1

Indian Financial System

New
Syllabus

Meaning Functions Key Elements Design Types

1. A system that allows the exchange of funds 1. Mobilization of savings Key elements of well functioning Financial System
between lenders, investors, and borrowers. 1. A strong legal and regulatory environment is must
2. Allocation of Savings
2. Operate at national, global, and firm-specific 2. Stable Money
3. Provide payment and settlement Formal Informal
levels.
system 3. Sound public finances and public debt management
3. They consist of complex, closely related Objectives of SEBI
4. Monitor Corporate Performance 4. A Central Bank
services, markets, and institutions intended to
1.Protect the interest of investors in securities.
provide an efficient and regular linkage between 5. Helps in risk reduction 5. Sound Banking System
investors and depositors. Financial Financial Financial Financial Regulatory 2.Promotes the development of securities
market.
6. Provide price related information 6. Information System Institutions Markets Instruments Services Authorities
4. Enable individuals and companies to share the 3. Regulating the securities market..
associated risks. 7. Well functioning securities market.
Functions of SEBI

Market Based
Advantages
1. Facilitate diversification of
securities
2. Helps in investors to reduce
their risk.
3. Provides an information
Disadvantage
1. Market based system is
prone to instability as
market may be fluctuating
in turbulent times.
2. Consequently, investors are
corporations which a broad term describing Are those instruments Are services which 1. Regulating the business in stock exchanges;
provide services as any marketplace where which have a monetary involves investment,
Bank Based intermediaries of trading of securities value. lending, and
2. Prohibiting fraudulent and unfair trade
SEBI practices;
financial markets including equities, management of money 3. Promoting investors' education and training;
bonds, currencies and and assets
Advantages Disadvantage derivatives occurs. 4. Prohibiting insider trading in securities;
1. Close relationship with 1. Retards innovation and 5. regulating take-over of companies.
classified as banking and can be divided into Can be classified into are essential for the
parties; growth as banks may have non-banking financial money market and debt based securities creation of new business,
preference for low risk, low institutions. capital market. and equity based expansion of existing Banking Functions
2. Provide tailor made securities. industries and economic
return projects.
contracts; growth. Functions of
RBI RBI
Supervisory Functions
2. Impedes competition and Banks are creators and Money market is a Equity based securities Financial services
3. Efficient risk sharing;

CA Mayank Kothari
exposed to market risk. entry of new firms because providers of credit. While market for short term consist of equity share rendered by financial Promotional Functions
system. non-banking financial securities having a capital which is institutions bridge the
4. No free rider problem; banks may collude with
3. There is a free rider companies are only maturity period
ownership based gap between lack of Importance of IRDA
4. Facilitate financing of new business managers against providers of credit. of less than one year. securities and represents knowledge on the part of
problem. 1. Regulation of Insurance Sector;
technologies. investors. risk capital. Debt based investors and latest
securities consists of trends in the financial 2. Protection of Policy Holders Interest;
bonds and debentures. instruments and markets.
3. Awareness of Insurance;
Difference Between Difference Between IRDAI
Example
Capital Market is a Debenture is an The producers of 4. Development of Insurance Product;
1.Export Import Bank of market for long term acknowledgement of financial services are
India (EXIM),
securities having a debt which has to be financial intermediaries 5. Saving and Investment of Individual.
Basis Market Based Bank Based Basis NBFC BANK 2. Tourism Finance maturity period of more repaid in full in certain or institutions such as
Corporation of India than one year.
number of years banks, insurance
Economy Economy is dependent The economy is Meaning Non Banking Financial Bank is a government (TFCI),
Further, capital market mentioned at the time of companies, mutual funds Benefits- National Auto Choice for
on how well or poorly dependent on how well Company (NBFC) is a authorized financial 3. Infrastructure can be divided into issue of debenture itself.
and stock exchanges.
Pension Scheme (NPS) distribution;

the stock market is or poorly the banking company that provides intermediary that aims at Development Finance primary market and
1. Additional Tax Benefit of 4. Portable

performing. system is doing. banking services to people providing banking services Company (IDFC) etc. secondary market. ₹50000 (80CCD);

without holding a bank to the general public. 5. Simple

Interest from Banks are less Banks are more license. 4. National Bank for In primary market, On the other hand, Financial services are PFRDA 2. Flexibility to choose
Loans dependent on interest dependent on Interest Agriculture and Rural securities (shares, bonds, bonds are financial needed for the following between 8 Fund 6. Regulated

from loans. from loans for their Incorporated under Companies Act Banking Regulation Act Development (NABARD)
debentures) are issued to instruments issued by activities:
Managers

7. Low Cost
revenue increase 5. National Housing Bank the public for the first companies which are (i) Borrowing and lending

Demand Deposit Not Accepted Accepted (NHB).

time.
basically a financial (ii) Investing

3. Flexibility to choose
between Active and
Wealth The wealth is spread Wealth is more evenly While in secondary contract between a (iii) Buying and selling
more unevenly spread Foreign Investment Allowed up to 100% Allowed up to 74% for
market, trading company (borrower) and securities

private sector banks

Opportunities Each individual within
the society has the
Integral part of the system.
to gain or
opportunity to gain or
(purchase and sale) takes investors (lenders). (iv) Making and enabling
Only a few are given the
RERA Other
opportunity to maximize Payment Settlement Not a part of system.
place in those securities payments and
their gain System are already issued to the settlements

lose public (v) Managing risk

lose on any given day
Maintenance of Reserve Not required Compulsory
Law Based on civil law rather Based on common law Ratios
than common law Functions of Characteristics Types of
Deposit Insurance Facility Not available Available Financial of Financial Financial AMFI FEDAI FIMMDA
Countries USA, UK, Japan, Germany, France,
Market Instruments Services
Singapore ,Malaysia, Italy, India, Argentina, Credit Creation NBFC do not create credit. Banks create credit.
Brazil, Mexico, Pakistan, Srilanka Objectives of AMFI Functions of FEDAI It is a voluntary market body
Philippines, Turkey Transaction Services Not provided by NBFC. Provided by banks. for the bond, money and
Investment Banking 1. Maintain high professional
and ethical standards;
1. Guidelines and Rules for derivatives markets
Forex Business.

Collateral Role of FIMMDA

Liquidity Marketing Credit Rating
2. Recommend and promote 2. Training of Bank Personnel in
Value best business practices and the areas of Foreign Exchange 1. Suggests Legal and Regulatory
To facilitate To help in the To provide To cater to the code of conduct; Business. framework for the development
creation and To serve as process of To provide information and various credits Consumer Finance of new products.

allocation of intermediaries for balanced financial facilitate needs of the

3. Represent to the
Government, Reserve Bank
3. Accreditation of Forex
Brokers.
mobilization of convenience.
2. Training & Development
credit and economic transactions at business Transferability Risk of India, SEBI etc. Support to the Debt &
savings Housing Finance
liquidity growth. low cost. organizations. 4. Represent member banks on Derivatives Market.
4. To undertake nationwide Government/Reserve Bank of
investor awareness India/Other Bodies. 3. Standardisation of market
Maturity Transaction Future Factoring programme practices.
1 2 3 4 5 6 Period Cost Trading 5. To protect the interest of
5. Announcement of daily and
periodical rates to member 4. Functions as the principal
Depository Services investors/unit holders. banks. interface with Regulators

When you’re a carpenter making a beautiful chest of drawers, you’re not going to use a piece of plywood on the back, even though it faces the wall and nobody will see it. You’ll know it’s there, so you’re going to use a beautiful piece of wood on the back. For you to sleep well at night, the aesthetic, the quality, has to be carried all the way through.
 2
Financial Policy & Corporate Strategy
Old
Syllabus

New
Syllabus

3 Essential 3 Questions to be Decisions falling Interface of Financial What makes an What makes an
Strategies at Different within Financial
Elements of Financial Planning answered by Corporate Policy & Strategic Organisation Organisation Financially
Hierarchy Level Strategy
any Business Level Strategy Management Sustainable? Sustainable?

1. Clear and 1. Financial planning is the backbone of the business planning and Corporate Level Suitability
realistic corporate planning. 1 1 1. have a clear strategic 1. Have more than one
strategy; is concerned with selection of businesses in Whether the strategy would work direction;
2. It helps in defining the feasible area of operation source of income;
2. The financial which a company should compete and also for the accomplishment of FINANCING SOURCES OF
3. The financial planner helps the customer to maximize his existing with the development and coordination of 2. able to attract, manage 2. Have more than one way
resources, common objective of the DECISIONS FINANCE
financial resources by utilizing financial tools to achieve his financial that portfolio of businesses. and retain competent
controls and company. of generating income;
goals.; staff;
systems to
4. There are 3 major components of Financial planning: 2 2 3. Do strategic, action and
see it Business Level Feasibility 3. able to demonstrate its
1. Financial Resources (FR) financial planning
through; INVESTMENT effectiveness and impact;
CAPITAL

CA Mayank Kothari
are about practical coordination of operating Determines the kind and number regularly;
3. The right 2. Financial Tools (FT) DECISIONS
units and developing and sustaining a of resources required to STRUCTURE 4. have an adequate
management 3. Financial Goals (FG) competitive advantage for the products and administrative and 4. Have adequate financial
formulate and implement the
team and services that are produced. financial infrastructure;
FR+FT=FG strategy. systems;
processes to 3 3
make it 5. For an individual, financial planning is the process of meeting one’s life 5. scan its environment or 5. Have a good public
goals through proper management of the finances. Functional Level Acceptability DIVIDEND INVESTMENT
happen; context to identify image;
6. These goals may include buying a house, saving for children's education DECISIONS DECISIONS opportunities for its work;
is the level of the operating divisions and It is concerned with the 6. Be clear about its values;
or planning for retirement. departments. Strategies in R&D, operations, stakeholders’ satisfaction and can 6. get community support
7. It is a process that consists of specific steps that helps in taking a big- manufacturing, finance, and Human be financial and non-financial 4 4 for, and involvement in its 7. Have financial autonomy.
picture look at where you financially are. Resource’s involve the development and
work
coordination of resources through which PORTFOLIO
8. Using these steps you can work out where you are now, what you may DIVIDEND
business unit level strategies can be
need in the future and what you must do to reach your goals. DECISIONS DECISIONS
executed effectively and efficiently.

New
Syllabus
International Financial Management
International Capital International Working Capital
Budgeting Management
International Sources of Finance

Complexities involved in Objectives of International Cash Management

International Capital Budgeting
Foreign Currency Convertible Bonds American Depository Receipts Global Depository Receipts Euro Convertible Bonds The main objectives of an effective system of international cash
management are:

1. Cash flows from foreign projects have to be 1. A type of convertible bond issued in a currency different 1. U.S. banks simply purchase a large lot of shares from a 1. GDR is similar to an ADR, but is a depositary receipt sold 1. Euro Convertible bonds are quasi- 1. To minimise currency exposure risk

converted into the currency of the parent than the issuer's domestic currency.
foreign company, bundle the shares into groups and outside of the United States and outside of the home country debt securities (unsecured) which 2. To minimise overall cash requirements of the company as a
organization.
2. A convertible bond is a mix between a debt and equity reissue them on either the NYSE, AMEX or Nasdaq.
of the issuing company.
can be converted into depository whole without disturbing smooth operations of the subsidiary
2. Profits remitted to the parent firm are instrument.
2. The depository bank sets the ratio of U.S. ADRs per home 2. If the Indian Company which has issued ADRs in the receipts or local shares.
or its affiliate

subject to tax in the home country as well 3. It acts like a bond by making regular coupon and country share. This ratio can be anything less than or American market wishes to further extend it to other 2. ECBs offer the investor an option 3. To minimise transaction costs

as the host country

principal payments, but these bonds also give the greater than 1. For example, a ratio of 4:1 means that one countries such as Europe, then they can sell these ADRs to to convert the bond into equity at 4. To minimise country’s political risk

3. Effect of foreign exchange risk on the bondholder the option to convert the bond into stock. ADR share represents four shares in the foreign company. the public of Europe and the same would be named as GDR. a fixed price after the minimum 5. To take advantage of economies of scale as well as reap
parent firm’s cash flow
lock in period.
benefits of superior knowledge.
4. Changes in rates of inflation causing a shift Advantages Advantages Advantages of GDR to Issuing Company 3. The price of equity shares at the
in the competitive environment and thereby time of conversion will have a
affecting cash flows over a specific time 1. Flexibility to convert the bond into equity at a price or 1. ADRs allow US Investor to invest in companies outside 1. Accessibility to foreign capital markets
How Centralised Cash Management helps MNCs
premium element. The bonds
period
redeem the bond at the end of a specified period,.
North America with greater ease.
carry a fixed rate of interest.

5. Restrictions imposed on cash flow 2. Companies prefer bonds as it leads to delayed dilution of 1. To maintain minimum cash balance during the year

2. Rise in the capital because of foreign investors 4. Indian companies which have
distribution generated from foreign equity and allows company to avoid any current dilution 2. By investing in different countries, you have the potential 2. To manage judiciously liquidity requirements of the centre

opted ECBs issue are Jindal

projects by the host country
in earnings per share
to capitalize on emerging economies. 3. To optimally use various hedging strategies so that MNC’s
Strips, Reliance, Essar Gujarat,
6. Political risk in the form of changed 3. Investor is assured of a minimum fixed interest earnings. foreign exchange exposure is minimised

Sterlite etc.

political events reduce the possibility of 4. To aid the centre to generate maximum returns by investing
5. Indian companies are increasingly
expected cash flows
Disadvantages Disadvantages Advantages of GDR to Investor all cash resources optimally

looking at Euro-Convertible bond

7. Estimation of the terminal value in 5. To aid the centre to take advantage of multinational netting so
in place of Global Depository
multinational capital budgeting is difficult 1. Exchange risk is more in FCCBs as interest on bonds 1. ADRs come with more risks, involving political factors, 1. Helps in diversification, hence reducing risk
that transaction costs and currency exposure are minimised

Receipts because GDRs are

since the buyers in the parent company would be payable in foreign currency.
exchange rates and so on.
6. To make maximum utilization of transfer pricing mechanism
falling into disfavour among
have divergent views on acquisition of the 2. FCCBs mean creation of more debt and a forex outgo in 2. Language barriers and a lack of standards regarding 2. More transparency since competitor’s securities can be so that the firm enhances its profitability and growth.
international fund managers.
project. terms of interest which is in foreign exchange.
financial disclosure can make it difficult to research
3. The interest rate is low, say around 3– 4%. foreign companies. compared

It’s simple, “Work hard when it’s time to work and drink hard when it’s time to celebrate, don’t put average efforts, this is what everybody is doing around you and you are doing no good. You can do much better than anybody. Put that extra effort because this is what is going to change your entire life. When you are going to travel on your dream path, it’s not going to be
easy but yes it’s going to be worth it.
 3 New
Syllabus

Risk Management
1. VAR is a measure of risk of investment means that during the day there is a
given the normal market condition in a only a 5% chance that the loss the
set of period, say, one day it estimates next day will be greater than
how much an investment might lose
£100,000.

2. VAR answers two basic questions

3. Assume a London bank determines
1. What is worst case scenario?
that its VaR is £3 million at 5% for
Types VaR 2. What will be loss?

3. VAR answers the question, "What is my

one day. This statement means that
the bank expects to lose a
worst-case scenario?" or "How much minimum of £3 million in one day
could I lose in a really bad month?”
5% of the time. A critical, and often
4. For example,
overlooked word, is minimum. In
Strategic Compliance Operational Financial 1. If a portfolio of stocks has a one- this example, the bank expects that
Types Evaluation day 5% VaR of Rs. 1 million, that its losses will be at least £3 million
Risk Risk Risk Risk 1. Equity shareholders 2. Even for a lender,
means that there is a 0.05 in one day with 5% probability. In a
view financial gearing existing gearing is Meaning
i.e. ratio of debt in also a risk since probability that the portfolio will fall VaR measure, there is no ultimate
A risk in which a Every business needs to This type of risk relates to Financial Risk is referred as in value by more than Rs.1 million maximum that one can state. VaR
capital structure of company having high
company’s strategy comply with rules and internal risk.
the unexpected changes in over a one-day period if there is no is thus a minimum extreme loss
Stakeholder’s company as risk since gearing faces more
becomes less effective regulations. For example with It also relates to failure on the financial conditions such as trading. Informally, a loss of Rs.1 metric. With a probability of 5%
Angle in event of winding up risk in default of
and it struggles to achieve the advent of Companies Act, part of the company to cope prices, exchange rate, million or more on this portfolio is and a measurement period of one
of a company they payment of interest
its goal.
2013, and continuous updating with day to day operational Credit rating, and interest expected on 1 day out of 20 days day, we can interpret the bank’s
will be least and principal
It could be due to
of SEBI guidelines, each problems.
rate etc.
(because of 5% probability). A loss VaR as expecting a minimum loss
prioritized.
repayment.
1. technological changes,
business organization has to Operational risk relates to Also people who borrowed which exceeds the VaR threshold is of £3 million once every 20
2. a new competitor comply with plethora of rules, ‘people’ as well as ‘process’.
money and who are unable termed a "VaR breach.
business days.
entering the market,
regulations and guidelines. to pay for the money they 2. If a daily VaR is stated as £100,000
1. From company’s point of view if a company
3. shifts in customer Noncompliance leads to borrowed is a type of to a 95% level of confidence, this
Company’s borrows excessively or lend to someone who
demand,
penalties in the form of fine and Financial Risk.
defaults, then it can be forced to go into
4. increase in the costs of imprisonment.
Angle liquidation.
raw materials. 2 3
1 4
Example: In case of Nokia Example: India’s securities Example: An employee paying Example: Liquor baron Vijay Components of Probability: Assuming Time Horizon: VAR Z score: Z score
1. From Government’s 2. Even this risk also
when it failed to upgrade regulator SEBI has banned the out Rs.1,00,000 from the Mallya, wanted in India for

CA Mayank Kothari
its technology to develop
touch screen mobile
phones. That delay
enables Samsung to
become a market leader in
be predicted.
1 week, 1 month
touch screen mobile
phones.
Control Risk:
global accountancy firm PwC
from auditing listed companies
in the country for two years,
after it failed to spot a $1.7bn
fraud at the now defunct
Satyam Computer Services.
PwC however said it will fight
month and so on. value of a
against the ban in court.
– Generally 95%
account of the company
instead of Rs.10,000. This is a
people as well as a process
risk. An organization can
employ another person to
check the work of that person
who has mistakenly paid Rs.
1,00,000 or it can install an
electronic system that can flag
off an unusual amount.
point of view, the includes willful Calculations: VAR the values are normally can be applied for
defaulting on over Rs 8,000 indicates how
financial risk can be defaulters. This can
crore in bank loans, was calculation is based attributed, probability different time
viewed as failure of also be extended to many standard
arrested in London. Within
any bank or (like sovereign debt crisis. on following 3 of maximum loss can horizons say 1 day,
hours, a court granted him Government’s Deviations is
L e h m a n B ro t h e r s )
bail. Mallya's wanted in components :
Angle down grading of any away from Mean
India on charges of financial
irregularities and loan financial institution Features 1. Time Period
leading to spread of
default related to his 2. Confidence Level
distrust among population. When
Kingfisher Airlines Statistical Method:
society at large.
it is multiplied
It is a type of Risk can be
and 99%

with Standard
statistical tool based controlled by
3. Loss in Deviation it
on Standard selling limits for
percentage or in provides VAR.
Counterparty Risk Political Risk Interest Rate Risk Currency Risk amount Deviation. maximum l o s s .

5 6
This risk occurs due to non-honoring of This type of risk is faced by and overseas This risk occurs due to change in interest This risk mainly affects the organization Application
obligations by the counter party investors, as the adverse action by the rate resulting in change in asset and dealing with foreign exchange as their cash
government of host country may lead to liabilities.
flows changes with the movement in the
huge losses.
This risk is more important for banking currency exchange rates.
To measure the
As a tool for Asset and
maximum possible loss
companies. Liability Management
on any portfolio or a
especially in banks.
trading position.
How to Identify Counterparty Risk? How to Identify Political Risk? How to Identify Interest Rate Risk? How to Identify Currency Risk?
1. Failure to obtain necessary resources to 1. Insistence on resident investors or labour
1. Monetary Policy of the Government.
1. Government Action

complete the project or transaction 2. Restriction on conversion of currency

2. Any action by Government such as 2. Nominal Interest Rate
As a benchmark for To fix limits for To enable the
undertaken.
3. Repatriation of foreign assets of the local demonetization etc.
3. Inflation Rate: Purchasing power parity performance individuals dealing in management to decide
measurement of any front office of a treasury
2. Any regulatory restrictions from the govt
3. Economic Growth
theory discussed in later chapters impact the trading strategies.
operation or trading. department.
Government.
4. Price fixation of the products 4. Release of Industrial Data
the value of currency.

3. Hostile action of foreign government.

5. Investment by foreign investors
4. The change of government and its attitude
4. Let down by third party.
6. Stock market changes
towards foreign investment also helps to
5. Have become insolvent. identify the currency risk.
How to mitigate/manage/reduce this risk? How to mitigate/manage/reduce this risk? How to mitigate/manage/reduce this risk? How to mitigate/manage/reduce this risk? Formula

1. Carrying out Due Diligence before dealing 1. Local sourcing of raw materials and labour
1. Using Forward Rate Agreement
1. Using Home Currency Invoicing

with any third party.

2. Using Swaps
2. Using Forward Contracts

2. Do not over commit to a single entity or 2. Entering into joint ventures

3. Using Interest Rate Futures
3. Using Futures Contracts

group or connected entities.

4. Using Caps, Collars, & Floors 4. Using Options Contract

3. Review the limits and procedure for credit 3. Local financing

5. Using Swaps

approval regularly.
6. Leading or Lagging the foreign currency
4. Rapid action in the event of any likelihood 4. Prior negotiations receivables or payables
of defaults.

5. Use of performance guarantee, insurance

or other instruments.

Sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving your other innovations. That’s been one of my mantras—focus and simplicity. Simple can be harder than complex; you have to work hard to get your thinking clean to make it simple.|“Do not wait; the time will never be ‘just
right.’ Start where you stand, and work with whatever tools you may have at your command, and better tools will be found as you go along.
 4 New Old

Security Analysis
Syllabus Syllabus

Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining Technical Analysis is a method of share price movements based on a study of price graphs or charts on
related economic, financial and other qualitative and quantitative factors. Fundamental Analysis Technical Analysis the assumption that share price trends are repetitive.

Economic Analysis Industry Analysis Support & Market 1. It is an index that covers all securities traded.
Company Analysis Assumptions Principles Theories Charts
Resistance Level Indicators 2. It is computed by dividing the net advances or declines in the
market by the number of issues traded.
Macro- economic factors are to An assessment has to be made
Company analysis is a process 1. Value of stock depends 1. A support level is a level where the price tends to find Breadth 3. The breadth index either supports (technical strength) or
be assessed while analyzing the regarding all the conditions and The market discounts
carried out by investors to on the supply and support as it falls. This means that the price is more likely Index contradicts(weakness) the movement of the Dow Jones Averages
overall economy. and quantitative factors relating to demand of the everything
evaluate securities, collecting info demand for a stock. to "bounce" off this level rather than break through it. 1. The volume of shares traded in the market provides useful clues
factors. Trends in peoples’ particular product, cost structure of
related to the company’s profile, 2. The supply and 2. A resistance level is the opposite of a support level. It is on how the market would behave in the near future.
income and expenditure reflect the industry. Since the basic Price moves in trends Volume of
products and services as well as demand is actually where the price tends to find resistance as it rises. Again,
the growth of a particular p r o fi t a b i l i t y o f a n y c o m p a n y Transactions 2. It may signal a bull market or bear market.
profitability. This requires careful governed by several
industry/company in future. depends upon the economic this means that the price is more likely to "bounce" off
examination of the company's factors. History tends to repeat 1. It is supposed to reveal how willing the investors are to take a
Consumption affects corporate prospects of the industry to which it this level rather than break through it. chance in the market. It is the ratio of high-grade bond yields to
quantitative and qualitative 3. Stock prices move in
profits, dividends and share belongs, an appraisal of the low-grade bond yields.
fundamentals. trends which continue
prices in the market. particular industry's prospects is
for a substantial period 2. A rising confidence index is expected to precede a rising stock
essential. market, and a fall in the index is expected to precede a drop in
of time Confidence stock prices.
4. Technical analysis Line Chart Bar Chart Index
relies upon chart 3. A fall in the confidence index represents the fact that low-grade
bond yields are rising faster or falling more slowly than high
Factors affecting Factors affecting Factors affecting analysis rather than the grade yields.
Economic Analysis Industry Analysis Company Analysis information in the
financial statements Point & Figure 1. The relative strength concept suggests that the prices of some
Candlestick
1. Product Life Cycle 1. Net Worth and Chart Chart securities rise relatively faster in a bull market or decline more
5. Growth Record
1. Growth Rates of National Income Book Value slowly in a bear market than other securities i.e. some securities
and Related Measures 2. Demand Supply Gap 6. Financial exhibit relative strength.
2. Sources and Analysis
3. Barriers to entry for new players Uses of Funds Relative 2. Investors will earn higher returns by investing in securities which
2. Growth Rates of Industrial Sector
7. Competitive Strength have demonstrated relative strength in the past.
4. Government Attitude 3. Cross- Sectional Advantage Analysis
3. Inflation 3. Relative strength can be measured in several ways.
and Time Series
5. State of competition in the industry Analysis 8. Quality of
4. Monsoon Management Efficient 1. Calculating rates of return and classifying those securities
Dow Jones Elliot Wave Random with historically high average returns as securities with high
6. Cost Conditions and Profitability 4. Size and Market
Ranking of the 9. Corporate Theory Theory Walk Theory relative strength is one of them.
7. Technology and research company Governance Hypothesis
2. Even ratios like security relative to its industry and security
relative to the entire market can also be used to detect
relative strength in a security or an industry.
Techniques used in Techniques used in Techniques used in 3 Movements Theory 1. Prices of shares in stock market can 1. EMH states that it is impossible
1. This theory is a contrary - opinion theory.
Economic Analysis Industry Analysis Company Analysis 1. Primary Movement - is the main 1. Elliot found that the markets
never be predicted. for an investor to outperform the
market a s the a vailable price Odd Lot
trend of the market, which lasts exhibited certain repeated patterns 2. The reason is that the price trends sensitive information are already Theory 2. It assumes that the average person is usually wrong and that a
from one year to 36 months or or waves. As per this theory wave is are not the result of any underlying included in the market price of the wise course of action is to pursue strategies contrary to popular
longer. This trend is commonly a movement of the market price factors, but that they represent a securities. And thus investor opinion.
Anticipatory Surveys Regression Analysis Correlation & Regression Analysis called bear or bull market. from one change in the direction to
the next change in the same
statistical expression of past data. cannot purchase the securities Data Interpreting
which are undervalued and sell it at 3.The odd-lot theory is used primarily to predict tops in bull
It i n c o r p o r a t e s e x p e r t o p i n i o n o n Investor diagnoses the factors determining the
Trend Analysis
2. Secondary Movement - of the direction. 3. There may be periodical ups or inflated price. Analysis Price Patterns markets, but also to predict reversals in individual securities.

CA Mayank Kothari
construction activities, expenditure on plant demand for output of the industry through market is shorter in duration than downs in share prices, but no
and machinery, levels of inventory – all having product demand analysis. Factors to be the primary movement, and is 2. These waves are resulted from connection can be established 2. EMH explains that investor can
a definite bearing on economic activities. Also considered are GNP, disposable income, per opposite in direction. It lasts from buying and selling impulses between two successive peaks (high earn higher returns only by having
future spending habits of consumers are taken capita consumption / income, price elasticity Decision Tree Analysis two weeks to a month or more. emerging from the demand and price of stocks) and troughs (low riskier assets in her (his) portfolio.
into account. of demand. For identifying factors affecting supply pressures on the market. price of stocks)
demand, statistical techniques like regression 3. Daily Movement - are the narrow
Gap
analysis and correlation are used. movements from day-to-day. Classification of Waves Moving Averages Run Test
3 Lessons Markets Have No Memory
Barometer/Indicator Approach Input/Output Analysis Principals Impulsive Patterns-(Basic
Here’s to the crazy ones — the Waves) - In this pattern there Market Prices are Fair AMA EMA
1. Market discounts everything
It reflects the flow of goods and services misfits, the rebels, the will be 3 or 5 waves in a given

through the economy, intermediate steps in troublemakers, the round pegs in 2. The 3-trend market direction (going upward or Read the Entrails Channel
Leading Roughly Lagging downward). These waves shall
production process as goods proceed from EMA=[CP x e]+[Previous EMA x (1-e)]
Indicator Coincidental Indicator the square holes. The ones who 1. Uptrend move in the direction of the
raw material sta ge through final basic movement. This 3 Challenges Limited Information
consumption. This is carried out to detect see things differently — they’re 2. Sideways Trend
movement can indicate bull Processing Capabilities.
CP = Current Closing Price,

e=exponent in decimals
Economic Model Building changing patterns/trends indicating growth/ not fond of rules. You can quote 3. Downtrend phase or bear phase.
decline of industries.
Approach them, disagree with them, glorify Irrational Behaviour
3. The 3-Phases of primary trend Double Top
or vilify them, but the only thing 3 Forms Monopolistic Influence
1. Accumulation Phase C o r re c t i v e Pa t t e r n s -
Forecast GNP based Forecast GNP based on you can’t do is ignore them (Reaction Waves) - These 3
on 1. consumption
1. political stability, expenditure,
because they change things. They 2. Public Participation Phase waves are against the basic Form Past Public Private
Information Information Information
2. rate of inflation, 2. gross private push the human race forward, and 3. Panic phase (Excess Phase) direction of the basic
3. rate of interest domestic I think if you do something and movement. Correction involves Weak Form Head & Flags & Double
while some may see them as the ✔ Wedge Triangle
4. economic & fiscal investment, it turns out pretty good, then 4. Market indexes must confirm each correcting the earlier rise in case Shoulders Pennants Bottom
policies of 3. government crazy ones, we see genius, other of bull market and fall in case of Semi
government purchases of goods/ you should go do something else bear market. As shown in the
✔ ✔
services, because the ones who are crazy 5. Volume must confirm trend Strong
wonderful, not dwell on it for following diagram waves 1, 3 and Form
4. net exports. enough to think that they can 6. Trend remains in effect until clear 5 are directional movements,
too long. Just figure out what’s reversal occurs. Strong
change the world, are the ones which are separated or ✔ ✔ ✔
next. corrected by wave 2 & 4, termed Form
Compare who do. as corrective movements.
Test to Verify Serial Filter
Weak Form of Correlation Run Test Rules
Market Efficiency
Test Test
 In finance, valuation is the process of determining the present value (PV) of an asset. Valuations can be done on

Security Valuation
assets (for example, investments in marketable securities such as stocks, options, business enterprises, or
5 intangible assets such as patents and trademarks) or on liabilities (e.g., bonds issued by a company).
Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition
Old New
transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.
Syllabus Syllabus

Overview Return Concepts Valuation Equity Valuation Preference Valuation Bond Valuation

Dividend Based Single Period Holding

Redeemable Irredeemable
Required Rate of Return Discount Rate Internal Rate of Return Multi Period Holding
No Growth Constant Growth

1. Required rate of return is 1. Discount Rate is the rate at which present value of future 1. The internal rate of return Two Stage
the minimum rate of return cash flows is determined.
Model
sometime known as yield on
that the investor is expected 2. Discount rate is normally the required rate of return project is the rate at which Three Stage
to receive while making an which is also called as cost of capital an investment project Model
investment in an asset over promises to generate a
a specified period of time.
(1+ Nominal Rate) = (1+ Real Rate)(1+Inflation rate) return during its useful life.
Gordon’s
2. T h i s i s a l s o c a l l e d We can form some principle based on the above formula
2. It is the discount rate at Earnings Based Growth Model
Walters Model PE Multiple
opportunity cost or cost of which
11
1. If projected cash flows are in real terms, the discount rate
capital because it is the PV of CIF = PV of COF

highest level of expected used should be real discount rate.

MP = EPS x PE Multiple
Or

return forgone which is 2. If projected cash flows are in money terms, the discount Convertible Bonds
NPV=0
available elsewhere from rate used should be money discount rate.

investment of similar risks.

Market Market Market Cash & 1. Conversion Ratio:

3. Where there are more than one inflation rates, then Situation Result Minority
3. Many times, required rate of Enterprise Value = Value of + Value of + Value of + - Cash The number of shares each convertible bond
convert the cash flows in which the discount rate is.
Interest
return and expected return Equity Preference Debt Equivalent converts into. It may be expressed per bond.

IRR > Ko Acceptable

are used interchangeably. 4. The depreciation charge remains the same irrespective of
But, that is not the case. the inflation rate and hence it should be considered as EV Multiple 2. Conversion Value:
IRR < Ko Not Acceptable
CV= Market price per share x Conversion
Zero Inflation item. Ratio

= Net
Capital Asset Pricing Model is Capital 🔺 Non Cash New Debt Debt
used widely to calculate Cash Flows Discount Stock Valuation Cash Flow Based FCFE +
Income Depreciation - - +
Expenditure Working Capital Issued
- Repayment 75+50-20-5+15-10 = 105
3. Conversion Premium:

required Return on Equity Rate The amount by which the price of a

Stock is undervalued as it is
Expected Return > EBITDA Capital 🔺 Non Cash convertible security exceeds the current
Equity Ke Buy expected that return will be FCFF
Based on = EBITDA*(1-tax) + Depreciation*(tax) - Expenditure - 260*(1-0.50)*+50*(0.50)-20-5=130
Working Capital market value of the common stock into
CAPM Return higher than required.
Preference Kp Capital 🔺 Non Cash which it may be converted.

Based on EBIT = EBIT*(1-tax) + Depreciation - Expenditure - 210*(1-0.50)+50-20-5=130 CP = MP - CV

where
Working Capital
Stock is correctly valued
Rx = expected return on Debt Kd(1-t) Expected Return = MP = Market Price of Convertible Bond

Hold hence we should hold and Capital 🔺 Non Cash

investment in "x"(company x)
CAPM Return Based on EAT = EAT+ Interest*(1-tax) + Depreciation - Expenditure - 75+60*(1-0.50)-20-5=130 CV = Conversion Value

Bonds YTM wait to buy or sell in future. Working Capital

CA Mayank Kothari
Rf = risk-free rate of return

βx = beta of "x"
= FCFE + Interest*(1-tax) + New Debt Preference 4. Conversion Premium Ratio:
Mix Ko Stock is overvalued as it is Based on FCFE Principal Prepaid - Issued + 105+60*(1-0.50)+10-15+0=130
Expected Return < Dividend Ratio which shows at what premium the
Rm = expected return of market
Sell expected that return will be
CAPM Return convertible bond is trading in the market

Rm-Rf = Market Risk Premium

less than required.
βx(Rm-Rf) = Equity Risk Premium
Rights Share Announcement of Ex-Right Date
1 2 3 4 Right Issue 2:1
5. Straight Value of the Bond:

Po=£50 P1=£46
It is the price where the bond would trade if it
Structure Types Yield Valuation S=£40 were not convertible to stock. Its then is
equivalent to non-convertible bond.

1. Face Value
1. Fixed Rate Bonds
1. Current Yield
2. Coupon Rate
2. Floating Rate Bonds

BV=Theoretical Value of Bond

6. Minimum Value of the Convertible Bond:
3. Maturity
3. Zero Coupon Bonds
£3
Rights Value £3.33 A convertible bond should at the lowest
4. YTM
4. Convertible Bonds
I = Annual Interest/Coupon Amount
46-40 3 trade at the higher of either the conversion
5. Market Price
5. Covered Bond
PVAF=Present Value Annuity Factor

value or straight value.

6. Redemption Value 6. Deep Discount Bonds

2. Yield To Maturity YTM= Yield to Maturity (Investors
7. Callable Bonds
a. Average Method Required Rate of Investors
8 9 10 7. Downside Risk:

8. Putable Bonds
PVF= Present Value Factor Downside risk is the % premium over the
Immunization Forward Rates Term Structure Theories straight value of the bond.

CY = Current Yield

YTM= Yield to Maturity

We k n o w t h a t w h e n An investor can purchase a two- The term structure theories explains the
C= Coupon Amount
interest rate goes up year Treasury bill (say rate is 10%) relationship between interest rates or bond
b. IRR or Discounted Cash Flow RV= Redemption Value
although return on or buy a one- year bill (say rate is yields and different terms or maturities:
8. Conversion Parity Price or Market Conversion
Method MV= Market Value(purchase price)

investment improves but 9%) and roll it into another one- Price:

N= No. of periods to expiry

value of bond falls and year bill once it matures.
1. Unbiased Expectation Theory: As per this Price at which the investor will neither gain
vice versa. Thus, the price theory the long-term interest rates can be used nor lose on buying the bond and exercising
5 6 7 of Bond is subject to The investor will be indifferent if to forecast short-term interest rates in the it.

following two risk:

they both produce the same future on the basis of rolling the sum invested
Duration Volatility Convexity result. An investor will know the for more than one period.

1. Price Risk
spot rate for the one-year bill 2. Liquidity Preference Theory: As per this 9. Favourable Income Differential Per Share
Macaulay Duration Modified Duration (Volatility) Modified Duration is a good approximation of the percentage of price change 2. Reinvestment Rate Risk
(10%) and the two-year bond theory forward rates reflect investors’ It represents extra income earned in Bond
attempts to estimate how the for a small change in interest rate. However, the change cannot be estimated (9%), but he or she will not know expectations of future spot rates plus a over dividend income in shares.

price of the bond will change in so accurately of convexity effect as duration base estimation assumes a linear Further, with change in the value of a one-year bill that is liquidity premium to compensate them for
response to a change in interest relationship
interest rates these two purchased one year from now.
exposure to interest rate risk. Positive slope
(ytm) and is stated in terms of % This estimation can be improved by adjustment on account of ‘convexity’ risks move in opposite
Year Cash PVF PV PV may be a result of liquidity premium.

Flows x Yr change in price direction. Through the Given these two rates though, the
PV+ = Bonds Price on increase in 🔺 Yield
3. Preferred Habitat Theory: Premiums are 10. Premium Payback Period
process of immunization forward rate on a one-year bill will related to supply and demand for funds at It represents the time in which we recover
1 C PV- = Bonds Price on increase in 🔺 Yield

selection of bonds shall be be the rate that equalizes the various maturities not the term to maturity and premium paid (to purchase the Convertible
PVo = Initial Bond Price

2 C+RV AnnModDur = Annual Modified Duration in such manner that the rupee return between the two hence this theory can be used to explain Bon) using extra income of Interest

effect of above two risks types of investments mentioned almost any yield curve shape.
shall offset each other. earlier.

My favorite things in life don’t cost any money. It’s really clear that the most precious resource we all have is Time. |I’m as proud of many of the things we haven’t done as the things we have done. Innovation is saying no to a thousand things.
 6
Portfolio Management
Old New
Syllabus Syllabus

SIM
[Single Index Model]
APT
[Arbitrage Pricing Theory]
CAPM
[Capital Asset Pricing Model]
Portfolio Return Security Return Investor Single Security
[Markowitz Model/ Modern Portfolio
Theory]
Portfolio Risk [2 Securities]
[Markowitz Model/ Modern Portfolio Theory]
Portfolio Risk
[3 Securities]
SIM
[Single Index Model]
[Markowitz Model/ Modern Portfolio Theory]

Security Variance Portfolio Variance

Return (R) Risk

Systematic Unsystematic
Risk Risk

Can be diversified &

reduced

Single Security/Asset Beta Portfolio Beta

Portfolio Evaluation Portfolio Rebalancing
Market Lines Optimum Portfolio Theory
Measures Theories
1. Buy & Hold Policy: Do
Regression Analysis Correlation Analysis Nothing Approach

2. Constant Mix Policy:

Balancing the portfolio in the
set proportion (say 30:70)at
each interval when the
portfolio value changes.

3. Constant Proportion
Portfolio Insurance Policy
[CPPI]:
Proportion of Risky Assets

Equity= M(PV-FV)
Where, M is the multiplier & M>1,
PV is the revised portfolio value
due to changes in Index , FV is
the Floor Value

Do You Know?
1. Market beta is 1, Total Risk (σ) = Systematic Risk + Unsystematic Risk
2. Beta= –ve (stock moves in opposite direction), +ve (stock moves in same direction), 0 (stock
CA Mayank Kothari Advantages of CAPM

1. Considers only systematic risk 1.

Objectives of Portfolio
Management
Security of the Principal
Levered & Unlevered Beta

Systematic Risk vs Unsystematic Risk 2. Better method to calculate cost of Investment

movement is independent of the market).
equity of no dividend company 2. Consistency of returns
3. Risk reduction means actual risk (σ) of the portfolio is less than the weighted average risk of
Basis Systematic Risk Unsystematic Risk 3. C a n b e u s e d a s r i s k a d j u s t e d 3. Risk Reduction
the securities that constitutes the portfolio. This is the point where one can say that Where D/E is the Debt Equity Ratio of the
discounted rate (RADR) 4. Capital Growth respective company
diversification has resulted into risk reduction. Meaning Risk inherent to the entire market or Risk inherent to the specific When more than one firm could be identified as
5. Liquidity
4. Beta measures the sensitivity of returns of the stock to the market. High beta represents entire market segment company or industry potential pure play, the firm with median beta could
6. Marketability
high risk, low beta: low risk. Disadvantages of CAPM be chosen as the pureplay otherwise mean of beta of
Control Uncontrollable by an organisation Controllable by an 7. Favourable tax treatment these can be used.
5. In CAPM if more than one risk free rate of return is given, then it is better to go moderate organisation 1. Unreliable Beta
and take average of all. Aggressive may resort highest rate whereas conservative can take Phases in Portfolio
Nature Macro in nature Micro in nature 2. Hard to get the market information Minimum Variance Portfolio
lowest rate. 3. No transaction cost Management
6. Coefficient of Variation, [CV = Risk➗ Return] Coefficient of variation is used where we Types Interest rate risk, market risk, Business/Liquidity risk, 1. Analysis of the underlying securities
purchasing power / inflationary risk financial/credit risk 2. Forming a feasible portfolio of the
cannot decide which securities to select from many with the given return and SD. Hence we Assumptions of CAPM
selected securities
find out for each security that how much risk we have to bear to earn one unit of return. And Also Market risk, Non diversifiable risk Diversifiable risk
Investors 3. Selecting the optimal portfolio
then it becomes easy to decide upon the securities for selection. Known
1. Aim to maximise economic utilities. 4. Constantly monitoring and revising
7. Coefficient of Determination / R-Squared/Square of Correlation Coefficient: , it shows that as
2. Are rational and risk averse. the selected optimal portfolio
how much the beta of the security is reliable. R-square of 0.35 means 35% of the risk comes Example Recession and wars all represent Sudden strike by the 5. Evaluation of the performance of
3. Are price takers i.e. they cannot
from market sources and rest 65% comes from firm specific sources. sources of systematic risk because employees of a company the portfolio
influence price.
8. A Portfolio’s Alpha is the weighted average of its alpha of the component securities and the they affect the entire market and you have shares in, is 4. Can lend and borrow unlimited
weight being the proportion of investment in a security. cannot be avoided through considered to be
diversification. unsystematic risk.
amount @ risk free rate of interest (Rf). Assumptions of Markowitz Model
9. Diversification is a risk-management technique that mixes a wide variety of investments 5. Trade without any transaction or
within a portfolio in order to minimize the impact that any one security will have on the taxation cost 1. Investors are rational
Situation Interpretation Action
overall performance of the portfolio. Diversification lowers the risk of your portfolio. 6. Assumes all information is available at 2. The investors have free access to fair
information of returns and risk.
10. The technique of identifying firms with publicly traded securities, which are engaged solely Actual/Expected Return > CAPM (Required Return) Security is giving more returns Buy the same time to all investors.
3. The markets are efficient and absorb the
in the same line of business as the division or project in question. These comparable firms than required. It’s Undervalued 7. Assumes that all assets are divisible and
information quickly and perfectly.
are called “pureplay firms” Actual/Expected Return = CAPM (Required Return) Security is giving equal returns Hold
liquid asset.
8. Assumes that Securities or capital asset 4. Investors are risk averse
11. In finance short selling (also known as shorting or going short) is the practice of selling as required. It’s correctly valued
does not face any bankruptcy or 5. Standard deviation or variance and expected
securities or other financial instruments that are not currently owned, and subsequently Actual/Expected Return < CAPM (Required Return) Security is giving less returns Sell
insolvency. returns are the basis for investors to take
repurchasing them ("covering"). than required. It’s Overvalued the decision.

Being the richest man in the cemetery doesn’t matter to me. Going to bed at night saying we’ve done something wonderful...that’s what matters to me. |The people who are crazy enough to think they can change the world are the ones who do.| We’re just enthusiastic about what we do
 … Continued _Portfolio
Fixed Income Portfolio
7
New
Syllabus Management

Process Methods Strategy

1. Setting up objective
Arithmetic Average Ri=Returns of respective period

2. Drafting guideline for Rate of Return N= no. of periods

investment policy
Active Strategy
Time Weighted Rate Passive Strategy
3. Selection of Portfolio
of Return
Strategy - Active and
Passive
Forecasting Returns Interest Rate
Money Weighted Bond Swaps
4. Selection of securities and & Interest Rate Swaps
Rate of Return
other assets

5. Evaluation of performance This strategy involves regularly monitoring bond process to identify mispricing and try to exploit this situation. Some of the popular
R= Entire return for 1. This strategy invokes the estimation of the return on
with benchmark Annualised Return swap techniques are as follows:
holding period the basis of change in the interest rates.

2. Since interest rate and bond values are inversely

related if portfolio manager is expecting a fall in
interest rate of bonds he/she should buy with longer International Spread Interest Rate Swap
maturity period.
Pure Yield Pickup Swap Substitution Swap Tax Swap
Matching Cash Swap is another technique
Buy & Hold Indexation Immunization 3. On the contrary, if he/she expected a fall in interest that is used by
Flows then he/she should sell bonds with longer period. It involves switching from a It involves swapping with similar type of In this swap portfolio It is based on taking tax Portfolio Manager.

CA Mayank Kothari
lower yield bond to a higher bonds in terms of coupon rate, maturity manager is of the belief advantage by selling This technique has
This technique is do This strategy is more popular among pension period, credit rating, liquidity and call
This strategy involves This approach yield bond of almost identical that yield spreads existing bond whose been discussed in
nothing technique and funds. Since pension funds promises to pay provision but with different prices.

replication of a involves buying of quantity and maturity.

between two countries price has decreased at greater details in the
investor continues with fixed amount to retire people in the form of This type of differences exists due to
predetermined Zero Coupon Bonds It is suitable for portfolio is temporarily out of capital loss and set it chapter Interest
initial selection and do not annuities any inverse movement in interest
benchmark well to meet the promised Bullet Barbell Ladder manager who is willing to temporary imbalance in the market. line and he tries to take off against capital gain Rate Risk.
attempt to churn bond may threaten fund’s ability to meet their
known bond index as payment out of the Strategy Strategy Strategy assume interest rate risk as he b e n e fi t o f t h i s in other securities and Management.

portfolio to increase return liability timely. By building an immunized

closely as possible. proceeds realized. may suffer a capital loss. mismatch. buying another security.

or reduce the level of risk. portfolio the interest rate risk can be avoided.

Portfolio Strategy Asset Allocation Strategies

The Active portfolio management relies on the fact Passive asset management relies on the fact 1 2 3 4 5 6
that particular style of analysis or management that markets are efficient and it is not
can generate returns that can beat the market.
possible to beat the market returns regularly
It involves higher than average costs and it over time and best returns are obtained from
stresses on taking advantage of market the low cost investments kept for the long Constant
inefficiencies. term. Strategic Tactical Dynamic Insured Integrated
Weighting
1 2 3

Active Portfolio Strategy
Top Down Approach
1. In this approach, managers
observe the market as a
whole and decide about the
industries and sectors that
are expected to perform
for creating a portfolio that
well in the ongoing
economic cycle.
p i p e l i n e , fi n a n c i a l
2. After the decision is made
on the sectors, the specific
averages cannot be beaten
stocks are selected on the
basis of companies that are
expected to perform well in
that particular sector.
Bottom Up Approach
1. In this approach, the market
conditions and expected
trends are ignored and the
evaluations of the
companies are based on the
strength of their product
follows this theory, firmly
statements, or any other
criteria.
benefits over the actively
2. It stresses the fact that
strong companies perform
well irrespective of the
prevailing market or
economic conditions.
Passive Portfolio Strategy
Efficient Market Theory
1. This theory relies on the fact
that the information that
affects the market is
immediately available and
processed by all investors.
2. The portfolio managers who
index.
believes that market
consistently.
1. Strategic asset 1. Tactical asset allocation With this approach, With this strategy you 1. With an insured asset allocation 1. While all of the other
allocation is an is an active management you continually sell assets that are strategy, you establish a base mentioned strategies take
investment strategy portfolio strategy that rebalance your declining and purchase portfolio value under which the into account expectations
focused on the shifts the percentage of portfolio. For example, assets that are portfolio should not be allowed for future market returns,
needs of the assets held in various if one asset is increasing, making to drop. not all of the strategies
Indexing investor rather than categories to take declining in value, you dynamic asset allocation account for investment risk
the constant advantage of market would purchase more the polar opposite of a 2. As long as the portfolio achieves tolerance.
tracking of the pricing anomalies or of that asset; and if constant-weighting a return above its base, you
1. According to this theory, the
markets. strong market sectors. that asset value is strategy. For example, if exercise active management to 2. Integrated asset allocation,
index funds are used for
increasing, you would the stock market is try to increase the portfolio value on the other hand, includes
taking the advantages of
2. Under this strategy, 2. This strategy allows sell it. showing weakness, you as much as possible. aspects of all strategies,
efficient market theory and
optimal portfolio portfolio managers to sell stocks in anticipation accounting not only for
3. If, however, the portfolio should
mixes based on create extra value by of further decreases; and expectations but also actual
i m p e r s o n a t e a s p e c i fi c ever drop to the base value, you
returns, risk, and co- taking advantage of if the market is strong, changes in capital markets
invest in risk-free assets so that
variances is certain situations in the you purchase stocks in and your risk tolerance.
2. The index funds can offer the base value becomes fixed.
generated using marketplace. It is as a anticipation of continued
3. Obviously, an investor
historical information moderately active market gains.
managed funds because 4. For example, an investor who would not wish to
and adjusted strategy since managers
they have lower than wishes to establish a minimum implement two strategies
periodically to return to the portfolio's
average expense ratios and standard of living during that compete with one
restore target original strategic asset
transaction costs. retirement might find an insured another.
allocation within the mix when desired short-
asset allocation strategy ideally
context of the term profits are achieved. suited to his or her management
constraints. goals.

Other Portfolio Strategy

Patient Portfolio Aggressive Portfolio Conservative Portfolio

The investors buy and hold stocks for
longer periods. In this portfolio, the
majority of the stocks represent
companies that have classic growth
and generate higher earnings on a
regular basis irrespective of financial
conditions.
This type of portfolio involves making investments
in “expensive stocks” that provide good returns
and big rewards along with carrying big risks. This
portfolio is a collection of stocks of companies of
different sizes that are rapidly growing and
expected to generate rapid annual earnings
growth over the next few years.
This type of portfolio involves the
collection of stocks after carefully
o b s e r v i n g t h e m a r k e t re t u r n s ,
earnings growth and consistent
dividend history.

Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma—which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition.
 An alternative investment is an asset that is not one of the conventional investment types, such
… Continued
8 Portfolio Management
as stocks, bonds and cash.

Most alternative investment assets are held by institutional investors or accredited, high-net- Alternative Investment Characteristics High Fees
Limited Historical
Return
Illiquidity
Less
Transparency
Extensive Research
Required
Leveraged
Buying
worth individuals because of the complex natures and limited regulations of the investments.

Mutual Fund
New Old Syllabus
Syllabus [only Mutual Fund]

Exchanges
Traded Commodities Factors
Meaning Players Advantages Disadvantages
Distressed Securities Funds affecting selection of mutual funds

Venture Capital A Mutual Fund is a trust 1. Sponsor

1. Professional 6. Low Cost
1. N o G u a r a n t e e d 1. Past Performance

Managed Mezzanine that pools money of a

number of investors. The
2. Asset Management
7. Liquidity
Return
2. Investment Objectives

Meaning Futures Finance trust is managed by Management

2. Diversification
8. Transparency
2. High Fees & 3. Expense Ratio

professional fund
Company
Expenses
4. Fund Manager

managers who invest the

1. It is a kind of purchasing the securities of Meaning Characteristics money collected from 3. Trustee

3. Affordability
9. Well
3. Management Risk
5. PE Ratio

companies that are in or near bankruptcy.

Closely Held Companies investors in capital market 4. Convenience
Regulated

4. Unit Holder
4. Diversification
6. Funds Turnover Ratio

2. The main purpose of buying such instruments such as

Venture capital means 1. Long Time Horizon: fund shares, debentures and 5. Mutual Fund 5. Return 10. Flexibility
5. Unethical Practices 7. Size of the Fund
securities is to make efforts to revive the
sick company.
funds made available would invest with a long time other securities. Potential
11. Tax Benefit
3. Suitable for those investors who cannot for startup firms and horizon in mind.

participate in the market and those who Real Estate small businesses with
wants avoid due diligence. exceptional growth
p o t e n t i a l . Ve n t u r e
capital is money
Analysis of Risk before investing in Reasons for Complexity in provided by
2. Lack of Liquidity: VC
assumes that there would be
less liquidity on the equity it Classification Schemes
gets and accordingly it would
be investing in that format. Functional Classification Portfolio Classification Ownership Classification 1. Balanced Funds

2. Equity Diversified Funds

DS Valuation professionals who 3. High Risk: VC works on

a l o n g s i d e 1. Open Ended Scheme 1. Equity Funds 1. Public Sector Funds
• Index Funds

principle of high risk and high • Dividend Yield Fund

1. Liquidity Risk – These securities may not 1. Inefficient Market

management invest in return. 2. Close Ended Scheme • Growth Funds
2. Private Sector Funds
- Dividend Payout Option

be saleable in the market.

2. Illiquidity
young, rapidly growing 4. Equity Participation : This 3. Interval Schemes:
• Aggressive Funds
3. Foreign Funds - Dividend Reinvestment
2. Event Risk – Any event that particularly 3. Comparison
companies that have would help the VC participate • Balanced Funds
Option

affect the company not economy as a the potential to Interval scheme are a • Income Funds
3. Special Funds • Small & Mid Cap Funds

4. High Transaction Cost

in the management and help
whole
5. No Organised Market develop into significant the company grow. cross between an open • Index Funds
3. Tax Saving Funds- Equity
3. Market Risk – This is another type of risk economic contributors.
ended and close ended 2. Debt Funds • International Funds
Linked Saving Scheme (ELSS)

4. Sector Specific Funds

though it is not important.

• Bond Funds
• Offshore Funds

Approaches used for structure 5. Thematic Funds

4. Human Risk – The judge’s decision on the • Gilt Funds • Sector Funds

company in distress also play a big role. Valuation • Money Market Funds

• Funds of Funds

1. Sales Comparison Approach

• Gold Funds
2. Income Approach
Advantages
3. Cost Approach

Hedge Funds 4. Discounted Cash Flow 1. Solid Capital Base: Provides a solid capital base for future Difference between Open, Close & Exchange Traded Funds 1. Trail Commission
Approach - A trailing commission is money
growth.

Open ended Close ended you pay an advisor each year

2. Risk & Rewards: Venture Capital shares both Risk and Parameter Exchange traded funds
funds funds that you own an investment.

Rewards

Fund Size Flexible Fixed Flexible

- The purpose of the fee is to
Meaning Types Strategies 3. Advice & assistance: Provide practical advice and provide incentive for the advisor
Stock Market/Fund to review his clients' holdings
assistance to the company based on past experience.
Liquidity provider Fund itself Stock market itself
1. A hedge fund is an investment vehicle that is 1. Selling Short : Selling shares without and to provide advice.

structured as a corporation or partnership.

Open Ended owning them, hoping to buy them back 4. Network of Contacts: Venture capitalist also has a network Significant 2. Entry Load & Exit Load
At NAV plus Very close to actual
2. The fund is managed by an investment at a future date at a lower price
of contacts in many areas that can add value to the Sale Price
load, if any
premium/discount
NAV of the scheme - Entry load is charged at the
manager in the form of an organization or Open-end mutual 2. Using Arbitrage : Seeking to exploit to NAV
company that is legally and financially company. time an investor purchases the
fund shares are pricing inefficiencies between related
distinct from the hedge fund and its portfolio Through exchange units of a scheme. The entry
bought and sold on securities.
5. Additional Funding: Capable of providing additional rounds Availability Fund itself Through exchange where listed/ fund
of assets.
demand at their net 3. Trading options and derivatives where listed load percentage is added to the
of funding should it be required to finance growth. itself

CA Mayank Kothari
3. Hedge funds are often open-ended and asset value, or NAV, 4. Investing in anticipation of a specific prevailing NAV at the time of
allow additions or withdrawals by their Event: Merger transaction, hostile allotment of units.

which is based on 6. IPO: Preparing a company for an initial public offering (IPO) Intra-Day Trading Not possible Expensive Possible at low cost
investors.
the value of the takeover, spin-off, exiting of bankruptcy
of its shares onto the stock exchanges.
NAV Daily Daily Real Time
- Exit load is charged at the time
4. Hedge funds are often open-ended and fund’s underlying proceedings etc.

allow additions or withdrawals by their of redeeming (or transferring an

securities and is 5. Investing in Deeply Discounted 7. Trade Sale: Also facilitate a trade sale.
investors.
securities: of companies about to enter
Portfolio Disclosure Monthly Monthly Daily/Real time investment between schemes).
generally calculated
5. A hedge fund's value is calculated as a share at the close of every or exit financial distress or bankruptcy, The exit load percentage is
of the fund's net asset value, meaning that trading d a y. often below liquidation value. deducted from the NAV at the
increases and decreases in the value of the time of redemption (or transfer
fund's investment assets (and fund
Investors buy shares
Stages of Funding Investment Process Exit Points Returns
directly from a fund.
between schemes).

expenses) are directly reflected in the

1. Consistent under performance
3. Expense Ratio
1. Seed Money: to prove a new - It is the percentage of the
Features Close Ended Benefits 1. Deal Origination
2. Changes in objectives of Mutual
idea. assets that were spent to run a
Fund

mutual fund.

2. S t a r t - U p : f o r e x p e n s e s 3. Changes in objectives of Investor

1. Hedge funds utilize a variety of financial
instruments to reduce risk, enhance returns
and minimize the correlation with equity and
product development.
bond markets.
traded among
2. Many, but not all, hedge fund strategies tend
Closed-end funds 1. Ability to generate positive returns in
associated with marketing and 2. Screening
- It includes things like
have a fixed number both rising and falling equity and bond 4. Replacement of Fund Manager management and advisory fees,
of shares and are markets.
2. Inclusion of hedge funds reduces risk travel costs and consultancy
3. First Round: Early sales and
investors on an and volatility and increases returns of 3. Due Diligence
fees.

manufacturing funds.

to hedge against downturns in the markets exchange. Like the portfolio.

NAV - The expense ratio does not
being traded.
stocks, their share 3. Huge variety of hedge fund provides 4. S e c o n d R o u n d : Wo r k i n g include brokerage costs for
3. Many hedge funds have the ability to deliver prices are determined investors with a wide choice of hedge capital for early stage 4. Deal Structuring
• NAV represents the market value of trading the portfolio.
non market correlated returns.
according to supply fund strategies to meet their investment companies that are selling the net assets of the funds

4. Many hedge funds have as an objective and demand, and objectives.

product, but not yet turning in a
consistency of retur ns and capital they often trade at a 4. Provide an ideal long term investment 5. P o s t I n v e s t m e n t • Assets & Liabilities should be
profit.

preservation rather than magnitude of wide discount or solution, eliminating the need to calculated at market value or net
returns.
premium to their net correctly time entry and exit from 5. Third Round: expansion money realisable value.

5. Many hedge funds are managed by asset value. markets.

for a newly profitable company
Activity

r2=Return desired by Investor

• NAV changes Daily.

experienced investment professionals who 5. Academic research proves hedge funds
are generally disciplined and diligent. have higher returns and lower overall
risk than traditional investment funds.
6. Fourth Round: it is intended to NAV = (Total Assets - Total Liabilities)
r1=Return earned by Mutual Funds
finance the "going public"
No. of Units
process 6. Exit Plan
 9 Securitization Corporate Valuation
New
Syllabus

1 2 3 4 5
Need for Corporate Valuation 1

Meaning Features Participants Mechanism Problems 1. Information for its internal stakeholders,
2 Important Terms
2. Comparison with similar enterprises for understanding
1. P ro c e s s o f s e c u r i t i z a t i o n 1. Creation of Financial Primary Participant 1. Creation of Pool of Assets
1. Stamp Duty
management efficiency, 1. Present Value of Cash Flows
typically involves the creation of
Instruments
1. Originator
2. Taxation
3. Future public listing of the enterprise, 2. Internal Rate of Return
pool of assets from the illiquid 2. Transfer to SPV

fi n a n c i a l a s s e t s , s u c h a s 2. Bundling and 2. Special Purpose Vehicle

3. Accounting
4. Strategic planning, for e.g. finding out the value driver of the 3. Return on Investment
receivables or loans which are 3. The Investors
3. Sale of Securitized Papers

Unbundling
4. Lack of enterprise, or for a correct deployment of surplus cash,
marketable.
Secondary Participant 4. Perpetual Growth Rate
2. It is the process of repackaging 3. Tools of Risk standardization

1. Obligors
4. Administration of assets
5. Ball park price (i.e. an approximate price) for acquisition, 3
or rebounding of illiquid assets 5. Terminal Value
Management
5. Inadequate Debt etc.
into marketable securities.
2. Rating Agency
5. Recourse to Originator

3. T h e s e a s s e t s c a n b e 4. Structured Finance
3. Receiving and paying agent
Market

automobile loans, credit card Methods of Valuation

5. Trenching
4. Agent or Trustee
6. Repayment of funds
6. Ineffective
receivables, residential
mortgages or any other form of 6. Homogeneity 5. Credit Enhancer
Foreclosure laws 1 2 3
7. Credit Rating to Instruments
future receivables. 6. Structurer
Asset Based Earnings Based Cash Flow Based
Book Value = Total Assets - Long Term
Instruments
There are essentially five
6 Debt steps in performing DCF
based valuation:
Total Assets = Fixed Assets + Intangible Assets +
Current Assets – Current Liabilities 1. Arriving at the ‘Free Cash
Flow’
Pass Through Certificates (PTCs) Pay Through Securities (PTS) Stripped Securities This can also be equated to share capital plus free
reserves. 2. Forecasting of future cash
1. Originator (seller of the assets) transfers the 1. In PTCs all cash flows are passed to the 1. Stripped Securities are created by dividing the cash flows associated flows (also called
entire receipt of cash in the form of interest or
principal repayment from the assets sold.

performance of the securitized assets. To

overcome this limitation there is another
with underlying securities into two or more new securities. Those two
securities are as follows:

4 Enterprise Value Based projected future cash

flows)
2. These securities represent direct claim of the structure i.e. PTS.
(1) Interest Only (IO) Securities

investors on all the assets that has been 2. In contrast to PTC in PTS, SPV debt (2) Principle Only (PO) Securities
Enterprise
Market Value Market Value Market Value Minority Cash & Cash 3. Determining the discount

CA Mayank Kothari
securitized through SPV.
securities backed by the assets and hence it 1. Accordingly, the holder of IO securities receives only interest while PO Value = of Equity + of Preference + of Debt + Interest - Equivalent rate based on the cost of
3. Since all cash flows are transferred the capital
can restructure different tranches from security holder receives only principal. Being highly volatile in nature
investors carry proportional beneficial interest varying maturities of receivables.
these securities are less preferred by investors.

1. The Enterprise Value, or EV for short, is a measure of a company's total 4. Finding out the Terminal
in the asset held in the trust by SPV.
3. In other words, this structure permits 2. In case yield to maturity in market rises, PO price tends to fall as Value (TV) of the
4. Since it is a direct route any prepayment of desynchronization of servicing of securities borrower prefers to postpone the payment on cheaper loans. Whereas value, often used as a more comprehensive alternative to equity market enterprise
principal is also proportionately distributed issued from cash flow generating from the if interest rate in market falls, the borrower tends to repay the loans as capitalization.
among the securities holders.
asset.
they prefer to borrow fresh at lower rate of interest.
5. Finding out the present
5. Further due to these characteristics on 4. Further, this structure also permits the SPV to 3. In contrast, value of IO’s securities increases when interest rate goes up 2. Enterprise value (EV) can be thought of as the theoretical takeover price if a values of both the free
completion of securitization by the final reinvest surplus funds for short term as per in the market as more interest is calculated on borrowings.
company were to be bought. cash flows and the TV,
payment of assets, all the securities are their requirement.
4. However, when interest rate due to prepayments of principals, IO’s and interpretation of the
terminated Simultaneously. 5. This structure also provides the freedom to tends to fall.
3. The value of a firm's debt, for example, would need to be paid off by the results.
issue several debt tranches with varying 5. Thus, from the above, it is clear that it is mainly perception of investors buyer when taking over a company, thus, enterprise value provides a much
maturities. that determines the prices of IOs and POs
more accurate takeover valuation because it includes debt in its value
calculation.
9 8 7
4. Why doesn't market capitalization properly represent a firm's value? It leaves
a lot of important factors out, such as a company's debt on the one hand and
its cash reserves on the other.
Securitization in India Benefits Pricing of Instruments
I Relative Valuation
5 Other Methods
1. It is the Citi Bank who pioneered the concept of securitization in India by
bundling of auto loans in securitized instruments.
From the angle of Originator The Relative valuation, also referred to as ‘Valuation by
Economic Value Added II multiples,’ uses financial ratios to derive at the desired
2. Thereafter many organizations securitized their receivables. Although 1. Off- Balance Sheet Financing
metric (referred to as the ‘multiple’) and then compares the
started with securitization of auto loans it moved to other types of From Originator’s
receivables such as sales tax deferrals, aircraft receivable etc.
2. More specialisation in main From Investor’s Angle same to that of comparable firms.
Angle
3. In order to encourage securitization, the Government has come out with business
In the process, there may be extrapolations set to the
Securitization and Reconstruction of Financial Assets and Enforcement of The instruments Security price can be
3. Helps to improve financial desired range to achieve the target set. To elaborate –
Security Interest (SARFAESI) Act, 2002, to tackle menace of Non can be priced at a determined by
Performing Assets (NPAs) without approaching to Court.
ratios
1. Find out the ‘drivers’ that will be the best representative
rate at which discounting best Market Value Added III
4. It has become an important source of funding for micro finance companies 4. Reduced borrowing Cost
for deriving at the multiple. Drivers can be
and NBFCs and even now a days commercial mortgage backed securities originator has to estimate of expected
are also emerging.
From the angle of Investor incur an outflow future cash flows using 1. Enterprise value based multiples, which would
5. Securitization in Indian Market is that it is dominated by a few players e.g. 1. Diversification of Risk
rate of yield to maturity of Shareholders Value Analysis IV
consist primarily of EV/EBITDA, EV/Invested
ICICI Bank, HDFC Bank, NHB etc.
Capital, and EV/Sales.
a security of comparable
6. As per a report of CRISIL, securitization transactions in India scored to the 2. Regulatory requirement
Steps involved in SVA computation:
security with respect to 2. Equity value based multiples, which would comprise
highest level of approximately Rs.70000 crores, in Financial Year 2016. 3. Protection against default
(Business Line, 15th June, 2016)
credit quality and a. Arrive at the Future Cash Flows (FCFs) of P/E ratio and PEG.
by using mix of the ‘value drivers’
7. In order to further enhance the investor base in securitized debts, SEBI average life of the 2. Determine the results based on the chosen driver(s)
allowed FPIs to invest in securitized debt of unlisted companies upto a securities. b. Discount these FCF using WACC
through financial ratios
certain limit. c. Add the terminal value to the present
values computed in step (b) 3. Find out the comparable firms, and perform the
comparative analysis, and
d. Add market value of non-core assets
e. Reduce the value of debt from the result 4. Iterate the value of the firm obtained to smoothen out
in step (d) to arrive at value of equity the deviations

The only way to do great work is to love what you do. —Steve Jobs |The question isn’t who is going to let me; it’s who is going to stop me. |You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something—your gut, destiny, life, karma,
whatever. This approach has never let me down, and it has made all the difference in my life.
 10
Derivatives
Old New
Syllabus Syllabus

Meaning Users of Derivatives Types

1. A Derivative is an agreement between Users Purpose
buyer and seller for an underlying asset
Corporation To hedge currency risk
which is to be bought/sold on certain
and inventory risk Forwards Futures Options Swaps
future date for a certain future price. [OTC Market] [ET Market] [ET Market] [OTC Market]
2. Derivative does not have any value of Individual For speculation,
its own but its value, in turn, depends Investors hedging and yield
enhancement. Discussed in Chapter
on the value of the other physical Pricing Hedging with Futures “Interest Rate Risk
Option Buyer Option Seller
assets which are called underlying Institutional For hedging asset Management”
[Holder] [Writer]
assets. Investor allocation, yield
enhancement and to
3. These underl ying a ssets may be
avail arbitrage
FactorsFactors
Affecting Option
affecting Valuation
Option Valuation (Option
(Premium Premium)
of Option)
securities, commodities, currency, live opportunities. Call Option
Put Option
Factor Call Explanation Put Explanation
stock etc. A derivative emerges out of [Right to Buy] [Right to Sell]
Dealers For hedging position, Stock Price Increase 🔺 For a given strike price(55) 🔻 For a given strike price(55)
a contract between two parties.
exploiting inefficiencies increase in the stock increase in the stock
4. Example: Forwards, Futures, Options, price(60,70,80) increases the price(30,40,50) decreases the
and earning dealer Decrease 🔻 🔺
Swaps, caps, floors, collars, etc. spreads. demand for call hence higher demand for put hence lower
Premium
paid to premium and vice-versa premium and vice-versa
[Value of the Option]
Exercise Increase 🔻 For a given stock price (55) 🔺 For a given stock price (55)
Valuation Price increase in the strike price increase in the strike price
( 3 0 , 4 0 , 5 0 ) d e c re a s e s t h e (60,70,80) increases the
Decrease 🔺 demand for call hence lower 🔻 demand for put hence higher
Methods Factors premium and vice-versa premium and vice-versa
Cash vs Derivatives Market Time to More More the time to expiry, more More the time to expiry, more
🔺 🔺
Expiration are the chances for Option to are the chances for Option to
Basis Cash Market Derivatives Market be In The Money, hence higher be In The Money, hence higher
Binomial Model Black Scholes Model Less 🔻 premium & vice-versa 🔻 premium & vice-versa
Assets Tangible Assets are traded Contracts based on tangible or
Traded intangibles assets like index or Volatility More 🔺 More the volatility, more are the 🔺 More the volatility, more are the
rates are traded. chances for Option to be In The chances for Option to be In The
Quantity Even one share can be In Futures and Options minimum Less Money, hence higher premium Money, hence higher premium
🔻 🔻
Traded purchased lots are fixed. & vice-versa & vice-versa

Risk More Risky Less Risky Interest Increase 🔺 Increase in interest rate 🔻 Increase in interest rate
Rate increases the interest income increases the opportunity cost
Purpose Cash assets may be meant for Derivative contracts are for that can be earned on money of interest income on put option
consumption or investment. hedging, arbitrage or speculation. Decrease 🔻 saved in buying call option, 🔺 which decreases demand for
which increases demand for put and premium thereon
Amount Buying securities in cash Buying futures simply involves call and premium thereon (however less practical)
Required market involves putting up all putting up the margin money.
the money upfront
Ownership The holder becomes part owner While in futures it does not Options Greeks
of the company. happen.
Greeks Symbol Represents Formula,
Forward Contracts vs Futures Contract Delta represents the change in the Option value with ₹1
Intrinsic Value [IV] & Time Value [TV] Option Payoff Delta
Basis Forward Contract Futures Contract change in the Stock Price
- Option Premium has two parts IV & TV Position Option Payoff Effect
Trading Traded in OTC Market Traded in Exchange Gamma represents the change in the Options Delta with
- IV is the difference between the spot price & the strike Gamma
Default Risk Traded privately, hence bears Are exchange traded which price of the share to the extent the option is in the Long (Holder Call Payoff = Max (0, S − K)
Limited Loss, ₹1 change in the Stock Price
risk of default provides the protection and of the option) Unlimited Profit
money. Rho represents the change in the Options Value with
hence no risk of default - Means at ATM and OTM the intrinsic value of the Option is Put Payoff = Max (0, K − S) Limited Profit, Rho
1% change in the Interest Rates
Margin Involves no margin payment Initial margin is required to be simply Zero. This represents that intrinsic value can never Limited Loss
be negative. Theta represents the change in the Options Value with 1
Requirement paid as a good faith money Short (Writer Call Payoff = Min (0, K − S) Limited Profit, Theta
- Call Option, IV = Max [K-St,0] of the option) Unlimited Loss day change in the time to expiry
Transparency Not transparent as the Transparency is maintained and - Put Option, IV = Max [St-K,0]
contract is private in nature is reported by the exchange Put Payoff = Min (0, S − K) Limited Loss, Vega represents the change in the Options Value with
- Time Value = Option Premium - Intrinsic Value Vega
Size of No standardised size Standard in terms of quantity or - Limited Profit
Say Call Option, K=55, St=50,55,60 1% change in the volatility of the stock
Contract the amount as the case may be
St K Action IV Premium TV Put Call Parity Theory Where, Vo= value of the option, So= Spot price of the stock, r= rate of Interest, t= time to expiration
Maturity Any valid business date Standard date, usually one It states that there exists some relationship between value of the
50 55 N.E. 0 3 3
agreed to by the two parties delivery date such as the last of call Option & value of the put option. In The Money, At The Money, Out of The Money (ITM, ATM, OTM)
Thursday of every month 55 55 N.E. 0 3 3 Where, S= Spot price of the underlying asset,
K= Exercise price of the stock, Po= Price (Premium) of St is the spot price (say 50,55,60) at time t and K is the strike price say (55) of the option
Currencies All Currencies Major Currenicies 60 55 Exercised 5 3 -2 the put option, Co= Price (Premium) of the call option
Traded Call Put

St K Situation Explanation St K

65 55 In The Money No matter you have call Option or put option, if you can make 50 55

CA Mayank Kothari
(ITM) money by exercising it immediately then it is said that CALL/PUT
option is In The Money

55 55 At The Money And if the current price and strike price are equal, it is said to be 55 55
(ATM) At The Money

50 55 Out of The Where the price of the underlying is such that if the option were 65 55
Money (OTM) exercised immediately, the option holder would be at loss then it is
said that CALL/PUT option is Out of The Money

Fake It Until You Make It! Act As If You Had All The Confidence You Require Until It Becomes Your Reality.” |“One Of The Lessons That I Grew Up With Was To Always Stay True To Yourself And Never Let What Somebody Else Says Distract You From Your Goals.” Michelle Obama
 11
Foreign Exchange and Risk Management
Old New
Syllabus Syllabus

Money Market Hedging

Basics Theories in Forex Exposures in Forex Risk Management in Forex 2

The main objective is to “arrange the transactions in such a manner that on due date there should not be
any flow of cash from one country to another country”

1 Transaction Exposure Decision In case of FC Liability In case of FC Asset

1 Exchange Rate 1 Interest Rate a Parity Theory - It measures the effect of
Rate at which one currency is converted in It states that higher interest in one country will
an exchange rate change 1. There is a foreign currency liability.
1. There is a foreign currency asset.

another currency. be offset by depreciation in the currency of that No Hedging

on outstanding Hedging
country

obligations that existed 2. Hence create foreign currency asset.

2. Hence create foreign currency liability.

I) Covered Interest Rate Parity

2 Direct & Indirect Quote before exchange rates Keeping the
When Exchange Rates are in Direct Quote Internal External 3. Determine the present value of the foreign 3. Determine the present value of the foreign currency
changed but were position open
DQ- Where the VALUE in exchange rate is in 1 currency liability (discounting factor is the FC asset (discounting factor is the FC lending rate).

settled after the

Home Currency
deposit rate).

exchange rate changes

Home Currency Invoicing 1 Derivatives
IDQ- Where the VALUE in exchange rate is in 4. Borrow foreign currency equivalent to the present
- Example: If an Indian - By invoicing in home currency 1. Forward 3. Options
Foreign Currency When Exchange Rates are in Indirect Quote 4. Borrow home currency equivalent to the value of the FC asset.

exporter has a receivable exporter can shift the risk of foreign 2. Futures 4. Swaps present value of the FC liability.

Let’s say Home Country is UK exchange rate movements.

of $100,000 due in six 5. Convert the borrowed foreign currency in home

Whether we want to buy
£/₹ 0.011 0.011 is in pound, Home Currency Direct Quote months hence and if the - Trading in home currency has the futures or buy option it 5. Convert the borrowed home currency in currency at the spot rate.

dollar depreciates some advantage but buyers may depends upon the foreign currency at the spot rate.

₹/£ 0.011 0.011 is in pound, Home Currency Direct Quote

Where, rd, rf =Interest Rates of Domestic and relative, to the rupee a prefer invoice in their home currency. underlying asset which 6. Invest this converted home currency amount at HC
£/₹ 90 90 is in Rupees, Foreign Currency Indirect Quote Foreign Country. F= Forward Rate, S= Spot Rate
cash loss occurs. the stock exchange is 6. Invest this foreign currency amount at FC deposit rate.

Conversely, if the dollar Leading & Lagging 2 trading

deposit rate.

₹/£ 90 90 is in Rupees, Foreign Currency Indirect Quote

appreciates relative to - Leading refers to prepaying import 7. On maturity, FC borrowed amount will be exactly
II) Uncovered Interest Rate Parity Say If you Want to Buy
Conclusion- Direct, Indirect does not depend on payments or receiving early payment Dollars
7. On maturity, invested amount will be exactly equal to the foreign currency asset. Receive FC
IRPT states that the size of the Forward the rupee, a cash gain
₹/£ or £/₹. It depends on the Value for exports;
equal to the foreign currency liability. Receive asset and settle the due borrowings.

Premium (Discount) should be approximately occurs. Situation 1

Situation 1 the maturity proceeds and settle the FC Liability.

- Lagging relates to delaying import

equal to the interest rate differential between the Now Futures available in 8. On the other hand the home currency invested
0.011 = 1/90 two countries. payments or receiving late payment
2 Translation Exposure on exports. the market at the price 8. On the other hand the home currency borrowed amount will mature receive the same along with

Data : Rd = 8%, Rf = 4%, S= ₹/$50, F=?

- Also known as of Rs/$ = 50
amount will due for payment along with the interest.
accounting exposure, it Netting 3 interest,
3 Bid & Ask Rate - The simplest scheme is known as
or Options available in
(1.08/1.04)=F/50 F= 51.92 refers to gains or losses the market at the strike
Bid - Banks Buying rate for Underlying Asset
bilateral netting and involves pairs of
caused by the companies.
price of Rs/$ = 50
Delivery Cancellation & Extension of Forward Contracts
Ask - Banks Selling rate for Underlying Asset translation of foreign
Interest Rate = 8%-4% 4% Here the asset (product)
- Each pair of associates nets out their
Differential currency assets and own individual positions with each = is Dollar (which is 1 in Early On due date Late
Underlying Asset - is the product quoted by liabilities into the other & cash flows are reduced by unit) and Price for the
bank, normally currency which is 1 in unit in Exchange Rate = (F-S)/S x100
3.84% asset is Rupees (which Cancel the Old Contract
currency of the parent the lower of each company's Delivery 1. Deliver at Agreed Rate
Deliver at Agreed
exchange rate
Differential = (51.92-50)/50 x100 purchases from or sales to its netting is 50)
2. Interest on outflow or Rate 1. Cancel at Spot Rate or the rate on 15th
company for
partner. inflow of funds (if any)
day from due date whichever is earlier

Conclusion: 4% is consolidation purposes.

What do you want to do
- It reduces the number of inter 3. Swap Gain or Loss (if 2. Interest on outflow of funds (if any)

Bid Rate ($/£) = 1/Ask Rate (£/$)

approximately equal to 3.84% - Translation exposures with the Asset(dollar) =
any) 3. Swap Gain or Loss (if any)

Ask Rate ($/£) = 1/Bid Rate (£/$) company payments and receipts. Buy, hence Buy Futures
arise due to the need to Enter into New Contract
- It reduces banking costs and (or Call Option)

“translate” foreign 4. Deliver at Spot Rate

increases central control of inter Situation 2
2 Purchasing Power Parity Theory currency assets and company settlements. Cancellation Cancel at Forward Rate Cancel at Spot Cancel the Old Contract
4 Cross Rates liabilities into the home Now Futures available in
It states that higher inflation in one country will for the balance period of Rate 1. Cancel at Spot Rate or the rate on 15th
currency for the purpose Matching 4 the market at the price the original forward day from due date whichever is earlier

be offset by depreciation in the currency of that of $/Rs = 0.02

country
of finalizing the accounts - Matching is a mechanism whereby a contract 2. Interest on outflow of funds (if any)

for any given period. A
When Exchange Rates are in Direct Quote
typical example of
translation exposure is
company matches its foreign currency or Options available in 3. Swap Gain or Loss (if any)
inflows with its foreign currency the market at the strike
Extension Cancel the Old Contract Cancel the Old Cancel the Old Contract
outflows in respect of amount and price of $/Rs = 0.02

1. Cancel at Forward Contract 1. Cancel at Spot Rate or the rate on 15th

the treatment of foreign approximate timing.
Here the asset (product) Rate for the balance 1. Cancel at day from due date whichever is earlier

currency loans.
- The prerequisite for a matching = is Rupees (which is 1 period
Spot Rate
2. Interest on outflow of funds (if any)

5 Spot Rate & Forward Rate When Exchange Rates are in Indirect Quote operation is a two-way cash flow in in unit) and Price for the 3. Swap Gain or Loss (if any)

Spot Rate - Rate at which one currency can be the same foreign currency
asset is Dollar (which is Enter into New Contract Enter into New Enter into New Contract
3 Economic Exposure 0.02)
2. At relevant Forward Contract 4. At relevant Forward Rate
converted into another currency at spot (t=0) - Although netting and matching are
- It refers to the extent to Rate 2. At relevant
terms, which are frequently used What do you want to do
which the economic with the Asset(Rupees)
Forward Rate
Forward Rate - Rate at which one currency can Where, id , if =Inflation Rates of Domestic and i n t e r c h a n g e a b l y, t h e r e a r e
value of a company can distinctions. Netting is a term applied = Sell (because you
be converted into another currency at some Foreign Country. F= Forward Rate, S= Spot Rate
1. In Automatic Cancellation please note in above in case of ‘late’ if there is profit by the bank on any course
decline due to changes to potential flows within a group of want to buy dollars, of action same shall not be passed on the customer as normally passed cancellation and extension on or
future date (t=3,6,9) in exchange rate. It is companies whereas matching can be means you want to sell before due dates.

Two forms of PPPT the overall impact of applied to both intra-group and to rupees) ,
2. Interest on outlay of funds is charged by a bank at a rate not less than prime lending rate (PLR)
6 Absolute Form - If a basket of goods cost exchange rate changes third-party balancing.
Appreciation & Depreciation If you want to sell asset
₹1000 in India and the same goods cost $25 in on the value of the firm. then Sell Futures(buy
United States then the purchasing power parity Price Variation 5 Put Option)
Broken Period Forward Rate
Asset Currency Price Currency The essence of
between the two currencies is ₹40 / US Dollar. - Price variation involves increasing
economic exposure is Conclusion
Conclusion For broken period the convenient way is to interpolate the rates between the
This form of exchange rate is called absolute selling prices to counter the adverse “For Every Reason
that exchange rate effects of exchange rate change. It all depends on the two standard day
PPP.
It’s Not Possible,
changes significantly UNDERLYING ASSET
Relative Form - It means that if the inflation There Are Hundreds
alter the cost of a firm’s Asset & Liability Management 6 which the stock Spot ₹/$ 1m ₹/$ 3m 6m
rate in one country is higher than that in another 47.0725/745 133/140 145/160 155/175 Of People Who
inputs and the prices of - This technique can be used to exchange is trading in ,
country then the effect of this high inflation is and not what you want.
Have Faced The
F= Forward Rate, S= Spot Rate, N = Number of Months its outputs and thereby manage balance sheet, income Bid Rate 145 + (155-145) x 25/90 148 47.0725+0.0148 = 47.0873
offset by the depreciation in the currency of that Same
influence its competitive statement or cash flow exposures.
If you want to sell Asset
country. Ask Rate 160 + (175-160) x 25/90 164 47.0745+0.0164 = 47.0909 Circumstances And
7 Spread & Swap position substantially. - It has aggressive or defensive - Sell Futures, or Buy
Put Option
Succeeded.”

Spot ₹/$ 1m ₹/$ 3m 6m

Spread - Difference between Ask & Bid
postures. In the aggressive attitude,
If you want to buy Asset 47.0725/745 140/133 160/145 175/155
Swap - Difference between Forward & Spot the firm simply increases exposed Be a yardstick of
3 International Fisher Effect c a s h i n fl o w s d e n o m i n a t e d i n -Buy Futures, or Buy Bid Rate 160 + (175-160) x 25/90 164 47.0725-0.0164 = 47.0561

CA Mayank currencies expected to be strong or Call Option

quality. Some
According to the IFE, ‘nominal risk-free interest Ask Rate 145 + (155-145) x 25/90 148 47.0745-0.0148 = 47.0597
₹/$ Bid Ask Spread Points increases exposed cash outflows people aren’t used
rates contain a real rate of return and anticipated If you will solve
denominated in weak currencies. By to an environment
Spot 65.4025 65.4250 225 inflation’. This means if investors of all countries Currency Futures and

Kothari
contrast, the defensive approach Options questions by American & European Term where excellence is
require the same real return, interest rate involves matching cash inflows and
Forward 65.4100 65.4375 275 considering the above expected.
differentials between countries may be the result outflows according to their currency of American Term US$ per unit of Foreign Currency $/£ 1.50
logic , the answer will
Swap Points 75 125 of differential in expected inflation.
denomination, irrespective of whether never be wrong.
they are in strong or weak currencies. European Term Foreign Currency per unit of US$ £/$ 0.60
 12 New
Syllabus
Old Syllabus
[only FRA, Interest Futures, Options, Swaps]
Determinants
1. Supply and Demand: When
economic growth is high,
demand for money
increases, pushing the
interest rates up and vice
versa.
2. Inflation - The higher the
inflation rate, the more
interest rates are likely to
rise.
3. Government- Government
is the biggest borrower. The
level of borrowing also
determines the interest
rates.
Traditional Methods
Asset & Liability Management
1. ALM is the management of structure of
balance sheet (liabilities and assets) in such
a way that the net earnings from interest
are maximized within the overall risk
preference (present and future)
2. Banks and other financial institutions
provide services which expose them to
various kinds of risks like credit risk,
interest risk, and liquidity risk.
3. It is therefore appropriate for institutions
(banks, finance companies, lea sing
companies, insurance companies, and
others) to focus on a sset- liability
management when they face financial risks
of different types.
Where,
N = the notional principal amount of the
agreement;
RR = Reference Rate for the maturity
specified by the contract prevailing on the
contract settlement date; typically LIBOR or
MIBOR
FR = Agreed-upon Forward Rate; and
dtm = maturity of the forward rate, specified
in days (FRA Days)
DY = Day count basis applicable to money
market transactions which could be 360or 365
days.
If LIBOR > FR the seller owes the payment to
the buyer, and if LIBOR<FR the buyer owes
the seller the absolute value of the payment
amount determined by the above formula.
The differential amount is discounted at post
change (actual) interest rate as it is settled in
the beginning of the period not at the end.
Gap Exposure
1. The risk that the interest 1.
Gap Interest Rate Interest Rate
= Sensitive Assets - Sensitive Liabilities
Exposure
(RSAs) (RSLs)
1. A positive or asset sensitive Gap means that an increase in market
interest rates could cause an increase in Net Interest Income
(NII).
2. Conversely, a negative or liability sensitive Gap implies that the 2. For example while assets
banks’ NII could decline as a result of increase in market interest
rates.
3. Positive or Negative Gap is multiplied by the assumed interest
rate changes to derive the Earnings at Risk (EaR). The EaR
method facilitates to estimate how much the earnings might be
impacted by an adverse movement in interest rates.
Forward Rate Agreement
1. A forward rate agreement (FRA) is an over-
the-counter contract between parties that
determines the rate of interest to be paid or
received on an obligation beginning at a
future start date.
2. An FRA involves two counterparties: the
fixed rate receiver (short) and the floating rate
receiver (long). Thus, being long the FRA
(Fixed Payer) means that you gain when Libor
rises (because you have to pay fix rate even if
the libor has increased).
3. If we are the fixed receiver, then it is
understood without saying that we also are
the floating payer, and vice versa.
4. Because there is no initial exchange of cash
flows, to eliminate arbitrage opportunities,
the FRA price is the fixed interest rate such
that the FRA value is zero on the initiation
date.
5. FRAs are identified in the form of “X × Y,”
where X and Y are months and the
multiplication symbol, ×, is read as “by.” To
grasp this concept and the notion of exactly
what is the underlying in an FRA, consider a 3
× 9 FRA, which is pronounced “3 by 9.”
6. The 3 indicates that the FRA expires in three
months. The underlying is implied by the
difference in the 3 and the 9.
7. FRAs are cash settled with the payment
based on the net difference between the
interest rate and the reference rate in the
contract.
Interest Rate Risk Management
Types Methods to Measure Hedging
1. The traditional Maturity Gap
Basis Risk Embedded Option Risk Yield Curve Risk Price & Reinvestment Risk
Analysis (to measure the
interest rate sensitivity of
Significant changes in market 1. earnings),
In a floating interest rate 1. Price risk is simply the risk that the price of a security will fall.
rate of different assets, interest rates create another source scenario, banks may price their 2. Duration (to measure interest
2. In the financial market, bond prices and yields are inversely
liabilities and off-balance of risk to banks’ profitability by assets and liabilities based on rate sensitivity of capital),
sheet items may change encouraging prepayment of cash related.
different benchmarks, i.e. TBs
in different magnitude is credit/demand loans/term loans and yields, fixed deposit rates, call 3. Increase in Interest Rates will lead to fall in prices 3. Simulation and
termed as basis risk. exercise of call/put options on money rates, MIBOR, etc.
4. Decrease in Interest Rates will lead to increase in prices 4. Value at Risk.
bonds/debentures and/or premature
withdrawal of term deposits before 2. In case the banks use two
may be benchmarked to different instruments maturing 1. Uncertainty with regard to interest rate at which the future
CA Mayank Kothari
their stated maturities.
Fixed Rate of Interest, at different time horizon for cash flows could be reinvested is called reinvestment risk.
l i a b i l i t i e s m a y b e 2. The faster and higher the magnitude pricing their assets and
2. Any mismatches in cash flows would expose the banks to
benchmarked to Floating of changes in interest rate, the liabilities, any non-parallel
variations in NII as the market interest rates move in
Rate of Interest. greater will be the embedded option movements in yield curves
different directions.
risk to the banks’ NII. would affect the NII.
Modern Methods
Interest Rate Futures Interest Rate Options Interest Rate Swaps Meaning 1. An interest rate swaption is simply an option on an interest rate
swap. It gives the holder the right but not the obligation to enter
into an interest rate swap at a specific date in the future, at a
1. An interest rate future is a contract between Caps: An interest rate swap is an agreement between two particular fixed rate and for a specified term.
the buyer and seller agreeing to the future counterparties in which one stream of future interest
A cap provides a guarantee that the coupon rate 1. A swaption is effectively an option on a forward-start IRS, where
delivery of any interest- bearing asset. payments is exchanged for another based on a specified Features
each period will not be higher than agreed limit. exact terms such as the fixed rate of interest, the floating
It will be capped at certain ceiling. principal amount. reference interest rate and the tenor of the IRS are established
2. Interest rate futures are used to hedge against upon conclusion of the swaption contract.
the risk that interest rates will move in an It’s a derivative instrument where the buyer of
2. A 3-month into 5-year Swaption would therefore be seen as an
adverse direction, causing a cost to the the cap receives payment at the end of each option to enter into a 5-year IRS, 3 months from now.
period where the rate of interest exceeds the
company.
agreed strike price. 3. The 'option period' refers to the time which elapses between the
transaction date and the expiry date.
3. Currently, Interest Rate Futures segment of Floors:
Types Swaptions 4. The swaption premium is expressed as basis points.
NSE offers two instruments i.e. Futures on 6
A floor provides a guarantee that the coupon rate
year, 10 year and 13 year Government of India 5. Swaptions can be cash-settled; therefore at expiry they are
each period will not be lower than agreed limit. Plain Vanilla Rate Swap marked to market off the applicable forward curve at that time
Security and 91- day Government of India It will be floored at certain ceiling. and the difference is settled in cash.
Treasury Bill (91DTB). 1. In this swap, Party A agrees to pay Party B a predetermined,
It’s a derivative instrument where the buyer of fixed rate of interest on a notional principal on specific dates for
1. Swap traders can use them for speculation purposes or to hedge a
4. Bonds form the underlying instruments, not the floor receives payment at the end of each 1
a specified period of time. Uses portion of their swap books.
the interest rate. Further, IRF, settlement is period where the rate of interest goes below the 2. Concurrently, Party B agrees to make payments based on a
agreed strike price. floating interest rate to Party A on that same notional principal 2. Swaptions have become useful tools for hedging embedded
done at two levels: on the same specified dates for the same specified time period. optionality which is common to the natural course of many
Collars: businesses.
1. Mark-to-Market settlement done on a
Basis Rate Swap 3. Swaptions are useful to borrowers targeting an acceptable
daily basis and Collar provides a guarantee that the coupon rate borrowing rate.
each period will not fall below lower limit and
2 1. A basis swap is a floating-floating interest rate swap. A simple
2. Physical delivery which happens on any will not go beyond upper limit. It will be capped example is a swap of 1-month Libor for 6-month Libor. 4. Swaptions are also useful to those businesses tendering for
at upper limit and floored at lower limit. contracts.
day in the expiry month.
5. Swaptions also provide protection on callable/puttable bond
5. In IRF following are two important terms: It’s a combination of caps and floors. Asset Rate Swap
issues.
1. Similar in structure to a plain vanilla swap, the key difference is
the underlying of the swap contract. Rather than regular fixed In which the owner is allowed to
Conversion factor: All the deliverable bonds have different maturities and coupon rates. To make them Categories Bermudian Swaption
and floating loan interest rates being swapped, fixed and floating e n te r t h e s w a p o n m u l t i p l e
comparable to each other, and also with the notional bond, RBI introduced Conversion Factor. Conversion 3 investments are being exchanged. specified dates.
1 factor is published by NSE.
2. In a plain vanilla swap, a fixed libor is swapped for a floating In which the owner is allowed to
libor. In an asset swap, a fixed investment such as a bond with European Swaption e n te r t h e s w a p o n l y o n t h e
(Conversion Factor) x (futures price) = actual delivery price for a given deliverable bond.
guaranteed coupon payments is being swapped for a floating expiration date.
investment such as an index.
In which the owner is allowed to
Cheapest to Deliver (CTD): The CTD is the bond that minimizes difference between the quoted Spot
American Swaption enter the swap on any day that
Price of bond and the Futures Settlement Price (adjusted by the conversion factor). It is called CTD bond Amortising Rate Swap falls within a range of two dates.
because it is the least expensive bond in the basket of deliverable bonds.
1. An exchange of cash flows, one of which pays a fixed rate of
2
Profit of seller of futures
interest and one of which pays a floating rate of interest, and For the past 33 years, I have looked in the mirror every morning and asked
both of which are based on a notional principal amount that myself: ‘If today were the last day of my life, would I want to do what I am
= (Futures Settlement Price x Conversion factor) – Quoted Spot Price of Deliverable Bond 4 decreases.
about to do today?’ And whenever the answer has been ‘No’ for too many days in
Loss of Seller of futures 2. In an amortizing swap, the notional principal decreases a row, I know I need to change something.
periodically because it is tied to an underlying financial
= Quoted Spot Price of deliverable bond – (Futures Settlement Price x Conversion factor) I'm convinced that about half of what separates successful entrepreneurs from
instrument with a declining (amortizing) principal balance, such
as a mortgage. the non-successful ones is pure perseverance.
That bond is chosen as CTD bond which either maximizes the profit or minimizes the loss
 13
Mergers, Acquisitions and Corporate Restructuring
Old New
Syllabus Syllabus

1 2 3 4 5 6 7

Definitions
Mergers
Merger can be defined as “The combination of
one or more corporations or business entities
into a single business entity; the joining of two
or more companies to achie ve greater
efficiencies of scale and productivity”.
Acquisitions
An acquisition or takeover is the purchase of
one business or company by another company
or other business entity. This includes
acquiring directly or indirectly shares, voting
rights, assets or control over management or
assets of another enterprise.
Corporate Restructuring
It is the process of making changes in the
composition of a firm’s one or more business
portfolios in order to have a more profitable
enterprise. Simply, reorganizing the structure
of the organization to fetch more profits from
its operations or is best suited to the present
situation.
Need for M&A
1. Synergistic operating economics: in
other words combined values of two firms
shall be more than their individual value
2. D i v e r s i f i c a t i o n : Greater the
combination of statistically independent
or negatively correlated income streams of
merged companies, there will be higher
reduction in the business risk in
comparison to companies having income
streams which are positively correlated to
each other.
3. Taxation: In the case of acquisition the
losses of the target company will be
allowed to be set off against the profits of
the acquiring company.
4. Growth: Merger and acquisition mode
enables the firm to grow at a rate faster
than the other mode viz., organic growth.
5. C o n s o l i d a t i o n o f Pro d u c t i o n :
Production capacity is increased by
combining two or more plants.
Objectives of M&A
1. Horizontal growth to achieve
optimum size, to enlarge the
m a r ke t s h a r e , t o c u r b
competition or to use
unutilised capacity;
2. Vertical combination with a
view to economising costs and
eliminating avoidable taxes
3. Diversification of business;
4. Mobilising financial resources
by utilising the idle funds
lying with another company
for the expansion of business.
5. Taking over a ‘shell’ company
which may have the necessary
industrial licenses etc., but
whose promoters do not wish
to proceed with the project.
Types of Merger
1. A Horizontal Merger is usually between two
companies in the same business sector. The example
of horizontal merger would be if a health care system
buys another health care system.
2. A Vertical Merger represents the buying of supplier
of a business. In the same example as above if a
health care system buys the ambulance services from
their service suppliers is an example of vertical
buying.
3. Conglomerate Merger is the third form of M&A
process which deals the merger between two
irrelevant companies. The example of conglomerate
M&A with relevance to above scenario would be if
the health care system buys a restaurant chain.
4. Congeneric Merger is a merger where the acquirer
and the related companies are related through basic
technologies, production processes or markets.
5. Reverse Merger Such mergers involve acquisition
of a public company (Shell Company) by a private
company, as it helps private company to by-pass
lengthy and complex process required to be followed
in case it is interested in going public.
Takeover Strategies Takeover by Reverse Bid Antitakeover Strategy
1. Tender Offer is a public, open offer or invitation (usually 1. Reverse Takeover : “Acquisition" usually refers to a 1. Crown Jewel Defense: Sell off the entire or
announced in a newspaper advertisement) by a prospective purchase of a smaller firm by a larger one. Sometimes, some of the company’s most valuable assets
acquirer to all stockholders of a publicly traded corporation (the however, a smaller firm will acquire management control
target corporation) to tender their stock for sale at a specified of a larger and/or longer-established company and retain 2. Poison Pill: Dilute the targeting company’s
price during a specified time, subject to the tendering of a the name of the latter for the post-acquisition combined stock in the company so much that bidder
minimum and maximum number of shares. entity. never manages to achieve an important part
of the company without the consensus of the
2. In Street Sweep the larger number of target company’s shares 2. Reverse Merger: A form of transaction that enables a board.
are quickly purchased by the acquiring company before it makes private company to be publicly listed in a relatively short
an open offer. time frame. A reverse merger occurs when a privately 3. Poison Put: Here the company issue bonds
which will encourage the holder of the bonds
held company (often one that has strong prospects and is
3. Bear Hug: A buyout offer so favourable to stockholders of a to cash in at higher prices which will result in
eager to raise financing) buys a publicly listed shell
company targeted for acquisition that there is little likelihood Target Company being less attractive.
company, usually one with no business and limited assets.
they will refuse the offer.
Three test requirement for takeover by reverse bid 4. G re e n m a i l : Greenmail involves
4. Strategic Alliance is a kind of partnership between two repurchasing a block of shares which is held
entities in which they take advantage of each other’s core 1. The assets of the transferor company are greater by a single shareholder or other shareholders
strengths like proprietary processes, intellectual capital, than the transferee company. at a premium over the stock price in return
research, market penetration, manufacturing and/or distribution for an agreement called as standstill
2. Equity capital to be issued by the transferee
capabilities etc. They will have an open door relationship with agreement. In this agreement it is stated that
company for acquisition should exceed its original
another entity and will mostly retain control. bidder will no longer be able to buy more
share capital. shares for a period of time often longer than
5. Brand Power: Acquirer Company enters into an alliance with five years.
such powerful brands that cut down the brands of the target 3. There should be a change of control in transferee
company making it weaker and then acquirer company simply company by way of introduction of a minority holder 5. White Knight: The target company seeks
takeover the target company. or group of holders. for a friendly company which can acquire
majority stake in the company

Divestiture / Demerger 10 9 8 6. White squire: Instead of acquiring the

majority stake in the target company white
squire acquires a smaller portion, but enough
Meaning Reasons of M&A Failures Benefits of Reverse Merger to hinder the hostile bidder from acquiring
majority stake
Divestiture means a company selling one of
the portions of its divisions or undertakings to 1. No common vision 1. Easy access to capital market. 7. G o l d e n Pa r a c h u te s : A n a g r e e m e n t
another company or creating an altogether between a company and an employee (usually
separate company. 2. Nasty surprises resulting from poor due 2. Increase in visibility of the company in upper executive) specifying that the employee
diligence corporate world. will receive certain significant benefits if
Reasons for Divestiture
3. Tax benefits on carry forward losses acquired e m p l o y m e n t i s te r m i n a te d . T h i s w i l l
3. Poor governance.
1. To pay attention on core areas of business; (public) company. discourage the bidders and hostile takeover
4. Poor communication can be avoided.
2. The Division’s/business may not be 4. Cheaper and easier route to become a public
sufficiently contributing to the revenues; 5. Poor program management company. 8. Pac-man defense: The target company
itself makes a counter bid for the Acquirer
3. The size of the firm may be too big to 6. Lack of courage Company and let the acquirer company
handle; defence itself which will call off the proposal
7. Weak leadership of takeover.
4. The firm may be requiring cash urgently in
view of other investment opportunities.

17 Cross Border M&A

Ways of Demerger
1. Sell off: It refers to the selling a
particular division, asset, product line,
subsidiary or factory to another entity for
an a greed upon sum which may be
payable either in cash or securities.
2. Spin-off: It refers to the separation of
the part of the existing business and
creating a new entity. Shareholders of the
existing company continue to be the
shareholders of the new entity
3. Split-up: A corporate action in which a
single company splits into two or more
separately run companies. Shares of the
original company are exchanged for shares
in the new companies. After a split-up,
the original company ceases to exist.
4. Equity Carve Outs: Similar to spin off
with the difference that the parent
company sells minority stake in the newly
11
12
Financial Restructuring
1. Financial restructuring is the reorganizing of a
business' assets and liabilities.
2. Consequent upon losses the share capital or net
worth of companies get substantially eroded
sometimes leading to negative net worth putting
the firm on the verge of liquidation.
3. To revive from this financial restructuring is
1. Cross-border M&A is a popular route for
global growth and overseas expansion.
2. Major factors that motivate multinational
companies to engage in cross-border M&A
include the following
13 14 15 16 1. Gl o b a l i z a t i o n o f p r o d u c t i o n a n d
distribution of products and services.
2. Integration of global economies.
Reasons of Selling Company Equity BuyBack Leveraged BuyOuts Management BuyOuts 3. Expansion of trade and investment
relationships on International level.
1. Competitor’s pressure is increasing. 1. This refers to the situation wherein a company 1. A leveraged buyout (LBO) is an acquisition A management buyout (MBO) is a form of 4. Many countries are reforming their
buys back its own shares back from the where the purchase price is financed through a acquisition where a company's existing manager e co n o m i c a n d l e g a l s y s te m s , a n d
2. No access to new technologies and developments market. combination of equity and debt and in which acquires a large part or all of the company from providing generous investment and tax
the cash flows or assets of the target are used either the parent company or from the private incentives to attract foreign investment.
3. Strong market entry barriers. Geographical
2. This results in reduction in the equity capital to secure and repay the debt. owners.
presence could not be enhanced 5. Privatization of state-owned enterprises
of the company.
2. Since the debt always has a lower cost of capital An MBO can occur for a number of reasons and consolidation of the banking
4. Badly positioned on the supply and/or demand 3. This strengthen the promoter’s position by than the equity, the returns on the equity industry.
side
increasing his stake in the equity of the increase with increasing debt. The debt thus 1. The owners of the business wants to retire

formed company usually in an IPO while
retaining the rest. This will bring some
cash into the company.
5. Sale of a Division: In the case of sale of
a division, the seller company is
demerging its business whereas the buyer
company is acquiring a business.
resorted to.
4. It requires the need to re-start with the fresh
balance sheet which is free from losses and
fictitious assets. This causes sacrifice on the part
of shareholders of the company.
5. Sometimes the creditors may also agree to reduce
their claim & also convert their dues to the agreed
extent in securities.
CA Mayank Kothari
company. effectively serves as a lever to increase returns & sell the company to the management
5. No efficient utilisation of distribution capabilities
which explains the origin of the term LBO. team they trust.
4. W h e n t h e c o m p a n y h a s v e r y l i m i t e d
6. New strategic business units for future growth
investment options it decides to buyback 3. LBOs can have many different forms such as 2. The owners of the business have lost faith
could not be developed
some of its outstanding shares from the Management Buy-out (MBO), Management in the business and are willing to sell it to
7. Not enough capital to complete the project shareholders, by utilizing some portion of its Buy-in (MBI), secondary buyout and tertiary the management (who believes in the future
surplus cash. buyout, among others, and can occur in growth of the business) in order to get some value
8. Possibility to sell the business at an attractive situations, restr ucturing situations and for the business.
5. Cairn India bought back 3.67 crores shares and
price or it is in best interest of shareholders insolvencies.
spent nearly ₹1230 crores by May 2014.

I’ve always been attracted to the more revolutionary changes. I don’t know why. Because they’re harder. They’re much more stressful emotionally. And you usually go through a period where everybody tells you that you’ve completely failed.
 14 International Financial Centre Islamic Finance
New
Syllabus

1 2 3 1 2 3

What is IFC? Benefits of IFC Constituents of IFC Meaning Riba Differentiate Conventional & Islamic Finance

1. International Financial Centre (IFC) is the 1. O p p o r t u n i t y f o r q u a l i fi e d 1. Highly developed Infrastructure

1. Islamic finance refers to the means by which 1. The meaning of RIBA is Interest or usury
Basis Islamic Finance Conventional
financial center that caters to the needs of professionals working outside India corporations in the Muslim world, including Finance
the customers outside their own to come here and practice their 2. Stable Political Environment
banks and other lending institutions, raise 2. Money is considered as medium of exchange,
jurisdiction.
profession.
capital in accordance with Sharia, or Islamic law.
store of value or unit of measurement only, RIBA (Interest) Riba is prohibited Interest must be
3. Strategic Location
hence Riba is considered haram i.e. unfair paid irrespective of
2. IFC is a hub that deals with flow of funds, 2. A platform for qualified and talented 2. To ensure that all Islamic finance products and reward to the provider of capital for little or no the losses
4. Quality Life

financial products and financial services professionals to pursue global service offered follow principles of Sharia Rules, effort or risk undertaken.

though in own land but with different set of opportunities without leaving their there is a board called Sharia Board which Speculation The financial transaction should be There are no such
5. Rationale Regulatory Framework

regulation and laws.

homeland.
oversees and reviews all new product offered by 3. Riba is equated with the wrongful appropriation (uncertainty) free from the element of uncertainty restrictions
6. Sustainable Economy financial institutions.
of property belonging to others
(Gharar), gambling (Maysir),
3. Thus, these centers provide flexibility in 3. Stops Brain Drain from India.
Corruption(Rishabh), Interest(Riba),
currency trading, insurance, banking and 3. Since under Islamic finance money is 4. Muslims are asked to accept principal only.
Ignorance (Jahl)

CA Mayank Kothari
other financial services.
4. Bringing back those financial
services transactions presently Types of IFC 4 considered as only a mean of carrying out
transactions any earning on the same in form of
5. And hence there should be a link between Unlawful Goods Islamic Finance must not be involved There are no such
4. Accordingly, through IFCs, businesses that carried out abroad by overseas money and profit as an alternative to interest.
& Services in any transactions involve trade not restrictions
interest (Riba)is strictly prohibited.

currently cannot be done in India can be
done at IFC.
branches or subsidiaries of Indian
Serve clients from all over the
5. India has its IFC in Gujarat at Gandhinagar –
financial institutions/entities or allowed as per Islamic principles such
I Global (GFCs) 6. Thus it can be said that money has no intrinsic
4. Complying with Sharia law also means that as alcohol, armaments, pork and other
value in Islamic finance. i.e Time Value of
Financial Market.
Islamic Financial Institutions are not permitted to socially detrimental products.
Money

world in the provision of the invest in alcohol, pork, pornography or

GIFT (Gujarat International Financial Tec
7. The relationship between the depositor and a
City)
5 GIFT City
5. Trading of complicated financial
widest possible array of IFS gambling.
derivative can be started from India. Risk Sharing Bank bears the risk of asset The customer
banker can be viewed as principal and agent,
5. Financing must be linked to real assets bears all the risk of
depositor And custodian, investor and
II Regional (RFCs) (materiality). Returns must be linked to risks paying back the
Serve their regional rather than
entrepreneur, fellow joint-partners. loan

their national economies

1. Gujarat International Finance Tec-City or GIFT is an under-construction central examples of such Dubai, Hong 4 Financial Instruments
business district between Ahmedabad and Gandhinagar in the Indian state of Gujarat.
Kong;
A B C D E F G
2. It’s main purpose is to provide high quality physical infrastructure (electricity, water,
Non-global and non-
gas, district cooling, roads, telecoms and broadband), so that finance and technology III
firms can relocate their operations there from Mumbai, Bangalore, Gurgaon etc. where regional, ordinary IFCs
Mudaraba Musharaka Sukuk Ijara Murabaha Istisna Salam
infrastructure is either inadequate or very expensive.

These are centres like Paris,

3. Currently, two 29-floor commercial towers have been completed with development of Frankfurt, Tokyo and Sydney The Mudaraba is a kind It is a kind of joint It is one of the most popular It is a kind of lease Also, known as cost plus It is a kind of funding It is analogues to forward
truck infrastructure now underway for further development.
that provide a wide range of IFS of profit sharing business venture Islamic financial products. It is financing contract it is a kind of arrangements for contract in the conventional
but cater mainly to the needs of arrangement wherein wherein all parties a kind of ‘Debt Certificate’ arrangement wherein trade credit or loans. Profit long term finance. Though cash is
4. The 1000MW electricity supply is planned to be 99.999% reliable (about 5.3 minutes their national economies rather one party provides provide the capital representing ownership in one party transfer the margin of the financier is construction received by the seller
of outage per year).
than their regions or the world – 100% of the capital in the business in business or assets and through asset to other party known to the buyer. In this contracts wherein immediately on sale but goods
one may call them national IFCs involved and other party agreed ratio and this instrument company for some specific time arrangement financier client pays some as per pre-decided quality,
5. Natural Gas will be distributed to every house and building via pipes, which is cheaper provides specialized also have right to borrows the money. Although it for specific fee which buys the assets and sells initial amount and quantity and time shall only be
and safer than cylinders.
Offshore (OFCs) knowledge and participate in the appears to be conventional includes capital cost to the client (buyer) and balance amount is delivered in future. This sale
entrusted with exclusive business. While the debt instruments but is differs of assets and profit buyer pays to the financier payable is repaid in shall be at the discounted
6. GIFT will have a centralized air conditioning system called district cooling, which is These are centres that are responsibility of loss is strictly in following aspects:
margin of the lessor. in installments consisting installments. The price so that financer could
cheaper to run and uses less electricity.
primarily tax havens for wealth working. In case there is shared in the ratio In this arrangement, of following two elements:
whole project is make some profit out of the
management and global tax profit it shared among of their capital • To have share in profit of the responsibility for funded by the deal. However, it is important
7. All waste will be automatically sucked through underground pipes at a high speed of
management rather than them in the pre-decided contribution, the assets.
maintenance of the • Cost of asset financed.
financer and to note that Salam is
90 km/h (56 mph), and will be treated through plasma gasification.
providing the full array of IFS. ratio and if there is loss profit is shared as leased items remains completion of prohibited in commodities
• To have share in the • Financier’s profit on
only financier will borne per pre-agreed with the lessor. project it is delivered such a gold, silver and other
underlying assets on realization acquisition of asset.
the same. ratio. to the client. type of monetary assets.
of assets.

… Continued _ Foreign Exchange & Risk Management

Nostro, Vostro & Loro Account Market Particpiants Pips Non-deliverable Forward Contract (NDFs) Rollover of Deliverable Forward Strategies for Exposure Management
Nostro “Our account It is the overseas The account held by State - PIP is the Price Interest Point.
• A cash-settled, short-term forward contract on a • A Contract wherein, as an Exporter, you • Low Risk: Low Reward
The participants in the foreign
with your account which is held Bank of India with Bank of have no Foreign Currency to Deliver at This option involves automatic hedging of exposures in
Account exchange market can be - It is the smallest unit by which a thinly traded or non-convertible foreign currency
bank” by the domestic bank America in New York is a
categorized as follows
currency quotation can change.
• The profit or loss at the time at the settlement date maturity and as an Importer you have no the forward market as soon as they arise, irrespective
in the foreign bank or Nostro Account of the state - Non-bank Entities - to meet - E.g., USD/INR quoted to a of the attractiveness or otherwise of the forward rate.

with the own foreign bank of India. is calculated by taking the difference between the Local Currency to deliver at maturity
their import or export customer is INR 61.75.

branch of the bank.

commitments or hedge their - agreed upon exchange rate and the sport rate at the • As an Exporter or Importer you would like to • Low Risk: Reasonable Reward
The minimum value this rate
transactions against can change is either INR 61.74 time of settlement, for an agreed upon notional rollover the contract which effectively means This strategy requires selective hedging of exposures
Vostro “Your account It is the account If Bank of America maintains
with our bank” which is held by a an account with State Bank of fluctuations
or INR 61.76.
amount of funds.
spot cancellation and booking of new whenever forward rates are attractive but keeping
Account - Banks - Banks also exchange - In other words, for USD/INR
foreign bank with a India it will be a Vostro • All NDFs have a fixing date and a settlement date.
contract for later date.
exposures open whenever they are not.

local bank, Account for State bank of currencies as per the quote, the pip value is. 0.01.

- • The fixing date is the date at which the difference • The rationale behind the rollover is: This option is similar to an investment strategy of a
India. requirements of their clients.
Pip in foreign currency
- Speculators - they buy and quotation is similar to the tick between the prevailing market exchange rate and 1. Non receipt of Foreign Currency from combination of bonds and equities with the proportion
Loro “Your account It is used when State bank of India account in sell currencies with a view to size in share quotations.
the agreed upon exchange rate is calculated.
client (export perspective),
of the two components depending on the
with their referring to third party Bank of America is Loro earn profit due to fluctuations - However, in Indian interbank attractiveness of prices.

Account • The settlement date is the date by which the 2. Shortage of local currencies (Import
bank” accounts. Account for ICICI Bank in the exchange rates.
market, USD-INR rate is quoted
- Arbitrageurs - make profit payment of the difference is due to the party perspective) ,
• High Risk: Low Reward
upto 4 decimal point. Hence
Account of SBI in from price differential existing minimum value change will be receiving payment.
3. Non-agreement of payment with Perhaps the worst strategy is to leave all exposures
SBI
Bank of America in two markets by to the tune of 0.0001.
• NDFs are commonly quoted for time periods of one clients,
unhedged. The risk of destabilization of cash flows is
simultaneously operating in two - Spot EUR/USD is quoted at a month up to one year, and are normally quoted and very high. The merit is zero investment of managerial
4. Non availability of longer period
different markets.
bid price of 1.0213 and an ask
Nostro
- Governments - monitor the settled in U.S. dollars.
forward contracts as normally forward time or effort.

price of 1.0219. The difference

market and help in stabilizing is USD 0.0006 equal to 6 “pips • They have become a popular instrument for contracts are available maximum for • High Risk: High Reward
Vostro
the exchange rates. corporations seeking to hedge exposure to foreign This strategy involves active trading in the currency
one year and to hedge the exposure
Bank of Loro currencies that are not internationally traded. for the period more than one roll over market through continuous cancellations and re-
America bookings of forward contracts.
contract shall be used.
ICICI

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 15
New
Small and Medium Enterprises StartUp Finance
Syllabus

9 1. Initial infusion of Money 5. Bootstrap- Without any help of investors

1 Meaning 2. Banks are not interested 6. Strong Business Plan

Purpose of MSMED Act 1 2

Purpose of MSMED Act SME Exchange 3. Use savings, loan from family and friends 7. Seek advice from experienced people

4. Ta ke s o m e r i s k & s p e e d u p i n i t i a l
These limits are subject to change with any amendment. Check updates at http://dcmsme.gov.in 1. Remove impediments due to multiple laws operations

Enterprises Manufacturing Service Sector 2. Introduce statutory consultative and Meaning An SME Exchange is a stock exchange dedicated for trading the shares /
securities of SMEs who otherwise find it difficult to get listed on the Main
Sector r e co m m e n d a to r y b o d i e s i n M S M E Board. The concept originated from the difficulties faced by SMEs in Sources of Personal Family & Personal
Vendor
Peer-to-
Crowd
Factoring
policies 2 Microloans Credit Peer Accounts
gaining visibility and attracting sufficient trading volumes when listed along
Funding 💰
Financing Friends
Investment in Investment in Lines
Financing
Lending
Funding
Receivables
Plant & Machinery Equipment 3. Statutory registration procedures of with other stocks on the Main Board of stock exchanges.
MSMEs

Micro 0 - 25 lakh 0 - 10 lakhs 4. Statutory basis for purchase preference

and credit policies Benefits of
1. Easy access to Capital 6. Equity financing through
Venture Capital Pitch 1. Pitch deck presentation is a short and brief presentation (not more than 20 minutes) to
investors explaining about the prospects of the company and why they should invest into the
Small 25 lakhs - 5 crores 10 lakhs - 2 crores
5. Improve realization of payments of
listing on 2. Enhanced Visibility and
Prestige 7. Efficient Risk Distribution
3
Presentation startup business.
Medium 5 - 10 crores 2 - 5 crores MSMEs SME
2. Some of the methods have been highlighted below as how to approach a pitch presentation:
Exchange 3. Encourages Growth of SMEs 8. Employee Incentives

4. Ensures Tax Benefits

Sources of Finance 3 4
Documents for Loan Introduction Team Problem Solution Marketing
Projections
or Milestone
Competition Business Financing
5. Enables Liquidity for Model
Shareholders
1. Balance Sheet and Profit Loss Statement
for last three consecutive years of firms
1. An individual is said to be boot strapping when he or she attempts to found and build a
2. Income Tax Assessment Certificates of Incorporation The Company shall be incorporated under the
Partners/Directors Criteria for Companies Act, 2013. 4 Bootstrapping company from personal finances or from the operating revenues of the new company.

SME Listing 2. Professionals who engage in bootstrapping are known as bootstrappers.

3. Proof of Possession of Land/Building Financials Post Issue Paid up Capital: shall be at least Rs. 3 crore.
Commercial/ SIDBI SFCs/SIDCs 3. Compared to using venture capital, boot strapping can be beneficial, as the entrepreneur is
4. Architect’s estimate for construction cost Net worth: (excluding revaluation reserves) of at least
Regional Rural/ able to maintain control over all decisions.
Co-operative Small Industries State Financial Rs.3 crore as per the latest audited financial results.
5. Partnership deed/Memorandum and
Banks. Development Corporations (e.g. 4. Methods of BootStrapping
Articles of Associations of Company Net Tangible Assets: At least Rs.3 crore as per the latest
Bank of India Delhi Financial
(refinance and Corporation)/State audited financial results.
6. Project Report
direct lending) Industrial State Tax Free &
Track Record: Distributable profits for at least two years Trade Discounted
Development 7. Budgetary Quotations of Plant and Credit
Factoring Leasing Credit
out of immediately preceding three financial years Program Resources
Machinery
Extraordinary income will not be considered

Or, the net worth shall be at least Rs.5 crores.

Benefits available to MSMEs 5 6
Export Promotion Strategy Other - website is mandatory Angel 1. Invest in small startups or entrepreneurs. funders, private investors, seed investors or
business angels.
5

1. Helps in generating employment - mandatory to facilitate trading in demat securities and Investors 2. One-time investment or an ongoing
injection of money 5. C r o wd f u n d i n g p l a t f o r m s o n l i n e o r
India’s export promotion strategy includes
enter into an agreement with both the depositories. networks.
2. SEZ’s are required to allocate 10% space for small - simplification of procedures, 3. More favourable terms
scale units. - There should not be any change in the promoters of 6. Use their own money, unlike venture
- incentives for higher production of exports, the company in preceding one year from date of filing 4. Focused on startups take their first steps. capitalist
3. Protections in relation to timely payment by buyers to Also called as informal investors, angel
the application to BSE for listing under SME segment.
MSME’s. - preferential treatments to MSMEs in the

CA Mayank Kothari
market development fund,
4. Assistance is also available in obtaining finance; help Disclosure A certificate from the applicant company / promoting
in marketing; technical guidance; training and
technology upgradation, etc.
- simplification of duty drawback rules, etc. companies stating the following: 6 Startup India Startup means an entity, incorporated or registered in India

" Initiative
- Products of MSME exporters are displayed “The Company has not been referred to the Board for
5. Certain exemptions from the eligibility requirements in international exhibitions free of cost under Industrial and Financial Reconstruction (BIFR)."
under the ICDR Regulation if turnover is less than 25 SIDO Umbrella abroad.
crores There is no winding up petition against the company,
which has been admitted by the court or a liquidator has Up to 7 years Turnover
Incorporated as Entity should Working towards
not been appointed. from its date for any
either a Private not have been innovation, development or
Role of World Bank 7 8
Export Growth Schemes Capital The post issue face value capital should not exceed Rs.
of Limited Company fiscal year formed by improvement of products
incorporation or a Registered has not splitting up or or processes or services, or
Twenty-five crores. / registration Partnership Firm exceeded reconstructio
Apart from the number of incentives and if it is a scalable business
A key area of the World Bank Group’s work is to INR 25
(10 years for or a Limited n a business model with a high potential
improve SMEs’ access to finance facilities to small-scale exporters, the following Trading Lot Size The minimum application and trading lot size shall not biotechnology Liability crore already in of employment generation
plan schemes are in operation for achieving be less than Rs. 1,00,000/-. startup) Partnership existence or wealth creation
Lending Operations and Policy Work: growth in exports:
The minimum depth shall be Rs 1,00,000/- and at any
1. Participation in the International Check the latest definition at https://www.startupindia.gov.in/content/sih/en/startup-scheme.html
point of time it shall not be less than Rs 1,00,000/-.
1) SME Lines of Credit provide dedicated bank Exhibitions/ Fairs.
financing The investors holding with less than Rs 1,00,000/- shall
2. Training Programmes on Packaging for be allowed to offer their holding to the Market Maker in
2) Partial Credit Guarantee Schemes (PCGs) Exports one lot.

3) Early Stage Innovation Finance 3. Marketing Development Assistance Participants The existing Members of the Exchange shall be eligible
Scheme for MSME exporters (MSME- to participate in SME Platform.
4) Policy work, analytical work, and other MDA)
Advisory Services can also be provided in support Underwriting The issues shall be 100% underwritten and Merchant
4. National Award for Quality Products
Bankers shall underwrite 15% in their own account.
of SME finance activities.

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something that shoots holes in how we’ve been thinking about a problem.