferable to institutional
finance, as in the former case, there are no conditionalities. Lease financing is beneficial
since it is free from restrictive covenants and conditionalities, such as, representations on
the board, conversion of debt into equity, payment of dividend, etc, which usually
accompany institutional finance and term loans from banks.
• Flexibility in Structuring of Rentals:- The lease rentals can be structured to
accommodate the cash flow situation of the lessee, making the payment of rentals
convenient to him. The lease rentals are so tailor-made that the lessee is able to pay the
rentals from the funds generated from operations. The lease period is also chosen so as
to suit the lessee’s capacity to pay rentals and considering the operating life-span of the
• Obsolescence Risk is Averted :- In a lease arrangement the lessor being the owner
bears the risk of obsolescence and the lessee is always free to replace the asset with the
latest technology.
18 What is mean by housing finance & its types of housing loans?
Answer:Housing finance is a fund based financial service. In India, Housing finance
was largely provided by Government till the mid-eighties. In 1988, RBI established a
fully owned subsidiary bank namely National Housing Bank (NHB) exclusively for
housing finance. The role of NHB is discussed later. Let us see various types of housing
loans and lending practices in India.
Types of Housing Loans
➢ Home Equity Loans: Loan is provided to customer by mortgaging the existing house
property at the market value for any purpose.
➢ Home Purchase Loans: The Loan is provided exclusively for the purchase of

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Apartments or individual building both new and old.

➢ Land Purchase Loans: Loan is provided for the purchase of land and construction of
residential houses.
➢ Home Extension Loans: This loan is provided for construction of additional rooms or
other facilities.
➢ Home improvement Loans: It is provided for renovation of old house.
19 What are the advantages of Housing Finance?
Answer:➢ Even lower middle class people can become the owner of the property
➢ Easy and convenient method of repayment (EMI) with lower interest rate is possible
for borrower.
➢The borrower can get bulk finance at the time of purchase of house and the same can
be mortgaged as security.
➢It creates greater employment opportunity both directly and indirectly.
➢The demand for construction materials like cement, brick, sanitary products, electrical
fittings and glass industries is rising day by day due to construction of building.
➢ Housing finance paves the way for infrastructure development.
➢The borrower can avail income tax exemption under the Income Tax Act for the
repayment of loan (both principal and interest) subject to certain limits.
20 Explain the steps involved in Lease agreement.
Answer:The steps involved in a leasing transaction are summarised as follows:
1. First, the lessee has to decide the asset required and select the suppler. He has to
decide about the design specifications, the price, warranties, terms of delivery, servicing
2. The lessee, then enters into a lease agreement with the lessor. The lease agreement
contains the terms and conditions of the lease such as,
(a) The basic lease period during which the lease is irrecoverable.
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(b) The timing and amount of periodical rental payments during the lease period.
(c) Details of any option to renew the lease or to purchase the asset at the end of the
(d) Details regarding payment of cost of maintenance and repairs, taxes, insurance and
other expenses.
3. After the lease agreement is signed the lessor contacts the manufacturer and requests
him to supply the asset to the lessee. The lessor makes payment to the manufacturer after
the asset has been delivered and accepted by the lessee.

Unit – III

S.No Questionswith Answers

21. Descripe the History of mutual fund.

Answer:The Mutual fund concept in India was launched by Unit Trust of India (UTI) in the year
1964 by a special Act of Parliament. The first scheme offered was the ―US-64. A host of other
fund schemes were subsequently introduced by the UTI. The basic objective behind the setting up
of the Trust was to mobilize small savings and to allow channeling of those savings into productive
sectors of the economy, so as to accelerate the industrial and economic development of the country.
In 1987, the Government of India permitted commercial banks in the public sector to set up
subsidiaries operating as trusts to perform the functions of mutual funds by amending the Banking
Regulation Act. SBI set its first mutual fund, followed by Canara Bank. Later many large financial
institutions under government control also came out with mutual funds subsidiaries. Recently, with
the beginning of the economic reforms and liberalization of the economy, based on the

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recommendations of the Abid Hussain committee, foreign companies were also permitted to start
mutual funds in India. The government introduced a number of regulatory measures, through
various agencies such as the SEBI, to the benefit the investors, esp. the small investors.
22. Write a short notes on open ended and closed ended mutual funds.
Answer:Open-end mutual fund
Open-end mutual fund shares are bought and sold on demand at their net asset value, or NAV,
which is based on the value of the fund’s underlying securities and is generally calculated at the
close of every trading day. Investors buy shares directly from a fund.An open-ended fund or
scheme is one that is available for subscription and repurchase on a continuous basis. These
schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net
Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end
schemes is liquidity.

Close-ended fund/scheme

A close-ended fund or scheme has a stipulated maturity period eg five and seven years. The fund is
open for subscription only during a specified period at the time of launch of the scheme. Investors
can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the
units of the scheme on the stock exchanges where the units are listed. In order to provide an exit
route to the investors, some close-ended funds give an option of selling back the units to the mutual
fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one
of the two exit routes is provided to the investor ie either repurchase facility or through listing on
stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis
23 How NAV is calculated?
Answer:The Net Asset Value (NAV) of a mutual fund is the price at which units of a mutual fund
are bought or sold. It is the market value of the fund after deducting its liabilities. The value of all
units of a mutual fund portfolio are calculated on a daily basis, from this all expenses are then

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subtracted. The result is then divided by the total number of units the resultant value is the NAV.
NAV is also sometimes referred to as Net Book Value or book Value. Let’s discuss its calculation in
a bit more detail.
NAV indicates the market value of the units in a fund. So, it helps an investor keep track of the
performance about the mutual fund. An investor can calculate the actual increase in the value of
their investment by determining the percentage increase in the mutual fund NAV. NAV, therefore,
gives accurate information about the performance about the mutual fund.
Calculation of NAV
Mutual fund assets usually fall under two categories – securities & cash. Securities, here, include
both bonds and stocks. Therefore, the total asset value of a fund will include its stocks, cash and
bonds at market value. Dividends and interest accrued and liquid assets are also included in total
Also, liabilities like money owed to creditors, and other expenses accrued are also included. Now
the formula is:
Net Asset Value (NAV) = (Assets – Debts) / (Number of Outstanding units)
Assets = Market value of mutual fund investments + Receivables + Accrued Income
Debts = Liabilities + Expenses (accrued)
The market value of the stocks & debentures is usually the closing price on the stock exchange
where these are listed.
24 What is mean by Off-Market transactions?
Answer:An off-market transaction is settled between two parties on mutually agreed terms and the
clearing corporation or the stock exchange is not involved. These include legacy transfers, gifts,
transfer of shares between two demat accounts, shifting of securities between a client and a sub-
broker, and transactions in unlisted securities. One party is the transferor, while the other is the
Instruction slip: The transferor has to give a delivery instruction slip (DIS) to his depository

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participant (DP), instructing the latter to transfer the securities to the receiver's (transferee's) demat
account. The 'off-market trade' option must be selected in the DIS.
Receipt instruction: The transferee must give a receipt instruction to his DP if standing
instructions for the automatic receipt of demat securities are not in place.

25 Who are trustees?


Persons who hold the property of the mutual fund in trust for the benefit of the unit
holders are called trustees. Trustees look after the mutual fund, which is constituted as a trust
under the provisions of the Indian Trust Act.

26 What are the features of stock exchanges.


1. Market for securities : Stock exchange is a market, where securities of corporate bodies,
government and semi-government bodies are bought and sold.

2. Deals in second hand securities : It deals with shares, debentures bonds and such securities
already issued by the companies. In short it deals with existing or second hand securities and
hence it is called secondary market.

3. Regulates trade in securities : Stock exchange does not buy or sell any securities on its own
account. It merely provides the necessary infrastructure and facilities for trade in securities to its
members and brokers who trade in securities. It regulates the trade activities so as to ensure free
and fair trade

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4. Allows dealings only in listed securities : In fact, stock exchanges maintain an official list of
securities that could be purchased and sold on its floor. Securities which do not figure in the
official list of stock exchange are called unlisted securities. Such unlisted securities cannot be
traded in the stock exchange.

5. Transactions effected only through members : All the transactions in securities at the stock
exchange are effected only through its authorised brokers and members. Outsiders or direct
investors are not allowed to enter in the trading circles of the stock exchange. Investors have to
buy or sell the securities at the stock exchange through the authorised brokers only.
27. What do you understand by mutual fund?
A mutual fund is a professionally -managed form of collective investments that pools money from
many investors and invests it in stocks, bonds, short -term money market instruments, and/or other
securities. fund, the fund manager, who is also known as the portfolio manager, trades the funds
underlying securities, realizing capital gains or losses, and collects the dividend or interest income.

28. What is meant by asset Management Company?

The investment manager of a mutual fund is technically known as the „Asset Management
Company‟, and is appointed by the sponsor or the trustees. The AMC manages the affairs of the
mutual fund. It is responsible for operating all the schemes of the fund, and can act as the AMC of
only one mutual fund.

29. Give some details about SEBI Guidelines for Post -Issue Management.

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The Post-issue obligations/requirements of lead managers/merchant bankers to an issue are
discussed below.
o Post-Issue Monitoring Reports
o Redressal of Investors‟ Grievances
o Co-ordination with Intermediaries
o Finalization of Basis of Allotment
o Dispatch of Share Certificates.

30. What are Gilt funds?

Gift funds are also known as Government Securities in India, Gift Funds invest in government
papers (named dated securities) having medium to long -term maturity period. Issued by the
Government of India, these investments have little credit risk (risk of default) and provide safety of
principal to the investors


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S.No Questions

31. Define venture capital.

Answer:Venture capital is defined as providing seed, start up and first stage financing
and also funding expansion of companies that have already demonstrated their business
potential but do not yet have access to the public securities market or to credit -oriented
institutional funding sources.
1. It is the financing of capital for new companies.
2. This finance can also be loan-based or in convertible debentures
3. Providers of venture capital aim at capital gain due to the success achieved by the
borrowing concern.
4. Venture capital is always a long-term investment and made in companies which have
high growth potential.
5. The venture capital provider take part in the business of borrowing concern
simultaneously provides managerial skill.
6. Venture capital financing contains risks. But the risk is compensated with a higher
return. 7. It involves financing mainly small and medium size firms, which are in their
early stages. When the assistance of venture capital, these firms will stabilize and later
can go in for traditional finance.
32. Write a short note on “factoring”?
Answer:Factoring means an arrangement between a factor and his client which
includes at least two of the following service to be provided by the factor:
(i) Finance,
(ii) Maintenance of accounts,
(iii) Collection of debts and
(iv) Protection against credit risk.

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33. List out the terms and condition in a factoring agreement.

Answer:The existence of an agreement between the factor and the client is central to
the function of factoring. The main terms and conditions generally included in a
factoring agreement are the following :
(i) Assignment of debt in favour of the factor,
(ii) Selling limits for the client,
(iii) Conditions within which the factor will have recourse to the client in case of non-
payment by the trade customer,
(iv) Circumstances under which the factor will have recourse in case of nonpayment,
(v) Details regarding the payment to the factor for his services, say for instance, as a
certain percentage on turnover,
(vi) Interest to be allowed to the factor on the account where credit has been sanctioned
to the supplier, and
(vii) Limit of any overdraft facility and the rate of interest to be charged by the factor.
34. What are the Characteristics of Consumer Credit
Answer:The nature of consumer credit may be the transfer of wealth to consumers for
purchase of semi durables or durables except real estate where the payment is deferred
in whole or in part upon agreed terms the agreed terms for repayment may be in the
form of EMI.
Consumer Finance Transactions
The nature of consumer finance transactions may be
(a) Parties and Structure of the Transaction: The parties and the structure of the
transaction may be either (i) Bipartite (ii) Tripartite.
A bipartite transaction involves two parties i.e.
1. Dealer-Cum-Financer and
2. Borrower or Customer.
A tripartite transaction involves three parties

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1. The dealer
2. The financier
3. Borrower or customer
35. Mention any two types of venture capital industry of India.


Two venture capital industry of India are

(i) Risk Capital and Technology Finance Corporation Limited. (ii) Technology
Development and Information Company of India Limited (TDICI).

36. What is last stage financing?

This stage of venture capital financing involves established businesses which require
additional financial support. At this stage, the firm is not ripe enough to go for a public
offer as it has not reached the profit -earning stage.

37. What is the meaning of “Forfeiting‟?


Forfeiting is a form of financing of receivables pertaining to international trade. It

denotes the purchase of trade bills/promissory notes by a bank/financial institution
without recourse to the seller. The purchase is in the form of discounting the documents
covering the entire risk of non -payment in collection.
38. Write short notes on Depositories?
Answer: American depositary receipt (ADR) is a negotiable certificate issued by a
U.S. bank representing a specified number of shares (or one share) in a foreign stock
traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying
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security held by a U.S. financial institution overseas, and holders of ADRs realize any
dividends and capital gains in U.S. dollars, but dividend payments in euros are
converted to U.S. dollars, net of conversion expenses and foreign taxes. ADRs are
listed on either the NYSE, AMEX or Nasdaq but they are also sold OTC.
Global Depositary Receipt: Any depositary receipt is a certificate which best
describes the ownership of stocks of particular company which is marketed outside the
home country of the company. These documents are useful in fetching greater amount
of capital for the company in many other countries. Global depositary receipt (GDR)
allows you to buy the shares of the company located outside United States and also
outside the home country of the particular company. Irrespective of the currency of the
home country, most of the GDR's are purchased in United States dollars. Usually you
can see more than 800 GDR listed on the stock exchange where the stocks belonging to
different companies are sold out.
List out the Features of venture capital.
1. It is the financing of capital for new companies.
2. This finance can also be loan-based or in convertible debentures
3. Providers of venture capital aim at capital gain due to the success achieved by the
borrowing concern.
4. Venture capital is always a long-term investment and made in companies which have
high growth potential.
5. The venture capital provider take part in the business of borrowing concern
simultaneously provides managerial skill.

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6. Venture capital financing contains risks. But the risk is compensated with a higher
40. List out the Credit rating Agency in India.
A. Credit Rating Information Services of India (CRISIL Ltd.)
CRISIL is the first rating agency in India. It was set-up in 1987 jointly by the
erstwhile ICICI Ltd. and UTI. The other shareholders are Asian Development
Bank (ADB), LIC, State Bank of India, HDFC etc. The head office of the
company is located at Mumbai and it has established offices outside India also.
The CRISIL Ltd. is the world’s fourth largest rating agency. ‘CRISIL’ has rated
over 4700 debt instruments issued by 2200 companies.
B. Investment Information and Credit Rating Agency of India Ltd. (ICRA)
ICRA was established in the year 1991 by the collaboration of financial
institutions, investment companies, and banks. The company has formed the
ICRA group together with its subsidiaries. The company offers products like
short-term debt schemes, Issue-specific long-term rating and offers fund based
as well as non-fund based facilities to its clients.
C. Credit Analysis and Research Limited (CARE)
CARE was incorporated in 1993. It was promoted by Industrial Development
Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI) and other
financial and lending institutions. CARE has completed over 7,564 rating
assignments since its inception in 1993.

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Unit – V

S.No Questions

41. Define a) Demerger and b) Reverse Merger

It is a form of corporate restructuring in which the entity's business operations are
segregated into one or more components. A demerger is often done to help each of the
segments operate more smoothly, as they can focus on a more specific task after

Reverse Merger
Reverse merger is the opportunity for the unlisted companies to become public listed
company, without opting for Initial Public offer (IPO). In this process, the private
company acquires majority shares of public company with its own name.

42. What is strategic Alliance and Take Over?

Strategic Alliance
Any agreement between two or more parties to collaborate with each other, in order to
achieve certain objectives while continuing to remain independent organizations is
called strategic alliance.

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Take Over

Takeover occurs when an acquirer takes over the control of the target company. It is also
known as acquisition. Normally this type of acquisition is undertaken to achieve market
supremacy. It may be friendly or hostile takeover.

43. Define Horizontal and Vertical Merger.

Horizontal Merger:
It is a merger of two or more companies that compete in the same industry. It isa merger
with a direct competitor and hence expands as the firm's operations in the same industry.
Horizontal mergers are designed to achieve economies of scale and result in reducing the
number of competitors in the industry.

Vertical Merger:
It is a merger which takes place upon the combination of two companieswhichare
operating in the same industry but at different stages of production or distribution
system. If a company takes over its supplier/producers of raw material, then it may result
in backward integration of its activities. On the other hand, forward integration may
result if a company decides to take over the retailer or Customer Company. Vertical
merger provides a way for total integration to those firms which are striving for owning
of all phases of the production schedule together with the marketing network
44. Explain Friendly Take Over and Hostile Take Over


Friendly Takeover:

Friendly takeover is with the consent of taken over company. In friendly takeover, there
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is an agreement between the management of two companies through negotiations and

the takeover bid may be with the consent of majority or all shareholders of the target
company. This kind of takeover is done through negotiations between two groups.
Therefore, it is also called negotiated takeover.
Hostile Takeover:
When an acquirer company does not offer the target company the proposalto acquire its
undertaking but silently and unilaterally pursues efforts to gain control against the
wishes of existing management.
45. List out the various laws with year to be considered for Legal Frame work in the
Merger and Amalgamation
The Regulatory Framework of Mergers and Amalgamations covers
(i) The Companies Act, 2013
(ii) National Company Law Tribunal Rules, 2016.
(iii) Companies (Compromise, Arrangements and Amalgamations) Rules,
(iv) Income Tax Act, 1961
(v) SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
(vi) Competition Act, 2002
46. Explain Bail Out Take Over.
Bail Out Takeover:

Takeover of a financially sick company by a profit earning company to bailout the

former is known as bail out takeover. There are several advantages for a profit making
company to takeover a sick company. The price would be very attractive as creditors,
mostly banks and financial institutions having a charge on the industrial assets, would
like to recover to the extent possible. Banks and other lending financial institutions

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would evaluate various options and if there is no other go except to sell the property,
they will invite bids. Such a sale could take place in the form by transfer of shares.
While identifying a party (acquirer), lenders do evaluate the bids received, the purchase
price, the track record of the acquirer and the overall financial position of the acquirer.
Thus a bail out takeover takes place with the approval of the Financial Institutions and
47. State the various approvals in the scheme of Amalgamation.
(I) Approval of Board of Directors
(II) Approval of Shareholders/Creditors
(iii) Approval of the Stock Exchanges:- Regulation 37 of the SEBI (LODR)
Regulation, 2015
(iv) Approval of Financial Institutions
(v) Approval from the Land Holders
(vi) Approval of the Tribunal
(vii) Approval of Reserve Bank of India
(viii) Approvals from Competition Commission of India (CCI)
48. Explain Take Over
A high level of competitive pressure and an increasing appetite for growth have led
firms across geographies and industries to choose the inorganic growth path. Mergers &
Acquisitions and Takeovers provide a robust growth vehicle often best suited for such
firms seeking an entry into a market, geography, product category or broadening its
product and/or client base.
Takeover is an inorganic corporate growth device whereby one company acquires
control over another company, usually by purchasing all or a majority of its shares.
Takeover implies acquisition of control of a company, which is already registered,

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through the purchase or exchange of shares. Takeovers usually take place when shares
are acquired or purchased from the shareholders of a company at a specified price to the
extent of at least controlling interest in order to gain control of that company.

49. Define a) Cross Border Acquisition and b) International Acquisition

Cross border Mergers and Acquisitions or Merger and Acquisition are deals between
foreign companies and domestic firms in the target country. The trend of
increasing Cross Border Merger &Acquisition has accelerated with the globalization of
the world economy.
International Acquisition
A Situation in which a company buys and takes control of a company in another country
or the company that is bought is called international acquisition.

50. Define Merger &Acqusitions.

Merger and acquisition are the two most commonly applied corporate restructuring
strategies, which are often uttered in the same breath, but they are not one and the same.
These are the form of external expansion, whereby through corporate combinations,
business entities purchases a running business and grows overnight. It helps the business
in maximizing the profit and growth by increasing the level of production and marketing
operation. While merger means “to combine”, Acquisition means “to acquire.”

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Subject : Financial Services

PART – C (10 Marks)

(Minimum 5 Questions from Each unit, no maximum limit)
Unit – I

S.No Questions

1 What are the Functions of Financial System?

Answer: The financial system of a country performs certain valuable functions for the economic
growth of that country. The main functions of a financial system may be briefly discussed as below:

1. Saving function: An important function of a financial system is to mobilise savings and channelize
them into productive activities. It is through financial system the savings are transformed into

2. Liquidity function: The most important function of a financial system is to provide money and
monetary assets for the production of goods and services. Monetary assets are those assets which can
be converted into cash or money easily without loss of value. All activities in a financial system are

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related to liquidity-either provision of liquidity or trading in liquidity.

3. Payment function: The financial system offers a very convenient mode of payment for goods and
services. The cheque system and credit card system are the easiest methods of payment in the
economy. The cost and time of transactions are considerably reduced.

4. Risk function: The financial markets provide protection against life, health and income risks.
These guarantees are accomplished through the sale of life, health insurance and property insurance

5.Information function: A financial system makes available price-related information. This is a

valuable help to those who need to take economic and financial decisions. Financial markets
disseminate information for enabling participants to develop an informed opinion about investment,
disinvestment, reinvestment or holding a particular asset.

6. Transfer function: A financial system provides a mechanism for the transfer of the resources
across geographic boundaries.

7. Reformatory functions: A financial system undertaking the functions of developing, introducing

innovative financial assets/instruments services and practices and restructuring the existing assts,
services etc, to cater the emerging needs of borrowers and investors (financial engineering and

2 Explain the components of Indian Financial System.

Answer: Components of a formal financial system include financial institutions, financial markets,
financial instruments, financial services and regulators.

• Financial assets/Instruments – A financial asset is an intangible asset that derives value because of
a contractual claim. It consist of Cash, Marketable securities, bank deposits, mutual fund units,

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insurance policies etc.

• Financial Institutions - Financial Institution is an institution (public or private) that collects funds
(from the public or other institutions) and invests them in financial assets. It include Banking and
Non-banking institutions, Term finance institutions, Specialised finance institutions, investment
institutions etc.

• Financial services – Financial services are the economic services provided by the financial
institutions. These may be either Fund based services such as underwriting, leasing, hire purchase,
insurance etc. or Fee based services such as merchant banking, issue management, credit rating, stock
broking etc.

• Financial Markets – A financial market is a market in which people and entities can trade financial
assets such as securities, bonds, derivatives, currencies etc. The main financial markets are Money
market, Capital market, Derivative market etc.

• Regulators - These are bodies which regulate and controls various constituents of financial system.
Examples are Securities and Exchange Board of India (SEBI), Insurance Regulatory and
Development Authority (IRDA), Reserve Bank of India (RBI), Forward Market Commission (FMC)

3 Distinguish between Money Market and Capital Market

Money market Capital market


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Meaning A segment of the A section of financial

financial market where market where long term
lending and borrowing securities are issued and
of short term securities traded.
are done.

Nature of Market Informal Formal

Financial instruments Treasury Bills, Shares, Debentures,
Commercial Papers, Bonds, Retained Earnings,
Certificate of Deposit, Asset Securitization, Euro
Trade Credit etc. Issues etc.

Institutions Central bank, Commercial banks, Stock

Commercial bank, exchange, non-banking
non-financial institutions like insurance
institutions, bill companies etc.
brokers, acceptance
houses, and so on.
Risk Factor Low Comparatively High
Liquidity High Low
Purpose To fulfill short term To fulfill long term credit
credit needs of the needs of the business.
Time Horizon Within a year More than a year
Merit Increases liquidity of Mobilization of Savings in
funds in the economy. the economy.
Return on Investment Less Comparatively High

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4 Discuss the Structure of Merchant Banking Industry?

Answer:Initially Merchant Bankers were classified into 4 categories with regard to their nature and
range of activities and their responsibilities to SEBI, investors and issuers of securities. Since
September 1997 only a single category exists. The requirements are as under: There are four different
categories of merchant bankers. Only category 1 merchant bankers are allowed to act as lead
managers to the issue:

Category 1: Those merchant bankers who can conduct all above mentioned activities, relating to
management of issues. They may, if they so choose, act only in an advisory capacity or as co-
manager, underwriter or as portfolio manager.

Category 2: Those merchant bankers who can act as consultant, advisor, portfolio manager and co-

Category 3: Those merchant bankers who can act as underwriter, advisor and consultant. Category 4:
Those merchant bankers who can act only as advisor or consultant to an issue. Different types of
organizations in India which provide merchant banking services:

i. Commercial Banks

ii. All India Financial Institutions

iii. Private Consultancy Firms

iv. Technical Consultancy Organizations

5 Explain the Difference Between primary market and secondary Market.


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Subject : Financial Services

Meaning The market place for The place where formerly
new shares is called issued securities are traded is
primary market. known as Secondary Market.
Another name New Issue Market After Market
Type of Purchasing Direct Indirect
Financing It supplies funds to It does not provide funding to
budding enterprises companies.
and also to existing
companies for
expansion and
How many times a Only once Multiple times
security can be sold?
Buying and Selling Company and Investors Investors
Who will gain the Company Investors
amount on the sale of
Intermediary Underwriters Brokers
Price Fixed price Fluctuates, depends on the
demand and supply force
Organizational Not rooted to any It has physical existence.
difference specific spot or
geographical location.

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Subject : Financial Services

Unit – II

S.No Questions

6. Difference Between Hire Purchase and Leasing .


Hire Purchase is also different from leasing on following grounds :

1. Ownership

In a contract of lease, the ownership rests with the lessor throughout and the lessee
(hirer) has no option purchase the goods.

2. Method of Financing

Leasing is a method of financing business assets whereas hire purchase is a method of

financing both business assets and consumers articles.

3. Depreciation

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Subject : Financial Services

In leasing depreciation and investment allowance cannot be claimed by the lease. In hire
purchase, deprecation and investment allowance can be claimed by the hirer.

4. Tax Benefits

The entire lease rental is tax deductible expense. Only the interest component of the hire
purchase instalment is tax deductible.

5. Salvage Value

The lessee, not being the owner of the asset, does not enjoy the salvage value of the
asset. The hirer, in purchase, being the owner of the asset, enjoys salvage value of the

6. Deposit

Lessee is not required to make any deposit whereas 20% deposit is required in hire

7. Rent-Purchase

With lease, we rent and with hire purchase we buy the goods.

8. Extent of Finance

Lease Financing is invariably 100 per cent financing. It requires no immediate down
payment or margin money by the lessee. In hire purchase, a margin equal to 20-25 per
cent of the cost of the asset is to be paid by the hirer.

9. Maintenance

The cost of maintenance of the hired asset is to be borne by the hirer himself. In case of

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Subject : Financial Services

finance lease only, the maintenance of leased asset is the responsibility of the lessee.

10. Reporting

The asset on hire purchase is shown in the balance sheet of the hirer. The leased assets
are shown by way of foot note only.

7. Discuss the status of income tax and sales tax in context of leasing in India.

Answer:The principal income tax provisions relating to leasing are as follows:

1. The lessee can claim lease rentals as tax-deductible expenses.

2. The lease rentals received by the lessor are taxable under the head of 'Profits and
Gains of Business or Profession’.

3. The lessor can claim depreciation on the investment made in leased assets.

The income tax considerations for the lessees are

Allow ability of lessee rentals

Deduction of Incidental Expenses and

Tax Planning o Flexible structuring of lease rentals

Transfer of unabsorbed capital allowance to the lessor.


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Subject : Financial Services

The major sales tax provisions relevant for leasing are as follows:

1. The lessor is not entitled for the confessional rate of central sales tax because the
asset purchased for leasing is meant neither for resale nor for use in manufacture. (It may
be noted that if a firm buys an asset for resale or for use in manufacture it is entitled for
the confessional rate of sales tax).

2. The 46th Amendment Act has brought lease transitions under the purview of 'sale' and
has empowered the central and state government to levy sales tax on lease transactions.
While the Central Sales Tax Act has yet to be amended in this respect, several state
governments have amended their sales tax laws to impose sales tax on lease transactions.

8. What are the limitations of lease financing?


Restrictions on Use of Equipment:- A lease arrangement may impose certain restrictions

on use or the equipment, or require compulsory insurance, etc. Besides, the lessee is not
free to make additions or alterations to the leased asset to suit his requirements.

Limitations of Financial Lease:- A financial lease may entail higher payout obligations,
if the equipment is found not useful and the lessee opts for premature termination of the
lease agreement. Besides, the lessee is not entitled to the protection of express or implied
warranties since he is not the owner of the asset.

Loss of Residual Value:- The lessee never becomes the owner of the leased asset. Thus,
he is deprived of the residual value of the asset and is not even entitled to any
improvements done by the lessor or caused by inflation or otherwise, such as
appreciation in value of leasehold land.

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Consequences of Default:- If the lessee defaults in complying with any terms and
conditions of the lease contract, the lessor may terminate the lease and take over the
possession of the leased asset. In case of finance lease, the lessee may be required to pay
for damages and accelerated rental payments.

Understatement of Lessee's Asset :- Since the leased assets do not form part of lessee's
assets, there is an effective understatement of his assets, which may sometimes lead to
gross under-estimation of the lessee. However, there is now an accounting practice to
disclose the leased assets by way or footnote to the balance sheet.

Double Sales Tax:- With the amendment of sale-tax law in various states, a lease
financing transaction may be charged to sales tax twice-once when the lessor purchases
the equipment and again when it is leased to the lessee
9. What are the types of leasing?


Leasing can be classified into the following types:

Types of Leasing

1.Financial Lease

Financial lease is an alternative to borrowing money and buying the equipment. The
features of financial lease are:

➢The machinery is selected from the supplier by lessee based on his requirement.

➢The lessee negotiates the terms of the purchase i.e., price, delivery, installation,
warranties, maintenance and payments.

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➢The payment for purchases is made by Lessor and he is the legal owner of the
machinery. ➢The risk of obsolescence and responsibility for maintenance are to be
borne by lessee.

➢ Lessee has to pay rent regularly.

2.Operating Lease

Operating lease is a rental agreement and its features are as follows:

➢The period of the operating lease is generally shorter than the economic life of the
leased asset.

➢The ‘lessor’ bears the risk of obsolescence and responsibility of maintenance of asset.

3.Sale and Lease Back

It is an agreement between owner of the asset and leasing company. First, the firm
(owner) sells the asset to the Leasing Company and leases it back simultaneously. The
ownership of the asset transfers to the leasing company, the company in turn leases it to
the seller and the seller becomes lessee.

4. Single Investor Lease :

The entire investment is funded by the lessor by arriving at a judicious mix of debt and
equity. The debt funds raised by the leasing company are without recourse to the lessee,
i.e., in the event of the default by the leasing company on its debt-servicing obligation,
the lender cannot demand payment from the lessee.

5.Leveraged Lease :

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It is a lease which is leveraged through a trustee. The leasing company invests in

equipments by borrowing large investments with full recourse to the lessee without any
recourse to it. The lender (loan participant) gets an assignment of the lease and enjoys
benefit of the rentals to be paid by the lessee and a first mortgage on the leased assets.
This transaction is routed through the trustee to take care of the lender and the lessee.

10. List out the Contents of a Lease Agreement:

The lease agreement specifies the legal rights and obligations of the lessor and
the lessee. It typically contains terms relating to the following:
 Description of the lessor, the lessee, and the equipment.
 Amount, time and place of lease rentals payments.
 Time and place of equipment delivery.
 Lessee‘s responsibility for taking delivery and possession of the leased
 Lessee‘s responsibility for maintenance, repairs, registration, etc. and the
lessor‘s right in case of default by the lessee.
 Lessee‘s right to enjoy the benefits of the warranties provided by the
equipment manufacturer/supplier.
 Insurance to be taken by the lessee on behalf of the lesser.
 Variation in lease rentals if there is a change in certain external factors like
bank interest rates, depreciation rates, and fiscal incentives.
 Options of lease renewal for the lessee.
 Return of equipment on expiry of the lease period.
 Arbitration procedure in the event of dispute.

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Unit – III

S.No Questions

11. Explain the difference between open-ended and closed ended mutual funds.



Open-ended funds can be Closed-ended funds are the

understood as the schemes that mutual funds, which offer new
offer new units to the investors on units to investors for a limited
a continuous basis. period only.

These funds are available These funds are available only

Subscription throughout the year for during specified days for
subscription. subscription.

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Subject : Financial Services


Fixed maturity period, i.e. 3 to 5

Maturity There is no fixed maturity.

Liquidity provider Funds itself Stock market

Corpus Variable Fixed

No listing on stock exchange,

Listed on a recognized stock
Listing transactions are performed directly
exchange for trading.
through fund.

12. What are the characteristics of stock Exchange?

Characteristics of Stock Exchange: The stock exchange is an organized market for the
purchase and sale of listed securities. They facilitate, regulate and control the trade in
securities. The following are the features of stock markets:
(1) Association: Stock market is an association of persons that may be incorporated or
(2) Mechanism: It provides a place or mechanism through which industrial and
government securities may be bought and sold.
(3) Organized market: It is an organized market for securities. It allows trading in
securities subject to certain regulations.
(4) Market for old securities: It provides the ready market for old securities that have
been already issued by the companies to public. It does not deal in the fresh shares,
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debentures and bonds to be issued by the companies or government agencies to the

public. In stock market transactions in old securities of companies are carried on without
the involvement of companies.
(5) Deals with listed securities: It offers trading facilities only for those securities that
are listed by the companies or issuing agencies with the exchange. It a company has not
complied with the listing procedure of a stock market then its securities are not allowed
to be traded on such stock market
13. Briefly Explain the Classification of Mutual Funds .


On The Basis Of Yield and Investment

1. Income Fund

Income funds are those which generate regular income to the members on a
periodical basis. It concentrates more on the distribution of regular income and it
also sees that the average return is higher than that of the income from bank deposits.
a. The investor is assured of regular income at periodical intervals b. The main
objective is to declare regular dividends and not capital appreciation. c. The
investment pattern is towards high and fixed income yielding securities d. It is
concerned with short run gains only.

2. Growth Fund

Growth are those which concentrate mainly on long term gains i.e., capital
appreciation. Hence they are termed as “Nest Eggs” investments. a. It aims at
meeting the investors need for capital appreciation. b. The investor‗s strategy
conforms to investing the funds on equities with high growth potential. c. The
Investment tries to get capital appreciation by taking much risks and investing on
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Subject : Financial Services

risk bearing equities and high growth equity shares. d. The fund declares dividends.
e. It is best suited to salaried and business people.

3. Balanced Fund

It is a balance between income and growth fund. This is called as Income cum
growth. It aims at distributing regular income as well as capital appreciation. Thus
the investments are made in high growth equity shares and also the fixed income
earning securities.

4. Specialized Funds

These are special funds to meet specific needs of specific categories of people like
pensioners, widows etc.

5. Money Market Mutual Funds

The funds are invested in money market instruments. These funds basically have all
the features of open ended funds but they invest in highly liquid and safe securities
like commercial paper, banker‘s acceptances, and certificates of deposits treasury
bills. These funds are called money funds in the U.S.A. The RBI has fixed the
minimum amount of investment as Rs.1 Lakh; it is out of the reach of many small
investors. However, the private sector funds have been permitted to deal in money
market mutual funds. It is best suited to institutional investors like banks and other
financial institutions.

6. Taxation Funds

It is a fund which offers tax rebated to the investors either in the domestic or foreign
capital market. It is suitable to salaried people who want to enjoy tax rebates
particularly during the month of February and March. An investor is entitled to get
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Subject : Financial Services

20% rebated in Income Tax for investments made under this fund subject to a
maximum investment of Rs.10,000 per annum. E.g. Tax Saving Magnum of SBI
Capital Market Limited.

7. Other Classification

i. Leveraged Funds: Also called as borrowed funds as they are used primarily to
increase the size of the value of portfolio of a mutual fund. When the value increases,
the earning capacity of the fund also increases.

ii. Dual Funds: It is a fund which gives a single investment opportunity for two
different types of investors. It sells income shares and capital. Those investors who
seek current investment income can purchase incomes shares. The capital shares
receive all the capital gains earned on those shares and they are not entitled to
receive any dividend of any type.

14. List out the SEBI Regulations in mutual fund.

The following rules and regulations of Securities Exchange of Board of India (SEBI) are
related to the establishment and issue of schemes of Mutual Fund. Mutual fund shall be
established in the form of trusts under the Indian Trust Act and managed by separately
formed Asset Management Company. In the Board of directors of AMC must be 50%
members are independent without the influence of sponsoring organization and they
should have at least 10 years experience in the field of portfolio management.

 A minimum of ` 10 crores must have AMC as net worth 

 An AMC can function for only one mutual fund and it is prohibited to work for
 AMCs are also allowed to do other fund based businesses such as providing
investment management services to offshore funds, venture capital funds and
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Subject : Financial Services

insurance companies.
 Minimum issue of fund for closed-end scheme and open end scheme should be `
20 crores and ` 50 crores respectively.
 The maximum period for subscription is 45 days in case of closeend schemes,
but no such limitation in case of open – end scheme.
 The entire subscription has to be returned to the investors when the minimum
amount or 60% of the target amount is not raised. There should be a separate and
responsible fund manager for each scheme.
 To protect the small investors, SEBI restrict the portfolio investment of Mutual
Fund in a single company by 10% of Net Assets Value of a scheme. The issue
expenses are restricted to 6% of raising funds under each scheme.
 A minimum of 90% of the profits must distribute to the unit holders in any given
year. Accounting and Auditing of Mutual funds are mandatory and furnish the
audited Annual statements to SEBI.
 SEBI has power to impose penalty on mutual funds for violation of SEBI

15. Explain the Benefits of Mutual Fund.

Mobilizing Small Savings

Funds are mobilized by way of selling units. A unit is a proportional share of securities
in the portfolio of a mutual fund. Small fund investors get benefits of portfolio
investment with the small amount of their savings.
Investment Avenue
Mobilized funds are invested in various types of investment avenues. Investment
avenues are Shares and Bonds of various Companies and Industries, Gold, Deposits,
Govt. bonds, Money Market Instruments etc., Investors can get opportunity on the
portfolio of assets proportionately. Individual investors may not invest in all these
investment avenues.
Professional Management
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‘Mutual Funds’ utilizes professional experts and the experts manage the investment
portfolios efficiently and profitably. Investors are free from taking risk of buying and
selling shares.
Diversified Investment
Small investors can enjoy the benefit of portfolio investment through mutual funds.
Mutual funds have the advantage of diversified investment in various industry segments.
Mutual fund investors can buy and sell their units in the secondary market in case of
close - ended mutual funds. In case of open-ended mutual funds, the investors can
withdraw holdings any time at the Net Asset Value.
Less Risk
Mutual fund investment involves very less risk. Because, the fund is managed with the
professional expertise, portfolio investment, diversification and the economies of scale
in transaction cost.

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Unit- IV

S.No Questions

16. What are the characteristics of Venture Capital?


Following are the characteristics of venture capital.

 Mode of Investment
 Objective
 Hands -On Approach
 High Risk-Return Ventures
 Nature Of Firms
 Liquidity
 New Ventures
 Continuous Involvement
17. What are the types of factoring?


The type of factoring services varies on the basis of the nature of transactions between the client
and the factor, the nature and volume of client’s business, the nature of factor’s security etc. In
general, the factoring services can be classified as follows:
(i) Full service factoring or without recourse factoring
Under this type, factor provides all kinds of services discussed above. Thus, a factor provides
finance, administers the sales ledger, collects the debts at his risk and renders consultancy service.
This type of factoring is a standard one. If the debtors fail to repay the debts, the entire
responsibility falls on the shoulders of the factor since the assumes the credit risk also. He can not
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Subject : Financial Services

pass on this responsibility to his client and hence, this type of factoring is also called ‘Without
Recourse’ Factoring.
(ii) With Recourse Factoring
As the very name suggest, under this type, the factor does not assume the credit risk. In other
words, if the debtors do not repay their dues in time and if their debts are outstanding beyond a
fixed period, say 60 to 90 days from the due date, such debts are automatically assigned back to
the client. The client has to take up the work of collection of overdue account by himself. If the
client wants the factor to go on with the collection work of overdue accounts, the client has to pay
extra charges called ‘Refactoring Charges”.
(iii) Maturity Factoring
Under this, the factor does not provide immediate cash payment to the client at the time of
assignment of debts. He undertakes to pay cash as and when collections are made from the
debtors. The entire amount collected less factoring fees is paid to the client immediately. Hence it
is also called ‘collection Factoring’. In fact, under this type, no financing is involved. But all other
services are available.
(iv) Bulk Factoring
Under this type, the factor provides finance after disclosing the fact of assignment of debts to the
debtors concerned. This type of factoring is resorted to when the factor is not fully satisfied with
the financial condition of the client. The work relating to sales ledger administration, credit
control, collection work etc. has to be done by the client himself. Since the notification has been
made, the factor simply collects the debts on behalf of the client. This is otherwise called as
“Disclosed Factoring” or Notified Factoring”.
(v) Invoice Factoring
Under this type, the factor simply provides finance against invoices without undertaking any other
functions. All works connected with sales administration, collection of dues etc. have to be done
by the client himself. The debtors are not at all notified and hence they are not aware of the
financing arrangement. This type of factoring is very confidential in nature and hence it is called
‘Confidential Invoice discounting’ or ‘Undisclosed Factoring’.
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18. Differentiate between factoring and forfeiting.

Both the services ‘factoring’ and ‘forfeiting’ are providing finance to the seller. Their main objective is to
provide smooth cash flow to the sellers. The basic difference between the forfeiting and factoring is that
forfeiting is a long term receivables (over 90 days up to 5 years) while factoring is short term receivables
(within 90 days) and is more related to receivables against commodity sales.

1. It is employed to finance both domestic

1. It is used to finance only ex port business.
and export business.

2. It involves the purchase of the invoice of

2. It involves the purchase of the export bill.
the client.

3. Oriented towards single transactions

3. Suitable for ongoing open account sales.
backed by LC or bank guarantee.

4. It provides short-term financing for a credit 4. It is medium and long-term financing for a
period up to 180 days. credit period from 180 days to 7 years.

5. It is a single transaction arrangement

5. It is a continuous arrangement between
between exporter and forfaier. Each transaction
factor and client.
is treated as individual.

6. The administrative cost on management of 6. The exporter must manage the receivables
receivables may reduce because the collection account because the forfaiter’s responsibility
responsibility is entrusted with the factor. ex tends to collection of for feited debt only.

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7. Single discount charges is applied which

depend on guaranteeing bank and country risk,
7. Separate charges are applied for financing,
credit period involved and currency of debt.
collection, administration, credit protection
Only additional charges are commitment fee if
and provision of information.
firm commitment is required prior to
drawdown during delivery period.

19. Explain the types of venture capital.


There are three main groups into which venture capital investment can be divided. They are early
stage, expansion, and buyout. Each of these groups is further divided into subgroups, as illustrated
in the chart on the next page:

Early Stage

Early stage investing is divided into three subgroups: seed financing, startup financing, and 1st
stage financing.

Seed Financing

This type of financing will be very early in the life of the business, usually pre-revenue and
sometimes even before the product or service is created. It will also make it easier for the
entrepreneur to get loans after being financed this way. The entrepreneur will use seed money for
market research and early product or service development.

Startup Financing

Startup financing is used by businesses to finish the development of their products and services. In

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some cases, it will also be used for marketing the products and services. This helps the company
launch their operations.

1st Stage Financing

This is the last subgroup of financing in the early stage category, and would be used to continue
operations of the company at a higher scale. Products (or services) would start to be produced in a
large scale, and the initial funding would have been used by this time.


Expansion investing is also broken up into three subgroups: 2nd stage financing, bridge financing,
and 3rd stage financing.

2nd Stage Financing

This stage of financing is used by a business for initial expansion plans whether that involves
products or services. The company usually will not be profitable even after receiving this type of

Bridge Financing

Bridge financing is used as a short term investment that will maintain liquidity, especially if an
inflow of cash is going to be received. One example could be if the company plans to have an IPO,
bridge financing can be used to sustain the company for a short period of time that is till it receives
money from the allottees.

3rd Stage Financing

This type of financing is also called mezzanine financing, and is invested into a company that has
achieved its breakeven point, and in some cases is achieving profitability. This type of financing

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will be used by a company for marketing, plant expansion, and new products or services.


The buyout stage of investing can be broken down into two subgroups: acquisition financing and
leveraged buyouts (LBO).

20. Explain in detail about credit rating process.


1) Receipt of the Request The issuing company approaches the credit rating agency to rate
their instruments which are issued to the public. It is the starting point in the process of
rating. The rating agency and Issuer Company enter into an agreement. The general terms
and conditions of the agreement are as follows:

➢ To Keep confidential information about the issuing company

➢ Acceptance of the rating is in the hands of issuing company

➢ Providing all information is essential on the part of issuing company

2) Assignment to Analytical Team

Credit rating agency entrusts the job to its expertise team for investigating the issuing
company after entering into the agreement with them. Normally, the team consists of two
members and it may vary depending upon jobs.

3) Obtaining Information The issuing company must provide all the requisite information to the
analytical team. The analytical team analyses the information relating to its financial statements,
cash flow projections and other relevant information.

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4) Team Visits and Interacts with Management

The analytical team must visit the issuing company for better understanding of the client’s
operations and interact with the company’s executives.

5) Presentation of Findings

The analytical team presents the report on the issuing company to the internal committee
of the credit rating agency.

6) Rating Committee Meeting The rating committee conducts meeting with the analytical
team to discuss about the assessment of all factors concerned to the issuer. After a deep
discussion, the rating committee evaluates the issuing company and rates their instruments.
The decision of the rating committee is final. The issuing company cannot be involved
directly in the process of rating.

7) Communication of Decision

The issuing company gets the information from CRA about the rating grade assigned by
them. The supported documents or explanations would be furnished to the issuing
company. The issuing company may accept or reject the ratings. The rejected ratings are
not disclosed by the Credit rating agency.

8) Broadcasting to the Public

The credit rating agency can broadcast the rating information through printed reports to the
public after the acceptance of the issuer.

9) Continuous Surveillance

The Credit Rating Agency is continuously monitoring the issuing company till the validity

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period of the ratings.

Unit – V

S.No Questions

21. Write various types of merger with examples?

Merger is the combination of two or more companies which can be merged together either by
way of amalgamation or absorption or by formation of a new company. The combining of two
or more companies, is generally by offering the stockholders of one company securities in the
acquiring company in exchange for the surrender of their stock.

Mergers may be
Horizontal Merger: It is a merger of two or more companies that compete in the same
industry. It isa merger with a direct competitor and hence expands as the firm's operations in
the same industry. Horizontal mergers are designed to achieve economies of scale and result
in reducing the number of competitors in the industry.

Vertical Merger: It is a merger which takes place upon the combination of two
companieswhichare operating in the same industry but at different stages of production or
distribution system. If a company takes over its supplier/producers of raw material, then it
may result in backward integration of its activities. On the other hand, forward integration
may result if a company decides to take over the retailer or Customer Company. Vertical
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merger provides a way for total integration to those firms which are striving for owning of all
phases of the production schedule together with the marketing network

Co generic Merger: It is the type of merger, where two companies are in the same or
relatedindustries but do not offer the same products, but related products and may share
similar distribution channels, providing synergies for the merger. The potential benefit from
these mergers is high because these transactions offer opportunities to diversify around a
common case of strategic resources.

Conglomerate Merger: These mergers involve firms engaged in unrelated type of activities
i.e. thebusiness of two companies are not related to each other horizontally or vertically. In a
pure conglomerate, there are no important common factors between the companies in
production, marketing, research and development and technology
22. Explain the difference between Merger and Amalgamation

Basis for Comparison Merger Acquisition

The merger means the
When one entity purchases the
fusion of two or more than
Meaning business of another entity, it is
two companies voluntarily
known as Acquisition.
to form a new company.
Formation of a new
Yes No
The mutual decision of the
Friendly or hostile decision of
Nature of Decision companies going through
acquiring and acquired companies.

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Minimum number of
3 2
companies involved

To decrease competition
Purpose and increase operational For Instantaneous growth

Generally, the size of The size of the acquiring company

Size of Business merging companies is more will be more than the size of
or less same. acquired company.

Legal Formalities More Less

23. What are the contents of Scheme of amalgamation?
Contents of Amalgamation Scheme
Any model scheme of amalgamation should include the following:
• Appointed Date or Transfer Date: This is usually the first day of the financial
year preceding the financial year for which audited accounts are available with the
companies. In other words, this is a cut-off date from which all the movable and immovable
properties including all rights, powers, privileges of every kind, nature and description of the
transferor-company shall be transferred or deemed to be transferred without any further act,
deed or thing to the transferee company.

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Effective Date: This is the date on which the transfer and vesting of the undertaking of the
transferor-company shall take effect i.e., all the requisite approvals would have been obtained,
i.e., date of filing of High Court order with ROC.
Arrangement with secured and unsecured creditors including debenture-holders.
Arrangement with shareholders (equity and preference): This refers to the exchange ratio,
which willhave to be worked out based on the valuation of shares of the respective companies
as per the audited accounts and accepted methods and valuation guidelines.

Cancellation of share capital/reduction of share capital: This will be necessitated when the
shares ofthe transferor-company(ies) are held by the transferee-company and/or its
subsidiary(ies) or vice versa.
Pending receipt of the requisite approvals to the amalgamation, the transferor-company(ies)
possesses the property to be transferred and to carry on the business for and on behalf and in
trust for the transferee-company.
24. What are the Objects of Takeover?
The objects of a takeover may inter alia be
1. To effect savings in overheads and other working expenses on the strength of combined
2. To achieve product development through acquiring firms with compatible products and
technological/manufacturing competence, which can be sold to the acquirer’s existing
marketing areas, dealers and end users;
3. To diversify through acquiring companies with new product lines as well as new market areas,
as one of the entry strategies to reduce some of the risks inherent in stepping out of the
acquirer’s historical core competence;
4. To improve productivity and profitability by joint efforts of technical and other personnel of
both companies as a consequence of unified control;
5. To create shareholder value and wealth by optimum utilisation of the resources of both
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Subject : Financial Services

6. To achieve economy of numbers by mass production at economical costs;

7. To secure advantage of vertical combination by having under one command and under one roof,
all the stages or processes in the manufacture of the end product, which had earlier been
available in two companies at different locations, thereby saving loading, unloading,
transportation costs and other expenses and also by affecting saving of time and energy
unnecessarily spent on excise formalities at different places and stages;
25. Explain in details about partial demerger and Complete demerger
Partial Demerger
In a partial demerger, one of the undertakings or a part of the undertaking or a department or a
division of an existing company is separated and transferred to one or more new
company/companies, formed with substantially the same shareholders, who are allotted shares
in the new company in the same proportion as the separated division, department etc. bears to
the total undertaking of the company.

Complete Demerger
In the first case, i.e. in the case of partial demerger, the existing company also continues to
maintain its separate legal identity and the new company, a separate legal identity, carries on
the separated or spun off business and undertaking of the existing company.

In a complete demerger, an existing company transfers its various divisions, undertakings etc.
to one or more new companies formed for this purpose. The existing company is dissolved by
passing a special resolution for members’ voluntary winding up and also authorising the
liquidator to transfer its undertakings, divisions etc. to one or more companies as per the
scheme of demerger approved by the shareholders of the company by a special resolution.
The shareholders of the dissolved company are issued and allotted shares in the new company
or companies, as the case may be, on the basis of the pre-determined shares exchange ratio, as

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Subject : Financial Services

per the scheme of demerger.

In the case of complete demerger, the existing company disappears from the corporate scene.
It is voluntarily wound up and its entire business, undertakings etc. are transferred to one or
more new companies.

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Subject : Financial Services

PART – D (10Marks)
(Minimum 2 Questions from Each unit, no maximum limit)
Part D should be Analytical in nature. This question should provide an opportunity to students to apply creativity / logic to answer.
Unit – I

S.No Questions

1. The Trading Procedure on Stock Exchange has been replaced by on-line screen based
electronic trading system. This is mainly done to eliminate problems like theft,
fake/forged transfers, transfer delays and paper work associated with share certificates or
debentures in physical form. This is a process where securities held by the investor in the
physical form are cancelled and the investor is given an electronic entry or number so
that he/she can hold it as an electronic balance in an account. This has increased the
equity cult among the people.

1. Identify and state the process mentioned above.

2. What is the most important requirement for the process identified in (a)?
3. State. State any two values which you think have enhanced the equity cult in the
Answer: Dematerialization – It is the process of holding securities in an electronic form.

1. For this, the investors has to open a ‘Demat account’ with a depository participant
(DP) for holding and transferring securities in the demat form. He / She will also have to
open a bank account for cash transactions in the securities market.
2. Values: Fair dealings (i.e., no danger of loss, theft or forgery of share certificates)
3.Transparency (i.e., participants can see the prices of all securities during real time)

1. Increased efficiency of information (i.e., computer screens displays information on

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Subject : Financial Services

prices) 2. Increased efficiency of operations (i.e., reduction in time, cost and risk error)

Saqib Ltd. is a large credit worthy company operating in the Kashmir Valley. It is
an export oriented unit, dealing in exclusive embroidered shawls. The floods in the
valley have created many problems for the company. Many craftsmen and workers
have been dislocated and raw material has been destroyed. The firm is therefore,
unable to get an uninterrupted supply or raw material, and the duration of the
production cycle has also increased. To add to the problems of the organization, the
suppliers of raw material who were earlier selling on credit are asking the company,
for advance payment or cash payment on delivery. The company is facing a
liquidity crisis. The CEO of the company feels that taking a bank loan is the only
option with the company to meet its short term shortage of cash. As a finance
manager of the company name and explain the alternative to bank borrowing that
the company can use to resolve the crisis.

Ans. Commercial Paper: It is a short term unsecured promissory note, negotiable and
transferable by endorsement and delivery with a fixed maturity period. It is issued by
large and creditworthy companies to raise short term funds at low companies tht are
generally considered to be financially strong.

Unit – II

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Subject : Financial Services

S.No Questions

3. Harsh works as a manager in a software company. He opened a Demat account with a

broking house in order to trade in securities with the money he received as his first
performance bonus. Since then he has been very active in stock trading under the guidance
of a stock broker. However, when he was hospitalized for a few days this year, his wife
received several calls from the stock broker for permission to transact on Harsh’s behalf.
Though she told him to wait till her husband had recovered, the stock broker went ahead and
executed the transactions. When Harsh got home from hospital, he discovered that the
unauthorizedtransactions had led to a loss for him.

Harsh complained to the broking house, but they claimed he had authorized the transactions.
Keeping in new, the guidelines issued by the National Stock Exchange that he had read in
the national newspaper Harsh demanded proof and threatened to file a complain. Since, the
broking house had no evidence that the deals had been authorized they made good the loss
that Harsh had incurred due to the transaction. Inthe context of the above case?

1. What is a Demat account?

2. Who is acting as the depository participant for Harsh?

3. Name the document that is illegally enforceable and helps to settle the claims between the
investor and the broker.


A Demat account is an account used for holding securities in electronic form.

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Subject : Financial Services

The Broking house is acting as the depository participant for Harsh.

A contract note is a legally enforceable document that helps to settle the claims between the
investor and the broker.
TheIDBI (bank) was earning good profits. Shareholders were happy as the bank was paying
regular dividends. The market price of their shares was also steadily rising. The bank was
about to announce the taking over of ‘UK Bank’. The chairman of the bank knew that the
share price of IBM Bank would rise on this announcement. Being a part of the bank, he was
not allowed to buy shares of the bank. He called one of his rich friends X and asked him to
invest Rs. 4 crores in the shares of his bank promising him the capital gains.As expected,
after the announcement, the share prices went up by 50% and the market price of the
chairman’s friend (X) shares was now Rs. 6 crores. As a result, the chariman’s friend earned
a profit of Rs. 2 crores. His friend gave Rs. 1crore to the chairman and kept Rs. 1 crore
withhim. On regular inspection and by conducting enquiries of the brokers involved, the
Securities and Exchange Board of India (SEBI) was able to detect this irregularity. SEBI
imposed a heavy penalty to the chairman. Quoting lines from the above paragraph, identify
and state any two functions performed by the SEBI in the above case.


The two functions performed by SEBI in the given case are stated below:

1. Regulatory function is being performed by SEBI: “on regular inspection and

conducting inquiries of the brokers involved.”

2. Protective function is performed by SEBI: “The SEBI imposed heavy penalty on the

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Subject : Financial Services

Unit – III

S.No Questions

A well known real estate company has managed to carve a niche for itself in this sector. Recently, it
was revealed that the directors of the company have used price sensitive information for their own
personal interest Adequate public disclosures were also not made. SEBI is considering action against
these directors.

1. Name the term used for trading malpractice done by the directors of this company.

2. Identify any two values that the company should have adhered to in order to gain the trust of its


1. Insider trading

2. Values:

 Protection and promotion of investors’ interests

 Transparency

 Efficiency of information
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Subject : Financial Services

 Efficiency of operations
‘X Steel Ltd.’ is a large and credit-worthy company manufacturing steel for the Indian market. It now
wants to cate to the Asian market and decides to invest in new hi-tech machines. Since the investment
is large, it requires long-term finance. It decides to raise funds by issuing equity shares.

The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost the
company decides to tap the money market.

1. Name and explain the money-market instrument the company can use for the above purpose.

2. What is the duration for which the company can get funds through this instrument?

3. State any other purpose for which this instrument can be used. (4 Marks)


1. Commercial paper

2. 15 days to one year

It can also be used for seasonal and working capital needs.

Unit- IV

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Subject : Financial Services

S.No Questions

Madhav’s is one of the India’s most trusted brands in Indian sweets and snacks segment.
The company has manufacturing plants in Kota, Kanpur, New Delhi, and Mumbai.
Madhav’s has its own retail chain stores and a range of restaurants in these cities. Now, the
company plans to extend its business in 12 more cities in India. In order to raise the funds,
its directors have decided to float a public issue through prospectus. Besides, it intends to
raise money to meet the floatation cost in terms of brokerage, underwriting commission,
advertising etc.

In context of the above case:

1. What is the other name used for the funds required to meet floatation costs?

2. Describe briefly the short term instrument popularly used by the companies to raise
for the funds required to meet floatation costs. Who can issue them?

3. Distinguish between the two types of financial markets that the company intends to
approach to meet its financial needs.


1. Bridge financing is the other name used for the funds required to meet floatation

2. Commercial Papers

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Subject : Financial Services

3. Capital Market and Money Market.

During navratras, Varun finalizes a deal to buy a new house. So, he visits a nearby branch
of ‘Subh Bank’ top withdraw Rs. 10 lakhs from his account in order to pay the token money
to the seller. In the bank he observes that a large number of customers are present to make
cash with drawls, probably because it is an auspicious time to make purchases. After
sometime, he overhears one of the bank staff members telling his colleague that, “Today
‘Shubh Bank’ is likely to fall short of cash and to make up for the deficit and maintain its
cash reserve ratio it will have to approach another bank.”

In context of the above case:

1. Identify the instrument that ‘Shubh Bank’ will use to meet its short term
requirements of funds.

2. State any three feature of the instrument as identified in part (a).


1. Call money is the instrument used by ‘Subh Bank’ to meet its short term
requirements of funds.

2. Three features of call money.

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Subject : Financial Services

Unit – V

S.No Questions

9. Explain the Merger and Amalgamation with corporate examples and distinguish Merger and
According to Prof. L.H.Haney, merger is, “a form of business organization which is
established by the outright purchase of the properties of constituents, organizations and the
merging or amalgamating of such properties into a single business unit”.
In a merger, one business unit acquires the other business unit. The acquiring company retains
its entity while the acquired loses its entity.
Examples of Mergers
Acquisition of Modern Foods, Kissan, Tata Oil Mills Co., Ltd (TOMCO), Kwality Walls etc.,
by Hindustan Level Limited(HLL).
Acquisition of ANZ Grindlays Indian operations by Standard Chartered, Times Bank by
HDFC Bank, Bank of Madura by ICICI Bank,
Acquisition of Voltas and Allwyn by Electrolux. Subsequently Electrolux’s – Indian
operations were acquired by Videocon International.
Recent international mergers include – acquisition of Gillette by P&G, Betapharma by
Ranbaxy, IBM’s PC division by Lenovo, Compaq by Hewlett Packard(HP) etc.
In Amalgamation, two or more companies combine to create a new company. All the
combining companies lose their separate existence and entity. The new company takes over
all existing assets and liabilities of the companies amalgamated. The new company allots its
shares to the shareholders of the amalgamating companies.
Example of Amalgamation
For e.g. Arcelor, the world’s largest steel company (which has been since been acquired by

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Subject : Financial Services

Mittal Steel) came into being as a result of amalgamation. French steel company Usinor
amalgamated with Aceralia of Spain and Arbed of Luxembourg in the year 2002 and the new
company formed out of this amalgamation was named as Arcelor.

Difference between Merger and Amalgamation:

Merger Amalgamation
Two or more companies who
share similar operations or are
engaged in the same line of A bigger and financially stronger
business combine to expand their entity takes over a smaller one
services or diversify their
Amalgamation in the nature of
Horizontal, vertical, and
Types purchase and amalgamation in
the nature of merger
The acquiring company retains its
Legal identity Merger gives rise to a new entity identity while the acquired
company’s identity is dissolved
the shareholders of the companies shareholders of the acquired
who are parties to the merger company is added to the existing
Owners of shares
become the shareholders of the number of shareholders of the
new entity acquiring company

10. Explain the Legal and Procedural aspects of Take Over with examples


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Subject : Financial Services

Takeover is acquisition, by one company of controlling interest of the other, usually by

buying all or majority of shares. Takeover may be of different types depending upon the
purpose of acquiring a company.

Appointment of a merchant banker

Before making any public announcement of offer referred to in regulation 10 or regulation 11

or regulation 12, the acquirer shall appoint a merchant banker in Category I holding a
certificate of registration granted by the Board, who is not an associate of or group of the
acquirer or the target company.[Regulation 13]

Public Announcement

A public announcement is an announcement made in the newspapers by the acquirer primarily

disclosing his intention to acquire shares of the target company from existing shareholders by
means of an open offer for not less than 20% of shares.
Public Announcement is made to ensure that the shareholders of the target company are aware
of an exit opportunity available to them.

No misleading information

The public announcement of the offer or any other advertisement, circular, brochure, publicity
material or letter of offer issued in relation to the acquisition of shares shall not contain any
misleading information.

Timing of the public announcement of offer

The acquirer is required to make the P.A within four working days of the entering into an
agreement to acquire shares or deciding to acquire shares/ voting rights of target company or
after any such change or changes as would result in change in control over the target
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Subject : Financial Services

In case of indirect acquisition or change in control, the PA shall be made by the acquirer
within three months of consummation of such acquisition or change in control or restructuring
of the parent or the company holding shares of or control over the target company in India.

Escrow Account

Before making the Public Announcement, the acquirer has to open an escrow account in the
form of cash deposited with a scheduled commercial bank or bank guarantee in favour of the
Merchant Banker or deposit of acceptable securities with appropriate margin with the
Merchant Banker. The Merchant Banker is also required to confirm that firm financial
arrangements are in place for fulfilling the offer obligations. The escrow amount shall be 25%
of the consideration if offer size is less than Rs. 100 cr. and 10% for excess of consideration
above Rs. 100 cr.

Letter of offer

A draft letter of offer is required to be filed with SEBI within 14 days from the date of Public
Announcement .

Specified date:
The public announcement shall specify a date, which shall be the specified date for the
purpose of determining the names of the shareholders to whom the letter of offer should be
sent: However such specified date shall not be later than the thirtieth day from the date of the
public announcement.

Minimum Offer Price and Payments made

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Subject : Financial Services

It is not the duty of SEBI to approve the offer price, however it ensures that all the relevant
parameters are taken in to consideration for fixing the offer price and that the justification for
the same is disclosed in the offer document.

Safeguards incorporated so as to ensure that the Shareholders get their payments

The regulations provide for opening of escrow account. In case, the acquirer fails to make
payment, Merchant Banker has a right to forfeit the escrow account and distribute the

General obligations of the acquirer

The public announcement of an offer to acquire the shares of the target company shall be
made only when the acquirer is able to implement the offer.
· Within 14 days of the public announcement of the offer, the acquirer shall send a
copy of the draft letter of offer to the target company at its registered office address, for being
placed before the board of directors and to all the stock exchanges where the shares of the
company are listed.
· The acquirer shall ensure that the letter of offer is sent to all the shareholders
(including non-resident Indians) of the target company, whose names appear on the register of
members of the company as on the specified date mentioned in the public announcement, so
as to reach them within 45 days from the date of public announcement.
· The date of opening of the offer shall be not later than the [fifty fifth] day from the
date of public announcement.
· The offer to acquire shares from the shareholders shall remain open for a period of 20

Revision of offer

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Subject : Financial Services

The acquirer who has made the public announcement of offer may make upward revisions in
his offer in respect of the price and the number of shares to be acquired, at any time up to
seven working days prior to the date of the closure of the offer.

Withdrawl of offer

The offer once made cannot be withdrawn except in the following circumstances:
· ·Statutory approval(s) required have been refused
· The sole acquirer being a natural person has died
· Such circumstances as in the opinion of the Board merits withdrawal.


The following transactions are however exempted from making an offer and are not required
to be reported to SEBI:
· allotment to underwriter pursuant to any underwriting agreement;
· acquisition of shares in ordinary course of business by;
· Regd. Stock brokers on behalf of clients;
· Regd. Market makers;
· Public financial institutions on their own account;
· banks & FIs as pledges
· Acquisition of shares by way of transmission on succession or by inheritance;
· acquisition of shares by Govt. companies;
· acquisition pursuant to a scheme framed under section 18 of SICA 1985;
· of arrangement/ restructuring including amalgamation or merger or de-merger under
any law or Regulation Indian or Foreign;
· Acquisition of shares in companies whose shares are not listed

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Subject : Financial Services

The Regulations have laid down the general obligations of acquirer, target company and the
Merchant Banker. For failure to carry out these obligations as well as for failure / non
compliance of other provisions of the Regulations, the Regulations have laid down the
penalties for non compliance.

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