2014 – Solved Question Paper | Financial Service | Final Year – Masters of Commerce (M.Com) | Dibrugarh University

2014 – Solved Question Paper | Financial Service | Final Year – Masters of Commerce (M.Com) | Dibrugarh University



Paper: 205

(Financial Services)

Full Marks: 80

Time: 3 hours

The figures in the margin indicate full marks for the questions

1. (a) What do you mean by Portfolio Management? Discuss in detail about the portfolio management procedure and strategy. (6+12=18)

-> Portfolio management’s meaning can be explained as the process of managing individuals’ investments so that they maximize their earnings within a given time horizon. Furthermore, such practices ensure that the capital invested by individuals is not exposed to too much market risk.

The entire process is based on the ability to make sound decisions. Typically, such a decision relates to – achieving a profitable investment mix, allocating assets as per risk and financial goals and diversifying resources to combat capital erosion.

Primarily, portfolio management serves as a SWOT analysis of different investment avenues with investors’ goals against their risk appetite. In turn, it helps to generate substantial earnings and protect such earnings against risks.

Objectives of Portfolio Management

The fundamental objective of portfolio management is to help select best investment options as per one’s income, age, and time horizon and risk appetite.

Some of the core objectives of portfolio management are as follows –

  • Capital appreciation
  • Maximizing returns on investment

· To improve the overall proficiency of the portfolio

  • Risk optimization
  • Allocating resources optimally
  • Ensuring flexibility of portfolio

· Protecting earnings against market risks

Nonetheless, to make the most of portfolio management, investors should opt for a management type that suits their investment pattern.

Types of Portfolio Management

In a broader sense, portfolio management can be classified under 4 major types, namely –

  • Active portfolio management

In this type of management, the portfolio manager is mostly concerned with generating maximum returns. Resultantly, they put a significant share of resources in the trading of securities. Typically, they purchase stocks when they are undervalued and sell them off when their value increases.

  • Passive portfolio management

This particular type of portfolio management is concerned with a fixed profile that aligns perfectly with the current market trends. The managers are more likely to invest in index funds with slow but steady returns which may seem profitable in the long run.

  • Discretionary portfolio management

In this particular management type, the portfolio managers are entrusted with the authority to invest as per their discretion on investors’ behalf. Based on investors’ goals and risk appetite, the manager may choose whichever investment strategy they deem suitable.

  • Non-discretionary management

Under this management, the managers provide advice on investment choices. It is up to investors whether to accept the advice or reject it. Financial experts often recommended investors to weigh in the merit of professional portfolio managers’ advice before disregarding them entirely.

There are few things more important and more daunting than creating a long-term investment strategy that can enable an individual to invest with confidence and with clarity about his or her future. Constructing an investment portfolio requires a deliberate and precise portfolio-planning process that follows five essential steps.

Step 1: Assess the Current Situation

Planning for the future requires having a clear understanding of an investor’s current situation in relation to where they want to be. That requires a thorough assessment of current assets, liabilities, cash flow, and investments in light of the investor’s most important goals. Goals need to be clearly defined and quantified so that the assessment can identify any gaps between the current investment strategy and the stated goals. This step needs to include a frank discussion about the investor’s values, beliefs, and priorities, all of which set the course for developing an investment strategy.

Step 2: Establish Investment Objectives

Establishing investment objectives centers on identifying the investor’s risk-return profile. Determining how much risk an investor is willing and able to assume, and how much volatility the investor can withstand, is key to formulating a portfolio strategy that can deliver the required returns with an acceptable level of risk. Once an acceptable risk-return profile is developed, benchmarks can be established for tracking the portfolio’s performance. Tracking the portfolio’s performance against benchmarks allows smaller adjustments to be made along the way.

Step 3: Determine Asset Allocation

Using the risk-return profile, an investor can develop an asset allocation strategy . Selecting from various asset classes and investment options, the investor can allocate assets in a way that achieves optimum diversification while targeting the expected returns. The investor can also assign percentages to various asset classes, including stocks, bonds, cash, and alternative investments, based on an acceptable range of volatility for the portfolio. The asset allocation strategy is based on a snapshot of the investor’s current situation and goals and is usually adjusted as life changes occur.

Step 4: Select Investment Options

Individual investments are selected based on the parameters of the asset allocation strategy. The specific investment type selected depends in large part on the investor’s preference for active or passive management . An actively managed portfolio might include individual stocks and bonds if there are sufficient assets to achieve optimum diversification, which is typically over $1 million in assets. Smaller portfolios can achieve the proper diversification through professionally managed funds, such as mutual funds or exchange-traded funds. An investor might construct a passively managed portfolio with index funds selected from the various asset classes and economic sectors.

Step 5: Monitor, Measure and Rebalance

After implementing a portfolio plan, the management process begins. This includes monitoring the investments and measuring the portfolio’s performance relative to the benchmarks. It is necessary to report investment performance at regular intervals, typically quarterly, and to review the portfolio plan annually. Once a year, the investor’s situation and goals get a review to determine if there have been any significant changes. The portfolio review then determines if the allocation is still on target to track the investor’s risk-reward profile. If it is not, then the portfolio can be rebalanced , selling investments that have reached their targets, and buying investments that offer greater upside potential.

When investing for lifelong goals, the portfolio planning process never stops. As investors move through their life stages, changes may occur, such as job changes, births, divorce, deaths, or shrinking time horizons, which may require adjustments to their goals, risk-reward profiles or asset allocations. As changes occur, or as market or economic conditions dictate, the portfolio planning process begins anew, following each of the five steps to ensure that the right investment strategy is in place.

(b) Explain the meaning of listing of securities in Stock Exchanges. What are the conditions to be fulfilled by a company to list their securities in any exchange? (6+12=18)

-> Listing means the admission of securities of a company to trading on a stock exchange. Listing is not compulsory under the Companies Act. It becomes necessary when a public limited company desires to issue shares or debentures to the public. When securities are listed in a stock exchange , the company has to comply with the requirements of the exchange .

Objectives of Listing

The major objectives of listing are

1. To provide ready marketability and liquidity of a company’s securities.

2. To provide free negotiability to stocks.

3. To protect shareholders and investors interests.

4. To provide a mechanism for effective control and supervision of trading.

Types of Listing of Securities

1. Initial listing: Here, the shares of the company are listed for the first time on a stock exchange.

2. Listing for public Issue: When a company which has listed its shares on a stock exchange comes out with a public issue.

3. Listing for Rights Issue: When the company which has already listed its shares.in the stock exchange issues securities to the existing shareholders on rights basis.

4. Listing of Bonus shares: When a listed company in a stock exchange is capitalizing its profit by issuing bonus shares to the existing shareholders.

5. Listing for merger or amalgamation: When the amalgamated company issues new shares to the shareholders of amalgamated company, such shares are listed.

Conditions for Listing

Before listing securities, a company has to fulfill the following conditions:

1. Shares of the company must be offered to the public through a prospectus and 25% of each class of securities must be offered.

2. The prospectus should clearly mention opening of subscription, receipt of application, etc.

3. The capital structure of the company should be broad-based and there should-be public interest in securities.

4. The minimum issued capital must be Rs. 3 crores of which Rs. 1.80 crores must be offered to the public.

5. There must be at least five public shareholders for every Rs. 1 lakh of fresh issue of capital and 10 shareholders for every Rs. 1 lakh of offer for sale of existing capital. On the excess application money, the company will have to pay interest from 4% to 15%, if there is delay in refund and delay should not be more than 10 weeks from the date of closure of subscription list.

6. A company with paid up capital of more than Rs. 5 crores should get itself listed in more than one stock exchange, it includes the compulsory listing on regional stock exchange.

7. The auditor or secretary of the company applying for listing should declare that the share certificates have been stamped so that shares belonging to the promoter’s quota cannot be sold or hypothecated or transferred for a period of 5 years.

8. Articles of Association of the company must have the following provisions:

  • A common form of transfer shall be used
  • Fully paid shares shall be used
  • No lien on fully paid shares

· Calls paid in advance will not carry a right to dividend and will not be forfeited before the claim becomes time-barred.

· Option to call off shares shall be given only after sanction by the general meeting.

9. Letter of allotment, Letter of regret and letter of rights shall be issued simu1taneously.

10. Receipts for all the securities deposited, whether for registration or split and no charges will be made for the services.

11. The company will issue consolidation and renewal certificates for split certificate, letter of allotment, letter of rights and transfer, etc. when required.

12. The stock exchange should be notified by the company regarding the date of board meeting, change in the composition of board of directors, and any new issue of securities, in place of reissue of forfeited shares .

13. Closing the transfer books for the purpose of declaration of dividend, rights issue or bonus issue. And for this purpose, due notice should be given to stock exchange.

14. Annual return of the company to be filed soon after the annual general body meeting.

15. The company will have to comply with conditions imposed by the stock exchange now and then for 1istmg of security.

Procedure for listing requirements

For listing the shares in the stock exchange, the public limited company will have to submit supporting documents. They are:

1. Certified copies of Memorandum , Articles of Association , prospectus and agreements with Underwriters.

2. All particulars regarding capital structure .

3. Copies of advertisements offering securities for sale during the last 5 years.

4. Copies of Balance sheet, audited accounts and auditors’ report for the last 5 years.

5. Specimen copies of shares and debentures, certificate letter of allotment, and letter of regret.

6. A brief history of the company since incorporation with any changes in capital structure, borrowings, etc.

7. Details of shares and debentures issued for consideration other than cash.

8. Statement showing distribution of shares and particulars of commission, brokerage, discounts or special terms towards the issue of shares.

9. Any agreement with financial institutions.

10. Particulars of shares forfeited.

11. Details of shares or debentures for which permission to deal with is applied for.

12. Certified copy of consent from SEBI.

Procedure at the Stock Exchange

After the application is made the Listing Committee of the stock exchange will scrutinize the application form of the company. Here, the stock exchange will ensure the following—

1. The financial position of the company is sound

2. Solvency and liquidity positions are good

3. The issue is large and broad based to generate public interest. If the application for listing is accepted, the listed company will be called to execute listing agreement with the stock exchange. The company must follow certain obligations which are:

· The company will treat all the applications with equal fairness.

· In case of over subscription, the allotment will be decided in consultation with stock exchanges; and

· The company will notify to the stock exchange any change in its management, business, and capital structure or bonus or rights issue of shares.

2. (a) Discuss the regulatory provisions which are to be followed by the Mutual Fund Institution operating in India. (10)

-> Regulation of Mutual Funds in India-

The term “regulation” means a rule or directive made and controlled by an authority.

Mutual funds are regulated by the Securities and Exchange Board of India (SEBI).

In 1996, SEBI formulated the Mutual Fund Regulation.

SEBI is additionally the apex regulator of capital markets and its intermediaries.

The issuance and trading of capital market instruments also come under the purview of SEBI.

Along with SEBI, mutual funds are regulated by RBI, Companies Act, Stock exchange, Indian Trust Act and Ministry of Finance.

RBI acts as a regulator of Sponsors of bank-sponsored mutual funds, especially in the case of funds offering guaranteed returns.

In order to provide a guaranteed returns scheme, a mutual fund needs to take approval from RBI.

The Ministry of Finance acts as a supervisor of RBI and SEBI and appellate authority under SEBI regulations.

Mutual funds can appeal to the Ministry of finance on the SEBI rulings.

Mutual funds in India are regulated by-

Primarily, mutual funds are regulated by the Securities and Exchange Board of India (SEBI).

A mutual fund should have the approval of RBI in order to provide a guaranteed returns scheme.

The Ministry of Finance acts as a supervisor of RBI and SEBI and appellate authority under SEBI regulations.

The Association of Mutual Funds in India (AMFI) has been made to develop this Mutual Fund Industry of India on professional and ethical lines and to enhance and maintain standards in all areas with a view to protect and promote the interests of mutual funds and their unit holders.

(b) Briefly explain: (5+5=10)

1) Close ended Fund.

-> Closed-ended funds, also known as CEFs for short, are basically a type of mutual fund , but their special feature is that they are a combination of the elements of regular open-end mutual funds and ETFs. A closed-end fund is also known as a “closed-end investment” or “closed-end mutual fund”. It is technically a public traded security that offers its shareholders partial ownership in an underlying portfolio of assets. Closed-ended funds, just like open-end mutual funds, give you a stake in the larger pool of stocks and hence share the expenses with other shareholders as well. But unlike these open-ended mutual funds, closed-ended funds directly trade on stock exchanges and therefore, their prices can change any time throughout the market day. There is a limit on the share counts of CEFs because of which they trade at a premium or a discounted price of their net asset value, and that can be very beneficial to the value investors who are bargain-hunting.

For closed-end funds, a predetermined number of shares is issued. While an open-ended fund allows investors to enter (by buying the stocks) or exit (by selling the stocks) at any time, it is different with closed-end funds. Investors can buy units of a closed-end at the time of New Fund Offer (NFO). These funds are associated with a fixed term ranging from 3 to 5 years. The investor has to hold on to the shares in this period and can sell it only after the term is over. However, the funds can be traded publicly like the open-ended schemes. There is a bit of cautionary note here – instead of buying/selling at NAV, the funds are bought/sold at market price. And the market price is typically a discounted value of the NAV, so selling closed-end funds on stock exchanges may result in lower yields.

Now that we have understood what closed-ended mutual funds are, let’s have a look at the features, benefits, and advantages and the top-performing closed-ended mutual funds in India

Features of Closed-ended Funds

A closed-ended fund is managed by professional fund managers that bring with them a wealth of experience in helping the fund meet its stated objectives. This expertise allows the investors to invest in the markets without having an in-depth knowledge of the underlying stocks that make up the fund portfolio. The fund managers usually invest in theme-based funds like contra funds in order to limit their spread. Due to the lock-in period, the fund managers don’t have to worry about sudden redemption requests, thus giving them better flexibility to manage the funds.

Investors are allowed to invest (or buy) only at the time of NFO. They have to hold on to the funds till the NFO term is up (usually between three to five years). Since there is no information available about the fund before the NFO, it is judicious for the investor to do thorough research on the portfolio spread. They can earn regular dividends if the fund portfolio performs well. They can sell these on the exchange as well at the prevailing market price, which is usually less than the fund’s NAV. Due to its lock-in feature, investors remain committed to the fund and track its performance more closely.

Advantages of Closed-ended Funds

Closed-ended funds offer various advantages that help investors in meeting their investment objectives. Some of them are:

1. Portfolio Management

Individual investors have access to professional portfolio managers. This leads to the investors having access to low cost, extensive investment research, trading and money management expertise that are generally unavailable to them.

2. Stable Asset Base

In closed-ended funds, the investors are allowed to redeem the units of the fund on prescribed dates only i.e. on the maturity of the fund. This thus allows the creation of a stable base of assets. These assets are not subject to frequent redemptions. The primary benefit of this characteristic is that allows the fund manager to be in a pole position to formulate an investment strategy inclined to the fund objectives.

3. Market Pricing

Closed-ended funds trade on stock exchanges where the investors can buy or sell shares throughout the trading day at any prices above or below the fund NAV. They use the usual stock trading tactics such as stops, market/limit orders, margin trading, and short sales.

4. Underlying Allocation

Closed-ended funds have the flexibility to limit their investment spread to around 20-30 stocks in the portfolio. This improves the likelihood of better returns from the concentrated portfolio bets of closed-ended funds.

5. Distribution

The earnings are distributed to the shareholders by the investment funds at regular intervals. This is typically done monthly or quarterly and is implemented in two ways:

• Income is delivered to the shareholders as the fund collects net interests or dividends.

• Once realized, the capital gains are passed to the shareholders.

6. Leverage

Closed-end funds can properly use leverage to increase the performance of the investment by generating enhanced gains or earnings. Whenever the funds use leverage, the NAV becomes more volatile than the other funds, which do not use leverage.

7. Lower Expense Ratios

Open-ended funds often have ongoing costs related to distributing, issuing and redeeming shares. Whereas, because closed-end funds have a fixed number of shares, they do not have any such costs. This mostly leads to the closed-ended funds having expense ratios lesser than other investment strategies. This lower expense further leads to lower fees over time.

Performance of Closed-ended Funds in India

On a broader level, closed-ended funds haven’t been so successful. For the past two years, the returns of the closed-ended funds have been around 3.23% while the open-ended funds generated returns up to 7.4% on an average.

About 65-85% of the large closed-ended mutual fund schemes have beaten their benchmark in indices. Then there are some schemes which have underperformed on an average level.

According to experts, closed-ended funds have performed largely in pockets. Studies have shown that closed-ended funds make sense if they are picked well. It’s too soon to reach a conclusion that whether closed-ended funds have worked out in India or not. The evidence so far is patchy but still, closed-ended funds seemed to be working out for some investors.

2) Open ended Fund.

-> Open-ended Mutual Fund is an investment scheme where the shares can be issued and redeemed at any time.

A mutual fund is an investment option. It involves pooling in money from investors for investment in a variety of underlying securities. A mutual fund house issues unit of mutual funds to investors in proportion to their investment money.

The objectives of the mutual fund are disclosed in the offer document. The profits or losses are shared by investors in proportion to their investments.

A mutual fund must be registered with the Securities and Exchange Board of India (SEBI) before it can collect funds from the public.

On the basis of structures, mutual funds can be classified into two categories: open-ended mutual funds and close-ended mutual fund. Open-ended schemes are available for subscription and repurchase on a continuous basis. There is no fixed maturity period. Investors have the option to buy and sell units at NAV which is declared on a daily basis. The past performance of these assets can be tracked which allows the investor to make a well-informed decision. If the investor is looking for liquidity alone, these funds are a great option.

A mutual fund is floated in the market through a new fund offer. In case of open-ended funds, an investor can purchase or sell units of an open-ended mutual fund at any time after the closure of NFO. The NFO is usually open for a maximum period of 30 days. Investment in these funds can be made through systematic investment plans (SIPs) and systematic withdrawal plans (SWPs).

In open-ended mutual funds, units are purchased and sold on demand at the net asset value of the fund. The NAV fluctuates every day based on the prices of the stocks and bonds in the market. There is no limitation on the number of units of the mutual fund that can be issued. There is no set maturity period for these funds. Once an investor redeems the units of an open-ended fund, the units are taken off the market. However, an investor has to pay exit loads for units that are sold within 1 year.

The fund is professionally managed by the fund manager. This scheme is a great option for investors who do not want to actively monitor their investments but are looking at optimal returns.

Advantages of investing in an open-ended fund:-

Here are the key advantages of investing in these funds

– Access to liquidity: There are no restrictions on the investor to redeem the units of an open-ended fund. This provides access to liquidity to the investors at any time they want. Moreover, the investors can redeem the funds as per the net asset value as on the day of redemption.

– Past performance: Investors of these funds can track the performance of the funds. The historical data available helps the investor take the best investment decision.

– Various systematic options available: These funds allow investors to make use of systematic plans for making investments and withdrawal. The investor can choose from SIPs, SWPs and systematic transfer plans.

– Professionally managed plans: There is an experienced fund manager who manages the fund. These managers have the expertise, experience, and resources to make the right investment decision for the investors.

Diversified portfolios: Open-ended funds invest a range of assets. The stocks belong to a variety of industries and companies. A diversified portfolio helps to reduce the risks associated with investments.

– Higher returns: These funds provide better returns in the long run compared to other schemes. For an investor with a short-term investment horizon, open-ended funds offer the perfect solution.

3. (a) Give an overview of Venture Capital financing in India. (10)

-> Venture Capital refers to the finance provided by Venture Capitalists, who invest in relatively new, high growth companies or startups that have a potential to grow and develop into highly profitable ventures. It has high-risk and high-return characteristics. Therefore, it acts as an important source of finance for entrepreneurs with new ideas.

Venture Capital is the most suitable form of funding for companies and for businesses having large up-front capital requirements which have no other cheap alternatives.

It is a private or institutional investment made to early start-up companies. Venture Capital is money invested in businesses that are small; or exist only as an initial stage but have huge potential to grow. The people who invest this money are known as venture capitalists.

It is an investment made when a venture capitalist buys shares of a startup company and become a financial partner in the business.

Venture Capital is also stated as a huge capital risk or patient risk capital investment, as it involves the risk of losing the money if the venture doesn’t succeed.

It is the basically the money invested by an outside investor to finance a new, growing or troubled business. The money invested, by capitalists, is in exchange for an equity stake in the business rather than given as a loan.

Importance of Venture Capital

Venture Capital institutions let entrepreneurs convert their knowledge into viable projects with the assistance of such Venture Capital institutions.

· It helps new products with modern technology become commercially feasible.

· It promotes export oriented units to earn more foreign exchange.

· It not only provides the financial institution but also assist in management, technical and others.

· It strengthens the capital market which not only improves the borrowing concern but also creates a situation whereby they can raise their own capital through capital market.

· It promotes modern technology through the process where financial institutions encourage business ventures with new technology.

· Many sick companies get a turn around after getting proper nursing from such Venture Capital institutions.

Features of Venture Capital

High-risk investment: It is highly risky and the chances of failure are much higher as it provides long-term startup capital to high risk-high reward ventures.

High Tech projects : Generally, venture capital investments are made in high tech projects or areas using new technologies as they have higher returns.

Participation in Management : Venture Capitalists act complementary to the entrepreneurs, for better or worse, in making decisions for the direction of the company.

Length of Investment : The investors eventually seek to exit in three to seven years. The process takes several years for having significant returns and also need the talent of venture capitalist and entrepreneurs to reach completion.

Illiquid Investment : It is an investment that is not subject to repayment on demand or a repayment schedule.

Venture Capital in India

Evolution of Venture Capital

In 1983, the first analysis was reported on risk capital in India. It indicated that new companies often face barriers while entering into the capital market and also for raising equity finance which weakens their future expansion and growth. It also indicated that on the whole, there is a need to assess the equity cult by ensuring competitive return on equity investment. This all came out as institutional inadequacies and resulted in the evolution of Venture Capital.

In India, IFCO was the first institution to initiate the idea of Venture Capital when it established the Risk Capital Foundation in 1975. It provided the seed capital to all small and risky projects. However, the concept of Venture Capital got its recognition for the first time in the budget for the year 1986-87.

Objectives of Venture Capital in India

It allows for the working together of capitalists and startups/businesses closely and for the promoting of entrepreneurs to focus on making more and more ideas.

· It creates an environment suitable for knowledge and technology-based enterprises.

· It helps to boost scientific, technology and knowledge-based ideas into a powerful engine of economic growth and wealth creation in a suitable manner.

· It aims to play a catalytic role to India on the world map as a success story.

  • Process Of Venture Capital Financing

· The Venture Capital Funding process gets completed in six different stages:

Seed Stage

In this stage, a small amount of capital is provided to an entrepreneur to market a better idea having future prospects. The investor investigates into the business plan before making any investment and, if he is not satisfied with the idea or he does not see any potential in the idea/product, then the investor may not consider financing the idea. But in case if the part of the idea is worth, then the investor may spend some time and money further on the idea. At this stage, the risk factor is very high because there are many uncertain factors.

Startup Stage

If the idea/product is fit for further investigation, then the process moves on to the second stage, also known as the Start-up stage. At this stage Venture Capital has to submit a business plan which must include the following:-

  • Executive summary of the business plan,
  • Review of current competitive scenario,
  • In-detailed financial projections,
  • Details of the management of the company,

· Description of the size and potential of the market.

All the above analysis needs to be submitted, in order to decide, whether or not, Venture Capital to take the project or not. This type of financing is provided to complete product development and commence initial market strategies.

Second Stage

At this stage, the idea transforms into a product and is being sold. The main goal at this stage is that Ventures tries squeezing between the rests and getting some market shares from the competitors. The management is being monitored by the Venture Capital firms in order to know the capability of the team just to ensure the development process of the product and how they respond to the competitors. If the firms find out that the capabilities are against the competition. Then the Venture Capital might not go to the next stage.

At this stage of financing, working capital is provided for the expansion of the business in terms of growing accounts and inventory.

At this stage, risk factor decreases as the product is not developing at the former start-up stage. But it concentrates on the promotion and sales of the product.

Third Stage

This stage is also called as later stage finance. Capital is provided to an enterprise that has basic marketing set-up, typically for market expansion, acquisition product development etc. At a later stage, ventures try to multiply market shares by increasing the sales of the product and having better marketing promotion.

Venture Capital monitors objectives of earlier stages i.e. second stage and also of the current stage to evaluate whether the team has made the expected cost reduction or not.

Venture Capitalists prefer this stage than any other stages as the rate of failure in the later stage is low. It is also because firms at this stage have a track record of the management, past performance data and established the procedure for financial data.

Risk at this stage is still decreasing because venture relies on the income from the sales of the current product.

IPO Stage

This stage is also known as a bridge finance stage. It is the last round of financing before exit. The Ventures at this stage gain a certain amount of shares which gives them opportunities, such as merger and acquisition, eliminating the competitors, keeping away new companies from the market. At this stage, Venture has to determine the product position, and if possible, reposition it attract the new market.

Advantages of Venture Capital

Expansion of Company : Venture capital provides large funding that a company needs to expand its business. It has the ability for company expansion that would not be possible through bank loans or other methods.

Expertise joining the company : Venture capitalists provide valuable expertise, advice and industry connections. These experts have deep knowledge of specific market standards and they can help you avoid your business from many downsides that are usually associated with startups.

Better Management : It’s not always that being an entrepreneur one is also a good business manager. However, since Venture Capitalists hold a percentage of equity in the business. They will have the power to say in the management of the business. So if one is not good at managing the business, this is a significant benefit.

No Obligation to repay : In addition, there is an obligation to repay to investors as it would be in case of banks loans. Rather, investors take the investment risk on their own shoulders because they believe in the company’s future success.

Value Added Services : Venture Capitalists provide HR Consultants, who are specialist in hiring the best staff for your business. This helps in avoiding to hire the wrong person. It also offers a number of other such services such as mentoring, alliances and also facilitates the exit.

Disadvantages of Venture Capital

Complex Process: It is a lengthy and complex process which needs a detailed business plan and financial projections. Until and unless the Venture Capitalists are properly satisfied with the business plan, whether or not it will succeed in the future, they won’t invest. So securing a deal with a Venture Capitalist can be a long and complex process.

Loss of control: Venture Capital firms add one of their team members to your management team, while this is usually done for ensuring the success of the business, it can also create internal problems.

Loss over decisions: Another big problem faced in Venture Capital funding is that you will have to give up many key decisions on how the company will process or operate. This is because Venture Capitalist are required to be informed about all the key decision relating to business plans, and they usually can override such decision if they are unsatisfied with the decision.

No Confidentiality: Generally Venture Capitalist treat information confidentially. But they refuse to sign non- disclosure agreement due to the legal ramification of doing so. This puts the ideas at risk, especially when they are new. Further, your investor will expect regular information and consultation to check how things are progressing. For example, accounts and minutes of board meetings.

Quick Liquidity: Most Venture Capitalists seek to realize their investment in the company in three to five years. If your business plan expects a longer timetable before providing liquidity, then Venture Capital funding may not be a suitable option for you.

4. (a) What do you mean by leasing? Discuss the importance of leasing as a vehicle of finance. (3+7=10)

-> A “lease” is defined as a contract between a lessor and a lessee for the hire of a specific asset for a specific period on payment of specified rentals.

The maximum period of lease according to law is for 99 years. Previously land or real resate, mines and quarries were taken on lease. But now a day’s plant and equipment, modem civil aircraft and ships are taken.


(i) Lessor:

The party who is the owner of the equipment permitting the use of the same by the other party on payment of a periodical amount.

(ii) Lessee:

The party who acquires the right to use equipment for which he pays periodically.

Lease Rentals:

This refers to the consideration received by the lessor in respect of a transaction and includes:

(i) Interest on the lessor’s investment;

(ii) Charges borne by the lessor. Such as repairs, maintenance, insurance, etc;

(iii) Depreciation;

(iv) Servicing charges.

At present there are many leasing companies such as 1st Leasing Company, 20th Century Leasing Company which are doing quite a lot of business through leasing, It has become an important financial service and a lucrative avenue of making sizable profits by leasing companies.

Types of Leases:

The different types of leases are discussed below:

1. Financial Lease:

This type of lease which is for a long period provides for the use of asset during the primary lease period which devotes almost the entire life of the asset. The lessor assumes the role of a financier and hence services of repairs, maintenance etc., are not provided by him. The legal title is retained by the lessor who has no option to terminate the lease agreement.

The principal and interest of the lessor is recouped by him during the desired playback period in the form of lease rentals. The finance lease is also called capital lease is a loan in disguise. The lessor thus is typically a financial institution and does not render specialized service in connection with the asset.

2. Operating Lease:

It is where the asset is not wholly amortized during the non-cancellable period, if any, of the lease and where the lessor does not rely for is profit on the rentals in the non- cancellable period. In this type of lease, the lessor who bears the cost of insurance, machinery, maintenance, repair costs, etc. is unable to realize the full cost of equipment and other incidental charges during the initial period of lease.

The lessee uses the asset for a specified time. The lessor bears the risk of obsolescence and incidental risks. Either party to the lease may termite the lease after giving due notice of the same since the asset may be leased out to other willing leases.

3. Sale and Lease Back Leasing:

To raise funds a company may-sell an asset which belongs to the lessor with whom the ownership vests from there on. Subsequently, the lessor leases the same asset to the company (the lessee) who uses it. The asset thus remains with the lessee with the change in title to the lessor thus enabling the company to procure the much needed finance.

4. Sales Aid Lease:

Under this arrangement the lessor agrees with the manufacturer to market his product through his leasing operations, in return for which the manufacturer agrees to pay him a commission.

5. Specialized Service Lease:

In this type of agreement, the lessor provides specialized personal services in addition to providing its use.

6. Small Ticket and Big Ticket Leases:

The lease of assets in smaller value is generally called as small ticket leases and larger value assets are called big ticket leases.

7. Cross Border Lease:

Lease across the national frontiers is called cross broker leasing. The recent development in economic liberalization, the cross border leasing is gaining greater importance in areas like aviation, shipping and other costly assets which base likely to become absolute due to technological changes.

Importance of Leasing:-

The use of hire purchase or leasing is a popular method of funding the acquisition of capital assets. However, these methods are not necessarily suitable for every business or for every asset purchase. There are a number of considerations to be made, as described below:


One important advantage is that a hire purchase or leasing agreement is a medium term funding facility, which cannot be withdrawn, provided the business makes the payments as they fall due.

The uncertainty that may be associated with alternative funding facilities such as overdrafts, which are repayable on demand, is removed.

However, it should be borne in mind that both hire purchase and leasing agreements are long term commitments. It may not be possible, or could prove costly, to terminate them early.


The regular nature of the hire purchase or lease payments (which are also usually of fixed amounts as well) helps a business to forecast cash flow. The business is able to compare the payments with the expected revenue and profits generated by the use of the asset.

Fixed Rate Finance

In most cases the payments are fixed throughout the hire purchase or lease agreement, so a business will know at the beginning of the agreement what their repayments will be. This can be beneficial in times of low, stable or rising interest rates but may appear expensive if interest rates are falling.

On some agreements, such as those for a longer term, the finance company may offer the option of variable rate agreements. In such cases, rentals or installments will vary with current interest rates; hence it may be more difficult to budget for the level of payment.

The Effect of Security

Under both hire purchase and leasing, the finance company retains legal ownership of the equipment, at least until the end of the agreement. This normally gives the finance company better security than lenders of other types of loan or overdraft facilities. The finance company may therefore be able to offer better terms.

The decision to provide finance to a small or medium sized business depends on that business’ credit standing and potential. Because the finance company has security in the equipment, it could tip the balance in favor of a positive credit decision.

Maximum Finance

Hire purchase and leasing could provide finance for the entire cost of the equipment. There may however, be a need to put down a deposit for hire purchase or to make one or more payments in advance under a lease. It may be possible for the business to ‘trade-in’ other assets which they own, as a means of raising the deposit.

Tax Advantages

Hire purchase and leasing give the business the choice of how to take advantage of capital allowances.

If the business is profitable, it can claim its own capital allowances through hire purchase or outright purchase.

If it is not in a tax paying position or pays corporation tax at the small company’s rate, then a lease could be more beneficial to the business. The leasing company will claim the capital allowances and pass the benefits on to the business by way of reduced rentals.

(b) Distinguish between: (10)

1) Hire purchase and Lease.

-> The difference between hire purchasing and lease financing are discussed in the points given below:

1. An arrangement to finance the use of the asset, in which one party pays consideration to the other party in periodical installments, is known as Hire Purchasing. Leasing is a business deal in which one party buys the asset and grants the other party to use it, in return for lease rentals.

2. Leasing is governed by AS – 19 whereas there is no specific Accounting Standard for Hire Purchasing.

3. Down Payment is a must, in hire-purchasing but not in leasing.

4. The duration of leasing is longer than the hire purchasing.

5. Leasing may cover asset like land and building, plant, and machinery, etc. Conversely, cars, trucks, tempos, vans, etc. are the kind of assets which are sold on hire purchasing.

6. The installment paid in hire purchasing includes the principal amount and interest. In contrast to Leasing, in which the lessee has to pay the cost of using the asset only.

7. In hire-purchasing, the ownership is transferred to the hirer only if he pays all the outstanding installments. On the other hand, in a finance lease, the lessee gets the option to buy the asset at the end of the term by paying a nominal amount, but in operating lease, there is no such option available to the lessee.

2) Financial lease and Operating lease.

-> The following are the major differences between finance (capital) lease and operating lease:

1. The lease agreement in which the risk and rewards are transferred with the transfer of an asset is known as Finance Lease. The lease agreement in which the risk and rewards are not transferred with the transfer of the asset is known as Operating Lease.

2. Finance Lease is a sort of loan agreement in which the lessor plays the role of financier. As opposed to the Operating Lease, which is similarly like a rental agreement?

3. Finance Lease is for the long term as it covers the maximum part of the life of the asset. Unlike, Operating Lease, which is for a shorter period.

4. An Operating lease is more flexible as compared to the Finance Lease.

5. In the finance lease, the ownership of the asset is transferred to the lessee at the end of the lease term, by paying a nominal amount which is equal to the fair market value of the asset. Conversely, in operating lease, there is no such kind of option.

6. In Finance Lease, the lessee bears the risk of obsolescence whereas in Operating Lease the lessor bears the risk for so.

7. Any cost for repairs and maintenance will be borne by the lessee in the finance lease, but the cost of repairs and maintenance will be borne by the lessor in operating lease.

5. (a) Discuss in detail how do credit rating agencies rate an instrument. (16)

-> A credit rating agency is a private company whose purpose is to assess the ability of borrowers, either governments or private enterprises, to repay their debt . To do this, these agencies issue credit ratings based on the borrower’s solvency.

The three biggest global rating agencies control 95% of the market . They include Fitch Rating Ltd , Moody’s and Standard and Poor’s .

Since 2011, these independent companies have had to obtain certification from the European Securities and Markets Authority (ESMA) in order to operate in Europe. ESMA performs regular inspections to ensure that the rating agencies are following European regulations and the authority can issue sanctions for any infractions.

Credit rating agencies are financed by-

Credit rating agencies collect a fee either from the entity seeking to receive a rating (business or government) or from the entity seeking to use and analyze the rating (the financial analysis department of a bank, financial institution, etc.).

To evaluate the solvency of borrowers, rating agencies issue credit ratings corresponding to the credit risk represented by the borrower, or in other words, the risk that the borrower will default on the loan. Credit ratings place this risk on a scale ranging from low risk (investment category) to high risk (speculative category).

Though there is no standard scale, credit ratings are typically expressed by letters corresponding to the potential risk, with the highest rating represented by AAA and the lowest rating by C or D , according to the agency. In addition to the letter grade, a credit rating might also consist of a “forecast” that describes how a particular rating may change in the future. For example, a credit rating with a negative outlook may indicate a future downgrade.

Each rating agency uses its own method to calculate its ratings. These methods take into account quantitative (financial data), qualitative (business strategy for a company or political stability for a country) and contextual criteria (changes in industry for a company or public finances for a country).

The final rating represents the credit agency’s evaluation of a borrower’s credit risk at a given time. It does not constitute investment advice.

The role which credit ratings plays are-

Along with other criteria, investors take credit ratings into account to help manage their portfolios . A rating downgrade indicates a greater risk for the lender. Depending on the sensitivity of the market, investors may require a higher return to protect against this risk, which in turn raises financing costs for the borrower.

Many investors give credit ratings a lot of consideration in their investment decisions. This has enabled credit rating agencies to play a central role in financial markets – a role that some economists see as excessive.

(b) Explain briefly about the rating process and methodology followed by Indian Rating agencies. (16)

-> Credit rating is a codified rating assigned to an issue by authorized credit rating agencies . These agencies have been promoted by well-established financial Institutions and reputed banks/finance companies. Credit rating is a relative ranking arrived at by a systematic analysis of the strengths and weaknesses of a company and debt instrument issued by the company, based on financial statements , project analysis, creditworthiness factors and future prospectus of the project and the company appraised at a point of time.

Objectives of Credit Rating

Credit rating aims to:

· Provide superior information to the investors at a low cost;

· Subject borrowers to a healthy discipline, and

· Assist in the framing of public policy guidelines on institutional investment.

Thus, credit rating in financial services represents an exercise in faith building for the development of a healthy financial system .

Approaches to Credit Rating

As a technique for independent examination of the investment worth of financial securities as an input to investment decision-making , the process of credit rating usually involves use of one or more of (i) implicit judgmental approach and (ii) explicit judgmental approaches and (iii) statistical approach. While implicit judgmental follows beauty-contest approach wherein a broad range of factors concerning promoter, project, environment and instrument characteristics are considered ‘generally’. Explicit judgmental approach involves identification and measurement of the factors critical to an objective assessment of the credit/investment worthier of an instrument with a view to arriving at a numerical credit score or index. Finally, statistical approach involves assignment of weights to each of the factors and obtaining the overall credit rating score with a view to doing away with personal bias inherent in both-explicit and implicit judgment.

Methodology of Credit Rating

The process of credit rating begins with the prospective issuer approaching the rating agency for evaluation. The experts in analyzing banks should be given a free hand and they will collect data and informant and will investigate the business strength and weaknesses in detail. The entire process of rating stands on the for of confidentiality and hence even the most confidential business strategies , marketing plans , future outlook etc., are revealed to the steam of analysis.

The rating is based on the investigation analysis, study and interpretation of various factors. The world of investment is exposed to the continuous onslaught of political, economic, social and other forces which does not permit any one to understand sufficiently certainty. Hence a logical approach to systematic evaluation is compulsory and within the framework of certain common features the agencies employ different methodologies. The key factors generally considered are listed below:

1. Business Analysis or Company Analysis

This includes an analysis of industry risk, market position of the company, operating efficiency of the company and legal position of the company.

  • Industry risk: Nature and basis of competition , key success factors; demand supply position; structure of industry; government policies, etc.
  • Market position of the company within the Industry: Market share; competitive advantages , selling and distribution arrangements; product and customer diversity etc.
  • Operating efficiency of the company: Vocational advantages ; labor relationships ; cost structure and manufacturing as compared to those of competition.
  • Legal Position: Terms of prospectus; trustees and then responsibilities; system for timely payment and for protection against forgery/fraud, etc.

2. Economic Analysis

In order to evaluate an instrument an analyst must spend a considerable time in investigating the various economic activities and also analyze the characteristics peculiar to the industry, whose issue the analyst is concerned with. It will be an error to ignore these factors as the individual companies are always exposed to changing environment and the economic activates affect corporate profits, attitudes and expectation of investors and the price of the instrument. Hence the relevance of the economic variables such as growth rate, national income and expenditure cannot be ignored. The analysis, while doing the economic forecasting use surveys, various economic indicators and indices.

3. Financial Analysis

This includes an analysis of accounting, quality, earnings, protection adequacy of cash flows and financial flexibility.

4. Management Evaluation

· Evaluation of capacity to overcome adverse situations

5. Geographical Analysis

  • Location advantages and disadvantages

· Backward area benefit to the company/division/unit

6. Fundamental Analysis

Fundamental analysis is essential for the assessment of finance companies. This includes an analysis of liquidity management, profitability and financial position and interest and tax sensitivity of the company.

  • Liquidity Management: Capital structure ; term matching of assets and liabilities policy and liquid assets in relation to financing commitments and maturing deposits.
  • Asset Quality: Quality of the company’s credit-risk management; system for monitoring credit; sector risk; exposure to individual borrower; management of problem credits etc.
  • Profitability and financial position: Historic profits, spread on fund deployment revenue on non-fund based services accretion to reserves etc.
  • Interest and Tax sensitivity: Exposure to interest rate changes, hedge against interest rate and tax law changes, etc.

6. Write short notes on: (any two) (8×2=16)

1) Indian Direct Investment abroad.


2) Foreign Direct investment.

-> Foreign direct investment (FDI) is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest. Lasting interest differentiates FDI from foreign portfolio investments, where investors passively hold securities from a foreign country. A foreign direct investment can be made by obtaining a lasting interest or by expanding one’s business into a foreign country.

Methods of Foreign Direct Investment

As mentioned above, an investor can make a foreign direct investment by expanding their business in a foreign country. Amazon opening a new headquarters in Vancouver, Canada would be an example of this.

Reinvesting profits from overseas operations, as well as intra-company loans to overseas subsidiaries , are also considered foreign direct investments.

Finally, there are multiple methods for a domestic investor to acquire voting power in a foreign company. Below are some examples:

· Starting a subsidiary of a domestic firm in a foreign country

Benefits of Foreign Direct Investment

Foreign direct investment offers advantages to both the investor and the foreign host country. These incentives encourage both parties to engage in and allow FDI.

Below are some of the benefits for businesses:

  • Market diversification
  • Tax incentives
  • Lower labor costs
  • Preferential tariffs
  • Subsidies

The following are some of the benefits for the host country:

· Access to management expertise, skills, and technology

For businesses, most of these benefits are based on cost-cutting and lowering risk. For host countries, the benefits are mainly economic.

Disadvantages of Foreign Direct Investment

Despite many benefits, there are still two main disadvantages to FDI, such as:

  • Displacement of local businesses
  • Profit repatriation

The entry of large firms, such as Walmart, may displace local businesses. Walmart is often criticized for driving out local businesses that cannot compete with its lower prices.

In the case of profit repatriation, the primary concern is that firms will not reinvest profits back into the host country. This leads to large capital outflows from the host country.

As a result, many countries have regulations limiting foreign direct investment.

Types and Examples of Foreign Direct Investment

Typically, there are two main types of FDI: horizontal and vertical FDI.

Horizontal: a business expands its domestic operations to a foreign country. In this case, the business conducts the same activities but in a foreign country. For example, McDonald’s opening restaurants in Japan would be considered horizontal FDI.

Vertical: a business expands into a foreign country by moving to a different level of the supply chain . In other words, a firm conducts different activities abroad but these activities are still related to the main business. Using the same example, McDonald’s could purchase a large-scale farm in Canada to produce meat for their restaurants.

However, two other forms of FDI have also been observed: conglomerate and platform FDI.

Conglomerate: a business acquires an unrelated business in a foreign country. This is uncommon, as it requires overcoming two barriers to entry: entering a foreign country and entering a new industry or market. An example of this would be if Virgin Group, which is based in the United Kingdom, acquired a clothing line in France.

Platform: a business expands into a foreign country but the output from the foreign operations is exported to a third country. This is also referred to as export-platform FDI. Platform FDI commonly happens in low-cost locations inside free-trade areas. For example, if Ford purchased manufacturing plants in Ireland with the primary purpose of exporting cars to other countries in the EU.

3) Drawbacks of foreign capital.

-> Some of the major disadvantages of foreign capital are as follows:

1. Distort of the Pattern of Development of the Economy:

It is not suitable for countries who have adopted a scheme of planned development, While deciding about the investment projects the foreign capitalists will be guided by the maximization of profit criteria and not the plan priorities of the country. In other words, it always invests in low priorities of the economy.

2. Adverse Effect on Domestic Savings:

This sort of investment should be expected to have an income effect which will lead to a higher level of domestic savings. But at the same moment if private foreign investment reduces profits in domestic industries, it will adversely affect the income of profit earning and further will tend to reduce domestic savings.

3. Adverse Effect on Balance of Payments of the Recipient Country:

Foreign investors may earn huge profits which are to be repatriated in due course of time. The repatriation of these profits may turn into serious imbalances in the balance of payments of the recipient nation.

4. Not Useful on Political Grounds:

Private foreign investment in under developed countries is feared not only for economic reasons but also on political grounds. There is a great fear that it may lead to loss of independence of the recipient country. In the opinion of Prof. Lewis, “The loss of independence may be partial or complete; partial if the capitalists confine themselves to bribing politicians or backing one political group against another or complete if the debtor country is reduced to colonial status”.

These fears are quite widespread. They are mainly responsible for the reluctance on the part of developing countries to accept private foreign capital. In this connection Prof. WA. Lewis holds the view that, “These fears are one of the strongest reasons as to why the less developed countries are anxious that the United Nations should create adequate institutions for transferring capital so that they should not become dependent upon receiving capital from any one of the great powers”.

5. Limited Coverage:

Private capital usually restricts itself to certain limited spheres of economic life. For example, it chooses those industries where it can make large and quick profits, irrespective of the fact whether the development of those industries is in the development interest. Such industries are largely consumer goods industries or those industries in which the gestation period is not too long. It is for these reasons that in India before Independence, foreign capital mostly British, was directed to such industries as plantations, etc.

6. More Dependence:

The use of private capital often increases dependence on foreign sources. This happens at least on two counts. One is that the use of foreign technology appropriate to the resource-endowments of advanced countries does not permit the development of indigenous technology appropriate to the conditions of the recipient country.

On the contrary, it positively discourages the development of such a technology in competition with itself. This means the country in question will continue to depend upon the import of foreign technology. Two, the foreign technology used requires import of goods for replacement and maintenance, thereby creating balance of payments difficulties.

We have taken so much from the foreign technical know-how that we have not yet developed what may be described, as an appropriate technology suited to our resources and needs. Further, imports of replacement and maintenance goods are costing us a lot.

7. Restrictive Conditions:

In many cases foreign collaboration agreements contain restrictive clauses in respect of such things as exports. For example, foreign collaborators make investments to exploit the Indian market because they find it difficult to approach this market from outside.

But these collaborators do not want the Indian concern to export its goods to other countries which are already being supplied by the foreign collaborators from their concerns operating in other countries. Obviously, such agreements are of limited value for the country.

8. Remittance of Large Amounts:

Remittance of profits of course is a normal facility which the foreign investor expects. But often the profits earned in the early stages are high, involving big remittances. In many collaboration agreements, for example, the initial foreign capital is confined to the foreign exchange component of the project.

The rest of the resources are made available through internal sources. Since the rate of return on initial investment is usually very high, it makes it possible for the foreign collaborator to recover his amount in a relatively short time. Yet the payment on account of such things as technical services, royalty payments, etc., continues.

From the above cited discussion, it can easily be concluded that private foreign capital is not very safe for less developed countries; it does not fit into their planned development. Again it does not provide hope for their rapid industrialization and economic growth.

4) NRI Investment in India.

-> As an NRI investing in India, your investments need to comply with regulations prescribed by the Foreign Exchange Management Act (FEMA). Your residential status as per FEMA will determine whether you can make your investments as a Resident or NRI.

You will be considered an NRI or a Non-Resident Indian if you are an Indian citizen who has resided in India for less than 182 days [1] during the preceding financial year or if you have gone or stayed out of India for employment, for carrying out a business or vocation. You are also considered to be an NRI if you have gone or remained outside India for any other purpose for an unspecified amount of time. Investments made by such an individual are considered to be NRI investments.

Investment options for NRIs

When it comes to investing in India, NRIs have several lucrative options. Fixed deposits, stocks and bonds, mutual funds and real estate are all excellent investment opportunities for NRIs. Fixed deposits and bonds are relatively less risky, while mutual funds and stocks tend to carry higher risk. If you are looking to buy a home in India, real estate is a great investment option as well. You will need to know the tax benefits of each investment option before you consider it. Moreover, you will need an NRE or NRO account to begin investing in India.

Steps for NRI investments

Each investment option has its procedures and requirements. However, you need to open an NRE (Non-Resident External) or NRO (Non-Resident Ordinary) savings bank account for any investment. An NRE account can be used for parking foreign earnings in India. NRE accounts are exempt from tax, and the principal amount and the interest earned on it, are freely repatriable.

An NRO account is used to park income earned in India through rent, pension, etc. Interest earned on this account is taxable and there is a cap on the principal amount that can be repatriated.

Through these accounts, you can start FDs or buy, sell or manage your real estate investments. However, if you want to invest in mutual funds or the stock market, you need to follow additional steps.

To invest in mutual funds, once your NRE/NRO account is functional, you will have to:

· Submit KYC papers and a copy of your PAN card. In the KYC form, you must mention whether this investment is on a repatriable or non-repatriable basis.

· An NRI can invest in mutual funds through another person by giving that person Power of Attorney (POA). In this case, KYC documents must contain the signature of both the NRI investor and the POA.

To invest in the stock market, NRIs will have to perform a few more steps after opening an NRE/NRO account, which are:

· Open a Portfolio Investment Scheme (PIS) bank account for buying and selling stocks. Transactions made through this account are reported to the RBI.

· Open a Demat and trading account with a SEBI-registered brokerage firm as all transactions can only be done through an Indian stockbroker.

Documents required for NRI investments

This section tells you all about the important NRI investment documents. The KYC form needs to be accompanied by documents like a recent photograph, attested copies of PAN card, passport, overseas residence proof and bank statements. Public notaries can do attestation of documents, a court magistrate or judge as well as authorized officials of overseas branches of commercial banks registered in India. It can also be done by the Indian embassy/consulate general in the country of residence.

Documents needed to open PIS/Demat/trading account include all of the above plus a copy of your Visa and PIS permission letter.

Taxes on NRI investments in India

If your country of residence has signed the Double Taxation Avoidance Treaty (DTAA) with India, you will have to pay tax in only one country. NRO FDs attract taxes in India. Interest earned is charged at a Tax Deducted at Source (TDS) rate of around 30% as per the Income Tax Act 1961. Similarly, rent earned from a real estate property too is taxable. When it comes to equity mutual funds, short-term capital gains are taxed at 15% and per the finance bill of 2018; long-term capital gains exceeding Rs. 1 lakh per annum are taxed at 10%.

Concerning debt funds, short-term capital gains (STCG) is taxable at the rate of 30% for a period, not more than 36 months. If you hold the fund for more than 36 months, you will have to pay 20% tax on the long-term capital gains with indexation benefit. LTCG on non-listed funds will be taxed at the rate of 10% without indexation.

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