Question Paper Investment Banking and Financial Services - I (261): January 2006 Section A : Basic Concepts (30 Marks)
1.
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This section consists of questions with serial number 1 - 30.
• • • •
Answer all questions. Each question carries one mark.
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Maximum time for answering Section A is 30 Minutes.
DP is a US based company. It wants to raise funds from India through Indian Depository Receipts. What is the profitability requirement for DP according to SEBI Act, 1992?
< Answer >
(a)
It has been making profits for the last three years preceding to issue and has been declaring dividend of not less than five percent each year for the said period (b) It has been making profits for the last three years preceding to issue and has been declaring dividend of not less than ten percent each year for the said period (c) It has been making profits for the last five years preceding to issue and has been declaring dividend of not less than five percent each year for the said period (d) It has been making profits for the last five years preceding to issue and has been declaring dividend of not less than ten percent each year for the said period (e) It has been making profits for the last five years preceding to issue and has been declaring dividend of not less than fifteen percent each year for the said period. 2.
Which of the following is not true with respect to Straight Debt Bonds? (a) (b) (c) (d) (e)
3.
< Answer >
Straights are fixed interest bearing securities which are redeemable at face value Straights are secured bonds Straights are floated in domestic markets or international markets In straights the interest rates are fixed on basis of certain formula applicable in the given market The yields on these instruments are dependant on the short-term interest rates and LIBOR is most commonly used benchmark.
Which of the following is/are not true regarding NRI (Non-Resident Indian) /PIO (Person of Indian Origin) investment in immovable properties in India?
< Answer >
I.
An NRI cannot acquire any immovable property in India other than agricultural land/ farmhouse/ plantation property. II. A PIO can acquire any immovable property in India other than agricultural land/ farmhouse/ plantation property out of repatriable funs only. III. NRI/PIO is allowed to repatriate sale proceed of agricultural land out of the repatriable funds with a flat lock-in period of 18 months. (a) (b) (c) (d) (e) 4.
Only (I) above Only (III) above Both (I) and (III) above Both (II) and (III) above All (I), (II) and (III) above.
Corporates who have foreign exchange earnings are permitted to raise External Commercial Borrowing (ECB) up to (a)
Two times the average amount of annual export during the previous two years subject to maximum of USD 200 million (b) Three times the average amount of annual export during the previous two years subject to maximum of USD 200 million
< Answer >
(c)
Three times the average amount of annual export during the previous three years subject to maximum of USD 200 million (d) Four times the average amount of annual export during the previous three years subject to maximum of USD 200 million (e) Five times the average amount of annual export during the previous five years subject to maximum of USD 200 million. 5.
< Answer >
Which of the following is/are the benefit(s) of credit rating to the issuer? I.
A company with highly rated instrument has the opportunity to reduce the cost of borrowing by quoting less interest rate. II. Rating encourages the companies to come out with more disclosures about their accounting system, financial reporting and management pattern. III. Smaller and not so well known companies can access the markets. IV. A company with high rating can approach a wider section of investors for resource mobilization. (a) (b) (c) (d) (e) 6.
7.
8.
Only (I) above Only (IV) above Both (I) and (II) above (I), (III) and (IV) above All (I), (II), (III) and (IV) above.
I. II. III. IV.
These are medium to long-term Government securities. These securities are issued at discount. These securities form a part in money market. These securities provide higher liquidity.
(a) (b) (c) (d) (e)
Only (II) above Only (IV) above Both (I) and (II) above (I), (II) and (III) above All (I), (II), (III) and (IV) above. < Answer >
Which of the following is/are true for call rates? I. II. III. IV.
In the money market call rate are quoted on the annualized basis. The rate of interest on call money is calculated on daily basis. Low call rates indicate tightness of liquidity in the financial system. Call rate is influenced by forces of supply and demand for funds.
(a) (b) (c) (d) (e)
Only (II) above Only (IV) above Both (I) and (II) above (I), (II) and (IV) above All (I), (II), (III) and (IV) above.
A 364-Day T-bill with face value of Rs. 100 is trading in the market at annual yield of 12.56%. Assuming 365 days in a year, the purchase price of T-bill is (a) Rs.88.04
9.
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Which of the following is/are not true with respect to Government dated securities?
(b) Rs.88.14
(c) Rs.88.28
(d) Rs.88.89
(e) Rs.89.12.
Sundar Finance issued a commercial paper and paid brokerage 0.1% on the issue amount. Sundar Finance issued the commercial paper for a period of (a) 15 days (d) 3 months
(b) 1 month (e) 12 months.
(b) Rs.2,50,000
< Answer >
(c) 2 months
10. Carbon Bank issued 1000 Certificate of Deposits maturing after10 months having the face value of Rs.1,00,000 at Rs.98,500. The stamp duty payable by the bank on such issue is (a) Rs.2,45,000
< Answer >
(c) Rs.3,67,500
< Answer >
(d) Rs.3,75,000 11.
(e) Rs.5,00,000.
Catholic Ltd. has accepted the public deposit of Rs.1,56,65,000 payable at the end of 27 months. It has the aggregate paid up capital and free reserves of Rs.10,00,00,000. The maximum amount of brokerage payable for soliciting public deposits is (a) (b) (c) (d) (e)
Rs.1,56,650 Rs.2,34,975 Rs.3,13,300 Rs.3,91,625 The company cannot accept the deposit exceeding 10% of its aggregate paid up capital and free reserves.
12. The premium payable with respect to the insurance for the deposits accepted on behalf of the depositors by the bank is (a) (b) (c) (d) (e)
(b) Only (II) above (d) (I), (II) and (III) above
14. Alps Limited is coming up with a right issue priced at Rs.55 per share. The right is offered in the ratio of 1 share for every 4 shares held. The shares are currently quoting at Rs.87 in the market. Mr. Vinod is currently holding 720 shares of the company. The change in the wealth of Mr. Vinod if he allows his right to expire is (a) +4,608 (d) -15,480
(b) -4,608 (e) No change.
< Answer >
(c) +15,480
15. Which of the following types of guarantees is generally issued by the insurance companies?
< Answer >
Guarantees extended to non-financial contracts Guarantees on behalf of hire purchase companies to banks and other institutions Guarantees to cover long-term loans from banks Both (b) and (c) above (a), (b) and (c) above.
16. Which of the following is true for Old Line Factoring? I.
A factoring arrangement, which combines the features of recourse and advance factoring, is called Old Line Factoring. II. Old Line Factoring provides the entire spectrum of services like collection, credit protection, sales ledger protection and short-term financing. III. Old Line Factoring is also known as maturity factoring. (a) (b) (c) (d) (e)
< Answer >
Past track record of in successfully handling similar issues. Distribution network along with institutional and individual investor. Trained manpower and skills for instrument designing and pricing. Value added services like providing bridge loans against public issue proceeds.
(a) Only (I) above (c) Both (I) and (III) above (e) All (I), (II), (III) and (IV) above.
(a) (b) (c) (d) (e)
< Answer >
2.5 paise per half year for every 100 rupees 2.5 rupees per half year for every 100 rupees 2.5 paise per year for every 1000 rupees 2.5 rupees per year for every 1000 rupees 2 rupees per year for every 1000 rupees.
13. Which of the following is/are the criteria normally used in selection of the Investment Banker? I. II. III. IV.
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Only (I) above Only (II) above Only (III) above Both (I) and (II) above All (I), (II) and (III) above.
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17. Which of the following information(s) is/are to be disclosed for finance lease, under the IAS: 17/AS-19?
< Answer >
I. Amount of assets that are subject to finance lease on each balance sheet date. II. Liabilities related to these assets differentiating between the current and long-term portions. III. Commitments for minimum lease payments in summary from giving the amounts and the periods in which these payments will become due. (a) (b) (c) (d) (e)
Only (II) above Both (I) and (II) above Both (I) and (III) above Both (II) and (III) above All (I), (II) and (III) above.
18. Which of the following is/are true for Securitization?
< Answer >
I.
Securitization refers to conversion of illiquid assets to liquid assets by converting longer duration cash flows into shorter ones. II. Securitization denotes the process of selling of assets by the person holding it, to an intermediary who in turn will break such assets in to marketable securities. III. The assets may virtually be anything ranging from future sales of cinema tickets and airline tickets to hire purchase deals and non-performing assets. (a) (b) (c) (d) (e)
Only (III) above Both (I) and (II) above Both (I) and (III) above Both (II) and (III) above All (I), (II) and (III) above.
19. Which of the following is/are not true with respect to Mortgage-backed Bonds?
< Answer >
I. Mortgage-backed bonds are collateralized term-debt offering. II. These are used only as collateral to the bonds, which are issued to raise finance. III. The mortgages are sold to the holder of the securities. (a) (b) (c) (d) (e)
Only (III) above Both (I) and (II) above Both (I) and (III) above Both (II) and (III) above All (I), (II) and (III) above.
20. Which of the following is/are the factor(s), which distinguishes real estate from other assets? I. II. III. IV. (a) (c) (e)
Real estate is fixed in location and each parcel of real estate is unique. The value of real asset is dependant upon local and regional economic conditions. Real estate is a durable asset with a long economic life. The transaction cost for real estate tends to be higher than that for many other types of assets. Only (I) above (b) Only (II) above Both (I) and (III) above (d) (I), (II) and (III) above All (I), (II), (III) and (IV) above.
21. Which of the following is not true with respect to credit cards? (a) (b) (c) (d) (e)
< Answer >
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A credit card is essentially a “Pay Later Product” It is issued on the basis of financial evaluation and creditworthiness of a client Normally it provides revolving credit payment period of 45 days Annual payment and commission both are charged on a credit card Usually credit equal to five times of net income is provided to the cardholder.
22. Demutualization is
< Answer >
(a) Stock split, which is mutually agreed upon by the shareholders and the management (b) Mutual decision between the management and the various stakeholders to wind up the company (c) Share buy-back, mutually agreed between the Institutional investors and the promoters of the company (d) Separation of ownership and trading rights of brokers in a stock exchange (e) Converting the debt into equity with the conversion ratio mutually decided between the debenture holders and the management. 23. Which of the following venture capital financing is provided to a company, which is intending to go public within six months? (a) Bridge financing (d) First stage financing
(b) Seed financing (e) Mezzanine financing.
(c) Start-up financing
24. Full Finance Ltd. is an NBFC. It has classified Rs.25,56,500 worth of assets as sub-standard assets. The provision to be made for these assets is (a) Rs.1,27,825 (d) Rs.7,66,950
(b) Rs.2,55,650 (e) Rs.12,78,250.
(b) Rs.50 lakhs (e) Rs.250 lakhs.
< Answer >
I. II. III. IV.
It should have been in existence for at least three years. It should not have overdue deposits, except those unclaimed. It should be a profit making company. It should obtain minimum rating B (if issued by CRISIL or ICRA) or BB (if issued by CARE).
(a) (b) (c) (d) (e)
Both (I) and (II) above Both (II) and (III) above Both (II) and (IV) above Both (III) and (IV) above All (I), (II), (III), and (IV) above.
27. Ujwal Finance wants to register itself with SEBI to carry on the activities either as a registrar or a share transfer agent. The minimum net worth Ujwal Finance should have is (b) Rs.3 lakhs (e) Rs.10 lakhs.
< Answer >
(c) Rs.5 lakhs
28. A finance company offers a hire purchase plan for its corporate borrowers for the following terms: Flat rate of interest Repayment period Frequency Deposit at the inception of hire agreement
< Answer >
(c) Rs.100 lakhs
26. Which of the following conditions an NBFC shall fulfill before accepting the deposits?
(a) Rs.2 lakhs (d) Rs.6 lakhs
< Answer >
(c) Rs.5,11,300
25. Blue Gaints is coming up with an IPO worth Rs.50 crores. The issue will be underwritten by Silverspots Financial Services, the lead Merchant Banker. The minimum underwriting commitment of Silverspots in this issue will be (a) Rs.25 lakhs (d) Rs.200 lakhs
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12% 3 years Monthly in advance 20% of the cost of asset. The annual percentage rate
using approximation formula is (a) 36.00%
(b) 24.70%
(c) 23.40%
(d) 19.80%
(e) 18.00%.
29. Which of the following are the parts of “Defensive Audit” carried out by the merchant bankers to assess the vulnerability to takeovers? I. II.
Analysis whether the market price reflects the intrinsic value of the share and if not, the reason for under-valuation Analysis whether the valuation of the company can be enhanced by restructuring
< Answer >
III. Review of the company’s shareholders’ profile IV. Review of the company's Memorandum and Articles of Association (a) (b) (c) (d) (e)
Both (I) and (II) above Both (II) and (III) above Both (II) and (IV) above Both (III) and (IV) above All (I), (II), (III) and (IV) above.
30. Which of the following is an example of open market? (a) A bought out deal (c) Public issue of securities
(b) A car loan (d) Housing finance (e) Private placement. END OF SECTION A
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Section B : Problems (50 Marks) This section consists of questions with serial number 1 – 5. Answer all questions. Marks are indicated against each question. Detailed workings should form part of your answer. Do not spend more than 110 - 120 minutes on Section B. 1.
Mr. Vrajesh opened account with National Housing Bank (NHB) six years ago. His contribution to this account is as follows: Year
Contribution per month
1
Rs.100
2
Rs.150
3
Rs.250
4
Rs.500
5
Rs.750
6
Rs.900
He has regularly withdrawn the interest from this account for personal use. His annual income is Rs. 1,20,000 p.a. Vrajesh wants to purchase a new house for which he is looking for a loan from NHB. The built up area of the accommodation is 858 square feet. He has requested NHB to provide the loan for 10 years. Description of the accommodation is as follows. Cost of plot:
Rs. 46,200
Estimated cost of construction:
Rs. 92,500
Total cost of accommodation:
Rs.1,45,900
Mr. Vrajesh has paid Rs.16,000 for the plot and rest of the amount is still outstanding. He also paid Rs.500 as the registration charges for the same. The current balance of his account stands to 45% of the total amount saved. You are required to calculate the maximum loan that may be available to Mr. Vrajesh under Home Loan Account Scheme offered by NHB. (8 marks) < Answer > 2.
Balaji Auto Limited (BAL) has announced an attractive scheme under which a customer can purchase a vehicle at Re.1 as token payment after twelve months. Further the scheme states that the customer is required to pay an amount of Rs.4,125 monthly in arrear over a period of 12 months. The cash purchase price of the vehicle is Rs.45,000. Mr. Shah is quite impressed with this scheme. You are required to assist Mr.Shah in a.
b.
i.
Computing the effective rate of interest and the nominal rates of interest implied by the plan and also advise him whether to go for this plan considering the effective rate of 21.50% offered by the peer group
ii.
Developing the repayment schedule clearly distinguishing the capital component and interest component.
Calculating the amount of single payment, if Mr. Shah wants to make a single payment at the end of one year in lieu of twelve intervening payments. (4 + 4 + 2 = 10 marks) < Answer >
3.
Food Mart Ltd. is proposing to expand its existing chain of retail super markets in South India during the year 2005-06. It has estimated the cost of expansion to be around Rs.l00 crore. To finance the project it is considering the following two alternatives: I.
Issue of 2 crore equity shares of face value Rs.10 at a premium of Rs.40 per share
II.
Six year floating rate notes of face value Rs.5000.
Details of Floating Rate Note: Basis of Interest: The rate of interest on these notes would be fixed at a mark up of 3.5% over SBI PLR at the beginning of each year from the deemed date of allotment. The interest will be calculated on the outstanding principal amount every year. At any time during the tenure of the bond, interest on these bonds will not be less than 10% or more than 16%. Annual Payment: For every Rs.5000 invested, the holder of the FRN would be paid an amount of Rs.1300 at the end of every year for the first five years from the deemed date of allotment. The amount of Rs.1300 would comprise interest on the principal amount outstanding as at the beginning of every year and part principal redemption. The annual payment will be adjusted first towards interest part and the balance towards principal. The last payment comprising principal outstanding and interest payable would be made at the end of year 6 from the date of allotment. Future Interest Rate Scenario: At the time of issue, SBI PLR is 11 %. Future SBI PLR as predicted by leading market analysts is as follows:
SBI PLR for the year Scenario
Probability
2nd
3rd
4th
5th
6th
1
0.40
11.15%
10.30%
9.20%
7.50%
6.25%
2
0.60
10.00%
8.00%
7.00%
6.00%
5.25%
The
data from the financial statements of Food Mart Ltd. for the year 2004-05 is given below:
Particulars
Rs. Crore
Equity Capital (Face value: Rs.10)
200.00
Reserves and Surplus
100.00
Term Loan @ 12%
200.00
EBIT
50.50
Effective Tax Rate
23%
Dividend
30%
The following estimates are given by the VP
Finance of Food Mart: •
•
EBIT is expected to increase by 35% for the year ended 2005-06
•
•
Dividend is expected to increase by 8% per year
•
•
Issue expenses in case of equity and FRN would be 2.00% and 0.75% respectively
•
•
The P/E ratio of the company is 35.
You are required to a.
Recommend the alternative based on the cost of funds to the company.
b.
Evaluate, qualitatively, the FRN of the company with a regular bond with fixed annual payments and term end redemption. Give your analysis from the company's point of view. (11 + 3 = 14 marks) < Answer >
4.
The commitment for aggregative bidding for Government Securities and T-bills of six Primary Dealers is as under:
Particulars
P
Q
R
S
T
U
T-Bills
2000
1600
2400
1500
1800
2200
Government Securities
2400
1600
2000
1800
1300
2000
P
Q
R
S
T
U
T-Bills
1800
2000
2400
1600
1600
2000
Government Securities
3000
2000
16000
2000
1500
2000
The details of bids tendered are as follows:
Particulars
The details of the bids accepted are as follows:
Particulars
P
Q
R
S
T
U
T-Bills
600
800
1200
400
600
700
Government Securities
1000
500
600
1000
800
1000
You are required to a.
Compute the required level of successful bidding in T-Bills and Government Securities for each of the Dealers.
b.
Tabulate which of the Dealers have adhered to the aggregative bidding commitment and achieved the required level of successful bidding. (8 marks) < Answer >
5.
th
Bank of India proposes to borrow on 14 July, 2005, an amount of Rs.1 crore from Bank of Punjab under REPO for a period of 14 days at an interest rate of 11.50%. The security for this transaction is 13.40% GOI 2010. Following are the information with respect to GOI 2010: Interest payments
:
24th April and 24th October
Current price of the security
:
Rs. 102.50
On the same day, Bank of India also enters in repurchase transaction for 1,00,000 91-day Treasury bill with Bank of South India for 14 days at the interest rate of 14%. The following are the information regarding 91-day Treasury bill:
Issue date
:
14th June, 2005
Maturity date
:
13th September, 2005
Price for first leg
:
Rs. 98.75
You are required to compute the repurchase price for GOI 2010 and 91-day Treasury bill. (10 marks) < Answer >
END OF SECTION B
Section C : Applied Theory (20 Marks) This section consists of questions with serial number 6 - 7. Answer all questions. Marks are indicated against each question. Do not spend more than 25 -30 minutes on section C.
6.
The traditional method of doing IPOs is fixed price offering. Extensive research has revealed that the fixed price offering is a poor way of doing IPOs. Fixed price offerings, all over the world, suffer from ‘IPO under-pricing’. In India, on average, the fixed-price seems to be around 50% below the price at first listing; i.e. the issuer obtains 50% lower issue proceeds as compared to what might have been the case. Book .Building is a solution to this imbroglio. Does book building also has its share of flaws? Can you design an idealized IPO process? (10 marks) < Answer >
7.
Though we are boasting about our congenial economic ambience, we are nowhere near China when Foreign Venture Capital Investment (FVCI) is concerned. One of the main reasons for this is the regulatory framework. What regulatory frameworks hinder the free FVCI inflow to India? What recommendations can you propose to make FVCI flow smoother in India? (10 marks) < Answer > END OF SECTION C END OF QUESTION PAPER
Suggested Answers Investment Banking and Financial Services - I (261): January 2006 Section A: Basic Concepts 1.
Answer : (d) Reason : The company, which wants to raise funds through IDR, has been making profits for the last five years proceeding to issue and has been declaring dividend of not less than ten percent each year for the said period. Hence (d) is the correct answer.
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2.
Answer : (b) Reason :Straight debt bonds are unsecured in nature. All other options are correct for Straight debt bonds. Hence (b) is the correct answer.
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3.
Answer : (c) Reason :Following are true regarding NRI/PIO investment in immovable properties in India An NRI can acquire any immovable property in India other than agricultural land/ farmhouse/ plantation property. A PIO can acquire any immovable property in India other than agricultural land/farm house/ plantation property out of repatriable funds only. NRI/PIO are allowed to repatriate sale proceed of immovable property out of the repatriable funds without any lock-in period. Hence (c) is the correct answer.
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4.
Answer : (c) Reason :Corporates who have foreign exchange earnings are permitted to raise ECB up to Three times the average amount of annual export during the previous three years subject to maximum of USD 200 million Hence (c) is the correct answer.
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5.
Answer : (e) Reason :All are the benefits of rating from the point of view of the issuer. Hence (e) is the correct answer.
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6.
Answer : (a) Reason :The government-dated securities are not issued at discount. They carry coupon rate. All other statements are correct for to government-dated securities. Hence (a) is the correct answer.
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7.
Answer : (d) Reason :High call rates indicate a tightness of liquidity in the financial system. Therefore statement (III) is not correct. All other statements are correct for call rates. Hence (d) is the correct answer.
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8.
Answer :
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(d)
Days Yield 1 Face Value 365 Pr ice Reason : 364 0.1256 1 100 365 Pr ice Price = Rs.88.89. Hence (d) is the correct answer. Answer : (e) Reason :If commercial paper is issued for the period more than 6 months, the maximum prescribed brokerage is 0.1%of issue amount. Hence, alternative (e) is answer.
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10 Answer : (e) . Reason :The stamp duty payable on CD for maturity 9 months – 12 months = Rs.5 per Rs.1000 on the face value of the CD. Hence Carbon Bank should pay stamp duty to the extent of 1,000*1,00,000*5/1000 = Rs.5,00,000. Hence (e) is the correct answer.
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11. Answer : (c) Reason :Brokerage is 2% of the amount of public deposits raised if the tenure of the deposit is more than two years. ∴ Brokerage = Rs.1,56,65,000*0.02 = Rs.3,13,300 Hence (c) is the correct answer.
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9.
12 Answer :
(a)
<
Reason :Every bank has to take the insurance cover on the deposits accepted by them. The premium payable equals to 2.5 paisa per half year for every 100 rupees. The deposits will have an insurance cover for the actual amount of the deposit subject to maximum of Rs.1,00,000. Hence (a) is the correct answer.
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13 Answer : (e) . Reason :All of the criteria are used for the selection of Investment Banker. Hence (e) is the correct answer.
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14 Answer : .
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.
(a) 4 87 55
4 1 Reason :Price per share after the right issue = = Rs. 80.60 Current market value for Mr. Vinod = 720*87 = Rs. 62,640 Value of shares after right is expired = 720*80.60 = Rs. 58,032 Therefore reduction in the value of shares = Rs. 4,608.
15 Answer : (e) . Reason :Insurance companies issue generally four types of guarantees: • • Guarantees extended to non-financial contracts • • Guarantees on behalf of hire purchase companies to banks and other institutions • • Guarantees to cover deferred payments to supplier of equipments, to bankers (either to suppliers or buyers’ bankers) • • Guarantees to cover long-term loans from banks Hence (e) is the correct answer.
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16 Answer : (b) . Reason :A factoring arrangement which combines the features of non-recourse and advance factoring is called Full Factoring or Old Line Factoring. Old Line Factoring provides the entire spectrum of services like collection, credit protection,
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sales ledger protection and short-term financing. Hence (b) is the correct answer. 17 Answer : (e) . Reason :All the statements are correct for disclosure requirement for finance lease according to the IAS: 17/AS-19. Hence (e) is the correct answer.
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18 Answer : (e) . Reason :All the statements given for Securitization are correct. Hence (e) is the correct answer.
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19 Answer : (a) . Reason :The mortgages are not sold to the holder of the securities. All other statements are correct. Hence (a) is the correct answer.
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20 Answer : (e) . Reason :All the statements are correct for real estate. Hence (e) is the correct answer.
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21 Answer : (d) . Reason :Commission charges are not levied on the credit card. It only attracts annual payment charges. All other options are correct for a credit card. Hence (d) is the correct answer.
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22 Answer : (d) . Reason :Demutualization is the latest buzzword rocking the stock exchanges all over. This means that securities exchanges will no longer be owned only by the members of these exchanges as hitherto. They will be converted into public companies where ownership will be divorced from trading rights of brokers and securities. Hence (d) is the correct answer.
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23 Answer : (a) . Reason :Bridge financing is provided to a company which is intending to go public within six months. So, the correct answer is (a).
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24 Answer : (b) . Reason :The provision requirement on sub-standard asset is 10% on outstanding.
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Therefore 25,56,500*0.10 = Rs.2,55,650. 25 Answer : (a) . Reason :In cases of underwritten issues, the minimum underwriting commitment of the Lead Manager shall be to the extent of 5% of the size of the offer 9r Rs.25 lakhs, whichever is less. Issue size of Blue Fox = Rs.5000 lakhs Minimum underwriting commitment by Goldmine, the Lead Manager will be the lesser of the two: • • 5% ofRs.5000 lakhs = Rs.250 lakhs
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• Rs.25 lakhs. Hence minimum underwriting commitment by Goldmine shall be Rs.25 lakhs. Therefore (a) is the correct answer. •
26 Answer : (b) . Reason :A NBFC shall fulfill the following conditions before accepting the fixed deposits: - It should have been in existence for at least two years. - It should not have overdue deposits, except those unclaimed. - It should be a profit making company. - It should obtain minimum rating A (if issued by CRISIL or ICRA) or BBB (if issued by CARE). - It should declare that it has complied with the latest guideline concerning acceptance of fixed deposits by NBFC. Hence (b) is the correct answer.
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27 Answer : (b) . Reason :According to SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 an applicant to the registration of Category II registrar i.e. to act either as a registrar or a share transfer agent should have a minimum net worth of Rs.3 lakhs.
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28 Answer : (b) . Reason :Annual percentage rate = [n/(n–1)] * 2F = 35/36 * (12*2)
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=
24.68%
or
24.70%
(app) 29 Answer : (e) . Reason :The following is included in “Defensive Audit”: • • Analysis whether the market price reflects the intrinsic value of the share and if not, the reason for under-valuation • • Analysis whether the valuation of the company can be enhanced by restructuring • • Review of the company’s shareholders’ profile • • Review of the company's Memorandum and Articles of Association. Hence all the given alternatives form part of defensive audit and the answer is (e).
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30 Answer : (c) . Reason :A bought out deal, a car loan, housing finance and private placement all are the examples of negotiated market. Only public issue of securities is the example of open market. Hence option (c) is the correct answer.
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Section B : Problems 1.
Amount saved: Year-1 100*12 =1,200 Year-2 150*12 =1,800 Year-3 250*12 =3,000 Year-4 500*12 =6,000 Year-5 750*12 =9,000 Year-6 900*12 =10,800 Total amount saved = Rs.31,800. Therefore, the balance in the account
= 31810*0.45 = Rs. 14,310
Computation of the loan disbursed: Balance available in the account 14,310 Add: (i) Amount paid for the plot 16,000 (ii) Registration charges paid for plot 500 30,810 The built up area of accommodation is 858 square feet, hence it falls under the Up to 850 square feet category. Therefore the loan that will be provided to him is equal to three times the amount saved. The loan amount = 31810 * 3 = Rs. 92,430. < TOP >
2. a. Define ‘k’ the effective rate of interest per month. The value of k can be obtained as follows: 4125 PVIFA (k,12) = 45000 PVIFA (k,12)
= 10.9091
From the table, PVIFA (1,12) = 11.2551 PVIFA (2,12) = 10.5753 Now, by interpolating we get K i.
0.346 11.2551 − 10.9091 1+ = 1+ 0.6798 11.2551 − 10.5753 = 1.51%
= The effective rate is, = (1+0.0151)12 – 1 =19.70%. Since the effective rate offered by the scheme is lower than the peers, it is advisable to go for this scheme.
The nominal rate is, = 0.0151 * 12 = 18.12%. ii. The repayment schedule will be as follows: Repayment schedule Month 1 2 3 4 5 6 7 8 9 10 11 12
b.
Amount Os. 45000 41554.50 38056.97 34506.63 30902.68 27244.31 23530.70 19761.02 15934.41 12050.02 8106.97 4104.39
Capital Component Interest Content 3445.50 679.50 3497.53 627.47 3550.34 574.66 3603.95 521.05 3658.37 466.63 3713.61 411.39 3769.69 355.31 3826.61 298.39 3884.39 240.61 3943.04 181.96 4002.58 122.42 4104.39 20.61*
Installment 4125.00 4125.00 4125.00 4125.00 4125.00 4125.00 4125.00 4125.00 4125.00 4125.00 4125.00 4125.00
* The interest adjusted with the difference of installment and out standing capital component. The single payment to be made at the end of one year will be equal to the accumulated value of the twelve monthly payments at 1.51% p.m. The amount will be equal to: = 4125 * PVIFA (1.51,12) = 4125 * 13.0485 = Rs.53,825 < TOP >
3.
a.
Computation of Cost of Funds under different alternatives for the year 2002-03 DPS = {200 x 30%}/20 =3 Expected DPS next year (Dl) = 3.24 Growth rate (g) = 8% Market price (PO) = 50 Flotation cost (f) = 2% Cost of equity = {Dl/PO(I-f)} + g = 14.61% Interest Allocation of FRN Realized amount per FRN = Rs.5000 x (1 – 0.0075) = 4962.5 Cash Flows Upfront Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Amount realized 4962.50 Interest -725.00 -617.73 -464.85 -330.88 -195.78 -83.42 Post Tax Interest -558.25 -475.66 -357.93 -254.78 -150.75 -64.24 = 1(1- 23%) = Principal repaid -575.00 -682.27 -835.15 -969.12 -1104.22 -834.24 Total Cash Flows 4962.50 -1133.25 -1157.92 -1193.09 -1223.90 -1254.97 -898.48 Effective cost of the FRN=IRR of the above cash flow = 10.30%. Hence from the cost of funds to the company point of view, the FRN would be preferred
b. Qualitative evaluation of the FRN with Regular Bond from the company point of view Positive a. Falling interest rates mean beneficial to the company if FRNs are issued b. As the principal repayment starts from Year 1, the leverage calculated by DIE starts reducing from Year 1 itself implying risk is reducing c. Flexibility to the company during the tenure of the bond to go in for additional debt d. No one time heavy cash outflow. Negative a. Tax shields on principal payments have to be foregone . b. Cash outflow each year would be higher as compared to regular bonds because FRN have principal and interest repayment < TOP >
4.
a.
Success rate to be maintained by Primary Dealers in Government Securities = 33.33% Success rate to be maintained by Primary Dealers in T-Bills= 40% Required amount of successful bids P Q R S T U 80 64 96 60 72 T-Bills 880 0 0 0 0 0 80 53 66 60 43 Government Securities 667 0 3 7 0 3 b. Adherence to successful bids Bids Commitment Adhered Bids Commitment T-Bills Tendered Adhered Y/N Tendered Y/N P Q R S T U
1800 2000 2400 1600 1600 2000 Government Securities
P Q R S T U
< > = > < <
2000 1600 2400 1500 1800 2200
N Y Y Y N N
Bids Commitment Tendered 3000 2000 1600 2000 1500 2000
> > < > > =
2400 1600 2000 1800 1300 2000
600 800 1200 400 600 700
< < < <
800 > 640 > 960 600 720 880
N Y Y N N N
Adherence to successful bids
Adhered Y/N Bids Commitment Tendered
Y Y N Y Y Y
1000 500 600 1000 800 1000
>
800 < 533 < 667 > 600 > 433 > 667
Adhered Y/N
Y N N Y Y Y < TOP >
5.
GOI 2010 Value of the security
Rs. 1,02,50,000
Interest for the period Rs. 3,01,500 th th 24 April to 14 July Total Rs. 1,05,51,500 This actual amount borrowed will, therefore be Rs. 1,05,51,500 Second Leg Date: 28 th July, 2005 The contract envisages payment of interest on the borrowing at 11.50% for 14 days. Therefore the amount of interest is Rs.1,05,51,500 * 11.5% * 14/365 = Rs. 46,542. Hence the amount to be paid by Bank India to Bank Punjab on the reversal date is Rs.1,05,51,500 + Rs. 46,542 = Rs.1,05,98,042. Amount to be paid Rs.1,05,98,042 Interest for the period Rs. 3,74,759 th th 24 April to 28 July Price of the security Rs. 1,02,23,283 91 day Treasury bill Value of the 91 day Treasury bill Rs. 98,75,000 Now, the interest on the value for 14 days at 14% is 98,75,000 * 0.14 * 14/365 = Rs. 53,027. Price for the second leg is Rs. 98,75,000 + Rs. 53,027 = 99,28,027. < TOP >
Section C: Applied Theory 6.
Some of the flaws in book building process are discussed as follows: 1. From a basic economic perspective, the IPO is a relationship between the issuer and investors. It is hard to justify the requirement that orders only go to merchant bankers or syndicate members; this greatly shrinks the extent to which the IPO harnesses NSE’s or BSE’s remarkable distribution machinery. A superior IPO process would involve investors going to any BSE or NSE terminal and placing orders. 2. The essence of modem market design is superior information display for superior price discovery. Investors should be able to continuously see how many shares have been bid for; the shape of the demand function; the cutoff price, etc. Using this information they would be able to think more effectively about order revisions, cancellations, fresh order placement, etc. IPOs in India, done through the space age VSA T technology of NSE, uses standards of transparency associated with a 19th century market design. 3. In book building IPOs in India, merchant bankers specify a band in which orders have to fall. The merchant bankers may prove to be wrong, and the IPO may suffer from severe under-pricing. If we take price discovery seriously, we should let the market set the price. 4. Most IPO processes in India are too elongated in time. The IPO process should obtain price discovery in a short time-period where everyone interested in the issue is trading on the screen at the same time. An issue that lasts for more than an hour raises the cost for
participants to constantly monitor the order book and revise orders. 5. The sale of part of the issue at a fixed price (discovered at the auction) reduces the size of the auction and raises the probability of market manipulation at the auction. 6. There should be no discretionary allocation of shares; insured shares should be allocated purely by price-time priority. From this perspective, we design an idealized IPO process: 1. On Monday morning, the newspaper should carry an advertisement, which is the prospectus of the IPO, which only talks about the firm and is silent on valuation. 2. The IPO should take place on Tuesday evening, from 4 PM to 5 PM. The auction should be a simple uniform-price auction with full transparency. A picture of the demand schedule, and the cutoff price, should update on the screen in real time. 3. Investors should be able to go to any NSE terminal and place orders into the auction. This harnesses 5000 odd computer screens in 300 cities all over India in the auction process. From the issuers' perspective, NSCC should perform the credit enhancement exactly as it does on the equity market. At a legal level, all orders on the screen should be placed by NSCC, thus shielding the issuer from the credit risk associated with anonymous order placement. 4. There should be no fragmentation of the shares on offer. All shares to be sold should go through a single auction. If a retail investor wanted to “access the WO at prices close to the offer price” she would just place non-competitive bids at the, IPO, where she bids to buy (say) 100 shares at the IPO price, whatever it proves to be. 5. Allocation of shares in the depository should take place on Tuesday itself. There should be no physical shares. Trading on NSE should start on Wednesday (the next day). This gives us a one day lag between the IPO and the start of trading. 6. Firms below a certain size should be barred from this IPO market. Using prospective valuations based on PIE, PIB and PIS ratios prevailing for the industry, a size of Rs.100 crore or so should be required. Smaller issuers should go to venture capitalists and private equity funds. This proposed IPO process sounds startlingly effective. To put it in perspective, it is part of the same disintermediation process that we have seen in other areas of the financial markets. With anonymous, electronic trading on the equity market, the broker/dealer has been fundamentally disintermediated out of secondary market trading, which is now dominated by the actions of buyers and sellers (and not intermediaries). In that same fashion, the IPO process proposed here uses technology to link up the issuer and the investor with a transparent pricing mechanism, and eliminates the traditional overheads of intermediation. < TOP >
7.
At present, offshore investors make investment in VCU either by investing in domestic venture capital funds by seeking one time approval from FIPB through FDI route directly. However, this requires FIPB approval for every single investment. Further, for every investment and disinvestment, RBI approvals are required in respect of pricing of securities. The Government of India guidelines provide for one time FIPB approval in the case of venture capital fund with 100% investment by offshore investors, but in practice, requirement of taking approval for pricing of securities from RBI remains for every investment and disinvestment. Foreign investors find the requirements of taking FIPB/RBI approvals very cumbersome and time
consuming. Most of the offshore investors are incorporated in tax havens particularly Mauritius to have the benefit of double tax treaty and they do not have an incidence of tax in India. These investors feel that if making investment in India is made hassle free and automatic in a transparent manner with proper tax exemptions, there would be no need for them to adopt Mauritius route and avoid several operational problems. FVCIs therefore shall be provided tax exemptions. This provision will put all FVCIs, whether investing through Mauritius route or not, on the same footing. Realising the importance of venture capital investments for the development of industry and business in India, it is necessary that inflow of such investments are encouraged and facilitated. In case of FIIs there is already a hassle free and automatic route for investment and repatriation without specific FIPB/RBI approval for investments and disinvestments. Once registered with SEBI, FIIs can freely make investments. This has brought positive investment and the net investment is around US$10 billions. It would therefore, be desirable that atleast at par with FIIs. FVCIs are allowed the facility of registration with SEBI and once registered they should have the same facility of hassle free investments without any requirement of approvals from FIPB/RBI. This would also provide authentic data and disclosures as regards their commitments and investments in VCU in India. Presently, as per Annexure III of the Industrial Policy 1991, there are already several sectors which are eligible for the investment under automatic approval route varying from 50% to 100% of the paid up capital of the companies. In case of NRIs and OCBs this limit is 100%. Keeping this in view and venture capital being a thrust area for attracting risk finance for development of business and industry, 100% inflow of funds of the foreign venture capital investors should be allowed through automatic approval route without requiring either FIPB/RBI approval once registered with SEBI. Appropriate regulatory requirements in respect of FVCIs could be incorporated under SEBI venture capital funds regulations. Alternatively, FVCIs should be allowed to invest within overall ceiling of 50% of the paid up capital of the investee company under automatic route. However, the ceiling of 50% would get substituted by higher ceilings of 51 %, 74% and 100% in respect of the sectors as provided in annexure III of the Statement of Industrial Policy and would get decreased accordingly wherever Government of India has prescribed lower ceiling as in the case of insurance, banking sector etc. This proposal is consistent with the existing policy of Government of India as regards automatic approvals. The hassle free entry of such FVCIs on the pattern of FIIs is even more necessary because of the following factors: i. Venture capital is a high risk area. In out of 10 projects, 8 either fail or yield negligible returns. It is therefore in the interest of the country that FVCIs bear such a risk. ii. For venture capital activity, high capitalization of venture capital companies is essential to withstand the losses in 80% of the projects. In India, we do not have such strong companies. iii. The FVCIs are also more experienced in providing the needed managerial expertise and other supports. Further, the FVCI bringing in foreign currency should be permitted to retain the same in foreign exchange either with the Bank in India or outside till it is actually invested. Further, as permitted in the case of FIIs they may be permitted to take forward cover to protect against the currency, price fluctuation risk.
Recommendations In view of the above background, following recommendations are proposed: a. SEBI regulations should be amended to include provisions for registration and regulation of Foreign Venture Capital Investor (FVCI) on the pattern of FIIs and once registered, should be extended the same facility of hassle free investment and disinvestment without any approval from FIPB/RBI. b. Foreign VC Investor (FVCI), registered with SEBI would be eligible to make venture capital investments under automatic route without any ceiling and any requirement of FIPB or RBI approval or alternatively, in the overall ceiling of 50% in any sector under automatic route without FIPB/RBI approval provided the overall ceiling would automatically get substituted by higher ceiling of 51 %,74% and 100% as prescribed under Annexure ill of Statement of Industrial Policy or will get reduced in accordance with the ceilings for investment prescribed by Government of India in certain specified sectors like banking, insurance etc. c. The FVCI should be permitted to park their foreign remittances in foreign exchange in a bank in India or outside till actually invested in VCUs and they should also be permitted to obtain forward cover as permitted to FIIs. < TOP >
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