END TERM EXAMINATION THIRD SEMESTER [MBA] DECEMBER 2009 PAPER CODE: - MS219 SUBJECT: Financial Markets and

Institutions

Q1). Briefly explain any five of the following: (i) Consortium loaning (ii) Loan pricing (iii) Non performing Assets (iv) Disinvestment (v) Capital Adequacy Norms (vi) Commercial Paper Consortium loaning A consortium is an association of two or more individuals, companies, organizations or governments (or any combination of these entities) with the objective of participating in a common activity or pooling their resources for achieving a common goal. Consortium is a Latin word, meaning 'partnership, association or society' and derives from consors 'partner', itself from con- 'together' and sores 'fate', meaning owner of means or comrade. Consortium Lending is that type of lending in which two or more banks come together to finance the big projects requiring huge amount of money. Consortium lending is usually done by banks to distribute the risks among the group of banks; it is also used by smaller banks to use as an opportunity to be a part of the big project financing and to gain expertise in this area. Big banks by resorting to consortium lending not only save their prospective customers but also build good relations with other banks. Loan pricing Loan pricing is a critically important function in a financial institution's operations. Loanpricing decisions directly affect the safety and soundness of financial institutions through their impact on earnings, credit risk, and, ultimately, capital adequacy. As such, institutions must price loans in a manner sufficient to cover costs, provide the capitalization needed to ensure the institution's financial viability, protect the institution against losses, provide for borrower needs, and allow for growth. Institutions must have appropriate policy direction, controls, and monitoring and reporting mechanisms to ensure appropriate loan pricing. Determining the effectiveness of loan pricing is a critical element in assessing and rating an institution's capital, asset quality, management, earnings, liquidity, and sensitivity to market risks. Non-performing assets A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or installment of principal has remained past due for a specified period of time. NPA is a classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments

for 90 days the loan is considered to be a non-performing asset. Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase in nonperforming loans and often results in massive write-downs. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the 90 days overdue norm for identification of NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall be a loan or an advance where;

Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, The account remains out of order for a period of more than 90 days, in respect of an overdraft /Cash Credit (OD/CC), The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

Disinvestment Disinvestment, sometimes referred to as divestment, refers to the use of a concerted economic boycott, with specific emphasis on liquidating stock, to pressure a government, industry, or company towards a change in policy, or in the case of governments, even regime change. The term was first used in the 1980s, most commonly in the United States, to refer to the use of a concerted economic boycott designed to pressure the government of South Africa into abolishing its policy of apartheid. The most frequently-encountered method of "disinvesting" was to persuade state, county and municipal governments to sell their stock in companies which had a presence in South Africa, such shares having been previously placed in the portfolio of the state's, county's or city's pension fund. Several states and localities did pass legislation ordering the sale of such securities, most notably the city of San Francisco. An array of celebrities, including singer Paul Simon, actively supported the cause. Many conservatives opposed the disinvestment campaign, accusing its advocates of hypocrisy for not also proposing that the same sanctions be leveled on either the Soviet Union or the People's Republic of China.

Capital Adequacy Norms Capital Adequacy Norms included different Concepts, explained as follows

1. Tier-I Capital Capital which is first readily available to protect the unexpected losses is called as Tier-I Capital. It is also termed as Core Capital.Tier-I Capital consists of:1. 2. 3. Paid-Up Capital. Statutory Reserves. Other Disclosed Free Reserves: Reserves which are not kept side for meeting any specific liability. 4. Capital Reserves: Surplus generated from sale of Capital Assets. 2. Tier-II Capital Capital which is second readily available to protect the unexpected losses is called as Tier-II Capital. Tier-II Capital consists of :1. 2. 3. 4. 5. 6. Undisclosed Reserves and Paid-Up Capital Perpetual Preference Shares. Revaluation Reserves (at discount of 55%). Hybrid (Debt / Equity) Capital. Subordinated Debt. General Provisions and Loss Reserves. There is an important condition that Tier II Capital cannot exceed 50% of Tier-I Capital for arriving at the prescribed Capital Adequacy Ratio.

Risk Weighted Assets Capital Adequacy Ratio is calculated based on the assets of the bank. The values of bank's assets are not taken according to the book value but according to the risk factor involved. The value of each asset is assigned with a risk factor in percentage terms.Suppose CRAR at 10% on Rs. 150 crores is to be maintained. This means the bank is expected to have a minimum capital of Rs. 15 crores which consists of Tier I and Tier II Capital items subject to a condition that Tier II value does not exceed 50% of Tier I Capital. Suppose the total value of items under Tier I Capital is Rs. 5 crores and total value of items under Tier II capital is Rs. 10 crores, the bank will not have requisite CRAR of Rs. 15 Crores. This is because a maximum of only Rs. 2.5 Crores under Tier II will be eligible for computation.

Subordinated Debt These are bonds issued by banks for raising Tier II Capital.They are as follows :1. 2. They should be fully paid up instruments. They should be unsecured debt.

3.

They should be subordinated to the claims of other creditors. This means that the bank's holder's claims for their money will be paid at last in order of preference as compared with the claims of other creditors of the bank. 4. The bonds should not be redeemable at the option of the holders. This means the repayment of bond value will be decided only by the issuing bank

Commercial paper In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 271 days. Commercial paper is a money-market security issued (sold) by large corporations to get money to meet short term debt obligations (for example, payroll), and is only backed by an issuing bank or corporation's promise to pay the face amount on the maturity date specified on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a recognized rating agency will be able to sell their commercial paper at a reasonable price. Commercial paper is usually sold at a discount from face value, and carries higher interest repayment rates than bonds. Typically, the longer the maturity on a note, the higher the interest rate the issuing institution must pay. Interest rates fluctuate with market conditions, but are typically lower than bank rates. Q2) What do you mean by Financial Institutions. Explain in detail the significance of institutions in promoting economic growth? FINANCIAL INSTITUTION - A financial system can be defined at the global, regional or firm specific level. The firm's financial system is the set of implemented procedures that track the financial activities of the company. On a regional scale, the financial system is the system that enables lenders and borrowers to exchange funds. The global financial system is basically a broader regional system that encompasses all financial institutions, borrowers and lenders within the global economy. The financial system conveys resources from lenders to borrowers, and transfers risks from those who wish to avoid them to those who are willing to take them. It is a complex interactive system, events in one component of which can have significant repercussions elsewhere. There are also complex interactions between financial transactions and other forms of economic activity, as consequence of which a malfunction of the financial system can cause a malfunction of the economy, and vice-versa. The system has evolved by adaptation and innovation, and the conduct of its participants has been modified from time to time by regulations designed to preserve its stability

The financial system of any country consists of (a) specialised and non-specialised financial institutions (b) organised and unorganised financial markets (c) financial instruments and services which facilitate transfer of funds. Significance of Institutions are as follows: Financial institutions have tended to play down their potential role in moving towards sustainable development, believing that such matters are primarily the role of government. Financial markets normally supply financial capital with the intention that is should ideally increase, and at least should be safeguarded.Financial institutions can respond quickly to new opportunities, particularly when the potential ispresented to them in a clearand consistent manner,Banking system and the Financial Institutions play very significant role in the economy. First and foremost is in the form of catering to the need of credit for all the sections of societyAn efficient banking system must cater to the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors. At the same time, the medium and small ventures must also have credit available to them for new investment and expansion of the existing units. Rural sector in a country like India can grow only if cheaper credit is available to the farmers for their short and medium term needs. Credit availability for infrastructure sector is also extremely important. The success of any financial system can be fathomed by finding out the availability of reliable and adequate credit for infrastructure projects. Fortunately, during the past about one decade there has been increased participation of the private sector in infrastructure projects. The banks and the financial institutions also cater to another important need of the society i.e. mopping up small savings at reasonable rates with several options. The common man has the option to park his savings under a few alternatives, including the small savings schemes introduced by the government from time to time and in bank deposits in the form of savings accounts, recurring deposits and time deposits. Another option is to invest in the stocks or mutual funds. The economic development greatly depends on the rate of capital formation. Now,the capital formation depends upon whether finance is made available in time, in adequate quantity, and on favourable terms all of which a good financial system could achieve. A efficient financial system helps in

mobilizing the savings thus results in economic growth of a economy. A financial system helps output to increase by moving the economic system towards the existing PPF or by moving the PPF of the economy rightwards. This is done by transforming a given total amount of wealth into more productive forms. It induces people to hold less of savings in the form of precious metals, real estate land, consumer durables, currency and to replace these assets by bonds, shares, units etc. It also helps to increase the volume of investment. Thus financial institutions play a quite significant role in the economic growth of a economy. Q3) Do you believe that the regulations affecting NBFCs have affected the returns to investors as well as access to credit for borrowers? Illustrate your arguments. Amendments to NBFC Regulations As you are aware, Reserve Bank of India has put in place a comprehensive regulatory and supervisory framework in January 1998, aimed at protecting the interests of depositors and ensuring that the NBFCs function on sound and healthy lines. These regulations are being reviewed by the Bank from time to time keeping in view the emerging situations. the following changes and further instructions are issued for information and necessary action : (1) Borrowings from Mutual Funds to be exempted from the purview of public deposits The borrowings from mutual funds are presently treated as Public Deposits. However, the Bank has received representations from leading NBFCs, more particularly the Primary Dealers, that the borrowings from mutual funds should be excluded from the purview of public deposits. In view of the fact that the mutual funds have the time tested appraisal techniques for assessment of the borrowers' capacity to repay the debts and they do not require the same degree of protection as needed by the depositors under the RBI Act, it has been decided to exempt the borrowings from mutual funds from the purview of public deposits. Accordingly, the NonBanking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 contained in the Notification DFC.118/DG(SPT)-98 dated January 31, 1998 has been amended. A copy of the amending notification is enclosed for your information and necessary action. The NBFCs could reduce the amount of borrowings from mutual funds while computing the outstanding public deposits as on December 31, 1999 and maintain the liquid assets on and from April 1, 2000 on the remaining public deposit liabilities as per the extant provisions under Section 45-IB of the RBI Act, 1934. (2) Need for public notice before (i) closure of the branch/office by any NBFC (ii) sale/transfer of ownership by an NBFC (a) With a view to ensuring that an NBFC intending to close a particular branch/ office gives proper notice to the depositors and adequate arrangements are made to service the deposits mobilised through such a branch/office, it has been decided that the concerned NBFC should give at least 3 months public notice

prior to the date of closure of any of its branches/ offices in, at least, one leading national news paper and a leading local (covering the place of branch / office) vernacular language newspaper indicating therein the purpose and arrangements being made to service the depositors etc. (b) (i) Reserve Bank grants Certificate of Registration to an NBFC after assessing and evaluating various factors including the quality of promoters and management to protect the interests of depositors and the soundness of the financial system. To ensure that the new management subserves the above objectives and to keep the public informed of the change of management and control of NBFCs, it has been decided that a public notice of three months shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such public notice shall be given by the NBFC and also by the transferor, or the transferee. For this purpose, the term 'control' shall have the same meaning as defined in Regulation 2(1) (c) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. (ii) The public notice should indicate the intention to sell or transfer ownership / control, the particulars of transferee and the reasons for such sale or transfer of ownership / control. The notice should be published in one leading national and another in leading local (covering the place of registered office) vernacular language newspaper. An intimation along with a copy of the notice in respect of items (a) and (b) above should be sent within 7 days of its publication in the newspapers to the Regional Office of RBI under whose jurisdiction the registered office of the company is located. Implementation of the recommendations of the Task Force on NBFCs (Vasudev Committee) 3. The NBFC Directions on Acceptance of Public Deposits, Directions on Prudential Norms and Auditors Directions were last reviewed on December 18, 1998 to give effect to some of the recommendations of the Task Force on NBFCs. Steps are afoot to implement the recommendations which require amendments to the Statute. The remaining recommendations would be implemented in due course of time.As you are aware, Reserve Bank of India has put in place a comprehensive regulatory and supervisory framework in January 1998, aimed at protecting the interests of depositors and ensuring that the NBFCs function on sound and healthy lines. These regulations are being reviewed by the Bank from time to time keeping in view the emerging situations. 2. Pursuant to our Governor's Statement on Mid-Term Review of Monetary and Credit Policy for the year 1999-2000 issued on October 29, 1999, the following changes and further instructions are issued for information and necessary action : (1) Borrowings from Mutual Funds to be exempted from the purview of public deposits The borrowings from mutual funds are presently treated as Public Deposits. However, the Bank has received representations from leading NBFCs, more particularly the Primary Dealers, that the borrowings from mutual funds should be excluded from the purview of public deposits. In view of the fact that the mutual funds have the time tested appraisal techniques for assessment of the borrowers' capacity to repay the debts and they do not require the same degree of protection as needed by the depositors under the RBI Act, it has been decided

to exempt the borrowings from mutual funds from the purview of public deposits. Accordingly, the Non Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 contained in the Notification DFC.118/DG(SPT)-98 dated January 31, 1998 has been amended. A copy of the amending notification is enclosed for your information and necessary action. The NBFCs could reduce the amount of borrowings from mutual funds while computing the outstanding public deposits as on December 31, 1999 and maintain the liquid assets on and from April 1, 2000 on the remaining public deposit liabilities as per the extant provisions under Section 45-IB of the RBI Act, 1934.(2) Need for public notice before (i) closure of the branch/office by any NBFC (ii) sale/transfer of ownership by an NBFC (a) With a view to ensuring that an NBFC intending to close a particular branch/ office gives proper notice to the depositors and adequate arrangements are made to service the deposits mobilised through such a branch/office, it has been decided that the concerned NBFC should give at least 3 months public notice prior to the date of closure of any of its branches/ offices in, at least, one leading national news paper and a leading local (covering the place of branch / office) vernacular language newspaper indicating therein the purpose and arrangements being made to service the depositors etc. (b) (i) Reserve Bank grants Certificate of Registration to an NBFC after assessing and evaluating various factors including the quality of promoters and management to protect the interests of depositors and the soundness of the financial system. To ensure that the new management subserves the above objectives and to keep the public informed of the change of management and control of NBFCs, it has been decided that a public notice of three months shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such public notice shall be given by the NBFC and also by the transferor, or the transferee. For this purpose, the term 'control' shall have the same meaning as defined in Regulation 2(1) (c) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. (ii) The public notice should indicate the intention to sell or transfer ownership / control, the particulars of transferee and the reasons for such sale or transfer of ownership / control. The notice should be published in one leading national and another in leading local (covering the place of registered office) vernacular language newspaper. An intimation along with a copy of the notice in respect of items (a) and (b) above should be sent within 7 days of its publication in the newspapers to the Regional Office of RBI under whose jurisdiction the registered office of the company is located. Implementation of the recommendations of the Task Force on NBFCs (Vasudev Committee) 3. The NBFC Directions on Acceptance of Public Deposits, Directions on Prudential Norms and Auditors Directions were last reviewed on December 18, 1998 to give effect to some of the recommendations of the Task Force on NBFCs. Steps are afoot to implement the recommendations which require amendments to the Statute. The remaining recommendations would be implemented in due course of time. These amendments have affected the return to investors as well as access to credit for borrowers

Q4). Define merchant banker. What are the criteria for authorization of a merchant banker? State the responsibilities of a merchant banker. MERCHANT BANKER A bank that deals mostly in (but is not limited to) international finance, long-term loans for companies and underwriting. Merchant banks do not provide regular banking services to the public.

CRITERIA FOR AUTHORISATION OF MERCHANT BANKER SEBIs authorization is a must to act as merchant bankers. Authorization criteria include Professional qualification in finance, law or business management Infrastructure like office space, equipment and manpower Capital adequacy Past track of record, experience, general reputation and fairness in all transactions Every merchant banker should maintain copies of balance sheet, profit and loss account, statement of financial position. Half-yearly unaudited result should be submitted to SEBI. Merchant bankers are prohibited from buying securities. SEBI has been vested with the power to suspend or cancel the authorization in case of violation of the guidelines. Every merchant banker shall appoint a Compliance Officer to monitor compliance of the act. SEBI has the right to send inspecting authority to inspect books of accounts, records etc.. of merchant bankers. Inspections will be conducted by SEBI to ensure that provisions of the regulations are properly complied.

An initial authorization fee, an annual fee and renewal fee may be collected by SEBI.

A lead manager holding a certificate under category I shall accept a minimum underwriting obligation of 5% of size of issue or Rs. 25 lakhs whichever is less.

RESPONSIBILITIES OF MERCHANT BANKER To the Investors Investor protection is fundamental to a healthy growth of the Capital Market. Protection is not to be conceived as that of compensating for the losses suffered. The responsibility of the Merchant Banker in ensuring the completeness of the disclosures is of paramount importance in view of the fact that entire reliance is based on offer Document either Prospectus or Letter of Offer because an independent agency like a Merchant Banker has done the scrutiny. Capital structuring The Merchant Bankers while designing the capital structure take into account the various factors such as Leverage effect on earnings per share, the project cost and the gestation period, cash flow ability of the company, the cost of capital, the considerations of management control, size of the company, and general economic factors. These exercise are done mainly in order to meet the fund requirement of the company taking due cognizance of the investors preference. Project Evaluation and due Diligence Due diligence and project evaluation is another major responsibility of the Merchant Banker. Where the project has already been appraised by a bank/financial institution, the Merchant Banker relies on the said appraisal before accepting an assignment. However, where the project has not been appraised by bank/financial institution, the Merchant Bank undertakes a detailed evaluation of the project before taking up an assignment for issue management. Legal aspect The factors that are looked into in case of the legal aspects are:

Compliance with the SEBI guidelines and the various guidelines issued by the Ministry of Finance and Department of Company Affairs. Pending litigations towards tax liabilities or any criminal/civil prosecution any of the directors for any offenses. Fair and adequate disclosures in the prospectus.

Pricing of the Issue The Merchant Banker looks into the various factors while pricing the issue. Some of the factors are past financial performance of the company, Book value per share, stock market performance of the shares. The Merchant Banker has a vital role to play in pricing of the instrument. Marketing of the Issue Marketing of the issue is a vital responsibility of the Merchant Banker. The firststage is Pre-issue marketing for placement of the issue with the financial institutions, banks, mutual funds, FIIs and NRIs. The second stage is the marketing of the issue to the general public through various vehicles such as press, brokers, etc. Bought out Deals The concept of wholesale but out of public offerings by the Merchant Banker sstarted off with over the Counter Exchange of India where a Merchant banker acts also as a sponsor and either takes up the entire issue to be offered wholly of jointly with other co-investors and off-loads the same to the public at a later date by an offer for sale. Major amendments were made to the SEBI regulations regarding Merchant Bankers. The duration of this transaction period has not officially been announced Q5) Explain the concept of mutual funds? Discuss SEBIs regulations relating to organization and management of mutual funds? Ans) Mutual Funds: A mutual fund is a type of professionally-managed collective investment vehicle that pools money from many investors to purchase securities.http://en.wikipedia.org/wiki/Mutual_fund - cite_note-0 It collects funds from different investors to a common pool of investible funds and then invests these funds in a wide variety of investment opportunities. It is a trust that pools the

savings of the number of investors who shares a common financial goal. Anybody with an investible surplus can invest in mutual funds. These investors by units of a particular mutual fund scheme that has defined investment, objective and strategy. The money collected is invested by the fund manager in different types of securities. These could range from shares to debentures to money market investments depending upon the scheme stated objectives. Characteristics of mutual funds: a mutual fund is a intermediary and works as an investment company. Some of its characteristics are as follows: Mutual fund is a pool of financial resources. Investors bring their individual funds together. Sometimes, the funds which otherwise may not come for investment in the capital market are invested through mutual funds. Mutual funds are indirect investing. The individual investors invest in mutual funds which in turn invest in shares, debentures and other securities in the capital market. Mutual funds are professionally managed. The resources collected by mutual funds are managed by professionals and experts in investment. These professionals undertake specialised investment analysis which are not otherwise expected from the individual investor. Investment in mutual fund is not borrowing-lending relationship. Investors do not lend money to the mutual fund, rather they invest.

Advantages of Mutual funds:

Increased diversification Daily liquidity Professional investment management Ability to participate in investments that may be available only to larger investors Service and convenience Government oversight Ease of comparison

Disadvantages of Mutual funds:

Fees Less control over timing of recognition of gains Less predictable income No opportunity to customize

Types of mutual funds Most funds have a particular strategy they focus on when investing. For instance, some invest only in Blue Chip companies that are more established and are relatively low risk. On the other hand, some focus on high-risk start up companies that have the potential for double and triple digit growth. Finding a mutual fund that fits your investment criteria and Value stocks Stocks from firms with relative low Price to Earning (P/E) Ratio, usually pay good dividends. The investor is looking for income rather than capital gains. Growth stock Stocks from firms with higher low Price to Earning (P/E) Ratio, usually pay small dividends. The investor is looking for capital gains rather than income. Based on company size, large, mid, and small cap Stocks from firms with various asset levels such as over $2 Billion for large; in between $2 and $1 Billion for mid and below $1 Billion for small. Income stock The investor is looking for income which usually come from dividends or interest. These stocks are from firms which pay relative high dividends. This fund may include bonds which pay high dividends. This fund is much like the value stock fund, but accepts a little more risk and is not limited to stocks. Index funds The securities in this fund are the same as in an Index fund such as the Dow Jones Average or Standard and Poor's. The number and ratios or securities are maintained by the fund manager to mimic the Index fund it is following. Enhanced index This is an index fund which has been modified by either adding value or reducing volatility through selective stock-picking. Stock market sector The securities in this fund are chosen from a particular marked sector such as Aerospace, retail, utilities, etc. Defensive stock The securities in this fund are chosen from a stock which usually is not impacted by economic down turns. International style is important. Types of mutual funds are:

Stocks from international firms. Real estate Stocks from firms involved in real estate such as builder, supplier, architects and engineers, financial lenders, etc.

SEBI Regulations with regard to mutual funds are: (SEBI Mutual funds Regulation 1996): The provision of this regulation pertaining to AMC is: All the schemes to be launched by the AMC need to be approved by the trustees and copies of offer documents of such schemes are to be filed with SEBI. The offer documents shall contain adequate disclosures to enable the investors to make informed decisions. Advertisements in respect of schemes should be in conformity with the SEBI prescribed advertisement code, and disclose the method and periodicity of valuation of investment sales and repurchase in addition to the investment objectives. The listing of close-ended schemes is mandatory and every close-ended scheme should be listed on a recognised stock exchange within six months from the closure of subscription. However, listing is not mandatory in case the scheme provides for monthly income or caters to the special classes of persons like senior citizens, women, children, and physically handicapped; if the scheme discloses details of repurchase in the offer document; if the scheme opens for repurchase within six months of closure of subscription. Units of a close-ended scheme can be opened for sale or redemption at a predetermined fixed interval if the minimum and maximum amount of sale, redemption, and periodicity is disclosed in the offer document. Units of a closeended scheme can also be converted into an open-ended scheme with the consent of a majority of theunit-holders and disclosure is made in the offer documentabout the option and period of conversion.

Units of a close-ended scheme may be rolled over bypassing a resolution by a majority of the shareholders.

No scheme other than unit-linked scheme can be opened for subscription for more than 45 days.

The AMC must specify in the offer document about the minimum subscription and the extent of over- subscription, which is intended to be retained. In the case of over-subscription, all applicants applying up to 5,000 units must be given full allotment subject to over subscription.

The AMC must refund the application money if minimum subscription is not received, and also the excess over subscription within six weeks of closure of subscription. Guaranteed returns can be provided in a scheme if such returns are fully guaranteed by the AMC or sponsor. In such cases, there should be a statement indicating the name of the person, and the manner in which the guarantee is to be made must be stated in the offer document.

A close-ended scheme shall be wound up on redemption date, unless it is rolled over, or if 75% of the unit-holders of a scheme pass a resolution for winding up of the scheme; if the trustees on the happening of any event require the scheme to be wound up; or if SEBI, so directs in the interest of investors.

Q6)What do you mean by venture capital? State its characteristics. Explain the guidelines for venture capital funds? Venture CapitalVenture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop i n t o s i g n i f i c a n t e c o n o m i c c o n t r i b u t o r s . I t i s a n i m p o r t a n t s o u r c e o f equity for start-up companies. Venture capital is capital typically provided by outside investors for financing of new, growing or struggling businesses. Venture capital

investments generally are high risk investments but offer the potential for above average returns and/or a percentage of o w n e r s h i p o f t h e c o m p a n y . A v e n t u r e c a p i t a l i s t i s a p e r s o n w h o m a k e s s u c h investments. A venture capital fund is a pooled investment vehicle (often a partnership)that primarily invests the financial capital of third p a r t y i n v e s t o r s i n enterprises that are too risky for the standard capital markets or bank loans. Venture capital is long-term risk capital to finance high technology projects which involve risk but at the same time has strong potential for growth. Venture capitalist pools their resources including managerial abilities to assist new entrepreneur in the early years of the project. Once the project reaches the stage of profitability, they sell their equity holdings at high premium. A venture capital c o m p a n y i s d e f i n e d a s a f i n a n c i n g i n s t i t u t i o n s w h i c h j o i n t s a n entrepreneur as a co-promoter in a project a n d s h a r e s t h e r i s k s a n d r e w a r d s o f t h e enterprise. Venture capital is money provided by an outside investor to finance a new, growing, or troubled business. The venture capitalist provides the funding knowing that theres a significant risk associated with the companys future profits and cash flow. Capital is invested in exchange for an equity stake in the business rather than given as a loan, and the investor hopes the investment will yield a better-than-average return. Venture capital is an important source of funding for start-up and other companies that have a limited operating history and dont have access to capital markets.

Under venture capital finance the lender provides financial support to a company which is in early stage of development, though it involves risk but at the same time is has the potential for generating abnormal returns for venture capitalist. Given below are some of the features of venture capital

Venture capital involves not only investing money but also active participation in the management of the company by the person who has made investments in the company.

Venture capitalist divests his or her holding once the investments has generated returns in accordance with the venture capitalist desired return. Venture Capital Financing is in the form of equity participation rather than giving it as loan or debt. Venture Capital Financing is usually done for companies which are small level or medium level and also relatively newly formed companies are the preferred choice of venture capitalist.

Venture capitalist does Venture Capital Financing in order to make a capital gain on equity investment at the time of exit. Venture Capital provides initial support to new companies using high technology and which have potential for high profits but suffers from capital inadequacy.

The Venture Capital firms in India can be categorized into the following four groups: All-India DFI-sponsored VCFs such as Technology Development

and Information Company of India Ltd. (TDICI) by ICICI, Risk Capital and Technology Finance Corporation Ltd. (RCTFC) by IFCI and Risk Capital Fund by IDBI2. SFC-sponsored VCFs such as Gujarat Venture Capital Ltd. (GVCL) by GIIC and Andhra Pradesh Venture Capital Ltd. (APVCL) by APSFC3. Bank-sponsored VCFs such as Canfina and SBI Caps4. Private VCFs supported by private sector companies such as Indus Venture Capital Fund, Credit Capital Venture Fund. GUIDELINES FOR VENTURE CAPITAL FUNDS Application for Grant of Certificate.

(1) Any company or trust [or a body corporate] proposing to carry on any activity as a venture capital fund on or after the commencement of these regulations shall make an application to the Board for grant of a certificate. (2) Any company or trust [or a body corporate], who on the date of commencement of these regulations is carrying any activity as a venture capital fund without a certificate shall make an application to the Board for grant of a certificate within a period of three months from the date of such commencement: Provided that the Board, in special cases, may extend the said period up to a maximum of six months from the date of such commencement. (3) An application for grant of certificate under sub-regulation (1) or sub regulation (2) Shall be made to the Board in Form A and shall be accompanied by a nonrefundable application fee as specified in Part A of the Second Schedule to be paid in the manner specified in Part B thereof. (4) Any company or trust [or a body corporate] referred to in sub-regulation (2) who fails to make an application for grant of a certificate within the period specified therein shall cease to carry on any activity as a venture capital fund. (5) The Board may in the interest of the investors issue directions with regard to the transfer of records, documents or securities or disposal of investments relating to its activities as a venture capital fund. (6) The Board may in order to protect the interests of investors appoint any person to take charge of records, documents, securities and for this purpose also determine the terms and conditions of such an appointment. Q7) What is yield curve? Explain the differences between the expectations, market segmentation, and liquidity premium view of the yield curve. A yield curve is a graphic representation of the relationship between interest rates (yields) on a particular security and its term to maturity. The time to maturity is measured on the horizontal axis and the interest rate (yield) on the vertical axis. The relationship between the term to maturity and interest rate is what determines the shape and level of a yield curve. In other words, a yield curve is a graphical representation of where interest rates are today. There is not one single interest rate; there is an interest rate for those who want

to invest now for the next three months, there is another interest rate for those who want to invest now for the next six months, and so on out to thirty years and longer. The yield curve shows the rate of return that can be locked in now for various terms into the future. Yield curves are usually upward sloping asymptotically: the longer the maturity, the higher the yield, with diminishing marginal increases (that is, as one moves to the right, the curve flattens out). The yield curve shows the various yields that are currently being offered on bonds of different maturities. It enables investors at a quick glance to compare the yields offered by short-term, medium-term and long-term bonds. The yield curve can take three primary shapes. If short-term yields are lower than longterm yields (the line is sloping upwards), then the curve is referred to a positive (or "normal") yield curve.

If short-term yields are higher than long-term yields (the line is sloping downwards), then the curve is referred to as an inverted (or "negative") yield curve.

Finally, a flat yield curve exists when there is little or no difference between short- and long-term yields.

It is important that only bonds of similar risk are plotted on the same yield curve. The most common type of yield curve plots Treasury securities because they are considered risk-free and are thus a benchmark for determining the yield on other types of debt. The shape of the yield curve changes over time. Investors who are able to predict how the

yield curve will change can invest accordingly and take advantage of the corresponding change in bond prices. There are three main economic theories attempting to explain how yields vary with maturity. Two of the theories are extreme positions, while the third attempts to find a middle ground between the former two. Market expectations (pure expectations) hypothesis

This hypothesis assumes that the various maturities are perfect substitutes and suggests that the shape of the yield curve depends on market participants' expectations of future interest rates. These expected rates, along with an assumption that arbitrage opportunities will be minimal, is enough information to construct a complete yield curve. For example, if investors have an expectation of what 1-year interest rates will be next year, the 2-year interest rate can be calculated as the compounding of this year's interest rate by next year's interest rate. More generally, rates on a long-term instrument are equal to the geometric mean of the yield on a series of short-term instruments. This theory perfectly explains the observation that yields usually move together. However, it fails to explain the persistence in the shape of the yield curve. Shortcomings of expectations theory are- Neglects the risks inherent in investing in bonds (because forward rates are not perfect predictors of future rates). Liquidity premium theory The Liquidity Premium Theory is an offshoot of the Pure Expectations Theory. The Liquidity Premium Theory asserts that long-term interest rates not only reflect investors assumptions about future interest rates but also include a premium for holding long-term bonds (investors prefer short term bonds to long term bonds), called the term premium or the liquidity premium. This premium compensates investors for the added risk of having their money tied up for a longer period, including the greater price uncertainty. Because of the term premium, long-term bond yields tend to be higher than short-term yields, and

the yield curve slopes upward. Long term yields are also higher not just because of the liquidity premium, but also because of the risk premium added by the risk of default from holding a security over the long term. The market expectations hypothesis is combined with the liquidity premium theory:

Where

is the risk premium associated with an

year bond.

Market segmentation theory This theory is also called the segmented market hypothesis. In this theory, financial instruments of different terms are not substitutable. As a result, the supply and demand in the markets for short-term and long-term instruments is determined largely independently. Prospective investors decide in advance whether they need short-term or long-term instruments. If investors prefer their portfolio to be liquid, they will prefer short-term instruments to long-term instruments. Therefore, the market for short-term instruments will receive a higher demand. Higher demand for the instrument implies higher prices and lower yield. This explains the stylized fact that short-term yields are usually lower than long-term yields. This theory explains the predominance of the normal yield curve shape. However, because the supply and demand of the two markets are independent, this theory fails to explain the observed fact that yields tend to move together (i.e., upward and downward shifts in the curve).

Submitted To Ms.Meenakshi Kaushik HoD, MBA RDIAS

Submitted By: Ms. Nidhi Sharma Assistant Professor RDIAS