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Mandalia Hetal Prabhudas
Master of Business Administration- MBA Semester 4 MF0017 – Merchant Banking and Financial Services- 4 Credits (Book ID: B 1318) Assignment Set- 1 (60 Marks) Note: Answer all questions (with 300 to 400 words each) must be written within 6-8 pages. Each Question carries 10 marks 6 X 10=60
Q1. Identify the role of merchant banking as financial intermediaries. Answer: Merchant Banking: 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. Merchant banking in India: The need for merchant banking was felt with the rapid growth in number of issues made and initiated into Indian capital market. The National and Grindlays Bank (NGB) then got the license from RBI in 1967. Later in 1970, First National City Bank (FNCB) set up a merchant banking division. As a commercial activity, merchant banking took shape in India through the management of public issues of capital and loan syndication.It includes public sector, private sector and foreign players. Some of the registered merchant banks in India are Kotak Mahindra Capital, HDFC Bank, ICICI Bank, IDBI Bank, and so on. Merchant banking helps with the following: Channelise the financial surplus of the public into productive investment prospects. Coordinate the activities of intermediaries to the share issue such as bankers, registrars, underwriters, and brokers. Ensure the compliance with the rules and regulations governing the market. Functions as financial intermediaries: Financial intermediation is a process by which capital is mobilised from a large number of investors and is made available to all those who need them, mainly to corporate customers. Merchant banking is a financial intermediary which helps to transfer capital from one who owns it to those who require it. Merchant banks invest their capital in client companies and provide fee-based services for mergers and acquisitions. Many companies approach merchant banks to enhance their financial stability or to meet an essential capital requirement. Due to their knowledge in international finances, merchant banks specialise in dealing with multinational corporations. Merchant banks do not offer regular banking services to the public.
foreign companies would issue shares. Profits or dividend – Company must have made profits in the previous five years and must have confirmed dividend of at least 10 percent for each of the previous year. It represents a security. The following are the eligibilities which the company must fulfill to issue an IDR: Capital requirement . permits investors to hold shares in equity of other countries.Foreign banks that have branches in India require an approval from Ministry of Finance to act as a custodian. usually in the form of equity that is issued by a foreign publicly listed company.Roll No. Level of issue – The issue during a particular year must not go beyond 15 percent of the paid up capital plus free reserves and the size of issue must not be less than Rs. Describe the issuance process of depository receipts. Redemption – The IDRs will not be redeemable into original equity shares before one year from the date of issue. Valuation – The IDRs will be valued in Indian rupees.The IDR issue requires consent from SEBI before the issue opening date. irrespective of the value of original shares.There must be an average turnover of USD 500 million for previous three years. which is a physical certificate. The DR. Debt equity ratio – The pre-issue debt equity ratio must not be more than 2:1.IDRs will be listed on stock exchanges and will be freely transferable In India. Profit – In addition to other opportunities. The IDRs have the following features: Abroad custodian . 500 million. Consents for issue of IDRs . Issue of Indian Depository Receipts (IDRs) As per the definition given in the Companies (Issue of IDRs) Rules. Listing . The actual shares underlying the IDRs would be held by an overseas custodian. Answer: The Issuance Process of Depository Receipts A Depositary Receipt (DR) which is traded on a local stock exchange is a type of transferable financial security. Sales turnover of companies . They also require a registration of Indian depository with the SEBI. 511026441 Mandalia Hetal Prabhudas Q2. to an Indian depository. which would in turn issue depository receipts to investors in India. In an IDR. -2- .The foreign company must have paid up capital and free reserve of at least USD 100 million. 2004. which shall authorise the Indian depository to issue the IDRs. IDR will be an extra investment opportunity to Indian investors for overseas investment. IDR is an instrument in the form of a depository receipt created by the Indian depository in India against the underlying equity shares of the issuing company. in order to issue IDR.
Redressal of investor grievances: . details of any enquiry or investigation conducted by SEBI at any time. The merchant banker has to actively associate with the post-issue refund and allotment activities and regularly monitor investor grievances emerging there from. 50 crores with the regional office of SEBI under the jurisdiction of the registered office of the issuer company.The lead merchant banker submits the post issue monitoring reports in duplicate within three working -3- . where the issue is proposed to be listed. The lead merchant banker makes ten copies of the draft offer document available to the Board. the details like registration number. date of registration or renewal of registration. Within three days of filing the offer document with registrar of companies or the stock exchange(s). the lead merchant bankers submits two copies of the final printed copy of the offer document to dealing offices of the Board and one final printed copy to the primary market department. Instructions on post-issue obligations The merchant banker ensures compliance with the following post-issue obligations: Association of resource personnel: . and head office. Answer: The following are the operational guidelines that need to be followed by a merchant banker: Submission of draft and final offer document First. While offer documents are filed with any department or office of the Board.The merchant bankers assign high priority to investor grievances and take all measures to minimise the number of complaints. Explain the operational guidelines that need to be followed by a merchant banker. SEBI. The lead merchant banker also submits a computer floppy containing the final prospectus or letter of offer to the primary market department. and takes all steps to resolve the grievances as soon as possible. Then the lead merchant banker or stock exchange makes the draft offer document available to the public. The expenses of the public representatives associated in the allotment process of oversubscribed issues will be borne by the lead merchant bankers and recovered from the issuers. 511026441 Mandalia Hetal Prabhudas Q3.Roll No. and the date of expiry of registration will be given by the lead merchant banker in the forwarding letters. and 25 copies to the stock exchange(s).A public representative nominated by the Board will be associated with the process of finalising the basis of allotment in case of over-subscription in public issues. the lead merchant banker files the offer documents of size up to Rs. SEBI. time. venue and other details with regard to the process of finalisation of basis of allotment. The lead merchant banker sets up proper grievance monitoring and redressal system in co-ordination with the issuers and the registrars to an issue. penalty imposed by stock exchange. and head office within three days of filing the final prospectus or letter of offer with the registrar of companies or concerned Stock Exchange. Submission of post issue monitoring reports: . The lead merchant banker informs the nominated person about the date.
The renewal application for the certificate of registering as a merchant banker provides a statement that highlights the changes in the information submitted to the Board in an earlier registration. accompanied by relevant details. Mumbai stating the location where the regional office of the Board has dealt with the offer document. -4- . The issuer company to the board submits an application for NOC in the required format. 511026441 Mandalia Hetal Prabhudas days from the due dates either by registered post or delivers it at respective regional offices or head office. Issue of penalty points The board can penalise the merchant banker if there is any violation regarding the provisions of operational guidelines.The issuer companies deposit 1% of the amount of securities offered to the public and/or to the holders of the existing securities of the company with the regional stock exchange based on the listing agreement of the stock exchanges. Registration and renewal of registration of Merchant Bankers Merchant bankers make the application for renewal of certificate of registration as per Regulation 9 of SEBI. The lead merchant banker sends a copy of the report to the Board’s head office. the lead merchant banker informs the Board regarding important developments about the particular issues handled by them. The earlier registration is accompanied by a declaration that there will not be any further changes in the statement. Registration with Association of Merchant Bankers of India (AMBI) The registered merchant bankers will inform the board of members of their registration with AMBI. The deposit amount can be released by the concerned stock exchange only after obtaining an NOC from the board.Roll No. Issue of No Objection Certificate (NOC):. During the intervening period of the reports. The merchant banker who is penalised by giving four or more penalty points cannot file any offer document or manage any issue for a certain periods of time.
The scheme is open for all market members in the Indian securities market. For the authorisation of AIs. obligations and responsibilities of the parties to the agreement. Operation – The scheme is operated on an order-matching. the AIs. provided by the Approved Intermediaries (AIs). The AIs conducts an auction for obtaining securities if the lender or borrower fails to return securities to the AI. The first part of the agreement is between the AIs and the CMs .Roll No. CMs and the clients enter into an agreement. CM and client. Answer: The following are the basic features of securities lending and borrowing scheme: To provide necessary momentum to short sell. 1997 the securities transacted in F&O segment are authorised for lending and borrowing. With the introduction of short selling by institutional investors. automated platform. banks and custodians who are authorised by the AIs. -5- . CMs and the clients are given in the agreement between the AIs. This agreement specifies the rights. The AIs sets up the platform for lending and borrowing which is accessed by the borrowers and lenders through the clearing members (CMs). Eligibility – Under the Securities Lending Scheme (SLS). Settlement – The settlement of the lending and borrowing transactions is independent of normal market settlement. Risk management systems – The AIs frame suitable risk management systems to provide guaranteed delivery of securities to the borrower and return of securities to the lender. Agreement – The agreement consists of the basic conditions for lending and borrowing of securities that is recommended in the scheme. Identification – The AIs allocates unique identification (ID) to each client which is mapped to the Permanent Account Number (PAN) of the clients. CMs and clients. 511026441 Mandalia Hetal Prabhudas Q4. a full-fledged security lending and borrowing scheme was introduced. The AIs also include appropriate conditions in the agreement for proper execution. The AIs ensures that a client does not obtain multiple client IDs by placing systematic safeguards. The settlement cycle for the scheme is based on T+1. The roles of the AIs. The netting of transactions at any level is not permitted as settlement of the lending and borrowing transactions is done on a gross basis at the level of the clients. screen based. This platform is independent of other trading platforms. institutional and so on. Explain the basic features of securities lending and borrowing scheme. Position limits – AIs in consultation with SEBI decides the position limits at the level of market. Participation – The scheme permits participation by all sections of investor. settlement of lending and borrowing transactions and risk management.The second part of the agreement is between the CMs and the clients. The abbreviation T+1 denote the settlement date of security transaction date plus one day. This included retail. Tenure – The tenure of lending and borrowing is fixed as standardised contracts. a scheme for Securities Lending and Borrowing (SLB) was introduced.
Bill discounting . The asset based financial service has emerged as an important supplementary source of finance in the industry. The debt market enables a borrower to organise his borrowings and structure the repayments to match future cash flows. this sector -6- . Discuss the difference between asset and fee based financial services. The investment options have widened significantly to enable the corporate entities to use their surplus cash in short-term maturities and increase the revenue. in particular.Roll No. These services enable the corporate institutions. Factoring – Factoring is a fund-based financial service that provides resources to finance receivables as well as facilitates the collection of receivables.Bill discounting is encashing or trading of bills at less than its par value and before its maturity date. They also undertake the responsibility of getting all government and other clearances. Answer: The difference between asset and fee based financial services:Asset or fund based Asset based financial services facilitate corporate and other business entities to mobilise resources at lower rates and open up investment opportunities with enhanced returns. The following are some of the asset based financial services: Leasing – Leasing is a contractual arrangement or transaction in which a party owning an asset provides the asset for use to another party over a certain period of time in return for rent. Hire-purchase – It is a mode of financing the price of the goods to be sold on a future date. Fee based or advisory – Fee based financial services are not used to create assets or liabilities. The goods are let on hire with an option to the hirer to purchase them Customer credit – Consumer credit includes all asset-based financing plans offered to individuals for acquiring durable consumer goods. These financial services facilitate certain financial functions such as managing capital issues. and arrangement of funds from financial institutions. 511026441 Mandalia Hetal Prabhudas Q5. In addition. making arrangements for the placement of capital and debt instruments. to reject the traditional bank finance and opt for the more competitive financial market. The main suppliers of consumer credit are multinational banks. Forfaiting – Forfaiting is financing of receivables arising from international trade. commercial banks and non banking finance companies. The agreement to asset based securities is facilitated by financial intermediaries through fee based services.
It pays the seller only if the buyer cannot pay and so the initial buyer-seller agreement depends on the seller's credit. the payment liability immediately falls on the banks and then becomes a fund based. While there are different forms of LGs in the context of business usually. For example. and credit rating services. foreign exchange services. There are mainly two types of letters of credit .commercial and standby. the intermediaries charge fees for their financial services. For these financial services the bank will charge fees. The following are some of the fee based financial services: Issuing of Letters of Credit (LC) – LCs successfully complete their purpose to facilitate trade by substituting the credit of the bank for the credit of the customer. Letters of guarantee are concerned with providing safeguards to buyers that suppliers will meet their obligations and are issued by the customer's bank depending on which party seeks the guarantee. registrar.Roll No. like merchant banking services. The bank essentially becomes a co-signer for the buyer. assisting in mergers. and guiding in capital restructuring to their clients. The commercial letter of credit is the primary payment mechanism for a transaction. merchant banking services. Issuing Letters of Guarantee (LGs) – LGs can be with or without collateral security deposit. Other services – The other important fee based financial services generally offered by banks and non banking financial companies include cash management services. -7- . whereas the standby letter of credit is a secondary payment mechanism. It will of course have recourse against the defaulter in whose favour the bank has issued the LC or LG. stock broking and so on. underwriting. plan mergers and acquisitions. 511026441 Mandalia Hetal Prabhudas does a large number of other services like rendering project advisory services. in the event of invocation of guarantee or letters of credit. they are associated with risk. custodial services. In fee based services. However.
the lease does not affect the balance sheet. IAS 17 requires the rental to be charged on a depreciation basis over the lease term. a percentage of the payment can be treated as prepaid expense. The lessee will have to disclose in the notes to the accounts the total amount charged in the year and the total amount of the payments to which the entity is committed at the year end. A lease agreement allows the use of an asset. The lessee has acquired an operating expense. Accounting and reporting for operating lease Let us examine the operating lease in the financial statements of lessees. if the payments are not made on such a basis. Since the lessee will not consider the risk of ownership. the lease expenditure is treated as an operating expense in the income statement. The lessor has made revenue from renting out the asset and consequently recognises the lease rental receivable as income in the profit and loss account. Lease income from operating leases is identified in income on a straight-line basis over the lease term. Answer: Operating lease Lessors present assets under operating leases in their balance sheets based on the nature of the asset. The entire payment is charged to the profit and loss account. -8- .Roll No. and depreciation is calculated in accordance with International Accounting Standard (IAS 16 and IAS 38). The operating lease will not show up as part of the capital of the firm. unless another organised basis is more representative of the pattern in which user benefit derived from the leased asset is reduced. but does not convey rights similar to ownership of the asset. The depreciation policy for depreciable leased assets will be consistent with the lessor’s normal depreciation policy for related assets. The accounting treatment for an operating lease is simple for both the lessor and the lessee. so the lease rental to be paid is written off in the profit and loss account. If the term of the lease requires a heavy initial payment. 511026441 Mandalia Hetal Prabhudas Q6. Describe accounting and reporting for operating lease in detail.
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