2008 exam paper solved

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END TERM EXAMINATION

THIRD SEMESTER [MBA] DECEMBER 2008

PAPER CODE: - MS219 SUBJECT: Financial Markets and Institutions

Q1) What are the different types of markets to be found in the financial system? Explainthe transformation services provided by financial institutions.

A financial market is a broad term describing any marketplace where buyers and sellersparticipate in the trade of assets such as equities, bonds, currencies and derivatives.Financial markets are typically defined by having transparent pricing, basic regulationson trading, costs and fees, and market forces determining the prices of securities thattrade.Investors have access to a large number of financial markets and exchangesrepresenting a vast array of financial products. Some of these markets have always beenopen to private investors; others remained the exclusive domain of major international

banks and financial professionals until the very end of the twentieth century.

Capital Markets

A capital market is one in which individuals and institutions trade financial securities.Organizations and institutions in the public and private sectors also often sell securitieson the capital markets in order to raise funds. Thus, this type of market is composed ofboth the primary and secondary markets. Any government or corporation requires capital(funds) to finance its operations and to engage in its own long-term investments. To dothis, a company raises money through the sale of securities - stocks and bonds in thecompany's name.

Stock Markets

Stock markets allow investors to buy and sell shares in publicly traded companies. Theyare one of the most vital areas of a market economy as they provide companies withaccess to capital and investors with a slice of ownership in the company and the potentialof gains based on the company's future performance.This market can be split into two main sections: the primary market and the secondarymarket. The primary market is where new issues are first offered, with any subsequenttrading going on in the secondary market.

Bond Markets

A bondis a debt investment in which an investor loans money to an entity (corporate orgovernmental), which borrows the funds for a defined period of time at a fixed interestrate. Bonds are used by companies, municipalities, states and U.S. and foreigngovernments to finance a variety of projects and activities. Bonds can be bought and soldby investors on credit markets around the world. This market is alternatively referred toas the debt, credit or fixed-income market. It is much larger in nominal terms that the
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world's stock markets. The main categories of bonds are corporate bonds, municipalbonds, and U.S. Treasury bonds, notes and bills, which are collectively referred to assimply "Treasuries." (For more, see the Bond Basics Tutorial.)

Money Market

The money market is a segment of the financial market in which financial instrumentswith high liquidity and very short maturities are traded. The money market is used byparticipants as a means for borrowing and lending in the short term, from several days tojust under a year. Money market securities consist of negotiable certificates of deposit(CDs), banker's acceptances, U.S. Treasury bills, commercial paper, municipal notes,eurodollars, federal funds and repurchase agreements (repos). Money market investmentsare also called cash investments because of their short maturities.

Cash or Spot Market

Investing in the cash or "spot" market is highly sophisticated, with opportunities for bothbig losses and big gains. In the cash market, goods are sold for cash and are deliveredimmediately. By the same token, contracts bought and sold on the spot market areimmediately effective. Prices are settled in cash "on the spot" at current market prices.This is notably different from other markets, in which trades are determined at forwardprices.The cash market is complex and delicate, and generally not suitable for inexperiencedtraders. The cash markets tend to be dominated by so-called institutional market playerssuch as hedge funds, limited partnerships and corporate investors. The very nature of the

products traded requires access to far-reaching, detailed information and a high level ofmacroeconomic analysis and trading skills.

Derivatives Markets

The derivative is named so for a reason: its value is derived from its underlying asset orassets. A derivative is a contract, but in this case the contract price is determined by themarket price of the core asset. If that sounds complicated, it's because it is. Thederivatives market adds yet another layer of complexity and is therefore not ideal forinexperienced traders looking to speculate. However, it can be used quite effectively as

part of a risk management program.

Examples of common derivatives are forwards, futures, options, swaps and contracts-for-difference (CFDs). Not only are these instruments complex but so too are the strategiesdeployed by this market's participants. There are also many derivatives, structuredproducts and collateralized obligations available, mainly in the over-the-counter (non-exchange) market, that professional investors, institutions and hedge fund managers useto varying degrees but that play an insignificant role in private investing.
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Forex and the Interbank Market

The interbank market is the financial system and trading of currencies among banks andfinancial institutions, excluding retail investors and smaller trading parties. While someinterbank trading is performed by banks on behalf of large customers, most interbank

trading takes place from the banks' own accounts.

The forex market is where currencies are traded. The forex market is the largest, mostliquid market in the world with an average traded value that exceeds $1.9 trillion per dayand includes all of the currencies in the world. The forex is the largest market in theworld in terms of the total cash value traded, and any person, firm or country mayparticipate in this market.

Primary Markets vs. Secondary Markets

A primary market issues new securities on an exchange. Companies, governments andother groups obtain financing through debt or equity based securities. Primary markets,also known as "new issue markets," are facilitated by underwriting groups,

The primary markets are where investors have their first chance to participate in a newsecurity issuance. The issuing company or group receives cash proceeds from the sale,which is then used to fund operations or expand the business.

The secondary market is where investors purchase securities or assets from otherinvestors, rather than from issuing companies themselves. The Securities and ExchangeCommission (SEC) registers securities prior to their primary issuance, then they starttrading in the secondary market on the New York Stock Exchange, Nasdaq or othervenue where the securities have been accepted for listing and trading.

The secondary market is where the bulk of exchange trading occurs each day. Primarymarkets can see increased volatility over secondary markets because it is difficult toaccurately gauge investor demand for a new security until several days of trading haveoccurred. In the primary market, prices are often set beforehand, whereas in thesecondary market only basic forces like supply and demand determine the price of thesecurity.

Secondary markets exist for other securities as well, such as when funds, investmentbanks or entities such as Fannie Mae purchase mortgages from issuing lenders.

The OTC Market

The over-the-counter(OTC) market is a type of secondary market also referred to as adealer market. The term "over-the-counter" refers to stocks that are not trading on a stockexchange such as the Nasdaq, NYSE or American Stock Exchange (AMEX). Thisgenerally means that the stock trades either on the over-the-counter bulletin board
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(OTCBB) or the pink sheets. Neither of these networks is an exchange; in fact, theydescribe themselves as providers of pricing information for securities. OTCBB and pinksheet companies have far fewer regulations to comply with than those that trade shares ona stock exchange. Most securities that trade this way are penny stocks or are from verysmall companies.

Third and Fourth Markets

You might also hear the terms "third" and "fourth markets." These don't concernindividual investors because they involve significant volumes of shares to be transactedper trade. These markets deal with transactions between broker-dealers and largeinstitutions through over-the-counter electronic networks. The third market comprisesOTC transactions between broker-dealers and large institutions. The fourth market ismade up of transactions that take place between large institutions. The main reason thesethird and fourth market transactions occur is to avoid placing these orders through themain exchange, which could greatly affect the price of the security. Because access to thethird and fourth markets is limited, their activities have little effect on the average

investor.

Transformation Services provided by Financial Institutions

Financial institutions provide three transformation services. Firstly, liability, asset andsize transformation consisting of mobilization of funds and their allocation, (provision oflarge loans on the basis of numerous small or retail deposits). Secondly, maturitytransformation by offering the savers the relatively short-term claim or liquid deposit theyprefer and providing borrowers long-term loans which are better matched to the cashflows generated by their investment. Finally, risk transformation by transforming andreducing the risk involved in direct lending by acquiring more diversified portfolios thanindividual savers can. While undertaking these transformation services banks incur risks,transform and embed them in banking products and services. Banks also assumed newroles and accepted new forms of financial intermediation in the past three decades byundertaking currency and interest rate swaps and of dealing in financial futures, optionsand forward agreements. These new instruments provide considerable flexibility inresponding to market situations and adjusting continually assets and liabilities both onand off balance sheet, while enhancing profitability.

Q2) What do you understand by non bank finance companies(NBFC)? Describe brieflythe RBI directions for floating NBFCs and acceptance of deposits by non-bank financecompanies?

Non-banking financial companies (NBFCs) are fast emerging as an important segment ofIndian financial system. It is an heterogeneous group of institutions (other thancommercial and co-operative banks) performing financial intermediation in a variety ofways, like accepting deposits, making loans and advances, leasing, hire purchase, etc.They raise funds from the public, directly or indirectly, and lend them to ultimate
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spenders. They advance loans to the various wholesale and retail traders, small-scaleindustries and self-employed persons. Thus, they have broadened and diversified therange of products and services offered by a financial sector. Gradually, they are beingrecognised as complementary to the banking sector due to their customer-orientedservices; simplified procedures; attractive rates of return on deposits; flexibility and

timeliness in meeting the credit needs of specified sectors; etc.

The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI)within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) and thedirections issued by it under the Act. As per the RBI Act, a 'non-banking financialcompany' is defined as:- (i) a financial institution which is a company; (ii) a non bankinginstitution which is a company and which has as its principal business the receiving ofdeposits, under any scheme or arrangement or in any other manner, or lending in anymanner; (iii) such other non-banking institution or class of such institutions, as the bankmay, with the previous approval of the Central Government and by notification in theOfficial Gazette, specify.

Under the Act, it is mandatory for a NBFC to get itself registered with the RBI as adeposit taking company. This registration authorises it to conduct its business as anNBFC. For the registration with the RBI, a company incorporated under the CompaniesAct, 1956 and desirous of commencing business of non-banking financial institution,should have a minimum net owned fund (NOF) of Rs 25 lakh (raised to Rs 200 lakh w.e.fApril 21, 1999). The term 'NOF' means, owned funds (paid-up capital and freereserves,minus accumulated losses, deferred revenue expenditure and other intangibleassets) less, (i) investments in shares of subsidiaries/companies in the same group/ allother NBFCs; and (ii) the book value of debentures/bonds/ outstanding loans andadvances, including hire-purchase and lease finance made to, and deposits with,

subsidiaries/ companies in the same group, in excess of 10% of the owned funds.

The registration process involves submission of an application by the company in theprescribed format along with the necessary documents for RBI's consideration. If thebank is satisfied that the conditions enumerated in the RBI Act, 1934 are fulfilled, itissues a 'Certificate of Registration' to the company. Only those NBFCs holding a validCertificate of Registration can accept/hold public deposits. The NBFCs accepting publicdeposits should comply with the Non-Banking Financial Companies Acceptance ofPublic Deposits ( Reserve Bank) Directions, 1998, as issued by the bank. Some of theimportant regulations relating to acceptance of deposits by the NBFCs are:-

They are allowed to accept/renew public deposits for a minimum period of 12months and maximum period of 60 months.

They cannot accept deposits repayable on demand. They cannot offer interest rates higher than the ceiling rate prescribed by RBI

from time to time. They cannot offer gifts/incentives or any other additional benefit to the depositors. They should have minimum investment grade credit rating. Their deposits are not insured.


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The repayment of deposits by NBFCs is not guaranteed by RBI.

The types of NBFCs registered with the RBI are:-

Equipment leasing company:- is any financial institution whose principal

business is that of leasing equipments or financing of such an activity. Hire-purchase company:- is any financial intermediary whose principal business

relates to hire purchase transactions or financing of such transactions. Loan company:- means any financial institution whose principal business is that

of providing finance, whether by making loans or advances or otherwise for anyactivity other than its own (excluding any equipment leasing or hire-purchasefinance activity).

Investment company:- is any financial intermediary whose principal business isthat of buying and selling of securities.

Now, these NBFCs have been reclassified into three categories:-

Asset Finance Company (AFC) Investment Company (IC) and Loan Company (LC). Under this classification, 'AFC' is defined as a financial

institution whose principal business is that of financing the physical assets whichsupport various productive/economic activities in the country.

Q3) What are the sebi guidelines relating to venture capital funds ? Discuss in brief theventure capital companies in India,along with their schemes.

The venture capital industry in India is still at a nascent stage. With a view to promoteinnovation, enterprise and conversion of scientific technology and knowledge based ideasinto commercial production, it is very important to promote venture capital activity inIndia. Indias recent success story in the area of information technology has shown thatthere is a tremendous potential for growth of knowledge based industries. This potentialis not only confined to information technology but is equally relevant in several areassuch as bio-technology, pharmaceuticals and drugs, agriculture, food processing,telecommunications, services, etc. Given the inherent strength by way of its skilled andcost competitive manpower, technology, research and entrepreneurship, with properenvironment and policy support, India can achieve rapid economic growth andcompetitive global strength in a sustainable manner.

II. Critical factors for success of venture capital industry:


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While making the recommendations the Committee felt that the following factors arecritical for the success of the VC industry in India:

(A) The regulatory, tax and legal environment should play an enabling role.Internationally, venture funds have evolved in an atmosphere of structural

flexibility, fiscal neutrality and operational adaptability.(B) Resource raising, investment, management and exit should be as simple andflexible as needed and driven by global trends(C) Venture capital should become an institutionalized industry thatprotects investors and investee firms, operating in an environment suitable forraising the large amounts of risk capital needed and for spurring innovationthrough startup firms in a wide range of high growth areas.

(D) In view of increasing global integration and mobility of capital it is important thatIndian venture capital funds as well as venture finance enterprises are able to haveglobal exposure and investment opportunities.

(E) Infrastructure in the form of incubators and R&D need to be promoted using

Government support and private management as has successfully been done bycountries such as the US, Israel and Taiwan. This is necessary for fasterconversion of R & D and technological innovation into commercial products.

Guidelines

1 Multiplicity of regulations need for harmonisation and nodal Regulator:Presently there are three set of Regulations dealing with venture capital activityi.e. SEBI (Venture Capital Regulations) 1996, Guidelines for Overseas VentureCapital Investments issued by Department of Economic Affairs in the MOF in theyear 1995 and CBDT Guidelines for Venture Capital Companies in 1995 whichwas modified in 1999. The need is to consolidate and substitute all these with onesingle regulation of SEBI to provide for uniformity, hassle free single windowclearance. There is already a pattern available in this regard; the mutual fundshave only one set of regulations and once a mutual fund is registered with SEBI,the tax exemption by CBDT and inflow of funds from abroad is availableautomatically. Similarly, in the case of FIIs, tax benefits and foreigninflows/outflows are automatically available once these entities are registeredwith SEBI. Therefore, SEBI should be the nodal regulator for VCFs to provideuniform, hassle free, single window regulatory framework. On the pattern of FIIs,Foreign Ventue Capital Investors (FVCIs) also need to be registered with SEBI.

2 Tax pass through for Venture Capital Funds:

VCFs are a dedicated pool of capital and therefore operates in fiscal neutralityand are treated as pass through vehicles. In any case, the investors of VCFs aresubjected to tax. Similarly, the investee companies pay taxes on their earnings.


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There is a well established successful precedent in the case of Mutual Fundswhich once registered with SEBI are automatically entitled to tax exemption atpool level. It is an established principle that taxation should be only at one leveland therefore taxation at the level of VCFs as well as investors amount to doubletaxation. Since like mutual funds VCF is also a pool of capital of investors, it

needs to be treated as a tax pass through. Once registered with SEBI, it should beentitled to automatic tax pass through at the pool level while maintaining taxationat the investor level without any other requirement under Income Tax Act.

3 Infrastructure and R&D :

Infrastructure development needs to be prioritized using government support andprivate management of capital through programmes similar to the Small BusinessInvestment Companies in the United States, promoting incubators and increasinguniversity and research laboratory linkages with venture-financed startup firms. Thiswould spur technological innovation and faster conversion of research into

commercial products.

4 Self Regulatory Organisation (SRO):

A strong SRO should be encouraged for evolution of standard practices, code ofconduct, creating awareness by dissemination of information about the industry.

Q4) What do you mean by investment trust companies? Have they been successful inIndia? What are the major methods of assessing the risk adjusted performance of mutualfunds?

ANS) Investment Trust Companies are companies which exist to invest in the shares ofother companies. They are used by small investors to gain easy access to a spread ofinvestments. So instead of investing in one company, the investor gets indirect holdingsin a number of companies through the ITC. ITCs are known as closed ended fundsbecause they can only take in more funds by issuing new shares, unlike unit trusts, whichare open ended and can expand at any time by taking in new money and issuing newunits.

A weak rupee means that there is currently an inflation risk but this also makes India

more competitive in the global landscape. Some companies have been negativelyimpacted while others, like exporters, benefit from higher foreign earnings.If foreign investment in India increases then the strength of the rupee would rise and thisappears to have been stimulated by a governmental decision to allow in excess of 50%ownership of foreign companies in the retail area.However, general weakness in global equities and the fact that the Indian market issomewhat more expensive than other emerging markets, means that large investmentflows into the country could be inhibited in the near to mid-term. This adds to the general


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volatility of the Indian marketplace and as investors around the globe are seeking to movetheir money into assets they perceive to be safe due to the global financial climate,predicting future Investment Trust activity in India is challenging.

The major methods of assessing the risk adjusted performance of mutual funds are:

There are five main indicators of investment risk that apply to the analysis of stocks,bonds and mutual fund portfolios. They are alpha, beta, r-squared, standard deviation andthe Sharpe ratio. These statistical measures are historical predictors of investmentrisk/volatility and are all major components of modern portfolio theory (MPT). The MPTis a standard financial and academic methodology used for assessing the performance ofequity, fixed-income and mutual fund investments by comparing them to marketbenchmarks.

All of these risk measurements are intended to help investors determine the risk-reward

parameters of their investments. In this article, we'll give a brief explanation of each ofthese commonly used indicators.

AlphaAlpha is a measure of an investment's performance on a risk-adjusted basis. It takes thevolatility (price risk) of a security or fund portfolio and compares its risk-adjustedperformance to a benchmark index. The excess return of the investment relative to thereturn of the benchmark index is its "alpha."Simply stated, alpha is often considered to represent the value that a portfolio manageradds or subtracts from a fund portfolio's return. A positive alpha of 1.0 means the fundhas outperformed its benchmark index by 1%. Correspondingly, a similar negative alphawould indicate an underperformance of 1%. For investors, the more positive an alpha is,the better it is.

Beta

Beta, also known as the "beta coefficient," is a measure of the volatility, or systematicrisk, of a security or a portfolio in comparison to the market as a whole. Beta is calculatedusing regression analysis, and you can think of it as the tendency of an investment'sreturn to respond to swings in the market. By definition, the market has a beta of 1.0.Individual security and portfolio values are measured according to how they deviate fromthe market.

A beta of 1.0 indicates that the investment's price will move in lock-step with the market.A beta of less than 1.0 indicates that the investment will be less volatile than the market,and, correspondingly, a beta of more than 1.0 indicates that the investment's price will bemore volatile than the market. For example, if a fund portfolio's beta is 1.2, it'stheoretically 20% more volatile than the market.


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Conservative investors looking to preserve capital should focus on securities and fundportfolios with low betas, whereas those investors willing to take on more risk in searchof higher returns should look for high beta investments.

R-Squared

R-Squared is a statistical measure that represents the percentage of a fund portfolio's orsecurity's movements that can be explained by movements in a benchmark index. Forfixed-income securities and their corresponding mutual funds, the benchmark is the U.S.Treasury Bill, and, likewise with equities and equity funds, the benchmark is the S&P500 Index.

R-squared values range from 0 to 100. According to Morningstar, a mutual fund with anR-squared value between 85 and 100 has a performance record that is closely correlatedto the index. A fund rated 70 or less would not perform like the index.

Fast Moving Penny Stocks

Mutual fund investors should avoid actively managed funds with high R-squared ratios,which are generally criticized by analysts as being "closet" index funds. In these cases,why pay the higher fees for so-called professional management when you can get thesame or better results from an index fund?

Standard Deviation

Standard deviation measures the dispersion of data from its mean. In plain English, themore that data is spread apart, the higher the difference is from the norm. In finance,standard deviation is applied to the annual rate of return of an investment to measure itsvolatility (risk). A volatile stock would have a high standard deviation. With mutualfunds, the standard deviation tells us how much the return on a fund is deviating from theexpected returns based on its historical performance.

Sharpe Ratio

Developed by Nobel laureate economist William Sharpe, this ratio measures risk-adjusted performance. It is calculated by subtracting the risk-free rate of return (U.S.Treasury Bond) from the rate of return for an investment and dividing the result by theinvestment's standard deviation of its return.

The Sharpe ratio tells investors whether an investment's returns are due to smartinvestment decisions or the result of excess risk. This measurement is very useful becausealthough one portfolio or security can reap higher returns than its peers, it is only a goodinvestment if those higher returns do not come with too much additional risk. The greateran investment's Sharpe ratio, the better its risk-adjusted performance.

The Bottom Line


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Many investors tend to focus exclusively on investment return, with little concern forinvestment risk. The five risk measures we have just discussed can provide some balanceto the risk-return equation. The good news for investors is that these indicators arecalculated for them and are available on several financial websites, as well as being

incorporated into many investment research reports. As useful as these measurements are,keep in mind that when considering a stock, bond or mutual fund investment, volatilityrisk is just one of the factors you should be considering that can affect the quality of aninvestment.

Q5) What are the SEBI guidelines relating to venture capital funds? Discuss in briefthe venture capital companies in India, along with their schemes.

Answer

Notifications & Circulars

SEBI Guidelines:1. SEBI registered Venture Capital Fund (VCFs) are permitted to invest in securities offoreign companies in terms of regulation 12(ba) of the SEBI (Venture Capital Funds)Regulations 1996. Reserve Bank of India (RBI) vide its Circulars dated April 30, 2007and May 04,2007, issued in this regard, has permitted these VCFs to invest in equity andequity linked instruments only of off-shore venture capital undertakings, subject tooverall limit of USD 500 million and applicable SEBI regulations.2. Accordingly, SEBI registered VCFs, desirous of making investments in off shoreVenture Capital Undertakings may submit their proposal for investment (in the attachedformat) to SEBI for its prior approval. It is clarified that no separate permission from RBIis necessary in this regard.3. For the purpose of such investment, it is clarified that -

i. "Offshore Venture Capital Undertakings" means a foreign company whoseshares are not listed on any of the recognized stock exchange in India or abroad.ii. Investments would be made only in those companies which have an Indianconnection (i.e. company which has a front office overseas, while back officeoperations are in India) and such investments would be upto 10% of the investiblefunds of a VCF.iii. The allocation of investment limits would be done on 'first come- first serve'basis, depending on the availability in the overall limit of USD 500 million.iv. It is clarified that in case a VCF who is allocated certain investment limit,wishes to apply for allocation of further investment limit, the fresh applicationshall be dealt with on the basis of the date of its receipt and no preference shall begranted to it in fresh allocation of investment limit.v. An applicant VCF shall have a time limit of 6 months for making allocatedinvestments in offshore venture capital undertakings. In case the applicant doesnot utilize the limits allocated in the stipulated period of 6 months from the dateof its approval, SEBI may allocate such unutilized limit to other VCFs/applicantswhose applications are pending with it.


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4. These investments would be subject to necessary amendments to Notification No.FEMA120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer orIssue of Any Foreign Security) Regulations, 2004], and will also be governed by therelated directions issued by the RBI from time to time.5. This circular is being issued in exercise of the powers conferred under sub section (1)

of Section 11 of the Securities and Exchange Board of India Act, 1992 and is withoutprejudice to compliances/permissions/approvals, if any, required under any other law.

These are venture capital companies in India.

Responsability India

Accel Partners India

Artheon Ventures

Artiman Ventures

August Capital Partners

Bluerun Ventures

DFJ India

Epiphany Ventures

Helion Venture Partners

IFCI Venture Capital Funds

India Innovation Investors

Inventus (India) Advisory Company

JAFCO Asia

Netz Capital

Nexus India Capital

Ojas Venture Partners Reliance Venture

SAIF Partners

Sequoia Capital

Trident Capital

Veddis Ventures

VentureEast

For Example:

IFCI Venture Capital Funds

IFCI Venture Capital Funds Ltd. (IFCI Venture) was originally set up by IFCI as aSociety by the name of Risk Capital Foundation (RCF) in 1975 to provide institutionalsupport to first generation professionals and technocrats setting up their own ventures inthe medium scale sector through soft loans, under the Risk Capital Scheme. In 1988, RCFwas converted into a company, Risk Capital and Technology Finance Corporation Ltd.(RCTC), when it also introduced the Technology Finance and Development Scheme forfinancing development and commercialisation of indigenous technology. Based on IFCIVenture's credentials and strengths, UTI entrusted it with the management of a new


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venture capital fund named Venture Capital Unit Scheme (VECAUS-III) in 1991. Thesize of VECAUS-III was ` 80 crores, contributed by UTI and IFCI. To reflect the shift inthe companys activities, the name of RCTC was changed to IFCI Venture Capital FundsLtd. (IFCI Venture) in February 2000.

Over the years, IFCI Venture acquired expertise and experience of investing intechnology-oriented & innovative projects. Since its inception, it has provided finance toover 350 ventures and supported commercialization of over 50 new technologies. It haspioneered effort for widening entrepreneurial base in the country and catalysed theintroduction of Venture Capital activity in India.

IFCI Venture Capital Funds Limited (IFCI Venture) has launched three new funds inemerging sectors of the economy namely:

India Automotive Component Manufacturers Private Equity Fund1-Domestic

(IACM-1-D) with a target corpus of Euro 60 million equivalent to ` 396 crore. This Fundwill be dedicated for investment mainly in Indian Automotive Component companies and

in other related/ emerging sectors. India Enterprise Development Fund (IEDF), a Venture Capital fund set up with

target corpus of ` 250 crore to invest in knowledge based projects in key sectors of Indianeconomy with outstanding growth prospects.

Green India Venture Fund (GIVF), a Venture Capital fund set up with a target

corpus of Euro 50 million (approx. 330 crore) with the objective to invest incommercially viable Clean Development Mechanism (CDM), energy efficient and othercommercially viable projects with an aim to reduce negative ecological impact, efficientusage of resources such as energy, power etc and other related sectors/projects.

IFCI Venture has already received in principle approval from SEBI for the three funds.

IFCI Venture with its background & experience is confident of generating good returnsout of these funds.

Q6) Write short note on the following:1. Yield Curve2. Consortium Loaning3. Loan Pricing4. Non-Performing Assets

1. Yield CurveA line that plots the interest rates, at a set point in time, of bonds having equal creditquality, but differing maturity dates. The most frequently reported yield curve comparesthe three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve isused as a benchmark for other debt in the market, such as mortgage rates or bank lendingrates. The curve is also used to predict changes in economic output and growth.


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The shape of the yield curve is closely scrutinized because it helps to give an idea offuture interest rate change and economic activity. There are three main types of yieldcurve shapes: normal, inverted and flat (or humped). A normal yield curve (pictured here)

is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. An inverted yield curve is one in whichthe shorter-term yields are higher than the longer-term yields, which can be a sign ofupcoming recession. A flat (or humped) yield curve is one in which the shorter- andlonger-term yields are very close to each other, which is also a predictor of aneconomic transition. The slope of the yield curve is also seen as important: the greater theslope, the greater the gap between short- and long-term rates.

2. Consortium Loaning :A consortium is an association of two or more individuals,companies, organizations or governments (or any combination of these entities) with theobjective of participating in a common activity or pooling their resources for achieving acommon goal.

Consortium is a Latin word, meaning 'partnership, association or society' and derivesfrom consors 'partner', itself from con- 'together' and sores 'fate', meaning owner ofmeans orcomrade.

Consortium Lending is that type of lending in which two or more banks come together tofinance the big projects requiring huge amount of money. Consortium lending is usually

done by banks to distribute the risks among the group of banks; it is also used by smallerbanks to use as an opportunity to be a part of the big project financing and to gainexpertise in this area. Big banks by resorting to consortium lending not only save theirprospective customers but also build good relations with other banks.

3. Loan Pricing


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Loan pricing is a critically important function in a financial institution's operations. Loan-pricing decisions directly affect the safety and soundness of financial institutions throughtheir impact on earnings, credit risk, and, ultimately, capital adequacy. As such,institutions must price loans in a manner sufficient to cover costs, provide thecapitalization needed to ensure the institution's financial viability, protect the institution

against losses, provide for borrower needs, and allow for growth. Institutions must haveappropriate policy direction, controls, and monitoring and reporting mechanisms toensure appropriate loan pricing. Determining the effectiveness of loan pricing is a criticalelement in assessing and rating an institution's capital, asset quality, management,earnings, liquidity, and sensitivity to market risks.

4. Non-Performing Assets

A Non-performing asset (NPA) is defined as a credit facility in respect of which theinterest and/or installment of principal has remained past due for a specified period of

time.

NPA is a classification used by financial institutions that refer to loans that are injeopardy of default. Once the borrower has failed to make interest or principal paymentsfor 90 days the loan is considered to be a non-performing asset. Non-performing assetsare problematic for financial institutions since they depend on interest payments forincome. Troublesome pressure from the economy can lead to a sharp increase in non-performing loans and often results in massive write-downs.

With a view to moving towards international best practices and to ensure greatertransparency, it has been decided to adopt the 90 days overdue norm for identification

of NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31,2004, a non-performing asset (NPA) shall be a loan or an advance where;

Interest and/or installment of principal remain overdue for a period of more than

90 days in respect of a term loan, The account remains out of order for a period of more than 90 days, in respect

of an overdraft /Cash Credit (OD/CC), The bill remains overdue for a period of more than 90 days in the case of bills

purchased and discounted, Interest and/or installment of principal remains overdue for two harvest seasons

but for a period not exceeding two half years in the case of an advance granted for

agricultural purposes, and Any amount to be received remains overdue for a period of more than 90 days in

respect of other accounts.

Q7) The emergence of SEBI on the horizon of Indian capital market has heralded an eraof protection of investors. Explain with reference to the guidelines issued by the SEBI inthis respect.


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SEBI (Securities and Exchange Board of India)

It was formed officially by the Government of India in 1992 with SEBI Act 1992 beingpassed by the Indian Parliament. SEBI is headquartered in the business district ofBandraKurla Complex complex in Mumbai, and has Northern, Eastern, Southern and Western

regional offices inNew Delhi, Kolkata, Chennai and Ahmedabad.

Controller of Capital Issues was the regulatory authority before SEBI came intoexistence; it derived authority from the Capital Issues (Control) Act, 1947.

Initially SEBI was a non statutory body without any statutory power. However in 1995,the SEBI was given additional statutory power by the Government of India through anamendment to the Securities and Exchange Board of India Act 1992. In April, 1998 theSEBI was constituted as the regulator of capital markets in India under a resolution of the

Government of India.

Protection Of The Investors By SEBI

The Primary function of Securities and Exchange Board of India under the SEBI Act,1992 is the protection of the investors interest and the healthy development of Indianfinancial markets. It is a very difficult task for the regulators to prevent the scams in themarkets considering the great difficulty in regulating and monitoring each and every

segment of the financial markets and the same is true for the Indian regulator also. Butwhat are the responsibilities of the regulators to set the system right once the scam hastaken place, especially the responsibility of redressing the grievances of the investors sothat their confidence is restored? The redressal of investors grievances, after the scam, isthe most challenging task before the regulators all over the world and the Indian regulatoris not an exception.

One of the weapons in the hand of the regulators is the collection and distribution ofdisgorged money to the aggrieved investors. SEBI had issued guidelines for theprotection of the investors through the Securities and Exchange Board of India(Disclosure and Investor Protection) Guidelines, 2000. These Guidelines have been

issued by the Securities and Exchange Board of India under Section 11 of the Securitiesand Exchange Board of India Act, 1992.

Guidelines that are offered by SEBI

Eligibility Norms for Companies Issuing Securities
http://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Parliament_of_Indiahttp://en.wikipedia.org/wiki/Bandra_Kurla_Complexhttp://en.wikipedia.org/wiki/Bandra_Kurla_Complexhttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/New_Delhihttp://en.wikipedia.org/wiki/Kolkatahttp://en.wikipedia.org/wiki/Chennaihttp://en.wikipedia.org/wiki/Ahmedabadhttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Parliament_of_Indiahttp://en.wikipedia.org/wiki/Bandra_Kurla_Complexhttp://en.wikipedia.org/wiki/Bandra_Kurla_Complexhttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/New_Delhihttp://en.wikipedia.org/wiki/Kolkatahttp://en.wikipedia.org/wiki/Chennaihttp://en.wikipedia.org/wiki/Ahmedabad


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Provisions regarding this are enshrined in Chapter-II of the said guidelines. No companyshall make any issue of a public issue of securities, unless a draft prospectus has beenfiled with the Board, through an eligible Merchant Banker, at least 21 days prior to thefiling of Prospectus with the Registrar of Companies (ROCs). Provided that if, within 21days from the date of submission of draft Prospectus, the Board specifies changes, if any,

in the draft Prospectus (without being under any obligation to do so), the issuer or theLead Merchant banker shall carry out such changes in the draft prospectus before filingthe prospectus with ROCs.

No listed company shall make any issue of security through a rights issue where theaggregate value of securities, including premium, if any, exceeds Rs.50 lacs, unless theletter of offer is filed with the Board, through an eligible Merchant Banker, at least 21days prior to the filing of the Letter of Offer with RSE. Provided that if, within 21 daysfrom the date of filing of draft letter of offer, the Board specifies changes, if any, in thedraft letter of offer, (without being under any obligation to do so), the issuer or the LeadMerchant banker shall carry out such changes before filing the draft letter of offer. No

company shall make an issue of securities if the company has been prohibited fromaccessing the capital market under any order or direction passed by the Board.

Pricing By Companies Issuing SecuritiesThese provisions are being dealt in the Chapter-III of the guidelines. A listed companywhose equity shares are listed on a stock exchange, may freely price its equity shares andany security convertible into equity at a later date, offered through a public or rightsissue. An unlisted company eligible to make a public issue and desirous of getting itssecurities listed on a recognised stock exchange pursuant to a public issue, may freelyprice its equity shares or any securities convertible at a later date into equity shares. Aneligible company shall be free to make public or rights issue of equity shares in anydenomination determined by it in accordance with Sub-section (4) of Section 13 of theCompanies Act, 1956 and in compliance with the following and other norms as may bespecified by SEBI from time to time:

In case of initial public offer by an unlisted company, if the issue price is Rs. 500/- ormore, the issuer company shall have a discretion to fix the face value below Rs. 10/- pershare subject to the condition that the face value shall in no case be less than Rs. 1 pershare; and, if issue price is less than Rs. 500 per share, the face value shall be Rs. 10/- pershare; The disclosure about the face value of shares (including the statement about theissue price being X times of the face value) shall be made in the advertisement, offerdocuments and in application forms in identical font size as that of issue price or priceband.)

Pre- Issue ObligationsThe pre issue obligations are provided in Chapter-V, they are as follows:- The lead merchant banker shall exercise due diligence. The standard of due diligence shall be such that the merchant banker shall satisfyhimself about all the aspects of offering, veracity and adequacy of disclosure in the offerdocuments.


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The liability of the merchant banker shall continue even after the completion of issueprocess.No company shall make an issue of security through a public or rights issue unless aMemorandum of Understanding has been entered into between a lead merchant bankerand the issuer company specifying their mutual rights, liabilities and obligations relating

to the issue.

Contents Of Offer DocumentIn addition to the disclosures specified in Schedule II of the Companies Act, 1956, theprospectus shall also contain all material information which shall be true and adequate soas to enable the investors to make informed decision on the investments in the issue. Theprospectus shall also contain the information and statements specified in this chapter andshall as far as possible follow the order in which the requirements are listed in thischapter and summarized in Schedule VIIA.

Consequence Of Non-Observance Of The Guidelines

SEBI in case of non-observance of these guidelines (Section 11B) as it seems to be a barfrom doing such things which may prejudice the interest of the investors the board cangive the following directions:-Direct the persons concerned to refund any money collected under an issue to theinvestors with or without requisite interest, as the case may be, direct the personsconcerned not to access the capital market for a particular period, direct the stockexchange concerned not to list or permit trading in the securities, direct the stockexchange concerned to forfeit the security deposit deposited by the issuer company, anyother direction which the Board may deem fit and proper in the circumstances of the case.

Provided that before issuing any directions the Board may give a reasonable opportunityto the person concerned. Provided further that if any interim direction is sought to bepassed, the Board may give post decisional hearing to such person.

Future Overcast Of The Investors

SEBI being a premiere institution for dealing with the problems relating to securities hasadvanced a long way towards protecting the investors from the hazards of the predatorsexisting in the market. As already stated before it has compiled a great bunch ofguidelines dedicated to this cause. But the real scenario which came as a consequencewas that only the big fishes could escape the net and the small ones were still striving touphold their existence. In this matter, according to a daily newspaper it has become clearthat SEBI had already received suggestion and advice regarding the need for a separateenactment concerning the small investors. As far as it is concerned, the Government hasthought of introducing an independent legislation on investor protection to safeguard theinterests of small investors. A separate legislation had also been recommended in thereport prepared by Mr. Mitra, who was commissioned by the Finance Ministry to draw upthe terms of reference for a new Bill. A debate has been on over the need for a separatelegislation for protecting the interests of small investors, considering that there aremultiple agencies involved in policing companies that raise funds from the public be itpublic listed companies, or NBFCs (Non Banking Financial Companies). These include


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the capital markets regulator, SEBI, the banking regulator, RBI, and the Department ofCompany Affairs (DCA) which is responsible for regulating unlisted companies. SEBIhas been in favour of a separate regulatory agency for the protection of small investors.The regulator had earlier submitted a proposal to the Finance Ministry, outlining the needfor a new Act. The setting up of a comprehensive fund for the protection of investors has

also been recommended by Mr. Mitra which we see in reality to have been alreadyexisting today. In fact, the report has suggested that the existing Investor Protection Fund,the corpus of which is to come from unclaimed dividends, should be merged with thenew fund.

Q8) Explain in detail the role and importance of financial institutions and banks in theemerging new environment of privatization and globalization in India.ANSWER: Financial sector plays an indispensable role in the overall development of a

country. The most important constituent of this sector is the financial institutions, whichact as a conduit for the transfer of resources from net savers to net borrowers, that is,from those who spend less than their earnings to those who spend more than theirearnings. The financial institutions have traditionally been the major source of long-termfunds for the economy. These institutions provide a variety of financial products andservices to fulfill the varied needs of the commercial sector. Besides, they provideassistance to new enterprises, small and medium firms as well as to the industriesestablished in backward areas. Thus, they have helped in reducing regional disparities byinducing widespread industrial development.

The Government of India, in order to provide adequate supply of credit to various sectors

of the economy, has evolved a well developed structure of financial institutions in thecountry. These financial institutions can be broadly categorised into All India institutionsand State level institutions, depending upon the geographical coverage of theiroperations. At the national level, they provide long and medium term loans at reasonablerates of interest. They subscribe to the debenture issues of companies, underwrite publicissue of shares, guarantee loans and deferred payments, etc. Though, the State levelinstitutions are mainly concerned with the development of medium and small scaleenterprises, but they provide the same type of financial assistance as the national levelinstitutions.

Banking system and the Financial Institutions play very significant role in the economy.First and foremost is in the form of catering to the need of credit for all the sections ofsociety. The modern economies in the world have developed primarily by making bestuse of the credit availability in their systems. An efficient banking system must cater tothe needs of high end investors by making available high amounts of capital for bigprojects in the industrial, infrastructure and service sectors. At the same time, the mediumand small ventures must also have credit available to them for new investment andexpansion of the existing units. Rural sector in a country like India can grow only ifcheaper credit is available to the farmers for their short and medium term needs.


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The banks and the financial institutions also cater to another important need of the societyi.e. mopping up small savings at reasonable rates with several options. The common manhas the option to park his savings under a few alternatives, including the small savingsschemes introduced by the government from time to time and in bank deposits in theform of savings accounts, recurring deposits and time deposits. Another option is to

invest in the stocks or mutual funds.Banks today are free to determine their interest rates within the given limits prescribed bythe RBI. It is now easier for the banks to open new branches. But the banking sectorreforms are still not complete. A lot more is required to be done to revamp the publicsector banks. Mergers and amalgamation is the next measure on the agenda of thegovernment. The government is also preparing to disinvest some of its equity from thePSU banks.Banks and financial intuitions have played major role in the economic development ofthe country and most of the credit- related schemes of the government to uplift the poorerand the under-privileged sections have been implemented through the banking sector.The role of the banks has been important, but it is going to be even more important in the

future.

Submitted To Submitted By:

Ms.Meenakshi Kaushik Ms. Nidhi Sharma

HoD, MBA Assistant Professor

RDIAS RDIAS


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2008 exam paper solved

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