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MF 0011 Mergers and Acquisitions Set- 1Q.1 What are the basic steps in strategic planning for a merger?

Ans. Basic steps in Strategic planning in Merger : Any merger and acquisitioninvolve the following critical activities in strategic planning processes. Some of theessential elements in strategic planning processes of mergers and acquisitions are aslisted here below :1. Assessment of changes in the organization environment2. Evaluation of company capacities and limitations3. Assessment of expectations of stakeholders4. Analysis of company, competitors, industry, domestic economy and internationaleconomies5. Formulation of the missions, goals and polices6. Development of sensitivity to critical external environmental changes7. Formulation of internal organizational performance measurements8. Formulation of long range strategy programs9. Formulation of mid-range programmes and short-run plans10. Organization, funding and other methods to implement all of the proceedingelements11. Information flow and feedback system for continued repetition of all essentialelements and for adjustment and changes at each stage12. Review and evaluation of all the processesIn each of these activities, staff and line personnel have important Responsibilities inthe strategic decision making processes. The scope of mergers and acquisition set thetone for the nature of mergers and acquisition activities and in turn affects the factorswhich have significant influence over these activities. This can be seen by observingthe factors considered during the different stages of mergers and acquisition activities.Proper identification of different phases and related activities smoothen the process of involved in merger Q.2 What are the sources of operating synergy? Ans. Sources of Operating Synergy Operating synergies are those synergies thatallow firms to increase their operating income, increase growth or both. We wouldcategorize operating synergies into four types:1. E conomies of scale that may arise from the merger, allowing the combined firm tobecome more cost-efficient and profitable. Economics of scales can be seen in mergersof firms in the same business For example : two banks combining together to createa larger bank. Merger of HDFC bank with Centurian bank of Punjab can be taken asan example of cost reducing operating synergy. Both the banks after combination canexpect to cut costs considerably on account of sharing of their resources and thusavoiding duplication of facilities available.2. Greater pricing power from reduced competition and higher market share, whichshould result in higher margins and operating income. This synergy is also more likely

to show up in mergers of firms which are in the same line of business and should bemore likely to yield benefits when there are relatively few firms in the business. Whenthere are more firms in the industry ability of firms to exercise relatively higher pricereduces and in such a situation the synergy does not seem to work as desired. Anexample of limiting competition to increase pricing power is the acquisition of universal luggage by Blow Plast. The two companies were in the same line of businessand were in direct competition with each other leading to a severe price war andincreased marketing costs. After the acquisition blow past acquired a strong hold onthe market and operated under near monopoly situation. Another example is theacquisition of Tomco by Hindustan Lever.3. Combination of different functional strengths , combination of differentfunctional strengths may enhance the revenues of each merger partner thereby enabling each company to expand its revenues. The phenomenon can be understoodin cases where one company with an established brand name lends its reputation to acompany with upcoming product line or a company. A company with strongdistribution network merges with a firm that has products of great potential but isunable to reach the market before its competitors can do so. In other words the twocompanies should get the advantage of the combination of their complimentary functional strengths.4. Higher growth in new or existing markets, arising from the combination of the twofirms. This would be case when a US consumer products firm acquires an emergingmarket firm, with an established distribution network and brand name recognition,and uses these strengths to increase sales of its products.Operating synergies canaffect margins and growth, and through these the value of the firms involved in themerger or acquisition.Synergy results from complementary activities. This can beunderstood with the following example E xample : Consider a situation where thereare two firms A and B. Firm A is having substantial amount of financial resources(having enough surplus cash that can be invested somewhere) while firm B is havingprofitable investment opportunities ( but is lacking surplus cash). If A and B combinewith each other both can utilize each other strengths, for example here A can invest itsresource in the opportunities available to B. note that this can happen only when thetwo firms are combined with each other or in other words they must act in a way as if they are one. Q.3 E xplain the process of a leveraged buyout.Ans. In the realm of increased globalized economy, mergers and acquisitions haveassumed significant importance both with the country as well as across the boarders.Such acquisitions need huge amount of finance to be provided. In search of an idealmechanism to finance and acquisition, the concept of

Leverage Buyout (LBO) hasemerged. LBO is a financing technique of purchasing a private company with the helpof borrowed or debt capital. The leveraged buyout are cash transactions in naturewhere cash is borrowed by the acquiring firm and the debt financing represents 50%or more of the purchase price. Generally the tangible assets of the target company areused as the collateral security for the loans borrowed by acquiring firm in order tofinance the acquisition. Some times, a proportionate amount of the long termfinancing is secured with the fixed assets of the firm and in order to raise the balance

amount of the total purchase price, unrated or low rated debt known as junk bondfinancing is utilized. Modes of purchase There are a number of types of financing which can be used in anLBO. These include : Senior debt : this is the debt which ranks ahead of all other debt and equity capital inthe business. Bank loans are typically structured in up to three trenches : A, B and C. The debt is usually secured on specific assets of the company, which means the lendercan automatically acquire these assets if the company breaches its obligations underthe relevant loan agreement; therefore it has the lowest cost of debt. These obligationsare usually quite stringent. The bank loans are usually held by a syndicate of banksand specialized funds. Typically, the terms of senior debt in an LBO will requirerepayment of the debt in equal annual installments over a period of approximately 7 years. Subordinated debt : This debt ranks behind senior debt in order of priority on any liquidation. The terms of the subordinated debt are usually less stringent than seniordebt. Repayment is usually required in one ¶bullet· payment at the end of the term.Since subordinated debt gives the lender less security than senior debt, lending costsare typically higher. An increasingly important form of subordinated debt is the high yield bond, often listed on Indian markets. High yield bonds can either be senior orsubordinated securities that are publicly placed with institutional investors. They arefixed rate, publicly traded, long term securities with a looser covenant package thansenior debt though they are subject to stringent reporting requirements. Mezzanine finance : This is usually high risk subordinated debt and is regarded as atype of intermediate financing between debt and equity and an alternative of high yieldbonds. An enhanced return is made available to lenders by the grant of an ¶equity kicker· which crystallizes upon an exit. A form of this is called a PIK, which reflectsinterest ¶paid in kind·, or rolled up into the principal, and generally includes anattached equity warrant. Loan stock : This can be a form of equity financing if it is convertible into equity capital. The question of whether loan stock is tax deductible should be investigatedthoroughly with the company·s advisers. Preference share : This forms part of a company·s share capital and usually givespreference shareholders a fixed dividend and fixed share of the company·s equity. Ordinary shares : This is the riskiest part of a LBOs capital structure. However,ordinary shareholders will enjoy majority of the upside if the company is successful. Q.4 What are the cultural aspects involved in a merger. Give sufficientexamples.Ans. The value chains of the acquirer and the acquired, need to be integrated inorder to achieve the value creation objectives of the acquirer. This integration processhas three dimensions: the technical, political and cultural. The technical integration issimilar to the capability transfer discussed above. The integration of social interaction and political relationships represents the informal processes and systems whichinfluence people·s ability and motivation to perform. At the time of integration, theacquirer should have regard to these political relationships, if acquired employees arenot to feel unfairly treated.An important aspect of integration is the cultural integration of the acquiring andacquired firms. The culture of an organization is embodied in its collective valuesystems, beliefs, norms, ideologies myths and rituals. They can motivate people andcan become valuable sources of efficiency and effectiveness. The following are theillustrative organizational diverse cultures which may have to be integrated duringpost-merger period:Strong top leadership versus Team approach· Management by formal paper work versus management by wandering around· Individual decision versus group consensus decision· Rapid evaluation based on performance versus Long term relationship based onloyalty · Rapid feedback for changes versus formal bureaucratic rules and procedures· Narrow career path versus movement through many areas· Risk taking encouraged versus ¶one mistake you are out· · Risky activities versus low risk activities· Narrow responsibility arrangement versus ¶Everyone in this company is salesman (orcost controller, or product quality improver etc.)· · Learn from customer versus ¶We know what is best for the customer· The above illustrative culture may provide basis for the classification of organizationalculture. There are four different types of organizational culture as mentioned below:· Power - The main characteristics are: essentially autocratic and suppressive of challenge; emphasis on individual rather than group decision making· Role - The important features are: bureaucratic and hierarchical; emphasis on formalrules and procedures; values fast, efficient and standardized culture service· Task/achievement - The main characteristics are: emphasis on team commitment;task determines organization of work; flexibility and worker autonomy; needs creativeenvironment · Person/support

- The important features are: emphasis on equality; seeks to nurturepersonal development of individual membersPoor cultural fit or incompatibility is likely to result in considerable fragmentation,uncertainty and cultural ambiguity, which may be experienced as stressful by organizational members. Such stressful experience may lead to their loss of morale,loss of commitment, confusion and hopelessness and may have a dysfunctionalimpact on organizational performance. Mergers between certain types can bedisastrous. Differences in culture may lead to polarization, negative evaluation of counterparts, anxiety and ethnocentrism between top management teams of theacquired and acquiring firms. In assessing the advisability of an acquisition, theacquirer must consider cultural risk in addition to strategic issues. The differencesbetween the national and the organizational culture influence the cross-borderacquisition integration. Thus, merging firms must consciously and proactively seek totransform the cultures of their organizations. Q.5 Study a recent merger that you have read about and discuss the synergiesthat resulted from the merger.Ans. Synergy is the additional value that is generated by the combination of two ormore than two firms creating opportunities that would not be available to the firmsindependently. There are two main types of synergy :1. Operating synergy 2. Financial synergy Operating Synergy Operating synergies are those synergies that allow firms toincrease their operating income, increase growth or both. We would categorizeoperating synergies into four types:1. E conomies of scale that may arise from the merger, allowing the combined firm tobecome more cost-efficient and profitable. Economics of scales can be seen in mergersof firms in the same business For example : two banks combining together to create alarger bank. Merger of HDFC bank with Centurian bank of Punjab can be taken as anexample of cost reducing operating synergy. Both the banks after combination canexpect to cut costs considerably on account of sharing of their resources and thusavoiding duplication of facilities available.2. Greater pricing power from reduced competition and higher market share, whichshould result in higher margins and operating income. This synergy is also more likely to show up in mergers of firms which are in the same line of business and should bemore likely to yield benefits when there are relatively few firms in the business. Whenthere are more firms in the industry ability of firms to exercise relatively higher pricereduces and in such a situation the synergy does not seem to work as desired. Anexample of limiting competition to increase pricing power is the acquisition of universal luggage by Blow Plast. The two companies were in the same line of businessand were in direct competition with each other leading to a severe price war andincreased marketing costs. After the acquisition blow past acquired a strong hold on the market and operated under near monopoly situation. Another example is theacquisition of Tomco by Hindustan Lever.3. Combination of different functional strengths , combination of differentfunctional strengths may enhance the revenues of each merger partner thereby enabling each company to expand its revenues. The phenomenon can be understoodin cases where one company with an established brand name lends its reputation to acompany with upcoming product line or a company. A company with strongdistribution network merges with a firm that has products of great potential but isunable to reach the market before its competitors can do so. In other words the twocompanies should get the advantage of the combination of their complimentary functional strengths.4. Higher growth in new or existing markets, arising from the combination of the twofirms. This would be case when a US consumer products firm acquires an emergingmarket firm, with an established distribution network and brand name recognition,and uses these strengths to increase sales of its products. Operating synergies canaffect margins and growth, and through these the value of the firms involved in themerger or acquisition. Synergy results from complementary activities. This can beunderstood with the following example E xample : Consider a situation where thereare two firms A and B. Firm A is having substantial amount of financial resources(having enough surplus cash that can be invested somewhere) while firm B is havingprofitable investment opportunities ( but is lacking surplus cash). If A and B combinewith each other both can utilize each other strengths, for example here A can invest itsresource in the opportunities available to B. note that this can happen only when thetwo firms are combined with each other or in other words they must act in a way as if they are one. F inancial Synergy With financial synergies, the payoff can take the form of eitherhigher cash flows or a lower cost of capital (discount rate). Included are the following: y A combination of a firm with excess cash, or cash slack, (and limited projectopportunities) and a firm with high-return projects (and limited cash) can yielda payoff in terms of higher value for the combined firm. The increase in valuecomes from the projects that were taken with the excess

cash that otherwisewould not have been taken. This synergy is likely to show up most often whenlarge firms acquire smaller firms, or when publicly traded firms acquire privatebusinesses. y Debt capacity can increase, because when two firms combine, their earningsand cash flows may become more stable and predictable. This, in turn, allowsthem to borrow more than they could have as individual entities, which createsa tax benefit for the combined firm. This tax benefit can either be shown ashigher cash flows, or take the form of a lower cost of capital for the combinedfirm. y Tax benefits can arise either from the acquisition taking advantage of tax lawsor from the use of net operating losses to shelter income. Thus, a profitable firmthat acquires a money-losing firm may be able to use the net operating losses of the latter to reduce its tax burden. Alternatively, a firm that is able to increase

the market and operated under near monopoly situation. Another example is theacquisition of Tomco by Hindustan Lever.3. Combination of different functional strengths , combination of differentfunctional strengths may enhance the revenues of each merger partner thereby enabling each company to expand its revenues. The phenomenon can be understoodin cases where one company with an established brand name lends its reputation to acompany with upcoming product line or a company. A company with strongdistribution network merges with a firm that has products of great potential but isunable to reach the market before its competitors can do so. In other words the twocompanies should get the advantage of the combination of their complimentary functional strengths.4. Higher growth in new or existing markets, arising from the combination of the twofirms. This would be case when a US consumer products firm acquires an emergingmarket firm, with an established distribution network and brand name recognition,and uses these strengths to increase sales of its products. Operating synergies canaffect margins and growth, and through these the value of the firms involved in themerger or acquisition. Synergy results from complementary activities. This can beunderstood with the following example E xample : Consider a situation where thereare two firms A and B. Firm A is having substantial amount of financial resources(having enough surplus cash that can be invested somewhere) while firm B is havingprofitable investment opportunities ( but is lacking surplus cash). If A and B combinewith each other both can utilize each other strengths, for example here A can invest itsresource in the opportunities available to B. note that this can happen only when thetwo firms are combined with each other or in other words they must act in a way as if they are one. F inancial Synergy With financial synergies, the payoff can take the form of eitherhigher cash flows or a lower cost of capital (discount rate). Included are the following: y A combination of a firm with excess cash, or cash slack, (and limited projectopportunities) and a firm with high-return projects (and limited cash) can yielda payoff in terms of higher value for the combined firm. The increase in valuecomes from the projects that were taken with the excess cash that otherwisewould not have been taken. This synergy is likely to show up most often whenlarge firms acquire smaller firms, or when publicly traded firms acquire privatebusinesses. y Debt capacity can increase, because when two firms combine, their earningsand cash flows may become more stable and predictable. This, in turn, allowsthem to borrow more than they could have as individual entities, which createsa tax benefit for the combined firm. This tax benefit can either be shown ashigher cash flows, or take the form of a lower cost of capital for the combinedfirm. y Tax benefits can arise either from the acquisition taking advantage of tax lawsor from the use of net operating losses to shelter income. Thus, a profitable firmthat acquires a money-losing firm may be able to use the net operating losses of the latter to reduce its tax burden. Alternatively, a firm that is able to increase its depreciation charges after an acquisition will save in taxes, and increase itsvalue.Clearly, there is potential for synergy in many mergers. The more important issues arewhether that synergy can be valued and, if so, how to value it. This result has to beinterpreted with caution, however, since the increase in the value of the combined firmafter a merger is also consistent with a number of other hypotheses explainingacquisitions, including under valuation and a change in corporate control. It is thus aweak test of the synergy hypothesis. The existence of synergy generally implies thatthe combined firm will become more profitable or grow at a faster rate after the mergerthan will the firms operating separately. A stronger test of synergy is to evaluatewhether merged firms improve their performance (profitability and growth) relative totheir competitors, after takeovers. On this test, as we show later in this chapter, many mergers fail. Q.6 What are the motives for a joint venture, explain with an example of a jointventure.Ans:-

As there are good business and accounting reasons to create a joint venturewith a company that has complementary capabilities and resources, such asdistribution channels, technology, or finance, joint ventures are becoming anincreasingly common way for companies to form strategic alliances. In a joint venture,two or more ´parentµ companies agree to share capital, technology, human resources,risks and rewards in a formation of a new entity under shared control. Broadly, theimportant reasons for forming a joint venture can be presented below: Internal Reasons to Form a JV y Spreading Costs: Y ou and a JV partner can share costs associated withmarketing, product development, and other expenses, reducing your financialburden. y Opening Access to Financial Resources: Together you and a JV partner mighthave better credit or more assets to access bigger resources for loans andgrants than you could obtain on your own. y C onnection to Technological Resources: You might want access to technological resources you couldn't afford on your own, or vice versa. Sharing innovative and proprietary technology can improve products, as well as your own understanding of technological processes. y Im proving Access to New Markets: You and a JV partner can combine customer contacts and together even form a joint product that accesses new markets. y H elp Econo m ies of Scale: Together you and a JV partner can develop products or services that reduce total overall production expenses. Bring your product to market cheaper where the customer can enjoy the cost savings. External Reasons to F or m a JV y D evelop Stronger I nnovative Product: Together you and a JV partner may be able to share ideas to develop a product that is more competitive in your industry. y Im prove Speed to Market: With shared access to financial, technological, and distribution resources, you and a JV partner can get your joint product to market faster and more efficiently.Strategic Move Against Competition: A JV may be able to better compete against another industry leader through the combination of markets, technology, and innovation. Strategic Reasons y Synergistic Reasons: You may find a JV partner with whom you can create synergy, which produces a greater result together than doing it on your own. y

Share and Im prove Technology and Skills: Two innovative companies can share technology to improve upon each other's ideas and skills.Diversification There could be m any diversification reasons: access to diverse m arkets, develop m ent of diverse products, diversify the innovative working force, etc. D on't let a JV opportunity pass you by because you don't think it will fit in with your own s m all business. S m all and big co m panies alike can benefit fro m the reasons listed above. Analyze how your co m pany can benefit internally,externally, and strategically, and then find a joint venture partner that will fit with your needs

Master in Business Administration – Semester 3 MF0010– Security Analysis and Portfolio Management - 4 Credits (Book ID: B1208) Assignment Set- 1 (60 Marks)Note: Each question carries 10 Marks. Answer all the questions. Q.1 Frame the investment process for a person of your age group. Answer: I t i s r a r e t o f i n d i n v e s t o r s i n v e s t i n g t h e i r e n t i r e s a vi n g s i n a s i n g l e s e c u r i t y. Instead, they tend to invest in a group of securities. Such a group of securities iscalled a portfolio . Most financial experts stress that in order to minimize risk; ani n v e s t o r s h o u l d h o l d a w e l l - b a l a n c e d i n v e s t m e n t p o r t f o l i o . T h e i n v e s t m e n t process describes how an investor must go about making.Decisions with regard to what securities to invest in while constructing a portfolio,how extensive the investment should be, and when the investment should bemade. This is a procedure involving the following five steps:• Set investment policy• Perform security analysis• Construct a portfolio• Revise the portfolio• Evaluate the performance of portfolio 1. Setting Investment Policy T h i s i n i t i a l s t e p d e t e r m i n e s t h e i n v e s t o r ’ s o b j e c t i v e s a n d t h e a m o u n t o f h i s investable wealth. Since there is a positive relationship between risk and return, the investment objectives should be stated in terms of both risk and return.T h i s s t e p c o n c l u d e s w i t h t h e a s s e t a l l o c a t i o n d e c i s i o n : i d e n t i f i c a t i o n o f t h e potential categories of financial assets for consideration in the portfolio that theinvestor is going to construct. Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds and cash.The asset allocation that works best for an investor at any given point in his lifedepends largely on his time horizon and his ability to tolerate risk. Time Horizon – The time horizon is the expected number of months, years, or d e c a d e s t h a t a n i n ve s t o r w i l l b e i n v e s t i n g h i s m o n e y t o a c h i e v e a p a r t i c u l a r financial goal. An investor with a longer time horizon may feel more comfortablew i t h a r i s k i e r o r m o r e vo l a t i l e i n v e s t m e n t b e c a u s e h e c a n r i d e o u t t h e s l o w economic cycles and the inevitable ups and downs of the markets. By contrast,an investor who is saving for his teen -aged daughter’s college education would be less likely to take a large risk because he has a shorter time horizon. Risk Tolerance - Risk tolerance is an investor’s ability and willingness to lose some or all of his original investment in exchange for greater potential returns. Anaggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low -risk tolerance, tends to favour investments that will preserve his or her original i n v e s t m e n t . T h e c o n s e r v a t i v e i n v e s t o r s k e e p a

" b i r d i n t h e h a n d , " w h i l e aggressive investors seek "two in the bush."W h i l e s e t t i n g t h e i n v e s t m e n t p o l i c y , t h e i n v e s t o r a l s o s e l e c t s t h e p o r t f o l i o management style (active vs. passive management). Active Management i s t h e p r o c e s s o f m a n a g i n g i n v e s t m e n t p o r t f o l i o s b y attempting to time the market and/or select „undervalued ‟ s t o c k s t o b u y a n d „overvalued ‟ stocks to sell, based upon research, investigation and analysis. Passive Management is the process of managing investment portfolios by tryingto match the performance of an index (such as a stock market index) or assetc l a s s o f s e c u r i t i e s a s c l o s e l y a s p o s s i b l e , b y h o l d i n g a l l o r a r e p r e s e n t a t i v e sample of the securities in the index or asset class. This portfolio management style does not use market timing or stock selection strategies. 2. Performing Security Analysis This step is the security selection decision: Within each asset type, identified inth e asset allocation decision, how does an investor select which securities to purchase. Security analysis involves examining a number of individual securitieswithin the broad categories of financial assets identified in the previous step. Onepurpose of this exercise is to identify those securities that currently appear to bem i s p r i c e d . S e c u r i t y a n a l ys i s i s d o n e e i t h e r u s i n g F u n d a m e n t a l o r T e c h n i c a l analysis (both have been discussed in subsequent units). Fundamental analysis is a method used to evaluate the wor th of a security bystudying the financial data of the issuer. It scrutinizes the issuer's income ande x p e n s e s , a s s e t s a n d l i a b i l i t i e s , m a n a g e m e n t , a n d p o s i t i o n i n i t s i n d u s t r y. I n other words, it focuses on the „basics ‟ of the business. Technical analysis i s a m e t h o d u s e d t o e v a l u a t e t h e w o r t h o f a s e c u r i t y b ys t u d yi n g m a r k e t s t a t i s t i c s . U n l i k e f u n d a m e n t a l a n a l ys i s , t e c h n i c a l a n a l ys i s disregards an issuer's financial statements. Instead, it relies upon market trendsto ascertain investor sentiment to predict how a security will perform. 3. Portfolio Construction T h i s s t e p i d e n t i f i e s t h o s e s p e c i f i c a s s e t s i n w h i c h t o i n v e s t , a s w e l l a s determining the proportion of the investor’s wealth to put into each one. Here selectivity, timing and diversification issues are addressed.S e l e c t i v i t y r e f e r s t o s e c u r i t y a n a l y s i s a n d f o c u s e s o n p r i c e m o v e m e n t s o f i n d i v i d u a l securities. Timing involves forecasting of price movement of stocks r e l a t i v e t o p r i c e m o v e m e n t s of fixed income securities (such as bonds). Diversification aims at constructing a portfolio in such a way that the investor’s risk is minimized

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I n f o r m a t i o n T e c h n o l o g y 0 . 1 5 2 . 0 3 500312O N G C O i l & G a s 0 . 2 0 3 . 8 7 532712RelianceCommunicationsT e l e c o m 0 . 3 5 0 . 9 2 500325R e l i a n c e I n d u s t r i e s O i l & G a s 0 . 5 0 1 2 . 9 4 500390R e l i a n c e I n f r a s t r u c t u r e P o w e r 0 . 6 5 1 . 1 9 500112S t a t e B a n k o f I n d i a F i n a n c e 0 . 4 5 4 . 5 7 500 900Sterlite IndustriesMetal, Metal Products,and Mining0 . 4 5 2 . 3 9 524715S u n P h a r m a c e u t i c a l IndustriesH e a l t h c a r e 0 . 4 0 1 . 0 3 532540T a t a C o n s u l t a n c y ServicesI n f o r m a t i o n T e c h n o l o g y 0 . 2 5 3 . 6 1 500570T a t a M o t o r s T r a n s p o r t E q u i p m e n t s 0 . 5 5 1 . 6 6 500400T a t a P o w e r P o w e r 0 . 7 0 1 . 6 3 5 0 0 4 7 T a t a S t e e l M e t a l , M e t a l P r o d u c t s 0 . 7 0 2 . 8 8 0 & M i n i n g 507685W i p r o I n f o r m a t i o n T e c h n o l o g y 0 . 2 0 1 . 6 1 Q.3 Perform an economy analysis on Indian economy in the current situation. Answer: Economic analysis is done for two reasons: first, a company’s growth prospectsare, ultimately, dependent on the economy in which it operates; second, share p r i c e p e r f o r m a n c e i s g e n e r a l l y t i e d t o e c o n o m i c f u n d a m e n t a l s , a s m o s t companies generally perform well when the economy is doing the same. 1 Factors to be considered in economy analysis T h e e c o n o m i c v a r i a b l e s t h a t a r e c o n s i d e r e d i n e c o n o m i c a n a l ys i s a r e g r o s s domestic product (GDP) growth rate, exchange rates, the balance of payments ( B O P ) , t h e c u r r e n t a c c o u n t d e f i c i t , g o v e r n m e n t p o l i c y ( f i s c a l a n d m o n e t a r y policy), domestic legislation (laws and regulations), unemployment (the percent of the population that wants to work and is currently not working), public attitude(consumer confidence) inflation (a general increase in the price of goods and s e r v i c e s ) , i n t e r e s t r a t e s , p r o d u c t i v i t y ( o u t p u t p e r w o r k e r ) , c a p a c i t y u t i l i z a t i o n (output by the firm) etc . GDP is the total income earned by a country. GDP growth rate shows how fast the economy is growing. Investors know that strong economic growth is good for c o m p a n i e s a n d r e c e s s i o n s o r f u l l - b l o w n d e p r e s s i o n s c a u s e s h a r e p r i c e s t o decline, all other things being equal. Inflation is important for investors, as excessive inflation undermines consumer spending power (prices increase) and so can cause economic Security Analysis and Portfolio Management stagnation. However, deflation (negative inflation) canalso hurt the economy, as it encourages consumers to postpone spending (as they wait for cheaper prices).The exchange rate affects the broad economy and companies in a number of w a ys . F i r s t , c h a n g e s i n t h e e x c h a n g e r a t e a f f e c t the exports and imports. If e x c h a n g e r a t e s t r e n g t h e n s , e x p o r t s a r e h i t ; i f t h e e x c h a n g e r a t e w e a k e n s , i m p o r t s a r e a f f e c t e d . T h e B O P a f f e c t s t h e e x c h a n g e r a t e t h r o u gh s u p p l y a n d demand for the foreign currency.BOP reflects a country’s international monetary transactions for a specific time p e r i o d . I t c o n s i s t s o f t h e c u r r e n t a c c o u n t a n d t h e c a p i t a l a c c o u n t . T h e c u r r e n t account is an account of the trade in goods and services. The capital account is an account of the cross-border transactions in financial assets. A current accountdeficit occurs when a country imports more goods and services than it exports. A capital account deficit occurs when the investments made in the country byforeigners is less than the investment in foreign countries made by local players. T h e c u r r e n c y o f a c o u n t r y a p p r e c i a t e s w h e n t h e r e i s m o r e f o r e i g n c u r r e n c yc o m i n g i n t o t h e c o u n t r y t h a n l e a v i n g i t . T h e r e f o r e , a s u r p l u s i n t h e c u r r e n t o r capital account causes the currency to strengthen; a deficit causes the currencyto weaken.The levels of interest rates (the cost of borrowing money) in the economy and themoney supply (amount of money circulating in the economy) also have a bearingon the performance of businesses. All other

things being equal, an increase in money supply causes the interest rates to fall; a decrease causes the interestrates to rise. If interest rates are low, the cost of borrowing by businesses is not e x p e n s i v e , a n d c o m p a n i e s c a n e a s i l y b o r r o w t o e x p a n d a n d d e v e l o p t h e i r activities.O n t h e o t h e r h a n d , w h e n t h e c o s t o f b o r r o w i n g b e c o m e s t o o h i gh ( w h e n t h e interest rates go up), borrowing may become too costly and plans for expansionare postponed. Interest rates also have a significant effect on the share markets.In very broad terms, share prices improve when interest rates fall and decline when interest rates increase. There are two reasons for that: the “intrinsic value”e s t i m a t e w i l l i n c r e a s e a s i n t e r e s t r a t e s ( a n d t h e l i n k e d d i s c o u n t r a t e ) f a l l a n d underlying company profitability will improve, if interest payments reduce. 2 Business cycle and leading coincidental and lagging indicators All economies experience recurrent periods of expansion and contraction. Thisrecurring pattern of recession and recovery is called the business cycle . Theb u s i n e s s c y c l e c o n s i s t s o f e x p a n s i o n a r y a n d r e c e s s i o n a r y p e r i o d s . W h e n business a c t i v i t y r e a c h e s a h i g h p o i n t , i t p e a k s ; a l o w p o i n t o n t h e c yc l e i s a t r o u g h . T r o u g h s r e p r e s e n t t h e e n d o f a r e c e s s i o n a n d t h e b e g i n n i n g o f a n e x p a n s i o n . P e a k s r e p r e s e n t t h e e n d o f a n e xp a n s i o n a n d t h e b e g i n n i n g o f a recession.In the expansion phase, business activity is growing, production and demand areincreasing, and employment is expanding. Businesses and consumers normally b o r r o w m o r e m o n e y f o r i n v e s t m e n t a n d c o n s u m p t i o n p u r p o s e s . A s t h e c yc l e moves into the peak, demand for goods overtakes supply and prices rise. Thiscreates inflation. During inflationary times, there is too much money chasing a limited amount of goods.Therefore, businesses are able to charge more for their items causing pr ices torise. This, in turn, reduces the purchasing power of the consumer. As prices rise,demand slackens which causes economic activity to decrease. The cycle thenenters the recessionary phase. As business activity contracts, employers lay off workers (unemployment increases) and demand further slackens. Usually, this c a u s e s p r i c e s t o f a l l . T h e c yc l e e n t e r s t h e t r o u g h . E v e n t u a l l y, l o w e r p r i c e s stimulate demand and the economy moves into the expansion phase.T h e p e r f o r m a n c e o f a n i n v e s t m e n t i s i n f l u e n c e d b y t h e b u s i n e s s c yc l e . T h e direction in which an economy is heading has a significant impact on companies ‟ performance and ability to deliver earnings. If the economy is in a recession, it islikely that many business sectors will fail to generate profits. This is because thedemand for most products decreases during economic declines, since people

and use the next closing price for calculations. By creating a time series of data p o i n t s , a c o m p a r i s o n c a n t h e n b e m a d e b e t w e e n p r e s e n t a n d p a s t l e v e l s . Technical indicators are usually shown in a g r a p h i c a l f o r m a b o v e o r b e l o w a security’s price chart for facilitating analysis. Once shown in graphical form, ani n d i c a t o r c a n t h e n b e c o m p a r e d w i t h t h e c o r r e s p o n d i n g p r i c e c h a r t o f t h e s e c u r i t y. S o m e t i m e s i n d i c a t o r s a r e p l o t t e d o n t o p o f t h e p r i c e p l o t f o r a m o r e direct comparison.Technical indicators measure money flow, trends, volatility and momentum etc. They are used for two main purposes: to confirm price movement and the qualityof chart patterns, and to form buy and sell signals. A technical indicator offers a d i f f e r e n t p e r s p e c t i v e f r o m w h i c h t o a n a l yz e t h e p r i c e a c t i o n . S o m e , s u c h a s moving averages, are derived from simple formulae and they are relatively easyto understand. Others, like stochastic have complex formulae and require moreeffort to fully understand and appreciate. Technical indicators can provide uniqueperspective on the strength and direction of the underlying price action.I n d i c a t o r s f i l t e r p r i c e a c t i o n w i t h f o r m u l a e . T h e r e f o r e t h e y a r e d e r i v a t i v e measures and not direct reflections of the price action. This should be taken intoaccount when analyzing the indicators. Any analysis of an indicator should be t a k e n w i t h t h e p r i c e a c t i o n i n m i n d . T h e r e a r e t w o m a i n t yp e s o f i n d i c a t o r s : leading and lagging. A leading indicator precedes price movements; thereforet h e y a r e u s e d f o r p r e d i c t i o n . A l a g g i n g i n d i c a t o r f o l l o w s p r i c e m o v e m e n t a n d therefore is a confirmation.The main benefit of leading indicators is that they provide early signaling for entryand exit. Early signals can forewarn against a potential strength or weakness.Leading indicators can be used in trending markets. In a market that is trendingu p , t h e l e a d i n g i n d i c a t o r h e l p s i d e n t i f y o v e r s o l d c o n d i t i o n s f o r b u y i n g o p p o r t u n i t i e s . I n a m a r k e t t h a t i s t r e n d i n g d o w n , l e a d i n g i n d i c a t o r s c a n h e l p identify overbought situations for selling opportunities. Some of the more popular l e a d i n g i n d i c a t o r s i n c l u d e R e l a t i v e S t r e n g t h I n d e x ( R S I ) a n d S t o c h a s t i c Oscillator.Lagging indicators follow the price action and are commonly referred to as trend-following indicators. Lagging indicators work best when the markets or securitiesdevelop strong trends. They are designed to get traders in and keep them in as long as the trend is intact. As such, these indicators are not effective in trading or s i d e w a ys m a r k e t s . S o m e p o p u l a r t r e n d - f o l l o w i n g i n d i c a t o r s i n c l u d e m o v i n g averages and Moving Average Convergence Divergence (MACD).Technical indicators are constructed in two ways: those that fall in a boundedr a n g e a n d t h o s e t h a t d o n o t . T h e t e c h n i c a l i n d i c a t o r s t h a t a r e b o u n d w i t h i n a r a n g e a r e c a l l e d o s c i l l a t o r s . O s c i l l a t o r s a r e u s e d a s a n o v e r b o u gh t / o v e r s o l d indicator. A market is said to be „overbought ‟ when prices have been trendinghigher in a relatively steep fashion for some time, to the extent that the number of market participants „long ‟

o f t h e m a r k e t s i gn i f i c a n t l y o u t w e i g h s t h o s e o n t h e s i d e l i n e s o r h o l d i n g „ s h o r t ‟ positions. This means that there are fewer participants to jump onto the back of the trend. The „oversold’ condition is just theopposite. The market has been trending lower for some time and is running outof „fuel ‟ for further price declines.Oscillator indicators move within a range, say between zero and 100, and signalp e r i o d s w h e r e t h e s e c u r i t y i s o v e r b o u g h t ( n e a r 1 0 0 ) o r o v e r s o l d ( n e a r z e r o ) . O s c i l l a t o r s a r e t h e m o s t c o m m o n t yp e o f t e c h n i c a l i n d i c a t o r s . T h e t e c h n i c a l indicators that are not bound within a range also form buy and sell signals anddisplay strength or weakness in the market, but they can vary in the way they dothis.The two main ways that technical indicators are used to form buy and sell signalsis through crossovers and divergence. Crossovers occur when either the pricem o v e s t h r o u gh t h e m o v i n g a v e r a g e , o r w h e n t w o d i f f e r e n t m o v i n g a v e r a g e s cross over each other. Divergence happens when the direction of the price trendand the direction of the indicator trend are moving in the opposite direction. Thisindicates that the direction of the price trend is weakening.Technical indicators provide an extremely useful source of additional information.These indicators help identify momentum, trends, volatility and various other aspects in a security to aid in the technical analysis of trends. While some traders just use a single indicator for buy and sell signals, it is best to use them alongwith price movement, chart patterns and other indicators.A number of technical indicators are in use. Some of the technical indicators arediscussed below for the purpose of illustration of the concept: Moving average The moving average is a lagging indicator which is easy to construct and is oneof the most widely used. A moving average, as the name suggests, represents a n a v e r a g e o f a c e r t a i n s e r i e s o f d a t a t h a t m o v e s t h r o u g h t i m e . T h e m o s t common way to calculate the moving average is to work from the last 10 days of closing prices. Each day, the most recent close (day 11) is added to the total andthe oldest close (day 1) is subtracted. The new total is then divided by the totalnumber of days (10) and the resultant average computed. The purpose of themoving average is to track the progress of a price trend. The moving average is asmoothing device. By averaging the data, a smoother line is produced, making itmuch easier to view the underlying trend. A moving average filters out random noise and offers a smoother perspective of the price action. Moving Average Convergence Divergence (MACD): M A C D i s a m o m e n t u m i n d i c a t o r a n d i t i s m a d e u p o f t w o e xp o n e n t i a l m o v i n g averages. The MACD plots the difference between a 26-day exponential movingaverage and a 12-day exponential moving average. A 9 -day moving average isgenerally used as a trigger line. When the MACD crosses this trigger and goes d o w n i t i s a b e a r i s h s i gn a l a n d w h e n i t c r o s s e s i t t o go a b o v e i t , i t ' s a b u l l i s h signal. This indicator measures shortterm momentum as compared to longer term momentum and signals the current direction of momentum. Traders use theMACD for indicating trend reversals. Relative Strength Index: T h e r e l a t i v e s t r e n g t h i n d e x ( R S I ) i s a n o t h e r o f t h e w e l l - k n o w n m o m e n t u m indicators. M o m e n t u m m e a s u r e s t h e r a t e o f c h a n g e o f p r i c e s b y c o n t i n u a l l y taking price differences for a fixed time interval. RSI helps to signal overbought a n d o v e r s o l d c o n d i t i o n s i n a s e c u r i t y . R S I i s p l o t t e d i n a r a n g e o f 0 - 1 0 0 . A reading above 70 suggests that a security is overbought, while a reading below30 suggests that it is oversold. This indicator helps traders to identify whether asecurity’s price has been unreasonably pushed to its current levels and whether a reversal may be on the way. Stochastic Oscillator: The stochastic oscillator is one of the most recognized momentum indicators. This indicator provides information about the location of a current Securityclosing price in relation to the period's high and low prices. The closer the closingprice is to the period's high, the higher is the buying pressure, and the closer thec l o s i n g p r i c e i s t o t h e p e r i o d ' s l o w , t h e m o r e i s t h e s e l l i n g p r e s s u r e . T h e i d e a behind this indicator is that in an uptrend, the price should be closing near theh i g h s o f t h e t r a d i n g r a n g e , s i gn a l i n g u p w a r d m o m e n t u m i n t h e s e c u r i t y. I n d o w n t r e n d s , t h e p r i c e should be closing near the lows of the trading range,signaling downward momentum. The stochastic o s c i l l a t o r i s p l o t t e d w i t h i n a range of zero and 100 and signals overbought conditions above 80 and oversoldconditions below 20. Q.5 Compare Arbitrage pricing theory with the Capital asset pricing model. Arbitrage Pricing Theory (APT) Arbitrage Pricing Theory (APT) are two of the most commonly used models for pricing all risky assets based on their relevant risks. Capital Asset Pricing Model(CAPM) calculates the required rate of return for any risky asset based on thesecurity’s beta.Beta is a measure of the movement of the security’s return with the return on themarket portfolio, which includes all the securities that are available in the world and where the proportion of each security in the portfolio is its market value as apercentage of total market value of all the securities. The problem with CAPM isthat such a market portfolio is hypothetical and not observable and we have to u s e a m a r k e t i n d e x l i k e t h e S & P 5 0 0 o r S e n s e x a s a p r o x y f o r t h e m a r k e t portfolio.H o w e v e r , i n d e x e s a r e i m p e r f e c t p r o x i e s f o r o v e r a l l m a r k e t a s n o s i n gl e i n d e x includes all capital assets, including stocks, bonds, real esta te, collectibles,

etc.Another criticism of the CAPM is that the various different proxies that are usedfor the market portfolio do not fully capture all of the relevant risk factors in the economy.A n a l t e r n a t i v e p r i c i n g t h e o r y w i t h f e w e r a s s u m p t i o n s , t h e A r b i t r a g e P r i c i n g Theory (APT), has been developed by Stephen Ross. It can calculate expectedreturn without taking recourse to the market portfolio. It is a multi-factor model for

determining the required rate of return which means that it takes into acco unt an u m b e r o f e c o n o m y w i d e factors that can affect the security prices. APTcalculates relations among expected r e t u r n s t h a t w i l l r u l e o u t a r b i t r a g e b y investors.The APT requires three assumptions:1) Returns can be described by a factor model.2) There are no arbitrage opportunities.3) There are large numbers of securities that permit the formation of portfoliosthat diversify the firm-specific risk of individual stocks. The Capital Asset Pricing Model (CAPM) i s a m o d e l t o e xp l a i n w h y c a p i t a l a s s e t s a r e p r i c e d t h e w a y t h e y a r e . W i l l i a m S h a r p e , T r e y n o r a n d L i n t n e r contributed to the development of this model. An important consequence of the modern portfolio theory as introduced by Markowitz was that the only meaningfulaspect of total risk to consider for any individual asset is its contribution to thetotal risk of a portfolio. CAPM extended Harry Markowitz’s portfolio theory to introduce the notions of systematic and unsystematic (or unique) risk. Arbitrage Pricing Theory vs. the Capital Asset Pricing Model The Arbitrage Pricing Theory (APT) and the Capital Asset Pricing Model are the two most influential theories on stock and asset pricing today. The APT model isdifferent from the CAPM in that it is far less restrictive in its assumptions. APTallows the individu al investor to develop their model that explains the expected return for a particular asset.I n t u i t i v e l y , t h e A P T m a k e s a l o t o f s e n s e b e c a u s e i t r e m o v e s t h e C A P M restrictions and basically states that the expected return on an asset is a functionof many factors and the sensitivity of the stock to these factors. As these factorsmove, so does the expected return on the stock - and therefore its value to theinvestor. However, the potentially large number of factors means that more factor s e n s i t i v i t i e s h a v e t o b e c a l c u l a t e d . T h e r e i s a l s o n o g u a r a n t e e t h a t a l l t h e relevant factors have been identified. This a d d e d c o m p l e xi t y i s t h e r e a s o n arbitrage pricing theory is far less widely used than CAPM.I n t h e C AP M t h e o r y, t h e e x p e c t e d r e t u r n o n a s t o c k c a n b e d e s c r i b e d b y t h e movement of that stock relative to the rest of the stock market. The CAPM theoryis really just a simplified version of the APT, where the only factor considered is the risk of a particular stock relative to the rest of the stock market - as describedby the stock's beta.From a practical standpoint, CAPM remains the dominant pricing model used today. When compared to the Arbitrage Pricing Theory, the Capital Asset PricingModel is both elegant and relatively simple to calculate. Q.6 Discuss the different forms of market efficiency. Answer: Forms of Market Efficiency A financial market displays informational efficiency when market prices reflect alla v a i l a b l e i n f o r m a t i o n a b o u t v a l u e . T h i s d e f i n i t i o n o f e f f i c i e n t m a r k e t r e q u i r e s answers to two questions: „what is all available information? ‟ & „ w h a t d o e s i t mean to reflect all available information? ‟ Different answers to these questions give rise to different versions of market efficiency.What information are we talking about? Information can be information about past prices, information that is public information and information that is privatei n f o r m a t i o n . I n f o r m a t i o n a b o u t p a s t p r i c e s r e f e r s t o t h e w e a k f o r m v e r s i o n o f m a r k e t efficiency, information that consists of past prices and all publicinformation refers to the s e m i - s t r o n g v e r s i o n o f m a r k e t e f f i c i e n c y a n d a l l information (past prices, all public information and all private information) refersto the strong form version of market efficiency.“ P r i c e s r e f l e c t a l l a v a i l a b l e i n f o r m a t i o n ” m e a n s t h a t a l l f i n a n c i a l t r a n s a c t i o n s which are carried out at market prices, using the available information, are zero NPV activities.T h e w e a k f o r m o f E M H s t a t e s t h a t a l l p a s t p r i c e s , vo l u m e s and other market s t a t i s t i c s ( g e n e r a l l y r e f e r r e d t o a s t e c h n i c a l a n a l y s i s ) c a n n o t p r o v i d e a n y information that would prove useful in predicting future stock price movements. T h e c u r r e n t p r i c e s f u l l y reflect all security-market information, including thehistorical sequence of prices, rates of return, t r a d i n g v o l u m e d a t a , a n d o t h e r market-generated information. This implies that past rates of return and other market data should have no relationship with future rates of return. It would meant h a t i f t h e w e a k f o r m o f E M H i s c o r r e c t , t h e n t e c h n i c a l a n a l ys i s i s f r u i t l e s s i n generating excess returns.The semi-strong form suggests that stock prices fully reflect all publicly availablei n f o r m a t i o n a n d a l l e x p e c t a t i o n s a b o u t t h e f u t u r e . “ O l d ” i n f o r m a t i o n t h e n i s a l r e a d y d i s c o u n t e d a n d c a n n o t b e u s e d t o p r e d i c t s t o c k p r i c e f l u c t u a t i o n s . I n sum, the semistrong form suggests that fundamental analysis is also fruitless;knowing what a company generated in terms of earnings and revenues in thepast will not help you determine what the stock price will do in the future. Thisimplies that decisions made on new information af ter it is public should not lead to above-average risk-adjusted profits from those transactions.Lastly, the strong form of EMH suggests that stock prices reflect all

information,whether it be public (say in SEBI filings) or private (in the minds of the CEO andother insiders). So even with material non-public information, EMH asserts that stock prices cannot be predicted with any accuracy

Master of Business Administration - Semester 3 MB 0051: “Legal Aspects of Business (4 credits) ASSIGNMENT- Set 1 Q1. Discuss the nature and significance of business law? Ans:The term „law is used in many senses: you may speak of the law ‟ of physics, mathematics, science, or the laws of the football or health. Inits widest sense, „law means any rule of conduct, standard or pattern, to ‟ which actions are required to conform; if not conformed, sanctions areimposed. When we speak of the law of a State, we use the term „law in a ‟ special and strict sense Significance of law 1. Law is a body of rules:These rules prescribe the conduct,standard or pattern to which actions of the persons in the state arerequired to conform. However, all rules of conduct do not becomelaw in the strict sense. We resort to various kinds of rules to guideour lives. For example, our conduct may be guided by a rule such as“do not be arrogant” or “do not be disrespectful to elders orwomen”. These are ethical or moral rules by which our daily livesare guided. If we do not follow them, we may lose our friends andtheir respect, but no legal action can be taken against us. 2. Law is for the guidance or conduct of persons :– both humanand artificial. The law is not made just for the sake of making it. Therules embodied in the law are made, so as to ensure that actions of the persons in the society conform to some predetermined standardor pattern. This is necessary so as to ensure continuance of thesociety. No doubt, if citizens are „self-enlightened ‟ or „self-controlled ‟ , disputes may be minimized, but will not be eliminated.Rules are, therefore, drawn up to ensure that members of thesociety may live and work together in an orderly manner. Therefore,if the rules embodied in the law are broken, is used to enforceobedience, and certain consequences ensue. 3. Law is imposed :Law is imposed on the members to bring aboutan order in the group, enabling it to continue and prosper. It is notsomething which may or may not be obeyed at the sweet will of themembers of society. If you cannot impose a rule it is better not tohave it. Thus, law is made obligatory on the members of the society. 4. Law is enforced by the executive :Obviously, unless a law isenforced it ceases to be a law and those persons subject to it willregard it as dead. For example , i f A s t e a l s B s b i c yc l e , h e m a y b e ‟ prosecuted by a court and may be punished. Also, the court mayorder the restitution of the bicycle to its rightful owner i.e., B. If thegovernment passes many laws but does not attempt to enforcethem, the citizens lose their respect for government and law, andsociety is greatly weakened. The force used is known as sanctionwhich the state administers to secure obedience to its laws.

5. The state :A state is a territorial division, with people thereinsubject to a uniform system of law administered by some authorityof the state. Thus, law presupposes a state. 6.

Content of law :The law is a living thing and changes throughoutthe course of history. Law responds to public opinion and changesaccordingly. Law can never be static. Therefore, amendments aremade in different laws from time to time. For example, theMonopolistic and Restrictive Trade Practices Act, 1969, has beensubjected to many amendments since its inception in 1969. 7. Two basic ideas involved in law :The two basic ideas involvedin any law are: (i) to maintain some form of social order in a groupand (ii) to compel members of the group to be within that order. These basic ideas underlie formulation of any rules for the membersof a group. A group is created because first, there is a social instinctin the people to live together and secondly, it helps them in self-preservation. Rules are made by the members of the group, so thatt h e g r o u p d o e s n t w h i t h e r a w a y. ‟ 8. Law is made to serve some purpose which may be social,economic or political :Some examples of „law in the widest ‟ sense of the term. „Law in its widest sense may include: ‟ a. Moral rules or etiquettes, the non-observance of which may lead topublic ridicule, b. Law of the Land the non-observance of which may lead to arrest,imprisonment, fines, etc., c. Rules of international law, the non-observance of which may lead tosocial boycott, trade-sanctions, cold war, hot war, proxy war, etc. Q2. Define contract of indemnity. Describe the rights of theindemnifier and the indemnity holder.Ans:-- Meaning of indemnitySecs.124 and 125 provide for a contractof indemnity. Sec.124 provides that a contract of indemnity is a contractwhereby one party promises to save the other from loss caused to him(the promisee) by the conduct of the promisor himself or by the conductof any other person. A contract of insurance is a glaring example of suchtype of contracts. A contract of indemnity may arise either by (i) anexpress promise or (ii) operation of law, e.g., the duty of a principal toindemnify an agent from consequences of all lawful acts done by him asan agent. The contract of indemnity, like any other contract, must have all theessentials of a valid contract. These are two parties in a contraction of identity indemnifier and indemnified. The indemnifier promises to makegood the loss of the indemnified (i.e., the promisee). Example: A contracts to indemnify B against the consequences of anyproceeding which C may take against B in respect of a certain sum of Rs200. This is a contract of indemnity. Rights of the indemnified (i.e., the indemnity holder)He is entitledto recover from the promisor: (i) All damages which he may be compelledto pay in any suit in respect of any matter to which the promise toindemnify applies; (ii) All costs of suit which he may have to pay to suchthird party, provided in bringing or defending the suit (a) he acted underthe authority of the indemnifier or (b) if he did not act in contravention of orders of the indemnifier and in such a way as a prudent man would act inhis own case; (iii) All sums which may have been paid under the terms of any compromise of any such suit, if the compromise was not contrary tothe orders of the indemnifier and was one which it would have beenprudent for the promisee to make. Rights of the indemnifierThe Act makes no mention of the rights of indemnifier. However, his rights, in such cases, are similar to the rights of a surety under Sec.141, viz., he becomes entitled to the benefit of all thesecurities which the creditor has against the principal debtor whether hewas aware of them or not. Q3. What is Partnership? Briefly state special features of apartnership on the basis of which its existence can be determinedunder the Indian Partnership Act?Ans:-Partnership is defined as “the relationship between persons whohave agreed to share profits of a business carried on by all, or by any of them acting for all”. On analysis of the definition, certain essentialelements of partnership emerge. These elements must be present so as toform a partnership and are discussed below. 1. Partnership is an association of two or more than two persons:There must be at least two persons who should join together to constitutea partnership, because one person cannot become a partner with himself. These persons must be natural persons having legal capacity to contract. Thus, a company (which is an artificial person) cannot be a partner.Similarly, a partnership firm cannot be a partner of another partnershipfirm. As regards maximum number of partners in a partnership firm,Sec.11 of the Companies Act, 1956, puts the limit at 10 in case of bankingbusiness and 20 in case of any other business. 2. Partnership must be the result of an agreement between twoor more persons:An agreement presupposes a minimum number of two persons. As mentioned above, a partnership to arise, at least twopersons must make an agreement. Partnership is the result of an

agreement between two or more persons (who are known as partnersafter the partnership comes into existence) . 3. The agreement must be to carry on some business:The term„business includes every trade, occupation or profession [Sec.2(b)]. ‟ Though the word „business generally conveys the idea of numerous ‟ transactions, a person may become a partner with another even in aparticular adventure or undertaking (Sec.8). Unless the person joins forthe purpose of carrying on a business, it will not amount to partnership. 4. The agreement must be to share profits of the business:The joint carrying on of a business alone is not enough; there must be anagreement to share profits arising from the business. Unless otherwise soagreed, sharing of profits also involves sharing of losses. But whereas thesharing of profits is an essential element of partnership, sharing of lossesis not. Example: A, a trader, owed money to several creditors. He agreed to payhis creditors out of the profits of his business (run under the creditors ‟ supervision) what he owed to them. Held, the arrangement did not makecreditors partners with A in business [Cox v. Hickman, (1860) 8 H.L.C.,268]. Formation of partnerships All the essential elements of a valid contract must be present in apartnership as it is based on an agreement. Therefore, while constituting apartnership. The following points must be kept in mind:1.The Act provides that a minor may be admitted to be benefits of partnership.2.No consideration is required to create partnership. A partnership is an extension of agency for which no consideration is necessary.3.The partnership agreement may be express (i.e., oral or writing) orimplied and the latter may be inferred from the conduct or thecourse of dealings of the parties or from the circumstances of thecase. However, it is always advisable to have the partnershipagreement in writing.4.An alien friend can enter into partnership, an alien enemy cannot.5.A person of unsound mind is not competent to enter into a partnership.6.A company, incorporated under the Companies Act, 1956 can enter into a contract of partnership. Duration of partnership The duration of partnership may or may not be fixed. It may beconstituted even for a particular adventure . Partnership at will In accordance with Sec.7, a partnership is called a partnership at willwhere;(i)it is not constituted for a fixed period of time and

In the absence of a contract to the contrary, the court may award interestat such rate as it thinks fit on the amount of the price. The interest maybe calculated from the date of the tender of the goods or from the date onwhich the price was payable. It is obvious that the unpaid seller can claiminterest only when he can recover the price, i.e., if the seller’s remedy isto claim damages only, then he cannot claim interest. 4 Buyer’s remedies against seller The buyer has the following rights against the seller for breach of contract:(i)damages for non-delivery (Sec.57);(ii)right of recovery of the price;( i i i ) s p e c i f i c p e r f o r m a n c e ( S e c . 5 8 ) ; ( i v ) s u i t f o r b r e a c h o f c o n d i t i o n ; (v)suit for breach of warranty (Sec.59);( v i ) ( a n t i c i p a t o r y b r e a c h ( S e c . 6 0 ) ; ( v i i ) r e c o v e r y of interest (Sec.61). Q5. Examine the rights of a consumer enshrined under theConsumer Protection Act, 1986. Ans:-Rights of Consumers For the first time in the history of consumer legislation in India, theConsumer Protection Act, 1986 extended a statutory recognition to therights of consumers. Sec.6 of the Act recognizes the following six rights of consumers: 1. Right to safety, i.e., the right to be protected against themarketing of goods and services which are hazardous to life andproperty. 2. Right to be informed, i.e., the right to be informed about thequality, quantity, potency, purity, standard and price of goods orservices, as the case may be, so as to protect the consumer againstunfair trade practices. 3. Right to choose: It means right to be assured, wherever possible,access to a variety of goods and services at competitive prices. Incase

of monopolies, say, railways, telephones, etc., it means right to beassured of satisfactory quality and service at a fair price.4. Right to be heard, i.e., the consumers interests will receive due ‟ consideration at appropriate forums. It also includes right to berepresented in various forums formed to consider the consumers ‟ welfare. 5. Right to seek redressal: It means the right to seek redressalagainst unfair practices or restrictive trade practices orunscrupulous exploitation of consumers. It also includes right to fairsettlement of the genuine grievances of the consumers. 6. Right to consumer education: It means the right to acquire theknowledge and skill to be an informed consumer. Q6. Write short notes on the following:a . C o p y r i g h t b. LicenseAns:-- a. Meaning of copyright (Sec.14) The term „copyright means the exclusive right, by virtue of, and subject ‟ to the provision of the Act: (a) in the case of literary, dramatic or musical work, not being acomputer programme – (i) to reproduce the work in any materialform including the storing of it in any medium by electronic means;(ii) to issue copies of thework to the public not being copies alreadyin circulation; (iii) to perform the work in public, or communicate itto the public; (iv) to make any cinematograph film or soundrecording in respect of the work; (v) to make any translation of thework; (vi) to make any adaptation of the work; (vii) to do, in relationto a translation or an adaptation of the work, any of the actsspecified in relation to the work in (i) to (vi);(b) in the case of computer programme – (i) to do any of the actsspecified in clause (a) above; (ii) to sell or give on hire, or offer forsale or hire any copy of the computer programme, regardless of whether such copy has been sold or given on hire on earlieroccasions;(c)in the case of an artistic work – (i) to reproduce the work in anymaterial form including depiction in three dimensions of a two –dimensional work or in two dimensions of a three – dimensionalwork; (ii) to communicate the work to the public; (iii) to issue copiesof the work to the public not being copies already in circulation; (iv)to include the work in any cinematograph film; (v) to make anyadaptation of the work; (vi) to do in relation to an adaptation of thework any of the acts specified in relation to the work in (i) to (iv)above;(d)in the case of a cinematograph film – (i) to make a copy of the film,including a photograph of any image forming part thereof; (ii) to sellor give on hire; or offer for sale or hire, any copy of the film,regardless of whether such copy has been sold or given on hire onearlier occasions; (iii) to communicate the film to the public.(e)In the case of a sound recording – (i) to make any other soundrecording embodying it; (ii) to sell or give on hire, or offer for sale orhire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) tocommunicate the sound recording to the public.b. LicenseLicence by owners of copyright Sec.30 provides that the owner of the copyright in any existing work orthe prospective owner of the copyright in any future work may grant anyinterest in the right by licence in writing signed by him or by his dulyauthorised agent. But in the case of a licence relating to copyright in anyfuture work, the licence shall take effect only when the work comes intoexistence. Compulsory licence in works withheld from public Sec.31 provides that at any time during the term of copyright in anyIndian work which has been published or performed in public a complaintmay be made to the Copyright Board that the owner of copyright in thework(a)has refused to re-publish or allow the republication of the work orhas refused to allow the performance in public of the work and byreason of such refusal the work is withheld from the public; or(b)has refused to allow communication to the public by broadcast of such work or in the case of a sound recording the work recorded insuch sound recording, on terms which the complainant considersreasonable. Compulsory Licence in unpublished Indian works (Sec.31A) Where in the case of an Indian work, the author is dead or unknown orcannot be traced or the owner of the copyright in such work cannot befound, any person may apply to the Copyright Board for a licence topublish such work or translation thereof in any language. Before makingan application, the applicant shall publish his proposal in one issue of adaily newspaper in the English language having circulation in the majorpart of the country and where the application is for the publication of atranslation in

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