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MF0017

MF0017

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Published by garima bhatngar
sem 4 finance
sem 4 finance

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Published by: garima bhatngar on Mar 07, 2013
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08/13/2013

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Q1. Define Merchant Banking and explain its function.
 
Ans
:-
Merchant banking is an essential service provided by financial institutions that help in the growthof corporate sector, which eventually reflects in the overall growth and economic development of thecountry.
Functions of merchant banking
 The following are the main functions of merchant banking:
Issue management
 
 – 
A major function of merchant banking is issue management. The issue can bethrough offer of sale or private placements, prospectus, and so on. The issue management includes thefollowing functions with respect to issue through prospectus:
 
To obtain approval for the issue from the SEBI.
 
To arrange underwriting for the proposed issue.
 
To draft and finalise the prospectus and to obtain clearance from the stock exchange, auditors,underwriters and registrar of companies.
 
To select registrar of the issue, advertising agencies, underwriters, bankers and brokers to theissue and finalise the charges to be paid to the registrar.
 
To arrange press conferences, and investors and brokers through advertising agency.
 
To finalise the terms of issue to make the issue more attractive.
Pre-investment studies of investors
 
 – 
The merchant bankers undertake the practicality surveys inselected areas of client
’s interest. It also includes the studies for foreign organisations which are planning
for joint ventures in India. The survey covers the advice on the nature of participation and Governmentregulations. Pre-investment study covers the study of the project and includes the following aspects:
 
Developing or reviewing of project profile.
 
Preparing project reports after analysing financial, market and economic feasibility.
 
Estimating the cost of the project.
 
Studying the procedural aspects of project implementation.
 
Determining the source of financing and deciding the capital structure.
 
Assisting in legal formalities for implementing the project.
Corporate counselling
 
 – 
Corporate counselling refers to the activities undertaken to ensure effectiverunning of a corporate enterprise through efficient management of finance. A merchant banker guides theclients on organisational goals, choice of product and market survey, forecasting a product, cost analysis,investment decisions, pricing methods, capital management and expenditure control, market strategy andso on. Corporate counselling is a facility provided by merchant bankers to corporate enterprises free of charge. This is to improve the performance of the enterprise. Merchant bankers also provide services sucha
s building a good image among the investors which help in increasing the market value of investor’s
equity shares. The following are the areas in which the corporate counselling is provided:
 
Area of diversification considering the Government’s licensing an
d economic policies.
 
Market analysis for growth, present and future demand, and profitability of each product produced by the corporate enterprise. The analysis also helps to determine whether to continuethe product or not.
 
Project counselling
 
 – 
Project counselling is a part of corporate counselling which is related to projectfinance. A merchant banker provides the clients project counselling that involves providing advice on procedural aspects of project implementation, conducting financial study of the project, providingassistance in project profiles, providing assistance in seeking approvals from Government of India for foreign technical and financial collaboration agreements.
Loan syndication
 
 – 
A merchant banker helps the clients to get loan for the project. They also help inconducting appraisal and designing capital structure.
Portfolio management
- Portfolio management refers to making decisions related to investment of cashresources of a corporate enterprise in marketable securities by deciding the type of security to be purchased. A merchant banker helps the clients in making the right choice of investment to obtainoptimum investment, undertaking investment in securities conducting critical evaluation of investment portfolio, and so on.
Project finance
 
 – 
A merchant banker who undertakes a project scheme also assists in arranging acomprehensive package for the project funding. The process involves the study of the pattern of financingavailable from merchant banks and financial institutions. The merchant bankers work closely with theclient and the technical consultant and submit a complete financial report to the client. They also provideassistance in legal documentation for the finance arranged.
Working capital
 – 
Merchant bankers assist in arranging finance for working capital particularly for newventures. For existing firms, the merchant bankers arrange the funds from non-traditional sources such asthrough issue of debentures, and so on. For example, Central Bank of India (CBI) has started workingcapital finance as one of the merchant banking service area.
Managerial and technical services
 
 – 
Merchant bankers provide services to deal with problems intechnical, financial and managerial fields.
Q2 Explain the taxation aspects of Hire-Purchase Transaction.Ans:-
The taxation aspects of hire purchase are divided into three parts. Let us now learn about incometax, sales tax and interest tax.
Income tax
 Hire purchase offers tax benefits to both hire purchase vendor, (finance company) and the hirer (user).
Assessment of hirer
As per provisions under the Income Tax Act, the hirer is entitled to a tax shield on depreciation calculatedon the cash purchase price, and the tax shield on the finance charge. The finance charge is the difference between the hire purchase price and the cash price. The following are the methods of distributing thefinance charge evenly:
 
Equal or level distribution.
 
Distribution based on sum-of-years-digits method.
 
Rate of return method.
 
The hire purchase agreement is terminated if it does not materialise.
 
Assessment of owner
The rental charge that the vendor receives is liable for tax as profits and gains of business.
Tax planning in hire purchase
The hire purchase transaction is used as a tax planning device in the following ways:
 
The net income is inflated at the end of the transaction and can affect the tax liability. This isdone by distributing the finance charge over the agreement period. The hirer can postpone his taxliability by allocating finance charge based on the rate of return method.
 
Tax planning can use hire purchase as an intermediary between the lessor and the lessee byintroducing an intermediate financier. For example, A wants to lease an asset to B. C is anintermediary. C takes the hire purchase from A and gives the asset to B on lease. In this strategy,C gets advantage of depreciation and finance charge against his income from the lease rentals.This helps in postponing his taxes.C can pass off some income to A in the form of high hire charges, and to B as low lease rentals.
Sales tax
The following are the important features of sales tax relating to hire purchase transactions after theConstitution Act, 1982:
 
Hire purchase as sale
 
 – 
Hire purchase is considered as a deemed sale and tax are levied after thedelivery of the equipment between the vendor and the hirer.
 
Taxable quantum
 – 
The quantum of sales tax is related to the sales price in hire purchasecontract which is the total amount to be paid before the transfer of goods.
 
States permitted to impose tax
 
 – 
The state that is entitled to impose sales-tax is when a hire purchase transaction is entered in the state where the goods are lying. If the contract of hire purchase is entered into one state and the goods are in another state, then the entitlement to tax isin the state which the goods are delivered by the vendor to the hirer. Sales tax is not levied on hire purchase if the state in which the goods are delivered has a single point levy system. Sales tax islevied on hire purchase transactions that are controlled by finance company only when they arethe dealers in the type of goods given on hire.
 
Rate of tax
 
 – 
The rate of sales tax on hire purchase varies from state to state. The rate in force onthe date of delivery of goods to the hirer is applicable.
Interest tax
Under the Interest Tax Act, 1974 (IT Act) the hire purchase finance companies must pay interest tax onthe total amount of interest earned less bad debts in the previous year at two per cent. This is a deductibleexpense under the IT Act.
Q3. Explain the concept of factoring. What are the characteristics of factoring?
 
Ans:-
Concept of factoring
 Factoring is an arrangement between a financial institution (the factor), usually a bank and a businessconcern, selling goods to the customer. In factoring, the factors buys the accounts receivable of a client

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thanx garima nd plz upload MB0053 als0
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