2016 – Solved Question Paper | Financial Service | Final Year – Masters of Commerce (M.Com) | Dibrugarh University

2016 – 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) Discuss in detail about the Registration and Regulation of Merchant Bankers. (13)

-> A merchant banker underwrites corporate securities and provides guidelines to clients on issues like corporate mergers. The merchant banker may be in the form of a bank, a firm, company or even a proprietary concern. It is basically service banking which provides non-financial services such as arranging for funds rather than providing them.

The merchant banker understands the requirements of the business concerns and arranges finance with the help of financial institutions, banks, stock exchanges, and money market.

Registrations of Merchant banking:-

1. The applicant shall be a body corporate

2. The applicant shall have necessary infrastructure like perform adequate office space, equipment, and manpower to carry on the business activities and to discharge his activities and services effectively

3. The applicant shall employ at least two persons having experience in the field of merchant banking activities

4. The applicant shall fulfill the minimum capital adequacy requirement i.e. the applicant must have a net worth of at least Rupees Five Crores

5. The applicant, his partner, director, or his principal officer shall not at any time been:

(i) involved in any litigation connected with the securities market which has an adverse bearing on the business of the applicant

(ii) convicted for any offence involving moral turpitude or has been found guilty of any economic offence.

Regulations by SEBI on Merchant Banking

Reforms for the merchant bankers

SEBI has made the following reforms for the merchant banker

1. Multiple categories of merchant banker will be abolished and there will be only one equity merchant banker.

2. The merchant banker is allowed to perform underwriting activity. For performing portfolio manager, the merchant banker has to seek separate registration from SEBI.

3. A merchant banker cannot undertake the function of a non banking financial company, such as accepting deposits, financing others’ business, etc.

4. A merchant banker has to confine himself only to capital market activities.

(b) Discuss the obligation and responsibility of Portfolio managers in connection with Portfolio Management. (13)

-> General obligations and responsibilities of portfolio managers are:

1. Code of Conduct:-

A portfolio manager has to, in the conduct of business; observe high standards of integrity and fairness in all his dealing with his clients and other portfolio managers. The money received by him from a client for an investment purpose should be deployed as soon as possible and money due and payable to a client should be paid forthwith.

A portfolio manager has to render at all times high standards of services, exercise due diligence, ensure proper-care and exercise independent professional judgment. He should either avoid any conflict of interest in his investment or disinvestment decision, or where any conflict of interest arises; ensure fair treatment of all his customers. He must disclose to the client, possible sources of conflict of duties and interest, while providing unbiased services. A portfolio manger should not place his interest above those of his clients.

He should not make any statement or become privy to any act, practice or unfair competition, which is likely to be harmful to the interest of other portfolio mangers or is likely to place them in a advantageous position in relation to the portfolio manager himself, while competing for or executing any assignment.

Any exaggerated statement, whether oral or written, should not be made ‘by him to client other about the qualification or the capability to- render certain services or his achievements in regards to services n rendered to the other clients.

At the time of entering into contract, he should been in writing from the clients his interest in various corporate bodies which enable him to obtain unpublished price-sensitive information of the, body corporate.

A portfolio manger should not disclose to any clients or press any confidential information about his clients, which has come in his knowledge.

Where necessary and in the interest of the clients, he should take adequate’ steps for the registration of the transfer of the clients’ securities and for claiming and receiving dividends, interest payment and other right accruing to the client. He must also make necessary action for the conversion of securities and subscription/ renunciation of/or rights in accordance with the clients’ instruction.

  • A portfolio manager has to endeavor to:-

a) Ensure that the investors are provided with true and adequate information without making any misguiding or exaggerated claims and are made aware of attendant risks before any investment decision is taken by them;

b) Render the best possible advice to the client having regards to the client’s needs and the environment and his own professional skills;

c) Ensure that all professional dealing is affected in prompt, efficient and cost effective manager.

  • A portfolio manger should not be party to:-

a) Creation of false market in securities;

b) Price rigging or manipulation of securities;

c) Passing of price sensitive information to brokers, members of the stock COI exchanges and any other intermediaries in the capital market or take any other action which in prejudicial to the interest of the investors. No portfolio manager or any of its directors, partners or managers should either on their respective accounts or through their associates or family members, relatives enter into any transaction in securities of the companies on the basis of published price sensitive information obtained by them during the course of any professional assignment.

  • Contract with Clients:-

Every portfolio manager is required, before taking up an assignment of management of portfolio on behalf of a client, is enter into an agreement with such client clearly defining the inter se relationship, and setting out their mutual rights, liabilities and obligation relating to the management of the portfolio of the client. The contract should, inter alias, contain.

1. The investment objectives and the services to be provided

2. Areas of investment and restrictions, if any, imposed by the client with regards to investment in a particular company or industry;

3. Attendant risks involved in the management of the portfolio;

4. Period of the contract and provision of early termination, if any;

5. Amount to be invested;

6. Procedure of setting the client’s accounts including the form of repayment on maturity or early termination of contract;

7. Fee payable to the portfolio manager;

8. Custody of securities.

The funds of all clients must be placed by the portfolio manager in separates accounts to be maintained by him in a scheduled commercial bank. He can charges an agreed fee from the client for rendering portfolio management services without guaranteeing or assuring, either directly or indirectly, any return and such fee should be independent of the returns to the clients and should not be on return sharing basis.

2. General Responsibilities;-

The discretionary portfolio manager should individually and independently manage the funds of each client in accordance with the need of the client in a manner, which does not partake the character of a mutual fund, whereas the non-discretionary portfolio manager should manage the funds in accordance with the direction of client. He should act in a fiduciary capacity with regard to the client funds and transact in securities in within the limitation placed by the client himself with regard to dealing to securities under the provisions of the reserve bank of India act, 1934. He should not derive any direct or indirect benefit out of the client funds or securities. he cannot pledge or give on loan securities held on behalf of client to a third person, without obtaining a written permission from his client. He should ensure proper timely handling of complaints from his client and take appropriate action immediately.

3. Investment of client’s money:-

The portfolio manager should not accept money of securities from his client from his client for a period of less than one year. Any renewal of portfolio funds the maturity of the indicial period is deemed as a fresh placement for a minimum period of one year. The portfolio funds can be withdrawn or taken back by the portfolio client at his risk before the maturity date of the contract under the following circumstances..

· Voluntary or compulsory termination of portfolio management service by the portfolio manager.

· Suspension or termination of registration of portfolio manager by the SEBI.

· Bankruptcy or liquidation in case the portfolio manager is a body corporate.

· Permanent disability, lunacy or insolvency in case the portfolio manager is an individual.

The portfolio manager can invest funds of his clients in money market instrument or as specified in the contract, but not in bill discounting, bedlam financing or for the purpose of lending or placement with corporate or non-corporate bodies.

While dealing with clients funds, he should not indulge in speculative transaction, that is, not enter into any transaction for the purchase or sale of any securities in which transaction is periodically or ultimately settled otherwise than by actual delivery or transfer of security. He may enter into transaction on behalf of the client for the specific purpose of meeting margin requirements only if the contract so provides and the client is made aware of, the attendant risk of such transaction.

He should ordinarily purchase all sell securities separately for each client. However, in the event of aggregation of purchase or sales for economy of scale, inter se allocation should be done on a pro rata basis and at weighted average price of the days transaction. The portfolio manager should not keep any position open in respect of allocation of sales or purchase affected in a day.

Any transaction of purchase or sale including that between the portfolio managers own account and client accounts or between two clients account should at the prevailing market price. He should segregate each clients fund and portfolio securities and keep them separately from his own funds and securities and be responsible for the safekeeping of clients fund and securities. He may hold the belonging to the portfolio account in his own name on behalf of his client’s only if, the contract so provides and in such an event his record and reports to the client should clearly indicate that the securities are held by him on behalf of the portfolio account.

4. Maintenance of book of accounts / records:

Every portfolio manager must keep am maintain the following book of accounts, records and documents.

· A copy of balance sheet at the end of each accounting period.

· A copy of the profit and loss account for each accounting period.

· A copy of the auditor report on the account for each accounting period.

· A statement of financial position and

· Record in support of every investment transaction or recommendation which indicate the data, fact and opinion leading to that investment decision.

After the end of each accounting period, copies of the balance sheet, profit and loss account and such other documents for any other preceding five accounting year when required must be submitted to the SEBI. Half yearly unedited financial result, when required with a view to monitor the capital adequacy have to be submitted to the SEBI the books of account and other record and document must be preserved for a minimum period off five years.

5. Disclosure to SEBI:

A portfolio manager must disclose to SEBI when required the following information.

· Particulars regarding the management of a portfolio.

· Any information or particulars previously furnished, which have a bearing on the certificate granted to him.

· The name of the clients whose portfolio he has managed and

Particulars relating to the capital adequacy requirement.

(c) Briefly explain the following (any one): (5)

1) Code of conduct of Portfolio Managers.

-> Code of conduct for portfolio managers

A portfolio manager should

1. Be fair in all dealings with clients and staff with higher standard of integrity.

2. Deploy as soon as possible the money received by him from a client.

3. Render at all times high standards of services, exercise due diligence.

4. Ensure proper care and exercise independent professional judgment.

5. Avoid any conflict of interest in his investment or disinvestment decision.

6. Ensure fair treatment to all his customers.

7. Provide unbiased service by disclosing all possible sources of conflict of duties and interest.

8. Not to place his interest above those of his clients.

9. Be fair in his approach and shall not utter any statement that will harm the interest of other portfolio managers.

10. Not to make any exaggerated statement to the clients about his qualification of capacity.

11. Obtain in writing from the client, his interest in various corporate bodies which would enable him to obtain unpublished price sensitive information of the body corporate.

12. Not to disclose to any client or the press, any confidential information about his clients which has come to his knowledge?

13. Take adequate steps for the registration of transfer of client’s securities and for claiming and receiving dividends, interest payments and other rights accruing to the clients.

14. Must take necessary action for the conversion of securities and subscription, renunciation of rights in accordance with the client’s institutions.

2) Objectives of Merchant Bankers.

-> A merchant bank can be classified as the type of financial intermediary or bank which deals and handles investments and commercial loans for small and medium-sized business. Their existence date back to the medieval period when there had been active trading of commodities.

Objectives of Merchant Bank

The broad objectives of this bank are offer to credit services and perform underwriting for its institutional clients and corporate clients. Additionally, their main objective is to help business in capital formation by providing services of standby credit, underwriting of securities that are generally backed by the guarantees.

They additionally have an objective of creation of secondary markets wherein the bills are exchanged or traded and wherein the merchant banks play the role of central accepting house. They additionally provide dealer services in terms of buy and sell transactions of financial instruments.

The main objectives of merchant banking are:-

1. Providing long term funds to projects or companies.

2. Portfolio management.

3. Underwriting.

4. Corporate advisory and issue management.

5. Deciding capital structure.

2. (a) “Investing in securities through mutual funds is a better choice than direct investment.” Explain the statement. (10)

-> Investment and risk taking go hand in hand. Whenever you are putting your hard-earned money into something you hope to receive great returns from, you are running the possibility of either becoming richer overnight or losing that much and even more. To put it simply, an investment is a gamble which requires considerable research, vision, and educated guesswork.

The question of finding the most reliable form of investments keeps springing up from people who, literally, want to put their money where their mouth is. And as a result, people often find themselves caught at the junction of two diverging roads – the one down mutual fund investments and other leading to direct investing in stocks.

It is widely assumed that making investments through mutual funds is a safer option than the latter. This is primarily because it is handled by professional fund managers who ensure that they select stock portfolios which guarantee successful long-term returns. However, a recent report by Economic Times revealed that only about 4.5 percent of the total market capitalization in India is held through equity funds. On the other hand, direct holding by individuals is nearly 22 percent of the market capitalization. This indicates that the practice of directly investing in stocks is more favorable to a select group of Indians with strong purchasing power.

However, the key words here are ‘select group’. Direct investing is practiced more largely among the rich in India, primarily businessmen and businesswomen who possess astute knowledge of the daily changing stock market and follow it to the bone. Choosing between the two kinds of investments also depends on a person’s risk taking ability, return expectations, and the ability and inclination to manage a share portfolio. And sources tell us that an increasing percentage of the average Indian population is turning towards mutual fund investments . And here’s why.

Professional money managers

Mutual fund investments require professional help from a fund manager whose only mandate is to expressly monitor and manage the investments that his fund makes. As an investor, you do not have to spend time examining the fund manager’s personal history. Rather, you should go by his or her past experience – the kind of returns they have managed to procure over the years – and decide on the basis of that. The many components to making an investment, which include picking stocks, tracking them, making sector and asset allocation, and booking profits when required, are all handled by the fund manager. The investor only has to check from time to time if the fund manager is sticking to the mandate and delivering a return superior to the corresponding index.

The constantly transforming Indian mutual fund industry

In a study conducted by Scripbox, it was found that among 25 equity mutual funds taken over the past 10 years to compare the median yearly return for these funds to the yearly returns of the Nifty, all showed significantly different returns from one another. At the same time, the cumulative annualised return of equity mutual funds over 10 years was significantly higher than the Nifty. On an average, about one-fourth of the top 25 funds were replaced by new funds every year. The analysis of the same report surmised that it is the periodic evaluation and rebalancing that works as the secret ingredient of better investing.

Stable returns

More often than not, mutual finds ensure more stabilised returns on your investments than direct investment in stocks. The latter, though it holds the possibility of procuring even higher returns than the ones garnered from mutual funds, always entail a greater risk, considering that a stock value and price can change dramatically within the matter of days.

Tax-benefits and lower cost of investing

Mutual funds provide a tax benefit of up to rupees one lakh under Section 80C when you invest in an equity-linked savings scheme, which has a lock-in period of three years. Additionally, there is no capital gains tax on stocks sold by the fund, as long as you hold your equity fund for a year or longer to avoid short-term capital gains tax on the investment, which can subsequently lead to significant benefits for you as an investor in that fund. This is in comparison to the amount you have to pay if you’re making direct investments on portfolios that you choose yourself. For this, you have to pay 15 percent short-term capital gains tax if the stocks are sold within one year.

At the same time, the cost of investing is significantly lower for mutual funds than direct stock investing. While you will be required to pay 0.5 to one percent as brokerage along with additional demat charges for buying and selling shares directly, mutual funds pay only a fraction of the brokerage charged to individual investors on account of their scale. Additionally, mutual fund investors do not require a demat account.

Defined time-period and diversification

As someone directly handling your shares, you are required to dedicate the time and effort into keeping a daily check on the stock market and the returns you could be expecting on any odd day. At the same time, you need to dip a toe in a highly diversified portfolio that lists at least 20 different stocks to ensure that you get returns from at least some of them. However, in most cases, direct investors may not possess the resources or bandwidth to create such a portfolio. In contrast, a mutual fund investment is usually undertaken with a specific time period in mind, where you can evaluate the returns as per the set date, most of which is anyway being handled by your fund manager. Additionally, since you, through your fund manager, are identifying and buying units of the fund that invests across several stocks, you will be awarded with a diversification benefit without having to invest in a huge corpus.

(b) Discuss the parameters for evaluating of mutual funds scheme in India. (10)

-> A mutual fund is nothing but a collective investment vehicle that enables investors to pool their money and invest in capital market instruments like equities, bonds, short-term money market instruments and other securities or assets as per their investment objectives. The underlying security types aka holdings form into a mutual fund portfolio which is managed by a fund manager appointed by the Asset Management Company (AMC).

In investing in mutual funds, the investor does not actually own the underlying securities but rather securities of the mutual fund. For example, if an XYZ mutual fund includes the shares of a particular company among others, the MF investor does not directly own the shares of the company but own the shares of the mutual fund. However, the investor will benefit from the appreciation in the value of the company’s shares.

The mutual fund comes out as a popular and reliable financial instrument that can help in achieving different financial goals. It offers the natural diversification allowing investors to spread their investment across multiple asset class and building their own investment portfolio with little or no knowledge of investing.

  • Performance Ranking:

More than the recent or long-term performance of any scheme, it’s ranking among peers should be looked at. To find out the ranking, you need to check out the quartile ranking which will show how the fund has performed quarter on quarter among its peer group. In quartile ranking, each quartile comprises 25% of peer group schemes. So one may select the scheme which has remained in top quartile most of the time. If at all you find your scheme going below 3rd quartile in a couple of consecutive quarters it hints that time has come to exit the scheme. You can find these rankings from the factsheets of various asset management companies (AMCs) and also on some mutual funds research websites.

  • Ratio analysis:

Risk and return ratios are like standard deviation. Along with those ratios, one also should check out the performance ranking of the fund manager. You may check how often the fund manager has generated extra income for the fund as compared to the benchmark in last few quarters and also keep a watch on its consistency going forward.

  • Total expense ratio:

Expense ratio is a critical parameter to be looked at while selecting any mutual fund scheme. All fund management and distribution related expenses are borne by the scheme. This means high expense ratio will affect the fund’s returns. Though SEBI has capped mutual fund’s total expense ratio , still its best lower the better, unless we get some excellent return by paying higher expenses for fund management.

  • Fund manager’s tenure and experience:

The fund manager plays a crucial role in the fund’s performance. Though it is a process-oriented approach, the fund manager is still the ultimate decision maker and his experience and points of view count for a lot. You should know who is the fund manager of the scheme and what is his past track record. You should also look at the performance of other funds which he is managing. If you find that due to change in the fund manager there is a considerable effect on the fund’s performance which does not suit your risk appetite, then you may decide to exit.

  • Scheme asset size:

This parameter is different for debt and equity schemes. In equity, the comfortable asset size is hundreds of crores, in debt, it should be in thousands of crores as the investment value per investor is higher in debt funds. 90% of total assets under management (AUM) of the mutual fund industry are invested in debt funds, so your selected scheme assets should also have a considerable AUM. Less AUM in any scheme is very risky as you don’t know who the investors are and what quantum of investments they have in this particular scheme. An exit of any prominent investor out of any mutual fund may impact its overall performance adversely, and the remaining investors in a scheme will have to bear the impact. In schemes with larger AUMs, this risk gets minimized.

4. (a) What do you understand by Leasing? State its advantages and limitations. (2+4+4=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.

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.

Merits of Leasing:

(i) The most important merit of leasing is flexibility. The leasing company modifies the arrangements to suit the leases requirements.

(ii) In the leasing deal less documentation is involved, when compared to term loans from financial institutions.

(iii) It is an alternative source to obtain loan and other facilities from financial institutions. That is the reason why banking companies and financial institutions are now entering into leasing business as this method of finance is more acceptable to manufacturing units.

(iv) The full amount (100%) financing for the cost of equipment may be made available by a leasing company. Whereas banks and other financial institutions may not provide for the same.

(v) The ‘Sale and Lease Bank’ arrangement enables the lessees to borrow in case of any financial crisis.

(vi) The lessee can avail tax benefits depending upon his tax status.

Demerits of Leasing:

(i) In leasing the cost of interest is very high.

(ii) The asset reverts back to the owner on the termination of the lease period and the lesser loses his claim on the residual value.

(iii) Leasing is not useful in setting up new projects as the rentals become payable soon after the acquisition of assets.

(iv) The lessor generally leases out assets which are purchased by him with the help of bank credit. In the event of a default made by the lessor in making the payment to the bank, the asset would be seized by the bank much to the disadvantage of the lessee.

(b) Explain the various types of Lease Financing. (10)

-> 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.

5. (a) Explain the process and types of Credit rating Services. (16)

-> Credit rating involves analysis and assessment of companies and government that issues securities for raising finance from various markets.

The credit rating agencies collects the data from various sources about the issuer of securities, the market in which issuer operates, the overall economy etc. and provides guidance to the investors in matter of credit risk associated with the securities so that the investor can take informed decisions.

Therefore, credit rating agencies are specialized institutions that evaluate the issuer of securities for raising funds and assign a rating or grade according to creditworthiness of the issuer.

Types of Credit Rating

A credit rating reflects current opinion on the relative likelihood of timely payment of interest and principal on the rated obligation. It is an unbiased, objective, and independent opinion as to the issuer’s capacity to meet its financial obligations.

The following are the common types of credit rating:

1. Sovereign credit rating: It is credit rating of a sovereign entity, i.e., government. The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad.

2. Credit Rating of Real Estate Builders and Developers: Housing and real estate form the backbone of the country’s infrastructure, and are critical drivers of economic development. With government policies emphasising faster economic growth, the real estate sector is attracting large investments from both domestic and foreign investors.

Investors and customers, however, need to exercise caution in their exposure, as the sector is largely unorganized. Recently, credit rating agencies have started assigning rating to the builders and developers with the objective of helping and guiding prospective real estate buyers.

National developers rating and Real estate rating are example of credit rating provided by CRISIL.

3. Corporate Debt credit rating: The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds. Credit rating is usually of a financial instrument such as a bond, secured debt, debentures and rather than the whole corporation.

4. Equity rating or IPO grading: Equity grading is the grade assigned by a Credit Rating Agency (CRAs) registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date.

The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India.

Credit Rating Process

Credit rating process starts with the receipt of formal request from a company desirous of having its issue obligations rated by credit rating agency. Rating agency regularly monitors all ratings with reference to new political, economic and financial developments and industry trends.

Figure depicts the credit rating procedure followed by CRISIL India. The process/ procedure followed by all the major credit rating agencies in India are almost similar and usually comprises of the following steps.

1. Receipt of the request: The rating process begins, with the receipt of formal request for rating from a company desirous of having its issue obligations under proposed instrument rated by credit rating agencies.

An agreement is entered into between the rating agency and the issuer company. The agreement spells out the terms of the rating assignment and covers the following aspects:

2. Assignment to analytical team: On receipt of the above request, the rating agency assigns the job to an analytical team. The team usually comprises of two members/analysts who have expertise in the relevant business area and are responsible for carrying out the rating assignments.

3. Obtaining information: The analytical team obtains the requisite information from the client company. Issuers are usually provided a list of information requirements and broad framework for discussions.

These requirements are derived from the experience of the issuers business and broadly confirms to all the aspects which have a bearing on the rating. The analytical team analyses the information\ relating to its financial statements, cash flow projections and other relevant information.

4. Plant visits and meeting with management: To obtain classification and better understanding of the client’s operations, the team visits and interacts with the company’s executives. Plants visits facilitate understanding of the production process, assess the state of equipment and main facilities, evaluate the quality of technical personnel and form an opinion on the key variables that influence level, quality and cost of production.

A direct dialogue is maintained with the issuer company as this enables the rating agencies to incorporate non-public information in a rating decision and also enables the rating’ to be forward looking.

Meting typically cover information about competitive position, strategies, financial policies, historical performance, risk profile and strategies in addition to reviewing financial data.

5. Presentation of findings: After completing the analysis, the findings are discussed at length in the internal committee, comprising senior analysts of the credit rating agency. All the issue having a bearing on rating are identified. An opinion on the rating is also formed. The findings of the team are finally presented to Rating Committee.

6. Rating committee meeting: This is the final authority for assigning ratings. The rating committee meeting is the only aspect of the process in which the issuer does not participate directly. The rating is arrived at after composite assessment of all the factors concerning the issuer, with the key issues getting greater attention.

7. Communication of decision: The assigned rating grade is communicated finally to the issuer along with reasons or rationale supporting the rating.

The ratings which are not accepted are either rejected or reviewed in the light of additional facts provided by the issuer. The rejected ratings are not disclosed and complete confidentiality is maintained.

8. Dissemination to the public: Once the issuer accepts the rating, the credit rating agencies disseminate it through printed reports to the public.

9. Monitoring for possible change: Once the company has decided to use the rating, CRAs are obliged to monitor the accepted ratings over the life of the instrument. The CRA constantly monitors all ratings with reference to new political, economic and financial developments and industry trends.

All this information is reviewed regularly to find companies for, major rating changes. Any changes in the rating are made public through published reports by CRAs.

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

a) Need and importance of Foreign Capital Investment.

-> Foreign direct investment is when an investor living in one country invests in a business based in another country. Under FDI, the foreign investor (individual or business) owns 10 per cent of the company where the investment is being made. If the investor owns less than 10 per cent, the International Monetary Fund (IMF) defines it as part of his or her stock portfolio.

A 10 per cent ownership is a safe bet because it does not give the investor a controlling interest but it does allow influence over the company’s management, operations, and policies. This ensures the investor to develop a lasting interest in the business and hence we can conclude that FDI is not merely the transfer of funds. It is differentiated in this regard from foreign portfolio investment.

Foreign direct investment is significant for developing economies and emerging markets where companies need funding and expertise to expand their international sales. Private investment in infrastructure, energy, and water is a critical driver of the economy as helps in increasing jobs and wages.

Some benefits of foreign direct investment is outlines below:

1. it helps in diversifying investors portfolio

2. it promotes stable long term lending

3. it infuses new technology in developing nations

4. it provides financing to developing countries

5. it brings in technological knowhow and managerial expertise

6. it creates more jobs and opportunities

7. it also helps in improving infrastructure in the developing countries

8. it helps in raising living standards in emerging economies

9. it helps create competitive global capital allocation

10. it facilitates economic growth or repair.

Today, India has become one of the most attractive destinations for foreign direct investments thanks to liberalized norms, easy policies and subsidized rates. Foreign investors are also willing to invest in the country due to lower labor costs, market diversification, subsidies, and preferential tariffs.

A foreign investor can invest in an Indian business through the following means:

1. Acquiring voting stock in a foreign company

2. Mergers and acquisitions

3. Joint ventures with foreign corporations

4. Starting a subsidiary of a domestic firm in a foreign country

b) Role of International Financial Instruments.

-> In many parts of the world, international financial institutions (IFIs) play a major role in the social and economic development programs of nations with developing or transitional economies. This role includes advising on development projects, funding them and assisting in their implementation.

Characterized by AAA-credit ratings and a broad membership of borrowing and donor countries, each of these institutions operates independently. All however, share the following goals and objectives:

· to reduce global poverty and improve people’s living conditions and standards;

· to support sustainable economic, social and institutional development; and

· to promote regional cooperation and integration.

IFIs achieve these objectives through loans, credits and grants to national governments. Such funding is usually tied to specific projects that focus on economic and socially sustainable development. IFIs also provide technical and advisory assistance to their borrowers and conduct extensive research on development issues. In addition to these public procurement opportunities, in which multilateral financing is delivered to a national government for the implementation of a project or program, IFIs are increasingly lending directly to non-sovereign guaranteed (NSG) actors. These include sub-national government entities, as well as the private sector.

Working with IFIs

During recent years, IFIs have made considerable progress in harmonizing the way they procure goods and services. In many cases, they are now using similar policies and procedures, although the interpretation of these approaches may still vary at the level of the individual institution. In the sections that follow, we’ll look at the common features of IFI procurement and how it works. Skip directly to the section on:

Country Strategies

All IFIs use country strategy documents, as these are fundamental to establishing an IFI’s lending priorities for a particular country. Based on the country’s own vision for its long-term development and written by the IFI, the document lays out the IFI’s support program for the nation.

A country strategy begins by analyzing the causes of poverty within the population and identifying key areas where the IFI’s assistance can reduce it most effectively. This establishes a foundation for the IFI’s future activities in the country, which can range across the entire spectrum of economic and social needs.

The development of the country strategy involves extensive discussions with many stakeholders, including government authorities, representatives of civil society, non-government organizations, development agencies and the private sector. These discussions are crucial to the success of the strategy because they promote collaboration and coordination among the various national partners.

The Project Cycle

All IFI-funded projects are implemented by the borrowing countries, not by the IFI providing the funds. However, all borrowers must follow the IFI’s rules and procedures throughout the entire project cycle. This is intended to guarantee efficiency and transparency in the use of IFI funds.

The project cycle, which has similar stages for all IFIs, is the framework for the design, preparation, implementation, completion and evaluation of a project. Business opportunities occur throughout the cycle, so becoming familiar with it will increase your chances of identifying an opportunity and securing a contract.

You should be aware, though, that project cycles can often last for several years, so being involved in a project from start to finish can require a substantial long-term investment on your part. However, the smaller components within a given project cycle can provide many shorter-term opportunities.

In general, the project cycle consists of the following stages:


The IFI and the borrowing country identify projects that are appropriate for the country’s development strategy and suitable for IFI support. Pre-feasibility studies are often required at this stage.


Once a proposed project has entered the project pipeline, the borrower and IFI technical staff study and define it further. The actual design and preparation of the project are the borrowing country’s responsibility. During this stage, the borrower and/or the IFI frequently hire consultants to help with feasibility studies, detailed project design and the assessment of the project’s environmental and social effects.


IFI staff conduct in-depth assessments of the technical, financial and economic elements of the project. The appraisal phase is the IFI’s responsibility and culminates in a project plan.


The IFI and the borrower negotiate the funding agreement and the project implementation plans. Negotiations result in a loan or funding document that is presented to the appropriate IFI board(s) for approval. The funding becomes effective after board approval and after the country has signed the documents. Funds can now be disbursed, thus commencing the implementation stage of the project.

Implementation and Supervision

Implementation of the project, including procurement, is the responsibility of the borrower and is carried out with minimal IFI assistance. However, the IFI does oversee all major procurement decisions made by the borrower. Most of the funds are spent during this phase, which provides the bulk of the procurement opportunities for contractors.


This final phase is an assessment of the project and of the results achieved. It is performed after the project has been completed and all funds have been disbursed.

The Procurement Process

Before you pursue a contract related to an IFI-funded project, be sure you understand the respective responsibilities of the IFI and the project’s executing agency. The IFI and the executing agency do share some of the work of project preparation but the executing agency is responsible for all phases of project execution and procurement, which must comply with IFI regulations. These regulations and their related procedures are similar for all IFIs.

Project and Procurement Information

The best sources of project information are contacts, partners and IFI staff in the donor and borrowing countries. Often, however, project-related documents, procurement notices and contract awards are available as well on IFI websites. Reviewing this information in the context of the country strategy document will help you monitor the progress of active projects and assess future developments (and therefore opportunities) in the borrowing country.

Procurement notices represent the actual business opportunities in IFI-financed projects. These are generally posted on the IFI’s website, and on independent websites that consolidate project information from major IFIs, UN agencies and foreign governments. These websites offer advanced search features and some will automatically notify you of opportunities that match your interests. Some are by subscription only, but most are free.

Suppliers of Goods, Works, Equipment and Non-Consulting Services

For the procurement of goods, equipment, civil works and non-consulting services such as transportation and maintenance, most opportunities occur during the implementation stage of the project.

Most IFIs require the borrower to draft a procurement plan, which states in general terms what products and services will be needed, when they will be required, their approximate costs and the procurement methods to be used. The procurement plan is published on the IFI’s website and is updated regularly.

International competitive bidding (ICB) is the preferred method when procurement involves large monetary values and/or complex needs. The objective of ICB is to provide all eligible firms with timely notification so that they all have an equal opportunity to bid. Borrowers must issue bid invitations or prequalification invitations in at least one local publication and in UN Development Business Online. In some cases, invitations will also appear on the IFI’s website.

Before bidding, always familiarize yourself with the procurement guidelines of the IFI that is providing the loan. These guidelines define the policies, procedures and procurement methods that have been agreed on by the borrower and the IFI.

Be aware, however, that the relationship between the supplier (you) and the borrower is governed by the bidding documents and your contract with the borrower, not by the IFI’s procurement guidelines.

Consultants and Consulting Services

IFIs use the term “consultant” for a wide variety of public and private entities that provide consulting services. These include consulting firms, engineering firms, management firms, procurement agents, auditors, commercial banks, universities, research institutions, governmental agencies, NGOs and individuals. Note that IFIs distinguish consulting services from non-consulting services such as maintenance, the latter being procured in the same way as goods and equipment.

Opportunities for consultants occur during most of the project cycle. The following list provides some examples and the points at which they occur:

· The preparation stage can include sector studies, master plans, (pre)feasibility studies, project design and environmental and social impact assessments.

· The implementation stage can include procurement assistance, project management, and training and construction supervision.

· Advisory services, which can be required throughout the project cycle, can include strategy and policy, regulation, institutional reform, capacity building, information technology and technical assistance.

Selection of Consultants

To select consultants for an assignment, the borrower publishes a procurement notice on UN Development Business Online, dgMarket and/or the IFI’s website. The notice will ask suitable firms to submit Expressions of Interest (EOIs). For further information, please refer to our market information guide on Preparing an Expression of Interest (EOI) .

Using the EOIs received, the borrower prepares a shortlist of six companies or individuals and sends a Request for Proposal (RFP) to them. The RFP includes the instructions to consultants, the Terms of Reference (ToR) for the project and the proposed contract. Technical and financial proposals may be requested at that time, but will be evaluated separately using a two-envelope system, in which the financial proposals are opened only after the technical scores have been assessed.

Before submitting an EOI, always familiarize yourself with the selection guidelines of the IFI that is disbursing the loan. These guidelines define the policies, procedures and selection methods that have been agreed on by the borrower and the IFI.

Be aware, however, that the relationship between the supplier (you) and the borrower is governed by the RFP and the contract, not by the IFI’s procurement guidelines.

The heaviest emphasis in selecting a consultant is on the quality of the services to be provided, and the most common selection method is Quality- and Cost-Based Selection (QCBS). The weight given to quality and cost will depend on the complexity and nature of the assignment although it is usually around 80 percent for quality and 20 percent for cost.

However, the borrower may also use Quality-Based Selection (QBS) if the scope and complexity of the assignment is highly specialized and/or difficult to define, or the assignment will have a major impact on the later stages of the project. In QBS, technical proposals are submitted for evaluation first, and financial proposals submitted only after the technical evaluation has taken place.

Corporate and Institutional Procurement

IFIs also generate business opportunities through corporate or institutional procurement, when they purchase goods or services for their own internal needs. They buy a wide variety of goods and services including:

  • information technology;
  • communications equipment and services;
  • office equipment and supplies;
  • graphic design and publications; and
  • printing services.

IFIs also hire a broad variety of individual consultants and consultancy firms to provide technical expertise that they do not have in-house.

Procurement over a certain threshold is carried out competitively and is advertised on the IFI’s website and/or on UN Development Business Online and dgMarket. Some IFIs have developed electronic notification and procurement systems for their corporate procurement, which enables potential suppliers to receive notifications, express their interest and bid electronically. Most IFIs require suppliers and consultants to register as a vendor.

Private Sector Lending

In recognizing the important role of the private sector to catalyze positive economic development, the IFIs have in recent years, increased their focus on direct financial lending to the private sector. Some of the IFIs also lend directly to non-sovereign guarantee actors such as municipal or local governments and other financial institutions.

IFIs offer this lending through a variety of financial instruments including direct financing and private equities, as well as other innovative financing mechanisms. These opportunities are typically identified and supported through distinct private sector units found within the respective IFI, whose main objective is to oversee the developmental impact of the financing. The exceptions to this would be the World Bank and the Inter-American Development Bank, which have distinct organizational entities, the International Finance Corporation ( IFC) and the Inter-American Investment Corporation (IIC ), to support their global private sector lending operations.

The share of lending allocated to the “public” versus “private” sectors varies significantly among the IFIs. At the AsDB, AfDB and the IDB, it has ranged from 10-25% in recent years whereas, it makes up the majority of the lending at the EBRD. Typically, the bulk of private sector lending at the IFIs is channelled towards infrastructure projects including those in the energy, power, transport, telecommunications, and water sectors.

Trust Funds

IFIs complement their resources through trust funds. These funds are financial and administrative arrangements with external donors, and are intended to finance high-priority development needs such as research, technical assistance, advisory services, debt relief and post-conflict transition. The funds come from donor countries, foundations, the private sector and sometimes the IFI’s own grant resources. The IFI is responsible for administering and allocating the funds.

Until recently, many consultant trust funds (CTFs) were donor-based and tied, which meant that they could only be used to hire consultants who were nationals of the donor country. Currently, however, almost all IFIs have phased out tied trust funds or are doing so. Most new trust funds are untied, are sector- or theme-specific, and are either multi- or single-donor funds. Their main purpose is to advance international development by providing targeted grants for key strategic needs.

For Canadian consultants, the loss of the tied Canadian CTFs is far outweighed by the dramatic increase in the number of funds they can access worldwide, and the large amount of available financing that has resulted from untying the funds.

Business Approaches

You should consider IFI-funded business opportunities as just one element of your larger international marketing strategy, rather than an entry point into a new market. That said, if you have already exported successfully to a particular market, you can expect that your strategy would adapt well to IFI project opportunities there.

All IFIs assign project officers to each project and these individuals serve as the managers and supervisors who implement the project on behalf of the IFI. They are key contacts for seeking opportunities, and they will be much more interested in your company if you can offer them expertise or technologies that will help them solve problems and contribute to their projects’ success.

As soon as you identify a project, you should review the project documents to identify the key decision makers and contact them to express your interest in participating. Visits to the borrowing country are essential for consulting and engineering firms, and can be very fruitful for exporters of goods and equipment as well.

Whether you are meeting with IFI staff or with representatives of the executing agency, be well prepared and have specific topics to discuss; making general inquiries about business opportunities or asking for readily available information will be seen as a waste of time. You should be prepared to clearly demonstrate what you or your company can do to help the project officers advance their project, and provide appropriate information about your experience, capabilities and the solutions you intend to propose.

Working with a local partner is usually advisable. Such partnerships can give you the local presence and expertise that will help with any necessary follow-up and having someone on the spot may help you reduce costs. In most cases, moreover, local content is one of the evaluation criteria for a contract, and demonstrating that your bid has such content can make the difference between winning and losing a contract.

Some of the subscription services that provide procurement notices also provide databases of local firms interested in IFI projects. There are also opportunities to participate in IFI-funded projects by subcontracting with prime contractors that have been awarded contracts in a project. Subcontracts are not governed by IFI procurement regulations and interested firms should contact prime contractors directly.

c) Trends in Foreign Capital inflows in India.

-> Trends in FDI Inflows to India:-

With the tripling of the FDI flows to EMEs during the pre-crisis period of the 2000s, India also received large FDI inflows in line with its robust domestic economic performance. The attractiveness of India as a preferred investment destination could be ascertained from the large increase in FDI inflows to India, which rose from around US$ 6 billion in 2001-02 to almost US$ 38 billion in 2008-09. The significant increase in FDI inflows to India reflected the impact of liberalisation of the economy since the early 1990s as well as gradual opening up of the capital account. As part of the capital account liberalisation, FDI was gradually allowed in almost all sectors, except a few on grounds of strategic importance, subject to compliance of sector specific rules and regulations. The large and stable FDI flows also increasingly financed the current account deficit over the period. During the recent global crisis, when there was a significant deceleration in global FDI flows during 2009-10, the decline in FDI flows to India was relatively
moderate reflecting robust equity flows on the back of strong rebound in domestic growth ahead of global recovery and steady reinvested earnings (with a share of almost 25 per cent) reflecting better profitability of foreign companies in India. However, when there had been some recovery in
global FDI flows, especially driven by flows to Asian EMEs, during 2010-11, gross FDI equity inflows to India witnessed significant moderation. Gross equity FDI flows to India moderated to US$ 20.3 billion during 2010-11 from US$ 27.1 billion in the preceding year.

Equity FDI inflows to India







Sectoral shares (Per cent)













Construction, Real estate and mining


















Equity Inflows (USS billion)













Construction, Real estate and mining












Total equity FDI






From a sectoral perspective, FDI in India mainly flowed into services sector (with an
average share of 41 per cent in the past five years) followed by manufacturing (around 23 per cent)
and mainly routed through Mauritius (with an average share of 43 per cent in the past five years)
followed by Singapore (around 11 per cent). However, the share of services declined over the
years from almost 57 per cent in 2006-07 to about 30 per cent in 2010-11, while the shares of
manufacturing, and „others‟ largely comprising „electricity and other power generation‟ increased
over the same period. Sectoral information on the recent trends in FDI flows to India
show that the moderation in gross equity FDI flows during 2010-11 has been mainly driven by
sectors such as „construction, real estate and mining‟ and services such as „business and financial
services‟. Manufacturing, which has been the largest recipient of FDI in India, has also witnessed
some moderation.

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