Unit – I
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Subject : Financial Services
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Subject : Financial Services
Unit – II
S.No Question
(a) Corporate counselling (b) Lease financing (c) Profit management (d) Issue
management.
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
a) RBI b)IRDA C)SEBI D)Both SEBI and GOI
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 ________.
C
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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Underwriting.
Unit – III
S.No Question
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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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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(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
these.
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
these.
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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(a) Income notes (b) Debt instrument (c) Equity instrument (d) None of
these
80. ‐‐‐‐‐‐‐‐‐ refers to transfer of management control. B
(a)Bridging (b) Buyout (c) Buyin (d) None of these
Unit – V
S.No Question
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Subject : Financial Services
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Subject : Financial Services
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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
Answer:
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
clients.
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
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.
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Subject : Financial Services
houses, factors, depositories, credit rating agencies, venture capital institutions, etc
arranges finances with the help of financial institutions, banks, stock exchanges and
market.
6 List out the Importance of Capital Market?
Answer:
It is only with the help of capital market, long-term funds are raised by the business
community.
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
7
Write a short notes on Classification of capital Market
Answer:
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
guarantee.
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Subject : Financial Services
Answer:
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Unit – II
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Subject : Financial Services
S.No Questions
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
finance.
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
forfeited.
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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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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business operations.
• Less Costly :- Leasing as a method of financing is less costly than other alternatives
available.
• 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
asset.
• 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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(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
period.
(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
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Subject : Financial Services
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
assets.
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)
Here:
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
transferee.
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.
Answer:
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.
Answer:
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?
Answer:
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.
29. Give some details about SEBI Guidelines for Post -Issue Management.
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Answer:
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.
UNIT -IV
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S.No Questions
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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.
Answer:
(i) Risk Capital and Technology Finance Corporation Limited. (ii) Technology
Development and Information Company of India Limited (TDICI).
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.
39.
List out the Features of venture capital.
Answer:
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
return.
40. List out the Credit rating Agency in India.
Answer:
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
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.
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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.
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
Answer:
Friendly Takeover:
Friendly takeover is with the consent of taken over company. In friendly takeover, there
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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
banks.
47. State the various approvals in the scheme of Amalgamation.
Answer:
(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
Answer:
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.
Answer:
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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S.No Questions
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
investments.
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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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
policies.
6. Transfer function: A financial system provides a mechanism for the transfer of the resources
across geographic boundaries.
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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• 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)
etc
BASIS FOR
MONEY MARKET CAPITAL MARKET
COMPARISON
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Subject : Financial Services
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-
manager.
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
Answer:
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Subject : Financial Services
BASIS FOR
PRIMARY MARKET SECONDARY MARKET
COMPARISON
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
(NIM)
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
diversification.
How many times a Only once Multiple times
security can be sold?
Buying and Selling Company and Investors Investors
between
Who will gain the Company Investors
amount on the sale of
shares?
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
Answer:
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
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
asset.
6. Deposit
Lessee is not required to make any deposit whereas 20% deposit is required in hire
purchase.
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.
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.
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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.
Answer:
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?
Answer:
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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Subject : Financial Services
➢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.
2.Operating Lease
➢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.
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.
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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Subject : Financial Services
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Subject : Financial Services
Unit – III
S.No Questions
11. Explain the difference between open-ended and closed ended mutual funds.
Answer:
BASIS FOR
OPEN-ENDED FUNDS CLOSED-ENDED FUNDS
COMPARISON
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BASIS FOR
OPEN-ENDED FUNDS CLOSED-ENDED FUNDS
COMPARISON
Answer:
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.
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.
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.
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
guidelines.
‘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.
Liquidity
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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Subject : Financial Services
Unit- IV
S.No Questions
Answer:
Answer:
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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Subject : Financial Services
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.
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.
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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Subject : Financial Services
Answer:
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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Subject : Financial Services
some cases, it will also be used for marketing the products and services. This helps the company
launch their operations.
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
Expansion investing is also broken up into three subgroups: 2nd stage financing, bridge financing,
and 3rd 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
financing.
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.
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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Subject : Financial Services
will be used by a company for marketing, plant expansion, and new products or services.
Buyout
The buyout stage of investing can be broken down into two subgroups: acquisition financing and
leveraged buyouts (LBO).
Answer:
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:
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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Subject : Financial Services
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.
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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Subject : Financial Services
Unit – V
S.No Questions
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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Subject : Financial Services
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
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Subject : Financial Services
Minimum number of
3 2
companies involved
To decrease competition
Purpose and increase operational For Instantaneous growth
efficiency.
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Subject : Financial Services
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?
Answer:
The objects of a takeover may inter alia be
1. To effect savings in overheads and other working expenses on the strength of combined
resources;
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
companies;
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Subject : Financial Services
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
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. 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)
prices) 2. Increased efficiency of operations (i.e., reduction in time, cost and risk error)
2.
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
Page 76 of 89
Subject : Financial Services
S.No Questions
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?
3. Name the document that is illegally enforceable and helps to settle the claims between the
investor and the broker.
Answer:
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Subject : Financial Services
A contract note is a legally enforceable document that helps to settle the claims between the
investor and the broker.
4.
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.
Answers.
The two functions performed by SEBI in the given case are stated below:
2. Protective function is performed by SEBI: “The SEBI imposed heavy penalty on the
Chairman
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Subject : Financial Services
Unit – III
S.No Questions
5.
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
investors.
Answers.
1. Insider trading
2. Values:
Transparency
Efficiency of information
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Subject : Financial Services
Efficiency of operations
6.
‘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)
Answers.
1. Commercial paper
Unit- IV
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Subject : Financial Services
S.No Questions
7.
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.
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.
Answers.
1. Bridge financing is the other name used for the funds required to meet floatation
costs.
2. Commercial Papers
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Subject : Financial Services
8.
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.”
1. Identify the instrument that ‘Shubh Bank’ will use to meet its short term
requirements of funds.
Answers.
1. Call money is the instrument used by ‘Subh Bank’ to meet its short term
requirements of funds.
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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
Amalgamation
Answers:
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.
Amalgamation:
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.
Merger Amalgamation
Two or more companies who
share similar operations or are
engaged in the same line of A bigger and financially stronger
Creation
business combine to expand their entity takes over a smaller one
services or diversify their
activities
Amalgamation in the nature of
Horizontal, vertical, and
Types purchase and amalgamation in
conglomeration
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
Answer:
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Subject : Financial Services
Public Announcement
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.
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
company.
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.
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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.
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
proceeds
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
days.
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.
Exemptions
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
Penalties
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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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