of 29
8/13/2019 107475_1139116_chapter_20__general_topics
1/29
J B GUPTA CLASSES98184931932, [email protected],
www.jbguptaclasses.com
Copyright: Dr JB Gupta
20
GENERAL TOPICS
Chapter IndexChapter IndexChapter IndexChapter Index
Consumer Finance
Credit Cards
Inter-Relationship between Investment, Financing and Dividend Decision
Impact of Taxation on Corporate Financing
Assets Securitization
Exchange Traded Funds
Economic Value Added
Carbon Trading
Self-Insurance
SEZ
Sub-Prime Crisis
Private Equity
Hedge Funds
Embedded Options
Curvilinear Break-Even-Analysis Financial Intermediation
Share Holder Value Analysis
Financial Engineering
NBFC
Big Ticket Lease
Dow Jones Theory
Corporate Governance
Corporate Social Responsibility
Information Technology
Investment Banking
Retail Banking
8/13/2019 107475_1139116_chapter_20__general_topics
2/29
2
Q. No. 1Q. No. 1Q. No. 1Q. No. 1: Write a note on Surge in Consumer Finance.
Answer:
Purchase of consumer goods and services on credit is everyday occurrence,
whether it is a major purchase like house or car or a lesser purchase such as
electronics items, home appliances, cloths, jewelry, furniture, etc., some type of
credit is generally used (particularly by urban middle class). Credit is also usedfor celebrating festivals, organizing functions and enjoying holidays. The credit
may be in the form of (i) credit card (ii) direct borrowings for above-mentioned
purposes and (iii) installment finance.
Till a few years back, Indians lived by the Maxim stretch your legs according to
size of your blanket. The maxim conveys that one should live within one's means,
i.e., there should be no borrowings for personal requirements. Assets were
created out of savings or inheritance. Good things in life either used to come too
late or they never came. All this has changed. There has occurred a change in
the mindset of Indians. Now people are borrowing not only for house but also for
every single durable item in the house.
Following are the reasons for surge in consumer finance:
(1) Consumer finance has become affordable. Interest rates have come
down. Repayment periods have become larger, resulting in lower amount of
period repayments.
(2) Consumer finance has become hassle-free. Convenience, tailor-
made schemes, quick disbursals, timely payment discounts and other value added
services have contributed to the growth of consumer finance.
(3) Prices of consumer durables have not increased in past few years,
rather in some cases the prices have come down. Incomes of people, particularlyurban middle class, have increased at a faster rate. The end result is that the
consumer goods have affordable.
(4) A large number of new goods and services are coming in the
market. Electronics media has also created demand for new goods and services.
The consumers are lured to buy these items.
(5) Improvement in quality of consumer goods and services has also
attracted the consumers towards them; this has led to growth in consumer
finance.
8/13/2019 107475_1139116_chapter_20__general_topics
3/29
3
(6) In the absence of other attractive avenues for lending, virtually
every player in the finance market is chasing the consumers in a big way.
(7) Producers and sellers are facing competition. They find it difficult
to sell their products without consumer finance. Hence, some of them are
offering installment finance, others are tying up with finance suppliers.
Consumer finance is a win-win situation for finance providers and consumers.
Consumers are enjoying king-size life-styles as they are getting consumer
finance quite conveniently at affordable terms and conditions and finance
providers are making money not only by way of interest but also by way of some
commission from those merchant outlets which sell goods and services on the
basis of finance provided by them.
Consumer finance has the potential of becoming one of the biggest sectors of theeconomy in future. Encouraging GDP growth, affordable prices and satisfactory
quality of consumer durables and quality of services provided by the consumer
finance companies will fuel the growth of consumer finance in coming years.
Q. No. 2 : Write a note onQ. No. 2 : Write a note onQ. No. 2 : Write a note onQ. No. 2 : Write a note on CREDIT CARDCREDIT CARDCREDIT CARDCREDIT CARDS.S.S.S.
Answer:
A credit card is a form of consumer finance. The credit card customer is the
borrower and credit card issuer is the lender. When the credit card customer
buys some thing (using credit card), the issuer pays at the rate of on his behalfand sends him a bill around the same time each month. The customer can obtain
a cash advance with his credit card at any AUTOMATED TELLER MACHINE.
Every card has a credit limit. There are two parts of the credit limit: (1) for cash
Advances (2) for other transactions.
Every transaction (other than cash advances) on a credit card involves three
parties: (1) The credit card issuer (2) The credit cardholder and (3) The party to
whom the cardholder is supposed to pay, say the merchant outlet (MO).
Examples of MO are: a departmental store, hotel, railways, airlines, etc.
On purchase of goods or services, instead of paying cash, the cardholder
presents his card to the MO. The MO makes verifications. The MO presents the
bills to the card issuer, who pays the amount of the bill to him. At the end of each
billing cycle, the value the transaction is included in the statement sent to the
cardholder. The credit cardholder is supposed to make payment up to a certain
date. If the credit cardholder does not pay by that date, he has to pay interest.
On cash advances, interest is charged from the date of cash advance. Besides
interest, the credit cardholder has to pay various charges like joining fees (these
days most of card issuers have stopped charging this fees), annual fees,
transaction fees and cash advance fees. The card issuer also charges
8/13/2019 107475_1139116_chapter_20__general_topics
4/29
4
commission from MO. All these items constitute revenue for the card issuer. The
rate of interest is quite high, in some cases as high as 3 per cent per month.
The card issuer generally associates itself with Master card or Visa card
networks. This type of arrangement enlarges the scope and operations of credit
card issuer. Visa and Master cards are associated with a large number of banks,
which issue their unique version of these cards. They have tie-ups with very
large number of MO(s). Discover and American express operate through their
own banks, so they are both, networks and issuer, rolled into one.
Credit card holders get various types of insurance covers without making any
separate payment for these covers.
Credit cards have become way of life for many. It is a costly way of borrowing.
However, if the cardholder does not carry forward the balance, i.e., makes timelypayments, it is not so costly considering the facilities the cardholder enjoys by
holding the card. The examples of such facilities are, not carrying cash,
statements keep records of spending, various insurance covers, discount offered
by MO and free credit period for grace period. It is certainly a convenient, safe
and timely help in an emergency.
A recent development in the field of credit cards is quite encouraging. It is that
the card issuers have began offering a dynamic differential interest rates
program linked to their credit history. Under this program, the loyal cardholders
with a good credit history will be charged lower rate of interest (the angels get
benefit of lower rates, the devils a bad deal).
Q. No. 3Q. No. 3Q. No. 3Q. No. 3:::: Write short note on Inter-relationship between investment, financing
and dividend decision. (Nov.(Nov.(Nov.(Nov. 1999)1999)1999)1999)
Answer :Answer :Answer :Answer : Financial ManagementFinancial ManagementFinancial ManagementFinancial Management is the process of financial decision-making.
There are three categories of financial decisions: (i) financing decisions, (ii)
investment decisions, and (iii) dividend decisions. All these decisions are
interrelated as each one affects the others and also each one has a single target
and that is maximization of wealth of shareholders in the long run (this can be
achieved through maximizing EPS while keeping the risk at optimum level).
Financing Decision: FFinancing Decision: FFinancing Decision: FFinancing Decision: Financing decision involves estimating the requirement of
funds and raising them at minimum cost of capital while keeping the risk at
optimum level.
Financing decisions affect investment decisionsinvestment decisionsinvestment decisionsinvestment decisions as investments can be made
only if enough funds are raised at reasonable cost of capital. Such decisions also
affect dividend decisionsdividend decisionsdividend decisionsdividend decisions as adequate dividend should be provided on equity
capital raised, otherwise the market price of the shares will go down.
8/13/2019 107475_1139116_chapter_20__general_topics
5/29
5
Financing decisions are affected by investment decisionsinvestment decisionsinvestment decisionsinvestment decisions as funds are
required to be raised only if profitable investment opportunities are present.
Such decisions are also affected by dividend decisionsdividend decisionsdividend decisionsdividend decisions as equity funds should beraised only if the company shall be earning on these funds at a rate which is
higher than the rate of return expected by equity shareholders (which depends
upon dividend decisions).
Investment Decision :Investment Decision :Investment Decision :Investment Decision : Such decision involves capital expenditure decision as
well as decisions regarding investing in working capital. While making the
decisions, it must be ensured that they will earn adequate return on funds
invested so that adequate return may be provided to the supplier of funds.
Investment decisions affect finance decisionsfinance decisionsfinance decisionsfinance decisions as finance has to be raised only
if investment opportunities are there. Such decisions also affect dividenddividenddividenddividend
decisionsdecisionsdecisionsdecisions as dividend depends upon the return obtained on these investments.Investment decisions are affected by finance decisionsfinance decisionsfinance decisionsfinance decisions as investments can be
made only if finance is available at reasonable cost. Such decisions are also
affected by dividend decisionsdividend decisionsdividend decisionsdividend decisions as only that much amount may be paid as dividend
for which profitable investment opportunities are notnotnotnot there (Residual theory of
dividend).
Dividend Decision:Dividend Decision:Dividend Decision:Dividend Decision: Such decisions are concerned with providing return to equity
shareholders. Such returns may be provided through dividend or bonus.
Dividend decisions affect financing decisionsfinancing decisionsfinancing decisionsfinancing decisions as equity funds should be raised
only if the company hopes to be able to provide adequate return to equity
shareholders (otherwise the market price of shares will go down which is notliked by any finance manager). Such decisions also affect investment decisionsinvestment decisionsinvestment decisionsinvestment decisions as
investment should be made only if the investment will provide adequate
(adequate enough to provide return to equity shareholders) return on funds
employed.
Dividend decisions are affected by investment decisionsinvestment decisionsinvestment decisionsinvestment decisions as dividend depends
upon the return provided by the investments. Such decisions are also affected by
financing decisfinancing decisfinancing decisfinancing decisionsionsionsions as higher the issue price of equity shares, larger should be
the amount of dividend per share.
Q. No. 3:Q. No. 3:Q. No. 3:Q. No. 3: Discuss briefly the impact of taxation on corporate financing.(Nov. 1996, May 2000)(Nov. 1996, May 2000)(Nov. 1996, May 2000)(Nov. 1996, May 2000)
Answer:Answer:Answer:Answer: Finance managers should base their financing decisions on three
considerations : (i) Try to minimize the cost of funds raised (ii) Try to reduce the
impact of corporate tax and (iii) Finance risk should be kept at optimal level.(The
level of optimum finance risk is determined after considering the operating risk.
If operating risk is high, the finance risk may be kept at low level. If operating
risk is low, finance risk may be kept at high level.)
8/13/2019 107475_1139116_chapter_20__general_topics
6/29
6
Corporate Financing decisions are affected by corporate taxation. Regarding the
impact of corporate taxation on corporate financing, the following points are
worth consideration:
(i) Debt(i) Debt(i) Debt(i) Debt : Debt is most attractive source of financing from the point of view of
corporate taxation as it is allowed as deduction for the purpose of calculating the
taxable income. For example, if debt is raised at the interest rate of 10%, the
effective cost will be only 6.91 % after considering the tax (including education
cess). There is tax saving on debt issue expenses as well.
(ii) Equity share capital(ii) Equity share capital(ii) Equity share capital(ii) Equity share capital: Return on equity shares can be provided to the
shareholders by two ways (i) Dividend and (ii) Bonus shares. The first option is
quite inferior option from the angle of taxation. On one hand, the amount of
dividend is not allowed as deduction for computing the taxable income of thecompany, on the other hand the company has to pay an all inclusive corporate
dividend tax The dividend is tax exempt in the hands of the receiver of dividend.
The second option is not so inferior. Though the amount of bonus shares is not
allowed as deduction while calculating taxable income of the company, the
company does not have to pay corporate dividend tax. The allottee of bonus
shares (i.e. the shareholder) , if needs cash , can sell these shares. If the shares
are listed in the stock exchange and these are sold through the stock exchange
after paying Security transaction tax (which is quite negligible), the shareholder
may not have to pay tax (if from taxation angle, the transaction results in
transfer of long term capital asset) or tax at [10 % + education cess], if from the
tax angel it is the transfer of short term capital asset.
(iii) Preference share capital(iii) Preference share capital(iii) Preference share capital(iii) Preference share capital : Return on preference shares can be provided to
the shareholders by way of dividend This is quite inferior way from the angle
of taxation. On one hand, the amount of dividend is not allowed as deduction for
computing the taxable income of the company, on the other hand the company
has to pay an all inclusive corporate dividend tax (corporate dividend tax +
education cess) (The dividend is tax exempt in the hands of the receiver of
dividend).
(iv) Retained earnings(iv) Retained earnings(iv) Retained earnings(iv) Retained earnings: If the company retains the earnings and uses them forfurther requirements of funds, it does not have to pay any corporate dividend
tax. If return on retained earnings is provided to the shareholders by way of
dividend, the company has to pay corporate dividend tax. If the same is provided
by way of bonus shares, there will be no corporate dividend tax.
(v) Depreciation:(v) Depreciation:(v) Depreciation:(v) Depreciation: Depreciation is a resource of funds. It is allowed as deduction
for tax purposes. It does not result in cash outflow and hence, and amount equal
to depreciation is reinvested in the business.
8/13/2019 107475_1139116_chapter_20__general_topics
7/29
7
Q. No. 4:Q. No. 4:Q. No. 4:Q. No. 4: Write a short note on Asset Securitization. (Nov. 2002)(Nov. 2002)(Nov. 2002)(Nov. 2002)
Answer:Answer:Answer:Answer: The term Asset Securitization is used is in two references:
(i)(i)(i)(i) The Securities and Reconstruction of Financial Assets and Enforcement of
Security Interest, 2002 (popularly known as Securitization Act)
(ii)(ii)(ii)(ii) Debt Securitization
Under Securitization Act:Under Securitization Act:Under Securitization Act:Under Securitization Act: Banks and FIs in India are facing the severe problem of
default (in repayment of loans and payment of interest on loans advanced by
them) by a large number of borrowers in spite of the fact that most of these
loans and advances are secured against the assets of the borrowers. The issue
has become unimaginable and threatening to the very existence of the lenders.
In order to help the banks and FIs, the Securities and Reconstruction of
Financial Assets and Enforcement of Security Interest, 2002 (popularly known as
Securitization Act) was enacted by the parliament. The enactment of this Act has
empowered the banks and FIs to attach the assets (on which the lenders have
charge) of the defaulters without intervention of time-consuming court
procedures. The lenders can issue notices to the defaulters to pay up the dues
and the borrowers have to clear their dues within 60 days. Once the borrower
receives such notice, the secured assets mentioned in the notice cannot be
transferred by the borrower without permission of the lender. The notice
requires the borrower that either pay the dues within 60 days or the assetsmentioned in the notice will be attached. Besides the assets, the bank can also
takeover the management of the borrower establishment. The main purpose of
the notice is to bring the defaulters on the negotiation table. (Banks and FIs
resort to attachment only as a last resort for two reasons: (i) Sale value of
second hand assets is generally very low and (ii) They are not in the business of
attachment and sale of assets, they are in the business of financial services.)
On receiving the notice, the borrower has the right of filing an appeal against the
notice to the Debt Recovery Tribunal (DRT). In this situation, the lenders cannot
dispose off the assets mentioned in the notice without permission of DRT.
However, it is mandatory for borrowers who prefer an appeal to the Debt
Recovery Appellate Tribunal (DRAT), to deposit upfront 50 per cent of the
amount decreed by the DRT (Debt Recovery Tribunal). However, the DRT can
reduce the upfront payment to 25 per cent.
Debt SecuritizationDebt SecuritizationDebt SecuritizationDebt Securitization: It is a process under which non-marketable assets such as
mortgages, automobiles leases and credit card receivables ( such assets are
referred as commercial / consumer credits ) are converted into marketable
securities that can be traded among the investors. Under this process, the
consumer / commercial credits ( which are assets for financing companies
8/13/2019 107475_1139116_chapter_20__general_topics
8/29
8
providing credit ) are sold to a specially formed separate entity called as Special
Purpose Vehicle or trust . The SPV / Trust issues securities (promissory notes
or other debt instruments) to the investors based on inflows of these assets. Theinflows from the assets (i.e. commercial / consumer credits) are collected in a
separate bank account. The investors who have invested in promissory notes or
other debt instruments (issued by the SPV or Trust) are first to be paid from this
account.
The securities issued by the SPV / Trust are rated independently by the credit
rating agencies i.e. credit rating of these securities is based on cash flow pattern
of the underlying assets ( consumer / commercial credits ) and not upon the
credit worthiness of the credit originator. It is used mainly by Housing Finance
Companies because of the initiative taken by National Housing Bank.
Q. No. 5:Q. No. 5:Q. No. 5:Q. No. 5: Write a note on Exchange Traded Funds. (May,(May,(May,(May, 2010)2010)2010)2010)
AnswerAnswerAnswerAnswer
Exchange Traded Funds (ETFs)Exchange Traded Funds (ETFs)Exchange Traded Funds (ETFs)Exchange Traded Funds (ETFs) issue their units, referred as creative units, to
the investors. These units represent some commodity or a basket of securities
and are traded in the stock exchange throughout the trading day, allowing for
intraday trading. Such funds are managed passively.
Basket of securities based ETFsBasket of securities based ETFsBasket of securities based ETFsBasket of securities based ETFs
Such funds track a benchmark share index i.e. the underlying assets of such
funds are shares which constitutes some Shares Index Number/ share priceindicator. For example, Dow Jones Industrial average is worlds one of the oldest
and most popular share prices indicator. It indicates the change in prices of
equity shares of 30 largest and most widely held companies in the USA, these
companies are considered as the business leaders of the USA. The average
provides a basic signal of performance of the US share markets. Diamonds is an
ETF of USA; the equity shares of these 30 companies constitute the underlying
asset of the Diamonds.
The sponsors of the ETFs are referred as authorized participants. They are
institutional investors/ super-rich individuals. They appoint a fund manager for
the purpose of constituting an ETF. The authorized participants transfer sharesto the fund manager. The total transfer should be in the ratio in which the shares
are represented in the share market indicator they want to track. For example, if
the ETF is to track the Dow Jones Industrial average, there should be equal
number of shares of the 30 companies which constitute the DJIA. These are
deposited with the custodian. Now the fund manager will issue the creative units
to the authorized participants for the shares they have transferred. Suppose
there are 10 authorized participants; they transferred in all 1,00,000 shares of
each of the 30 companies. Further suppose that the fund manager issued
1,00,000 creative units , then each creative unit is representing one share of
8/13/2019 107475_1139116_chapter_20__general_topics
9/29
9
each of these 30 companies. If the fund manager issued 2,00,000 creative units,
then each creative unit represents 0.50 share of each of these 30 companies.
These creative units are issued to the authorized participants in the ratio of thevalue of the shares they transferred to the fund manager. Now these creative
units are listed in the stock exchange. These are traded as the shares are traded.
Any one buy/sell these creative units in the exchange at the current market
price.
The authorized participants can get more creative units issued by transferring
the shares to the fund manager or by making payment of these shares. Suppose,
originally 1,00,000 shares of each of 30 companies were transferred to the fund
manager and for these 100000 creative units were issued. Now suppose some
participants transferred 30,000 shares of each of these companies to the fund
manager, the fund manager will issue them 30000 creative units. Alternatively,suppose the some of the participants paid the fund manager an amount equal to
price of 30000 shares of each of these 30 companies, the fund manager will buy
the shares and issue creative units to the authorized participants (who made the
payment).
The authorized participant (s) can accumulate minimum number ( as decided at
the time of formation of the ETF) of creative units and get them converted into
the shares they represent. Other investors (who purchase the creative units from
the share market) can not get the creative units created or redeemed.
In India, the ETFs are listed on NSE.
Commodity based ETFs (For example, Gold ETF)Commodity based ETFs (For example, Gold ETF)Commodity based ETFs (For example, Gold ETF)Commodity based ETFs (For example, Gold ETF)
In such ETFs, the underlying asset is some asset, say gold. The authorized
participants appointed fund manager makes new fund offer to the public, the
amount so collected is invested in gold and creative units are issued to the
investors. (Generally, each creative unit represents 1 gm of 24 carrot gold).
These units are listed, and traded in the stock exchange.
After the listing, the authorized participant (s) can transfer gold to the fundmanager and get the creative units issued.
The authorized participant (s) can accumulate minimum number ( as decided at
the time of formation of the ETF) of creative units and get them converted into
the gold represented by these units. Other investors (who purchase the creative
units from the share market) can not get the creative units created or redeemed.
Gold ETFs in India : There are two such ETFs in India. One is managed by UTI
Asset management company Pvt. Ltd and the other is managed by Bench market
8/13/2019 107475_1139116_chapter_20__general_topics
10/29
10
Asset management Co. Private Ltd. Both the funds are traded on the NSE. Each
unit represents approximately one unit of gold.
Gold ETFs offer cost effective, transparent and convenient way of investing in
the gold.
Q. No. 6:Q. No. 6:Q. No. 6:Q. No. 6: Write short note on Economic Value Added method. ( Nov. 2001). ( Nov. 2001). ( Nov. 2001). ( Nov. 2001)
Answer:Answer:Answer:Answer:
EVA is an accounting based technique of measuring the performance of an entity.
The entity whose performance is being measured could be a division,
department, project or the firm itself. The concept of EVA has been developed
and popularized by Stern Steward & co.- a US consulting firm.
EVA measures how much an entity has earned over and above its cost of
capital1, which includes both debt and equity. Put simply, EVA is net operating
profit2minus an appropriate charge for opportunity cost of all capital invested in
an enterprise. As such, EVA is an estimate of true economic profit, or the
amount by which earnings exceed or fall short of the required minimum rate of
return that that shareholders and lenders could get by investing in other
securities of comparable risk.
EVA =EVA =EVA =EVA = EBITEBITEBITEBIT TAX on EBITTAX on EBITTAX on EBITTAX on EBIT ---- [C.E.[C.E.[C.E.[C.E. xxxx WACC]WACC]WACC]WACC]
IMPROVEMENT IN EVA
Improvement in EVA can be achieved in four ways:
(i) Increase operating efficiency.
(ii) Taking on new investments that promise to earn more than WACC.
(iii) Get rid of those parts of business that earn less than WACC.
(iv) WACC is lowered by altering financial strategies.
FIVE FEATURES OF EVAFIVE FEATURES OF EVAFIVE FEATURES OF EVAFIVE FEATURES OF EVA
(i) EVA & Financial Management
(ii) EVA & Incentive compensation
(iii) EVA & Divisional performance
(iv) EVA & Goal setting
(v) EVA & Market valuation
1Weighted average cost of equity and borrowed funds. It is calculated on the basis of current cost and not
on the bass of historical cost.2Net operating profit = EBIT Tax on EBIT
8/13/2019 107475_1139116_chapter_20__general_topics
11/29
11
EVA & Financial management
As per EVA concept, the managers should incorporate two basic principles
of finance in their decision making. The first is that the primary financialobjective of any company is to maximize the wealth of the shareholders.
The second is that it is the continuous improvement in EVA that brings
continuous increase in shareholders wealth.
EVA & Incentive Compensation
The objective of incentive compensation is to make managers behave like
owners. They should identify themselves with the fortunes of the company.
EVA is a useful tool for incentive compensation.
EVA & Divisional Performance
EVA is a useful tool for divisional performance appraisal.
EVA & Goal Setting
Most companies set different goals for different managers. Under
EVA, there is only one goal for each manager and that is, improve EVA.
EVA based goal (i.e. goal of every manager is to improve the EVA of
activities under his control) is simple and can be communicated to, and
easily understood by , the managers of different levels.
EVA & Market Valuation
Market value of a company depends upon its EVA. There is high
degree of correlation between EVA growth and market value addition.Increase in EVA results in increase of market value and vice- versa.
Conclusion
The most valuable resource in any company is the creativity and will to
succeed that its people possess. EVA equips them with better information
and better motivation to succeed.
Q . No. 7 :Q . No. 7 :Q . No. 7 :Q . No. 7 : Write short note on Carbon Trading....
AnswerAnswerAnswerAnswer:
Carbon Trading : The scientists have been warning since 1960 or so that thetemperature of the earth is rising and this is quite dangerous. The principal
reasons responsible for this are (i) the burning of greater quantities of oil, gas
and coal and (ii) cutting down of forests. The industrial and transport units are
throwing excessive quantities of six most dangerous gases ( referred as
Greenhouse Gases), especially carbon dioxide, in the environment. On the
initiative of the UNO, the international community joined hands to find the ways
to cope up the problem and an international protocol, known as KYOTO Protocol,
was singed. This protocol came into force with effect from 16thDecember, 2005.
8/13/2019 107475_1139116_chapter_20__general_topics
12/29
12
The Kyoto protocol aims to tackle global warming by setting target levels for
nations to reduce greenhouse gas emission worldwide.
Mechanism : Under this approach, the companies with emission levels less than theprescribed level, are issued certificates by the Secretariat of Kyoto Protocol. These
certificates are referred as Carbon Credit certificates. These certificates are tradable. The
companies having excess emissions may buy these certificates (other wise they have to
pay penalty for excess emissions). Carbon trading has come as a wind fall for manyIndian Companies. Companies using biogas, solar energy, windmill etc. are making a
fortune on account of this system.
Q. No. 8:Q. No. 8:Q. No. 8:Q. No. 8: Write a Short note on Self Insurance.
Answer:Answer:Answer:Answer:
Self-insurance is a risk management method whereby the business itselfassumes the risk directly. This means the business does not buy insurance,
saves the cost of insurance premium and pays losses from its own funds. The
business sets aside the funds to cover losses, should they arise. The amount set
aside is calculated using actuarial valuation and theory of probability. The
amount should be enough to cover the future losses. The idea of self-insurance
is that retaining the risk (i.e. by not buying insurance) and paying the losses out
of own funds, is a cheaper process than buying insurance because the
organizations self-insuring does not have to pay the profit component of the
insurer.
The concept of self-insurance may be advantageous for large sized
businesses as only such organizations may be able to bear the losses.
Self-insurance does not work for small organizations as they rarely have enough
money to set aside to cover a potential future loss.
Organizations going for self-insurance should be more careful about loss
prevention programs. For example, installing fire extinguishers, sprinkler system,
adding burglar alarm etc. Prevention program is always desirable whether the
business buys insurance policy or goes for self-insurance.
Q. No. 9:Q. No. 9:Q. No. 9:Q. No. 9: Write a short note on Special Economic Zones.
Answer:Answer:Answer:Answer:
Special Economic Zones :::: A Special Economic Zone (SEZ) is a geographical
region that has economic laws that are different from and more liberal than a
country's economic laws; it is deemed to be foreign territory for the purposes
of trade operations, duties and tariffs. Special economic zones are intended to
function as zones of rapid economic growth by using tax and business incentives.
It is expected that a well-implemented and designed SEZ can bring about many
8/13/2019 107475_1139116_chapter_20__general_topics
13/29
13
desired benefits for a host-country: increases in employment, FDI attraction,
general economic growth, foreign exchange earnings, international exposure, and
the transfer of new technologies and skills. Hence, many developing countriesare also developing the SEZs with the expectation that they will provide the
engines of growth for their economies.
The SEZ Policy, announced by Government of India enables the creation of SEZs
in the country, with a view to provide an internationally competitive and hassle-
free environment for exports. These zones are designated duty-free enclaves,
and are deemed foreign territories for the purpose of trade operations, duties
and tariffs. The Policy offers several fiscal and regulatory incentives to
developers of the SEZs as well as units within these zones. The SEZ are of two
types : (i) specific products or services zones and (ii) multi-product zones.
A Special Economic Zone for multi product shall have an area of 1,000 hectares3
or more but not exceeding 5000 hectares.
The Government of Indias policy is being criticized by many economists on the
basis of two grounds :
(i) To establish the SEZs, the state governments are procuring farmland in
coercive ways and handing it over to big business groups. The land
procurement process is producing enormous resentment among farmers.
(ii) They will also result in huge losses on the exchequer through tax breaks and
forgone duties.
Q. No. 11:Q. No. 11:Q. No. 11:Q. No. 11: Write a note on Private Equity.
Answer:Answer:Answer:Answer:
The term Private Equity refers to Private Equity Funds. Owned by private
investment organizations, these funds are pools of capital provided by their
investors. Such funds are popular in the Europe and the USA, though in most
cases these have been registered in tax haven countries like Mauritius etc.
The Private Equity Funds invest mainly in the equity shares of unlisted
companies.(In some cases, the investment in made in all or substantially all
equity shares of a listed company and then the shares are delisted). Private
equity is medium to long-term finance provided in return for an equity stake inpotentially high growth unquoted companies.4 The funds are not passive
investors, they take active part in the management of the companies in which
they invest through representation on the Board etc. Studies have shown that
private equity backed companies grow faster than other companies as
3 One Hectare = 2,50 Acres = 10,000 Square meters.
4British Venture Capital Association A Guide to private equity
8/13/2019 107475_1139116_chapter_20__general_topics
14/29
14
Private Equity Funds (i) provide not only equity finance but also management,
business experience, technology and other helps like getting orders, getting
supplies, making human resource available, and (ii) arrange more finance neededin the form of loans, bridge loans etc.
The funds make profit by selling the shares, purchased by them, in ways : (i)
selling the shares after the Initial Public Offer by the company i.e. after their
listing (ii) selling the shares to the acquirer in the case of merger or acquisition
(iii) selling back the shares to the promoters when they have sufficient funds to
buy them, and (iv) sale of shares to some other buyer, for example some other
Private Equity Fund.
General partners get three types of fees (i) management fee (as a percentage of
the fund's total equity capital) (ii) transaction fees (fees paid to the generalpartner on making the investment) and (iii) a performance fee, based on the
profits generated by the fund.
The performance of private equity funds is relatively difficult to track, as private
equity firms are under no obligation to publicly reveal the returns that they have
achieved from their investments. London-based research and consultancy firm
Private Equity Intelligence collects information from (i) the websites of PEFs and
(ii) from the investors, where possible using the provisions of Freedom Of
Information Act in the USA and similar Acts in the European countries.
There are strong prospects for private equity in the rapidly developing markets
of India and China, according to Wharton faculty and private equity experts.
Q. No. 12:Q. No. 12:Q. No. 12:Q. No. 12: Write a note on Hedge Funds.
Answer:Answer:Answer:Answer:
Hedge Funds are private investment organizations in Europe and USA. These are
generally structured as limited liability partnership with the general partner being
the portfolio manager, making the investment decisions, and other partners as
the investors. The investor partners are super-rich persons like institutions,
professionals and wealthy individuals (minimum investment amount ranging
anywhere from $2,50,000 to $1 million). Investment is hedge funds in generallyfor a lock-in-period of one year so. The funds provided by all the partners,
including the general partner, are pooled and invested in various financial assets
including derivatives. The investment strategy of such funds in generally
aggressive and flexible; the funds take all steps, permissible by law, such as
leverage, long, short, swaps, futures, options and other derivatives in both
domestic and international markets to get high returns on the investments made
by the partners.
8/13/2019 107475_1139116_chapter_20__general_topics
15/29
15
Hedge funds are subject to the same market rules and regulations as any trader.
There are no such restrictions on the hedge funds as are applicable to other
pooled investments like mutual funds. No registration is required with Securitiesand Exchange Commission or Financial Services Authorities (unless a general
partner manages more than 15 such funds). No special reports have to be
submitted, no investor protection guidelines have to be followed. Of course, like
mutual funds, hedge funds are subject to the anti-fraud provisions of securities
laws.
First hedge fund was set up by A.W.Jones in 1949 in the USA. This fund was to
protect its investors against risk using various techniques i.e. hedging of risk
was the central to its investment strategy. Hence, it was referred as Hedge Fund.
Today, the term "hedge fund" refers not so much to hedging techniques, which
hedge funds may or may not employ, as it does to their status as private andunregistered investment pools. For the majority of these funds the hedging of
risk was not the central to their investment strategy.
Hedge funds have generally provided very high returns to their investors even
during the periods of falling share prices, though there have been some cases of
huge losses, there have been even some of fraud. Such funds are quite popular
among such investors who are ready to take high risk in the hope of getting high
returns.
Many times the investment strategies of hedge funds have caused in volatility in
the markets for three reasons (i) they have large amount of funds to invest at
their disposal, (ii) they do not have to follow transparent policies and (iii) they
follow aggressive policies.
There is was domestic/foreign hedge fund in India till Sept. 2007. In October,
2007, SEBI has allowed the foreign hedge funds operations in India.
The new development in this field is emergence of funds of hedge funds. These
are the organizations which invest in the hedge funds. They attract investment
from various investors mainly the small investors.
Q. No. 13:Q. No. 13:Q. No. 13:Q. No. 13: Write a note on Embedded Options / Embedded Derivatives.(Nov..(Nov..(Nov..(Nov.
2008).2008).2008).2008).
Answer:Answer:Answer:Answer:
An embedded option is an option that is part of the structure of a bond. It
therefore does not trade by itself, but it does affect the value of the bond of
which it is a part. It provides either the bondholder or issuer the right to get
some thing done by the other party; the other party is obliged to do that. There
are 3 types of embedded options:
8/13/2019 107475_1139116_chapter_20__general_topics
16/29
16
Call option:Call option:Call option:Call option: It is the option with the issuer of the bonds. This option provides the
issuer to call back (i.e. to redeem) the bonds before their maturity as per the
terms of the call option. For example, the issuer issues the bonds with 7 yearsmaturity. The terms of the issue provides that the issuer has the right (not the
obligation) to call back the bonds at any time after 3 years of the date of issue at
a premium of 10% of the face value.
Indian capital market witnessed the exercise of a call option of very large
magnitude by IDBI in the year 2000. IDBI issued deep discount bonds in 1996
offering a return of about 16% with 25 years maturity. The issue received
overwhelming response from the investors planning their retirement, education
of children etc. The investors got a shocking news in the year 2000 that the IDBI
has decided to call back (i.e. to redeem) the bonds. Many investors filed their
grievances against IDBI with SEBI, Ministry of Finance etc but these could not beredressed as the offer document clearly mentioned the option clause (which
perhaps no body cared to go through).
By getting the bonds allotted, the holders write the call option in favour of the
issuer. Call option has adverse impact on the value of the bond.
Put option :Put option :Put option :Put option : It is an option written by the issuer of the bond in favour of the buyer
of the bond. Under this option, the buyer may get the bonds redeemed before the
maturity as per the terms of the put option. For example, a company issues 10%
Bonds with 10 years maturity. The bonds contain put option under which the
Bonder may get the bonds redeemed at any time after three years at a discount
of 5% if redeemed after 3 years but up to 5 th year, at a discount of 3% if
redeemed after 5 years but up to 8thyear and at a discount of 1% if after that.
By issuing the bonds, the issuer writes the put option in favour of the investor.
Put option has positive impact on the value of the bond.
ConveConveConveConversion optionrsion optionrsion optionrsion option : Under this option the bondholder may get his bond amount
converted into shares as per the terms of the conversion option. For example, a
company issued 10% Debentures of Face value of Rs.100 each, maturity 10 years
; the bond holder is given the option of getting the amount of the bond convertedinto 4 equity shares of Rs.10 each at a premium of Rs.15 per share at any time
after 3 years from the date of the issue.
By issuing the bonds, the issuer writes the conversion option in favour of the
investor. Conversion option has positive impact on the value of the bond.
Q. No.Q. No.Q. No.Q. No. 14:14:14:14: Write Short Note on: Curvilinear Break-even-Analysis (May, 2002)(May, 2002)(May, 2002)(May, 2002)
Answer:Answer:Answer:Answer:
Break-even point is the sales level at which there is no profit no loss. In other
8/13/2019 107475_1139116_chapter_20__general_topics
17/29
17
words, It is the sales level at which total cost is equal to total sales. For
calculating the Break even point, we assume that variable cost per unit, selling
price per unit and total fixed cost remain unchanged for different levels ofoperations. If these assumptions hold good, the relation between sales and cost
is linear and there is only one Break-even point.
Even if one of the three assumptions do not hold good, the relation between
sales and cost is not linear and they be multiple Break-even points. In other
words, if one or more of the following conditions are satisfied, the cost-volume
relationship is curvilinear ( non-linear) and there may be multiple break- even
points. This situation is described as curvilinear Break-even-Analysis.
Q. No. 15:Q. No. 15:Q. No. 15:Q. No. 15: Write Short Note on Financial intermediation. (May , 2002). (May , 2002). (May , 2002). (May , 2002)
AnswerAnswerAnswerAnswer
Financial intermediation is the routing of savings to investments through financial
intermediaries. It is a process through which an economy's savings are
transformed into capital investments.
There are two types of Financial Intermediations : (I) Traditional Financial
Inter-mediation; and (II) Contemporary Financial Intermediation.
Traditional Financial Intermediation:Traditional Financial Intermediation:Traditional Financial Intermediation:Traditional Financial Intermediation: In this case, the savers/suppliers of funds
deposit their money with the financial intermediaries (for example: banks,
financial institutions, non-banking financial companies etc.) and the financial
intermediaries lend the money in the way they like (subject to some government
regulations). In other words, the savers/suppliers of funds have no say or role in
the lending by the financial intermediaries. The risk arising out of lending is
borne by the intermediaries, i.e. there is no financial risk for the savers/suppliers
of the funds (except in case of bankruptcy of the intermediary).
The main drawback of this approach is that the difference between cost to
the borrower and return to the supplier of funds is substantial, i.e. while the
borrower has to pay a quite high interest for the funds borrowed; the suppliers of
funds generally get only a fraction of it.
Contemporary Financial Intermediation:Contemporary Financial Intermediation:Contemporary Financial Intermediation:Contemporary Financial Intermediation: Contemporary Financial intermediation isaimed at overcoming the limitation of the traditional intermediation. In other
words, on the one hand it aims at providing higher return to the suppliers of
funds, and on the other, at making funds available to productive investors at
minimum cost. The difference between the borrower's cost and lender's return is
the fees (and sometimes expenses also) of the intermediary who simply
negotiates the deal. Though the risk is borne by the suppliers of funds, it is
minimized/optimized through professional competency of the intermediaries. The
suppliers of funds can determine the levels of risk they are ready to bear.
8/13/2019 107475_1139116_chapter_20__general_topics
18/29
18
Examples of such intermediaries are Mutual funds, Issuing and Paying Agents
(appointed for issuing commercial papers) and negotiators of large deals of funds
Q. No. 16:Q. No. 16:Q. No. 16:Q. No. 16: Write Short Note on: Shareholder value Analysis ((((May , 2002)May , 2002)May , 2002)May , 2002)
AnswerAnswerAnswerAnswer
Maximization of shareholders' wealth (in the long run) has been accepted as the
object of financial management since Adam Smith's days. The shareholders value
analysis got recognition only after 1986, when Prof. Rappaport of USA published
his book Creating shareholder value. As per the concept of Shareholder Value
Analysis (SVA), all business activity should aim to maximise the value of a
company's equity shares in the long run. As per SVA, the primary responsibility
of management (not only of the finance manager) is create value for theshareholders. All the decisions of the management should have only one target
and that is value creation for the shareholders. Critics argue that concentrating
on shareholders value will be harmful for other stakeholders like employees,
suppliers, customers, society etc. The advocates of the SVA counter this view
and express that shareholders value can be created only after meeting the
requirement of these stakeholders. (This concept has been used as a shield by a
fairly large number of European and US companies while downsizing their human
resources).
Q. No. 17:Q. No. 17:Q. No. 17:Q. No. 17: Write Short Note on: Financial Engineering. (May, 2002,. (May, 2002,. (May, 2002,. (May, 2002, N0v. 2008)N0v. 2008)N0v. 2008)N0v. 2008)
AnswerAnswerAnswerAnswer
Financial Engineering is a process that uses science-based mathematical
techniques for financial decision-making. It applies quantitative techniques to the
theory of finance to optimize the firm's financial transactions. Financial
engineering is a subset of finance.
The term financial engineering came into use after the Black-Scholes option
pricing model was developed in the early 1970s. This scientific breakthrough led
to a new way to solve practical financial problems using the quantitative
techniques. Later on, the use of computer skills vastly increased the scope offinancial engineering. A Nobel Prize for the Black and Scholes Model (on 14th
October, 1997) gave further recognition to financial engineering.
Decision-makers have to take decisions, and the outcome of their decisions is
affected by uncertain future events (on which they have no control). The
scientific way of decision making is that the decision should be taken after
considering all possible uncertainties. Sometimes, the numbers of uncertainties
extend to infinity. Ordinary techniques cannot consider all these uncertainties.
Hence, financial engineering is applied. Utilizing various derivatives and other
methods, financial engineering aims to precisely control the financial risks that
8/13/2019 107475_1139116_chapter_20__general_topics
19/29
19
an entity takes on. (Some thinkers on the subject opine that financial engineering
is mainly concerned with risk management). It helps in optimum pricing of
various financial services and operations, in the face of unlimited uncertaintiesand combination of uncertainties otherwise their prices cannot be determined.
Q. No.18:Q. No.18:Q. No.18:Q. No.18: Write a note on Non-Banking Finance Companies.
Answer:Answer:Answer:Answer:
A Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 1956 and is engaged in the business of loans and advances, acquisition
of shares/stock/bonds/debentures/securities issued by Government or local authority or
other securities of like marketable nature, leasing, hire-purchase, insurance business, chit
business but does not include any institution whose principal business is that ofagriculture activity, industrial activity, sale/purchase/construction of immovable property.
A Residuary non-banking company is also a NBFC. Residuary Non-Banking Company is
a class of NBFC which is a company and has as its principal business the receiving of
deposits. These companies are required to maintain investments as per directions of RBI,
in addition to liquid assets..
NBFCs are doing functions akin to that of banks, however there are a few
differences:
i. a NBFC cannot accept demand deposits;
ii. it is not a part of the payment and settlement system and as such cannot
issue cheques to its customers; andiii. Deposit insurance facility is not available for NBFC depositors unlike in
case of banks.
It is mandatory that every NBFC should be registered with RBI to
commence or carry on any business of non-banking finance company. It
should have a minimum net owned fund of Rs raised to Rs 200 lakh
All NBFCs are not entitled to accept public deposits. Only those NBFCs
holding a valid Certificate of Registration with authorisation to accept
Public Deposits can accept/hold public deposits.
Presently, the maximum rate of interest a NBFC can offer is 12.50 %. TheNBFCs are allowed to accept/renew public deposits for a minimum period
of 12 months and maximum period of 60 months. They cannot accept
deposits repayable on demand.
RBI regulates the NBFC through the following measures:
(i) Mandatory Registration.
(ii) Minimum owned funds.
8/13/2019 107475_1139116_chapter_20__general_topics
20/29
20
(iii) Only RBI authorised NBFCs can accept public deposits.
(iv) RBI prescribes the ceiling of interest rate.
(v) RBI prescribes the period of deposit.
(vi) RBI prescribes the prudential norms regarding utilization of funds.
(vii) RBI directs their investment policies particularly in case of Residuary
Non-banking Company.
(viii) RBI inspectors conduct inspections of such companies.
(ix) RBI prescribes the points which should be examined and reported by the
auditors of such companies.
(x) RBI prescribes the norms for preparation of Accounts particularly
provisioning of possible losses.
Q. No. 19:Q. No. 19:Q. No. 19:Q. No. 19: Write a note on Big-Ticket Lease....
Answer:Answer:Answer:Answer:
It is a lease in which the asset's capital cost is very large. In other words, lease
of the assets of bigger value running into hundreds and thousands crores of
rupees is called Big-Ticket lease. Leasing of aircraft, satellites etc. are typical
examples. Big-ticket lease can either be operating or finance lease depending
upon the terms of the lease agreement. For example, if Air-India takes, say, one
hundred planes on lease from Boeing, the media would describe it as a big-ticket
lease merely to drive home the huge size of the transaction. (The Hindu Business
Linedated 19thJune, 2006).
This type of lease should be structured by professionals of both the parties,
lessee as well as lessor, after considering various aspects like legal, tax,
technological aspects, cost of funds etc. Professionals of each side should take
care of their client's interests. Generally this type of lease is cross-border lease.
Q. No. 20:Q. No. 20:Q. No. 20:Q. No. 20: Write a note on Dow Jones Theory.
Answer:Answer:Answer:Answer:
The ideas of Charles Dow, the first editor of the Wall Street Journal, are known
as Dow Jones Theory. In 1900 Dow Jones wrote a series of articles emphasizing
that the direction of share market appeared to be based on a set of rules.
Collectively, these articles and rules became known as The Dow Theory.
Dow expressed that the general level and trend of the stock market can be
understood with the help of index numbers/averagesconstructed on the basis of
price movements of some important stocks. He believed that the behaviour of
8/13/2019 107475_1139116_chapter_20__general_topics
21/29
21
these index numbers/averages reflected the hopes and fears of the entire
market. (For example, in India, if Sensex rises it is hoped that the market will go
up and if Sensex falls it is feared that the share market will go down). He createdtwo averages to understand the price behavior of the stocks in the USA:
(a)(a)(a)(a)Dow Jones Industrial averageDow Jones Industrial averageDow Jones Industrial averageDow Jones Industrial average : It is an average of prices of 30 blue-chip U.S.
stocks prevailing in the New York Stock Exchange.8
(b)(b)(b)(b) Dow Jones Transport average:Dow Jones Transport average:Dow Jones Transport average:Dow Jones Transport average: The Dow Jones Transportation Average
(DJTA) is the most widely recognized indicator/average of the
transportation sector of USA.
TheoryTheoryTheoryTheory
1. A share price reflects everything that is known about a stock. This means
that all the positives and all the negatives about a company are assumed
to be known by the market and built into the share price.
2. Share market has three well-defined movements which fit into each other:
(I) Ripple: It is the daily variation due to difference between buying and
selling at that particular time or changes in very short period very
short period is known as market period in economics. Such changes
are due to instant reactions.
(II) Wave: It refers to the movements which cover a period ranging from
days to weeks (changes in short period). Such changes are generally
referred as corrections. Such changes do not reflect change in
fundamentals.
(III) Tide: It refers to the movement which is a great swing covering from
months to years, (Long term trend, also termed as primary trends).
Such changes are the results of changes in fundamentals.
3. Primary Trends: Bull markets are broad upward movements of the market
that may last several years, interrupted by secondary reactions. Bear
markets are long declines interrupted by secondary rallies. Thesemovements are referred to as the primary trends.
Bull MarketsBull MarketsBull MarketsBull Markets
Bull markets commence with reviving confidence as business
conditions improve.
Prices rise as the market responds to improved earnings.
Rampant speculation dominates the market and price advances are
based on hopes and expectations rather than actual results.
8/13/2019 107475_1139116_chapter_20__general_topics
22/29
22
Dow defined a bull trend as a time when successive rallies in a
security price close at levels higher than those achieved in previous
rallies and when lows occur at levels higher than previous lows.
Bear MarketsBear MarketsBear MarketsBear Markets
Bear markets start with abandonment of the hopes and expectations
that sustained inflated prices.
Prices decline in response to disappointing earnings.
Distress selling follows as speculators attempt to close out their
positions, and securities are sold without regard to their true value.
Bear trend occurs when markets make lower lows and lower highs.
4. Trends are confirmed by volume:::: Dow believed that volume confirmed
price trends. When prices move on low volume, there could be many
different explanations why. An overly aggressive seller could be
present for example. But when price movements are accompanied by
high volume, Dow believed this represented the true market view.
5. Trends should be judged with the help of Share price Index-
Numbers.
The purpose of the Dow Theory is to determine the market's primary trend.
Successful investing, according to the Dow Theory, means staying on the right
side of the primary trend and ignoring short-term movements. According to Dow,
the primary trend cannot be manipulated.
Q .No. 21:Q .No. 21:Q .No. 21:Q .No. 21: Write a note on Corporate Governance.
AnswerAnswerAnswerAnswer::::
Corporate governance is commonly referred to as a system by which the
corporates are directed and controlled. It is the process by which the corporate's
objectives are established, achieved and monitored. Corporate governance is
concerned with the relationships and responsibilities between the board,
management, shareholders and other relevant stakeholderswithin a legal and
regulatory framework. Corporate governance is to conduct the business of a
corporate in such ways that the interest of all its stakeholders (within regulatory
frame-work) is served.
Corporate Governance is about promoting corporate fairness,
transparency and accountability.
Good governance contributes to good performance.
PrinciplesPrinciplesPrinciplesPrinciples
Commonly accepted principles of corporate governance include:
8/13/2019 107475_1139116_chapter_20__general_topics
23/29
23
Organizations should respect the rights of shareholders and help
them to exercise their rights.
Organizations should recognize that they have legal and other
obligations to all legitimate stakeholders.
The board needs a range of skills and understanding to be able to
deal with various business issues and have the ability to review and
challenge management performance.
Organizations should develop a code of conduct for their directors
and executives that promotes ethical and responsible decision
making.
Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide shareholders
with a level of accountability.
Corporate Governance in IndiaCorporate Governance in IndiaCorporate Governance in IndiaCorporate Governance in India
The listed companies are required to comply with the following conditions
(popularly known as clause 49 of the listing agreement) as stipulated by the
SEBI.
COMPOSITION OF BOARD
(i) The Board of directors of the company shall have an optimum combination
of executive and non-executive directors with not less than fifty percent
of the board of directors comprising of non-executive directors.
(ii) Where the Chairman of the Board is a non-executive director, at least
one-third of the Board should comprise of independent directors and in
case he is an executive director, at least half of the Board should
comprise of independent directors.
AUDIT COMMITTEE
A qualified and independent audit committee shall be set up with at least
three directors as members. Two-thirds of the members of audit committee
shall be independent directors. The audit committee should meet at least four
times in a year and not more than four months shall elapse between two
meetings.
DISCLOSURES
Risk Management
The company shall lay down procedures to inform Board members about the risk
assessment and minimization procedures.
8/13/2019 107475_1139116_chapter_20__general_topics
24/29
24
Proceeds from public issues, rights issues, preferential issues etc.
When money is raised through issuing the shares, the company shall prepare a
statement regarding uses of the funds so raised. This statement shall be certified
by the statutory auditors of the company.
CEO/CFO CERTIFICATION
The CEO and the CFO shall certify to the Board that:
(a) They have reviewed financial statements and the cash flow statement
for the year
(b) There are, to the best of their knowledge and belief, no transactions
entered into by the company during the year which are fraudulent or
illegal.
REPORT ON CORPORATE GOVERNANCE
(i) There shall be a separate section on Corporate Governance in the Annual
Reports of the company, with a detailed compliance report on Corporate
Governance.
(ii) The companies shall submit a quarterly compliance report to the stock
exchanges within 15 days from the close of a quarter.
COMPLIANCE
The company shall obtain a certificate from either the auditors or practicing
company secretaries regarding compliance of conditions of corporate governance
as stipulated in clause 49 and annex the certificate with the directors' report,
which is sent annually to all the shareholders of the company. The same
certificate shall also be sent to the Stock Exchanges along with the annual report
filed by the company.
Q. No. 22 :Q. No. 22 :Q. No. 22 :Q. No. 22 : Write a note on Corporate Social Responsibility.
AnAnAnAnswer:swer:swer:swer:
Society is not just another stakeholder in corporates. It is the very
purpose of the corporates.
The existence of the corporates depends upon the society:
society buys goods and services produced by the corporates,
society provides its savings to the corporates,
society supplies human resources to the corporates, and
society provides infrastructure and other facilities to the corporates.
Sometimes, the society bears the adverse impact of corporate actions, like
8/13/2019 107475_1139116_chapter_20__general_topics
25/29
25
society's land is acquired to run the commercial activities of the
corporates,
corporate operations injure the ecology and environment, and
small farmers and entrepreneurs lose their livelihoods on account
of coporate businesses.
The corporates owe their very existence to the society. The society
therefore expects the corporates to operate in a manner that strengthens the
society and takes it forward. The conclusion is that the corporates have their
social responsibilities.
Corporate Social Responsibility is a commitment to improve the wellbeing of
community through discretionary business practices and contribution of
corporate resources.
It is defined as operating a business in a manner thatmeets or exceeds the expectations the society has from the corporate. It is a
way of converting `a good company' to `a great company.'
Social responsibilities of the Corporate:
Earning profits and acquiring financial strength
Efficient use of resources:
Produce the goods and services of good quality
Take care of environment
Providing healthy working environment to the working people.
Providing community services like. providing medical check-ups and
health services in the neighbourhoods, building community centres,
running creches, organising tournaments and entertainment events etc.
create goodwill among the members of the community.
Corporate draw a lot from the society. They are expected to deliver a lot to
the society. They are interdependent. The well-being of one depends on the
well-being of the other.
Q. No.: 24Q. No.: 24Q. No.: 24Q. No.: 24 :The information age has given a fresh perspective on the role of
finance management and finance managers. With the shift in paradigm it isimperative that the role of the Chief Financial Controller changes from a
controller to a facilitator. Explain.
AnswerAnswerAnswerAnswer
Lead us from darkness to light have been the prayer of human beings to God.
This prayer has been answered by the information technology which leads us
from secrecy to transparency. Information technology has brought a revolution in
management functions including the finance function. In pre-IT era, most of the
financial information was treated as secret ones and the finance manger (called
8/13/2019 107475_1139116_chapter_20__general_topics
26/29
26
Controller) was expected to control the finances and in this process he used to
keep all the information under secret cover. In the present IT-era, most of the
financial information is available to the managers. Capabilities as well as integrityof the mangers and other employees are trusted. Hence, nothing much remains to
be controlled.
Today's finance manager has two important roles: (i) to facilitate other
managers in achieving the objects of the company. For example, he may guide
the marketing manager regarding cash discount policies regarding early
payments by the customers; he may guide the production manager regarding cost
control through bulk purchase or asking for cash discount on early payments to
suppliers or for longer credit periods and (ii) the finance manager should
concentrate on external finance environment of the company. He may
concentrate on cheaper sources of finance, repaying the costlier finance raisedearlier. He should take appropriate steps for hedging against adverse movement
in foreign exchange rates. He may concentrate on the returns expected by the
shareholders particularly about their dividend expectation. He should evaluate
more and more investment opportunities.
The author or the speaker wants to convey that the IT era has provided the
finance manager with an opportunity of thinking and looking big. He need not
devote his time on routine matters (IT has reduced the requirement of his time
and efforts for such matters; he should concentrate on the bigger issues.) He
should help the top management in widening their horizon about the business.
Q. No.: 25.Q. No.: 25.Q. No.: 25.Q. No.: 25. Write a detailed note on Investment Banking. (May 2010)(May 2010)(May 2010)(May 2010)
AnswerAnswerAnswerAnswer
Commercial banking refers to raising the funds (mainly through taking deposits)
and providing commercial and retail loans. Investment banking provides all the
financial services to the corporate, governments and government agencies,
other business entities, non-profit organizations and high net worth individuals.
They provide total financial services at one-stop shop. Their services include:
(i) issue management public as well right issues equity as well debt (a)
advisory services timing, size & composition and pricing of issue (b)preparation of offer documents with due care & diligence and
compliance of legal formalities
(c) offering the securities to the public/ shareholders
(d) underwriting of the securities
(e) ensuring smooth completion of the issue
(f) Post issue services allotment, exercise of Greenshoe option
(ii) Management of buy back of shares Buy back is used by cash rich
companies to (i) increase the value of shares (ii) avoid hostile takeover
(iii) delisting the shares (iv) optimization of the capital structure.
8/13/2019 107475_1139116_chapter_20__general_topics
27/29
27
(a)Compliance of the provisions of Company Law and SEBI regulations
(b)Smooth completion of the buy back
(iii) Loan syndication(a) negotiation with loan provides like banks, financial institutions
(b) preparation of information memorandum
(c) presentation of information memorandum
(d) negotiating the terms
(e) smooth completion of transaction
(iv) Private placement of equity as well debt
(a) preparation of Information Memorandum
(b) legal compliances particularly in case of listed companies
(c) placement of the securities to high net worth individuals,
financial institutions and other buyers like Private equity
(v) Amalgamations and Absorptions Advisory services
Valuation of both the companies for deciding the swap ratio
Legal compliances meetings of share holders, filing
petition with High court
Liaison with stock exchange(s) for listing of the securities
issued as purchase consideration and delisting of the shares
of the amalgamated company
Ensuring completion deal
(vi) Takeover and acquisition :
Advisory services
Valuation of both the companies for deciding the swap ratio
SEBI compliances meetings of share holders, filing petition with High
court
Liaison with stock exchange(s) for listing of the securities issued as
purchase consideration
Ensuring completion deal
(vii) Research and develop opinions on securities, markets, and economies
(viii) Management of investment portfolios cash rich companies place their
surplus cash with the investment banks for investing in various
securities for obtaining appropriate return and maintaining the risk at
affordable levels.(ix) Trading in the securities.
(x) Securitization Debt.
The main source of income for the investment banks is the fees they charge for
providing the financial services. They also earn income from trading the
securities on their own behalf.
Q .No. 26;Q .No. 26;Q .No. 26;Q .No. 26; Write a note on Retail Banking.
AnswerAnswerAnswerAnswer
8/13/2019 107475_1139116_chapter_20__general_topics
28/29
28
RRRRetailing Banking refers to the various services provided by the commercial
banks to small customers, mainly individuals. The services include (i) accepting
their deposits ( in savings account, fixed deposit accounts, recurring depositaccounts etc with deposit insurance cover ) (ii) providing housing loans,
educational loans, auto loans, consumer loans, locker services ( safe vault),
depository services, money transfer facilities, internet banking services (iii)
issuing debit cards, credit cards, ATM cards etc. and so forth. The retail banking
provides multiple services ( As outlined above) at multiple centers ( Branch,
extension counters, ATM centers, on-line banking, phone banking, any where
banking, direct debits, direct credits etc) to multiples customers ( senior citizens,
students, salaried people, self employed professions and other individuals) as per
their requirements.
Retail banking has witnessed the surge in recent years in India. There are threeindicators of this scenario:
(i) Retail Loans constitute a large portion of total advances by the banks.
(ii) Housing loans have seen phenomenal growth in recent years ( tax-
break has been an important factor in this regard)
(iii) The retail loan market has been converted from the lenders market to
the borrowers market.
(iv) Almost every bank is competing with other banks, to get a larger slice
of the retail pie, in this field by way of providing the better quality of
services.
The reasons behind this surge are:
(i) Economic prosperity: With growing Indian economy the income of the
urban households, particularly salaried and self-employed professional
class, is increasing and they are demanding more and better
customized services. The result is that retail banking sector growing at
a faster rate.
(ii) Retail banking services are demanded mainly by the young people.
India is in a very advantageous position. About 70 % of the population
in India is below 35 year age. This percentage is perhaps highest in
the world. The young people have substantial purchasing power;besides they have liberal attitude towards personal loans. They do not
have time to stand in queues, so they are willing to pay for time saving
services.
(iii) The spend-now-pay-later credit culture is picking up in India. The
households are borrowing not only for consumer durables but also for
leisure and pleasure like advances for foreign travels, festivals etc.
8/13/2019 107475_1139116_chapter_20__general_topics
29/29
29
(iv) The legal procedure in India is in favour of the retail banks advancing
the loans ( particularly the law regarding dishonour of the cheques).
The ratio of NPAs to retail advances is only a fraction of that ofNPAs to all advances, particularly in the sector of housing loans.
(v) Advances in information technology techniques have led to
spectacular innovations in the field of retail banking in recent years.
(vi) Retail banking is a profit driver for large sized banks in the big cities,
particularly for those banks which have been able to control their costs
(using advanced information technology and outsourcing of some of the
operations)
(vii) Decline in interest rates has made the borrowing affordable.
(viii) Setting up of the Credit Information Bureau (India) Limited (CIBIL)
which collects and disseminating credit information pertaining
borrowers has given boost of retail banking in India.
Though the retail banking of todays standards was introduced in India in the
metro cities by the foreign banks, today they are facing fierce competition not
only from private banks like HDFC, ICICI etc but also from nationalized banks
like State Bank of India, Allahabad Bank, Bank Of India, Bank of Baroda etc.
mainly on account of large branch network spread over the length and width of
the country.
The banks are bullish on this sector, they are focusing more and more on this
sector and are waking up to its potential specially by way of improving the
quality of service and cutting the costs.