SIKKIM MANIPAL UNIVERSITY DDE

Master of Business Administration MBA Semester IV

MF0017 Merchant Banking & Financial Services 4 Credits

Book ID B1815

Model Question Paper

Time: 3 hours Max.Marks:140

Section A

ESSAY TYPE QUESTIONS (10 Marks each)

[Please answer Any Four essay type questions in a separate page answer sheet

especially provided for the purpose]

1. Explain the concept of merchant banking. Give a small introduction on book building and write about the methods and guidelines for book building.(Refer unit 1)

2. Explain the whole concept of issue management which includes pre-issue and post issue management. (Refer unit 2)

3. Give the difference between Bank Vs Depository. Explain the functions performed by depository.(Refer unit 6)

4. Write about the concept of securitization and its features. Explain the process of securitization of debts and its advantages.(Refer unit 13)

Case Study

Investors Investing in Long-Term Funds With the decline in interest rates, investors are likely to enjoy the benefits of investing in longer period funds yielding returns of 9.5-10 per cent. Sometime back, investors were investing in low-risk funds such as liquid and FMPs (fixed maturity plans), but money is now being invested in long duration funds. Hence, short-term income funds, dynamic bond funds and long-term bond funds are the viable options of investment. Moreover, it is to be noted that it is not the risk factor as much as the fact that investors are willing to invest money in longer duration funds. Funds such as FMPs which were considered to be safe and protected till June 2012 are now closing down. In 2011, investors were wary with the declining interest rates. This seems to have played a pivotal role in the investment factor. In 2011, UTI fund was able to yield 11 per cent return and short-term funds delivered 10.5 per cent return. However, moving forward double digit returns might be reduced to single digit for instance, 9.5-10.5 per cent. Looking from the perspective of

risk returns, investors most likely will invest in bond funds, provisional dynamic bond funds and short-term income funds. The regulatory bodies i.e. RBI and Central Banks are going to closely monitor the investment trends and the changes taking place in the stock market. Accordingly, they will cut down the rates. To be more specific, the January-March 2013 quarter could witness some decline in rates due to the slow growth of the economy. UTI has repositioned its portfolio. The company has increased the time period of all its funds. For instance, the duration of bond funds has been increased to seven years. Shorter income funds are now available for three or three and half years. About nine months ago, the above mentioned funds were available for half the time period than they are available now. Therefore, keeping pace with the dynamic stock markets and anticipating the investment trends, UTI has increased the time period of the funds offered in its portfolio. Questions 5. Do you think that the risk factor is instigating investors to move towards long-terms funds? 6. Do most of the non-banking financial institutions need to reposition their portfolio as per the current Indian scenario? Source: Adapted from http://www.business-standard.com/india/news/ money-is-moving-into-longer-term-funds-amandeep-chopra/493257/ (Retrieved on 23 November 2012) (refer unit 11)

Section B

Multiple Choice Questions (MCQ)

[Please answer all the following questions]

1. Who is responsible for monitoring of trade and setting of policies and procedures to prevent insider trading? a) Portfolio manager b) Compliance officer c) Underwriter d) Auditor

2. Which of the following is a process by which capital is mobilised from a large number of investors and is made available to all those who need them, mainly to corporate customers? a) Working capital b) Project finance c) Financial intermediation d) Loan syndication

3.

Which among the following is the function of registrar to an issue?

a. Maintaining records of applications. b. Executing a trust deed c. Undertakes the management of portfolio of

securities d. Coordinating the prelimnary distribution of

securities and acquire direct subscription form investors.

4.

As per the _______________, IDR is an instrument in the form of a depository receipt created by the Indian depository in India against the underlying equity shares of the issuing company. a. Companies (issue of IDRs) Rules, 2004 b. Companies Act, 1956( the Act) c. SEBI(Custodian of Securities) Regulations, 1996 d. SEBI ( Depositories and Participants), Regulations,1996

5. ___________ is a type of transferable financial security which is traded in a local stock exchange . a. Debt instruments b. Depository Receipts( DRs) c. Offer documents d. Initial Public offerings

6. A company offering convertible or non-convertible debt instruments through an offer document should comply with which of the following? a. 75 % book building b. Requirement of credit rating c. Agreement with stock exchange d. Appointment of registrar to issue

7. Which of the following comes under the pricing norms of the OTCEI? a. A company must have a minimum paid up capital of Rs. 30 lakhs b. The minimum offer to the public should be 25% of the issued capital c. The promoter retains at least 20 percent of the total issued capital for

three years from the date of the assignment of securities in the proposed issue.

d. The sponsor of the issue must provide the market makers to give buy and sell quotes in the securities

8. ____________ relates to the action initiated by the issuing company through its merchant banker prior to the issue of the shares.

a. Post issue management b. Memorandum of understanding c. Pre issue management d. Due diligence

9. __________ must submit a certificate within two weeks from the date of allotment to the board. a. The pre-issue lead merchant banker b. The post-issue lead merchant banker c. A lead merchant banker d. The registrars to an issue

10. Which is the contract that has an agreement to buy/sell an asset at a predetermined future date on an agreed price? a. Futures b. Options c. Forward d. Short selling

11. The securities traded in ___________________ segment are eligible for short selling. a. Primary market b. Futures and options c. Forwards d. Secondary market

12. Which of the following is the function of a custodian? a. Maintains the securities of a shareholder in an electronic form

b. Deals in securities on behalf of clients for a commission c. Administrates and protects the assets of the clients

d. Deals with the depository directly or on behalf of their clients

13. Which of the following is a condition that a sub-broker should satisfy to get the certificate from SEBI?

a. A sub-broker should be a member of a stock exchange.

b. Authorised, in writing, by a broker for affiliation in buying, selling or dealing in securities c. Maintains a database of their clients according to any format d. Takes adequate steps for redressal of investor grievances within three month of the receipt of the complaint.

14. The post-issue lead merchant banker maintains close coordination with the __________________. a. Investor b. Registrars to an issue c. Individual shareholders d. Investment banker

15. A _____________ is a member of a recognised stock exchange who buys, sells, and deals in securities on behalf of the clients for a commission. a. Depository b. Sub broker c. Stock broker d. Custodian

16. Financial services enable mobility and allocation of savings through the transformation of savings into _____________.

a. investments b. loans c. debentures d. fixed deposits

17. In which of the following the transfer of risks takes place? a. Finance lease b. Direct lease c. Tripartite lease d. Operating lease

18. On what subject was the draft introduced by the International Accounting Standard Committee Accountants of India (ICAI) in 1987?

a. AS-19 b. IAS-17 c. IAS-4

d. IAS-16

19. Which one of the following term best describes "The value of a leased asset is the estimated fair value of the asset at the end of the lease term".

a. Residual value b. Lease c. Inception of lease d. Economic life

20. The asset must be depreciated over its expected useful life under __________, using rates for similar assets.

a. IAS 16 b. IAS 38 c. IAS 17 d. IAS 4

21. Which lease does not give rise to manufacturers or dealer's profit to the lessor but meets the criteria, of the property to the lessee by the end of the lease term?

a. Operating lease b. Direct financing lease c. Sales type lease d. Finance lease

22. Which of the following is a short-term contract in which the only the rights to use the property is transferred by the lessor to the lessee? a. Financial lease b. Leveraged lease c. Operating lease d. Direct lease

23. From the viewpoint of the lessor, the cash outflows contains ________.

a. Income-tax on lease payments b. Security deposit c. Tax shield on depreciation d. Residual value

24. ___________ involves three parties, the lessor, lessee and the financier. a. Operating lease b. Financial lease c. Direct leasing d. Leveraged lease

25. The ___________ are financial institutes which provide financial assistance in leasing. a. Credit union b. Leasing intermediaries c. Stock brokerage firms d. Asset management firms

26. From the point of view of lessor, the ___________ aims at determining whether to accept a lease proposal or to choose from the alternative proposals. a. Appraisal method b. Lease evaluation c. Break-even lease rental d. Discount rate

27. Each instalment in the hire-purchase finance consists of ____________. a. Ownership of goods and payment b. Capital payment and the interest c. Interest and agreement d. Depreciation and finance charge

28. A ________ is a contract where the seller transfers the ownership of goods

to the buyer for a price.

a. Sales of goods

b. Hire Purchase c. Agreement d. Lease

29. In operating lease, who bears the maintenance cost of the assets? a. Hirer b. Seller c. Lessee d. Lessor

30. In ____________ factoring, the factor provides all types of facilities except debt protection.

a. Non-recourse b. Advance c. Recourse d. Full

31. The factoring contract is similar to any other __________agreement which is regulated under the law of contract. a. Factoring b. Sale purchase c. Forfaiting d. Bank guarantee

32. __________________ are bills of exchange that are supplemented by documents confirming the authenticity of a trade transaction between the buyer and the seller of goods. a. Usance bills b. Supply bills c. Documentary bills d. Accommodation bills

33. What kind of document is accepted by Reserve Bank of India (RBI) as security to grant demand loans to the scheduled banks?

a. Promissory notes b. Supply bills c. Accommodation bills d. Usance bills

34. What is the margin between the advance granted by the bank and the face value of the bill ? a. Discount b. Tenure c. Maturity date d. Tax benefits

35. As the financial institutions offer refinancing facility to banks for bills discounted and purchased by them, the discounted bills are a good _______.

a. Liability b. Net worth c. Asset d. Debenture

36. Which of the following has an advantage of obtaining a profit that is higher

than other types of loan and advances ? a. Facility of refinancing b. Bill discounting c. Credit rating d. Discount charge

37. Which of the following insurance provides life insurance protection for a specific period only? a. Whole life insurance b. Endowment insurance c. Term insurance d. Annuities

38. Which of the following is a subdivision of early stage financing? a. Mezzanine or development capital b. Bridge or expansion c. Seed capital d. Hands-on-nurturing

39. Venture capital provides finance through__________ . a. Equity b. Debt c. Receivables d. Angel funding

40. Until 1985, which institutions have played the role of venture capitalist in India in the absence of an organised venture capital industry ? a. Industrial Finance Corporation of India (IFCI) b. Risk Capital Foundation (RCF) c. Individual investors and Development Finance Institutions (DFIs) d. Technology Development and Information Company of India (TDICI)

41. Identify the true and false statements: 1. Seed capital investment is basically a small amount that an entrepreneur receives as a confirmation that they are eligible for a start up loan.

2. Early stage financing is typically for a company which has already started production and distribution and also has established inventories.

a. 1T, 2T b. 1T,2F c. 1F,2F d. 1F,2T

42. Identify true and false statements.

1. Issue management is a fee-based service provided by financial institutions.

2. Corporate counselling is a fee-based service provided by merchant bankers to corporate enterprises.

a. 1T,2T b. 1F,2F c. 1T,2F d. 1F,2T

43. Which among the following is a fraudulent or unfair practice? a. Indulges in an act which creates correct impression of trading in securities market.

b. Coordinates the preliminary distribution of securities and acquires direct subscription from many investors.

c. Advertises information in a correct manner which can influence the decision of the investors.

d. Agrees to pay any person, any money for inducing such person for dealing in any security with the object of causing fluctuation in the price of such security.

44. Which among the following is true? a. The portfolio manager safeguards the interest of holders of debentures b. The registrar to an issue assists companies in deciding the basis of allotment of securities in consultation with stock exchanges.

c. The banker to an issue undertakes the management and administration of portfolio of securities and funds of clients on their behalf. d. The underwriter finalises the allotment of securities and dispatching allotment letters.

45. Identify the true and false statements.

1. The pricing of issue is one of the many ways by which companies can hike their capital.

2. The concept of Qualified Institutional Placements (QIP) was introduced in India to prevent the export of domestic equity markets, and encourage on-shore investment.

a. T,F b. T,T c. F,F d. F,T

46. Which of the following is true? 1. Issue management helps the corporate clients to raise funds from the capital market.

2. The objective of post-issue management is the issuance and pricing of shares.

a. 1T, 2T b. 1T,2F c. 1F,2F d. 1F,2T

47. Identify true and false statements.

1. The lead merchant banker files the offer documents of size up to Rs. 25 crores with the regional office of SEBI under the jurisdiction of the registered office of the issuer company.

2. An unlisted company can ask for relaxation from SEBI in the applicability of the rule, for listing its shares.

a. T,F b. T,T c. F,F d. F,T

48. by the ?

a.

b.

Which of the following is not a operational guideline issued SEBI for the standard disclosure of the offer document

Submission of draft and final offer document c. Offer document made public d. Instructions on post-issue obligations e. Registration with Association of Merchant Bankers of India (AMBI).

49. Which of the following is a false statement?

a. The depository involves in all transfers resulting from the settlement of transactions.

b. The depository helps in speeding up the transfer process by registering the rights of shares in the name of the depository. c. The depository is intimated electronically within 60 days when any dematerialisation request is rejected.

d. The depository maintains current accounts for participants.

50. Identify the true or false statements.

1. Institutional investors are permitted to do day trading or square off their transactions.

2. The members permitted to short sell are all sections of investors such as retail and institutional investors.

a. 1T, 2T b. 1T,2F c. 1F,2T d. 1F,2F

51. Which of the following are advantages of leasing?

1. The lessors ownership is fully secured 2. Lessee is not capable of adding or altering anything to the leased asset 3. The lessor being the owner of the asset bears the risk of obsolescence and the lessee is free on this score. 4. Double sales tax can be charged once at the time of purchase of the asset

a. 1, 3 b. 2, 4 c. 1, 2 d. 3,4

52. State which of the following statements are true or false. 1. In some cases the lease period may stretch over the entire economic life of the asset which we call as financial lease 2. The rentals are the payment which the lessor and the lessee fix after the contract is prepared.

a. 1T, 2F b. 1F,2F c. 1T,2T d. 1F,2T

53. The commitment for minimum lease payments under________ or _____ with a term of more than one year should be disclosed in summary form giving the amounts and periods in which the payment become due. a. Sales-type lease , opeating leases b. Direct financing lease, sales-type lease c. Finance lease, non cancellable leases d. AS-19, IAS-17

54. Which of the following are exempt from the accounting policies and disclosures in finance and operating leases? a. Leases of land, if title is not transferred b. If the title to the land is not likely to pass to the

lessee, then the rewards and risks of ownership has not substantially passed

c. The option to continue the lease for a secondary term at significantly below market rent.

d. Lease agreements to use property such as land

55. Which one of the following is true regarding financial lease? a. Financial lease is generally for a shorter period and is

cancellable. b. The cost of maintenance of equipment is borne by the lessee. c. The lessee has the option to acquire the asset by paying the first

rental d. The lease cannot be renewed for a further period of time.

56. Identify true and false statements. 1. The leasing intermediaries are financial institutions such as commercial banks, insurance company, NBFC (non-banking financial companies), and other financial institutions.

2. Financial appraisal is a financial evaluation technique to determine which possible alternative is economically viable. a. 1T, 2F

b. 1F, 2F

c. 1F, 2T

d. 1T, 2T

57. Identify the true and false statements.

1. In leasing, lessee is the owner of the asset and ownership is transferred to the lessee. 2. In hire-purchase financing, the ownership of the asset is with the finance company.

a. 1T, 2T b. 1T, 2F c. 1F, 2T d. 1F, 2F

58. Identify the true and false statements. 1. The consumer credit transaction consists of two parties. They are bipartite and tripartite. 2.The customer can terminate the agreement before the payment of the full amount.

a. 1T, 2T b. 1T, 2F c. 1F, 2T d. 1F, 2F

59. Identify true and false statements 1. In India, insurance business can be undertaken only by a public company, a cooperative society, a body corporate other than a private company incorporated in any country outside India.

2. The registration with the IRDA is not mandatory for all insurance companies to carry on business in India.

a. 1T, 2T b. 1T,2F c. 1F,2F d. 1F,2T

60. Identify true and false statements

1. Structure of regulations relating to obligations of insurers to rural or social sectors is one of the functions of IRDA.

2. Endowment policy gives assurance that the benefits under the policy will be given to the beneficiaries on the death of the policy holder within the selected term or on its maturity date.

a. T, F b. T, T c. F,F d. F,T

61. Match the following: First set: A. Issue management B. Corporate counselling C. Project finance D. Working capital Second set: 1. To arrange the funds from non-traditional sources such as through issue of debentures. 2. To obtain approval for the issue from the SEBI. 3. To provide advice on procedural aspects of project implementation.

4. To ensure effective running of a corporate enterprise through efficient management of finance. a. A-4, B-1, C-3, D-4

b. A-3, B-4, C-2, D-1 c. A-2, B-4, C-3, D-1 d. A-1, B-2, C-4, D-3

62. Match the following:

First set:

A. Debenture trustee B. Broker to an issue C. Underwriter D. Portfolio manager Second set: 1. Take up shares specified in the underwriting agreement of the public, who fails to subscribe them.

2. Has the right to carry on with the sale of secured property in case of default by the issuer of security.

3. Takes decisions regarding investments and policy, allocating assets for individuals and balancing risk against performance.

4. Coordinates the preliminary distribution of securities and acquire direct subscription from many investors.

a. A-4, B-1, C-3, D-2 b. A-3, B-1, C-4, D-2 c. A-2, B-4, C-3, D-1 d. A-1, B-3, C-2, D-4

63. Match the following: First set: A. Disclosure and creation of charge B. Other requirements C. Requirement of letter of option D. Requirement of credit rating Second set: 1. The company must file a copy of notice of the resolution with the SEBI.

2. The offer document must state the assets on which the security is created.

3. A rights issue of all debt instruments is made only when the credit rating of minimum investment grade is obtained from two credit rating agencies.

4. Companies cannot issue Fully Convertible Debentures (FCDs) having a conversion period of more than 36 months. a. B-1, A-2, D-3, C-4 b. C-1, D-2, B-3, A-4 c. A-2, B-4, C-1, D-3 d. D-1, A-2, C-3, B-4

64. Match the following:

The steps involved in the book building process:

First set:

A. Step 1

B. Step 2

C. Step 3

D. Step 4

Second set:

1. The draft prospectus is filed with SEBI to provide a legal standing.

2. The issuer company proposing an IPO appoints a lead merchant banker as a Book Running Lead Manager (BRLM).

3. A definite period is set as the bid period and BRLM conducts awareness campaigns like advertisement, road shows and so on.

4. Primarily, the issuer company consults with the BRLM in drawing up an offer document which does not mention the price of the issues, but consists of other details about the size of the issue, companies past history, and a price band.

a. A-2, B-4, C-1, D-3 b. A-3, B-4, C-1, D-1 c. A-3, B-1, C-4, D-2 d. A-2, B-3, C-4, D-1

65. Identify true and false statements. 1. A company must enter into an agreement with the stock exchange and must specify their mutual duties or rights or responsibilities.

2. Green Shoe Option (GSO) is an option where a company can retain a part of the over-subscribed capital by issuing additional shares.

3. In an IDR, foreign companies can not issue shares, to an Indian depository. 4. The basis of pricing of the issue must be disclosed in the offer document where the issuer discloses information related to the quantitative and qualitative factors justifying the issue price.

a. 1T, 2T, 3T, 4F b. 1T,2T,3T,4T c. 1T,2T,3F,4T d. 1F,2T,3T,4T

66. Match the following: First set: A. Due diligence B. Memorandum of understanding C. Inter-se allocation of responsibilities D. Due-diligence certificate Second set: 1. Submitted to the Board and disclosed in the offer document if the issue is handled by more than one merchant banker. 2. Investigates or audits potential investments to verify all material facts to a sale.

3. Qualified people like lawyers, chartered accountants, and investment bankers examine every aspect of the target company usually before mergers, acquisitions, strategic investments and so on.

4. An agreement between the lead manager and the issuing company.

a. B-1, A-2, D-3, C-4

b. C-1, D-2, B-3, A-4

c. A-2, B-4, C-1, D-3

d. D-1, A-2, C-3, B-4

67. Match the following:

SEBI regulations provided for the four categories of merchant bankers: First set:

A. Category I

B. Category II

C. Category III

D. Category IV

Second set:

1. They are allowed to act as an underwriter, advisor, and consultant. Capital adequacy norm for this category is Rs. 20 lakh.

2. They are allowed take up activities related to issue management. Capital adequacy norm for this category is Rs. 5 crores.

3. They are allowed to act as an advisor or consultant. There is no capital adequacy norm for this category of merchant banker.

4. They are allowed to carry the roles of advisor, consultant, comanager, underwriter and portfolio manager. Capital adequacy norm for this category is Rs. 50 lakh. a. A-2, B-4, C-1, D-3

b. A-3, B-4, C-1, D-1

c. A-3, B-1, C-4, D-2

d. A-2, B-3, C-4, D-1

68. Match the following:

First set:

A. Compliance officer B. Custodian C. Participant D. Sub broker

Second set: 1. Administrates and protects the assets of the clients

2. Monitors the compliance of the SEBI ACT 3. Acts as an agent on behalf of a stockbroker 4. Directly deals with the depository directly or on behalf of their clients a. A-1, B-4 , C-3, D-2 b. A-2, B-1, C-4, D-3 c. A-3, B-4, C-2, D-1 d. A-4, B-2, C-1 D-3

69. Identify the true or false statements.

1. Future contracts are structures for the delivery of the underlying assets on an agreed future date. 2. Future contract is a transferable specific delivery forward contract. 3. Future contracts have high risk and low liquidity. 4. Future contracts are non-transferable legal agreements.

a. 1T, 2F, 3T, 4F b. 1F, 2T, 3F, 4T c. 1T, 2T, 3F, 4F d. 1F, 2F, 3T, 4T

70. Match the following First set A. Domestic lease B. Leveraged lease C. International lease D. Single investor lease

Second set 1. Import lease and cross-border lease are its sub classifications. 2. The leasing company buys the asset through considerable borrowing. 3. The leasing company manages the fund of the entire investment by an appropriate mix of debt and equity funds. 4. All parties mentioned in the agreement are the residents of the same country.

a. A-2, B-1, C-4, D-3 b. B-3, A-2, D-4, C-1 c. D-3, C-1, A-4, B-2 d. C-1, A-3, B-4, D-2

71. State whether the following statements are true or false. 1. The government decides which company is eligible for leasing. 2. The NBFCs play a vital role in expanding the access to financial services and enhancing competition. 3. To coordinate, control and regulate the functioning of all NBFCs, the Reserve Bank of India (RBI) issues direction from time to time under the RBI Act. 4. The AFC is a financial institution which carries on its major business like the financing of physical assets that support economic activities

a. 1T, 2F, 3T, 4F b. 1F, 2T, 3T, 4T c. 1F, 2T, 3T, 4F d. 1T, 2T, 3T, 4T

72. Match the following statements First set A. Issuing of Letters of Credit B. Factoring C. Lease rentals D. Asset Finance Company

Second set 1. an element of leasing 2. a fee based financial service 3. an asset based financial service 4. a classification of NBFCs

a. A-2, B-3, C-1, D-4 b. B-3, C2, A-1, D-4 c. D-1, B-2, A-4, C-3 d. C-2, B-4, A-1, D-3

73. Which of the statements are true and false? 1. A lease which transfers all the risks and rewards incident to ownership of an asset is finance lease

2. Conditions in the lease may specify that an entity has only a limited disclosure to the risks and benefits of the leased asset 3. The lessor has the choice to purchase the asset at a cost that is expected to be lower than its fair value and such that the option is likely to be exercised.

4. The highest lease payments need to be allocated between the land and the building component in proportion to their relative fair values of the lease holding interests at the beginning of the lease.

a. 1T, 2T, 3F, 4F b. 1F,2T,3F,4T c. 1T,2F,3T,4F d. 1T,2T,3T,4F

74. Match the following: First set: A. Guaranteed residual value B. Lease term C. Finance lease D. Lease

Second set: 1. Accounting or Reporting Framework and Taxation of Leasing.

2. It is sure by the lessee to pay the maximum amount of the guarantee; and in the case of the lessor, the part of the residual value which is guaranteed by the lesse or an independent third party who is financially able of discharging the obligations under the guarantee.

3. Is is an agreement calling for the lessee (user) to pay the lessor (owner) for use of an asset for an agreed period of time. 4. A lease which transfers all the risks and rewards incident to ownership of an asset.

a. A-1,B-4,C-3,D-2 b. A-3,B-2,C-1,D-4 c. A-3,B-4,C-2,D-1 d. A-2, B-1, C-4, D-3

75. Match the following: First set: A. Break-even lease rental B. Process of financial appraisal in a lease transaction C. Leveraged lease D. Operating lease Second set: 1. Under this type of leasing, the lessor borrows funds from a financer to finance the asset and leases it to a lessee. 2. It is the rental at which the lessee is indifferent between lease financing and borrowing and buying. 3. Service lease 4. Appraisal of the client in terms of financial strength and credit worthiness

a. A-2, B-1, C-4, D-3

b. A-4, B-3, C-1,D-2 c. A-2, B-4, C-1, D-3 d. A-2, B-4, C-3, D-1