Merchant Banking and Financial Services (Book ID: B1318) Question No-1 Define merchant banking and explain

its functions.

Answer - Merchant Banking is like as financial services which are provided by financial Institute that helps in the growth of corporate sector. Its helps us for hire purchase or installment buying. Merchant Banks act as an intermediary between issuer and purchase of securities. Merchant banking manage the new issue of companies. The give services and for capital structure of a company Function of merchant banking Loan Syndication- A merchant banks helps the clients to get loan for their projects They helps in conducting appraisal and designing capital structure. Portfolio management- A merchant bankers helps the clients in making the right choice of investment to get best return. Project Funding A merchant bankers who undertakes a projects scheme also assists in arranging a complete package for the projects funding. The merchant bankers work closely with the client and technical consultant and submit a complete financial report to the client Working Capital- Merchant bankers assist in arranging finance for working capital particularly for new ventures. For existing firms the merchant bankers arrange the funds from non traditional sources such as through issue of debentures and so on. Managerial and Technical services Merchant bankers provide services to deal with problems in technical financial and managerial fields Corporate Analysis A merchant bankers guides the clients on organisational goals, choice of product and market survey, forecasting a product, cost analysis, investment decisions, pricing method, capital management and expenditure control, market strategy and so on corporate counseling is a facility provided by merchant bankers to corporate enterprises free of charge. This is improve the performance of the enterprise. Merchant bankers also provide services such as building a good image among the investors which help in increasing the market value of investors equity shares. The following are the areas in which the corporate counseling is provided Area of diversification considering the Governments licensing and economic policies. Market analysis for growth present and future demand, and profitability of each product by corporate enterprise.

Functions as financial intermediaries-Merchant banking is a financial intermediary which helps to transfer capital from one who owns it to those who require it. Question No-2 Explain the taxation aspects of hire- purchase transaction.? Answer Taxation aspects of hire purchase are devided into three parts. Les us how learn about income tax, sales tax and interest tax. Income Tax- Hire purchase offers tax benefits to both hire purchase vendor ( finance company) and the hire (user) Tax planning in hire purchase- The hire purchase transaction is used as a tax planning device in the following ways ::- The net income is inflated at the end of the transaction and can tax liability. This is done by distributing the finance charge agreement period. The hirer can postpone his tax liability by finance charges based on the rate of return method. : - Tax planning can use hire purchase as an intermediary between and the lessee by introducing an intermediate financier. affect the over the allocating the lesser

Sales Tax - The important features of sales tax relating to hire purchase transactions are as follows::- Hire purchase as sales- Hire purchase is considered as a deemed sales and tax are levied after the delivery of the equipment between the vendor and the hirer. :- Taxable quantum- The quantum of sales tax is related to the sales price in hire purchase contract which is the total amount to be paid before the transfer of goods. :- States permitted to impose tax- The state that is entitled to impose sales tax is when a hire purchase transaction is entered in the state where the goods are lying. If the contract of hire purchase is entered into one state and the goods are in another state, then the entitlement to tax is in the state which the goods are delivered by the vendor to the hirer. Sales tax is not levied on hire purchase if the state in which the goods are delivered has a single point levy system. Sales tax is levied on hire purchase transaction that are controlled by finance company only when they are the dealers in the type of goods given on hire.

Rate of tax - The rate of tax of sales tax on hire purchase varies from state to state The rate in force on the date of delivery of goods to the hire is applicable.

Interest Tax- Under the interest Tax Act. 1974 ( IT Act) the hire purchase finance companies must pay interest tax on the total amount of interest earned less bad debts in the previous year at two per cent. This is a deductible expense under the IT Act.

Question No-3 Explain the concepts of factoring. What are the characteristics of factoring ? Answer- The word factoring is derived form the Latin term Facere which means to make or to do. Concepts of factoring- Factoring is the financial services which involves conversion of credit sales into cash, collection of debts at a certain interest rate. Factoring is an arrangement between a financial institution (the factor ) usually a bank and a business concern selling goods to the customer. In factoring, the factors buys the accounts receivable of a client and then pays up to 80 percent of the amount immediately on agreement. The rest of amount is paid to the client when the customer pays the debt. Domestic factoring is not a well- defined concepts till now and therefore is left to the legal framework, trade usage and convention of the individual country. Factoring is broadly defined as a financial services in which receivable are acquired by the factor and credit sales are converted to cash sales. As a result of this the factor becomes the bearer of the receivable. Thus the factor is responsible for all credit control, sales accounting and debt collection from the buyer. In the case of factoring without recourse, the factor has to bear the losses if the debtor fails to pay the dues on time. Characteristics of factoring- The importance of factoring is well recognised in the industry. The following are the characteristics of factoring :- Invoices represent book debts assigned in favour of a factor. :- It requires customer consent to make a repayment directly to the factor not to the client or buyer.

:- Factoring follows dual pricing structure consisting discount charges and service charges :- Money is collected from the seller or customer and after deducting customers own charges the remaining amount of the value of invoice is paid to the client. :- The period of factoring normally lies between 90 to 150 days. In some cases, the factoring company extends the period up to 150 days. :- It is a method of off-balances sheet financing. :- Bad debts are not considered for factoring. Question No-4 Explain the different life insurance products. Answer- Life insurance is a business of effecting contracts of insurance upon human life. It is a contract between the policy owner and insurer. Different life insurance products- Life insurance is a policy that people purchase from a life insurance company. This can be way of protecting the family and its financial stability after ones death. The different type of life insurance products is as below Term Insurance A term insurance is a temporary insurance. Term insurance provides life insurance protection for a specific period only. If the policy holder dies during the selected period, the benefits are payable to the estate or named beneficiary as mentioned in the policy. In case the policy holder survives till the end of the selected term, the policy expires without providing any benefits to the policy holder. Whole life insurance- The whole life insurance policy are intended to provided life insurance protection over ones lifetime. The benefits are only payable to the policy holder after his death. The different whole life policies are as follows::- Ordinary Whole life insurance :- Limited payment whole life insurance. :- Convertible whole life insurance. Endowment insurance Endowment policy gives assurance that the benefits under the policy will be given to the beneficiaries on the death of

the policy holder within the selected term or on its maturity date. The Endowment insurance is paid out whether or not the policy holder lives after certain period. Annuities - An annuity is a series of period payment. This is an insurance policy under which the insurer agrees to pay the policy holder a series of regular periodical payments for fixed period of time of during someones life time. Annuities can be classified on the basis of the following aspects. :- The number of lives covered. :- The beginning of the payment of annuity

Question-No5 scenario ?

Give an overview of Indian venture capital

Answer- An investment firm is a financial institution that provides money for the developing companies. The developing companies utilize this money for advertising. Building, infrastructure, producing quality output and so on. These investment firms are known as venture capital firm and the finance they provide is called venture capital. Indian Venture Capital Scenario- In India the concept of venture capital was initiated by the industrial Finance Corporation of India (IFCI) When it established the Risk Capital Foundation (RCF ) to provide seed capital to small and risky projects. However, the concepts of venture capital financing first time got statutory recognition in the fiscal budget for the year 1986 to 187 The venture capital companies operating at present in India can be divided into four categories based on their mode of promotion. Promoted by All India Development Financial Institution (IDFCI)- The ICICI provided the required impetus to venture capital activities in India in 1986 it started providing venture capital finance. In 1998, it promoted with the Unit Trust of India (UTI) and Technology Development and Information Company of India (TDICI) as the first venture capital company registered under the companies Act, 1956.

Promoted by state level finance institution In India, the state level finance institute in some states like Gujarat, UttarPradesh has done an excellent job by providing venture capital finance to small scale enterprises. Private Venture Capital Funds- In India, several venture capital funds have been established to provide funding to various small scale enterprises. Examples of these funds established in India are 20the Century venture capital corporation and funds venture capital fund The SEBI appointed the committed to find out the problem in the growth of venture capital industry in the country and also to suggest suitable measures for its fast growth. The recommendation of the SEBI relate to the following. -: Harmonisation of multiplicity of regulation. -: Venture capital funds (VCF) structures. -: Resources raising. -: Investment related issues. -: Exit related issues -: SEBI regulations. -: Company law related issues -: Other related issues

Question No.6mutual fund.?

What is mutual fund ? Illustrate the flow of funds in

Answer- A mutual fund is an open- ended fund administered by an investment company which emphasis in raising money form shareholders and investing in a group of assets which in agreement with a stated set of objectives. Mutual funds raise money by selling share to the public. Mutual funds then use the money to purchase various investment vehicles, such as stocks bonds and money market instrument. The mutual funds are governed by an investment company with the financial aim of generating high rate of return. These asset management or investment management companies invest in different stock, bonds and other money market instruments in a diversified manner with the money collected from investors. Only some mutual funds which carry certain maturity term cannot be sold at any time. However the return of funds is being very good. Mutual funds are classified on the basis of structure and investment objective. Mutual Funds

Structure Based Based

Investment

Objective

Operation of Mutual Funds- The operation of mutual funds are as below -: -: -: -: Investors money invests their mutual funds Fund manager invests the money in securities Securities generate return s and then returns given to the investor

The operation of mutual funds depend on its asset class and the nature of the fund

Treasury Management (Book Id-B1311) Q.1 Analyse the significance and objective of asset and liability management. Answer. Significance-: Volatility The globalization scenario has led to increase in number of economies. This has paved way for market driven economies due to the changing dynamics of the financial markets. These changes are reflected in interest rate structures, money supply, and credit position of the market, exchange rate and price levels. Hence the organization experiences low market value, net interest income ect.

Product innovation The innovation in financial has growth rapidly. Some of the innovations are repacked with existing products with slight modification. These have major impact on risk profile in the organization enhancing the need for ALM.

Management recognition The top management in the organization realized that asset liability is neither a franchise for credit disbursement nor its place for retail deposit base. it must be considered to relate and link the asset with liability. Hance the need for efficient asset liability management came into existence.

Regulatory environment The integration of domestic and international market has enabled the regulatory bodies of financial markets to initiate number of measures. These measures prevent major losses that occur due to market impulses. Objectives-: The objective of ALM is to achieve perfect match in assets and liability. The match is related to the changes in the present value of assets and liabilities. The importance of AML has led to the changes in the functional environment. The ALM objectives are divided into micro and macro levels. The macro level objective deal with formulation of critical business policies, efficient allocation of capital and designing of products with suitable pricing strategies. At macro level, the ALM aims at obtaining profit through price matching while ensuring liquidity by maturity matching. The process of price matching ensures deployment of liabilities which are greater than costs.

Q.2 What are the features of capital market? Answer-: A capital market is an organization where securities like debt and equity are traded to rise long-term fund in the economy. The capital market is fragmented into stock market which trade equity securities and the bond market which trade debt security. Various financial instruments like equity insurance, derivative instruments and so on are traded in capital market to enhance liquidity. A financial market is an organization which permits the employees to trade financial security like stock, bond, and commodities and so on to raise its net capital in economy. A financial market includes parties like brokers, dealers, investment bankers and financial mediators. The regulation of an organization is essential for its perfect functioning. In Indian capital market the protection of investors activity. FEATURES-: Capital market deal with primary securities like equities, bond so on. Trading in capital market occurs without intervention of financial intermediary. The information structure is complex. The security prices are volatile in nature. Raising long turn capital. Proper channelization of funds. Promotion of industrial growth.

Capital market provides long turn debt and equity finance for the government and the corporate sector. Capital market can be classified into primary and secondary market. Primary Market-: Primary market or new issue market is a type of equity market which is involved in issuing new securities which are traded over a longer period for time. May shall and medium scale companies enter primary market to expend their business by raising money from public. Secondary Market-: Secondary market or after market is the market where an investor buys a security directly from another investor instead of the issuer. The securities are issued initially in primary and them they enter in to secondary market. Secondary market help in reducing the investment risk and maintaining liquidity in financial system. It assist in minimizing the markets impact on government debt operations and coordination the authorities monetary police and debt management. Q.3 Describe the approaches of CAC.

Answer-: capital account convertibility (CAC) refers to relaxing control on capital account transaction. It means freedom of currency conversion in term of inflow and outflows with respect to capital account transaction. The perception of CAC has undergone some changes following the events of emerging market economic in asia and latin America which went through currency and banking crises in 1990s. A few counties backtracked and reimposed capital control as part of crises resolution.Crisis such as economic, social, human cost and even extensive presence of capital control creates distortions, making CAC either ineffective or unsustainable. The cost and benefit from capital account liberalization is still being debated among academics and police makers. These development have led to consideration caution being exercised by EMEs in opening up capital account. The committee on capital account convertibility which submitted its report in 1997 highlighted the benefits of a more open capital account but at the same time cautioned that CAC could pose tremendous pressures on the financial system. India has cautiously opened its capital account and state of capital control in india is considered as the most liberalized it had been since late 1950s.The different ways of implementing CAC are as follows: Open the capital account for residents and non-residents. Initially open the inflow account and later liberalise the outflow account. Approach to simultaneously liberalise of inflow and outflow account.

Liberalisation of current account transactions: Current account convertibility enhances the increase of capital inflow in the country. The confidence of a country will be enhanced when the country will manage its affairs without exchange restrictions which enhance the international confidence in the country policies. Relaxing the exchange restriction has inproved the balance of payment (BOP) in the country.

RBI has introduced more relaxation in current account transaction. The authorised dealers have been permitted to provide exchanges facilities to their customers up the specified limit without period approval of the RBI. Authorised dealers of category bank permit withdrawal of foreign exchange payment below USD 2million by the individuals and approval of ministry of commerce and industry. As per the rule 4 of FEMA it is mandatory to get approval of ministry of commerce and industries for drawing foreign exchange remittances when the payment exceeds 5% on local sales and 8% increase on exports.

Currency accounts with banks outside india. The liberalized remittance scheme is not applicable for the following. Any purpose under schedule I and any item under schedule II are prohibited for remittance under foreign exchange management rules 2000. The resident individual cannot remit directly to Nepal, Bhutan and Pakistan.

Q.4

Explain the IRR hedging techniques.