FINANCIAL SERVICES

(CPC6A)

Prepared by
M. JEGANRAJ
Department of B.Com CA
JHA Agarsen College
Email: jeganrajraj@gmail.com
 FINANCIAL SERVICES – CPC6A
Unit I : Introduction
Financial Services - Concept - Objectives - Functions - Characteristics - Financial Services Market - Concept
- Constituents - Growth of Financial Services in India - Financial Services Sector Problems - Financial
Services Environment - The Forces - Players in Financial Markets - Interest Rate Determination - Macro
Economic Aggregates in India.

Unit II: Merchant Banking and Public Issue Management

Definition - Functions - Merchant Bankers Code of Conduct - Public Issue Management
Concept - Functions - Categories of Securities Issue - Mechanics of Public Issue Management - Issue
Manager - Role of issue Manager - Marketing of Issue - New Issues Market Vs Secondary Market -
Underwriting - Types - Benefits Functions

Unit III : Money Market and Stock Exchange

Characteristics - Functions - Indian Capital Market - Constituents of Indian Capital Market -
New Financial Institutions and Instruments - Investor Protection - Stock Exchange - Functions -
Services - Features - Role - Stock Exchange Traders - Regulations of Stock Exchanges - Depository -
SEBI - Functions and Working

Unit IV : Leasing
Characteristics - Types - Participants - Myths about Leasing - Hire Purchase - Lease Financing Vs Hire
Purchase Financing - Factoring - Mechanism - Functions of a Factor - Factoring - Players - Types -
Operational Profile of Indian Factoring - Operational Problems in Indian Factoring - Factoring Vs bills
Discounting - Consumer Finance - Mechanics - Sources - Modes - Demand for Consumer Finance -
Factors - Consumer Finance Insurance.

Unit - V: Venture Capital

Origin and Growth of Venture Capital - Investment Nurturing Methods - Mutual Funds - Portfolio
Management Process in Mutual Funds - Credit Rating System - Growth Factors - Credit Rating Process -
Global and Domestic Credit Rating agencies - Principles of Insurance - Life and Non - Life Insurance -
IRDA - Powers - Pension Fund - Objectives - Functions - Features - Types - Chilean Model - Pension
Investment Policy - Pension Financing.

Suggested Readings
1. Gurusamy S, Essentials of Financial Services, Vijay Nicole Imprints,Chennai,2014
2. Gomez Clifford, Prentice Hall of India, Financial Markets, Institutions and Financial Services,2008
3. Financial Institutions and Markets, Oxford University Press
4. Rajesh Kothari, Financial Services in India: Concept and Application, Sage publications, 2012, New Delhi.
5. MadhuVij&SwatiDhawan,MerchantBankingandFinancialServices,JainBook Agency,2000,Mumbai
6. VasantDesai,FinancialMarketsandFinancialServices,HimalayanPublishing House Pvt Ltd,2000,Mumbai
 SUMMARY OF PREVIOUS YEARS QUESTION PAPERS - FINANCIAL SERVICES - CPC6A

Section A – 2 Mark Questions

APRIL - 2019 APRIL - 2018 APRIL - 2017 APRIL - 2016 APRIL - 2015
Name any two What are asset
What are the financial State the meaning of
components of financial What is meant by management
instruments? financial system
Unit - 1 services Financial Services? companies?
How interest rate is to be Who are the players of
Mention any two players What is a financial
determined? financial markets?
in financial service sector services market?
State any two functions of What is Merchant
Define merchant banking Who are merchant
Underwriters. banking?
Unit - 2 What do you mean by What is IPO? bankers?
What is merchant Explain the meaning of
underwriting? What is underwriting?
banking? issue management

What is money market? Define Primary Market.

Define a depository
Unit - 3 Expand the terms IPO and What is capital market? What is Stock Exchange?
IRDA What is right issue?

State any two benefits

What is hire purchase State the meaning of a
What do you mean by Hire What is meant by involved in Hire-
Give the meaning of revolving credit.
Purchase? factoring? Purchase transactions.
leasing Give the meaning of a
Who is called as a lessor? Define lease financing What is factoring?
Write down the meaning financial lease.
Unit - 4 What is International Who are the parties to the What is meant by
of factoring What do you mean by
Lease? Hire-Purchase Contract? financial lease?
What do you mean by factoring?
Write down the meaning What is consumer Give the meaning of
consumer finance? Define hire purchase.
of Factoring finance? Hypothecation.
Who is called consumer?
Explain the meaning of
credit rating? What is Venture Capital? How is venture capital
State the meaning of Expand CRISIL. defined?
Define venture capital mutual fund What is meant by What is ‘CARE’?
State the meaning of
Unit - 5 Expand the terms CRISIL What is an investment Mutual Fund? What is an open ended
pension fund
and IRDA Define insurance company? Mention any two specific scheme of mutual fund?
Mention any two benefits scheme of UTI. What is a mutual fund?
of mutual fund from the
point of view of promoter
 SUMMARY OF PREVIOUS YEARS QUESTION PAPERS - FINANCIAL SERVICES - CPC6A

Section B – 5 Mark Questions

APRIL - 2019 APRIL - 2018 APRIL - 2017 APRIL - 2016 APRIL - 2015
What are the objectives of What are the constituent
Discuss the features of
financial services What are the significance of Who are the players in of a financial service
Unit - 1 financial services
Who are the main players financial system? the financial services? market?
of financial markets?
Explain the role of Issue
What are the various
Manager Explain the various
How SEBI has classified advantages of What are the types of
Unit - 2 Write short note on growth distribution function of
merchant bankers? underwriting? underwriting?
of merchant banking in new issue market
India
Differentiate between a
primary issue market and
What are the defects of
What are the various types a secondary market.
Unit - 3 Indian Money Market?
of listing?
Write down the features
of a Capital Market.
Write down the various What are the rights of a
Explain the Contents of
sources of consumer List out the legal aspects hirer under the provisions
Hire-purchase
finance involved in leasing of the Hire Purchase Act
Distinguish between Hire Agreement.
Bring out the disadvantages 1972?
Unit - 4 Purchase and Instalment
of factoring Write a note on tax
sale What are the different
What are the basic benefits involved in Hire- Write a note on with
steps involved in
advantages of leasing Purchase transaction Recourse factoring.
factoring finance?
company?
What are the different What are the
types of venture capital characteristics features of
Discuss the importance of venture capital? Explain the types of credit
venture capital How are the Open-ended facility available to
What are the objectives of
Unit - 5 schemes of mutual funds Explain the advantages of consumers.
IRDA
List out the various different from the close- Mutual Funds. Discuss any five features
functions of IRDA ended schemes of mutual of mutual funds.
funds What are the main
objectives of UTI?
 SUMMARY OF PREVIOUS YEARS QUESTION PAPERS - FINANCIAL SERVICES - CPC6A

Section C – 10 Mark Questions

APRIL - 2019 APRIL - 2018 APRIL - 2017 APRIL - 2016 APRIL - 2015
Bring out the important Elaborate on the new
Describe the various role played by financial Explain the various types financial instruments
Explain various objectives
Unit - 1 functions of financial
of financial services
services in developing the of financial services launched by the
services economic growth of a Corporate in India.
country
State the procedure to be What are the main Discuss in detail any 10
Explain the services
followed by merchant functions of the New functions of Merchant
Unit - 2 banker while acting as a
rendered by merchant
Issue Market? Bankers in India.
banks
banker to an issue

List out the various

Explain the various Discuss the objectives
Discuss the various powers of a recognized
Unit - 3 components of money
functions of SEBI stock exchange
and powers of SEBI.
market

Explain the role of Distinguish between Explain the various

Distinguish between What are the different
factoring in India and Hire-purchase and advantages of lease
Unit - 4 mention the guideline laid
factoring and bill of types of loan available to a
leasing. financing.
exchange consumer
down by SEBI

State the different types

of credit rating based on
What is meant by mutual How life insurance in India Describe the different Explain the benefits of
Unit - 5 fund? Explain its types is regulated by IRDA? functions of mutual fund
different securities.
mutual funds.
Explain the classification
of mutual funds.
 ANSWERS
Section A – Questions (2 Marks)
Unit – 1

Unit I : Introduction
Financial Services - Concept - Objectives - Functions - Characteristics -
Financial Services Market - Concept - Constituents - Growth of Financial
Services in India - Financial Services Sector Problems - Financial
Services Environment - The Forces - Players in Financial Markets -
Interest Rate Determination - Macro Economic Aggregates in India.

1. What are the financial instruments?

 Financial instruments are monetary contracts between parties
 Financial instruments are assets that can be traded
 They can be created, traded, modified and settled.
  They can be cash, evidence of an ownership interest in an entity

2. How interest rate is to be determined?

 Interest rates are the cost of borrowing money
 In India, short-term interest rates are determined by central banks
 Fiscal and Monetary policy also influences the determination of interest rates

3. State the meaning of financial system

 Financial system is a system that allows the exchange of funds between
lenders, investors, and borrowers
 It is a network of financial institutions, financial markets, financial
instruments, and financial services that helps money transfer
 According to Dhanilal, “Financial system is the integrated form of financial
institutions, financial markets, financial securities, and financial services which
aim is to circulate the funds in an economy for economic growth.”

4. Who are the players of financial markets?

1. Banks
2. Primary Dealers (PDs)
3. Financial Institutions (FIs)
4. Stock Exchanges - BSE & NSE
5. Brokers - intermediating between buyers and seller of securities
6. Investment Bankers (Merchant Bankers)
7. Foreign Institutional Investors (FIIs)
8. Custodians - They are allowed to hold securities on behalf of customers
9. Depositories - hold securities in DEMAT (electronic) form

5. Name any two components of financial services

1. Banking
2. Wealth management
3. Mutual funds
4. Insurance
 5. Stock Market
6. Tax / Audit Consulting
7. Capital Restructuring
8. Portfolio Management
6. Mention any two players in financial service sector
1. Financial Institutions
2. Financial Markets
3. Financial Instruments (Assets or Securities)
4. Financial Services

7. What is meant by Financial Services?

 The services provided by the finance market
 Financial service is part of financial system
 The products and services offered by institutions

8. What are asset management companies?

 An asset management company (AMC) is an investment
management company/firm that invests the mutual funds of retail investors
in securities with the fixed investment objectives

9. What is a financial services market?

 A market that comprises participants such as commercial banks that provide
various financial services like ATM
 A financial market is a market in which people trade financial securities and
derivatives at low transaction costs.
 ANSWERS
Section B – Questions (5 Marks)
Unit – 1

1. What are the objectives of financial services?

Objectives of Financial Services
 Fund
Raising

Economic Funds
Growth Deployment
Objectives
of Financial
Services

Specialized
Regulation
Services

1. Fund Raising
 Financial services help to raise the required funds from a host of investors,
individuals, institutions, and corporate using various instruments.
2. Funds Deployment
 Arrays of financial services are available in the financial markets which help the
players to ensure an effective deployment of the funds raised.
3. Specialized Services
 They are specialized services catering the needs of different corporate like
mutual funds, book building, etc.
4. Regulation
 Agencies such as SEBI, RBI, Department of banking and insurance of the
government of India, through a plethora of legislations, regulate the
functioning of financial service institutions.
5. Economic Growth
 Financial services contribute, in good measure by mobilizing savings, to
speeding up the process of economic growth and development

2. Who are the main players of financial markets? / Who are the players in
the financial services?
 Banks

Hire Purchase Financier

Leasing Companies

Factoring

Underwriters And Merchant

Bankers

Players in Financial
Book-Builders
Services Sector

Mutual Funds

Credit Rating Companies

Housing Finance Companies

Asset Liability Management

Company

Finance Companies

1. Banks: Financial service sector comes under the tertiary sector in which banks play
a major role.

2. Hire Purchase Financier: It is also a player in the financial service sector as he

enables the consumer to buy the product on credit basis.

3. Leasing Companies through financial and operating lease ensure the acquiring of
assets by producers on a long-term basis at a reasonable charge.

4. Factoring: enables the seller to obtain 80% value of sales from the financial
companies undertaking factoring services.
5. Underwriters and Merchant Bankers are additional players who promote not only
companies but also ensure dynamic activity in the capital market.
 6. Book-Builders help companies in allotting shares to different categories of
investors.

7. Mutual Funds ensure investment by the public and also ensure tax relief to the
investor.

8. Credit Cards, another important player in the financial services, ensure the
circulation of plastic money and enable purchase on credit by the consumer.

9. Credit Rating Companies play an important role by giving different credit ratings to
companies to mobilize public deposits.

10. Housing Finance Companies and insurance companies also promote investment in
the economy as they also form a part of the players in the financial services.

11. Asset Liability Management Company enables mutual funds to undertake proper
investment in different types of companies.

12. Finance Companies in general and also as a part of non-banking finance

companies provide additional funds to the above players so that there is more
activity in the economy.

3. What is the significance of financial system?

4. Discuss the features of financial services

 1. Intangibility

2. Inseparability

Nature of Financial 3. Perishability

Services 4. Variability

5. Dominance of Human Element

6. Information Based

1. Intangibility
 Financial services are intangible. Therefore, they cannot be standardized or reproduced
in the same form.

2. Inseparability
 Both production and supply of financial services have to be performed simultaneously.
Hence, there should be perfect understanding between the financial service institutions
and its customers.

3. Perishability
 Like other services, financial services also require a match between demand and supply.
Services cannot be stored. They have to be supplied when customers need them.
4. Variability
 In order to cater a variety of financial and related needs of different customers in
different areas, financial service organizations have to offer a wide range of products
and services. This means the financial services have to be tailor-made to the
requirements of customers.

5. Dominance of Human Element

 Financial services are dominated by human element. Thus, financial services are labour
intensive. It requires competent and skilled personnel to market the quality financial
products.

6. Information Based
 Financial service industry is an information based industry. It involves creation,
dissemination and use of information. Information is an essential component in the
production of financial services.

5. What are the constituent of a financial service market?

1. Financial Institutions
 The financial institutions are intermediaries of financial markets which facilitate financial
transactions between individuals and financial customers.
A. Banking Institutions: These are the banks and credit unions that collect money from the
public in returns of interest on money deposits and use that money to advance loans of
financial customers.
B. Non-Banking Institutions: These are brokerage firms, insurance and mutual funds
companies that cannot collect money deposits but can sell financial products to financial
customers.
C. Regulatory Institutions: RBI, SEBI, IRDA etc., which regulate the financial markets and
protect the interests of the investors.
D. Intermediaries: Commercial banks, that provides the short term loans and other
financial services to the individuals and corporate customers.
E. Non-Intermediaries: Financial institutions like NABARD, IDBI etc that provide long-term
loans to corporate customers.

2. Financial markets
  Financial markets are the places where the buyers and sellers participate in trading of
assets such as shares, bonds, currencies and other financial instruments.
A. Capital Market: The capital market deals in long term securities having maturity period
of more than one year
B. Money Market: The money market deals with the short-terms debt instruments having
maturity period of less than one year

3. Financial Assets/Instruments
 Financial assets include cash deposits, checks, loans, accounts receivable, letter of
credit, bank notes and all other financial instruments that provide a claim against a
person/financial Institution to pay either a specific amount on a certain future date or to
pay the principal amount along with interest.

4. Financial Services
 The financial services are concerned with the design and delivery of financial
instruments and advisory services to individuals and businesses with the area of banking
and related institutions, personal financial planning, leasing, investment, assets,
insurance etc.
 ANSWERS
Section C – Questions (10 Marks)
Unit – 1
1. Describe the various functions of financial services

Vibrant Capital Market

Expands activities of financial markets

Benefits of Government

Economic Development

Economic Growth

Functions / Ensures Greater Yield

Importance of
Financial
Services Maximizes Returns

Minimizes Risks

Promotes Savings

Promotes Investments

Balanced Regional Development

Promotion of Domestic & Foreign Trade

1. Promoting Investment
 The presence of financial services creates more demand for products and the producer,
in order to meet the demand from the consumer goes for more investment.

2. Promoting Savings
 Financial services such as mutual funds provide full opportunity for different types of
saving.
3. Minimizing the Risks
 The risks of both financial services as well as producers are minimized by the presence
of insurance companies.
4. Maximizing the Returns
 The presence of financial services enables businessmen to maximize their returns. This is
possible due to the availability of credit at a reasonable rate.

5. Ensures Greater Yield

 The financial services enable the producer to not only earn more profits but also
maximize their wealth.

6. Economic Growth
 The development of all the sectors is essential for the development of the economy.
This brings in a balanced growth of the economy as a result of which employment
opportunities are improved.

7. Economic Development
 Financial services enable the consumers to obtain different types of products and
services by which they can improve their standard of living.

8. Benefit to Government
 The presence of financial services enables the government to raise both short-term and
long-term funds to meet both revenue and capital expenditure.

9. Expands Activities of Financial Institutions

 Mutual funds, factoring, credit cards, hire purchase finance are some of the services
which get financed by financial institutions.

10. Capital Market

 The financial services ensure that all the companies are able to acquire adequate funds
to boost production and to reap more profits eventually.

11. Promotion of Domestic and Foreign Trade

 Banking and insurance services further contribute to step up such promotional activities

12. Balanced Regional Development

 The government monitors the growth of economy and regions that remain backward
economically are given fiscal and monetary benefits through tax and cheaper credit by
which more investment is promoted.
2. Explain various objectives of financial services

Fund Raising

Economic Funds
Growth Deployment
Objectives
of
Financial
Services

Specialized
Regulation
Services

6. Fund Raising
 Financial services help to raise the required funds from a host of investors, individuals,
institutions, and corporate using various instruments.

7. Funds Deployment
 Arrays of financial services are available in the financial markets which help the players
to ensure an effective deployment of the funds raised.

8. Specialized Services
 They are specialized services catering the needs of different corporate like mutual funds,
book building, etc.

9. Regulation
 Agencies such as SEBI, RBI, Department of banking and insurance of the government of
India, through a plethora of legislations, regulate the functioning of financial service
institutions.

10. Economic Growth

 Financial services contribute, in good measure by mobilizing savings, to speeding up the
process of economic growth and development
3. Bring out the important role played by financial services in developing the
economic growth of a country

1. Savings-Investment Relationship
 Financial services provides facility for savings
 These savings are channelized by lending to various business concerns which are
involved in production and distribution.

2. Financial services help in growth of capital market

 Every business requires two types of capital namely, fixed capital and working capital.

3. Foreign Exchange Market

 It enables the exporters and importers to receive and raise the funds for settling
transactions. It also enables banks to borrow from and lend to different types of
customers in various foreign currencies.

4. Government Securities Market

 Financial system enables the state and central governments to raise both short-term
and long-term funds through the issue of bills and bonds which carry attractive rates of
interest along with tax concessions.

5. Infrastructure and Growth

 The Development Banks and the Merchant banks help in raising capital for these
industries.

6. Development of Trade
 The financial system helps in the promotion of both domestic and foreign trade.

7. Employment Growth is boosted by Financial System

 The presence of financial system will generate more employment opportunities in the
country.
8. Venture Capital
 The economic development of a country will be rapid when more ventures are
promoted which require modern technology and venture capital.
9. Financial system ensures balanced growth
 Economic development requires a balanced growth which means growth in all the
sectors simultaneously.
10. Fiscal discipline and control of economy
 It is through the financial system, that the government can create a congenial business
atmosphere so that neither too much of inflation nor depression is experienced

11. Financial system’s role in balanced regional development

 Through the financial system, backward areas could be developed by providing various
concessions.

12. Attracting foreign capital

 Financial system promotes capital market. A dynamic capital market is capable of
attracting funds both from domestic and abroad.

13. Economic Integration

 Financial systems of different countries are capable of promoting economic integration.

14. Political Stability

 The political conditions in all the countries with a developed financial system will be
stable.

15. Uniform Interest Rates

 The financial system is capable of bringing a uniform interest rate throughout the
country

16. Electronic Development

 Due to the development of technology and the introduction of computers in the
financial system, the transactions have increased
4. Explain the various types of financial services

Types of Financial Services

Fund Based Services Fee Based Services

Issue Management
Leasing
Portfolio Management
Hire Purchase
Corporate Counseling
Factoring
Merchant Banking
Forfeiting
Credit Rating
Mutual Funds
Stock Broking
Bill Discounting
Capital Restructuring
Credit Financing
Bank Guarantee
Housing Finance
Letter of Credit
Venture Capital
Debt Restructuring

Leasing
 An arrangement between the lessor (owner of the asset) and the lessee (user of the
asset) whereby the lessor purchases an asset for the lessee and allows him to use it in
exchange for periodical payments called lease rentals or minimum lease payments
(MLP).
A. Lessor: The party who is the owner of the equipment permitting the use of the
same by the other party on payment of a periodical amount.
B. Lessee: The party who acquires the right to use equipment for which he pays
periodically.
1. Hire Purchase
 It is known as installment plan
 It is an arrangement whereby a customer agrees to a agreement to get an asset by
paying an initial installment
o Down Payment / Initial Payment: A certain sum of money is paid at the time of
taking delivery known as ‘down payment’ or ‘initial payment’

2. Factoring
 A type of debtor finance in which a business sells its accounts receivable (i.e., invoices)
to a third party (called a factor) at a discount.
 The firm (client) gets advances in return for receivables, from a financial institution
(factor).

3. Forfeiting
 Forfeiting is a means of financing that allow exporters to receive immediate cash by
selling their medium and long-term receivables
 The importer's bank guarantees the amount

4. Mutual Funds
 Mutual funds pool money from the investing public and use that money to buy other
securities, usually stocks and bonds.
 Mutual funds give small or individual investors access to diversified, professionally
managed portfolios at a low price.

5. Bill Discounting
 Bill discounting refers to a method of working capital finance for the seller of goods.
 It refers to a fee charged by the bank from the seller of the goods to release funds
before the end of the credit period.

6. Credit Financing
 An agreement between a buyer and a seller in which the buyer receives the good or
service in advance and makes payment later, often over time and usually with interest.

7. Housing Finance
 Housing finance is what allows for the production and consumption of housing
 A type of seller financing in which a firm extends customers a loan, allowing them to
purchase its goods or services

8. Venture Capital
 A type of financing that is provided by firms or funds to small, early-stage, emerging
firms
 It is capital that is invested in projects that have a high risk of failure
5. Elaborate on the new financial instruments launched by the Corporate in
India
A financial instrument could be any document that represents an asset to one party and liability
to another. It can be a contract or a document like a bond, share, bill of exchange, futures or
options contract, cheque, draft, or more

Debt instrument
 To provide loans for research and development activity investments and give
guarantees to financial intermediaries who will distribute loans to companies and
institutions in compliance with goals of the instrument, or enable combinations of loan
and guarantee

Equity Capital Instrument

 for investments to risk capital funds, offering funding with the equity capital to R&D
intensive SMEs in the seed phase, and to support investments in development and
innovation areas through funds of a wide international investor base.

Risk Capital Instrument

 For seed phase investments, mainly to provide risk capital to SMEs through financial
intermediaries
 ANSWERS
Section A – Questions (2 Marks)
Unit – 2
Unit II: Merchant Banking and Public Issue Management
Definition - Functions - Merchant Bankers Code of Conduct - Public Issue
Management - Concept - Functions - Categories of Securities Issue -
Mechanics of Public Issue Management - Issue Manager - Role of issue Manager
- Marketing of Issue - New Issues Market Vs Secondary Market - Underwriting -
Types - Benefits Functions

1. State any two functions of Underwriters

  To purchase securities from the issuer and resell them to investors.
 Underwriter act as intermediaries between issuers and investors
 Underwriters take the risk of reselling the securities at a profit
2. What is merchant banking? / Define merchant banking / Who are merchant
bankers?
 A merchant bank is a company that do underwriting, loan services, financial
advising, and fundraising services for large corporations and high net worth
individuals
 A Merchant Bank is a firm or financial institution that invests equity capital directly
in businesses

3. What do you mean by underwriting?

 Underwriting is an act of guarantee by an organization for the sale of certain
minimum amount of shares and debentures issued by a Public Limited company.
 Underwriting of shares is a guarantee or insurance given by the underwriter to the
company that the shares offered to the public will be subscribed in full

4. What is IPO?
 Initial public offering (IPO)
 Initial public offering or stock market launch is a type of public offering in which
shares of a company are sold to investors and retail investors
 An initial public offering (IPO) refers to the process of offering shares to the public in
a new stock issuance.

5. Explain the meaning of issue management / What Public Issue

Management?
 The management of issues for raising funds through various types of instruments by
companies is known as issue management.
 The management of securities offered to the public on a regular basis and existing
shareholders on a right basis is known as public issue management.
 ANSWERS
Section B – Questions (5 Marks)
Unit – 2
1. Explain the role of Issue Manager / Role of Merchant Bankers in Managing
Public Issue

1) Easy Floatation: An issue manager acts as an indispensable pilot facilitating a public / rights
issue. This is made possible with the help of a repository of special skills possessed by him to
execute the management of issue.

2) Financial Consultant: An issue manager essentially acts a financial architect, by providing

advice relating to capital structuring, capital gearing and financial planning for the company.

3) Underwriting: An issue manager allows for underwriting the issues of securities made by
corporate enterprises. This ensures due subscription of the issue.

4) Market Makers: Merchant bankers, as issue managers often act as the market makers for
the issues lead managed by them. They invest, continue to old and provide, buy and sell quotes
for the listed scraps of the company.

5) Due Diligence: The issue manager has to comply with SEBI guidelines. The merchant banker
will carry out activities with due diligence and furnish a Due Diligence Certificate to SEBI. The
detailed diligence guidelines that are prescribed by the Association of Merchant Bankers of
India (AMBI) have to be strictly observed. SEBI has also prescribed a code of conduct for
merchant bankers.

6) Coordination: The issue manager is required to co-ordinate with a large number of

institutions and agencies while managing an issue in order to make it successful.

7) Liaison with SEBI: The issue manager, as a part of merchant banking activities, should
register with SEBI. While managing issues, constant interaction with the SEBI is required by way
of filing of offer documents, etc. In addition, they should file a number of reports relating to the
issues being managed.
2. Write short note on growth of merchant banking in India
 Merchant Banking as a concept can be traced back to the 17th and 18th Centuries to
countries like France and Italy
 Merchant banking activity formally initiated into Indian capital markets when Grind lays
bank received license in

Merchant Banking in India

a. In India, Merchant Bank services were formally started by an already well-
established National Grindlays Bank in 1967, through its merchant banking division.
b. Citibank also set up a merchant banking department in 1970
c. The State Bank of India also set up a merchant banking in 1972.
d. Most of the commercial banks in India, like the ICICI Bank, IDBI Bank, Syndicate Bank,
Canara Bank, Bank of Baroda, Bank of India and many others set up their own merchant
banking divisions to compete in this growing market.
e. Later, private individuals and consultancy firms, both national and international also
entered this race.
 The Indian merchant bankers have developed to such an extent where they can provide all
the following services: Project counselling Pre investment activities Feasibility studies
Project reports Designing capital structure and many more.

3. How SEBI has classified merchant bankers? / Types of Merchant Banks in

India
The Securities and Exchange Board of India (SEBI has classified ‘Merchant Bankers’ under the
following four categories
1. Category I
 This category contains the Merchant Bankers who can act as Issue Managers,
Consultants, Advisors, Portfolio Managers and Underwriters.
2. Category II
 These Merchant Bankers can act as Advisors, Consultants, Portfolio Managers and
Underwriters. But they cannot act as issue managers on their own but as Co-Managers.
3. Category III
 This category of Bankers is allowed to act as Advisors, Consultants and Underwriters
only. They can neither act as Issue Managers on their own nor as Co-Managers.
 Also, they cannot undertake portfolio management activities.
4. Category IV
 This category of Merchant Bankers can only act as Advisors or Consultants regarding an
issue of capital.
4. Explain the various distribution function of new issue market

1. Origination
 In primary market, origination means to investigate, evaluate and procedure new
project proposals.
 It initiates before an issue is present in the market.
 It is done with the help of merchant bankers.

2. Underwriting
 In primary market, underwriting can be done by a single underwriter or by a group of
underwriters.
 Minimum subscription is guaranteed by underwriters.
 If the issue is completely subscribed, no liability would be left for the underwriters.
 If by chance any part of the issue remains unsold, afterwards the underwriter has no
option, rather than buying all the unsubscribed shares.

3. Distribution
 In primary market, the success of any grand new issue is hinges on the issue is being
subscribed by the people.
 The sale of the securities to the supreme or highest investors is termed as distribution.
 Distribution Job is given to brokers and dealers.
 The brokers or agents maintain direct contact with the supreme investors.
5. What are the various advantages of underwriting?
1. Underwriting ensures success of the proposed issue of shares
2. Underwriting enables a company to get the required minimum subscription.
3. The reputation of the underwriter acts as a confidence to investors.
4. The company is sure of getting the value of shares issued
5. It enhances goodwill of the company
6. It facilitates wide distribution of securities
7. The company gets expert advice from underwriters in the matter of marketing securities
8. It fulfils requirement of minimum subscription

6. What are the types of underwriting?

1. Firm Underwriting
 An underwriting agreement in which underwriter takes up a certain number of
securities of firm himself.
 An underwriting firm is giving assurance to buy and sell the shares which are not
subscribed by the public in all or unsubscribed portion.

2. Sub-Underwriting
 It is an underwriting agreement under which an underwriter appoints several other sub-
underwriters to pass the risk linked with underwriting.
 When underwriter feels that it is beyond his capacity to assume the whole risk, he
appoints other underwriters with him. This is done to diffuse the risk associated with
underwriting of securities which is too high for single underwriter to assume.
 The sub-underwriter has no connection with customer and is liable only to underwriter
for the amount of securities they have underwritten
3. Joint Underwriting
 Joint underwriting is one in which there are more than one underwriter appointed by
company for underwriting of its securities.
 This type of underwriting takes place when issue by company is too large and contains
large risk

4. Syndicate Underwriting
 Syndicate underwriting is an underwriting agreement in which several underwriters join
together for underwriting securities.
 Such agreement takes place when issue is too big that a single underwriter cannot
underwrite the whole amount.

5. Complete Underwriting
 Complete underwriting is one in which whole issue of securities of company is
underwritten.
 Under such agreement, underwriter underwrites full amount of shares/debentures
issued by companies.

6. Partial Underwriting
 Partial underwriting is one in which only a certain part of issue of securities of company
is underwritten.
 Under such agreement, underwriter underwrites partial amount of shares/debentures
issued by companies.
 In partial underwriting, securities are underwritten either by single underwriter or by
many underwriters who agrees to assume the risk to specified amount.
7. Explain the various Functions Merchant banking in India
1. Issue management: Merchant Bankers advice their clients on the issuing of different
types of shares such as equity shares, preference shares, and debentures, which are a
type of debt instrument.
2. Credit Syndication: The Merchant Banks provide loans to a specific set of clients for
setting up or executing various projects.
3. Portfolio Counseling: Merchant Banks also help their clients in investing and
managing Portfolios, which are large investments consisting of a number of various
financial instruments and investments.
4. Project Counseling: Clients are advised on various procedural and financial aspects of
their short or long-term projects.
5. Brokering in Stock Exchange: Many Merchant Banks act as brokers of stock exchanges.
They buy and sell shares of different types on behalf of their clients.
6. Advice on Expansion and Management: Some Merchant Banks also provide advice to
their customers on the expansion and modernization of their businesses. They advise on
mergers, acquisitions and takeovers too.
7. Services to Private & Public Sector Units: Merchant Bankers also offer many services to
public & private sector units like helping in raising funds, marketing of securities, foreign
collaborations and managing long-term finances.
8. Management of Interests and Dividends: Merchant Banks also help their clients in the
management of interest on and dividends on their invested shares, and regarding the
rate of dividend as well as their timing.
9. Leasing Services: Some Merchant Banks also help in leasing services where the lessor
allows the use of specific assets to the lessee for a certain period on behalf of rentals or
fees.
 ANSWERS
Section C – Questions (10 Marks)
Unit – 2
1. State the procedure to be followed by merchant banker while acting as a
banker to an issue

1. Furnishing Information:
 Number of issues for which the merchant banker is engaged as banker to issue.
 Number of applications received and details of application money received
 Dates on which applications from investors were forwarded to issuing company.
 Details of amount as refund to investors.

2. Books to be maintained:
 Books of accounts for a minimum period of 3 years
 Records regarding the company
 Documents such as company applications, names of investors, etc.

3. Agreement with issuing company

Agreement with the issuing company by the merchant banker should contain
 Number of collection centers
 Application money received
 Daily statement by each branch which is a collecting centre.

4. Action by RBI
 Any action by RBI on merchant banker should be informed to SEBI by the merchant
banker concerned.

5. Code of Conduct
 Having high integration in dealing with clients.
 Disclosure of all details to the authorities concerned. Avoiding making exaggerated
statements.
 Disclosing all the facts to its customers.
 Not disclosing any confidential matter of the clients to third parties.
2. Explain the services rendered by merchant banks / Discuss in detail any 10
functions of Merchant Bankers in India.

1. Project counseling
2. Market survey and forecasting
3. Estimating the amount of funds required.
4. Raising funds from capital market.
5. Rising of funds through new instruments.
6. Bought out deals.
7. OTC market operations.
8. Mergers and amalgamations.
9. Loan syndication.
10. Technology tie-ups.
11. Working Capital Finance.
12. Venture Capital.
13. Lease Finance.
14. Fixed deposit management.
15. Factoring
16. Portfolio management of mutual funds.
17. Rehabilitation of sick units.
3. What are the main functions of the New Issue Market?

1. Origination
 In primary market, origination means to investigate, evaluate and procedure new
project proposals.
 It initiates before an issue is present in the market.
 It is done with the help of merchant bankers.

2. Underwriting
 In primary market, underwriting can be done by a single underwriter or by a group of
underwriters.
 Minimum subscription is guaranteed by underwriters.
 If the issue is completely subscribed, no liability would be left for the underwriters.
 If by chance any part of the issue remains unsold, afterwards the underwriter has no
option, rather than buying all the unsubscribed shares.

3. Distribution
 In primary market, the success of any grand new issue is hinges on the issue is being
subscribed by the people.
 The sale of the securities to the supreme or highest investors is termed as distribution.
 Distribution Job is given to brokers and dealers.
 The brokers or agents maintain direct contact with the supreme investors.
 ANSWERS
Section A – Questions (2 Marks)
Unit – 3
Unit III : Money Market and Stock Exchange
Characteristics - Functions - Indian Capital Market - Constituents of Indian Capital
Market - New Financial Institutions and Instruments - Investor Protection -
Stock Exchange - Functions - Services - Features - Role - Stock Exchange
Traders - Regulations of Stock Exchanges - Depository - SEBI - Functions and
Working
1. What is money market?
 The money market is a part of the economy which gives short-term funds.
 A section of the financial market where high liquid financial instruments with
short-term maturities are traded
 The money market deals in short-term loans, for a period of less than or equal
to 365 days

2. Expand the terms IPO and IRDA

 IPO - Initial Public Offering
o A process by which a company offers its shares to the public for the first
time
 IRDA - Insurance Regulatory and Development Authority of India
o It is the apex body managing the insurance business in India

3. Define a Depository
 Depository is a place where financial securities are saved in dematerialized
(DEMAT) form
 It is responsible for maintenance of ownership records and helps trading in
dematerialized securities
 Depository Participant (DP): It is an Agent of the depository

4. What is capital market?

 Capital market is where both equity and debt instrument like equity shares,
preference shares, debentures, bonds, etc. are bought and sold.
 A place where various companies trade different financial instruments
5. Define Primary Market
 The primary market is the part of the capital market
 It also known as a New Issue Market
 It deals with the issuance and sale of securities to investors directly
 It is a market where buyers and sellers discuss and transact directly without any
intermediaries or resellers

6. Abbreviate SEBI
 Securities and Exchange Board of India (SEBI)
 It is the regulator of the securities and commodity market in India owned by the
Government of India

7. What is stock exchange?

 A stock exchange, securities exchange or bourse is a facility where stockbrokers
and traders can buy and sell securities, such as shares of stock and bonds and
other financial instruments
 It acts as a market where stock buyers connect with stock sellers.

8. What is a rights issue?

 It refers to issuing shares to the present share holders instead of going to the
public
 It is a way by which a listed company can raise additional capital.
 the company gives its active shareholders the right to subscribe to newly issued
shares in share to their active holdings
 ANSWERS
Section B – Questions (5 Marks)
Unit – 3
1. What are the defects of Indian Money Market?
1. Existence of Unorganised Money Market
 In this segment of the market the purpose as well as period is not clearly defined.
The segment undermines the role of the RBI in the money market.
2. Lack of Integration
 There is lack of integration of different segments or functionaries.
3. Disparity in Interest Rates
 There are different types of interest rates prevailing in the market at the same time
like borrowing rates of govt., rates of financial institutions etc. this was basically due
to the mobility of funds from one sub-segment to another.
4. Seasonal Diversity of Money Market
 There are wide fluctuations in the interest rates in the money market from one
period to another.
5. Lack of Proper Bill Market
6. Lack of Very Well Organized Banking System
 A well developed banking system is essential for money market.

2. What are the various types of listing?

1. Initial listing: Here, the shares of the company are listed for the first time on a stock
exchange.
2. Listing for public Issue: When a company which has listed its shares on a stock exchange
comes out with a public issue.
3. Listing for Rights Issue: When the company which has already listed its shares in the
stock exchange issues securities to the existing shareholders on rights basis.
4. Listing of Bonus shares: When a listed company in a stock exchange is capitalizing its
profit by issuing bonus shares to the existing shareholders.
5. Listing for merger or amalgamation: When the amalgamated company issues new
shares to the shareholders of amalgamated company, such shares are listed.
3. Differentiate between a primary issue market and a secondary market
4. Write down the features of a Capital Market

1. Deals in Long term Investment

 Capital market is a market for trading of long term securities. It provides long term
investment avenues to the investors.
2. Bring together borrowers and lender
 It acts as mediators between the borrowers and lenders of money. It links the person
having surplus funds with the one who is the deficit of money.
3. Regulated by government
 Capital market works as per the regulation of government. There is a body named SEBI
set up by the government who looks and regulate the functioning of the capital market.
4. Utilizes Intermediaries
 There are several intermediaries who are connected with the capital market to facilitate
its functioning. Intermediaries are termed as important work organs of capital market.
5. Determines capital formation rate
 Capital market reflects the rate of capital growth in the economy. Capital market
circulates the funds among different sectors of the economy.
6. Provides Liquidity
 Capital market is a highly liquid market as the instruments traded in the capital market
are easily convertible into cash.
7. Variety of Instruments
 There are varieties of instruments which are traded in the Capital market. There is a lot
of options available for both investors and borrowers hence providing greater flexibility
to both.
8. Includes primary market and secondary market
 Capital market includes two markets within it: Primary market and secondary market.
Primary market is a market concerned with the issue of new securities.
 ANSWERS
Section C – Questions (10 Marks)
Unit – 3
1. Explain the various components of money market
Money Market
 Money market is a place for trading in money and short term financial assets that are
close substitutes of money.
 Provides an opportunity for balancing the short term surplus funds of investors with
short term requirements of borrowers.

1. Call Money Market

 It is the market for very short term funds, also called money at call and short notice
 These loans are given for a very short period not exceeding 7 days
 More often from day to day or for overnight only i.e. 24 hours
 Highly liquid market Loans are unsecured

2. Collateral loan market

 Backed by the securities, stocks and bonds.
 Collateral securities may be in the form of some valuable say govt. bonds which are
easily marketable and do not fluctuate much in prices.
 The collateral is returned to the borrower when the loan is repaid
 Once the borrower is unable to repay the loan, the collateral becomes the property of
the lender.
 These loans are given for few months.

3. Acceptance Market
 Bankers’ acceptance is a draft drawn by an individual or a firm upon a bank and
accepted by the bank whereby it is ordered to pay to the order of a designated party or
to bearer a certain sum of money at a specified time in future.
  The market where the bankers’ acceptance are easily sold and discounted is known as
acceptance market.
 A banker’s acceptance can be easily discounted in the money market because they carry
signature of the bankers

4. Bill Market
 It is a market in which short term papers or bills are bought and sold.
 Short term papers
 Treasury bills
o Treasury bills are government papers securities for a short period usually of 91
days duration. Treasury bills are promissory notes of the government to pay a
specified sum after a specified period
 Bills of exchange
o A bill of exchange is a written unconditional order which is signed by the drawer
requiring the drawee to pay on demand or at fixed future time, a definite sum of
money
2. Discuss the various functions of SEBI / Discuss the objectives and powers of
SEBI

A) Review of the market operations, organizational structure and administrative control of

the exchange
 The exchange’s organization, systems and practices are in accordance with the
Securities Contracts (Regulation) Act (SC(R) Act), 1956
B) Registration and Regulation of the Working of Intermediaries
 Regulates the working of the depositories [participants], custodians of securities, foreign
institutional investors, credit rating agencies and such other intermediaries
C) Registration and Regulation of Mutual Funds, Venture Capital Funds & Collective
Investment Schemes
 SEBI has the authority to inspect the books of accounts, records and documents of a
mutual fund, its trustees, AMC and custodian where it deems it necessary
D) Promoting & Regulating Self Regulatory Organizations
 In order for the SRO to effectively execute its responsibilities, it would be required to be
structured, organized, managed and controlled such that it retains its independence,
while continuing to perform a genuine market development role
E) Prohibiting Fraudulent and Unfair Trade Practices in the Securities Market
 SEBI is vested with powers to take action against these practices relating to securities
market manipulation and misleading statements to induce sale/purchase of securities
F] Prohibition of Insider Trading
 Stock Watch System, which has been put in place, surveillance over insider trading
would be further strengthened
G] Investor Education and the Training of Intermediaries
 SEBI distributed the booklet titled “A Quick Reference Guide for Investors” to the
investors
H) Inspection and Inquiries
I) Regulating Substantial Acquisition of Shares and Takeovers
J) Performing Such Functions and Exercising Such Powers under the Provisions of the
Securities Contracts (Regulation) Act, 1956 As May Be Delegated To It By The Central
Government;
K) Levying Fees or Other Charges for Carrying Out the Purposes of This Section
L) Conducting Research for the Above Purposes
3. List out the various powers of a recognized stock exchange
1. Prescribing hours of trade.
2. Procedure for clearing house for settlement of transactions, delivery and payment for
securities.
3. Submission of report by the clearing house periodically to SEBI with regard to details of
various classes of securities.
4. Rules pertaining to prohibition of blank transfers. When securities are traded, the buyer
must receive the security and send it for transfer in his name after signing the transfer
document. However, if the buyer keeps the transfer document blank and further sells it to
other buyer, then it is a blank transfer.
5. Different classes of contract and the payment to the clearing house.
6. Fixing, altering or postponing settlement dates.
7. Fixing of prices such as opening, closing, high and low.
8. Prescribing margin requirements for different contracts.
9. Regulating termination of contracts between members.
10. In case of default or insolvency of seller or buyer, procedure for dealing with such contracts.
11. Procedure for listing securities in stock exchange.
12. Settlement of disputes.
13. Fixing of fees, fines and penalties.
14. Fixing broker commission.
15. In case of syndicate transaction or cornering or pool which is illegal, fixing of prices on
securities.
16. Separating the functions of jobbers and brokers.
17. Limiting the volume of trade by individual members.
18. Obligation on the part of members to furnish information as required by the governing
body.
 ANSWERS
Section A – Questions (2 Marks)
Unit – 4
Unit IV : Leasing
Characteristics - Types - Participants - Myths about Leasing - Hire Purchase -
Lease Financing Vs Hire Purchase Financing - Factoring - Mechanism -
Functions of a Factor - Factoring - Players - Types - Operational Profile of
Indian Factoring - Operational Problems in Indian Factoring - Factoring Vs bills
Discounting - Consumer Finance - Mechanics - Sources - Modes - Demand for
Consumer Finance - Factors - Consumer Finance Insurance.

1. What do you mean by Hire Purchase? / Define hire purchase / What is

hire purchase?
 It is known as installment plan
  Hire purchase is an arrangement for buying expensive consumer goods
 In hire purchase, the buyer makes an initial down payment and pays the
balance plus interest in installments

2. Who is called as a lessor?

 LESSOR
o The owner called the LESSOR
o The person who owns the asset and gives it on lease
 LESSEE
o The user of the asset is called the LESSEE
o The lessee takes the asset on lease and uses it for the period of the lease

3. What is International Lease?

 If the parties of the lease are from different countries is called as international
lease
 the type of lease agreement where one or more parties to the lease agreement
reside or are domiciled in different countries

4. Write down the meaning of factoring / What do you mean by factoring?

/ What is meant by factoring?
 The business body sells its bill receivables to a third party at a discount in order
to raise funds
 Factoring is the act of selling the right to collect receivables for a percentage of
their value.
o Concept: The seller makes the sale of goods or services and creates
invoices. The business then sells all its invoices to a third party called the
factor. The factor pays the seller, after deducting some discount on the
invoice value

5. What do you mean by consumer finance? / What is consumer credit? /

What is consumer finance?
 It is the division of retail banking
 It refers to lending money to consumers for personal or business use
 It make possible finance for purchasing consumer durables

6. Give the meaning of leasing / Define lease financing

 The right to use the property in exchange for payment of rents for a specified
 period
 The lease is a contract whereby one party, (the lessor), grants the right to use a
particular good for a period of time to the other party, (the lessee), in which the
lessee will pay to the lessor a fixed amount regularly for the transfer of the right
to use

7. Who are the parties to the Hire-Purchase Contract?

A. Hire Vendor – Who owns the goods until hire purchaser pays all the payments
B. Hire Purchaser – The customer who gets the ownership by paying all the
installments
C. Financial Institution – The institution who pays initially to the hire vendor

8. State any two benefits involved in Hire-Purchase transactions

1. Convenience in Payment
2. Increased Volume Of Sales
3. Increased Profits
4. Encourages Savings
5. Helpful For Small Traders
6. Lesser Risk

9. What is meant by financial lease?

 Financial lease also known as a Capital Lease or a Sales Lease
 The leasing company buys the asset for the user and rents it to him for an
agreed period
 An agreement wherein the lessor receives lease payments for the covering of
ownership costs

10. Give the meaning of Hypothecation

  Hypothecation means offering an asset as collateral security to the lender.
 Hypothecation happen when an asset is pledged as collateral to secure a loan,
without giving up title, possession or ownership rights

11. State the meaning of a revolving credit

 It is an instalment credit
 It refers to the permission to borrow funds over and over again, up to an
approved maximum amount
 Example: Credit Card

12. What is Sale and Lease Back?

 "Sale-And-Leaseback", is a financial transaction in which one sells an asset and
leases it back for the long term
 Example: X owns a land. Under the leaseback transaction, X will sell the land to
Y and will get a lease on the same land from Y for a long term.

13. What is Operating Lease?

 It is a short-term lease or contract in which the lessee agrees to rent an asset
from the lessor and the lessor retains the rights of ownership.
 An operating lease is a lease that is less than one year in length and the lessor
always maintains ownership of the leased asset.
 Operating leases are also cancellable

14. What is Consumer Finance Insurance?

 It is an insurance for ability of the consumers’ credit repayment
 Consumer credit insurance (CCI) is insurance that covers if something happens
that affects consumer’s capacity to meet the payments on their loans
 ANSWERS
Section B – Questions (5 Marks)
Unit – 4
1. Distinguish between Hire Purchase and Installment sale

2. Write down the various sources of consumer finance

3. Bring out the disadvantages of factoring
1. Reduction Of Profit
 The factor deducts a certain discount from the value of accounts receivable as fees for
the services offered.

2. Reliability Of Customer’s Credit

 The factor assesses and evaluates credit wellness of the party who owes bills
receivables. This is a critical factor which is outside the control of the seller.

3. Exhausting Of Collateral Security

 Factoring exhaust bills receivables of an entity as the entity is no longer entitled to
receive payments from them.

4. Presence Of Contingent Liability

 The liability of the seller is not completely waived in case of with recourse factoring. If a
party fails to pay its debts to the factor, the factor is legally entitled to recover it from
the seller.

5. Higher Finance Charges

 Factors usually deduct 2% to 4% of the total amount involved as their fees for the
duration of 45-60 days. Computing it annually, the cost of finance turns out to be
around 18% to 24% p.a. which is very higher than other sources of finance.

6. Loss Of Personal Touch

 The buyer may not be willing to deal with a factor because of their professional nature
and stringent methods.
4. What are the basic advantages of leasing company?
5. List out the legal aspects involved in leasing
Section 148 of Indian Contracts Act has explained the legal aspects involved in leasing in the
following heading:
 Relationship of Bailor and Bailee
 The delivery of goods by one person to another, for some purpose
 When the purpose is accomplished, be returned or otherwise disposed of according to
the directions of the person delivering them.
 The lesser has the duty to deliver the asset to the lessee,
 The lessee has the obligation to pay the lease rentals as specified in the lease agreement
o The person delivering the goods is called the ‘Bailor’ and
o The person to whom they are delivered is Bailee
Typical Contents of a Lease agreement
1. Description of equipment
2. Amount, time and place of rental payments
3. Lessee’s rights and responsibilities
4. Variation clauses
5. Option for renewals and cancellations
6. Arbitration clause

6. Write a note on tax benefits involved in Hire-Purchase transaction

7. Explain the Contents of Hire-purchase Agreement.

8. What are the different steps involved in factoring finance?

9. What are the rights of a hirer under the provisions of the Hire Purchase Act
1972?
1. The owner cannot terminate the hire-purchase agreement for default in payment of
hire
2. The right to recover the goods will not stay alive unless it is allowed by court
3. The hirer has the right of receiving from the owner for expenses
4. If the amount paid by the hirer till the date of repossession of the goods and the value
of the goods on the date of the repossession together exceeds the hire- purchase price,
the excess is payable to the hirer

10. Write a note on with Recourse factoring

 In this type of factoring, factor has no option to the client if the debt / account
receivables purchased become to be bad or irrecoverable.
 Factor cannot claim the amount from the client.
 As factor bear the risk of non-payment, commission charged for the services is higher
than recourse type of factoring.
 ANSWERS
Section C – Questions (10 Marks)
Unit – 4
1. Explain the role of factoring in India and mention the guideline laid down by
SEBI

Factoring In India
 The Factoring Regulation Act, 2011, enabled banks and non-banking financial companies
registered as factors to undertake the business of factoring.
 The enactment of the Factoring Regulation Act was the first step taken by the government
to regularize and facilitate the business of factoring in India.
 The RBI formed a committee headed by CS Kalyansundaram, a former managing director of
the State Bank of India (SBI) to examine the need for and the scope of factoring
organizations in India.
 The committee submitted its report in December 1988 and recommended introduction of
factoring services in India. The RBI advised banks to take up factoring activity through a
subsidiary.

Role of Factoring In India

1. It helps improve the current ratio. Improvement in the current ratio is an indication of
improved liquidity. Enables better working capital management. This will enable the unit to
offer better credit terms to its customers and increase orders.
2. It increases the turnover of stocks. The turnover of stock into cash is speeded up and this
results in larger turnover on the same investment.
3. It ensures prompt payment and reduction in debt.
4. It helps to reduce the risk. Present risk in bills financing like finance against accommodation
bills can be reduced to a minimum.
5. It helps avoid the collection department. The client need not undertake any responsibility
of collecting the dues from the buyers of the goods.

RBI Guidelines
 Banks are permitted to set up separate subsidiaries/invest in factoring companies
should not engage in financing of other companies or other factoring companies.
 The investment of a bank cannot exceed in the aggregate 10% of paid-up capital and
reserves of the bank.
 According to the RBI guidelines (2010), banks now with the prior approval of RBI can
form subsidiary companies for undertaking the factoring services and other incidental
activities.
2. Distinguish between factoring and bill of exchange
Basis Bill Discounting Factoring

Bill discounting means to trade Factoring means to sell its debt to

Meaning bill before it becomes due for the financial transaction to the
payment at par value. factoring company at a discount.

Bill discounting comes under

There is no such specific law for
Existence the Negotiable instrument act,
factoring.
1881.

In factoring, the financer gives a

In bill discounting, the bill is maximum amount as an advance
Settlement of finance discounted and paid when the when a transaction takes place the
transaction takes place. remaining amount at the time of
settlement.

In bill discounting there is a In factoring, there is a factoring

Parties involved
drawer, drawee, and a payee. company, debtor and a customer.

Financer gets fees in the form of

A financer charges fees in the
interest for the financial services
Fees form of discounting charges or
and commission for extra services
interest.
facilitate.
3. Distinguish between Hire-purchase and leasing.
4. Explain the various advantages of lease financing
 ANSWERS
Section A – Questions (2 Marks)
Unit – 5

Unit - V: Venture Capital

Origin and Growth of Venture Capital - Investment Nurturing Methods - Mutual
Funds - Portfolio Management Process in Mutual Funds - Credit Rating System -
Growth Factors - Credit Rating Process - Global and Domestic Credit Rating
agencies - Principles of Insurance - Life and Non - Life Insurance - IRDA - Powers
- Pension Fund - Objectives - Functions - Features - Types - Chilean Model -
Pension Investment Policy - Pension Financing.

1. State the meaning of pension fund

 Pension fund also known as a superannuation fund
 Pension fund is any plan, fund, or scheme which provides retirement income
  Pension plan or retirement plan are a type of investment plan, which helps to
build up a part of savings over a long-term period

2. Define venture capital / What is Venture Capital? / How is venture

capital defined?
 A form of private equity
 It is an investments received by start-up companies
 A type of funding for a new or growing business
 Funding to the high-growth potential start-ups in exchange for equity in the
company
 Finances high-risk projects

3. Expand the terms CRISIL and CARE / Expand CRISIL / What is ‘CARE’?
CARE - Credit Analysis and Research Ltd
 CARE Ratings is a full service rating company that offers a large range of rating
and rank services to many sectors.
 The company is recognized by SEBI, Government of India (GoI) and RBI

CRISIL - Credit Rating and Information Services of India Ltd

 CRISIL is a global analytical company providing ratings, research, and risk and
policy advisory services

ICRA - Investment Information And Credit Rating Agency

 ICRA Limited is an Indian independent and professional investment information
and credit rating agency. It was established in 1991

Brickwork Ratings India Pvt. Limited (Brickwork)

 It is a full service rating agency and assigns ratings to number of financial products
such as NCDs / Bonds, Bank Loans, Commercial Paper, Fixed Deposits, Security
Receipts, and other structured products as wells as SME

4. Define insurance
 Insurance is a means of protection from financial loss.
 It is a form of risk management primarily used to avoid the risk of a contingent,
uncertain loss.
 It is a “Little Price - For a Priceless Security.”
 ANSWERS
Section B – Questions (5 Marks)
Unit – 5

1. What are the objectives of IRDA?

IRDA - Insurance Regulatory and Development Authority: is an autonomous, legal body tasked
with regulating and promoting the insurance and re-insurance industries in India

1. To bring clearness and organized behaviour in financial markets dealing with insurance.
2. To ensure speedy settlement of real claims and to stop frauds and malpractices
3. To promote and ensure the growth of Insurance Industry
4. To promote the interest and rights of policy holders
5. To promote orderly growth of insurance industry in the country, including registration of
the insurance companies
6. To administer the provisions of the insurance act
7. To protect interests of policy holders and investors
8. To device control activities needed for smooth functioning of the insurance companies
including investment of funds and the solvency requirements to be maintained by
insurance companies
9. To lay down the accounting methodology to be adopted
10. To adjudicate on disputes

2. Discuss the importance of venture capital

1. Promotion of the Enterprise
 This is the foremost function of an entrepreneur.

2. Encouragement to Entrepreneurship
 Venture capital is an important tool or method to encourage entrepreneurship
 The venture capital encourages the innovators to establish the industries

3. Performance of Economic Activities

 Economic activities are efficiently performed through venture capital.

4. Management and Organization

 Management and Organization of the industry should be efficient for the performance
of various economic activities.

5. Fulfillment of Financial Requirements of High-Risk Entrepreneurs

 Use of automatic machines, computers, the latest machinery, robots, new sources of
energy, email, rocket research, etc

6. Representation of Funds Incorporated in New Enterprise

 Venture capital represents the funds in the new enterprise.
  Sometimes, debt funds are also made available for it.

7. Assistance in Strategy Formulation

 Venture capital has to sustain in all types of competition, which enables the
entrepreneur to prepare strategies right from the establishment of the industry to its
development expansion

8. Possibility of Rapid Development Expansion

 Venture capital includes all types of high risk and high probable investments. As a result,
the possibility of rapid development expansion of the company increases.

9. Other Roles and Importance

 Investment of venture capital for the purchase of modern machinery establishment of
laboratories, the appointment of scientists and training for new functions and activities,
etc.

3. List out the various functions of IRDA

1. Issuing, renewing, modifying, withdrawing, suspending or cancelling registrations
2. Protecting policyholder interests
3. Specifying qualifications, the code of conduct and training for intermediaries and agents
4. Specifying the code of conduct for surveyors and loss assessors
5. Promoting efficiency in the conduct of insurance businesses
6. Promoting and regulating professional organizations connected with the insurance and re-
insurance industry
7. Levying fees and other charges
8. Inspecting and investigating insurers, intermediaries and other relevant organizations
9. Specifying how books should be kept
10. Regulating company investment of funds
11. Regulating a margin of solvency
12. Adjudicating disputes between insurers and intermediaries or insurance intermediaries
13. Supervising the Tariff Advisory Committee

4. What are the different types of venture capital?

 1. Seed money: Low level financing for proving and fructifying a new idea
2. Start-up: New firms needing funds for expenses related with market in grand product
development
3. First-Round: Manufacturing and early sales funding
4. Second-Round: Operational capital given for early stage companies which are selling
products, but not returning a profit
5. Third-Round: Also known as Mezzanine financing, this is the money for expanding a
newly beneficial company
6. Fourth-Round: Also called bridge financing, 4th round is proposed for financing the
"going public" process

5. How are the Open-ended schemes of mutual funds different from the close-
ended schemes of mutual funds?

6. What are the characteristics features of venture capital?

 A. High Degrees of Risk: Venture capital represents financial investment in a highly risk
project with the objective of earning a high rate of return.
B. Equity Participation: Venture capital financing is, always, actual or potential equity
participation
C. Long Term Investment: Venture capital financing is a long term investment. It generally
takes a long period to en-cash the investment in securities
D. Participation in Management: In addition to providing capital, venture capital funds
take an active interest in the management of the assisted firms.
E. Venture capital financing contains risks. But the risk is compensated with a higher
return.
F. Venture capital involves financing mainly small and medium size firms, which are in
their early stages
G. Venture capital aim at capital gain due to the success achieved by the concern that
borrows

7. Explain the advantages of Mutual Funds

1. Simple to Invest: Investment in mutual fund is simple as compared to other

available investments in the market. The minimum investment required is pretty less.
2. Professionally Managed: Mutual funds are managed by skilled and professionally
experienced managers with a backup of a research team.
3. Offers Diversification: Mutual fund offers diversification in a portfolio which reduces
the risk of fall in a value of investments.
4. Conveniently Administered: In mutual fund, there is no administrative risk of share
transfer, as many funds offer these services in their Demat trading accounts, which finally
save investor's time.
5. Gives Higher Returns: Investor usually gets higher returns in mutual fund as compared to
other avenues of investment.
6. Low Cost Management: As per the policy of the various statutory authorities, the
organizations operating the mutual fund can only shift certain prescribed percentage of cost
on the investors.
7. Offers Liquidity: A mutual fund can be easily liquidated at the request of an investor. Just
like an individual stock, it also allows investors to liquidate their holdings as and when they
feel it necessary.
8. Provides Transparency: Statutory authorities have compelled all the mutual fund
companies to disclose their Net Assets Value (NAV).
9. Highly Regulated: Mutual funds all over the world are highly regulated. The fund manager
has to submit all necessary documents to the statutory authorities for their approval, to
make investment in the required securities.
10. Allows Switching to Other Schemes: Mutual fund gives an option to an investor, to switch
to other schemes whenever they like, without any charges.

8. What are the main objectives of UTI?

 To promote and pull the small savings
Primary
Objectives of UTI
To give them an opportunity to share
the benefits

Objectives of UTI To encourage the savings of people

To mobilize savings from the small

savers
Other Objectives
of UTI
To channelize savings to industrial
growth

To allow investors to participate

9. Explain the types of credit facility available to consumers

A. Short term: It is used for working capital requirements of the organization including paying
off creditors and bills
B. Long term: It is used for to meet the capital expenditure requirements of the enterprise,
generally financed through banks, private placements, and banks.

A. Short term Credit Facilities

 Cash credit and overdraft: In this type of credit facility, a company can withdraw funds
more than it has in its deposits.
 Short-term loans: A corporation may also borrow short-term loans for its working
capital needs, the tenor of which may be limited to up to a year.
 Trade finance: This type of credit facility is essential for an efficient cash conversion
cycle of a company, and can be of the following types:

B. Long term Credit Facilities

 Bank Loans: The most common type of long-term credit facility is a term loan, which is
defined by a specific amount, tenor (that may vary from 1-10 years) and a specified
repayment schedule.
 Notes: These types of credit facilities are raised from private placement or capital
markets and are typically unsecured in nature.
 Mezzanine Debt: Mezzanine debt is a mix between debt and equity and rank last in the
payment default waterfall. This debt is completely unsecured, senior only to the
common shares, and junior to the other debt in the capital structure.
 Securitization: This type of credit facility is very similar to the factoring of receivables
mentioned earlier. The only difference is the liquidity of assets and the institutions
involved.
 Bridge Loan: Another type of credit facility is a bridge facility, which is usually utilized
for M&A or working capital purposes. A bridge loan is typically short-term in nature (for
up to 6 months), and are borrowed for an interim usage, while the company awaits
long-term financing.
10. Discuss any five features of mutual funds
1. Mobilizing Small Savings: mutual funds mobilize funds by selling their own shares known as
units. This gives the benefit of convenience and satisfaction of owning shares in many
industries.
2. Investment Avenue: the basic characteristic of a mutual fund is that it provides an ideal
avenue for investment for investors and enables them to earn a reasonable return with
better liquidity. It offers investors a proportionate claim on the portfolio of assets that
fluctuate in value.
3. Professional Management: mutual fund provides investors with the benefit of professional
and expert management of their funds.
4. Diversified Investment: mutual fund has the advantage of diversified investment of funds in
various industries and sectors.
5. Better Liquidity: mutual fund have the distinct advantage of better liquidity of investment.
There is always a market available for mutual funds
6. Reduced Risks: the risk on mutual fund is minimum. This is because of expert management
diversification , liquidity and economies of scale in transaction cost
7. Investment Protection: mutual funds are regulated by guidelines and legislative provisions
put in place by regulatory agencies such as SEBI in order protect the investor interest the
mutual funds are obligated to follow the provisions laid down by the regulators
8. Switching Facility: mutual funds provide investors with the flexibility to switch from one
scheme to another
9. Tax Benefits: mutual funds offer tax shelter to the investors by investing in various tax
saving schemes under the provisions provided by the income tax act
10. Low Transaction Cost: the cost of purchase and sale of MF’s is relatively lower
11. Economic Development: MF’s contribute to economic development by mobilizing savings
and channelizing them to more productive sectors of the economy.
12. Convenience: MF units can be traded easily with little or no transaction cost
 ANSWERS
Section C – Questions (10 Marks)
Unit – 5
1. What is meant by mutual fund? Explain its types / Explain the classification of
mutual funds
What are Mutual Funds?
 Mutual Funds is a type of financial vehicle which Pool the money
 MF is a financial instrument that allows people to pool their money to build a huge
amount, and then this money is invested by group of people (refereed as FUND
MANAGERS)

1. Open-ended Mutual Fund

2. Close Ended Mutual Funds

3. Growth-oriented Mutual Funds

Types Of
4. Income -Oriented Mutual Funds
Mutual Funds

5. Specialized Mutual Fund

6. Domestic Mutual Fund

7. Off Shore Mutual Fund

1. Open-Ended Mutual Fund

 Open ended type of mutual funds sells units to public.
 These mutual funds can also repurchase the units.
 There is no fixed maturity period for the open ended type mutual funds.
 When the Initial public offer period is over, it is opened again for another period of 30
days as an open-ended scheme from the date of closure of the IPO.
2. Close Ended Mutual Funds
 A close ended mutual fund is open for a fixed period and whatever money invested
forms the basis for investment in various securities.
 Close ended types have fixed maturity period anywhere from 2 to 15 years.
 One can invest in the scheme at the time of initial issue as it is open for a maximum
period of 45 days.
 Thereafter, these schemes cannot issue new units.

3. Growth-oriented mutual funds

 It has the object of capital appreciation through investment in equity shares. Normally,
investment is done in equity shares of such companies which have high growth
potential.
 Examples: Software companies, petrol chemical companies and MNCs will come under
this category.

4. Income -oriented mutual funds

 The main object of this type of fund is to provide regular income to the investor. So, the
mutual fund would wish to invest the public money raised in bonds, debentures and
other debt related instruments.
 In some cases, they may even invest in equity shares of companies with high dividend
pay outs.

5. Specialized mutual fund

 Here, the mutual fund will be investing the money of the investors in a particular
industry such as steel, or petroleum so that such industries will grow rapidly.

6. Domestic mutual fund

 When the mutual fund mobilizes savings from a particular geographic location like a
country or region, it is known as domestic mutual fund. Example: UTI Mutual fund, LIC
Mutual Fund and SBI Mutual Fund, etc.

7. Off shore mutual fund

 The objective of launching off-shore mutual fund is to attract foreign capital for
investment in the country of the issuing company.
 Due to these mutual funds, there is cross border fund flow. Off-shore mutual funds
open up the capital market to the foreign investors and to global portfolio investments.
2. How life insurance in India is regulated by IRDA?
IRDA Act
 In order to control private sector insurance companies, the Government of India passed
the IRDA Act (Insurance Regulatory and Development Authority Act, 1999) which
permits it to regulate the private sector companies in insurance business.
 Now, the IRDA controls the entire insurance business in India.

Duties of IRDA
1. Regulates insurance companies
2. Promotes insurance companies
3. Ensures growth of insurance and reinsurance companies

How life insurance in India is regulated by IRDA

1. Issuing certificate of registration.
2. Protecting the interest of policy holders.
3. Issuing license to agents.
4. Specifying code of conduct for surveyors and loss assessors.
5. Promoting efficiency in the insurance business.
6. Undertaking inspection, conducting enquiries etc., on insurance companies.
7. Control and regulations of rates, terms and conditions by insurance company to policy
holders.
8. Adjudication of disputes between insurance company and others in the insurance business.
9. Fixing the percentage of insurance business to rural and social sectors.
3. Describe the different functions of mutual fund / Explain the benefits of
mutual funds

Mutual funds
 A mutual fund is an investment option that pools money from several investors, and
invests it in several sectors and asset classes such as stocks, bonds, treasury bills, etc

1. A mutual fund promotes savings among the lower and middle income groups.
2. Mutual fund provides attractive return on investment.
3. Mutual fund minimizes the risk on investment by diversifying the investment.
4. Different types of investment opportunities are given for different categories of investors,
such as income, growth, reinvestment, etc.
5. Benefits of corporate sector are made available to common man.
6. As mutual funds are managed by experts, their services are made available at a nominal
cost to the investors from lower and middle income group.
7. There is no risk on investment as mutual funds offer assured returns.
8. A stricter control on the activities of the mutual funds has made them very transparent
9. They have contributed to the improvement of the capital market with their bulk
investment.
10. Reploughing of capital into investment is made possible by the mutual funds by issuing
bonus shares to their unit holders against dividends due to them.
11. Foreign investment by foreign financial institutions in mutual funds has been made
possible
12. Tax concessions have enabled more investment in Infrastructure development bonds by
which the economy is able to attract funds for infrastructure growth.
13. Old age pensioners, war widows and children are benefited by different schemes of
mutual funds.
14. Future growth or expectations about the market are predicted more precisely by mutual
funds and they help capital market in corrective measures.
15. Liquidity for the investors: Those who invest in mutual funds, can encash their units or the
mutual fund certificate at any time by selling them to the organization itself, if they
are open-ended fund or by selling them in the market, if they are close-ended fund.
16. Convenience and flexibility: The investors in the mutual fund can transfer their investment
from one scheme to the other on the basis of updated market information.
4. State the different types of credit rating based on different securities.
What is credit rating?
 Credit rating is a mechanism by which the reliability and viability of a credit instrument
is brought out.
 Credit rating reveals the soundness of any credit instruments issued by various business
concerns for the purpose of financing their business.

Rating Symbols of CRISIL (The Credit Rating Information Services of India Ltd)

Debt Rating
Debt Category Symbols
Remarks
Instrument
AAA Highest Safety
*AA High Safety
*A Adequate Safety
Long Term Debentures, *BBB Moderate Safety
Instruments Bonds *BB Inadequate Safety
*B Risk Prone
*C Substantial Risk
D Default
FAAA Highest Safety
Medium Term *FAA High Safety
Fixed Deposits
Instrument *FA Adequate Safety
*FB Inadequate Safety
*FC Risk Prone
FD Default
Short Term Commercial *P1 High Safety
Instrument Paper *P2 Highest Safety
*P3 Adequate Safety
*P4 Risk Prone
P5 Default