MF0017 – Merchant Banking and Financial Services -summer/spring 2012

Spring / February 2012

Master of Business Administration- MBA Semester 4

MF0017 – Merchant Banking and Financial Services - 4 Credits

(Book ID: B1318)

Assignment Set- 1 (60 Marks)

Note: Each Question carries 10 marks. Answer all the questions.

Q1. Discuss the role of a custodian of shares.

Custodial services refer to the safeguarding of securities of a client. The activities relating to

custodial services involve collecting the rights benefiting the client in respect to securities,

maintaining the securities’ account of the client, informing the clients about the actions taken or

to be taken, and maintaining records of the services.

Custodian of services is a person who proposes or carries on the business of providing custodial

services. The custodian provides the services to a client. To receive custodial services, the client

enters into an agreement with the custodian of securities. The custodian of securities must be

registered with the SEBI. The person proposing to carry on business as custodian of securities

after the commencement of the SEBI regulations has to send an application to the Board to grant

a certificate. The applicant has to provide the necessary information to the Board to receive the

certificate of registration. The application without complete information is rejected. However,

before rejecting any application, the Board gives an opportunity to the applicant to remove the

objection within a specified time.

Custodial services is a new method of services provided to Foreign Institutional Investors (FIIs)

and Mutual Funds (MFs) to protect their assets such as security certificates and documents of

ownership. Every custodian should have adequate facilities, sufficient capital and financial

strength to manage the custodial services.

Roles and responsibilities of custodians

The SEBI regulations prescribe the roles and responsibilities of the custodians. According to the

SEBI the roles and responsibilities of the custodians are to:

· Administrate and protect the assets of the clients.

· Open a separate custody account and deposit account in the name of each client.

· Record assets.

· Conduct registration of securities.

· Segregate securities and cash belonging of each client from others including custodian himself.

·

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Take adequate insurance of risks.

· Maintain records manually or in machine readable form.

· State clearly the method and system of receiving instructions from the client regarding

collection, receipt, reporting and delivery of securities.

· Conduct verification of securities and to follow the stated control mechanism.

· Mention specifically the fees charged in the agreement.

· Conduct audit annually.

The custodian should have an adequate internal control system to prevent the manipulation of

records and documents, which includes audit for securities and entitlements arising from

securities, and held on behalf of the clients. To ensure that securities are protected from theft and

natural hazards, the custodian must have appropriate safekeeping measures. On behalf of the

client, the custodians have to maintain records and documents such as details of securities,

money received and released registration of securities, and all reports submitted to the SEBI.

To monitor the compliance to the SEBI Act, every custodian of securities appoints a compliance

officer. The SEBI can ask for any information with respect to any matter relating to the activities

of the custodian. The SEBI is authorised to conduct inspection or investigation of accounts,

documents or records of the custodians to ensure that the provisions of the SEBI Act and

regulations are followed. In case of default, the SEBI can suspend or cancel registration of a

custodian.

Every registered custodian must follow the code of conduct prescribed by SEBI. The following

are the code of conduct prescribed by SEBI:

· Integrity – The custodian of securities must maintain high standards of integrity and

professionalism while discharging duties.

· Prompt distribution – The custodian of securities must be prompt in distributing interests and divide

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nds collected by him, on behalf of his clients on the securities held in custody.

· Infrastructure – The custodian of securities must establish and maintain suitable infrastructure

to discharge custodial services to the satisfaction of the clients. The operating procedures and

systems of the custodian of securities need to be well documented.

· Accountability – The custodian of securities is responsible for the movement of securities. The

movement of securities can be from custody account, deposit and withdrawal of cash from the

client’s account. Whenever demanded by SEBI or the client, the custodian of securities must

provide the complete audit trail.

· Confidentiality – The custodian of securities has to maintain confidentiality regarding the

client.

· Precautions – The custodian of securities must take necessary precautions to ensure that

continuity in custodial records is not lost or destroyed. To maintain sufficient backup records, the

custodial records are kept electronically.

· Records – The custodian of securities must create and maintain records of securities held in

custody appropriately. This must be done to locate securities or obtain duplicate documents

easily if the original records are lost due to any reason.

· Cooperation – The custodian of securities must cooperate with other custodial entities and

depositories which are necessary for the conduct of business, especially in the areas of inter

custodial settlements and transfer of securities and funds.

· Diligence – The custodian of securities must exercise diligence in administrating and

safekeeping the client’s assets which are in his custody.

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Q2. What are the provisions for prevention of fraudulent and unfair trade practices by

SEBI regulations?

Q3. Explain the different life insurance products.

Q4. Describe the deposit products and loan products.

Deposit products

Q5. Discuss about the two important credit rating agencies in India.

Q6. Describe issue management in merchant banking.

Spring / February 2012

Master of Business Administration- MBA Semester 4

MF0017 – Merchant Banking and Financial Services - 4 Credits

(Book ID: B1318)

Assignment Set- 2 (60 Marks)

Note: Each Question carries 10 marks. Answer all the questions.

Q1. Give examples of various venture capital funds that are present and examples of some

business ventures that have been successful with venture capital financing.

Indian Venture Capital Scenario

In India, the emergence of venture capital companies is a relatively new phenomenon. Until

1985, individual investors and Development Finance Institutions (DFIs) have played the role of

venture capitalists in the absence of an organised venture capital industry. During that time

entrepreneurs have largely depended on private placements, public offerings and lending by

financial institutions. The venture capital phenomenon has arrived at a take-off stage in India

with the easy availability of risk capital in all forms. In the earlier stage, it was easy to raise only

growth capital but financing of ideas or seed capital is now available after the introduction of

venture capital phenomenon. The number of players offering growth capital and the number of

investors is rising rapidly.

In India, the concept of venture capital was initiated by the Industrial Finance Corporation of

India (IFCI) when it established the Risk Capital Foundation (RCF) to provide seed capital to

small and risky projects. However, the concept of venture capital financing first time got

statutory recognition in the fiscal budget for the year 1986 to 1987.

The venture capital companies operating at present in India can be divided into four categories

based on their mode of promotion. Let us read about each mode.

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Promoted by All-India Development Financial Institution (IDFI)

The ICICI provided the required impetus to venture capital activities in India. In 1986 it started

providing venture capital finance. In 1998, it promoted with the Unit Trust of India (UTI) and

Technology Development and Information Company of India (TDICI) as the first venture capital

company registered under the Companies Act, 1956.

The risk capital foundation established by the IFCI in 1975 was converted to Risk Capital and

Technology Finance Company (RCTC). The RCTC was established as a subsidiary company of

IFCI to provide assistance in form of conventional loans and to give financial support to high

technology projects.

Promoted by state level finance institution

In India, the state level financial institutions in some states like Gujarat, Uttar Pradesh have done

an excellent job by providing venture capital finance to small scale enterprises.

Promoted by commercial banks

Venture capital funds have been established by their corresponding commercial banks to

undertake venture capital financing activity. Examples of these funds are Canbank venture

capital fund, State bank venture capital fund, and Grindlays bank.

Private venture capital funds

In India, several venture capital funds have been established to provide funding to various small

scale enterprises. Examples of these funds established in India are 20th Century Venture Capital

Corporation and Indus venture capital fund.

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Q2. Mutual fund schemes can be identified by investment objective, List one scheme within

each category.

Q3. What are the advantages of leasing to a company ?

Advantages of leasing

Q4. What is the provision of green shoe option and how is it used by companies to stabilize

prices?

Q5. What do you understand by insider trading? What are the SEBI rules and regulations

to prevent insider trading?

Q6. A company wishes to take machinery on lease. Study the lease options available to the

company.

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Documents

MF0017 – Merchant Banking and Financial Services -summer/spring 2012