Ques.no.1.

Rating methodology is used by the major Indian credit

agencies. Explain the main factors of that are analysed in detail
by the credit rating agencies.
Ans. - The following are the main factors that are analysed in detail by
the credit rating agencies:
I.

II.

III.

IV.

V.

VI.

Business risk analysis- This analysis focuses on analysing the

industry hazards, market position of the company, operating
competence and legal position of the company. The industry risk by
taking into consideration various factors like strength of the industry
prospect, nature and basis of competition, demand and supply
position, structure of industry, pattern of business cycle etc. How
the industry players are competing with each other on the basis of
price, product quality, distribution capabilities etc are also analysed.
Industries with stable growth in demand and flexibility in the timing
of capital outlays are in stronger position and, enjoy better credit
rating.
Financial analysis- Financial analysis aims at determining the
financial strength of the issuer company through ratio analysis, cash
flow analysis and study of the existing capital structure. Financial
risk covers accounting quality, existing financial position, cash flow
and financial flexibility.
Management evaluation- The managements strong points and
weak points are evaluated for rating a debt instrument. Any
companys performance is significantly affected by the management
goals, plans and strategies, capacity to overcome unfavourable
conditions, staffs own experience and skills, planning and control
system etc. Rating exercise requires evaluation of the management
strength and weakness.
Geographical analysis- Geographical analysis facilitates in
ascertaining the location advantages enjoyed by the issuer
company. An issuer company whose business covers a large
geographical region avail the advantage of diversification and as a
result, gets an improved credit rating.
Regulatory and competitive environment- Credit rating
agencies assess the composition and regulatory structure of the
financial system in which it operates. CRAs have to assess the
bearing of regulation/deregulation on the issuer company, while
allotting rating symbols.
Fundamental analysis- Fundamental analysis includes an analysis
of liquidity management, profitability and financial position, interest
and tax rates sensitivity of the company. Fundamental analysis is

undertaken for rating debt instruments of financial institutions,

banks and non- banking finance companies.

Ques.no.2. Give the meaning of the concept of venture capital

funds. Explain the features of venture capital fund.
Ans. - Venture capital is the money provided by investors to start firms
and small businesses with long term growth potential. This is a very
important source of funding for start-ups that do not have access to
capital markets. It typically entails high risk for the investor, but it has
the potential for average returns.
Venture capital defined as investment (long term) which is made in:

Ventures that are promote by persons who though they are

qualified and technically sound but do not have any
entrepreneurial experience.
Projects which involves high degree of risk.

The concept of venture capital financing is very old but todays

changing business environment makes it more tempting for business.
Venture capital companies give risky capital to the entrepreneur so that
they can meet the minimum requirements of the promoters
contribution. Venture capitalists not only provide the finance for risky
business but also provide value-added services and business and
managerial support.
Features of a venture capital fund
Venture capital is provided for businesses which involve higher risk and
also a higher rate of return, it has some specific features. These are:
(a)
Long-term investment: It is provided for the long term, who
cannot arrange funds from other sources of finance. Venture
capital is for that project which starts earning returns after some
time.
(b)
Participation in equity capital: Venture capital is always
invested in equity capital. Because venture capitalist can sell his
part of equity when they start earning profit from their equity
holding.
(c)
High risk: Venture capital signifies equity investment in
highly risky projects which have growth prospective and a
projected high rate of return.
(d)
Management participation: Venture capital funds also
provide them with various kinds of services like participation in
management of the assisted business. Due to this reason they are
different from bankers. They are not like other stock market
investors who do not participate in the management of companies
but invest and trade in shares in the stock market.

(e)
Liquid investment: Investment made by venture capital
fund is in equity portion of the company which makes it less liquid.
Funds cannot demand its money back anytime during the life of
the assisted business. They get their money back when the
assisted business goes into liquidation.
(f) Fulfils its social objectives: Unlike several state and centrallevel government organizations, venture capitalists provide
finance with profit as their main objective. But venture capital
funds help in generating new employment opportunities and also
help in the balanced growth of the economy by the development
of new and innovative business.
(g)
Large scope of venture capital activities: Venture capital
is not merely a means for financing technology. It is financing new
technology-oriented companies and business. It extends to involve
the financing of small and medium enterprises at their early
stages of business and helps them establish in the market. It is
said that the scope of venture capital activities is big.

Ques.no.3. Hire purchase is one of the important concept. There

are certain features of hire purchase agreement so explain the
points of it. Differentiate between hire purchase and leasing.
Ans. - The buyer acquires the property by promising to pay in monthly,
quarterly and half- yearly instalments, in a hire purchase system. The
period of payment has to be fixed while signing the hire sale agreement.
Though the buyer acquires the asset after signing the agreement, the title
of ownership remains with the vendor until the buyer pays the entire
liability. The buyer has the right to return the goods to the vendor, if they
are not according to the terms and condition of the hire purchase
agreement. It has the following features:
1. The buyer buys some goods from the hiree and the possession of
the goods is immediately given to the buyer while the ownership
rests with the merchant.
2. This payment for goods is made in made in instalments and this
must be completed in a specific period of time.
3. The ownership of the asset transfer to the buyer when he pays the
last instalment for it; till then ownership lies with the merchant or
vendor.
4. In this agreement hiree charges interest on flat rate.
5. The hire purchaser has the right to terminate the agreement at any
time before the property so passes.
Difference between Hire Purchase and Leasing
i.

ii.

Ownership

Repayment amount

iii.

Advantage of tax
deductibility

iv.

Depreciation

In leasing ownership is never transfer to

the lessee even after the payment of last
lease rentals.
But in hire purchase, after the payment of
last instalment ownership is transferred
to the buyer of the goods.
Generally in lease, repayment is called
lease rentals and that in case of hire
purchase is called instalments.
In lease financing lease rentals are tax
deductible expenses. However, in hire
purchase arrangement only the amount
of interest is tax deductible not the full
installment.
Lessee cannot claim depreciation as he is
not the owner of the asset.
In hire purchase the buyer can have the
claim
of
depreciation
with
other

expenses.

v.

Realization of salvage value

Lessee cannot realize salvage value of

the leased asset after the end of the
lease contract.
The hire can claim salvage value.

Ques.no.4. Explain the concept of Depository receipts. Write

down the difference between American Depository Receipts (ADR)
and Global Depository Receipts (GDR) also mention the issues
involved in ADR/GDR.
Ans. - Depository receipts are securities that are traded in foreign
currency. These receipts are issued by the foreign bank or institution,
which act as a depository of shares issued by a domestic company.
Depository receipts can be of two types- GDRs and ADRs. GDRs are
usually listed on a European stock exchange and ADRs on the US stock
exchange.
If a company wants to issue depository receipts, it has to conform to the
following regulations:
A resolution needs to be passed the board meeting of the company
for any such issue and file the same with the Registrar of companies
in Form no.23.
Approval must be obtained from the Ministry of Finance.
Ministry of Finance specifies the price range.
Final price is determined only at the last stage.
A red herring prospectus is issued by the company without
specifying the price.
Underwriter of the issue takes care of the marketing of issue.
The company issues the shares to the depository but these are
delivered to the custodian.
Difference between ADRs and GDRs are:
I.
The ADRs are issued by the companies to raise funds from the US
markets and GDRs are issued by the companies to raise funds
from international markets.
II.
Even though both are negotiable instruments, ADRs are
negotiable in the US markets only and GDRs are negotiable in
international markets.
III.
The GDRs can be used as a substitute of ADRs, but ADRs cannot
be substitute for GDRs.

IV.
V.

Companies prefer to issue GDRs in comparison to ADRs due to

wider scope to access the international markets by GDRs.
ADRs are found in three forms from level-I to level-III, but GDRs
are already called in high preference receipts of level-II and levelIII.

Involved in ADRs /GDRs issues

i.
Issuer company- A company, which wants to tap the
foreign by raising foreign funds by way of ADRs/GDRs
issue is called issuer company.
ii.
Lead manager- Responsibility of marketing the issue
lies with the lead manager.
iii.
Co-managers/underwriters- Underwriters assists the
lead managers to perform their duties with regard to the
global issue to market it a successful effort.
iv.
Depository, custodian, Legal advisors and Auditors
are also involved.
Ques.no.5. What is online trading? Explain the process of online
trading.
Ans. - Online trading is one of the crucial financial services provided by
financial institutions and merchant bankers.
Online trading is completed through Bombay Stock Exchange (BSE) and
National Stock Exchange (NSE). Market timings are 9 am to 4 pm and
traders carry out trading in these markets. Online trading leads to
smoother and quicker transaction on these exchanges. Some 5000
companies were listed on the BSE and 1650 companies were listed on the
NSE till december2011. The government recognised BSE IN 1956. In 1995
the new electronic trading system, there is an automated screen-based
trading platform which is known as BOLT and at present it has an ability of
eight million orders a day. This system enables an investor to trade from
any part of the world. This system is the worlds first centralized
exchange-based internet trading system called BSEWEBx.co.in.
Both NSE and BSE have switched over to computerized online trading
from open outcry trading system.
Process of Online Trading
Online trading is the procedure through which transaction of financial
securities, currencies and commodities takes place through the internet.
Investors should use the right software made available by several brokers
for making online transactions. Several leading online transaction portals
are available in India besides the ones provided by NSE and BSE. The

settlement cycle in India is T+ 2days. T+2 means the transactions done

on the trade day will be resolved by exchange of money and securities on
the second business day. Pay-in and pay-out for securities settlement is
done on a T+2 basis.

The trading and settlement process in India has been listed

below:

Orders are placed at the trading depots by investors.

It is the responsibility of the broker houses to confirm the
orders and then certify them to the exchange.
Order corresponding at the exchange.
Trade confirmation information is provided by the brokers to the
investors.
The clearing corporation obtains the particulars of trade from
the exchange.

Ques.no.6. Write short notes on:

Depository Participants
Benefits of Depository Systems

Ans. - Depository Participants- All the functions performed by

depositories are actually executed by the depository participants. All
activities related to recording of allotment of securities, transfer of
securities etc. Are executed through depository participants and no
investor can directly open an account with a depository. A depository can
enter into an agreement with various depository participants who would
work as agents of the depository. Depository Participants works as an
intermediary between the investor and depository and they are called as
agents of the depository. Depositories Act, 1996, and SEBI Regulation,
1996, specify the relationship between a depository and depository
participant. A depository participant is always registered with SEBI and is
a legal entity, once a depository participant obtains a certification of
registration with SEBI after that it can start giving its depositories-related
services.

SEBI Regulations, 1996 has prescribed a minimum net worth of Rs.

50 lakhs for the applicants who are stock brokers or Non Banking
Finance companies (NBFCs), for granting a certificate of registration
to act as a depositories-related services.

Benefits of a Depository System

In the depository system, the ownership and transfer of securities take
place by means of electronic book entries. NSDL provides numerous direct
and indirect benefits like:
No stamp duty- For transfer of any type kind of securities in the
depository. This waiver extends to equity shares, debt instruments and
units of mutual funds.
Immediate transfer and registration of securities- In the depository
environment, once the securities are credited to the investors account on
pay out, he becomes the legal owner of the securities. There is no further
need to send it to the companys registrar for registration.
Speedy settlement cycle- The settlement cycle follows rolling
settlement on a T+2 basis, i.e., the settlement of trades will be on the
second working day from the trade day. This will enable faster turnover of
stock and more liquidity with the investor.