Q1. Define Merchant Banking and explain its function.

Ans:- Merchant banking is an essential service provided by financial institutions that help in the growth
of corporate sector, which eventually reflects in the overall growth and economic development of the country. 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 be through offer of sale or private placements, prospectus, and so on. The issue management includes the following 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 the issue 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 in selected 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 Government regulations. 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 effective running of a corporate enterprise through efficient management of finance. A merchant banker guides the clients 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 and so 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 such as 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 and 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 continue the product or not.

Project counselling – Project counselling is a part of corporate counselling which is related to project finance. A merchant banker provides the clients project counselling that involves providing advice on procedural aspects of project implementation, conducting financial study of the project, providing assistance 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 in conducting appraisal and designing capital structure. Portfolio management - Portfolio management refers to making decisions related to investment of cash resources 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 obtain optimum 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 a comprehensive package for the project funding. The process involves the study of the pattern of financing available from merchant banks and financial institutions. The merchant bankers work closely with the client and the technical consultant and submit a complete financial report to the client. They also provide assistance in legal documentation for the finance arranged. Working capital – Merchant bankers assist in arranging finance for working capital particularly for new ventures. For existing firms, the merchant bankers arrange the funds from non-traditional sources such as through issue of debentures, and so on. For example, Central Bank of India (CBI) has started working capital finance as one of the merchant banking service area. Managerial and technical services – Merchant bankers provide services to deal with problems in technical, 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 income
tax, 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 calculated on 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 the finance 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 is done by distributing the finance charge over the agreement period. The hirer can postpone his tax liability 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 by introducing an intermediate financier. For example, A wants to lease an asset to B. C is an intermediary. 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 the Constitution Act, 1982:    Hire purchase as sale – Hire purchase is considered as a deemed sale and tax are levied after the delivery of the equipment between the vendor and the hirer. Taxable quantum – The quantum of sales tax is related to the sales price in hire purchase contract 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 is in 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 is levied on hire purchase transactions that are controlled by finance company only when they are the 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 on the 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 on the total amount of interest earned less bad debts in the previous year at two per cent. This is a deductible expense 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 business concern, selling goods to the customer. In factoring, the factors buys the accounts receivable of a client

and then pays up to 80 percent of the amount immediately on agreement. The rest of the amount is paid to the client when the customer pays the debt. Domestic factoring is not a well-defined concept till now and therefore is left to the legal framework, trade usage and convention of the individual country. Factoring is broadly defined as a financial service in which receivables are acquired by the factor and credit sales are converted to cash sales. As a result of this the factor becomes the bearer of the receivables. Thus, the factor is responsible for all credit control, sales accounting and debt collection from the buyer. In the case of factoring without recourse, the factor has to bear the losses if the debtor fails to pay the dues on time. Characteristics of factoring The importance of factoring is well recognized in the industry. The following are the characteristics of factoring:         Invoices represent book debts assigned in favour of a factor. It requires customer consent to make a repayment directly to the factor not to the client or buyer. Factoring follows dual pricing structure consisting discount charges and service charges. Money is collected from the seller or customer and after deducting customer’s own charges, the remaining amount of the value of invoice is paid to the client. The period of factoring normally lies between 90 to 150 days. In some cases, the factoring company extends the period up to 150 days. It is a method of off-balance sheet financing. Bad debts are not considered for factoring. Credit rating is not compulsory but still the factoring companies usually perform credit risk analysis before entering into an agreement.

Q4. Explain the different life insurance products. Ans:- Different life insurance products
Life insurance is a policy that people purchase from a life insurance company. This can be a way of protecting the family and its financial stability after one's death. The following are the different types of the conventional life insurance products:     Term Insurance. Whole Life Insurance. Endowment Insurance. Annuities.

Term insurance A term insurance is a temporary insurance. Term insurance provides life insurance protection for a specific period only. If the policy holder dies during the selected period, the benefits are payable to the estate or named beneficiary as mentioned in the policy. In case the policy holder survives till the end of the selected term, the policy expires without providing any benefits to the policy holder.

Whole life insurance The whole life insurance policies are intended to provide life insurance protection over one's lifetime. The benefits are only payable to the policy holder after his death.The different whole life policies are as follows:    Ordinary whole life insurance. ·Limited payment whole life insurance. Convertible whole life insurance.

Endowment insurance Endowment policy gives assurance that the benefits under the policy will be given to the beneficiaries on the death of the policy holder within the selected term or on its maturity date. The Endowment insurance is paid out whether or not the policy holder lives after a certain period. Annuities An annuity is a series of periodic payments. This is an insurance policy, under which the insurer agrees to pay the policy holder a series of regular periodical payments for a fixed period of time or during someone's life time.Annuities can be classified on the basis of the following aspects:   The number of lives covered. The beginning of the payment of annuity.

Q5. Give an overview of Indian venture capital scenario.

Ans:- In India, the emergence of venture capital companies is a relatively new phenomenon. Until 1985,
individual investors and Development Finance Institutions (DFIs) have played the role of venture capitalists in the absence of an organised venture capital industry. During that time entrepreneurs have largely depended on private placements, public offerings and lending by financial institutions. The venture capital phenomenon has arrived at a take-off stage in India with the easy availability of risk capital in all forms. In the earlier stage, it was easy to raise only growth capital but financing of ideas or seed capital is now available after the introduction of venture capital phenomenon. The number of players offering growth capital and the number of investors is rising rapidly. In India, the concept of venture capital was initiated by the Industrial Finance Corporation of India (IFCI) when it established the Risk Capital Foundation (RCF) to provide seed capital to small and risky projects. However, the concept of venture capital financing first time got statutory recognition in the fiscal budget for the year 1986 to 1987. The venture capital companies operating at present in India can be divided into four categories based on their mode of promotion. Let us read about each mode. Promoted by All-India Development Financial Institution (IDFI)

The ICICI provided the required impetus to venture capital activities in India. In 1986 it started providing venture capital finance. In 1998, it promoted with the Unit Trust of India (UTI) and Technology Development and Information Company of India (TDICI) as the first venture capital company registered under the Companies Act, 1956. The risk capital foundation established by the IFCI in 1975 was converted to Risk Capital and Technology Finance Company (RCTC). The RCTC was established as a subsidiary company of IFCI to provide assistance in form of conventional loans and to give financial support to high technology projects. Promoted by state level finance institution In India, the state level financial institutions in some states like Gujarat, Uttar Pradesh have done an excellent job by providing venture capital finance to small scale enterprises. Promoted by commercial banks Venture capital funds have been established by their corresponding commercial banks to undertake venture capital financing activity. Examples of these funds are Canbank venture capital fund, State bank venture capital fund, and Grindlays bank. Private venture capital funds In India, several venture capital funds have been established to provide funding to various small scale enterprises. Examples of these funds established in India are 20th Century Venture Capital Corporation and Indus venture capital fund.

Q6. What is mutual fund? Illustrate the flow of funds in mutual fund Ans:- A mutual fund is an open-ended fund administered by an investment company which emphasise in
raising money from shareholders and investing in a group of assets which is in agreement with a stated set of objectives. Mutual funds raise money by selling shares to the public. Mutual funds then use the money to purchase various investment vehicles, such as stocks, bonds and money market instruments. Shareholders receive an equity position in the fund in return for the money they provide to the fund when purchasing shares. The mutual funds are governed by an investment company with the financial aim of generating high rate of returns. These asset management or investment management companies invest in different stocks, bonds and other money market instruments in a diversified manner with the money collected from the investors. These companies carry out a detailed research and thorough analysis on the market conditions and orientation of stock and bond prices before investing which help the fund managers to contemplate properly in the right direction. Investors can normally sell the units of their mutual funds at any time they want. Only some specific mutual funds which carry certain maturity term cannot be sold at any time. However, the return of the funds will vary in respect to the value of the stocks and bonds in the market in which that particular mutual fund made investment. Commonly the share holders of mutual fund sell their units when the net asset value is high and capital gain is sure to happen.

The transactions carried out are within the purview of the Securities and Exchange Board of India (SEBI). This type of investment is popular because mutual funds are managed professionally, gives the investors a wide range to choose from, and has high liquidity. The flow of funds in mutual fund Equity funds Mutual funds that invest an individual investor’s money in equity shares are also referred to as equity mutual funds or equity MFs. The returns from equity MFs are ideal for long term investments as the aim is to generate capital appreciation. Based on the purpose of the MF scheme, the fund manager invests in large cap, small cap company stocks, or a combination of both. The returns from equity MFs emerge from the following ways: · The dividend payout from the fund scheme. · Change in the NAV of the fund in the growth option. Equity MFs are better suited to investors who have long term investment goals. The equity funds are subclassified based upon their investment purpose, as follows: · Diversified equity funds: Diversified equity funds offer high returns for investment growth. The value of each unit rises and falls greatly than other funds and hence this scheme of funding is meant for longterm goals. This category of investment is a mutual fund that invests in the stocks of various companies in different sectors giving more profit. For example: Franklin India Blue chip Fund (FIBCF) is an open-end equity fund that aims to attain steady and reliable capital appreciation through investment in wellestablished, large size blue chip companies. · Mid-Cap funds: Mid cap funds are those mutual funds, which invest in small or medium sized companies. Investors are investing more and more in mid caps nowadays because the price of large caps has increased significantly. But mid cap funds are very unpredictable and tend to fall like a pack of cards in bad times. Kotak Indian Mid Cap Fund is one of the leading mid cap funds in India. · Sector specific funds: Sector specific funds are those funds which craft investments in those sectors that have been defined in the prospectus of the funds. The ranges of sectors in which the sector specific funds in India make investments are software, pharmaceuticals, power and so on. For example, Prudential ICICI Mutual Fund is one of the few companies who have launched sector specific funds in India. · Tax savings funds: These are a category of mutual funds which a major portion is invested in equity and equity-related instruments. It is a great instrument for tax planning which also ensures good returns. But investment should be carefully planned and one should devote sufficient time in selecting the right fund. SBI Mutual Funds are one of the popular Tax saving mutual funds in India. Debt funds

Now let us see how debt funds work. Unlike equity MFs, debt funds are less volatile and suitable for investors who want minimum risk and a regular income. However, they can be short or long term investments. The fund manager invests the funds in fixed income instruments such as corporate bonds or government securities. A debt instrument’s market price is based on the interest rates of its assets. The investor earns interest on the fixed income securities in addition to any capital appreciation. The aim of these funds is to invest in debt papers. Government authorities, banks and financial institutions are a few of the major issuers of debt papers. These funds guarantee low risk and provide stable income to the investors. For example, X has invested his money in a debt fund that yields 10 percent interest. If the interest rates fall, new instruments in the market will offer lower rates of interest. Consequently, the price of the fund’s instrument will increase, since the higher yield will raise the instrument’s value. Therefore, X’s NAV will also rise. Computation of Net Asset Value (NAV) The NAV of the fund is the collective market value of the assets fund net of its liabilities. If the fund is paid off or dissolved, by trading off all the assets in the fund, NAV is the amount that the shareholders would collectively own. It is calculated basically by dividing the NAV of the fund by the number of units. The most essential part of the calculation is the valuation of the assets owned by the fund and once it is calculated, the NAV is simply the NAVs divided by the number of units outstanding. The complete methodology for the calculation of the asset value is given below: NAV = ([Market Value of schemes investments + Cash/current assets + Income earned on investments] – [Amount payable on unpaid assets + Expenses accrued]) / Number of outstanding units of the scheme.

Sign up to vote on this title
UsefulNot useful