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DRIVE WINTER 2015

PROGRAM MBA(SEM 4)
SUBJECT CODE & NAME
MA0046
MERCHANT BANKERS

Q1 How does a merchant banker get registered with SEBI ? What are the eligibility
criteria ?

ANSWER:- General Category:-Any person holding any of the following Certificates:

(a) NISM Series IX: Merchant Banking Certification Examination (after August 02,
2013)

(b) NISM Series IX: Merchant Banking Continuing Professional Education and the
validity of which has not expired, may attend NISM Series IX: Merchant Banking CPE
Program, on uploading the Required Documents (as mentioned in (B)).

Principal Category

Any person who is actively engaged in the management of an Intermediarys securities

business including supervision, solicitation, conduct of business, and is a

1. Proprietor / Sole Proprietor

2. Partner / Managing Partner

3. Chairman

4. Director / Executive Director

5. Whole Time Director / Director

6. Chief Executive Officer

may attend NISM Series IX: Merchant Banking CPE Program under the Principal
Category, on uploading the Required Documents(as mentioned in (B).

Grandfather by Age Category

Any associated person, other than Principal, who has completed the age of 50 years as on
August 02, 2013, may attend NISM Series IX: Merchant Banking CPE Program under
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the Grandfather by Age Category, on uploading the Required Documents (as mentioned
in (B)).

Note: A person holding any of the Certificates, mentioned earlier, belongs to the
General Category irrespective of his/her age.

Grandfather by Experience Category

Associated persons designated as Key Management Personnel, who,-

(a) perform SEBI regulated activities such as initial public offer, further public offer,
Open Offer, Buy-back, Delisting;

(b) deal with the issuers in connection with activities mentioned in (a) above;

(c) deal with intermediaries associated with activities mentioned in (a) above;

(d) act as designated Compliance Officer dealing with the activities mentioned in (a)
above;

(e) submit Due Diligence Certificates to SEBI in connection with the activities mentioned
in (a) above;

and as mentioned in the SEBI Notification No. LAD-NRO/GN/2013-14/15/6319 dated

August 2, 2013 for 10 years or more, as on August 02. 2013, may attend NISM Series IX:
Merchant Banking CPE Program under the Grandfather by Experience Category, on
uploading the Required Documents (as mentioned in (B).

Q2 How does an Indian Company raise funds from the foreign markets
?Differentiate between ADRs and GDRs.

ANSWER:- Sources of raising funds in international markets

1. SOURCES OF RAISING FUNDS IN INTERNATIONAL MARKETS By: MEGHA

KUSHWAHA

2. SOURCES EURO ISSUE DEPOSITORY RECEIPTS AMERICAN DEPOSITORY

RECEIPTS GLOBAL DEPOSITORY RECEIPTS FOREIGN CURRENCY
CONVERTIBLE BONDS

3. DEPOSITORY RECEIPT It is a negotiable financial instrument issued by a bank to

represent a foreign company's publicly traded securities. Through it, companies in India
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tap the global equity market to raise foreign currency funds by way of equity When the
depository bank is in the U.S., the instruments are known as American Depository
Receipts (ADRs). European banks issue European depository receipts(EDRs), and other
banks issue global depository receipts (GDRs).

4.AMERICAN DEPOSITORY RECEIPT (ADR) It is a negotiable security representing

securities of a non- US company trading in the US financial markets It is denominated
in US dollars and may be traded like regular shares of stock Securities of a foreign
company that are represented by an ADR are called American depository Shares(ADSs)

5.GLOBAL DEPOSITORY RECEIPT (GDR) It is issued by one countrys bank as

negotiable certificate and is traded on the stock exchange of another country against a
certain number of shares held in its custody It is denominated in some freely convertible
currency.

6.INDIAN DEPOSITORY RECEIPT (IDR) It is issued and traded in a similar manner

as that ADR and GDR A foreign company lists its shares in Indian domestic market in
INR terms while the underlying shares are listed and traded in any foreign exchange Till
date only Standard Chartered Bank has issued IDRs. 10 IDRs represent one share of
Standard Chartered PLCs share listed in London Stock Exchange.

Differentiate between ADRs and GDRs

Global depository receipt (GDR) is compulsory for foreign company to access in
any other countrys share market for dealing in stock. But American depository
receipt (ADR) is compulsory for non us companies to trade in stock market of
usa .
ADRs can get from level -1 to level III. GDRs are already equal to high
preference receipt of level II and level III.
Indian companies prefer to get GDR due to its global use for getting foreign
investment for own business projects.
ADRs up to level I need to accept only general condition of SEC of USA but
GDRs can only be issued under rule 144 A after accepting strict rules of SEC of
USA .
GDR is negotiable instrument all over the world but ADR is only negotiable in
USA .
Many Indian Companies listed foreign stock market through foreign banks GDR.
Names of these Indian Companies are following :- (A) Bajaj Auto (B) Hindalco
(C) ITC
( D) L&T (E) Ranbaxy Laboratories (F) SBI Some of Indian Companies are listed
in USA stock exchange only through ADRs :- (A) Patni Computers (B) Tata
Motors
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Even both GDR and ADR is the proxy way to sell shares in foreign market by
India companies ADRs is not substitute of GDRs but GDRs can use on the place
of ADRs .
Investors of UK can buy GDRs from London stock exchange and luxemberg stock
exchange and invest in Indian companies without any extra responsibilities .
Investors of USA can buy ADRs from New york stock exchange (NYSE) or
NASDAQ
American investors typically use regular equity trading accounts for buying ADRs
but not for GDRs .

Q3:-Illustrate some of the fund based financial services

ANSWER:- Fund based financial services are explain below:-

1.WORKING CAPITAL FINANCING:

A firm's working capital is the money available to meet current obligations (those due in
less than a year) and to acquire earning assets. Chinatrust Commercial Bank offers
corporations Working Capital Finance to meet their operating expenses, purchasing
inventory, receivables financing, either by direct funding or by issuing letter of credit.
Key Benefits

Funded facilities, i.e. the bank provides funding and assistance to actually
purchase business assets or to meet business expenses.
Non-Funded facilities, i.e. the bank can issue letters of credit or can give a
guarantee on behalf of the customer to the suppliers, Government Departments for
the procurement of goods and services on credit.
Available in both Indian as well as Foreign currency.

2. SHORT TERM FINANCING

The bank can structure low cost credit programmes and cash flow financing to meet your
specific short-term cash requirements. The loans are structured to enhance your
profitability by scheduling the repayment to match the cash flow available to repay the
debt.

3.BILL DISCOUNTING
Bill discounting is a short tenure financing instrument for companies willing to discount
their purchase / sales bills to get funds for the short run and as for the investors in them.
These are customized to suit your requirement for short-term finance, from the date of
sale to the date of receipt of payment there on.
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We consider two types of bills facility viz. where documents are delivered on payment,
i.e. D/P Bills and where the documents are delivered against acceptance i.e. D/A Bills.

4.EXPORT CREDIT
We offer short-term working capital finance both at the pre-shipment and post-shipment
stages
Pre-shipment finance facility provides liquidity for procuring raw materials, processing,
packing, transporting, meant for export.
Post-shipment finance is a credit facility extended from the date of shipment of goods till
the realization of the export proceeds. The different types of post-shipment advances
include:

Export bills purchased/discounted

Export bills negotiated (against letter of credit)
Advances against bills sent on collection basis
Advances against exports on consignment basis

5.STRUCTURED FINANCE
Structured Finance describes any "non-standard" way of raising money. These tailor-
made securities go beyond "standard" securities like conventional loans, debentures, debt,
and equity. The reason to structure a more advanced security may be that conventional
securities may be unattractive, unavailable or too expensive. These products are
structured for both long and short tenor with exit options at intervals for both parties.

6.TERM LENDING
CTCB offers very competitive rates for term financing. We also provide advisory
services to companies for syndication of the term loans to a wide spectrum of financial
institutions.
Under Term Finance, Chinatrust Commercial Bank, offers the following:

Fund Based Finance for capital expenditure acquisition of fixed assets towards
starting or expanding a business to swap with high cost existing debt from other
bank / financial institution
Non-Fund Based Finance in the form of Deferred Payment Guarantee for
acquisition of fixed assets towards starting / expanding a business or industrial
unit.

Q4:-Explain the essentials of an Insurance Contract.

What is Bancassurance ?

ANSWER:- The contract of insurance is very useful to indemnify any loss. In this light,
contract of insurance is also called as contract of indemnity in which insurer indemnifies
the loss incurred due to the happening or non-happening of any event depending upon
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contingency. To make contract of insurance valid in the eye of law, some essential
elements must be considered in its process of validity. The essentials of insurance
contracts are as follows:

1. Agreement
Agreement means communication by the parties to one another of their intentions to
create legal relationship. For a valid contract of insurance, there must be an agreement
between the parties, i.e. one making offer or proposal and another accepting the proposal
or signifying his acceptance upon proposal.

2. Free consent
There must be free consent between the parties to contract. Consent means that parties to
an agreement must agree on a specific thing in the same sense or their understanding
should be the same. Consent must be given by the parties thereto in a contract, freely,
independently, without any fear and favor. The consent is known to be free when it is not
caused by, fraud, misrepresentation, mistakes and other undue influences .

3. Components to contract
The parties in an agreement must be legally competent to enter into the contract. It means
both parties in the insurance contract must be age of majority, posses sound mind and not
disqualified by any law of the country. It clears that a person who is minor, lunatics, idiot
and alike cannot enter into a insurance contract. The contract entered into by these will be
declared as void.

4. Lawful object
In insurance contract, the object of the contract must be lawful as in other types of
contracts. The agreement must not relate to a thing which is contrary to the provision of
any law or has expressly been forbidden by any law. It must not be of such nature that if
permitted, it implies injury to the person or property of other or immoral or opposed to
public policy.

5. Lawful consideration
There must be due and lawful consideration in the insurance contract. The consideration,
for which the contract is entered and created by the parties, must be lawful. To establish
legal relationship, to create obligation between them and to make it enforceable by law
there must be lawful consideration.

6. Compliance with legal formalities

To make an agreement valid, prescribed legal formalities of writing, registration, etc.
must have been observed. In the contract of insurance, the agreement between parties
must be in written form and dully signed by both parties, properly attested by witness and
registered otherwise, it may not be enforced by the court.
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Bancassurance:-The bank insurance model (BIM), also sometimes known as

bancassurance or allfinanz, is the partnership or relationship between a bank and an
insurance company, or a single integrated organisation, whereby the insurance company
uses the bank sales channel in order to sell insurance products, an arrangement in which a
bank and an insurance company form a partnership so that the insurance company can
sell its products to the bank's client base.

BIM allows the insurance company to maintain smaller direct sales teams as their
products are sold through the bank to bank customers by bank staff and employees as
well.Bank staff and tellers, rather than an insurance salesperson, become the point of sale
and point of contact for the customer. Bank staff are advised and supported by the
insurance company through product information, marketing campaigns and sales
training.The bank and the insurance company share the commission. Insurance policies
are processed and administered by the insurance company. Bancassurance, the sale of
insurance and pensions products through a bank, has proved to be an effective
distribution channel in a number of countries in Europe, Latin America, Asia and
Australia.BIM differs from classic or Traditional Insurance Model (TIM) in that TIM
insurance companies tend to have larger insurance sales teams and generally work with
brokers and third party agents.An additional approach, the hybrid insurance model
(HIM), is a mix between BIM and TIM. HIM insurance companies may have a sales
force, may use brokers and agents and may have a partnership with a bank.BIM is
extremely popular in European countries such as Spain, France and Austria.The use of
the term picked up as banks and insurance companies merged and banks sought to
provide insurance, especially in markets that have been liberalised recently. It is a
controversial idea, and many feel it gives banks too great a control over the financial
industry or creates too much competition with existing insurers.

Q5:-Explain the benefits and limitations of Leasing.

Answer:- Leasing is becoming a preferred solution to resolve fixed asset requirements

vs. purchasing the asset. While evaluating this investment, it is essential for the owner of
the capital to understand whether leasing would yield better returns on capital or not. Let
us have a look at leasing advantages and disadvantages:

Advantages of Leasing:

1. Balanced Cash Outflow: The biggest advantage of leasing is that cash outflow or
payments related to leasing are spread out over several years, hence saving the burden
of one-time significant cash payment. This helps a business to maintain steady cash-
flow profile.
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2. Quality Assets: While leasing an asset, the ownership of the asset still lies with the
lessor whereas the lessee just pays rental expense. Given this agreement, it becomes
plausible for a business to invest in good quality assets which might look unaffordable
or expensive otherwise.

3. Better Usage of Capital: Given that a company chooses leasing over investing in an
asset by purchasing, it releases capital for the business to fund its other capital needs
or to save money for better capital investment decision.

4. Tax Benefit: Leasing expense or lease payments are considered as operating

expenses, and hence, like interest, are tax deductible.

5. Off-Balance Sheet Debt: Although lease expenses get the same treatment as that of
interest expense, the lease itself is treated differently from debt. Leasing is classified
as an off-balance sheet debt and doesnt appear on companys balance sheet.

6. Low Capital Expenditure: Leasing is an ideal option for a newly set-up business
given that it means lower initial cost and lower capex requirements.

7. No Risk of Obsolescence: For businesses operating in sector, where there is high risk
of technology becoming obsolete, leasing yields great returns and saves the business
from the risk of investing in a technology that might soon become out-dated.

Limitations of Leasing:

1. Lease Expenses: Lease payments are treated as expenses rather than as equity
payments towards an asset.
2. Limited Financial Benefits: If paying lease payments towards a land, the business
cannot benefit from any appreciation in the value of the land. Long-term lease
agreement also remains a burden on the business as the agreement is locked and the
expenses for several years are fixed. In case when the use of asset does not serve the
requirement after some years, lease payments become a burden.
3. Reduced Return for Equity Holders: Given that lease expenses reduce the net
income without any appreciation in value, it means limited returns or reduced returns
for an equity shareholder. In such case, the objective of wealth maximization for
shareholders is not achieved.
4. Debt: Although lease doesnt appear on the balance sheet of a company, investors
still consider long-term lease as debt and adjust their valuation of a business to
include leases.
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5. Limited Access of Other Loans: Given that investors treat long-term leases as debt,
it might become difficult for a business to tap capital markets and raise further loans
or other forms of debt from the market.
6. Processing and Documentation: Overall, to enter into a lease agreement is a
complex process and requires thorough documentation and proper examination of
asset being leased.

Q6:-Illustrate the concept of effective portfolio management to minimise risk and

maximize returns.

Answer:- Portfolio management looks at the entire scope of where an organisation is

deploying its resources and asks whether this is the optimum mix of activity to deliver the
strategic goals. Where project management asks "are we doing the projects right?"
portfolio management asks "are we doing the right projects?" The risk of a single
investment cant be totally eliminated, corporations attempt to reduce the risk of a
portfolio by picking investments that are likely to change in value in different ways or at
different times. This process is called diversification. Diversification means taking
advantage of differences in risk among your investments. Investments tend to change in
value at different times and even in different directions.So if your portfolio consists of
several different investments and only one of them loses value, the portfolio loses a
smaller percentage of its value than does that single investment.

A well defined portfolio management programme is a system of people, processes and

tools that, properly implemented, results in clear financial and operational oversight of all
investment activities, a robust system of IT governance, a series of enabling processes
and training and collaborative tools to support this. Most importantly, it brings a culture
of continuous improvement into the organisation.

Generally speaking there is a 5-step process to follow:

Gather Data
This involves developing an inventory of the organisations current component
structure of projects and programmes, including which resources are deployed and
where. Data on all investments, including those in the early stages, is collected and
organised in preparation for analysis.

Develop Portfolio Infrastructure

This not only involves the development of portfolio management processes but
also the selection criteria required for inclusion into the portfolio, taking its lead
from the portfolios strategic objectives.

Evaluate Data
This involves applying the criteria to the current portfolio to examine which
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components comply and identify further/alternative components that may be

required. This will also include assessing the organisations capacity to deliveron
the investments in the portfolio.

Optimise
This involves the prioritisation and selection of the final mix of components in the
portfolio to represent the best spread of risk and investment. The resulting set of
components would then be categorised and ongoing performance metrics defined.

Mobilise & Review

The newly optimised portfolio is communicated to the organisation and initiated
through revised programme and project management plans. Through pre-defined
governance structures, status and performance information is regularly fed back
and reviewed at the portfolio level to provide a complete closed-loop process. Any
emergent strategies developed by the organisation will feed into this review
process to ensure the portfolio is continuously reflecting the direction of the
organisation.