2018

Q1. Discuss pre-issue and post-issue obligations of merchant bankers as per SEBI guidelines.
A. Merchant bankers play a pivotal role in facilitating the issuance of securities in the capital
markets. Their responsibilities encompass a range of tasks, from conducting due diligence to
ensuring regulatory compliance and maintaining transparency throughout the issuance process. In
India, the Securities and Exchange Board of India (SEBI) lays down comprehensive guidelines to
regulate the activities of merchant bankers and safeguard the interests of investors. Central to these
guidelines are the pre-issue and post-issue obligations that merchant bankers must adhere to
diligently. Let's explore these obligations in detail.

Pre-issue Obligations:

1. Due Diligence:

• Merchant bankers undertake thorough due diligence to assess the issuing company's
financial health, business operations, and regulatory compliance. This involves
scrutinizing financial records, evaluating management credibility, and ensuring the
accuracy of information provided in the offer document.

2. Disclosure Requirements:

• SEBI mandates comprehensive disclosure requirements to ensure transparency in

securities issuance. Merchant bankers are tasked with ensuring that all material
information relevant to investment decisions is disclosed in the offer document. This
includes details about the company's business, financial performance, risk factors,
and regulatory compliance.

3. Compliance with Regulations:

• Merchant bankers oversee the entire issuance process to ensure compliance with
SEBI regulations and other applicable laws. This involves obtaining necessary
approvals, coordinating with legal advisors, and ensuring adherence to disclosure
norms and pricing guidelines.

4. Price Justification:

• One of the critical responsibilities of merchant bankers is to justify the pricing of

securities being offered to the public. They analyze market conditions, demand-
supply dynamics, and intrinsic value to determine a fair and reasonable price for the
securities.

Post-issue Obligations:

1. Monitoring:

• After the securities are issued, merchant bankers monitor the utilization of funds
raised to ensure compliance with the stated objectives. This entails regular oversight
of financial statements, project progress reports, and other relevant information.

2. Addressing Investor Queries:

 • Merchant bankers promptly address investor queries and concerns regarding the
offering. They provide accurate information and clarification to assist investors in
making informed investment decisions.

3. Compliance Reporting:

• Merchant bankers submit periodic compliance reports to SEBI detailing the

utilization of funds raised through the issuance. These reports assess whether funds
have been utilized as per the stated objectives and highlight any deviations from the
initial plan.

4. Resolving Grievances:

• In the event of grievances or complaints from investors, merchant bankers facilitate

resolution in a timely manner. They collaborate with the issuing company, regulatory
authorities, and other stakeholders to address investor concerns and uphold investor
confidence.

Q2.
(a) India's largest software exporter TCS came up with its IPO in 2004. It made the green shoe option
available to its lead book runner J M Morgan Stanley, its stabilizing agent. What do you understand
by the Green Shoe Option and how does it act as an investor protection measure?

A. The Green Shoe Option, also known as the overallotment option, is a provision that allows
underwriters of an initial public offering (IPO) to sell additional shares to the public if there is high
demand for the stock. In the case of TCS's IPO in 2004, the company made the Green Shoe Option
available to its lead book runner, J M Morgan Stanley, which acted as its stabilizing agent.

Here's how the Green Shoe Option works and how it acts as an investor protection measure:

1. Additional Share Allocation: When an IPO is oversubscribed, meaning there is more demand
for shares than there are shares available for sale, the underwriters may exercise the Green
Shoe Option. This allows them to issue and sell additional shares, up to a certain percentage
of the original offering size, to meet the excess demand.

2. Stabilizing Market Price: By having the flexibility to allocate additional shares through the
Green Shoe Option, underwriters can help stabilize the market price of the newly listed
stock. If the stock price experiences significant fluctuations in the initial trading days due to
high demand or volatility, the underwriters can use the option to supply more shares,
thereby potentially preventing excessive price fluctuations.

3. Investor Protection: The Green Shoe Option acts as an investor protection measure in
several ways:

• Price Stabilization: By helping to stabilize the market price, the Green Shoe Option
reduces the likelihood of sudden price spikes or crashes, which can be detrimental to
investors.
 • Market Liquidity: Additional share issuance increases the liquidity of the stock in the
secondary market, making it easier for investors to buy or sell shares at fair prices.

• Fair Allocation: The option ensures that investors who were unable to secure shares
during the initial offering due to oversubscription still have an opportunity to invest
at the IPO price, promoting fairness in the allocation process.

4. Underwriter's Role: Underwriters, such as J M Morgan Stanley in the case of TCS's IPO, play
a crucial role in managing the Green Shoe Option. They assess market demand, price trends,
and investor sentiment to determine whether and when to exercise the option.

(b) Explain the terms:

(i) Offer Document
A. An offer document is a comprehensive legal document prepared by a company that intends to
issue securities to the public through an initial public offering (IPO) or a follow-on public offering
(FPO). It contains all the relevant information about the company, its business operations, financial
performance, risks associated with investing in its securities, and the terms of the offering. The offer
document is submitted to the regulatory authorities, such as the Securities and Exchange Board of
India (SEBI) in India, for approval before the securities can be offered to the public.

Key components of an offer document typically include:

• Company Information: Details about the company's history, management team, business
model, and industry.

• Financial Information: Audited financial statements, including balance sheets, income

statements, and cash flow statements, providing insights into the company's financial health
and performance.

• Risk Factors: Factors that could potentially affect the company's operations, financial
condition, or future prospects, such as regulatory changes, competition, or market volatility.

• Offer Details: Information about the type and pricing of the securities being offered,
including the number of shares or bonds, offering price, and any special conditions.

• Legal and Regulatory Disclosures: Compliance with applicable laws, regulations, and listing
requirements, as well as any legal proceedings or regulatory investigations involving the
company.

The offer document plays a crucial role in informing potential investors about the company and the
securities being offered, helping them make informed investment decisions.

(ii) Red Herring Prospectus

A. A red herring prospectus is a preliminary version of the offer document that is filed with the
regulatory authorities and made available to prospective investors before the launch of an IPO. It is
called a "red herring" because it contains a disclaimer in red ink stating that the document is
incomplete and subject to further changes or updates. Once all the necessary regulatory approvals
are obtained, and any pending information is finalized, the red herring prospectus is amended to
remove the disclaimer and becomes the final offer document.

The red herring prospectus contains most of the information found in the final offer document,
including details about the company, its business, financials, and the terms of the offering. However,
certain key information, such as the offer price and the exact number of securities being offered, may
be omitted or stated as indicative until finalized.

Potential investors use the red herring prospectus to evaluate the investment opportunity and
decide whether to participate in the IPO. It helps generate interest in the offering and allows for early
marketing and investor education efforts by the company and its underwriters.

(iii) Qualified Institutional Buyer

A. A qualified institutional buyer (QIB) is a category of institutional investors that meets certain
eligibility criteria to participate in securities offerings, such as IPOs, FPOs, or private placements,
without the need for individual regulatory approval. In India, the Securities and Exchange Board of
India (SEBI) regulates QIBs and sets the eligibility criteria for participation in securities offerings.

Typically, QIBs include:

• Institutional Investors: Such as mutual funds, insurance companies, pension funds,

investment banks, and foreign institutional investors (FIIs).

• Banks and Financial Institutions: Commercial banks, development finance institutions, and
other regulated financial entities.

• Qualified Corporate Buyers: Certain corporate entities meeting specific financial criteria.

QIBs are considered sophisticated investors with the expertise and financial resources to evaluate
investment opportunities and absorb large quantities of securities. They play a significant role in the
capital markets by providing liquidity and stability to securities offerings.

QIB participation in securities offerings is subject to regulatory limits and disclosure requirements to
ensure fairness and transparency in the allocation process. In India, SEBI mandates a minimum
allocation of securities to QIBs in IPOs and FPOs to promote broad-based participation and
distribution of securities.

Q3.
(a) The leasing of an equipment having a purchase price of Rs. 35,00,000 is being considered by a
firm. The equipment having an estimated economic life of 5 years, is expected to generate annual
lease rentals of Rs. 12,00,000 to the leasing company. Depreciation @25% (WDV) is to be allowed as
specified by income tax rules. Evaluate the desirability of lease option to the firm. Assuming that the
marginal corporate tax rate is 50% and after tax borrowing rate is 8%.
A.

(b) Discuss the different types of lease with examples.

A. Leasing is a popular financing option used by businesses to acquire assets without having to make
a large upfront payment. There are several types of leases, each offering different benefits and
obligations to both the lessor (the owner of the asset) and the lessee (the party leasing the asset).
Let's discuss some of the most common types of leases with examples:

1. Operating Lease:

• An operating lease is a short-term lease agreement where the lessee uses the asset
for a limited period, typically less than the asset's useful life.

• This type of lease is often used for assets that have a high turnover rate or are
subject to rapid technological advancements.

• Example: A company leases office space for a period of three years. At the end of the
lease term, the lessee has the option to renew the lease or return the space to the
lessor.

2. Financial Lease (Capital Lease):

• A financial lease, also known as a capital lease, is a long-term lease agreement that
resembles a purchase in many ways. It transfers most of the risks and rewards of
ownership to the lessee.

• This type of lease is typically used for assets with a long economic life and where the
lessee intends to retain the asset for its useful life.

• Example: A logistics company leases a fleet of trucks for a period of five years. The
lease agreement includes a bargain purchase option at the end of the lease term,
allowing the lessee to acquire ownership of the trucks at a nominal price.

3. Sale and Leaseback:

• A sale and leaseback arrangement involves a company selling an asset to a lessor and
then immediately leasing it back from the lessor under a lease agreement.

• This type of lease allows the company to unlock the capital tied up in the asset while
retaining the ability to use it for business operations.

• Example: A manufacturing company sells its production facility to a real estate

investor and then leases back the facility to continue its manufacturing operations.
This enables the company to free up cash for other business needs while maintaining
access to the facility.

4. Direct Lease:

• In a direct lease, the lessee leases the asset directly from the lessor. There are no
intermediaries involved in the lease arrangement.
 • This type of lease is straightforward, with the lessee dealing directly with the lessor
to negotiate lease terms and conditions.

• Example: A company leases office space directly from a property management

company without involving any third-party leasing agents or brokers.

5. Indirect Lease:

• In an indirect lease, a financial institution, such as a bank or leasing company,

purchases the asset from the manufacturer or vendor and then leases it to the
lessee.

• The financial institution acts as the lessor, while the lessee interacts with the
manufacturer or vendor as the supplier of the leased asset.

• Example: A company leases construction equipment from a leasing company. The

leasing company purchases the equipment from the manufacturer and leases it to
the company, allowing the company to use the equipment without having to make a
large upfront payment.

Q4.
(a) Under a Hire-Purchase deal structured by the Hypothetical Finance Ltd. (HFL) for the
Hypothetical Industries ltd. (HIL), the HFL has offered to finance the purchase of an equipment
costing Rs. 120 lakh. The (flat rate) of interest is 10%. The amount would have to be repaid in 36
equal monthly installments in advance. The HIL is required to make cash down payment of 25%. It
uses WDV method of depreciation @30% on similar assets. From above information you are required
to show the allocation of finance charge on the basis of Effective Rate of Interest (ERI) method.

(b) Differentiate between Life and General Insurance.

A. Life insurance and general insurance are two broad categories of insurance products, each
serving different purposes and covering different risks. Here's a differentiation between the two:

1. Purpose:

• Life Insurance: Life insurance provides financial protection to individuals and their
families in the event of the policyholder's death or in some cases, disability or critical
illness. It helps ensure that dependents are financially supported after the
policyholder's death.

• General Insurance: General insurance, also known as non-life insurance, covers a

wide range of risks other than those covered by life insurance. It includes insurance
policies that protect against property damage, liability, health-related expenses,
travel-related risks, and other non-life-threatening events.

2. Coverage:
 • Life Insurance: Life insurance typically provides coverage for a specific term (term life
insurance) or for the policyholder's entire life (whole life insurance). It pays out a
lump sum amount or periodic payments to beneficiaries upon the death of the
insured or after the policy matures.

• General Insurance: General insurance offers coverage for various risks, including
property damage (e.g., fire insurance, home insurance), liability (e.g., third-party
liability insurance, professional indemnity insurance), health-related expenses (e.g.,
health insurance, medical insurance), travel-related risks (e.g., travel insurance), and
other contingencies (e.g., vehicle insurance, crop insurance).

3. Premiums and Payouts:

• Life Insurance: Premiums for life insurance policies are generally based on factors
such as the insured's age, health, lifestyle, and the coverage amount. Payouts are
made to beneficiaries upon the death of the insured or when the policy matures,
providing financial support to dependents or the policyholder during retirement.

• General Insurance: Premiums for general insurance policies vary depending on the
type of risk being insured, the coverage amount, the insured property's value, and
other factors. Payouts are made to cover specific losses or expenses incurred due to
insured events, such as property damage, medical expenses, legal liabilities, or travel
disruptions.

4. Duration of Coverage:

• Life Insurance: Life insurance policies typically provide coverage for the insured's
entire life (whole life insurance) or for a specific term (term life insurance). Some
policies may also offer coverage until a certain age, such as 65 or 70.

• General Insurance: General insurance policies usually provide coverage for a

specified period, such as one year, after which the policy needs to be renewed. Some
policies may offer multi-year coverage, but they still require periodic renewal to
maintain coverage.

Q5.
(a) What is meant by Venture Capital? Explain the different stages of financing in early and late
stage by a Venture Capital Institution.

A. Venture capital (VC) refers to a form of financing provided by investors, known as venture
capitalists, to startup companies and small businesses with high growth potential. Venture capital
firms typically invest in early-stage companies that are in the initial stages of development and have
innovative business ideas or disruptive technologies. In exchange for their investment, venture
capitalists receive equity ownership in the company, allowing them to share in the company's
success if it grows and becomes profitable.

Now, let's delve into the different stages of financing typically provided by venture capital
institutions:
Early-Stage Financing:

1. Seed Stage:

• The seed stage is the earliest stage of financing, where startups are in the conceptual
or idea stage.

• Funding at this stage is used to conduct market research, develop prototypes,

validate business models, and hire key team members.

• Investment amounts are relatively small, and the risk of failure is high.

• Venture capitalists or angel investors typically provide seed funding in exchange for
equity ownership or convertible notes.

2. Startup/Early Stage:

• In the startup or early stage, companies have progressed beyond the idea stage and
are building their products or services.

• Funding at this stage is used to develop minimum viable products (MVPs), launch
initial marketing campaigns, acquire early customers, and refine business strategies.

• Venture capital firms specializing in early-stage investments provide funding in

exchange for equity ownership, typically through seed rounds or Series A rounds.

Late-Stage Financing:

3. Expansion/Growth Stage:

• At the expansion or growth stage, companies have established product-market fit

and are scaling their operations.

• Funding at this stage is used to expand sales and marketing efforts, scale production,
enter new markets, and strengthen the management team.

• Venture capital firms or private equity investors provide larger funding rounds,
known as Series B, C, or D rounds, in exchange for minority or majority ownership
stakes.

4. Mezzanine Stage:

• The mezzanine stage, also known as pre-IPO financing, occurs shortly before a
company goes public or is acquired.

• Funding at this stage is used to prepare for an IPO, expand internationally, make
strategic acquisitions, or buy out existing shareholders.

• Venture capital firms, private equity investors, or hedge funds provide mezzanine
financing in exchange for convertible preferred stock, warrants, or other equity-
linked securities.

(b) Explain the difference between traditional and non- traditional mortgages. What is a Graduated
Payment mortgage and a Pledged Account mortgage?
A. Traditional mortgages and non-traditional mortgages differ in their structure, terms, and eligibility
criteria. Let's explore the distinctions between them:

Traditional Mortgages:

1. Structure:

• Traditional mortgages typically have fixed interest rates and monthly payments that
remain constant over the life of the loan.

• These mortgages follow a standard amortization schedule, where each payment

consists of both principal and interest, with the majority of the payment going
towards interest in the early years and gradually shifting towards principal over time.

2. Terms:

• Traditional mortgages usually require a down payment of around 20% of the home's
purchase price, although there are options available with lower down payment
requirements.

• Borrowers need to meet strict eligibility criteria, including credit score, income
verification, employment history, and debt-to-income ratio.

3. Risk Profile:

• Traditional mortgages are considered relatively low-risk for lenders and borrowers
because of their fixed terms and predictable payment schedules.

• These mortgages are backed by the property itself, which serves as collateral,
providing lenders with security in case of default.

Non-Traditional Mortgages:

1. Structure:

• Non-traditional mortgages, also known as alternative or unconventional mortgages,

deviate from the standard fixed-rate and fixed-payment structure of traditional
mortgages.

• These mortgages may have adjustable interest rates, interest-only payments, or

other non-standard features.

2. Terms:

• Non-traditional mortgages may have more flexible eligibility criteria compared to

traditional mortgages, making them accessible to borrowers who may not qualify for
conventional loans.

• These mortgages may require lower down payments or allow for alternative forms of
income verification.

3. Risk Profile:

• Non-traditional mortgages carry higher risk for both lenders and borrowers due to
their non-standard terms and potential for payment fluctuations.
 • Borrowers may face the risk of payment shock if their interest rates reset or if they
transition from interest-only payments to full amortization.

Graduated Payment Mortgage (GPM): A Graduated Payment Mortgage (GPM) is a type of mortgage
where the initial monthly payments start lower than those of a traditional fixed-rate mortgage but
gradually increase over time. GPMs are designed to accommodate borrowers who expect their
income to increase in the future. These mortgages often feature fixed interest rates and longer loan
terms.

Pledged Account Mortgage (PAM): A Pledged Account Mortgage (PAM) is a type of mortgage that
combines elements of a traditional mortgage with a savings account. With a PAM, the borrower
deposits a sum of money into a pledged savings account held by the lender. The funds in the savings
account serve as collateral for the mortgage. Over time, as the borrower makes mortgage payments,
a portion of each payment is deposited into the savings account. Once the mortgage is paid off, the
borrower receives the remaining balance in the savings account. PAMs are designed to help
borrowers build savings while simultaneously paying off their mortgage.

2019
Q1.
(a) How has the merchant banking industry grown in India in the recent past? Which are the key
responsibilities that a merchant banker undertakes? Discuss some recent public issues that have
raised funds from the Indian stock market.

A. The merchant banking industry in India has witnessed significant growth in recent years, driven
by various factors such as economic reforms, technological advancements, and the increasing
participation of retail investors in the capital markets. Here are some ways in which the merchant
banking industry has grown:

1. Expansion of Capital Markets:

• India's capital markets have experienced robust growth, with increasing participation
from both domestic and foreign investors.

• The growing number of companies seeking to raise capital through initial public
offerings (IPOs) and follow-on public offerings (FPOs) has fueled demand for
merchant banking services.

2. Diversification of Financial Products:

• Merchant bankers have diversified their offerings beyond traditional underwriting

and advisory services to include debt syndication, mergers and acquisitions (M&A),
private equity, venture capital, and wealth management.
 • The emergence of new financial products and services has broadened the scope of
activities for merchant bankers, allowing them to cater to a wider range of client
needs.

3. Increased Regulatory Scrutiny:

• The Securities and Exchange Board of India (SEBI) has introduced stringent
regulations and guidelines to ensure transparency, investor protection, and market
integrity.

• Merchant bankers are required to comply with regulatory requirements, adhere to

ethical standards, and maintain high levels of corporate governance in their
operations.

4. Technological Innovation:

• Technological advancements have transformed the way merchant bankers conduct

business, with the adoption of digital platforms, online trading, and algorithmic
trading.

• Fintech solutions, such as mobile trading apps, robo-advisors, and blockchain

technology, have streamlined processes and improved efficiency in the merchant
banking industry.

Key responsibilities undertaken by merchant bankers include:

1. Underwriting:

• Merchant bankers underwrite securities issuances by agreeing to purchase unsold

shares or bonds at the offer price, ensuring that the issuer raises the required
capital.

2. Advisory Services:

• Merchant bankers provide advisory services to companies on various capital market

transactions, including IPOs, FPOs, rights issues, debt offerings, and M&A activities.

• They assist companies in structuring transactions, pricing securities, conducting due

diligence, and complying with regulatory requirements.

3. Marketing and Distribution:

• Merchant bankers play a crucial role in marketing and distributing securities to

investors through roadshows, investor presentations, and online platforms.

• They help generate investor interest, assess demand for securities, and allocate
shares or bonds to institutional and retail investors.

4. Compliance and Due Diligence:

• Merchant bankers conduct thorough due diligence on issuers and transactions to

ensure compliance with regulatory requirements and mitigate risks.

• They verify the accuracy and completeness of offer documents, assess the financial
viability of issuers, and identify potential legal or regulatory issues.
 5. Post-Issue Management:

• Merchant bankers provide post-issue management services, including monitoring

the utilization of funds raised through securities issuances, addressing investor
queries and grievances, and submitting compliance reports to regulatory authorities.

Recent public issues that have raised funds from the Indian stock market include:

1. Paytm IPO:

• Paytm, India's leading digital payments and financial services company, conducted its
initial public offering (IPO) in November 2021, raising over Rs. 18,300 crore.

• The IPO attracted strong investor interest, with the company offering shares at a
price range of Rs. 2,080 to Rs. 2,150 per share.

2. Zomato IPO:

• Zomato, a popular online food delivery platform in India, went public in July 2021,
raising around Rs. 9,375 crore through its IPO.

• The IPO was oversubscribed, reflecting investor confidence in the company's growth
prospects and the online food delivery market.

3. Nykaa IPO:

• Nykaa, India's leading e-commerce platform for beauty and wellness products, made
its stock market debut in November 2021, raising approximately Rs. 5,352 crore.

• The IPO received strong demand from investors, driven by the company's strong
brand presence, diversified product offerings, and growth potential in the e-
commerce sector.

(b) (i) How can a conflict of interest arise between the Lead Manager and Companies raising funds
from the stock market?

A. A conflict of interest can arise between the lead manager (merchant banker) and companies
raising funds from the stock market due to their differing roles, priorities, and incentives. Here are
some scenarios where conflicts of interest may occur:

1. Underpricing of Securities:

• Companies seeking to raise funds through an initial public offering (IPO) typically
want to maximize the proceeds by pricing their securities at the highest possible
level.

• However, lead managers may have an incentive to underprice the securities to

attract investor interest and ensure a successful offering, as they often receive a
percentage of the funds raised as their fee.

• This can create a conflict of interest, as underpricing may result in the company
receiving less capital than it could have raised at a higher price.

2. Allocation of Shares:
 • In IPOs and follow-on public offerings (FPOs), lead managers play a crucial role in
allocating shares to institutional and retail investors.

• There may be conflicts of interest in the allocation process if lead managers prioritize
certain investors over others based on factors such as relationship, trading volume,
or potential future business opportunities.

• This can result in perceived or actual unfairness in the distribution of shares and may
undermine investor confidence in the offering.

3. Advisory Services:

• Lead managers often provide advisory services to companies on various capital

market transactions, including IPOs, FPOs, and debt offerings.

• Conflicts of interest may arise if lead managers have existing relationships or

business interests with other clients that could influence their advice to the company
raising funds.

• For example, a lead manager may recommend a particular pricing strategy or timing
of the offering that benefits another client at the expense of the company.

4. Cross-Selling of Services:

• Lead managers may offer a range of financial services beyond underwriting, such as
M&A advisory, private equity investments, and wealth management.

• Conflicts of interest may arise if lead managers prioritize cross-selling additional

services to companies raising funds, potentially influencing their decision-making or
advice.

• Companies may feel pressured to engage in other transactions or services offered by

the lead manager to maintain a favorable relationship or access to future capital
market opportunities.

To mitigate conflicts of interest, regulatory authorities such as the Securities and Exchange Board of
India (SEBI) impose strict disclosure requirements, ethical standards, and compliance guidelines on
lead managers and companies raising funds from the stock market. Additionally, companies may
engage independent advisors or committees to oversee the offering process and ensure fairness and
transparency.

(ii) Mention post-issue obligations of a Lead Manager.

A. Post-Issue Obligations of a Lead Manager
After a company successfully raises funds from the public through an initial public offering (IPO) or
other public issues, the lead manager (merchant banker) has several key responsibilities to ensure
that everything runs smoothly and complies with regulatory requirements. These obligations are
critical for maintaining investor confidence and the integrity of the financial markets.

1. Finalization of Allotment

Ensure Fair Allotment:

 • The lead manager must oversee the allocation of shares to investors, making sure the
process is fair and transparent.

• If the issue was oversubscribed, meaning more shares were applied for than available, the
lead manager ensures that shares are allotted proportionately. This is done according to the
rules set by SEBI (Securities and Exchange Board of India) and as described in the offer
document.

Example: If an IPO receives applications for twice the number of shares available, the lead manager
ensures that investors receive shares in proportion to their applications.

2. Refunds

Timely Processing of Refunds:

• When some applications are rejected or when the issue is oversubscribed, not all investors
will receive the shares they applied for. In such cases, the lead manager ensures that the
money is refunded to these investors promptly.

• This involves coordinating with the registrar to the issue to ensure refunds are processed
within the time frame specified by regulatory guidelines.

Example: If an investor applies for shares but doesn't receive any due to oversubscription, the lead
manager makes sure the investor gets their application money back quickly.

3. Listing and Trading

Ensure Shares are Listed on Stock Exchanges:

• The lead manager is responsible for making sure that the new shares are listed on the stock
exchange and are available for trading on the agreed date.

• This involves completing all necessary formalities with the stock exchanges and ensuring that
all regulatory requirements are met.

Example: After an IPO, the lead manager ensures that the shares start trading on the stock exchange
on the date mentioned in the offer document, so investors can buy and sell them.

4. Compliance Reporting

Submit Post-Issue Reports:

• The lead manager must submit detailed reports to SEBI, the stock exchanges, and other
regulatory bodies after the issue is completed.

• These reports include information about the allotment, refunds, and any deviations from the
details provided in the offer document.

Example: The lead manager submits a report to SEBI confirming that all guidelines were followed
during the IPO process and detailing how the shares were allotted.

5. Monitoring of Funds Utilization

Ensure Proper Use of Funds:

• The lead manager has to monitor how the funds raised through the public issue are used by
the company. This ensures the funds are used for the purposes stated in the offer document.
 • They periodically report on the status of fund utilization to regulatory authorities and
investors.

Example: If a company raised funds to build a new factory, the lead manager checks that the money
is actually being used for this purpose and not diverted elsewhere.

6. Investor Grievance Redressal

Address Investor Complaints:

• The lead manager is responsible for handling and resolving any complaints or grievances
from investors related to the issue, allotment, refunds, or listing.

• They work with the registrar and other stakeholders to ensure issues are resolved promptly
and effectively.

Example: If an investor has a complaint about not receiving their refund on time, the lead manager
investigates and resolves the issue to the investor’s satisfaction.

7. Post-Issue Advertisements

Release Informative Advertisements:

• The lead manager ensures that post-issue advertisements are released in accordance with
regulatory requirements. These ads provide important information to investors, such as the
basis of allotment and other relevant details.

Example: After an IPO, the lead manager publishes advertisements in major newspapers with details
about how the shares were allotted to various categories of investors.

8. Post-Issue Surveillance

Monitor Market Activity:

• The lead manager monitors the trading of the newly listed securities to detect any unusual or
manipulative trading activities that might affect the stock price.

• They ensure that the market activities are based on fair trading practices and market
fundamentals.

Example: If there are sudden spikes or drops in the stock price immediately after listing, the lead
manager investigates these to ensure they are not due to manipulative practices.

9. Compliance with Lock-In Requirements

Ensure Adherence to Lock-In Periods:

• For certain categories of investors, such as promoters, there are lock-in requirements where
they cannot sell their shares for a specified period. The lead manager ensures these
requirements are adhered to.

Example: The lead manager makes sure that promoters’ shares are locked in for the period specified
in the offer document, usually to maintain stability and investor confidence.

10. Continuous Disclosure Obligations

Assist in Ongoing Disclosures:

 • The lead manager helps the company comply with ongoing disclosure requirements to keep
investors informed about significant developments and material changes.

Example: If the company makes significant business decisions or faces major events post-issue, the
lead manager assists in timely disclosures to stock exchanges and the public.

11. Coordination with Registrars and Transfer Agents

Ensure Efficient Post-Issue Processing:

• The lead manager coordinates with registrars and transfer agents to ensure smooth
processing of post-issue activities like dispatch of refund orders and crediting shares to
demat accounts.

Example: The lead manager works with the registrar to ensure that shares are credited to investors’
demat accounts within the stipulated time, avoiding delays and ensuring investor satisfaction.

12. Investor Education and Communication

Facilitate Investor Engagement:

• Post-issue, the lead manager may play a role in educating and communicating with investors,
providing updates about the company’s performance and future plans.

Example: Hosting webinars, conference calls, or sending out newsletters to keep investors informed
about the company’s progress and strategic direction.

By fulfilling these post-issue obligations, the lead manager helps to maintain trust and transparency
in the capital markets, ensuring that both the issuer and the investors are well-served and that
regulatory compliance is maintained. This comprehensive approach is essential for the continued
growth and stability of the financial markets.

Q2.
(a) What are the factors considered by a Merchant Banker before deciding price of an issue? List out
the SEBI norms regarding promoter's contribution, lock-in conditions and Advertising of the issue.

A. Factors Considered by a Merchant Banker Before Deciding the Price of an Issue

When a merchant banker is deciding the price of a public issue, several key factors are taken into
consideration to ensure that the pricing is fair, attractive to investors, and reflects the true value of
the company. Here are the main factors:

1. Company's Financial Performance:

• Historical Financials: Examination of past financial statements to understand

revenue, profit margins, earnings per share (EPS), and other key financial metrics.

• Future Projections: Assessment of future earnings potential, growth prospects, and

financial forecasts.

2. Industry and Market Conditions:

 • Industry Trends: Analysis of the industry in which the company operates, including
growth rates, competitive landscape, and regulatory environment.

• Market Sentiment: Current market conditions, investor sentiment, and overall

economic environment.

3. Comparable Company Analysis:

• Peer Comparison: Comparison with similar companies in the same industry in terms
of valuation multiples like Price-to-Earnings (P/E), Price-to-Book (P/B), and Price-to-
Sales (P/S) ratios.

4. Demand and Supply Dynamics:

• Investor Demand: Gauging investor interest and demand for the shares through
roadshows and investor meetings.

• Market Liquidity: Assessment of market liquidity and the ability to absorb the new
issue.

5. Company’s Business Model and Prospects:

• Unique Selling Proposition: Evaluation of the company’s unique strengths, business

model, competitive advantages, and market positioning.

• Growth Potential: Analysis of the company’s potential for growth and expansion.

6. Regulatory Environment:

• Compliance: Ensuring compliance with all regulatory requirements and guidelines

set by SEBI.

SEBI Norms Regarding Promoter's Contribution, Lock-In Conditions, and Advertising of the Issue

Promoter's Contribution

1. Minimum Contribution:

• Initial Public Offerings (IPOs): Promoters must contribute at least 20% of the post-
issue capital.

• Further Public Offerings (FPOs): SEBI may specify the minimum promoter
contribution based on the size and other characteristics of the issue.

2. Fully Paid-Up Shares:

• Promoters' contribution should be in the form of fully paid-up shares.

Lock-In Conditions

1. Lock-In Period for Promoter's Contribution:

• For IPOs: Promoter’s minimum contribution (20% of post-issue capital) is locked in

for a period of three years from the date of allotment in the public issue.

• For Additional Promoter Contribution: Any promoter contribution exceeding the

required 20% is locked in for one year.
 2. Lock-In for Other Shareholders:

• Pre-issue capital held by persons other than promoters is locked in for one year from
the date of allotment in the public issue.

3. Restrictions During Lock-In Period:

• Shares under lock-in cannot be sold or transferred. However, they can be pledged
with banks or financial institutions as collateral for loans.

Advertising of the Issue

1. Pre-Issue Advertising:

• Advertisements must be accurate, fair, and not misleading. They should not contain
any information that is not in the offer document.

• Disclosures: Advertisements must include disclosures such as risk factors, and

mention that investors should read the offer document carefully before investing.

2. Post-Issue Advertising:

• Advertisements announcing the issue opening and closing dates must be made in
prominent newspapers.

• Basis of Allotment: After the allotment, an advertisement must be published

detailing the basis of allotment and the number of applications received.

3. Content and Format:

• Advertisements must follow the content and format guidelines specified by SEBI to
ensure they are not misleading and provide clear and relevant information to
investors.

4. Compliance and Monitoring:

• SEBI monitors advertisements to ensure compliance with these regulations and takes
action against any misleading or non-compliant advertisements.

By carefully considering these factors and adhering to SEBI norms, merchant bankers can effectively
price the issue, ensuring a successful public offering while maintaining investor trust and regulatory
compliance.

(b) What is the difference between IPO, FPO, Rights Issue and Private Placement?
A. Understanding the differences between Initial Public Offerings (IPOs), Further Public Offerings
(FPOs), Rights Issues, and Private Placements is crucial for both companies seeking to raise capital
and investors looking to invest in these offerings. Here's a simplified breakdown of each:

Initial Public Offering (IPO)

Definition:
 • An IPO is the first time a company offers its shares to the public on a stock exchange,
transitioning from being privately owned to publicly traded.

Key Features:

• New Listing: The company's shares become available for trading on a stock exchange for the
first time.

• Access to Capital: Raises funds from public investors, allowing the company to grow and
expand its operations.

• Regulatory Scrutiny: Requires approval from regulatory bodies like the Securities and
Exchange Board of India (SEBI) and compliance with extensive disclosure requirements.

Example: When a private company like a tech startup decides to go public and lists its shares on a
stock exchange for the first time, it conducts an IPO.

Further Public Offering (FPO)

Definition:

• An FPO occurs when a company, already listed on a stock exchange, offers additional shares
to the public.

Key Features:

• Capital Expansion: Enables the company to raise more funds for various purposes such as
expansion, debt repayment, or acquisitions.

• Already Listed: The company is already publicly traded, and the FPO increases the number of
shares available for trading.

• Compliance: Like IPOs, FPOs require regulatory approval and adherence to disclosure
requirements.

Example: If a company listed on the stock exchange decides to issue more shares to raise funds for a
new project or to pay off debt, it conducts an FPO.

Rights Issue

Definition:

• A rights issue allows existing shareholders of a company to purchase additional shares

directly from the company, usually at a discounted price.

Key Features:

• Existing Shareholders Only: Only current shareholders have the right to buy additional
shares, typically in proportion to their existing holdings.

• Discounted Price: Shares are offered at a lower price than the prevailing market price,
making it attractive for existing shareholders.

• Purpose: Often used to raise capital quickly without incurring the costs associated with a
public offering.
Example: If a company needs to raise funds and offers its existing shareholders the opportunity to
buy additional shares at a discount, it conducts a rights issue.

Private Placement

Definition:

• Private placement involves the sale of shares or other securities directly to a select group of
investors, such as institutional investors, private equity firms, or high-net-worth individuals.

Key Features:

• Selective Investors: Shares are offered to a limited number of investors rather than the
general public.

• Less Regulatory Scrutiny: Involves fewer regulatory requirements compared to public

offerings, allowing for greater flexibility and privacy.

• Purpose: Used to raise capital from specific investors without the need for public disclosure
or listing on a stock exchange.

Example: A privately-owned company seeking to raise funds may sell shares to a group of venture
capitalists or private equity investors through a private placement.

Summary of Differences

Aspect IPO FPO Rights Issue Private Placement

Type of Company Private to Public Public Public Any (Public or Private)

Target Investors General Public General Public Existing Shareholders Select Group of Investors

Regulatory Approval Extensive Extensive Moderate Less Extensive

Market-
Pricing Market-Determined Determined Typically Discounted Negotiated with Investors

Disclosure Limited (Specific to Rights Minimal (Limited to Select

Requirements Comprehensive Comprehensive Issue) Investors)

Yes (Listed on Stock Yes (Already

Market Listing Exchange) Listed) Yes (Already Listed) No (Shares Not Listed

Q3. The Hindustan Industries Limited (HIL) has an investment plan amounting to Rs. 100 lakhs. The
tax relevant rate of depreciation of the HIL is 30%, its marginal cost of debt is 20%. It is in the 40% tax
bracket. It is examining financing alternative for its capital expenditure. A proposal from Hindustan
Finance Limited (HFL), with the following salient features is under active consideration:
Hire Purchase Plan: The flat rate of interest charged by the HFL is 16%. The repayment amount is to
be made in 36 equated monthly instalments in advance. The hirer/hire purchaser is required to make
a down payment of 20%.

Leasing Alternative: The lease rentals are payable @Rs. 30 ptpm in advance. The primary lease
period can be assumed to be 5 years.

Assume that the SOYD (Sum of Years Digits) method is used to allocate total charge for credit under
the hire-purchase plan. The net salvage value of the equipment after 3 years is assumed to be Rs. 20
lakhs.

Which alternative-leasing or hire-purchase-should the HIL use? Why?

Q4. A limited company is inserted in acquiring the use of an asset costing Rs. 500,000. It has two
options.

(i) to borrow the amount at 18% p.a. repayable in 5 equal instalments.

(ii) to take on lease the asset for a period of 5 year at the year-end rentals of Rs. 1,20,000

The corporate tax is 50% and the depreciation is allowed on W.D.V at 20%. The asset will have a
salvage of Rs. 1,80,000 at the end of 5th year.

You are required to advise the company about lease or buy decision.

Q5. (a) Explain the concept of venture capital. Discuss various steps in venture capital financing.
A. Concept of Venture Capital:
Venture capital (VC) refers to a form of private equity financing provided to early-stage, high-
potential, and growth-oriented companies that have the potential to generate significant returns for
investors. Venture capital firms typically invest in startups and small businesses that exhibit
innovative ideas, scalable business models, and strong growth prospects.

1. Seed Stage:

Description:

• The seed stage is the earliest stage of financing where a startup is in its conceptual or pre-
revenue phase.

• Funding at this stage is used to validate the business idea, develop a prototype, conduct
market research, and build the founding team.

Investment Characteristics:

• High risk: Startups at this stage often lack a proven product or market traction, making them
riskier investments.
 • Limited funding: Investment amounts are relatively small, typically ranging from tens of
thousands to a few hundred thousand dollars.

• Angel investors: Funding may come from angel investors, friends, family, or early-stage
venture capital firms.

2. Early Stage (Series A and Series B):

Description:

• The early stage encompasses Series A and Series B rounds of financing, where startups have
progressed beyond the initial concept stage and have begun commercialization.

• Funding is used to further develop the product or service, expand the team, acquire
customers, and scale operations.

Investment Characteristics:

• Moderate risk: Startups have demonstrated some market validation and early traction but
may still face challenges in achieving sustainable growth.

• Increasing investment size: Series A and Series B rounds typically involve larger investment
amounts compared to the seed stage, ranging from a few hundred thousand to several
million dollars.

• Venture capital firms: Investments at this stage are primarily led by venture capital firms
specializing in early-stage investments.

3. Growth Stage (Series C and Beyond):

Description:

• The growth stage includes Series C and subsequent rounds of financing, where companies
have achieved significant market traction, revenue growth, and are scaling rapidly.

• Funding is used to accelerate expansion into new markets, invest in sales and marketing
efforts, enhance product development, and prepare for potential exit opportunities.

Investment Characteristics:

• Lower risk: Companies at the growth stage have established product-market fit,
demonstrated revenue growth, and are on a path to profitability, reducing investment risk.

• Larger investment size: Series C and later rounds involve substantial investment amounts,
often ranging from several million to tens or hundreds of millions of dollars.

• Institutional investors: Funding at this stage primarily comes from institutional investors,
including venture capital firms, private equity firms, and corporate investors.

4. Exit:

Description:

• The exit stage represents the culmination of the venture capital investment cycle, where
investors realize returns on their investments through various exit strategies.
 • Common exit options include initial public offerings (IPOs), mergers and acquisitions (M&A),
or secondary market sales of shares.

Investment Characteristics:

• Realization of returns: Investors aim to exit their investments at this stage to realize capital
gains and generate liquidity for future investments.

• Value creation: Successful exits are typically driven by the company's growth, profitability,
market leadership, and competitive positioning.

• Portfolio management: Venture capital firms strategically manage their portfolio companies
to optimize exit opportunities and maximize returns for their investors.

(b) Briefly explain all the principles of insurance.

A. The principles of insurance serve as the foundation for understanding how insurance works and
the relationships between insurers and policyholders. Here's a brief explanation of each principle:

1. Principle of Utmost Good Faith (Uberrimae Fidei):

Explanation:

• This principle requires both the insurer and the insured to act honestly and disclose all
material facts relevant to the insurance contract.

• The insured must provide accurate and complete information about the risk being insured,
while the insurer must be transparent about the terms and conditions of the policy.

2. Principle of Insurable Interest:

Explanation:

• Insurable interest refers to the legal or financial interest that the insured party must have in
the subject matter of the insurance contract.

• The insured must demonstrate a legitimate interest in the insured property or person, such
as ownership, financial stake, or relationship, to purchase an insurance policy.

3. Principle of Indemnity:

Explanation:

• Indemnity principle ensures that the insured party is restored to the same financial position
they were in before the loss occurred.

• Insurance policies aim to compensate the insured for the actual financial loss suffered, up to
the policy limit, without providing a financial gain or profit.

4. Principle of Contribution:
Explanation:

• Under the principle of contribution, if the insured has multiple insurance policies covering
the same risk, each insurer shares the loss proportionately.

• The insured cannot recover more than the actual loss from any one insurer, preventing the
insured from profiting from the loss.

5. Principle of Subrogation:

Explanation:

• Subrogation allows the insurer to assume the rights and remedies of the insured after
settling a claim and pursue legal action against any third party responsible for the loss.

• This principle prevents the insured from being compensated twice for the same loss and
helps insurers recover the amount paid out in claims.

6. Principle of Causa Proxima (Proximate Cause):

Explanation:

• Causa proxima principle focuses on identifying the dominant or proximate cause of the loss
to determine whether it is covered by the insurance policy.

• Insurers consider the immediate or direct cause of the loss rather than remote or incidental
factors when assessing coverage eligibility.

7. Principle of Mitigation of Loss:

Explanation:

• Insured parties have a duty to take reasonable steps to minimize or mitigate the extent of
the loss once an insured event occurs.

• Failure to mitigate the loss may affect the insurer's obligation to compensate the insured or
result in reduced claim payments.

Understanding and adhering to these principles is essential for both insurers and insured parties to
maintain the integrity of insurance contracts, promote fair dealing, and ensure effective risk
management.

Q6. Write short notes on ANY Three:

(i) Bought Out Deals

(ii) Green Shoe Option

(iii) Differential Pricing in a Public Issue

(iv) Incubation financing

Answers:
(i) Bought Out Deals
Definition:

• Bought Out Deals (BOD) refer to a method of raising funds where a company sells its entire
issue of securities to a single investor or a group of investors, typically financial institutions or
venture capitalists, before making a public offering.

Key Features:

• Immediate Funding: Provides immediate capital to the issuing company, which can be crucial
for financing immediate projects or expansion plans.

• Reduced Risk: Transfers the risk of selling the securities from the issuing company to the
investors who buy the entire issue.

• Pricing Certainty: Establishes a clear price for the securities before they are offered to the
public, reducing uncertainty for the issuer.

Advantages:

• Simplifies the fund-raising process for the issuer.

• Reduces underwriting and marketing costs associated with public issues.

Example: A startup needing quick capital for expansion might opt for a bought out deal with a
venture capital firm, selling a significant portion of its shares before considering an IPO.

(ii) Green Shoe Option

Definition:

• The Green Shoe Option, also known as an over-allotment option, is a provision in an IPO
underwriting agreement that allows the underwriters to sell additional shares, usually up to
15% of the issue size, if the demand exceeds expectations.

Key Features:

• Price Stabilization: Helps stabilize the share price post-IPO by allowing underwriters to buy
back shares if the price falls below the offering price.

• Market Confidence: Builds confidence among investors by ensuring that the share price does
not drop significantly immediately after the IPO.

Advantages:

• Provides flexibility to underwriters to manage demand and supply.

• Protects the issuer from share price volatility shortly after the IPO.

Example: During the TCS IPO in 2004, the Green Shoe Option was used to maintain the share price
stability, managed by the lead book runner, J M Morgan Stanley.

(iii) Differential Pricing in a Public Issue

Definition:

• Differential Pricing refers to the practice of offering shares at different prices to different
categories of investors during a public issue.
Key Features:

• Retail Discount: Often, retail investors are offered shares at a lower price compared to
institutional investors to encourage broader participation.

• Institutional Premium: Institutional investors might pay a premium price due to their larger
investment capabilities and sophisticated analysis.

Advantages:

• Encourages wider retail participation by making shares affordable to smaller investors.

• Helps the issuer attract a diverse investor base, balancing between retail and institutional
investors.

Example: A company might offer shares at ₹100 to institutional investors and at ₹95 to retail
investors in its public issue to ensure broader market participation.

(iv) Incubation Financing

Definition:

• Incubation financing involves providing financial support and resources to early-stage

startups and new ventures through incubators or incubator programs.

Key Features:

• Comprehensive Support: Besides funding, incubators often provide office space,

mentorship, business development services, and networking opportunities.

• Early-Stage Focus: Typically targets startups in their nascent stages, helping them develop
their business models, products, and market strategies.

Advantages:

• Reduces the risk for startups by providing a supportive environment.

• Helps startups accelerate their growth and improve their chances of success.

Example: A tech startup might receive seed funding, office space, and mentoring from a tech
incubator to develop its product and prepare for market entry.
 2023
Q1.
(a) "The Financial Institutions act as a mediator between the investor and the borrower. The
investor's savings are mobilised either directly or indirectly via the Financial Markets". Explain this
statement and also discuss role and function of financial institution.

Answer.
Financial Institutions as Mediators

Explanation of the Statement:

Financial institutions play a crucial role in the economy by acting as intermediaries between investors
(savers) and borrowers (those who need funds). Here’s how they facilitate this process:

1. Mobilization of Savings:

o Investors deposit their savings into financial institutions, such as banks, mutual
funds, or pension funds.

o These savings are pooled together, allowing the institution to have a substantial
amount of capital to lend or invest.

2. Direct Mobilization via Financial Markets:

o Financial institutions can directly invest in financial markets by purchasing stocks,

bonds, and other securities.

o By doing so, they provide capital to businesses and governments, which use the
funds for expansion, operations, and other expenditures.

3. Indirect Mobilization via Loans:

o Financial institutions lend money to individuals, businesses, and governments.

o Borrowers repay the loans with interest, which provides a return on investment for
the institution and, subsequently, for the individual savers.

Role and Functions of Financial Institutions:

1. Intermediation:

o Matching Savers with Borrowers: Financial institutions match savers, who have
excess funds, with borrowers, who need funds.

o Risk Management: They diversify risk by pooling funds from many investors and
spreading them across various loans and investments.

2. Facilitating Payments:

o Payment Systems: Banks and other institutions provide payment systems, such as
checking accounts, electronic funds transfers, and credit card processing.
 o Settlement Services: They ensure the smooth settlement of transactions in financial
markets.

3. Provision of Credit:

o Loans and Credit Facilities: They provide various types of credit, including personal
loans, mortgages, and business loans.

o Credit Assessment: Institutions assess the creditworthiness of borrowers to manage

risk.

4. Investment Services:

o Wealth Management: Offering investment products and advisory services to help

clients grow their wealth.

o Underwriting: Assisting companies in issuing new securities and underwriting the

risk associated with these securities.

5. Economic Stability:

o Monetary Policy Implementation: Central banks and other financial institutions play
a role in implementing monetary policy by managing liquidity and interest rates.

o Financial Stability: They help maintain stability in the financial system by providing
liquidity and preventing systemic risks.

(b) Explain SEBI guidelines for merchant bankers. Discuss obligations and responsibilities of Lead
Managers.

Answer.
SEBI Guidelines for Merchant Bankers and Responsibilities of Lead Managers

SEBI Guidelines for Merchant Bankers:

The Securities and Exchange Board of India (SEBI) regulates merchant bankers to ensure fair practices
and protect investor interests. Here are some key guidelines:

1. Registration:

o Merchant bankers must be registered with SEBI to operate legally in India.

o Registration ensures that only qualified and credible institutions offer merchant
banking services.

2. Capital Adequacy:

o Merchant bankers must maintain a minimum net worth as specified by SEBI to

ensure financial stability and capability to manage large transactions.

3. Code of Conduct:

o They must adhere to a strict code of conduct, emphasizing transparency, due

diligence, and fair dealing.
 o They must avoid conflicts of interest and ensure that all actions are in the best
interest of clients and investors.

4. Due Diligence:

o Conduct thorough due diligence on the issuing companies to verify the accuracy of
the information provided in offer documents.

o Ensure compliance with regulatory requirements and safeguard investor interests.

5. Disclosures:

o Provide comprehensive and accurate disclosures in offer documents, including risk

factors, financial statements, and business prospects.

o Ensure that the information is not misleading and adequately informs investors.

6. Investor Protection:

o Establish mechanisms to address investor grievances and provide timely resolutions.

o Ensure that the investment advice given is suitable for the investor's profile and risk
tolerance.

Obligations and Responsibilities of Lead Managers:

Lead managers play a critical role in public issues and have specific post-issue obligations to ensure
compliance and maintain investor confidence:

1. Finalization of Allotment:

o Ensure the fair and transparent allotment of shares to investors.

o Oversee the allocation process and ensure adherence to SEBI guidelines.

2. Refunds:

o Manage the process of refunds for rejected applications or in cases of

oversubscription.

o Coordinate with the registrar to ensure timely refunds to investors.

3. Listing and Trading:

o Ensure that the issued shares are listed on the stock exchange as per the schedule
mentioned in the offer document.

o Coordinate with stock exchanges to complete the listing formalities and make shares
available for trading.

4. Compliance Reporting:

o Submit various post-issue reports to SEBI, stock exchanges, and other regulatory
bodies.

o Ensure all regulatory requirements are met and address any discrepancies promptly.

5. Monitoring of Funds Utilization:

 o Monitor the use of funds raised through the issue to ensure they are used for the
disclosed purposes.

o Report the status of fund utilization periodically to regulatory authorities and

investors.

6. Investor Grievance Redressal:

o Address complaints or grievances raised by investors related to the issue process,

allotment, refunds, or listing.

o Work with the registrar and other stakeholders to resolve issues promptly.

7. Post-Issue Advertisements:

o Ensure the release of post-issue advertisements, detailing the allotment process,

number of applications received, and other relevant information.

o Comply with SEBI guidelines on advertising to ensure accurate and fair

communication to investors.

These guidelines and responsibilities ensure that merchant bankers and lead managers operate with
integrity, protect investor interests, and contribute to the overall stability and efficiency of the
financial markets.

Q2.
(a) "The risks of the investment are typically disclosed early in the prospectus and then explained in
more detail later in the document." Explain this statement. Discuss types of prospectus.

Answer.
Disclosure of Investment Risks in Prospectus

Explanation of the Statement:

• The statement refers to the practice of highlighting the risks associated with an investment at
the beginning of the prospectus and providing a more detailed explanation of these risks
later in the document. This approach ensures that potential investors are aware of the major
risks upfront, allowing them to make informed decisions early in the review process. The
detailed sections later in the prospectus provide comprehensive information and context
about these risks.

Types of Prospectus:

1. Red Herring Prospectus:

o Definition: This is a preliminary prospectus filed by a company with the Securities

and Exchange Board of India (SEBI) during an IPO process. It contains most of the
information pertaining to the company’s operations and prospects but does not
include details about the price or number of shares being offered.
 o Purpose: To gauge investor interest and gather feedback before finalizing the offer
details.

2. Abridged Prospectus:

o Definition: A summarized version of the prospectus containing all the essential

information that a prospective investor might need to make an informed decision.

o Purpose: To provide a quick and concise overview of the offering, making it easier for
investors to understand the key points.

3. Shelf Prospectus:

o Definition: Issued by public financial institutions, companies, or banks, this type of

prospectus allows them to issue securities in multiple tranches over a period of time
without having to issue a new prospectus each time.

o Purpose: To streamline the fundraising process by reducing the need for repetitive
filings and approvals.

4. Deemed Prospectus:

o Definition: When a company issues a document that offers securities to the public,
and it is deemed a prospectus under the law. This usually applies when the securities
are offered through intermediaries.

o Purpose: To ensure that all offerings to the public are subject to the same disclosure
requirements as a traditional prospectus.

(b) Explain the concept of green shoe option? Discuss its process in detail with example.
Answer.
Concept and Process of Green Shoe Option

Concept of Green Shoe Option:

• The Green Shoe Option is a provision in an IPO (Initial Public Offering) underwriting
agreement that allows the underwriters to sell additional shares, typically up to 15% more
than the original number of shares offered. This mechanism is used to stabilize the share
price in the days following the IPO.

Process of Green Shoe Option:

1. Initial Offering:

o During the IPO, a certain number of shares are offered to the public. The Green Shoe
Option is specified in the underwriting agreement, allowing underwriters to
purchase up to an additional 15% of shares if demand exceeds expectations.

2. Over-Allotment:
 o If the demand for the stock is high, underwriters can exercise the Green Shoe Option
to sell more shares than originally planned. This helps to accommodate extra
demand without causing a supply shortage.

3. Price Stabilization:

o Post-IPO, the underwriters may engage in stabilizing activities to prevent the stock
price from falling below the offering price. If the stock price drops, underwriters can
buy back shares in the market, thus supporting the price.

4. Closing the Option:

o If the stock price remains stable or increases, underwriters can exercise the Green
Shoe Option by purchasing additional shares from the company at the offering price.
These shares are then sold in the market, often at a profit.

Example:

• TCS IPO: During the TCS IPO in 2004, the Green Shoe Option was used to stabilize the share
price. TCS and its underwriters included the option in the offering, allowing the lead book
runner, J M Morgan Stanley, to sell additional shares if demand exceeded the original
offering. This mechanism helped manage the stock price and provided confidence to
investors about the stability of the new shares.

By using the Green Shoe Option, companies and underwriters can better manage the IPO process,
ensuring a smoother entry into the market and protecting against volatility that could harm investor
confidence.

Q3.
(a) Explain Book building process with appropriate example.
Answer.
Book Building Process

Explanation of the Book Building Process:

The book building process is an innovative and efficient method for pricing and allocating shares
during an Initial Public Offering (IPO). It allows the issuer to determine the optimum price based on
the demand from investors. Here is a detailed step-by-step explanation:

1. Appointment of Book Runner

• Role of Book Runners:

o Book runners, usually investment banks, play a pivotal role in the book building
process. They advise the issuing company on the IPO structure, pricing, timing, and
marketing strategy.

o They coordinate the entire IPO process, ensuring compliance with regulatory
requirements and managing investor relations.
2. Draft Red Herring Prospectus (DRHP)

• Contents of DRHP:

o The DRHP includes detailed information about the company’s business, financial
statements, management team, risk factors, and objectives of the IPO.

o It’s a preliminary document that provides potential investors with a comprehensive

understanding of the company, but it does not include final issue price and the
number of shares.

3. Setting the Price Band

• Determining the Price Band:

o The issuer and the book runners determine a price band based on various factors
such as the company’s financial health, industry benchmarks, market conditions, and
investor appetite.

o The price band is crucial as it sets the boundaries within which investors can place
their bids.

4. Bidding Period

• Conducting the Bidding Process:

o The bidding period typically lasts for 3-5 days during which institutional investors
submit their bids.

o Investors specify the number of shares they wish to buy and the price they are
willing to pay within the set price band.

o This period is critical for gauging investor interest and demand for the shares.

5. Collection and Recording of Bids

• Book Building:

o During the bidding period, the book runners collect and record all the bids in an
electronic book.

o This book provides a snapshot of the demand at different price levels, offering
insights into investor sentiment and interest.

6. Demand Analysis

• Assessing Demand:

o After the bidding period closes, the book runners analyze the data to understand the
demand across the price band.

o They evaluate the bids to determine at what price level the total demand matches or
exceeds the number of shares offered.

7. Determining the Issue Price

• Setting the Final Price:

 o The final issue price is set based on the highest price at which all shares can be sold
(cut-off price), ensuring full subscription.

o This price aims to balance the issuer’s need for capital and investor’s appetite,
maximizing both fundraising and market confidence.

8. Allocation of Shares

• Allocating Shares Fairly:

o Shares are allocated primarily to institutional investors who placed bids at or above
the final issue price.

o Any remaining shares are then allocated to retail investors, ensuring a fair and
transparent distribution.

9. Filing the Final Prospectus

• Final Prospectus Submission:

o Once the issue price is finalized, the company files the final prospectus with the
regulatory authority.

o This document includes the final issue price, number of shares, and other relevant
details, providing full disclosure to the public and regulatory bodies.

10. Listing and Trading

• Commencement of Trading:

o After filing the final prospectus, the shares are listed on the stock exchange and
made available for trading.

o The listing typically occurs within a few days, allowing investors to trade the shares in
the open market.

Example: Zomato IPO (2021)

• Context:

o Zomato, a leading Indian food delivery company, opted for the book building process
for its IPO in 2021. The IPO was highly anticipated given Zomato’s prominence in the
market.

• Process:

o Price Band: Zomato set a price band of ₹72-76 per share.

o Bidding Period: During the bidding period, institutional investors placed their bids,
indicating the number of shares they desired and the prices they were willing to pay
within the price band.

o Final Issue Price: Based on the bids received, the final issue price was set at the
upper limit of ₹76 per share, reflecting strong demand.

o Allocation: Shares were allocated to investors based on their bid prices, with
institutional investors receiving priority.
 o Listing: Zomato’s shares were listed on the stock exchange, and trading commenced
with a positive market reception.

(b) Discuss the various exit options available to a Venture capital fund whenever they want to exit
from a firm.

Answer.
Exit Options for Venture Capital Funds

Venture capital (VC) funds invest in startups and early-stage companies with the expectation of
exiting at a profit after a certain period. The exit strategy is crucial for VCs as it determines how they
will realize their returns. Here are the various exit options available to VC funds:

1. Initial Public Offering (IPO):

o Description: The portfolio company goes public by listing its shares on a stock
exchange. VC funds can sell their shares in the public market, often realizing
significant returns if the company’s stock performs well.

o Advantages: High potential returns, increased liquidity, and enhanced public profile
for the company.

o Challenges: High costs, regulatory requirements, and market volatility.

o Example: A tech startup backed by a VC fund goes public, and the VC fund sells its
shares during the IPO, capitalizing on the market demand.

2. Trade Sale (Mergers and Acquisitions):

o Description: The portfolio company is sold to another company, often a larger

competitor or a firm looking to enter a new market or acquire new technology.

o Advantages: Quick realization of investment, strategic benefits for both parties.

o Challenges: Finding a suitable buyer, negotiating terms.

o Example: A pharmaceutical startup is acquired by a larger pharmaceutical company,

providing an exit for the VC fund.

3. Secondary Sale:

o Description: VC funds sell their equity stakes to another private equity firm,
institutional investor, or another venture capitalist. This allows the original VC to exit
without the company going public or being sold.

o Advantages: Flexibility in timing, continued growth potential for the company.

o Challenges: Finding interested buyers, pricing negotiations.

o Example: A VC fund sells its stake in a profitable tech startup to another investment
firm seeking exposure to the tech sector.

4. Buyback by Promoters:
 o Description: The company's original founders or promoters buy back the shares held
by the VC fund. This is often done when the promoters want to regain full control of
the company.

o Advantages: Promoters retain control, potentially smoother negotiation.

o Challenges: Availability of sufficient funds for buyback, valuation agreements.

o Example: Founders of a startup buy back equity from the VC fund after achieving
profitability and wanting to retain ownership.

5. Repurchase by the Company:

o Description: The company itself buys back shares from the VC fund, usually when it
has sufficient cash flow and wants to consolidate ownership.

o Advantages: Company retains ownership, often signals confidence.

o Challenges: Requires strong cash flow, regulatory considerations.

o Example: A successful startup generating enough revenue to repurchase its shares

from early investors.

6. Liquidation:

o Description: If the company fails to perform and cannot find a buyer, the VC fund
might liquidate its assets to recover whatever value it can.

o Advantages: Exit from underperforming investment, recoup some capital.

o Challenges: Often results in a loss, complex process.

o Example: Selling off the remaining assets of a struggling startup to recoup some of
the investment.

Q4. X Ltd is in the business of manufacturing steel. The firm is planning to diversify and add a new
product line. The firm either can buy the required machinery or get it on lease. The machine can be
purchased for Rs. 20,00,000. It is expected to have a useful life of 5 years with salvage value of Rs.
1,50,000 after the expiry of 5 years. The purchase can be financed by 20 per cent loan repayable in 5
equal annual installments (inclusive of interest) becoming due at the end of each year. Alternatively,
the machine can be taken on year-end lease rentals of Rs. 5,50,000 for 5 years. Advise the company,
which option it should choose and why?

(i) The company follows written down value method of depreciation, the rate of depreciation being
25 per cent.

(ii) Tax rate is 20 per cent

(iii) Lease rents are to be paid at the end of the year

Q5.

(a) The Delhi Ltd sells goods on credit and annual sales amount 150 lakhs. The credit terms are 2/ 20,
net 40. On the current sales the bad debts are 1.5%. 40% customers avail of the cash discount, the
remaining pay on an average 60 days after the date of the sale. The book debt of the firm are
presently being financed in the ratio of 3:1 by mix of a bank borrowing and owned funds which cost
per annum 22% and 18% respectively. As an alternative to the in house management of receivable,
Delhi Ltd is want to use non recourse factoring deal with PNB factors Ltd. Factor

reserve 20%, guaranteed payment 35 days after the date of purchase, Interest charge 20%,
Commission 2% (upfront) Calculate cost of factoring and in-house management cost.

OR
"Hire purchase is an arrangement for buying expensive consumer goods, where the buyer makes an
initial down payment and pays the balance plus interest in installments." Explain this statement and
also differentiate hire purchase finance with lease finance.

(b) What is the role of National Housing Bank in housing finance sector? Discuss fixed and floating
rate of interest.

Answer.
Role of National Housing Bank (NHB) in the Housing Finance Sector

The National Housing Bank (NHB) was established in 1988 under the National Housing Bank Act,
1987, with the primary aim of promoting housing finance institutions and providing financial support
to such institutions. Here is an overview of its roles and functions:

1. Regulation and Supervision:

o NHB regulates and supervises Housing Finance Companies (HFCs) to ensure they
operate in a healthy and efficient manner.

o It establishes guidelines and prudential norms for HFCs, similar to the regulations set
by the Reserve Bank of India (RBI) for banks, ensuring transparency and stability in
the housing finance sector.

2. Financial Support and Refinance:

o NHB provides refinance to primary lending institutions like HFCs, banks, and other
financial institutions. This support enables these institutions to offer more housing
loans to the public.

o Refinance schemes are tailored for different needs, including rural housing, low-
income housing, and housing for economically weaker sections (EWS).

3. Promotion and Development:

o NHB works to promote the growth of the housing finance sector by encouraging the
entry of new players and supporting the expansion of existing ones.

o It implements various housing finance schemes and programs to enhance the

availability of housing finance, aiming to make home ownership more accessible.
 4. Capacity Building and Training:

o NHB organizes training programs, workshops, and seminars to build the capacity of
stakeholders in the housing finance sector.

o It collaborates with international agencies and institutes to enhance the skills and
knowledge of those involved in housing finance.

5. Policy Advocacy and Development:

o NHB plays a crucial role in policy formulation and advocacy related to housing
finance. It provides recommendations to the government to improve housing finance
policies.

o It conducts research and analysis to identify trends, challenges, and opportunities in

the housing finance market.

6. Direct Lending:

o NHB extends direct loans to public agencies for housing development projects,
particularly in underserved areas, though its primary focus remains on refinancing.

7. Risk Management:

o NHB promotes sound risk management practices among HFCs to protect the housing
finance sector from systemic risks and ensure its long-term stability.

Fixed and Floating Rate of Interest

Interest rates on housing loans can be categorized into two main types: fixed and floating rates. Each
has distinct characteristics, advantages, and disadvantages.

Fixed Rate of Interest

Characteristics:

• The interest rate remains constant throughout the loan tenure or for a specified period (e.g.,
3, 5, or 10 years).

• The EMI (Equated Monthly Installment) amount remains unchanged, providing predictability
and stability to borrowers.

Advantages:

• Predictability: Borrowers know exactly how much they need to pay each month, making
financial planning easier.

• Protection Against Rate Hikes: Borrowers are shielded from any increase in interest rates
during the fixed-rate period.

Disadvantages:

• Higher Initial Rates: Fixed rates are usually higher than the initial floating rates because they
factor in the risk of future rate increases.

• No Benefit from Rate Drops: Borrowers cannot take advantage of a decrease in interest rates
in the market during the fixed-rate period.
Example: A borrower takes a home loan with a fixed interest rate of 8% for a tenure of 10 years. The
EMI remains constant, regardless of market fluctuations in interest rates.

Floating Rate of Interest

Characteristics:

• The interest rate fluctuates based on market conditions, typically linked to a benchmark rate
such as the RBI’s repo rate or the lender’s base rate.

• The EMI can change periodically (e.g., quarterly, semi-annually) in response to changes in the
benchmark rate.

Advantages:

• Lower Initial Rates: Floating rates are generally lower than fixed rates at the start of the loan.

• Benefit from Rate Drops: Borrowers benefit from a decrease in interest rates, leading to
lower EMIs.

Disadvantages:

• Uncertainty: EMIs can increase if market interest rates rise, leading to potential financial
strain for borrowers.

• Complexity in Financial Planning: Fluctuating EMIs make long-term financial planning more
challenging.

Example: A borrower takes a home loan with a floating interest rate starting at 7.5%, linked to the
lender’s base rate. If the base rate changes due to market conditions, the interest rate and EMI will
adjust accordingly.

Conclusion

The National Housing Bank plays a crucial role in the housing finance sector in India by regulating and
supporting housing finance institutions, promoting development in housing finance, and ensuring
stability and growth in the sector. It provides financial support, advocates for policy improvements,
and ensures that housing finance becomes more accessible and affordable.

Understanding the differences between fixed and floating interest rates is essential for borrowers
when choosing a housing loan. Fixed rates offer stability and predictability, while floating rates
provide the potential for lower costs but come with the risk of fluctuating payments. Borrowers
should consider their financial situation, risk tolerance, and market conditions when deciding
between these two types of interest rates.

Q6. Write short note on any three.

(a) Principles of Insurance

(b) Poison Pill and White knight

(c) Credit rating process

(d) Securitization Process

(e) Role of a Broker in an IPO

Answer.
(a) Principles of Insurance

Insurance operates on foundational principles that ensure its effectiveness and fairness. These
principles include:

1. Utmost Good Faith (Uberrimae Fidei):

o Both parties in an insurance contract must act with utmost good faith. This means
the insurer and the insured must disclose all material facts truthfully. For example,
when applying for health insurance, the applicant must disclose any pre-existing
medical conditions.

2. Insurable Interest:

o The insured must have a legitimate interest in the preservation of the insured
subject matter. This means the insured must stand to suffer a direct financial loss if
the insured event occurs. For instance, you can insure your own house but not your
neighbor’s house.

3. Indemnity:

o Insurance contracts are contracts of indemnity, meaning the insured is compensated

for the actual loss incurred. The aim is to restore the insured to the same financial
position they were in before the loss. This principle prevents the insured from
making a profit from insurance claims.

4. Subrogation:

o After compensating the insured for a loss, the insurer gains the right to recover the
loss from a third party responsible for it. For example, if a car accident was caused by
another driver, the insurer who paid the claim can sue the other driver to recover
the amount paid.

5. Contribution:

o If the insured has multiple insurance policies covering the same risk, each insurer will
contribute proportionately to the compensation of the loss. This prevents the
insured from claiming more than the actual loss from multiple insurers.

6. Proximate Cause:

o The insurer is liable for losses that are the direct result of a covered peril. This
principle determines the closest cause of the loss. For instance, if a house is
damaged by fire (covered peril) following an earthquake (excluded peril), the insurer
will investigate the proximate cause to determine liability.

(b) Poison Pill and White Knight

Poison Pill:

• A poison pill is a strategy used by companies to thwart hostile takeover attempts. There are
various forms of poison pills, but a common one involves allowing existing shareholders
 (except the acquirer) to purchase additional shares at a discount. This dilutes the equity
interest of the potential acquirer, making the takeover more costly and less attractive. For
example, Netflix implemented a poison pill in 2012 to prevent a takeover attempt by Carl
Icahn.

White Knight:

• A white knight is a more favorable company that steps in to acquire a target company facing
a hostile takeover. This friendly acquisition is typically more agreeable to the target
company's management and shareholders. For instance, in 2008, JPMorgan Chase acted as a
white knight by acquiring Bear Stearns, which was facing financial difficulties and a potential
hostile takeover.

(c) Credit Rating Process

Credit rating agencies (CRAs) evaluate the creditworthiness of entities (such as corporations,
governments, or financial instruments). The credit rating process includes several steps:

1. Request for Rating:

o The issuer or borrower requests a credit rating and submits detailed information
about their financial health and business operations to the CRA.

2. Initial Evaluation:

o Analysts at the CRA conduct a preliminary review of the submitted information to

understand the entity’s financial position and risk profile.

3. Meetings and Discussions:

o The CRA’s analysts meet with the issuer’s management to discuss business
strategies, financial practices, and future projections. This provides deeper insights
into the entity's operations and potential risks.

4. Analysis and Evaluation:

o A comprehensive analysis is performed, examining financial statements, market

conditions, industry position, management quality, and other relevant factors. Both
qualitative and quantitative analyses are used to assess credit risk.

5. Rating Committee:

o The findings are presented to a rating committee, which deliberates and assigns a
final rating. This committee is typically composed of senior analysts and executives
to ensure a rigorous and unbiased rating process.

6. Publication:

o The final credit rating is communicated to the issuer. Upon acceptance, it is

published along with a detailed rationale explaining the rating decision. This
transparency helps investors understand the creditworthiness of the entity.

7. Ongoing Surveillance:
 o The CRA continuously monitors the rated entity’s financial health and market
conditions. Ratings are periodically reviewed and updated to reflect any significant
changes.

(d) Securitization Process

Securitization transforms illiquid assets (such as loans) into tradable securities. The process involves
several key steps:

1. Asset Selection:

o The originator (e.g., a bank) selects a pool of assets to be securitized, such as

mortgages or auto loans. These assets are chosen based on their quality and risk
profiles.

2. Special Purpose Vehicle (SPV) Creation:

o An SPV is established to hold the pool of assets. This separates the assets from the
originator’s balance sheet, protecting investors if the originator faces financial
difficulties.

3. Issuance of Securities:

o The SPV issues securities backed by the asset pool. These securities are structured in
tranches, each with different levels of risk and return. Higher-risk tranches offer
higher returns to attract investors with different risk appetites.

4. Credit Enhancement:

o To make the securities more attractive to investors, various credit enhancement

techniques are used. These can include over-collateralization (having more assets
than needed to back the securities), guarantees, or reserve funds.

5. Sale to Investors:

o The securities are sold to institutional and retail investors. These investors receive
periodic payments derived from the cash flows of the underlying assets, such as
mortgage payments.

6. Servicing the Assets:

o A servicer (often the originator) is responsible for collecting payments from the
borrowers of the underlying assets and passing these payments to the SPV. The SPV
then distributes these payments to investors according to the terms of the securities.

(e) Role of a Broker in an IPO

Brokers play a pivotal role in the Initial Public Offering (IPO) process, ensuring it runs smoothly and
efficiently. Their key responsibilities include:

1. Marketing and Distribution:

o Brokers are responsible for promoting the IPO to potential investors. They provide
detailed information about the company and the offering, creating awareness and
generating demand for the shares.
 2. Advisory Services:

o Brokers advise both the issuing company and investors on various aspects of the IPO,
including pricing, timing, and market conditions. They help the company determine
the optimal issue price and structure of the offering.

3. Book Building:

o During the book-building process, brokers collect bids from institutional and retail
investors. They compile these bids to gauge demand at different price levels, helping
to set the final issue price.

4. Application Processing:

o Brokers assist investors in submitting their IPO applications, ensuring all necessary
documentation is completed correctly. They help streamline the application process
and address any issues that arise.

5. Allotment and Allocation:

o Once the issue price is determined, brokers facilitate the allocation of shares to
investors. They ensure that shares are allotted fairly and in compliance with
regulatory guidelines, often prioritizing institutional investors.

6. Post-IPO Support:

o After the IPO, brokers provide market-making services to ensure liquidity for the
newly listed shares. They help stabilize the stock price and facilitate trading in the
secondary market, maintaining investor confidence.

These roles are critical in ensuring the success of an IPO, making it accessible to a wide range of
investors, and maintaining market stability and confidence.