Master of Business Administration - MBA Semester 4

MF0017 – Merchant Banking &Financial Services

ASSIGNMENT-
Marks 60
Roll No. 1208030663
Student Name: Parth Sarthi
Q-1 Rating methodology is used by the major Indian credit rating agencies. Explain the main
factors of that are analyzed in detail by the credit rating agencies

A) Business risk analysis: Business risk analysis focuses on analysing the industry hazards,
market position of the company, operating competence and legal position of the
company. Industries with stable growth in demand and flexibility in the timing of
capital outlays are in a stronger position and, therefore, enjoy better credit rating.

B) Financial analysis: Financial analysis aims at determining the financial strength of the
issuer company through ratio analysis, cash flow analysis and study of the existing
capital structure.

C) Management evaluation: A company’s performance is largely influenced by the aims

and objectives of the management, its plans and policies, ability to prevail over adverse
conditions, employees experience and skills, planning and control system among others.
The management’s strong points and weak points are evaluated for rating a debt
instrument.

D) Geographical analysis: Geographical analysis facilitates in ascertaining the locational

advantages enjoyed by the issuer company.

E) Regulatory and competitive environment: Credit rating agencies assess the

composition and regulatory structure of the financial system in which it operates. CRAs
have to assess the bearing of regulation/ deregulation on the issuer company, while
allotting rating symbols.

F) Fundamental analysis: Fundamental analysis includes an analysis of liquidity

management, profitability and financial position, interest and tax rates sensitivity of the
company.

Q2. Give the meaning of the concept of venture capital funds. Explain the features of
venture capital fund.

A) Meaning of venture capital funds : Venture capital is the money provided by investors
to start firms and small businesses with long-term growth potential. This is a very
important source of funding for start-ups that do not have access to capital markets. It
typically entails high risk for the investor, but it has the potential for above-average
returns.
Venture capital can be defined as investment (long term) which is made in:
• Ventures that are promoted by persons who though they are qualified and
technically sound but do not have any entrepreneurial experience.
• Projects which involves high degree of risk.
 Venture capital institutions can be summarized as financial intermediaries between the
entrepreneurs who need institutional capital (as they are not ready for public finance)
and investors who are looking for higher returns.

B) Features of venture capital funds: As venture capital is provided for businesses which
involve higher risk and also a higher rate of return, it has some specific features. These
are:
 Long-term investment: Venture capital is provided for the long term as these
investments starts earning returns after some time.
 Participation in equity capital: Venture capital is always invested in equity capital
(actual or potential). The reason for this is that the venture capitalist can sell his part of
equity when they start earning profit from their equity holding.
 High risk: Venture capital signifies equity investment in highly risky projects which
have growth prospective and a projected high rate of return.
 Management participation: Venture capital funds not only provide equity capital to the
firms or businesses but also provide them with various kinds of services like
participation in management of the assisted business. Due to this reason they are
different from bankers.
 Liquid investment: Investment made by venture capital fund is in equity portion of the
company which makes it less liquid. They get their money back when the assisted
business goes into liquidation.
 Fulfils its social objectives: Venture capital funds help in generating new employment
opportunities and also help in the balanced growth of the economy by the development
of new and innovative business.
 Large scope of venture capital activities: VC extends to involve the financing of small
and medium enterprises at their early stages of business and helps them establish in the
market. So, it can be said that the scope of venture capital activities is big.

Q3. Hire purchase is one of the important concept. There are certain features of hire
purchase agreement so explain the points of it. Differentiate between hire purchase
and leasing.
A) Concept of hire purchase : In a hire purchase system, the buyer acquires the property by
promising to pay in monthly, quarterly and half-yearly installments. The period of
payment has to be fixed while signing the hire sale agreement. Though the buyer
acquires the asset after signing the agreement, the title of ownership remains with the
vendor until the buyer pays the entire liability. When the buyer pays the entire
installment and any other obligation according to hire purchase agreement, only then
the title of ownership of goods would be transferred to the hirer. If the hirer makes any
default in the payment of any installment, the hire vendor has the right to reposses the
goods. In this case, the amount that is already paid so far by the hirer will be forfeited.
B) Differences between hire purchase and leasing :
 Ownership: In leasing ownership is never transfer to the lessee even after the payment
of last lease rentals. But in hire purchase, after the payment of last installment ownership
is transferred to the buyer of the goods.
  Repayment amount: Generally in lease, repayment is called lease rentals and that in
case of hire purchase is called installments.
 Advantage of tax deductibility: In lease financing lease rentals are tax deductible
expenses. However, in hire purchase arrangement only the amount of interest is tax
deductible not the full installment.
 Depreciation: Lessee cannot claim depreciation as he is not the owner of the asset. In
hire purchase the buyer can have the claim of depreciation with other expenses.
 Realization of salvage value: Lessee cannot realize salvage value of the leased asset
after the end of the lease contract. The hirer can claim salvage value.
 Magnitude of funds involved: In leasing, magnitude of funds involved is very large
because these contracts are generally for capital goods such as plant and machinery,
ships, among others. In the case of hire purchase, the magnitude of funds involved is
low. Generally, these contracts are for the purchase of office equipments, automobiles,
furniture among others.
 Nature of Expenditure: In lease, rentals paid by the lessee are entirely revenue
expenditure of the lessee. But, only interest element included in the HP installment is
revenue expenditure.
 Components: Lease rental comprises two elements: (1) finance charge and (2) capital
recovery. In case of Hire Purchase, HP installments comprise three elements (1) normal
trading profit (2) finance charge and (3) recovery of cost goods/assets.

Q4. Explain the concept of Depository receipts. Write down the difference between American
Depository Receipts (ADR) and Global Depository Receipts (GDR) also mention the issues
involved in ADR/GDR.

A) Explanation of Depository Receipts: Depository receipts are securities that are traded in
foreign currency. These receipts are issued by the foreign bank or institution which acts
as a depository of shares issued by a domestic company. Depository receipts can be
classified into sponsored and unsponsored ones.
1. Sponsored depository receipts: It is created by a single depository which is appointed
by the issuing company under rules provided in a deposit agreement. The issues of
sponsored ADR/GDR require prior approval of the Ministry of Finance.
2. Unsponsored depository receipts: These are issued without any formal agreement
between the issuing company and the depository, although the issuing company must
consent to the creation of the ADR/GDR facility.

B) Differences between ADR and GDR: The following are the main points of difference
between ADRs and GDRs.
(i) The ADRs are issued by the companies to raise funds from the US markets and
GDRs are issued by the companies to raise funds from international markets.
(ii) Even though both are negotiable instruments, ADRs are negotiable in the US
markets only and GDRs are negotiable in international markets.
(iii) The GDRs can be used as a substitute of ADRs, but ADRs cannot be substituted
for GDRs.
 (iv) Companies prefer to issue GDRs in comparison to ADRs due to wider scope to
access the international markets by GDRs.
(v) ADRs are found in three forms from level-I to level-III, but GDRs are already
called in high preference receipt of level-II and level-III.
C) Issues involved in ADR/GDR:

Q5. What is Online Trading? Explain the process of online trading.

A) Measuring and explanation of Online Trading: Online trading is one of the crucial
financial services provided by financial institutions and merchant bankers. Online
trading is completed through Bombay Stock Exchange (BSE) and National Stock
Exchange (NSE). Online trading leads to smoother and quicker transaction on these
exchanges. In 1995, in a span of fifty days BSE was converted into an electronic trading
system from an open outcry floor trading exchange system. In the new electronic trading
system, there is an automated screen-based trading platform which is known as BOLT
(i.e. BSE online trading system) and at present it has an ability of eight million orders a
day. This system enables an investor to trade from any part of the world. This system is
the world’s first centralized exchange-based internet trading system called
BSEWEBx.co.in.
Both NSE and BSE have switched over to computerized online trading system from
open outcry trading system. BSE has BOLT (BSE Online Trading) and NSE has NEAT
(National Exchange Automated Trading). With these highly efficient online trading
systems, efficiency and transparency of BSE and NSE have increased dramatically.
With the online trading systems it is very easy to do online trading with just a PC and an
internet connection. All an investor needs to do is open a demat account and a trading
account with a depository participant or DP. DP connects a depository to investors.
Depository is the individual who stores shares in an electronic form. In India, there are
two depositories, NSDL and CDSL.

B) Explanation of process of Online trading: Online trading can be defined as the

procedure through which transaction of financial securities, currencies and commodities
takes place through the internet. The settlement cycle in India is T+2 days i.e. trade + 2
days. The trading and settlement process in India has been listed below:
 Orders are placed at the trading depots by investors.
 It is the responsibility of the broker houses to confirm the orders and then certify
them to the exchange (BSE or NSE as per the client’s choice).
 Order corresponding at the exchange.
 Trade confirmation information is provided by brokers to the investors.
 The clearing corporation obtains the particulars of trade from the exchange.
 The clearing corporation conveys the particulars of trade to clearing
members/custodians who validate it. Based on the validation, the clearing
corporation decides the duties and responsibilities.
 Understanding of duties and responsibilities and pay-in advice of funds/
securities by the clearing corporation.
  The clearing corporation orders the clearing banks to make funds available by
pay-in time.
 The clearing corporation orders the depositories to make securities available by
pay-in-time.
 Pay-in of securities: The clearing corporation recommends the depository to
debit pool account of custodians/clearing members and credit its (clearing
corporation’s) account and depository does the same.
 Pay-in of funds: The clearing corporation recommends the clearing banks to
debit account of custodians/clearing members and credit its account and
clearing bank does the same.
Q6. Write short notes on:

A) Depository Participants: All the functions performed by depositories are actually

executed by the depository participants (DPs). All activities related to recording of
allotment of securities, transfer of securities etc. are executed through depository
participants and no investor can directly open an account with a depository. A
depository can enter into an agreement with various depository participants who would
work as agents of the depository. Depository Participant works as an intermediary
between the investor and depository and they are called as agents of the depository. The
Depositories Act, 1996, and SEBI (Depository & Participants) Regulations, 1996, specify
the relationship between a depository and depository participant. Any issue related to
the governance of relationship between the depository and DPs will be in accordance
with the Depositories Act and SEBI regulations. A depository participant is always
registered with SEBI and is a legal entity. Once a depository participant obtains a
certification of registration with SEBI after that it can start giving its depositories-related
services.
B) Benefits of Depository Systems: In the depository system, the ownership and transfer
of securities takes place by means of electronic book entries. At the outset, this system
rids the capital market of the dangers related to handling of paper. NSDL provides
numerous direct and indirect benefits like:
 Removal of bad deliveries
 Removal of all hazards associated with physical certificates
 No stamp duty
 Immediate transfer and registration of securities
 Speedy settlement cycle
 Faster pay-out of non cash corporate benefits like rights,bonus, etc.
 Decrease in brokerage by many brokers for trading in dematerialized securities
 Periodic status reports
 Removal of problems related to change of address of investor
 Removal of problems related to transmission of demat shares
 Removal of problems related to selling securities on behalf of a minor