I.

Multiple Choice Questions

1. State National Bank acquires 6.45 GS 2029 on auction by RBI of Face value of INR 200 crores.
The Bond was issued for a period of 10 years on 7 October 2021 with maturity date fixed as 7
October 2031. The coupon rate of the Bond was fixed at 6.45% per annum. Coupon to be paid
semi annually on 7 October and 7 April each calender year.
Determine the amount of interest to be received on the bond holding on the first coupon
payment date.
(a) 64,676,712.33
(b) 129,353,424.66
(c) 65,575,000.00
(d) 64,500,000.00
2. A 91 day Treasury bill was issued by Government of India on 8 January 2020 maturing on 9
April 2020. 2020 is a leap year i.e February 2020 has 29 days. The day convention for yield
computation for this Treasury Bill is
(a) 364 (b) 365
(c) 360
(d) 366
3. Which of the below money market instrument is not issued on a front-ended negotiable,
i.e issued at discount and payable at face value on maturity?
(a) Commercial Paper
(b) Certificate of Deposit
(c) Short Term deposit
(d) Treasury Bill
4. What is the minimum amount of bid for a Treasury bill instrument?
(a) INR 25,000
(b) INR 250,000
(c) INR 10,000
(d) INR 100,000

5. The State National Bank subscribed to the issue of a Certificate of Deposit issued by Gramin
Commercial Bank for a period of 1 year. The CD with denominated face value of INR 100,000/-
each was issued at a discount of 8.25%. 6 Months, hence, the Bank is considering to sell its
Gramin Commercial Bank CD holdings in the secondary market. Determine the price at which
the CD was issued and what amount shall the bank expect on sale on each CD assuming there
has been no change in the market yield. (8.25% p.a.)
(a) Issue price INR 95,875; expected sale price 91,750
(b) Issue price INR 91,750; expected sale price 95,875
(c) Issue price INR 95,875; expected sale price 97,937

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 (d) Issue price INR 97,937; expected sale price 94,785

6. In an open ended scheme, redemption period is ……….

(e) Definite
(f) Indefinite
(g) 5 years
(h) 10 years
7. Gilt Funds mainly invested in …………
a) Government Securities

b) Only in Debt Securities

c) Only in shares

d) Mix of debt and equity

8. ……… seeks to generate long term capital appreciation by investing in equity and equity
related instruments including equity derivatives as well as debt instruments.
a Focused Fund
b Arbitrage Fund

c Index Funds

d Dynamic Equity Funds

9. ………… is an offer document containing all the relevant details except that of price or
number of shares being offered.
a) Letter of Offer

b) Draft Offer Document

c) Abridged Prospectus

d) Red Herring Prospectus

10. Index value on a particular date is calculated as
a Index on previous day x Total market capitalization for current day/Total market
capitalization of the previous day
b Index on current day x Total market capitalization for current day/Total market
capitalization of the previous day
c Index on previous day x Total market capitalization for previous day/Total market
capitalization of the current day
d Index on current day x Total market capitalization for previous day/Total market
capitalization of the current day
11. While Sharpe ratio measures ………., the Treynor Ratio measures only the …………
a Total Risk; Systematic Risk

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 b Unsystematic Risk; Systematic Risk

c Systematic Risk; Unsystematic Risk

d Systematic Risk; Total Risk

12. A bank rediscounted a commercial bill with a face of `100 @12% for 3 months. The sale value
is `96.8. The yield to the investor will be

a 15.39%

b 14.08%

c 13.22%

d 12.80
13. Market Makers comprises of
a Commercial Banks

b Mutual Funds
c Insurance Companies

d All of the above

14. The risk which arises due to possible change in spreads is called
a) Optionality Risk
b) Repricing Risk

c) Yield Curve Risk

d) Basis Risk
15. The role of ………. is responsible for the delivery and settlement and consequent accounting
entries for all those transactions.
a) Front Office

b) Back Office

c) Mid-Office

d) Top Office
16. Ex-Bonus date is the date …………….
a On which the share price is adjusted on stock exchanges.
b On which the share price is decreased on stock exchanges.
c On which the share price is increased on stock exchanges.
d Which is before the record date.
17. Record Date is the ……………….
a date on which company record the details of both the dividend payout and bonus issue
proceedings.
b cut-off date fixed by a company to determine who is eligible to get bonus shares.

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 c date on which company record the details of bonus issue proceedings.
d date fixed by a company to determine who has got the bonus shares of the company.
18. Which among the following are the effects of Bonus Issue:
a Share capital gets increased
b Liquidity in the stock increases
c Accumulated profits get reduced
d All of the above

19. A listed company may issue bonus shares to its members if authorized by:
a Memorandum of Association
b Articles of Association
c Both Memorandum and Articles of Association
d None of the above

20. The bonus shares shall be made out of

a free reserves only
b either free reserves or revaluation reserves
c either free reserves or securities premium
d either free reserves or revaluation reserves or capital reserves

21. In case if Rupee further depreciates vis-à-vis US $ in the beginning of the year
2017 then the Net Profit of the company
a is likely to increase for the fin year 2016-2017
b is likely to decrease for the fin year 2016-2017
c is likely to remain same for the fin year 2016-2017
d is likely to increase for the fin year 2015-2016

Answers to MCQs
1. (d) Principal amount of Bonds purchase for coupon computation = 200 crores
Rate of Interest = 6.45 % per annum
Coupon payment date = 7 April 2022.
No of days for coupon computation:
October 2021 - 23 November 2021 - 30
December 2021 - 30 January 2022 - 30
February 2022 - 30

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 March 2022 - 30
April 2022 -7

Total = 180
(For Indian G sec bonds the day count convention is 30 / 360, thus number of days in a
month is taken as 30 and number of days in a year is takes in 360)
Interest amount = INR 200 crores x 6.45% x 180/360
= INR 64,500,000
2. (d)
3. (c)
4. (a)
5. (b) Issue price = Face value – (Face Value x Discount Yield x Duration of the CD in months
/12)
Issue Price = 100,000 – (100,000 x 8.25% x 12 / 12)
Issue price = INR 91,750
Expected Sale price = Issue Price + (Face Value – Issue Price)/Duration of the
CD in months) x No of months passed the issue date
Expected Sale price = 91,750 + (100,000– 91,750)/12) x 6
Expected Sale price = 91,750 + (8,250)/12) x 6
Expected Sale price = 91,750 + 4,125
Expected Sale price = INR 95,875
6. (b)
7. (a)
8. (d)
9. (d)
10. (a)
11. (a)
12. (c)
13. (a)
14. (d)
15. (b)
16. (a)

17. (b)

18. (d)

19. (b)

20. (c)

21. (a)

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 CASE STUDY 1

One fine morning Zahir woke with the beep sound of Whatsapp message in his mobile. Half woke
up thinking it to be some urgent message from his boss read the message (Exhibit 1) from his one
friend Joseph who accidently sent the same to him instead of Tahir.
Joseph who is lawyer by profession and employed with a leading law firm handling the legal matters
listed companies. Last year he was also handling a legal case of Rajendra Holidays.
Since Zahir has no interest in the Stock Market without understanding the message further forwarded
the same to his friend Kanjibhai (a jobber in stock market).
A few days later Zahir received a call from Kanjibhai inviting him on a party bash at coming Saturday
at one of the 5 Star Hotel of the city. To the utter surprise of Zahir, Kanjibhai who never offered a cup
of tea to anyone and always in debt is organizing such a big party. Zahir called back Kanjibhai to
know the exact of organizing such party. Kanjibhai expressed there is no special occasion only few
of his friends have been invited as a matter of change from daily life.
On Saturday evening Zahir reached the venue of party where other friend were already there. On
asking what is reason for this party from all friends, Kanji told he made a huge profit from the stock
market and after repaying his old debts now he is buying a small office of his own to work as sub-
broker.
During the party after consuming a lot of alcohol Kanji gone out of control and started shouting it is
because Zahir who made him rich. Since earlier one or two occasions Kanji had gone out of control
after consuming alcohol no one paid heed to his loose talks.
Next morning as a daily routine Zahir was enjoying reading a financial daily. One news (as per
Exhibit 2) catches his attention. Although Zahir had no interest in the Stock Market but the amount
of penalty was enough to further read the news (as per Exhibit 2).
Further he compiled some of actual information of these listed companies from website. (as per
Exhibit 6)

I. Multiple Choice Questions

(i) The following is not a systematic risk.

a) Business Risk
b) Purchasing Power Risk
c) Market Risk
d) Interest Rate Risk

(ii) Which of the following is not the real risk of a security.

a) Market Risk
b) Inflation Risk
c) Political Risk
d) Business Risk

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 (iii) When a Collateralized Debt Obligation (CDO) does not acquire original assets but does a ‘default
swap’, it is called ___________
a) Cash CDO
b) Market Value CDO
c) Swap CDO
d) Synthetic CDO

(iv) Which of the following Fund focuses on trends that are likely to result in the óut-performance’ by
certain sectoral funds.
a) Contra Fund
b) Index Fund
c) Thematic Fund
d) Hedge Fund

(v) Certificate of Deposit is a negotiable instrument.

a) Front-ended
b) Back-ended
c) Face Value
d) None of these

(vi) Once client has identified a particular target company to be acquired advisory services are
provided in which of the order.
a) Short-Listing→ Due Diligence → Preparing and Executing Term Sheet → Transaction Closure
b) Short-Listing→ Preparing and Executing Term Sheet → Due Diligence → Transaction Closure
c) Due Diligence → Short-Listing→ Preparing and Executing Term Sheet → Transaction Closure
d) Due Diligence→ Preparing and Executing Term Sheet → Short-Listing → Transaction Closure

(vii) The full form of SCSB is .

a) Self-Credited Syndicate Bank
b) Self-Created Syndicate Bank
c) Self- Certified Syndicate Bank
d) None of These

(viii) LME specializes in .

a) Gold and Silver
b) Ferrous and Non Ferrous Metals
c) Non Ferrous Metals
d) All of These

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 (ix) If the standard deviation of changes of spot and future prices of Copper are 4% and 6%
respectively and hedge ratio is 0.60 then, correlation coefficient among these prices shall be __
a) 0.25
b) 0.60
c) 0.75
d) 0.90

(x) In India is also known as headline inflation rate.

a) CII
b) CPI
c) WPI
d) None of These

Answers to Multi Choice Questions (MCQs)

(i) (a)
(ii) (d)
(iii) (d)
(iv) (c)
(v)(a)
(vi) (b)
(vii) (c)
(viii) (b)
(ix) (d)
(x) (c)

CASE STUDY 2

PQR Ltd. is engaged in the steel sector. It needs money from time to time to meet its working capital
needs. It is considering fulfilling its short term fund requirements by issuing commercial papers (CPs).
It has decided not to approach the banks for short term loans. Instead it is inclined towards opting for
commercial papers for fulfilling its working capital requirements.
The banks are witnessing a loss of demand for working capital loans from companies as interest rates
on commercial paper fall below the reverse repo rate, the rate at which banks put their surplus money
with the Reserve Bank of India (RBI).
Some of the companies such as HDFC Ltd, Godrej Industries, Aditya Birla Finance and NABARD are
raising cheap funds. It shows the transmission of lower rates being pushed by the central bank and
the choice of companies who are cash-rich to invest it in mutual funds rather than keeping it in new
projects.

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 CP rates in the secondary market have significantly dropped due to high liquidity and reduced
issuances. Much of the collapse in money market rates has been attributed to the huge flow of cash
due to RBI’s purchase of US dollars (under a rupee-dollar swap arrangement), which aggregated
about a
hundred billion since the start of the pandemic, taking the reserves to a record $578.5 billion.
The Dollar-Rupee Swap was a liquidity management tool that is operated through a swap (exchange)
between the US Dollar and the Rupee; aimed to facilitate comfortable liquidity situation in the
economy. Therefore, rupee was exchanged for dollar and the participants in the swap were the
identified banks. What made the new facility unique was its connection with foreign currency
management and at the same time dealing with the liquidity of rupee in the financial system. In the
swap arrangement, the RBI conducted auction for getting dollars from banks while exchanging
rupees. The rate at which dollar was exchanged for rupee was based on the spot exchange rate on
the auction day. The swap was for a period of three years. On that day when the swap period of three
years will end, the banks have to buy back dollars from the RBI while paying rupee back.
Companies are not in a hurry to initiate any new investment. In fact, they are raising from the capital
market either for meeting their working capital requirements or to pay existing bank loans.
Burgeoning liquidity is putting challenge for commercial banks in terms of pricing of assets &
liabilities. According to data from CARE Ratings, the average liquidity surplus in the banking system
rose further to ` 5.31 lakh crore in November 2020, compared to ` 4.03 lakh crore in the previous
month and ` 2.33 lakh crore in November 2019.
Commercial papers issued by Godrej Industries, yielded 3.28-3.30% with three-month maturities
earlier in the month of November 2020. India’s largest home financier HDFC Ltd.’s three-month CPs
have yielded 3.26%. Further, the NABARD’s papers are yielding 17 basis points lower than the
reverse repo rate. The reverse repo is now at 3.35%.
The RBI, though hesitant in reducing the interest rates due to rising prices, has promised to keep the
rates low with abundant liquidity aimed at transmission and smooth passing of government’s
borrowing.
Although the central bank aims to boost investments, companies left with spare capacities are saving
cash and waiting to see a push in demand before investing to create fresh capacities. However, the
objective of the RBI to keep the interest rate low is working. Now that the investors have started
parking their money and the debt capital market is witnessing vibrancy, the certainty on availability of
funds at competitive rates has improved.
Now, the question is what should be the RBI’s stance with relation to this situation. The experts are
expecting the RBI to tighten liquidity in the upcoming monetary policy and control the easy liquidity
that was made available during the year. The central bank was urged to reduce excess liquidity up
to ` 3 lakh crore through monetary interventions to stabilise the money markets. In response to that,
RBI has intervened to reduce excess liquidity to the extent of ` 2 lakh crore through a reverse repo
auction resulting in an enhancement in shorter duration rates including the tri-party repo rates,
sovereign treasury bills, and inter-bank call money rate.
I. Multiple Choice Questions
1. Reverse Repo rate is …….

(a) the rate at which RBI lends to commercial banks

(b) the rate at which commercial banks lends to RBI

(c) the rate at which commercial banks lends to companies

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 (d) the rate at which commercial banks lends to NBFCs

2. What makes the dollar swap arrangement as one of its kind?

(a) Dealing with excess rupee liquidity in the financial system

(b) Foreign currency management

(c) Both (a) and (b)

(d) None of the above

3. The entire approved amount of CP should be raised within a period of _______from the date
on which issuer opens the issue for subscription.
(a) two weeks

(b) three weeks

(c) four weeks

(d) one week

4. Which among the following is not an advantage of commercial papers to its issuer?

(a) Access to short term funding

(b) Low interest expenses

(c) less recognition among investors in comparison to other money market instruments
(d) higher yield than other short term money market instruments
5. Which among the following is not a traditional credit policy instrument of RBI to curtail excess
liquidity?
(a) Increase Cash Reserve Ratio

(b) Increase Statutory Liquidity Ratio

(c) Sale of Securities

(d) Rupee Dollar Swap by buying rupees from the banks and giving them dollars in exchange

ANSWERS TO CASE STUDY 2

Answers to Multiple Choice Questions

1. (b)

2. (c)

3. (a)

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 4. (c)

5. (d)

CASE STUDY 3

(a) Reliable Mutual Fund wants to invest in various Initial Public Offers (IPOs) which are lined up.
However, at the same time, the top management is skeptical about putting money in the IPOs as it
heard about various news regarding misuse of funds raised through the IPO route. The Chief
Financial Officer (CFO) of the company apprises the top management of the company about the
different methodologies adopted by various companies to siphon off money raised through the initial
public offer and recent effort by SEBI to curb this phenomenon. He also emphasized that with required
due diligence on the part of the company and help from the market regulator, the Reliable Mutual
Fund can go ahead with its initial plan of investing in the IPOs. He also pointed out that onethird of
the anchor investments are reserved for mutual funds so that can also be taken advantage of. The
explanation provided by the CFO has been discussed in the following paragraphs.
In the year 2016-17, the market regulator SEBI has found in its investigation that the money collected
from the initial public offers was being misspent in certain cases by way of channeling the money
through inter-corporate deposits immediately after collecting the funds through the public issue.
SEBI, however, found a number of companies had stated in their offer documents that pending
utilization of net proceeds, the issuer would temporarily invest the same in various instruments.
Nevertheless, companies are now using various methods to siphon off funds raised through the
IPOs. For example, they engage their directors, employees, and even related entities to make the
deal complicated. They even use certain assets of the company as collateral, including being
coborrower and/or guarantor, for enabling third parties to obtain loans without authorization, viewed
an expert who is aware of these techniques.
To handle this menace, the market regulator SEBI has set up a specialized department to tackle
cases of diversion of funds, bank loans, and resources by company promoters. This measure was
taken after a large number of cases come to the surface involving Cox and Kings, DHFL, and the
now-infamous liquor baron Vijay Mallya. This new department is called by the name - Corporation
Finance Investigation Department (CFID).
The Corporation Finance Investigation Department is responsible for carrying out preliminary/
detailed investigations on fraud, diversion/ siphoning or misappropriation of funds; material
misstatement in financial statements; fraudulent related party transactions; non-compliance with
Objects of the issue of IPO; and suspected diversion of funds, etc.
On careful analysis of the point of view expressed by the CFO and with the recent formation of CFID
by the SEBI, the top management of the mutual fund decided to go ahead by investing in the
upcoming IPO.
(b) Zomato Ltd.’s stock prices fell drastically in three weeks after the compulsory one-month lock-in
period for the shares allotted to anchor investors during the company’s initial public offering ended.
The company had collected about Rs 4,200 crore by distributing nearly 55.2 crore shares to 186
anchor investors, including Morgan Stanley Investment Fund, New World Fund, Tiger Global

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 Investment Fund, Fidelity Fund Canada Pension Plan Investment Fund. Domestic mutual funds
including SBI, Axis, Aditya Birla, Kotak, Motilal Oswal, Nippon India, HDFC were also given shares.
The anchor investors got the shares at 76 rupees each, out of which the Indians have received about
a third of such allotment. The IPO of Zomato, the first such issue by a food technology company in
India, was oversubscribed by 40 times on the last day of bidding. But, the shares of the company fell
by as much as 7.2%, since the lock-in period for anchor investors end as they resorted to a selling
spree.
This has happened in the case of other companies also. For instance, Paytm whose shares witnessed
a sharp fall of 13 percent when the mandatory anchor lock-in period of the company expired, exerted
more pressure after a debut starts in the stock exchange.
Similar things were observed in the case of Go Fashion whose shares corrected nearly 6 percent to
Rs 1057.05 per share on the day when anchor investors' deadline to sell shares ended.
Therefore, it can be observed that there is selling pressure near the end of the 30-day lock-in period
or on the first day of trade after the 30-day lock-in period is over. Also, take the case of SBI Cards
and Payment Services which fell 15 percent on the day after the 30-day lock-in for anchor investors.
From this decline to Rs 505, SBI Cards shares plunged by 30 percent from its issue price of Rs. 755
per share.
So, in order to reduce the volatility of prices after listing, SEBI has mandated that Anchor investors
have to lock in their investment for 30 days for 50 percent of the portion given to them. For the rest of
the portion, a lock-in period of 90 days will be applicable. Before this, the entire investment by the
anchor investors is locked in for a period of 30 days from the date of allotment.
The term anchor investor is conceptualized by the Securities Exchange Board of India (SEBI) in the
year 2009. Basically, anchor investors are urged to subscribe to the shares before the opening of the
Initial Public Offers (IPOs) so that it increases the popularity of the issue.
As evident from the name itself, the anchor investors are required to take up the shares at a fixed
price to make other investors convinced and enhance the demand of the share. This phenomenon
also helps to enhance the investment opportunity for retail investors with the company. Each anchor
investor needs to invest a minimum of ` 10 crores in the issue on the mainboard and ` 2 crores on the
SME Exchange.
Anchor investors are part of Qualified Institutional Buyers (QIBs) who can invest in an IPO one day
prior to the opening of the issue. As the name indicates, they are meant to ‘anchor’ the issue by
agreeing to subscribe to shares at a fixed price so that other investors may know that there is demand
for the shares offered.
Moreover, the share market analysts, brokers, or investment bankers generally bring out their reports
on an IPO. However, anchor investors are the ones who actually take the plunge. They subscribe to
the shares at the price which is fixed for them. Since the anchor portion of an issue is generally taken
up by institutions such as mutual funds, insurance companies and foreign funds, the valuations of
such companies coming out with IPOs can give some good indicators to other people who are thinking
of investing in the IPO. If the issue has some difficulties, such as corporate governance, or it asks for
an exorbitant price, the issue will face a lacklustre reaction from the anchor investors.
As it is well known, the talks between the issuer and the potential investors begin much earlier.
However, the allotment to the anchor investors can only be made a day before the IPO. (Paytm’s IPO
opened on Monday. But, since, Thursday and Friday were market holidays, the allotment was made
on Wednesday). In the majority of the situations, anchor investors are allotted shares at the upper
portion of the IPO price band. The list of investors to get allotment in the anchor book is decided by

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 the investment bankers handling the IPO and the issuer company. Anchor allotments are made on a
discretionary basis, unlike in the IPO, where allotment needs to be done on a proportionate basis.
IPOs that have raised maximum amount from the anchor investors are shown in the following chart:

Companies Anchor Issue Size Year

Allotment (Rupees Crores)
(Rupees
Crores)
Zomato 4197 9375 2021
SBI Cards 2769 10341 2020

Policy Bazaar 2569 5709 2021

Sona BLW 2498 5550 2021

Nykaa 2396 5352 2021

HDFC Life 2322 8695 2017

SBI Life 2226 8389 2017

Gland Pharma 1944 6480 2020

Chemplast Sanmar 1733 3850 2021

ICICI Sec 1717 3480 2018

I. Multiple Choice Questions

1. What is the main purpose of setting up the Corporate Finance Investigation Department?
(a) Carrying out preliminary/ detailed investigations on siphoning or misappropriation of
funds.
(b) Carrying out preliminary/ detailed investigations on Fraudulent related party transactions.
(c) Carrying out preliminary/ detailed investigations on Non-compliance with Objects of the
issue of IPO.
(d) All of the above
2. ____________of the anchor investor portion are reserved for domestic mutual funds.
(a) One-half
(b) One-third
(c) One-fourth
(d) One-fifth
3. In case of an initial public offer, the minimum trading lot on the stock exchange shall be
________ and in multiples thereof.
(a) one lakh rupee
(b) two lakh rupees (c) five lakh rupees
(d) ten lakh rupees
4. Which among the following is not true?

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 (a) The promoters of the company shall hold at least twenty per cent of the total capital in
case of an Initial Public Offer.
(b) In an anchor issue, the lead manager is responsible for the price stabilization process.
(c) An issuer shall make a bonus issue of equity shares only if it has made reservation of
equity shares of the same class in favour of the holders of outstanding compulsorily
convertible debt instruments if any, in proportion to the convertible part thereof.
(d) In case of an initial public offer, the condition of lock in period of promoter’s minimum
contribution would not apply to a company which has been listed on the Innovators Growth
Platform for a minimum period of three years or more.
5. At least_________independent director on the board of directors of the listed entity shall be a
director on the board of directors of an unlisted material subsidiary, whether incorporated in
India or not.
(a) one
(b) two
(c) three
(d) five

ANSWERS TO CASE STUDY 3

I. Answers to Multiple Choice Questions

1. (d)
2. (b)

3. (b)

4. (b)

5. (a)

CASE STUDY 4

Initial Public Offers (IPOs) by companies saw a huge surge recently. About 14 years ago, four
IPOs opened for subscription on the same day i.e. on August 4. All were lapped up within
hours. Oversubscription which has been as high as 116.7 times and listing day gains (as
much as 113.5 percent) since June point to the high investor appetite for new offerings. Both
high net worth individuals (HNIs) and retail investors are required to exercise vigilance in such
situations.
According to media reports, non-banking financial companies (NBFCs) are providing massive
amounts of funding to HNIs to bet on IPOs. The interest cost for such borrowings is around
11 percent. Investors put in one percent and the NBFC could finance as much as 99 percent.
However, this can vary. By putting in large amounts, HNIs are able to ensure they get good

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 allotments despite issues being oversubscribed. Most HNIs, who invest by utilizing the
leveraged money, move into the market on the last day of the IPO. The reason is that by
when there is clearness on the oversubscription numbers and the chances of listing gains.
Furthermore, using margin financing or leverage financing while investing may look like a
sure-shot way of getting success in the stock market. But things can go bad. The HNI’s cost
of funding is known. The result of his speculation depends on two factors - how much
allotment he gets and the amount of listing day gain. Leveraging is a double-edged sword –
it can multiply one’s gains as well as one’s losses (see the table given at the end of the case
study).
Instead of listing at a premium, shares can list at a discount, despite being oversubscribed, if
market sentiment takes a turn for the worse between the closing of the IPO and the stock’s
listing on the exchanges. The HNI is then hit by a double whammy. Not only the investor has
to bear the interest cost, but he will also has to bear the capital loss on the entire leveraged
amount. The NBFC, which has a lien on the shares, sells them to gather its interest cost. But
if that proves to be insufficient, the investor has to pay out more from his own pocket.
Even for retail investors making non-leveraged bets, it is not easy to make money in an IPO.
In the 1990s and early 2000s, companies came out with an IPO because they required capital
to fund their growth. Nowadays, start-ups turn to private-equity (PE) investors for growth
funding. These days companies mostly do offer for sale (OFS) in an IPO, whose primary
purpose is to provide an exit to PEs and enable promoters to monetize a part of their holding.
The early stakeholders ensure that they get the best possible price for their stake.
And how do they achieve this? They time their IPOs during the good phase of the market
cycle – when sentiment is euphoric, liquidity is abundant, and there is a high probability of the
issue being oversubscribed, irrespective of its valuation.
Promoters also do IPOs during the good part of the industry cycle, so that past three years’
performance numbers appear strong and they are able to command high valuations.
Investors have to see whether the stock will be able to maintain such performance and
command such valuations over the long term says an expert.
Another issue the retail investor faces is the amount of allotment he can get. Especially if a
high-quality company is offered at an attractive valuation, the IPO is likely to be heavily
oversubscribed. The chances of getting an adequate allotment, which will have a meaningful
impact on one’s portfolio return, are quite low, pointed out by another expert.
To get a better estimate of the performance of IPOs, look at their longer-term rolling returns.
The bulk of IPOs doesn’t do well over the long term. Either their current market prices are
lower than the IPO price or they lag the leading market benchmarks’ returns. Only a few IPOs
prove to be profitable to the investors in the long run.
Retail investors who invest for listing day gains can also end up burning their fingers. So, it is
advisable for the investors to read the offer document carefully in spite of the fact that is often
bulky. Doing so will provide an investor with comprehensive knowledge about the company,
its history, the background of the promoters, all the legal cases against the company, etc.
Watch out for two risks. At present, in the case of about one-third of the companies, there is
a restatement of financials to make it look better. View such restatement with skepticism.
Another thing to watch out for is if, prior to a public issue, the promoter makes a large dividend

© The Institute of Chartered Accountants of India

 payout to reward himself and his near ones. If the payout is given under a stated dividend
policy, then it is all right.
Most new offerings are made at rich valuations. Compare the multiple of the IPO stock with
that of already listed peers. A premium for an IPO shall be paid only if it has some merit. It
should have a better margin profile or higher return ratios. Alternatively, it should address a
niche opportunity or have a long growth runway.
If the new company is fundamentally attractive but richly valued, play the waiting game. Often,
as an investor, you will find a good entry price in the stock within 6-12 months, either because
the hype has died down, or due to market gyrations.

BOTH GAINS AND LOSSES GET ENHANCED BY LEVERAGE TRADING

Subscription level and listing gains determine gain or loss

Amount put in by the investor (5%): Rupees 5 lakh. Amount borrowed: Rupees 95 lakh. Interest on
loan @ 11% for 7 days: Rupees 20,041
No. of times IPO is oversubscribed 10 25 30

Amount worth of shares investor gets 10,00,000 4,00,000 2,00,000

(Rupees)
If listing day gain is 15%

Gain on investment on listing day 1,50,000 60,000 30,000

(Rupees)
STCG @ 15% 22,500 9,000 4,500

Gain after interest and tax payment 1,07,459 30,959 5,459

(Rupees)
Absolute return on capital employed (%) 21.5 6.2 1.1

If listing day loss is 15%

Loss on investment on listing day -1,50,000 60,000 30,000

(Rupees)
Loss after interest payment (Rupees) -1,70,041 -80,041 -50,041

Absolute return on capital employed (%) -34 -16 -10

Source: Personal Finance Plan

I. Multiple Choice Questions

1. A debenture trustee should be a/an_____________
(a) Scheduled Commercial Bank
(b) Public Financial Institution
(c) Insurance Company

© The Institute of Chartered Accountants of India

 (d) Any of the above
2. Announcement regarding a public issue should be made at least _________ before the
subscription list opens.
(a) seven days
(b) ten days
(c) fourteen days
(d) twenty days
3. __________ is a price stability mechanism.
(a) Green Shoe Option
(b) Application Supported by Blocked Amount
(c) Anchor Issue
(d) Right Issue
4. Which among the following is true in respect of an eligibility of an initial public offer?
(a) It has net tangible assets of at least five crore rupees in each of the preceding three
full years.
(b) It has an average operating profit of at least ten crore rupees during the preceding
three years.
(c) It has a net worth of at least one crore rupees in each of the preceding three full years.
(d) None of the above
5. Which among the following is not true?
(a) In case of convertible debt instruments, the issuer has to obtain credit rating from at
least one credit rating agency.
(b) An issuer shall be eligible to issue warrants in an initial public offer if the tenure of
such warrants shall not exceed eighteen months from the date of their allotment in the
initial public offer.
(c) The promoters of the issuer shall hold at least 25% of the post issue capital.
(i) The minimum promoter’s contribution shall be locked-in for a period of three years
from the date of commencement of commercial production or date of allotment in the
initial public offer, whichever is later.

ANSWERS TO CASE STUDY 4

I. Answers to Multiple Choice Questions

1. (d)

2. (b)

© The Institute of Chartered Accountants of India

 3. (a)

4. (c)

5. (c)

CASE STUDY 5

D M LIMITED

Balance Sheet as at 31stMarch, 2019

Particulars As at 31st March,

2019

(` In Crores )

A EQUITY AND LIABILITIES

1 Shareholders’ funds

(a) Share capital 1,200.00

(b) Reserves and surplus 2,410.00

(c) Money received against share warrants 0

3,610.00

2 Share application money pending allotment

3 Non-current liabilities

(a) Long-term borrowings 320.00

(b) Deferred tax liabilities (net)

-
(c) Other long-term liabilities 80.00

(d) Long-term provisions 30.00

430.00

4 Current liabilities

(a) Short-term borrowings 25.50

(b) Trade payable 490.50

© The Institute of Chartered Accountants of India

 (c) Other current liabilities 5.85

(d) Short-term provisions 8.45

530.30

4,570.30

B ASSETS

1 Non-current assets

(a) Fixed assets

(i) Tangible assets 2,210.95

(ii) Intangible assets 150.00

(iii) Capital work-in-progress

-
(iv) Intangible assets under development
-
(v) Fixed assets held for sale
-
2,360.95

(b) Non-current investments 372.00

(c) Deferred tax assets (net)

-
(d) Long-term loans and advances 310.00

(e) Other non-current assets 102.85

784.85

2 Current assets

(a) Current investments 12.25

(b) Inventories 410.90

(c) Trade receivables 295.35

(d) Cash and cash equivalents 670.50

© The Institute of Chartered Accountants of India

 (e) Short-term loans and advances 35.50

(f) Other current assets 1,424.50

4,570.30
Notes:
1. Company Issued 10% p.a. Bonds in 2005 at discount of 5% for total amount of ` 10,00,00,000/-
(` Ten Crores) redeemable in 2025 i.e. for 20 years and interest is payable on yearly basis. Out
of ` 10 Crores bonds company issued ` 1 Crore bonds under Call Protection.

2. Current interest rates are about to 7.5 % p.a.

3. Share capital is fully paid up at ` 10 each.

4. D M Limited`s Shares are trading at BSE and NSE.
5. Reserve and surplus includes ` 1,200/- (Rupees one thousand twelve hundred Crores) free
reserve of D M Limited.
6. D M Limited pass resolution at board meeting held as on 15th June, 2019 and passed special
resolution of buy back of shares in general meeting held on 15th July, 2019 and giving result of
postal ballot.
7. One of the Tax and Financial Consultants give knowledge of call features for bonds to D M
Limited. They told that D M Limited can “call in” the bonds and repay them at predetermined
price before maturity. Also giving knowledge that company can issue new bond with “call
protection” i.e. they are guaranteed not to be called for five to ten years or other period specify.
8. D M Limited wants to expand its business and starting new manufacturing of product X and for
that it incorporates one new company i.e. K M Limited and offers shares via book building
method. K M Limited appoints merchant banker as book runner lead manager. K M Limited
opened its offer for 5 days which may be extended to 10 working days for all corporate and for
3 days which is minimum working days for all non-corporates.
9. If D M Limited buy back its shares via tender offer, then price will be ` 300 per share.
10. D M Limited come to know that if we go for buy back we have to giving disclosures under the
Companies Act which contains full and complete material facts, necessity of buy back, the class
of shares, amount to be invested, time limit of completion of buy back etc.
I. Multiple Choice Questions
1. The task of SEBI is mainly……………

(a) Safeguard and looking into the interest of company.

(b) To promote the development and to regulate the securities market.

(c) (a) and (b) Both

(d) None of the above.

2. Full form of BRLM is _______________

(a) Book Running Lead Manager.

(b) Book Reader Lead Management.

© The Institute of Chartered Accountants of India

 (c) Book Runner Lead Management.

(d) Book Reader Lead Manager.

3. What is the maximum upto which D M Limited can buy back?

(a) ` 400 Crores.

(b) ` 600 Crores.

(c) ` 902.50 Crores. (d) ` 670.50 Crores.

4. What will be the last date of buy-back if D M Limited buy back its shares amounting to ` 110
Crores?
(a) 14th July, 2020

(b) 14th June, 2020

(c) 15th June, 2020

(d) 15th July, 2020

5. Total bidding period of public issue is

(a) Minimum 3 and maximum 10 days

(b) Minimum 3 and maximum 7 working Days (c) Minimum 3 and maximum 10 working
days (d) Minimum 3 and maximum 7 days.

ANSWERS TO CASE STUDY 5

I. Answers to Multiple Choice Questions

1. (b)

2. (a)

3. (b)

4. (b)

5. (c)

CASE STUDY 6

Vikas Limited (“Vikas” or the “Company”) wants to buy back some of its outstanding shares from
shareholders. The Company wants your advice on buyback of its equity shares. The Company has
provided below information to you for your perusal.

© The Institute of Chartered Accountants of India

 Vikas Limited, an Indian company incorporated on December 29, 1945, is a leading global information
technology, consulting and business process services company. The Company has over 17,000
dedicated employees serving clients across six continents. The name of the Company was changed
from Eastern Bharat Limited to Vikas Limited on April 28, 1984. The Company has its registered office
situated at Doddakannelli, Sarjapur Road, Bengaluru-560035, India. The Company shifted its
registered office from the State of Maharashtra to the State of Karnataka on July 10, 1996. The Equity
Shares of the Company were listed in the year 1995 on the NSE. The ADRs of the Company were
listed on NYSE in the year 2000. The ISIN Number of the Company is INE075A010XX.
The Buyback will be undertaken by the Company to return surplus funds to the Equity Shareholders,
which are over and above its ordinary capital requirements and in excess of any current investment
plans, in an expedient, effective and cost efficient manner.
The Buyback will be undertaken for the following reasons:
1. The Buyback will help the Company distribute surplus cash to the Equity Shareholders broadly
in proportion to their shareholding, thereby, enhancing the overall return to Equity Shareholders.
2. The Buyback, which is being implemented through the Tender Offer route as prescribed under
the Buyback Regulations, involves a reservation of up to 15% of the Buyback Size for Small
Shareholders. The Company believes that this reservation of up to 15% for Small Shareholders
would benefit a large number of the Company’s public shareholders, who would be classified
as Small Shareholders for the purposes of the Buyback.
3. The Buyback would help in improving financial ratios like earnings per share and return on
equity, by reducing the equity base of the Company.
4. Finally, the Buyback gives the Eligible Shareholders the choice to either (A) participate in the
Buyback or receive cash in lieu of their Equity Shares which are accepted under the Buyback,
or (B) not to participate in the Buyback and get a resultant increase in their percentage
shareholding in the Company post the Buyback, without additional investment.
The salient financial information of the Company as extracted from the audited standalone financial
statements as on March 31, 2020 are as under:

Sr. Particulars ` in Crore

No.
1 Equity Share Capital (Shares of ` 10 each - 330
fully paid up)
2 Reserve and Surplus:
General Reserve
240 -
Securities Premium Account 90 -
P&L Account 90 -
Infrastructure development Reserve 180 600

3 Loan Funds 1800

4 Cash 150
5 Earnings after tax for the year 561
The funds for the Buyback will be sourced from current balances of cash and cash equivalents and/or
internal accruals of the Company. The Company does not intend to raise additional debt for the
explicit purposes of the Buyback. Borrowed funds will not be used for the Buyback.

© The Institute of Chartered Accountants of India

 This Buyback is not likely to cause any material impact on the earnings of the Company, except for
the cost of financing the Buyback, being a reduction in the treasury income that the Company could
have otherwise earned on the funds deployed.
The
prevailing PE ratio of the company considering market value of the company’s share is 1.47 and in
order to induce the existing shareholders to offer their share for buy back, it can be decided to offer
a price of 20% over market price. You are also informed that the Infrastructure Development Reserve
is created to satisfy Income-tax Act requirements.
The Buyback will not result in any benefit to the Promoter and Promoter Group or any Directors except
to the extent of the cash consideration received by them from the Company pursuant to their
respective participation in the Buyback in their capacity as Equity Shareholders of the Company, and
the change in their shareholding as per the response received in the Buyback, as a result of the
extinguishment of Equity Shares, which will lead to reduction in the equity share capital of the
Company post the Buyback.
I. Multiple Choice Questions
1. Buyback of share also called as,
(a) Initial Public Offer
(b) Follow-on Public offer
(c) Share Purchase
(d) Share Re-purchase

CASE STUDIES 6.3

2. Identify which one is the correct effect of buyback.

(a) ROA Increase and ROE Increase
(b) ROA Increase and ROE Decrease
(c) ROA Decrease and ROE Decrease
(d) ROA Decrease and ROE Increase
3. When a company purchases its own shares out of free reserves, a sum equal to nominal value
of shares so purchased shall be transferred to ………
(a) Revenue redemption reserve
(b) Capital redemption reserve
(c) Buyback reserve
(d) No reserve to be created as shares purchased out of free reserves
4. Every buyback needs to be completed within …….. from the date of passing the special
resolution or the resolution passed by the board of directors
(a) 12 Months
(b) 6 Months
(c) 9 Months

© The Institute of Chartered Accountants of India

 (d) 3 Months
5. No buy back shall be made within a period of 1 year reckoned from the date of __________.
(a) Board meeting in which buy back is approved
(b) General meeting in which special resolution passed
(c) Closure of a previous offer of buy back
(d) General meeting in which ordinary resolution passed

ANSWERS TO CASE STUDY 6

I. Answers to Multiple Choice Questions

1. (d)
2. (a)

3. (b)

4. (a)

5. (c)

CASE STUDY 7

Prakash Cement Limited (PCL) is a leading player in the Indian building materials space, with a
manufacturing and marketing presence in almost the whole of India. With 15 cement manufacturing
units, over 80 ready mix concrete plants, over 5,500 talented employees, a vast distribution network
of 40,000+ dealers & retailers and a countrywide spread of sales offices, it contributes tremendously
to the landscape of the country. For over 70 years, Prakash Cement Ltd. has been synonymous with
cement, establishing its reputation as a pioneer organization that consistently sets new benchmarks
in research and innovative product development. The summarized financials of the company for the
last few years are as follows:
Dec'2019 Dec'2018 Dec'2017 Dec'2016 Dec'2015
12 12 12 Months 12 12
Months Months Months Months
NET SALES 15656.65 14801.35 13284.6 11158.34 11796.83
EBIT 2117.69 1583.49 1400.66 924.55 1004.46
EBT 2031.47 1494.29 1298.36 851.68 937.14
Profit and Loss for the 1358.91 1506.63 915.45 645.21 744.74
Year
Total Current Assets 9425.24 8353.31 7155.96 3910.06 3709.18
Total Current Liabilities 5560.82 5497.39 5464.22 4726.01 4362.28

© The Institute of Chartered Accountants of India

 NET CURRENT 3864.42 2855.92 1691.74 -815.95 -653.1
ASSETS
Considering the huge growth potential of the company especially the fillip the cement sector has got
after the
recent spurt in the real estate deals post pandemic, many large investors such as the institutional
investors and High Net Worth Individuals (HNIs) are considering “block deals” in Prakash Cement
Ltd.
Block deal is a trading transaction of which the minimum order size for its execution is ` 10 Crore,
executed through a single transaction, on the special "Block Deal window". Market regulator SEBI
(Securities and Exchange Broad of India) has also made it mandatory for the stock brokers to disclose
on a daily basis the block deals made through Data Upload Software (DUS).
Block deal takes place when two parties agree to buy or sell securities at an agreed price between
themselves and inform the stock exchange. The orders in a block deal are not visible to the people
who trade from normal trade window. The stock exchanges are required to disclose the information
on block deals to the public on the same day after market hours. This should contain information like
name of the scrip, scrip code, name of the client, quantity of shares bought and sold, traded price and
so on.
According to SEBI, to facilitate block deals, stock exchanges provide a separate trading window only
for 15 minutes in the morning and 15 minutes in the afternoon on all trading days in the equity
segment. The transaction price of a share ranges from +1% to -1% of the previous day’s closing or
the current market price. These transactions take place on delivery basis. As per the SEBI guidelines,
shares transacted under the block deal window should not be squared off or reversed. Further, the
stock exchanges are required to disclose the information on block deals.
So, a block deal is a special window where pre-arranged trades between two parties can be executed.
The news of a block deal often provides a boost to the stock, although for a very short term. For
instance, the share price of Kotak Mahindra Bank rallied as much as 11 per cent in three sessions in
June 2020 when its promoter Uday Kotak sold a part of his shares through a block deal. Hindustan
Unilever (HUL), HDFC Life and Crompton Greaves also witnessed similar trends during block deals
in 2020.
Investors with prior knowledge of the block deal can buy the shares or take bullish positions in the
stock just a session or two before such a deal. Once the deal is done, they sell these shares and
make quick profits. However, such buying right before the deal disturbs the entry price for the buyer
since the prevailing market price determines the share price for a block deal. SEBI rules require the
price quoted in such a deal to be within 1 per cent of the market price.
Furthermore, another company by the name Rainbow Paints Ltd. was incorporated in the year 2002.
To begin with it started in the manufacture of lower-end Cement paints, and gradually expanded its
range to cover most segments of water-based paints like Exterior Emulsions, Interior Emulsions,
Distempers, Primers, etc. From an early age, the Company spread its footprints across the country,
with the rapid expansion of its reach across India. Today, the Company stands out as one of the
strongest contenders in the Indian paint industry, being rated as an innovative paint manufacturer,
which keeps coming out with unique products never before offered in the country. The summarized
financials of the company for the last few years are as follows:
Dec'2019 Dec'2018 Dec'2017 Dec'2016
NET SALES 624.79 535.63 413.8 289.21
EBIT 73.02 38.67 7.38 -14.92
EBT 67.43 34.02 3.58 -17.58

© The Institute of Chartered Accountants of India

 Profit and Loss for the Year 47.81 27.17 3.89 -15.87
Total Current Assets 199.28 200.53 166.97 137.22
Total Current Liabilities 179.4 164.7 129.6 96.79
NET CURRENT ASSETS 19.89 35.82 37.37 40.43
Moreover, it has recently made a fantastic debut in the stock exchange. The shares kick started
trading with a bumper premium of 75 percent over its issue price, given the strong IPO subscription
and Budget-driven bullish market sentiment. The stock opened at ` 2500 on the BSE, against the
public issue price of ` 1,500, while the opening price on the National Stock Exchange was at ` 2600,
a 75 percent premium.
This prompted some institutional investors to enter into “bulk deals” to take advantage of the
company’s rising share prices. However, it was alleged by foreign institutional investors that some
investors having prior knowledge of the deal are trying to make quick profits out of them.
Bulk deal is a trading transaction in which the total quantity bought or sold is more than 0.5% of the
number of equity shares of a listed company. Another feature of bulk deal is that it can be traded
through the normal trading window provided by brokers in the entire trading hours in a day. Bulk deals
are driven by market and take place throughout the trading day. The stock broker, who facilitates the
trade, is required to reveal to the stock exchange about the bulk deals on a daily basis through DUS.
Bulk orders are visible to everyone. If the bulk deal takes place through a single transaction, it should
be informed to the exchange immediately upon the closing of the deal. If it takes place through
multiple transactions, it should be informed to the exchange within one hour from the closing of the
trading.
On the other hand, block deals are increasingly becoming a challenge for India’s foreign portfolio
investors (FPIs). It has been pointed out by experts that some institutional investors and domestic
brokerages who are aware of such deals, are trying to make quick profits out of them. Several FPIs,
including two large US-based public institutions, reportedly raised complaints with market regulator
Securities and Exchange Board of India (SEBI) in early December 2020. Further, some foreign fund
grouping, the Asian Securities Industry and Financial Markets Association (ASIFMA) that represents
big FPIs such as Citi, CLSA and Amundi, has made multiple representations to SEBI between August
and October, 2020.
The experts are suggesting that India should adopt a similar framework used in the developed
markets, such as the US and the UK, where there is a special window and pricing freedom. It was
also pointed out that the best way to do it is by increasing the price band allowed for block deals from
1 per cent currently to 5-6 per cent. It will reduce the risk considerably.

I. Multiple Choice Questions

1. ……… is a prospectus which enables an issuer to make a series of issues within a period of 1
year without the need of filing a fresh prospectus every time.
(a) Red Herring Prospectus

(b) Shelf Prospectus

(c) Abridged Prospectus

(d) Letter of Offer

2. Which among the following is a risk management mechanism in a secondary capital market?

© The Institute of Chartered Accountants of India

 (a) Laying down trading rules and regulations for broker members.

(b) Setting up market surveillance systems to curb excess volatility.

(c) Setting up a clearing corporation to guarantee financial settlement of all trades and
thereby reduce credit risk in the settlement system.
(d) All of the above
3. BSE Sensex fell to 12% during the morning session on Monday. The stock trading will be halted
for ………….
(a) 45 minutes

(b) 60 minutes

(c) 1 hour 15 minutes

(d) 15 minutes
4. An investor buys 200 shares @ ` 1000 each on Tuesday and sell those shares @ 1500 each
on the same day. As per the present T + 2 settlements, his netting obligation will be calculated
on ………….
(a) Tuesday itself

(b) Wednesday

(c) Thursday

(d) Friday

5. ……… is a facility given to the investors in which they can invest in shares by part financing
from the bank.
(a) Short Selling

(b) Securities Lending and Borrowing

(c) Margin Trading

(d) Market Making

ANSWERS TO CASE STUDY 7

I. Answers to Multiple Choice Questions

1. (b)
2. (d)

3. (a)

4. (b)

© The Institute of Chartered Accountants of India

 5. (c)

CASE STUDY 8

The market regulator SEBI is examining the extent of minimum public shareholding in companies and
the actual float. For instance, whether 25% minimum public shareholding does actually mean 25%
free float. The reason for this initiative by SEBI is that certain foreign funds have cornered the bulk of
the free float in several listed stocks, leading to stock price manipulation.
Free float methodology is globally regarded as an ideal methodology for the calculation of equity
indices. As per this methodology, the free-float market capitalization of all index constituents is
considered for the calculation of the index. The free-float market capitalization of the index
constituents is derived by applying Investible Weight Factors (IWFs) on the full market capitalization
of respective companies in the index. This approach aims to limit the influence of a particular company
in the index to the extent of its actual free float and reduces the influence of large promoter/ strategic
holding (which generally is not available for trading) on the index, thus making it truly investable.
Free float methodology in index calculation aids both active and passive investment strategies. Active
managers are able to compare their portfolio return vis-à-vis the investable index and at the same
time, passive fund managers are able to offer low tracking error by introducing passive funds such as
index funds, exchange-traded funds linked to investable indices calculated based on free-float
methodology.
IWF as the term suggests is a unit of floating stock expressed in terms of a number available for
trading and which is not held by the entities having strategic interest in a company. Higher IWF
suggests greater number of shares held by the investors as reported under the public category within
a shareholding pattern reported by each company.
The IWFs for each company in the index is determined based on the public shareholding of the
companies as disclosed in the shareholding pattern submitted to the stock exchanges on a quarterly
basis. The following categories are excluded from the free float factor where identifiable separately:

• Shareholding of promoter and promoter group

• Government holding in the capacity of a strategic investor

• Shares held by promoters through ADR/GDRs.

• Strategic stakes by corporate bodies

• Investments under FDI category

• Equity held by associate/group companies (cross-holdings)

• Employee Welfare Trusts

• Shares under lock-in category

The effect of the float

The effect of float on stock prices and volatility can be quite perceptible. The reason is that it is supply
and demand that determine the prices of stocks. So, if more and more institutions take up the
outstanding shares of a company, the demand for such shares will increase which will enable the

© The Institute of Chartered Accountants of India

 price to scale higher. This generally happens during the early part of a company’s shares being
publicly traded.
Low Float Stocks
A low float stock means that the number of outstanding shares is low i.e. the number of shares to be
traded is low. In such cases, the daily and average volumes tend to be on the lower side. The low
volumes of such stocks create volatility and therefore, the difference between the bid and ask prices
is large.
So, even before the company can dilute its value by bringing up more shares into the market, the
lower float in the beginning, can cause its price to shoot up as long as there is demand.
Therefore, in the case of low float stocks, a market rally boosted by fundamental factors generates
demand. In other words, investors generally tend to buy shares when they are scarce, driving the
price to escalate higher.
If the reason for low float stocks is majority holding by insiders, it means the general investing public
has little control over matters that require votes. However, a stock can also be low float if for some
reason the float reduces relative to its usual average.
High Float Stocks
Stocks with high float generally have a high predictability and less volatility. High-float stocks are
generally related to larger companies.
Also, because of the large number of shares in the float, there is liquidity and it can absorb any big
trading move. Thus, it is normal to witness 30%, 40%, or even 100% upside during a short period of
time in a low float stock that is generally not seen with high float stocks. Further, the lack of demand
tends to keep the value at evenness with the number of shares being traded.
So, it takes more effort to move the price.

Stock Price Manipulation Through Float

A common question that generally lurks among traders is whether one can manipulate the price of a
stock based on the float.
The research paper titled “Float manipulation and stock prices” gives a coherent depiction of how
firms can increase or decrease float. The researchers observe Japanese stock listings and the price
impact of firms that reduce their float between 0.1% to 99.9% for a period of one to three months.
The study finalized the fact that the price of a stock tends to rise when the float is reduced, while, the
price of the stock falls when the float is increased.
Further, the study also showed that firms tend to issue equity or redeem their convertible debts when
the float is low. The reason is obvious. They want the highest price for their shares.
Therefore, firms have strong incentives for manipulating the stock price through its float.

How can a Company Increase or Decrease Its Float?

Companies can increase or decrease their float in the following ways:

• A company can increase the float by issuing new shares and it can decrease the float by
announcing buyback of its shares. Other examples can be when a company announces a stock
split which could impact the float.

© The Institute of Chartered Accountants of India

 • The insiders can also influence the float. For example, insiders who own options can choose to
exercise their options. This can also impact the float if options are exercised for a substantial
amount.

• A company can also increase its float by deciding to sell some of the insider shares. This can
be done for genuine reasons such as raising cash, but there could also be intentionally hidden
motives.

• Generally, the float changes, when there are some big changes. The trigger for the float
changes can be attributed to fundamental factors such as any major news events, company
reports, or rumours.

Advantages and Disadvantages of Trading Low Float Stocks

There are certain advantages and disadvantages to trading low float stocks. They are as follows:
Advantages
Because of the volatility of the low float stocks, there is an immense upside to the stock. Canny traders
who take a calculated risk on low float stocks generally accumulate huge returns.
So, in spite of the risks inherent in it, traders can find an occasional good trade with huge upside
potential in low float stocks. However, the significant part to look for is liquidity.
Disadvantages

It can be said that trading low float stocks can be similar to trading penny stocks or micro-cap stocks.
Low float stocks can be very risky to hold because they can have sudden moves in either direction.
Since very few shares are available to trade, the effect on supply and demand can be crucial.
Low float stocks can be easy to manipulate with large unexpected orders. This is something that
investors need to bear in mind.
Stocks with low floats also tend to be volatile around fundamental news releases. These include any
type of news that is related to the industry or the sector in particular. Liquidity also increases around
such events which can give a good opportunity for investors to exit the stock after making a good
trade.
I. Multiple Choice Questions
1. Each rating obtained by the listed entity with respect to non-convertible debt securities shall be
reviewed at least ………. by a credit rating agency registered by SEBI.
(a) once a year

(b) twice a year

(c) Thrice

(d) Quarterly

2. The minimum offer size at Innovators Growth Platform is.____________rupees.

(a) one crore

(b) five crores

© The Institute of Chartered Accountants of India

 (c) ten crores

(d) twenty crores

3. Which among the following is true?

(a) A company cannot delist its shares voluntarily.

(b) Where a buy-back is 20% or less of the total paid-up equity capital and free reserves of
the company, only a board resolution is required.
(c) Laying down trading rules and regulations for broker members is a risk management
mechanism.
(d) Circuit breakers are always unfair to retail investors.

4. If an issuer is not satisfying the conditions mentioned in the eligibility requirements of an IPO, it
has to offer at least___________ of the net offer to qualified institutional buyers.
(a) forty percent

(b) fifty percent

(c) sixty percent

(d) seventy-five percent

5. The job of the market maker is to provide_________

(a) liquidity to the stock market

(b) quote a buy and a sell quote

(c) both (a) and (b)

(d) none of the above

ANSWERS TO CASE STUDY 8

I. Answers to Multiple Choice Questions

1. (a)

2. (c)

3. (c)

4. (d)

5. (c)

© The Institute of Chartered Accountants of India

 CASE STUDY 9

D K M BANK LIMITED is one of the most reputed banks in the banking industry. The facility of
opening current account, cash credit account, loan account and various other services are being
provided by D K M Bank Limited. One of the reputed companies i.e. ABC Limited has its current
account and cash credit account held with D K M Bank Limited and it also keeps fixed deposits of `
10 lakhs. Once ABC Limited faces working capital crisis during business operation and it took a cash
credit limit of ` 2.80 Crores and continues to renew it every year. Seven Directors are there in ABC
Limited. Out of those seven directors, two directors are husband and wife i.e. Mr. and Mrs. Beem.
ABC Limited has a very big company on an international level and also have branches out of India.
ABC Limited also engaged in import and export of goods in innovative products and because of that
ABC Limited faces Transaction Risk, Translation Risk and Economic Risk during the course of
imports and exports. Also, ABC Limited knows that due to their innovative products, receivables and
other current assets level takes time. As initial Receivable level may go up if the product has
competition in the market, it may not be so in case of an innovative product.
D K M BANK LIMITED has to fulfill all the guidelines of Reserve Bank of India. Every time, they have
to satisfy the requirements of CRR and SLR. D K M Bank Limited also interested to purchase treasury
bills (TBs) issued by RBI as and when it is issued for 91 days or 182 days or 364 days. TBs are issued
in lots of minimum ` twenty-five thousand. The treasury bills are repaid at par on the expiry of their
tenor at the office of the Reserve Bank of India, Mumbai. For treasury bills, the day count is taken as
364 days for a year. After considering all the things, D K M Bank Limited invested in Treasury Bills.
D K M Limited have to maintain a certain portion of their deposits in the form of liquid assets like cash,
gold and non-mortgage securities etc. The current CRR and SLR rate are 3% and 18% respectively.
ABC LIMITED arranged one seminar for the directors, employees and their families who are 55 years
or above to give information about the reverse mortgage scheme of bank. In that seminar, following
points have been discussed:

− A reverse mortgage is a loan available to homeowners, 60 year or older, that allows them to convert
part of the equity in their homes into cash.

− The payout is generally for a fixed term of 15-20 years, after which the borrower or legal heirs (on
death) can release the house by either repaying the loan or the company settles

the amount by selling the house. Any excess in the process is paid to borrower or legal heirs as
the case may be.
− Interest rate on these loans is usually in the range of 2.75-3% above the
base rate.
− The main risks associated with Reverse Mortgage for lenders are - If the
person lives for longer life, then it is quite difficult to source long term funds
to match with asset’s value, Drop in the value of assets, Interest Rate Risk,
Legal risk etc.
Reasons for failure of Reverse Mortgage to take off are - Tendency of Indians
− to treat
their property as family heritage, love and respect from their kins, no guarantee of lifetime
income, if someone who sustained the entire term of say, 20 years, he runs the risk of losing
the house if he is not able to repay the loan etc.

© The Institute of Chartered Accountants of India

 I. Multiple Choice Questions
1. ABC limited exports goods worth USD 100,000 to Singapore and payment is due on 150th day
from
the date of export. What type of risk this transaction faces?

(a) Transaction Risk.

(b) Economic Risk.

(c) (a) and (b) both.

(d) None of the above.

2. For an innovative product, it can be assumed for its inventory and receivable that

(a) Inventory level may go up but Receivable level may not go up.

(b) Inventory level may go up and Receivable level may also go up.

(c) Inventory level may not go up but Receivable level go up.

(d) Inventory level may not go up and Receivable level may also not go up.

3. D K M Bank Limited has to keep statutory liquidity of ` 1950 Crores to fulfil the RBI Requirement
of SLR. It has gold worth ` 700 Crores, Mortgage tax free bonds worth ` 410 Crores, Other tax
free bonds issued by government of ` 350 Crores and Tax free bonds of ` 150 Crores issued by
ABC Limited. Now how much cash or other liquid asset required by D K M Bank Limited to fulfill
the statutory liquidity requirements of RBI?

(a) ` 490 Crores.

(b) ` 900 Crores.

(c) ` 750 Crores. (d) ` 690 Crores.

4. RBI issued treasury bills for 182 days at a discount of 2.5%. The face value is ` 100. D K M
Bank Limited purchased it for the minimum amount prescribed for treasury bill. Also RBI repaid
it on time. Calculate the yield for the same.

(a) 5.1282

(b) 1.2785

(c) 1.2500

(d) 5.0000

5. Mr. and Mrs. Been has got one shop in a posh area of Chennai. They want money in monthly
installment from bank under reverse mortgage scheme. Value of that property is ` 39 lakhs.
What will be the monthly maximum amount that they can get from the bank under reverse
mortgage.

(a) ` 50,000

(b) `0

(c) 60-75% of ` 50,000

© The Institute of Chartered Accountants of India

 (d) None of the above.

ANSWERS TO CASE STUDY 9

I. Answers to Multiple Choice Questions
1. (c)
2. (a)
3. (b)
4. (a)
5. (b)

CASE STUDY 10
Sambhavna Ltd is an investment company that “pools” money from shareholders and invests it in the
appropriate security instruments and multiply investment money. It is comparatively new in its field of
operation. The Chief Finance Officer (CFO) of the company, Mr. Vikrant wants to invest money from
the shareholders in mutual funds. However, the Chief Executive Officer (CEO) of the company, Mr.
Saurabh has reservations about the move as he is not very much aware of the various intricacies of
mutual funds. The CFO of the company convinced him about the benefits of investing in mutual funds.
Mr. Vikrant apprised the CEO about a relatively new phenomenon in the mutual fund arena which is
laddering. Laddering means putting the money in bonds with varying maturity dates. It helps to curtail
the interest rate risk. It also affords linking investments with specific goals based on corresponding
horizons.
He further highlighted that the current generation of target maturity bond funds consists of portfolios
which are of very high credit quality. The reason is that they invest in government or AAA rated PSU
bonds as well as state development loans. Therefore, the default risk is negligible. As can be
understood from the name itself, target maturity debt funds come up with a defined maturity like a
traditional bank fixed deposit. Also, since they are mostly in the form of index funds and ETFs, these
give better liquidity over individual bonds and have very low expenses. So, all these factors make for
a perfect recipe for laddering.
Sometime ago formation of such a bond ladder was not an easy task. The introduction of multiple
target maturity funds in recent years opened up this possibility. As the name suggests, target maturity
debt funds come with a defined maturity like a traditional bank fixed deposit. This is unlike typical
bond funds with an open-ended structure.
This don’t yield predictable returns. Also, since the maturity period is defined in target maturity bond
funds, the returns are more or less certain if one stays invested till the funds’ maturity. The fund
manager buys those instruments that match the tenure of the fund, and holds them till maturity. Any
incremental bond purchases are also aligned with the residential maturity of the fund.
For example, there are now bond funds with maturities ranging from the year 2023 to 2032. By
launching its most recent tranche, the Bharat Bond ETF itself has investors covered for maturities of
2023, 2025, 2030, 2031 and 2032. So, with the starting of this new Bharat Bond ETF, there are five
different maturities on the yield curve which will enable the investors to choose the right maturity
according to their needs.
Also, there are other multiple target maturity bond funds which meets the needs of other maturity
buckets. For example, Nippon India ETF Nifty CPSE Bond Plus SDL 2024 matures three years from
now. And, those which wants their invested money back five years from now can invest in Axis AAA
Bond Plus SDL 2026 or Nippon Ind ETF Nifty SDL 2026 or Edelweiss Nifty PSU Bond Plus SDL 2026
Index Fund. Further, IDFC Gilt 2027 Index Fund and IDFC Gilt 2028 Index Fund have investors

© The Institute of Chartered Accountants of India

 covered for 2027 and 2028. The yield in these funds are generally from 4.75% at shorter tenures to
6.84% for longer tenures. Some of the target maturity bond funds of varying maturity are shown in
the following table:

AUM (Rs. Current

Fund Maturity In crores) YTM
Bharat Bond ETF April 2023 2023 4201 4.7
Nippon India ETF Nifty CPSE Bond Plus 2024 1735 5.35
SDL – 2024
Bharat Bond ETF April 2025 2025 9169 5.56
ABSL SDL Plus PSU Bond Sep 26 60:40 2026 929 5.98
Axis AAA Bond Plus SDL ETF - 2026 2026 442 5.87
Edelweiss NIFTY PSU Bond Plus SDL 2026 3612 6
2026
Nippon India ETF Nifty CPSE SDL - 2026 2026 3276 6.04
Edelweiss NIFTY PSU Bond Plus SDL 2027 816 6.31
Index 2027
ICICI Pru PSU Bond Plus SDL 40:60 Sep 2027 630 6.26
2027
IDFC Gilt 2027 Index Fund 2027 1377 5.97
IDFC Gilt 2028 Index Fund 2028 429 6.12
Bharat Bond ETF April 2030 2030 12517 6.8
Bharat Bond ETF April 2031 2031 10484 6.84
Bharat Bond ETF April 2032 2032 NA NA
Source: Value Research
Furthermore, several other funds targeting different maturities are also in the stand by. Effectively,
investors can now build a ladder of target maturity bond funds with yearly rungs – so that portion of
the portfolio will mature each year. Else, maturities to match the time horizon for their specific cash
needs. For instance, if one has cash needs 3, 5 and 10 years from now, one can split his capital
across three target maturity funds with matching tenures.
Also, if at the time of maturity, cash is not particularly required, investors can reinvest the amount
received from these maturing funds into a new fund at next part of the ladder. However, it is
recommended to hold on to these bonds till maturity to avoid interest rate linked mark-to-market
volatility.
I. Multiple Choice Questions
1. Which among the following is not true?
(a) Liquid funds come under the money market funds
(b) A mutual fund located in India to raise money globally for investing in India is an
international fund.
(c) In flexicap funds, minimum investment in equity must be 65% of the total investment.
(d) A dividend yield fund invests in shares of companies having high dividend yields.

2. Which among the following is true?

© The Institute of Chartered Accountants of India

 (a) The expense ratio in case of Index Funds is lower than that of Exchange Traded Funds.
(b) Index funds can be traded just like stocks.
(c) Demat account is required in case of Exchange Traded Funds.
(d) Index funds are active funds while Exchange Traded Funds are passive funds.
3. In case of close ended funds, the expense ratio shall not exceed ……….
(a) 1%
(b) 1.25 % (c) 2 %
(d) 2.25 %
4. The expense ratio does not include___________for trading the portfolio.
(a) brokerage costs
(b) advisory fees
(c) travel costs
(d) consultancy fees
5. Higher the tracking error higher is the _________ of the fund.
(a) risk profile
(b) liquidity
(c) illiquidity
(d) return

ANSWERS TO CASE STUDY 10

I. Answers to Multiple Choice Questions

1. (b)
2. (c)

3. (b)

4. (a)

5. (a)

CASE STUDY 11

XYZ Mutual Fund has been constituted as a trust on December 27, 2019 in accordance with the
provisions of the Indian Trusts Act, 1882. The Deed of Trust has been registered under the Indian

© The Institute of Chartered Accountants of India

 Registration Act, 1908. The Mutual Fund was registered with SEBI on January 18, 2020. They
attribute their success thus far to their 3 founding principles:
Outside-in view – Communicate with customers in their language to assist them in taking the right
investment decision.
Long-term wealth creation – Encourage investors to create a long-term investment strategy and play
a critical role in their wealth management.
Long-term relationship – Build relationships beyond finances
XYZ Mutual Fund is a professionally managed investment fund that pools money from many investors
to purchase securities. Within a short span of time it becomes very popular amongst various investors.
It provides comprehensive suite of savings and investment products across asset classes, which
provide income and wealth creation opportunities to large retail and institutional customer.
The single most important factor that drives XYZ Mutual Fund is its belief to give the investors the
chance to profitably invest in the financial market, without constantly worrying about the market
swings. To realize this belief, XYZ Mutual Fund has set up the infrastructure required to conduct all
the fundamental research and back it up with effective analysis. Their strong emphasis on managing
and controlling portfolio risk avoids chasing the latest "fads" and trends.
ABC Ltd. has entrusted a sum of ` 10 Lakh as the initial contribution towards the corpus of the Mutual
Fund. PQR limited looks after the operation and investment of Mutual Fund. PQR limited may
undertake any other business activities including activities in the nature of management and advisory
services to offshore funds, financial consultancy and exchange of research on commercial basis etc.,
subject to receipt of necessary regulatory approvals. In accordance with SEBI (Mutual Funds)
Regulations, 1996, activities of PQR Ltd. are reviewed by CID Ltd. The Board of Directors of the PQR
Ltd. and CID Ltd. comprises eminent personalities with varied experience.
It has launched its new scheme recently. This scheme mainly invest (appx. 85%) its funds in equity
& equity related instruments of top 100 company in terms of full market capitalization. This scheme
has 1,05,00,000 outstanding units. NAV published on February 18, 2020 is ` 15 per unit. On February
19, 2020, XYZ mutual fund has sold investments worth costing ` 2,50,00,000 at ` 2,75,00,000. On
the same day, XYZ Mutual Fund purchased investments worth ` 1,50,00,000 whose market value at
the end of day is ` 1,51,15,000. Market value of investment sold was ` 2,74,50,000 on February 18,
2020. Current Assets and Current Liability
11.2

on February 18, 2020 was ` 85,00,000 and ` 10,00,000 respectively. Market value of other investment
as on February 19, 2020 is increased by 1% as compared to February 18, 2020.
XYZ mutual fund is willing to buy back ("redeem") their shares from their investor at the net asset
value (NAV) computed that day based upon the prices of the securities owned by the fund. The cut-
off timing for the redemption is 3:00 PM. The average expenses ratio (including management fees)
amounted to 2.65% which also included GST.
I. Multiple Choice Questions
1. Which is not the type of Mutual Fund on the basis of “Structure”.
(a) Equity Schemes
(b) Debt Schemes
(c) Open Ended Funds

© The Institute of Chartered Accountants of India

 (d) and b) both
2. Minimum Networth requirement of AMC as per SEBI (Mutual Funds) Regulations, 1996?
(a) ` 50 Million
(b) ` 50 Billion
(c) ` 50 lakhs
(d) ` 50 Crore
3. Which ratio measures excess return generated per unit of risk in the portfolio.
(a) Sharpe Ratio
(b) Treynor Ratio
(c) Jensen’s Alpha
(d) Sortino Ratio
4. CAMEL stands for -
(a) Cost, Assets, Management, Earning and Liquidity
(b) Cost, Assets, Managers, Earning and Liquidity
(c) Cost, Assurance, Managers, Earning and Liquidity
(d) Capital, Assets, Management, Earning and Liquidity
5. Liquid fund invests in debt and money market securities with maturity:
(a) Upto 1 day
(b) Upto 10 days
CASE STUDIES 11.3

(c) Upto 91 days

(d) Upto 100 days

ANSWERS TO CASE STUDY 11

I. Answers to Multiple Choice Questions

1. (d)
2. (d)

3. (b)

4. (d)

© The Institute of Chartered Accountants of India

 5. (c)

CASE STUDY 12

Fiduciary Asset Management Company launched two new open ended schemes under the flag ship
fund Fiduciary Mutual Fund. The extract of the fund information document is laid below.
Name of the Scheme Fiduciary Equity Growth Fund Fiduciary Active Bond Fund

Issue size INR 100 crores INR 200 Crores

Theme Equity Debt

Plans (i) Growth (ii) Dividend Growth

Entry Load Nil Nil

Exit Load Nil Nil

Expense Ratio 2% 1.75%

Switch option Yes Not Applicable

Face Value of Unit ` 10/- ` 10/-

Risk Moderately High Low

Trustee IBDI Trusteeship Services

Principal Stock Exchange National Stock exchange

Registrar and Transfer Agent Zintech Investment Services Pvt Ltd

Asset Management Company Fiduciary Asset Management Company

Fund Manager Equity: Pankaj Agarwal

Debt: Sudhir Shah

Banking Partners ICICI

HDFC
Axis
Disclaimer: Please refer to the Scheme Information Document (SID) for the detailed asset allocation
and investment strategy. Portfolio allocation is based on prevailing market conditions and is subject
to change depending on funds manager’s view of the equity markets. Fiduciary Asset Management
Company is not liable for loss or shortfall resulting from the operation of the schemes.
Long Term Capital gains on equity-oriented fund are taxed at 10% on gains greater than ` 1 lakh
without indexation subject to payment of STT.

© The Institute of Chartered Accountants of India

 Mutual Fund Investments are subject to market risks, read all the scheme related documents
carefully. Mutual Fund does not assure a profit or guarantee protection against loss in a declining
market.

The Prospectus mentioned above is not based on any judgments of the future return of the debt and
equity markets / sectors or of any individual security and should not be construed as promise on
minimum returns and/or safeguard of capital. Information gathered and material used for the
prospectus is believed to be from reliable sources. Fiduciary Asset Management Company however
does not warrant the accuracy, reasonableness and/or completeness of any such information. The
illustration do not purport to represent the performance of any security or investments. Nothing
contained herein shall amount to an offer, invitation, advertisement, promotion or sponsor of any
product or services. In view of individual nature of tax consequences, each investor is advised to
consult his/her own professional tax advisor before taking any investment decision. Lastly, Mutual
Fund does not assure profits.
The launch was successful, and both the schemes received positive response from the investors.
The investor funds was duly received in the bank accounts. Leading market brokers were empanelled
for market investment activity. ICICI Securities was appointed as custodian for holding the scheme
portfolio. Fund accounting was outsourced to Intelenet Global Services.
I. Multiple Choice Questions
1. Mr Rajiv enrolled for a SIP saving programme out of his monthly savings for an amount of `
5000/- month at the beginning of every month in a growth scheme of a leading mutual fund.
The NAV of the scheme at the beginning of each month is given as below
:
Month NAV in INR at the beginning of
the month

1 10

2 10.22

3 10.35

4 10.56

5 11.1

NAV at the end of the 5th month is ` 11.15

What is the value of the scheme holding of Mr. Rajiv at the end of five months under this SIP
saving plan.
(a) ` 25,000.00 (b) ` 30,536.65

(c) ` 26,718.34

(d) ` 22,324.44
2. In case of (1) above, what is the annualised rate of return at the end of the fifth month on the
scheme unit holdings of Mr. Rajiv assuming that an investment of INR 25000/- was made at the
beginning of the first month instead of monthly SIP of INR 5000/-

© The Institute of Chartered Accountants of India

 (a) 27.6%

(b) 25.4%

(c) 11.5%

(d) 22.8%
3. What is the minimum lock in period for an open ended equity linked saving scheme (ELSS) with
tax benefit?
(a) Six Months

(b) One Year

(c) Three Years

(d) Five Years

4. For which of the following funds, the NAV is published on Sunday as well?

(a) Equity Fund

(b) Debt Fund

(c) Index Fund

(d) Liquid Fund

5. Mr. Khanna is evaluating investment in equity scheme of a mutual fund and want to evaluate
his choice based on the risk reward ratio offered by various schemes available in market.
Four schemes as indicated below were proposed by his investment advisor:

Magnum Active India Middleton

Advantage
Scheme Growth Growth Opportunity
India Fund
Fund Fund Fund
Annual return 15 12.5 13 14
(%)
Beta 1.2 0.8 0.9 1.1
The equity market gave a return on 13.5%. Currently sovereign yields are running at 7%.

Determine which scheme offers the best Alpha (Jenson Alpha) for Mr. Khanna

(a) Magnum Growth Fund

(b) Active India Growth Fund

(c) Middleton Opportunity Fund

(d) Advantage India Fund

ANSWERS TO CASE STUDY 12

I. Answers to Multiple Choice Questions

© The Institute of Chartered Accountants of India

 1. (c) The unit holding from the amount invested every month at the respective NAV can be
computed as below
Month Investment in INR (2) NAV No of Units (4) [2
(1) (3) /3]

1 5,000 10 500.00

2 5,000 10.22 489.24

3 5,000 10.35 483.09

4 5,000 10.56 473.48

5 5,000 11.1 450.45

Total 25,000 2,396.26

Value of the scheme holding = No of units x closing NAV

= 2,396.26 x 11.15
= 26,718.30
2. (a) Change in NAV from the date of investment to the end of the fifth month = ` 1.15
(11.15-10).
Return for 5 months = 1.15/10
= 11.5%
Annualised return = Return for 5 months x 12/5
= 11.5% x 12/5 = 27.6%
3. (c)
4. (d)
5. (b) Jenson’s Alpha = Actual Return – Expected Return
Expected Return = Risk Free Return – Beta (Market Return-Risk Free Return)
The expected return for each of the fund and resultant jenson’s alpha is calculated as
below:
Scheme Magnum Active Middleton Advantage
Growth India Opportunity India Fund
Fund Growth Fund
Fund
Annual
15 12.5 13 14
return

Beta 1.2 0.8 0.9 1.1

Market
13.5 13.5 13.5 13.5
Return
Risk Free
7 7 7 7
Return

© The Institute of Chartered Accountants of India

 Expected
14.8 12.2 12.85 14.15
Return
Jenson’s 0.2 0.3 0.15 -0.15
Alpha
Thus, Active Growth Fund has the best alpha.

CASE STUDY 13

Three friends, Aman, Amar and Armaan, were meeting after a long time, enjoying coffee in Cafe
Coffee Day. Aman is an IT consultant working with Tata Consultancy Services. Amar is a business
man and runs a firm engaged in manufacturing and sale of toys. Armaan is a finance professional
working with an investment firm.
The casual talk over coffee suddenly turned into discussion on mutual funds. Both Aman and Amar
were looking forward for investment in mutual funds. Being inclined to equity schemes, Amar has
been constantly gathering knowledge about Mid-cap funds and ELSS schemes while Aman was
inclined to hybrid schemes.
Aman: "Amar, which category of scheme do you prefer?"
Amar: "I prefer equity schemes. They deliver highest returns. I am particularly interested in Midcap
Funds and ELSS schemes. As far as I know, Mid-Cap funds are open ended schemes and invests
55% or more of total assets in stocks of companies ranked between 50 and 100 by full market
capitalisation. On the other hand, ELSS schemes offer tax benefit with a lock-in period of 5 years.
And you ??"
Aman : "To me, hybrid schemes are better. They invest equally in equity and debt instruments.
A good example is Balanced Hybrid Fund. It allows arbitrage too. Amar, why don't you consider
Equity Savings Scheme ? It is similar to ELSS Scheme. Armaan, which scheme do you like?"
Armaan: '"Well, there is no such perfect scheme. To select a particular mutual fund, we need to
consider various factors such as past performance, PE ratio, expense ratio, size and age of fund etc."
Aman: "Fair enough. Armaan, I need some information. I heard in news about Kotak Nifty ETF. What
exactly is an ETF? I heard Infrastructure Investment Trusts are like ETF in some sense. "
Armaan: "An ETF stands for Exchange Traded Fund. It is a basket of securities that reflects the
composition of an Index, like Nifty 50. Investors can trade ETFs throughout the trading day. Well
Infrastructure Investment Trusts, INVITs as they are called, are like ETFin some sense. But they are
entirely a different concept...."
Armaan received a call from office in mid of discussion and had to leave immediately for an urgent
work in office. The two friends continued their discussion.
Amar: "How about closed ended mutual fund schemes"?
Aman: "Frankly, I don't know much about them. From hearsay, I know that unlike open ended
schemes, they do not imply corpus size volatility for AMC."
Amar: "Hmmm.. "

© The Institute of Chartered Accountants of India

 Aman: "Hey, I just recall, the company where my wife Ananya works, Techvision has issued
Commercial Paper and it is currently open for subscription. Do you think I should invest in it?"
Amar: "Yes, you should. I too had invested before in a Commercial Paper few years ago. Why? Firstly,
Commercial paper is freely negotiable just like a commercial bill. You know, I am in a business line.
Daily, we have many transactions on credit. We draw bills of exchange and get them discounted.
Similarly, you can endorse and deliver CP. Secondly, you can match your cash flow requirements.
CP are generally issued for periods ranging from 15 days to one year. Only problem is that issuer has
to pay higher stamp duty on CP if issued for a shorter period. Thirdly, CP are issued by high rated
corporate entities and are secured. They are therefore safe investments. Lastly, the investment is
quite liquid."
Aman: "That's sounds convincing."
While the two friends were still discussing, Armaan was called upon by his manager, Raman.
Raman: "Armaan, we have been approached by Mr. Ramen. Mr Ramen, if you remember, aged 52
years, is our client with investment on mutual funds side. He is now looking for Government
securities in money market that offer inflation linked returns. You contact Mr Ramen and advise him
about such securities."
Armaan: "Sure Sir."
Raman: "Also, prepare a presentation on money market mutual funds. Refer RBI site for regulatory
framework. We need this presentation for technical learning session."
Armaan: " Ok Sir, In case of any problem, I will approach you Based on above,
answer the following:
I. Multiple Choice Questions
1. Based on advice from Armaan, Aman collected data for two mid-cap mutual funds ABC and
XYZ from their annual reports for the financial year ended March 31, 2020:
Expenses ABC Fund XYZ Fund

Management fee 1,50,00,000 1,60,00,000

Trustee fees 12,00,000 10,00,000

GST on management fee and Trustee 29,16,000 30,60,000

fees
Custodian service charges 18,00,000 21,00,000

Registrar Service Charges 6,00,000 5,50,000

Auditor's remuneration 6,74,485 7,86,453

Brokerage expense 40,97,740 38,75,497

Commission to distributors 82,14,723 75,64,219

Other operating expenses 2,38,564 3,92,137

Total 3,47,41,512 3,53,28,306

Net assets ABC Fund XYZ Fund

© The Institute of Chartered Accountants of India

 At 01/04/2019 80,42,10,196 81,50,90,257

At 31/03/2020 1,01,64,96,712 1,01,74,36,911

Expense ratio of a similar fund DEF is 3.33

In the light of above, which statement is correct in terms of expense ratio?

(a) If ABC had assets equal to XYZ, ABC would have underperformed XYZ.

(b) If XYZ had assets equal to ABC, XYZ would have outperformed ABC.

(c) DEF outperforms both ABC and XYZ.

(d) All of the above.

2. Continuing his evaluation, Aman computed following statistical ratios to look at point to point
returns:
Ratio ABC Fund XYZ Fund

Sharpe Ratio 0.54 0.58

Sortino Ratio 0.81 0.42

Jensen Alpha 0.40 -0.04

Annualised Return 7.50 7.36

Risk free rate is 5%. Market return is 8%. Which of the following conclusions by Aman is not
correct?
(a) Negative volatility of XYZ returns exceeds its total volatility.
(b) If the annualised return of both ABC and XYZ is equal, total return variability is higher in
case of ABC.
(c) ABC fund is more suitable for investment in terms of Treynor ratio.

(d) Systematic risk is higher in case of ABC fund.

3. Which of the following statements of Amar as to Commercial Paper is incorrect?

(a) Statement 1.

(b) Statement 2.
(c) Statement 3. (d) Statement 4.
4. Aman was curious to know more about ETF and INVITs. He dropped a message to Armaan
seeking information about them. Armaan replied on email. Based on his reply, Aman called
upon an AMFI Agent and asked to suggest ETFs and INVITs for investment. Which statements
by AMFI agent is correct?
(a) "There are many options available for ETFs. They allow investors to have exposure to
index similar to futures. You can directly buy ETF units on NSE F&O Segment."

© The Institute of Chartered Accountants of India

 (b) "You can invest in INVITs provided you meet the minimum investment amount
requirements of SEBI. Why don't you invest in REITs? Just like INVITs, REITs invest in
infrastructure assets."
(c) "The performance of PSR Realty Fund has been really impressive.
PSR Realty fund is a real estate mutual fund. It invests in securities of companies having
investments in properties. This way, it is similar to a REIT or INVIT. "
(d) If you looking for ETF, you can think considering closed ended mutual funds also.
Similar to ETF, Closed ended funds trade on exchange intraday.
5. In his presentation, Armaan made following statements about money market mutual funds.
Which of the following statements, do you think, will be only be accepted by his manager,
Raman?
(a) Money Market Mutual Funds are closed ended debt schemes set up specifically for the
purpose of mobilisation of short-term funds. The resources mobilised by MMMFs are
invested exclusively in various money market instruments having maturity upto 1 year
such as Treasury bills, Commercial Paper, call money, etc.
(b) Money market mutual fund provides principal preservation while yielding a high return.
They are generally the safest and most secure of mutual fund investments. Akin to a high-
yield bank account, they are entirely risk free.
(c) Money market mutual funds offer the advantage of high liquidity, expertise of a
professional fund manager, access to capital markets and diversification of short term
assets.
(d) Money market mutual funds set up by banks are subject to reserve requirements as these
funds are invested in money market instruments

ANSWERS TO CASE STUDY 13

I. Answers to Multiple Choice Questions

1. (c) The Expense Ratio relates to the extent of assets used to run the Mutual Fund. It is
inclusive of travel cost, management consultancy and advisory fees. It however excludes
brokerage expenses for trading.
Accordingly expense ratio for ABC and XYZ can be computed as follows:
ABC Fund XYZ Fund

Total Expenses 3,47,41,512 3,53,28,306

Less: Brokerage expenses 40,97,740 38,75,497

Expenses for expense ratio (A) 3,06,43,772 3,14,52,809

Net assets as at 01/04/2019 (a) 80,42,10,196 81,50,90,257

Net assets as at 31/03/2020 (b) 1,01,64,96,712 1,01,74,36,911

© The Institute of Chartered Accountants of India

 Average Value of assets during 91,03,53,454 91,62,63,584
the period (B)=(a+b)/2
Expense ratio (A/B) 3.3661 3.4327
ABC has outperformed XYZ as its expense ratio is lower. However, expense ratio of DEF
is 3.32 which is lower than both ABC and XYZ. Hence DEF has outperformed both ABC
and XYZ.
If ABC had assets equal to XYZ, expense ratio of ABC would have been 3.34 and it would
have still outperformed XYZ. Hence statement a is incorrect
If XYZ had assets equal to ABC, expense ratio of XYZ would have 3.455 and it would
have still underperformed ABC. Hence statement b is incorrect.
Statement d is incorrect as both a and b are incorrect.

2. (d) Statement a is correct.

Sharpe ratio is computed using standard deviation which is a measure of total volatility.
It is equal to :
Annualised Return - Risk free return
Sharpe Ratio =
Annualised Standard Deviation
Sortino Ratio uses downside deviation which is a measure of negative volatility. It is
equal to :
Annualised Return - Risk free return
Sortino Ratio =
Downside Deviation
The numerator in both Sharpe and Sortino Ratio is same. Only denominator differs.
Since Sortino Ratio of XYZ (0.42) is less than Sharpe Ratio (0.58), numerator being equal,
it implies that denominator is higher in case of Sortino Ratio which is nothing but negative
volatility. Hence, Negative volatility of XYZ returns exceeds its total volatility.
Statement b is correct. If the annualised return of both ABC and XYZ is equal, the
numerator becomes equal. Higher denominator leads to lower Sharpe Ratio for ABC.
Higher denominator is nothing but higher standard deviation which is a measure of total
return variability.
Statement c is correct. Treynor Ratio measures excess return generated per unit of
systematic risk in the portfolio. It is similar to Sharpe ratio except that denominator is
portfolio beta which is a measure of systematic risk.
Annualised Return - Risk free return
Treynor Ratio =
Portfolio Beta

© The Institute of Chartered Accountants of India

 We need to use Jensen Alpha statistics to compute fund beta. Jensen Alpha is the
difference between a fund’s actual return and those that could have been made on a
benchmark portfolio with the same risk- i.e. beta.
Therefore Jensen Alpha = Return of Portfolio - Expected Return where
Expected return = Risk Free Return + Portfolio Beta (Market Return – Risk Free Return)
Accordingly,
ABC Fund XYZ Fund

Risk free Rate (given) (A) 5.00 5.00

Market return (given) (B) 8.00 8.00

Excess Return (C) = (B-A) 3.00 3.00

Jensen Alpha (given) (D) 0.40 -0.04

Annualised Return (given) (E) 7.50 7.36

Expected Return (F)=(E-D) 7.10 7.40

Fund Beta (G)=( F - A)/C 0.70 0.80

Treynor Ratio (E-A)/G 3.57 2.95

Since the Treynor Ratio of ABC Fund is higher, ABC fund is more suitable for investment
in terms of Treynor ratio.
Statement d is incorrect. Systematic risk is measured by portfolio beta. Beta of ABC
fund (0.7) is lower than XYZ fund (0.8), hence systematic risk is lower in case of ABC
fund as compared to XYZ.
3. (c) Statement 3 is incorrect because Commercial Paper are unsecured, though issued by high
rated corporate entities.
4. (d) Statement a is incorrect. Though ETFs allow investors to have exposure to index similar
to futures, they trade on cash market of NSE and one can buy ETF units on NSE Capital
segment.
Statement b is incorrect. It is true that an individual can invest in INVITs provided the
minimum investment amount requirements of SEBI are met. However, REITs invest in
revenue generating real estate assets and not infrastructure assets."
Statement c is incorrect. REIT or INVIT do not invest in securities of companies.
Rather, they invest in revenue generating real estate assets and or infrastructure assets
directly or indirectly through a Special Purpose Vehicle (SPV).
Statement d is correct. It is true that both ETF and closed ended funds trade on
exchange intraday.
5. (d) Statement a is incorrect. Money Market Mutual Funds are not closed ended debt schemes.
Rather they are open ended schemes.

© The Institute of Chartered Accountants of India

 Statement b is incorrect. Its true that money market mutual fund provides principal
preservation but they yield a modest return. They are very much safer but they are not
entirely risk free.

Statement c is incorrect. Money market mutual funds offer the advantage of access to
money markets and not capital markets.

CASE STUDY 14

Aditya is a credit rating analyst with FAIR Ratings, a reputed credit rating agency in India. FAIR
Ratings not only provides grading and rating services but also conducts analytical studies and surveys
on the economy, money market and corporate performances. The manager of Aditya asked Aditya to
study ABC India Limited and gather relevant information.
ABC India Limited is an Indian banking and financial services company headquartered in Mumbai. As
of March 31, 2019, the Bank’s distribution network was at 500 branches across 264 cities.
Business
The bank is divided into two divisions:
The Consumer Bank
This division is retail-focused and the clients served are individuals and small businesses. The product
offered by this division include advances, deposits, mortgages, personal loans, wealth management
services, trade credit, business finance and cash management services. The Bank recorded 23%
growth in the retail deposits in the previous year.
The Wholesale Bank
The wholesale bank’s clients are large corporations, government and financial institutions. The
products and services include working capital and term Loans as well as trade credit, cash
management, supply chain financing, foreign exchange, and investment banking services. The
Wholesale Banking business recorded a healthy 29% percent growth.
Risk Architecture of the bank
The key risks that the Bank is broadly exposed to in the course of its business are Credit Risk, Liquidity
Risk, Market Risk, and Operational Risk. The Board of Directors assumes the oversight responsibility
for all the risks assumed by the Bank and specific Board Committees have been constituted to
facilitate focussed risk management. The Board has in place approved Risk Strategy and Policies
whose implementation is supervised by the Risk Management Committee. The committee periodically
reviews the risk levels and ensures timely action for the risk identified.
Credit Risk
Credit Risk is defined as the possibility of losses associated with diminution in the credit quality of
borrowers or counter parties. Losses stem from outright default or reduction in portfolio value. The
Bank has sufficient policies, procedures and systems for managing credit risk in

both its retail and wholesale businesses.

Given the granularity of individual exposures, risk management in Retail business is largely on a
portfolio basis across various products and customer segments. The factors considered while
sanctioning retail loans include income, demographics, credit history of the borrower and the tenure
of the loan.

© The Institute of Chartered Accountants of India

 Risk in Wholesale business is managed on an individual as well as portfolio basis. Credit risk is
managed by capping exposures on the basis of borrower group, industry, credit rating grades and
country amongst others. This is backed by portfolio diversification, stringent credit approval processes
and periodic post-disbursement monitoring and remedial measures.
Market and Liquidity risk
Market risk stems from the movement in interest rates, foreign exchange rates, credit spreads and
equity prices. Liquidity Risk is the risk that a bank may not be able to meet its short term financial
obligations due to an asset– liability mismatch or interest rate fluctuations. The bank is structurally
exposed to market risks and liquidity risks because of statutory liquidity ratio requirement as well as
capital and liquidity requirements. These risks are managed through a well-defined Board approved
Investment Policy, Asset Liability Management Policy and Market Risk Policy. The risk measures
include position limits, gap limits, tenor restrictions and sensitivity limits.
Operational Risk
This is the risk of loss resulting from inadequate or failed internal processes, people and systems or
from external events. This could include fraud or other misconduct by employees or outsiders,
unauthorised transactions by employees and third parties, misreporting or non-reporting with respect
to statutory, legal or regulatory reporting and disclosure obligations, operational errors including
clerical and record keeping and system failures. To manage operational risks, the Bank has put in
place a system of internal controls, systems and procedures to monitor transactions, key back-up
procedures and undertakes regular contingency planning. The governance and framework for
managing operational risks is defined in the Operational Risk Management Policy.
Recent developments
1. The bank announced the launch of its first Collateralized Loan Obligation.
The bank pooled 80% of its institutional loan and assigned all the future receivables from them
to a SPV as collateral. The institutional loans, represent ` 450 crores bank loans to 10
companies from various sectors with existing track record of repayment and average residual
maturity of about 3 years. The SPV here is close-ended debt scheme under the PQR Securities
Fund, a mutual fund registered with SEBI. The Scheme offers three classes of units:

• The Class A units (senior tranche) representing 60% of collateral, being offered for
investment are rated AAA(SO) by CARE. The Class A units will be offered to institutional
investors through the book-building process.
• The Class B units (Mezzanine tranche) representing 25%, are rated A+ (SO) by CARE
and would be subscribed by the XYZ Bank subject to regulatory approvals. Class B is
subordinate to Class A.

• The Class C units (equity tranche) representing 15%, unrated would be subscribed by
PQR. Class C is subordinate to both Class A and Class B.

• Under the Scheme, each unit will have a face value of ` 50 lacs with a minimum investment
of ` 2 crore.
2. The bank has a 10-year, unsecured, 8% bond of DEF Limited with ` 10 crores par value. Last
year, the credit rating of the bond was downgraded to BB. Discussion is going on between ABC
Bank Limited and MNC Bank to buy a credit default swap.
3. The bank is considering purchasing a bond issued by Government of Nigeria.
Aditya prepared a report on his findings and mailed it to his manager. Next day, his manager
called a meeting to have a discussion with Aditya on his report.

© The Institute of Chartered Accountants of India

 I. Multiple Choice Questions
1. Aditya performed a financial analysis of ABC Bank Limited and few other banks using the

CAMEL framework. Banks were ranked as follows:

Bank C A M E L Average Rank
ABC Bank 1 2 2 1 2.5 1.7 1
Limited
JKL Bank 3 1 4 4 1 2.6 3
NGO Bank 2 4 1 3 2.5 2.5 2
TMG Bank 4 3 3 2 3 3 4
In the light of above, which statement is correct?
(a) ABC Bank scores highest in terms of Credit worthiness.
(b) JKL Bank scores lowest in Employment Level.
(c) NGO Bank scores par with ABC in Leverage.
(d) TMG Bank scores higher than NGO Bank in Asset quality.
2. Aditya noted that the CLO launched by ABC Limited is a form of Cashflow CDO. It differs from
a Synthetic CDO. Which statement is correct for unfunded synthetic CDO?
(a) Unfunded synthetic CDO comprises of Credit Linked Notes (CLN) only.
(b) Unfunded synthetic CDO comprises of Credit Default Swap (CDS) only.

(c) Unfunded synthetic CDO comprises partially Credit Default Swap and partially CLN.
(d) None of the above.
3. While studying the annual report, Aditya noted that the ABC bank has originated on an average
` 1500 crores of home loans last year.
Following are the details pertaining to one such home loan advanced by ABC Bank:

• Original Home Value ` 1.2 crore, Loan to Value 80%, Home Loan `96 lakhs

• Outstanding loan 90 lacs, Current home value ` 84 lacs,

• Probability of Default 50%.

The recovery rate and expected loss on home loan is:
(a) 87.5% and ` 6,00,000
(b) 70% and ` 3,00,000
(c) 93.33% and ` 3,00,000
(d) 100% and ` 12,00,000
4. Which of the following statement is correct with respect to Credit Default Swap (CDS) on 10
year unsecured 8% corporate bond of DEF Limited?
(a) In case a Credit Default Swap (CDS) is entered into, the cost of CDS will be lower.

© The Institute of Chartered Accountants of India

 (b) In case a Credit Default Swap (CDS) is entered into, it will be a naked CDS.
(c) In case a Credit Default Swap (CDS) is entered into, credit risk will be eliminated.
(d) In case a Credit Default Swap (CDS) is entered into, MNC Bank will make profit as long
as DEF does not default on the bond.
5. Which of the following statements by Aditya about country risk in purchasing bond from
Government of Nigeria is correct?
(a) The bond carry liquidity risk as the Nigerian government may fail to make timely payments
on the bond it issued or actually default on its bond obligations.
(b) The bond carry exchange risk as bonds are priced in local currency and country may
inflate their way out of debts by simply issuing more currency, making the debt less
valuable.
(c) The bond carry repricing risk as in case of distress, Nigerian government may renegotiate
terms of the bond resulting in new bond value.
(d) The bond carry transfer risk as in case of a political instability, change in regime
could affect how well an interim or new government may pay its debt.

ANSWERS TO CASE STUDY 14

I. Answers to Multiple Choice Questions

1. (d) CAMEL stands for Capital, Assets, Management, Earnings, Liquidity. Statement a is
incorrect because ABC Bank scores highest in terms of Capital adequacy and not credit
worthiness
Statement b is incorrect because JKL Bank scores lowest in Earnings and not
employment Level
Statement c is incorrect because NGO Bank scores par with ABC in Liquidity and not
Leverage.
2. (b) Statement a is incorrect because fully funded synthetic CDO comprises of CLN only
Statement c is incorrect because partially funded synthetic CDO comprises of CLN and
CDS.
3. (c) The calculation is as under:
Loan outstanding 90,00,000

Amount of exposure (loan to be written off) 90,00,000

Current Home Value 84,00,000
Recovery amount (home to be sold) 84,00,000
Recovery rate (Amount recovered/Loan 0.9333
outstanding*100)
Default Probability 0.50
Expected Loss (Default risk*Amount of Exposure*(1- 3,00,000
Recovery Rate)

© The Institute of Chartered Accountants of India

 4. (d) Statement a is incorrect. The cost of CDS that is the premium paid by the buyer has a
positive relationship with risk attached with bonds. In case of DEF corporate bond, since the

rating has been downgraded and the bond is unsecured, the credit risk is higher and hence, the
premium for CDS providing protection against default on such bond will be higher.
Statement b is incorrect. If an investor buys a CDS without being exposed to credit risk
of the underlying bond issuer, it is called “naked CDS”. In this case, ABC is exposed to
credit risk of DEF and hence the CDS purchased will not be a naked CDS.
Statement c is incorrect because by entering into CDS, credit risk is not eliminated but it
transfers from bond holder (CDS buyer) to CDS Seller. Statement d is correct. MNC will
receive periodic premium payments as long as DEF does not default during the period of
swap contract. If it defaults, MNC will pay ABC the stipulated amount and contract will be
terminated.
5. (b) Statement a is incorrect as failure by Nigerian Government to make timely payments on the
bond issued or actually default on its bond obligations is not liquidity risk but sovereign risk.
Statement c is incorrect because repricing risk is not a country risk but a market risk.
Statement d is incorrect because the risk mentioned is political risk and not transfer risk.
CASE STUDY 15

Venus Plc is an investment and trading company based in United Kingdom primarily owned by
Venture capitalists, Private Investors and Family offices. Venus is primarily focused on Debt market
across Latin America and Sub Saharan Africa. Venus recorded a corpus of USD 200 million (net of
provisions) as at the end of December 2020. The company primarily takes exposures in gilts of the
target investee country and gradually brings the corporate bond and commercial papers under their
investment umbrella.
The Investment team at Venus comprises of veteran Portfolio Managers and Traders with vast
experience in banking and investment space across global markets. Venus had planned to explore
Debt Markets in Asia and Eastern Europe. However, the outbreak of Covid-19 pandemic averted any
actual investment activity.
In the last Investment Board meeting of year 2020, Mr. Thomas Bridges, senior Portfolio Manager
and Head of Global Credit Trading appraised the Covid-19 situation across Investee countries and
target markets. Mr. Bridges pointed out that the recent arrival of the second wave across Europe with
advent of winter is worrisome however remarkable recovery rate in emerging economies throws a
new light of optimism. With the successful vaccines trials and roll out of vaccination program across
the globe a steep recovery in the economic activities across sectors is expected.
Mr. Bridges proposed to consider investment opportunities in Asia and laid down a plan to be taken
up in the beginning of 2021 after the team returns from year end holidays.
The plan consists of taking exposure in Sovereign bonds of target countries in Asia and gradually
diverse in Corporate Bond segment.
The overview of various countries presented in the plan was as follows:
Country S&P Moody’s Fitch Gsec yield Geo Political
(10 yr) Outlook

India BBB- Baa3 BBB- 5.93% Stable

© The Institute of Chartered Accountants of India

 Sri Lanka CCC+ Caa1 CCC 7.95% unstable

Bangladesh BB- Ba3 BB- 5.85% Stable

Pakistan B- B3 B- 10.1% unstable

The Board deliberated over the plan laid down by Mr. Bridges. After a detailed discussion on the risk
and rewards, geo political outlook, Regulatory constraints and Operational and Legal hurdles the
Board unanimously agreed to work on the plan to execute the investments in India in the first quarter
of 2021. The other countries were kept out of the purview due to unstable geo-political outlook and
undesirable ratings by leading rating agencies.
Member of Credit Trading team were put to task to research and analyze for potential investee
corporates in India in sectors with strong potential for Debt Investments for various horizon.
On 31 March 2021, the next Investment Board Team was held and after months of thorough analysis
and risk evaluation of the potential corporates in India, the Credit Trading team short listed below
target investees in India.

Local
Maturit Agency
Corporate Security Sector Coupon Yield y Rating ISIN
HOUSING AND
URBAN
DEVELOPMENT
CORPORATION
LIMITED SR F-
2020 4.78 LOA
28FB24 28-
HUDL FVRS10LAC Housing 4.78% 4.78% Feb-24 AAA INE031A08822
BHARAT
SANCHAR NIGAM
LIMITED SR I 6.79
LOA
23SP30 23-Sep-
BSNL FVRS10LAC Telecom 6.79% 6.84% 30 AAA INE103D08021
RELIANCE Energy
INDUSTRIES and
LIMITED SERIES H Materials
8.95
NCD 09NV28 09-
RIL FVRS10LAC 8.95% 6.35% Nov-28 AAA INE002A08542
NATIONAL
HIGHWAYS
AUTHORITY OF 15-
NHAI INDIA SR Infra 7.03% 6.99% Dec-40 AAA INE906B07IH3

© The Institute of Chartered Accountants of India

 VIII 7.03 BD
15DC40
FVRS10LAC
NTPC
LIMITED SR 72
5.45 BD 15OT25
FVRS10LAC 15-Oct-
NTPC LOAUPTO21DC20 Power 5.45% 5.38% 25 AAA INE733E08163
The Board appraised the team for their efforts and commended Mr. Bridges effort in lead running the
Asia proposal.
I. Multiple Choice Questions
1. When would Venus Plc receive the first coupon payment on their HUDL Bond and what would
be the amount of the Coupon?
(a) 28 Aug 2021; INR 47,407,123.29

(b) 28 Feb 2022; INR 95,600,000

(c) 28 Feb 2021; INR 47,407,123.29

(d) 28 Aug 2021; INR 39,287,671.23

2. Venus Plc has entered into a Credit Default Swap. Which of the following would Venus Plc
would not be able to achieve through Credit Default Swap.

(a) Hedging Default Risk

(b) Arbitrage

(c) Speculation

(d) Hedging Interest Rate Risk

3. When do the exchange traded Equity and Index Futures and Options contracts expire in India?

(a) Last working day of the month

(b) Two working days before the last working day of the month.

(c) Last working Thursday of the month.

(d) Last working Friday of the month.

4. Phantom Capital, an Equity trading house entered into 80 short future contracts of Nifty 50 at
11380 on 12th March 2020. The contract expired on last Thursday of March and the closing of
Nifty 50 index was 11320.

Determine the Profit/(Loss) on settlement for Phantom. (Ignore transaction cost. Nifty Future
Lot size: 75)

© The Institute of Chartered Accountants of India

 (a) Loss of INR 360,000

(b) Profit if INR 4,800

(c) Profit of INR 4,500

(d) Profit of INR 360,000

5. Mr. Suthar is a professional derivative trader who has expertise in Option trading strategies.
When market witnesses high volatility due to impeding news event like elections results, RBI
Monetary policy etc., he writes (Sell) Options on NSE Nifty 50 Index. He speculates that the
actual market volatility would subside after the new event. There was a speculation in the
market about Finance ministry making important announcement about FPI participation in the
equity markets. The Nifty 50 index was trading at 12750 at the beginning of the month. Taking
advantage of the high volatility,
Mr. Suthar sold 30 lots of current month Call at strike price of 12750 at INR 120 and 30 lots of
current month put at strike price of 12500 at INR 45.

No major announcement was made by the Finance Ministry. The settlement price for Nifty 50
index on the expiry date of the contract was 12444.

Determine the Profit/(Loss) made by Mr. Suthar on his speculation.

(Ignore transaction cost. Nifty Option Lot size: 75)

(a) Profit of INR 371,250

(b) Loss of INR 168,750

(c) Profit of INR 357,750

(d) Loss of INR 371,750

ANSWERS TO CASE STUDY 15

I. Answers to Multiple Choice Questions
1. (a) Principal amount of Bonds purchase for coupon computation = 200 crores

Rate of Interest = 4.78 % per annum

The coupon is paid semi annually. Maturity date of the Bond is 28 February 2024.
Thus semi annual rolls shall be 28 Feb and 28 Aug every year.

Since the HUDL Bonds were acquired on 31 March 2021 the next coupon date shall be
28 August 2021
No of days for coupon computation:
March 2021– 31
April 2021– 30

May 2021 - 31
June 2021 - 30

© The Institute of Chartered Accountants of India

 July 2021 - 31
August 2021 - 28

Total
= 181
Interest amount = INR 200 crores x 4.78% x 181/365

= INR 47,407,123.29

2. (d)

3. (c)

4. (d) Profit and (Loss) on settlement of a short future contract shall be computed as follows

(Trade Price - Settlement Price) x No of Lots x Lot Size

(11380-11320) x 80 x 75
= INR 360,000 (Profit)

5. (c) Mr Suthar has sold options. Thus the profit and loss shall be computed as follows

Profit/ (-Loss): Premium received on sale of Options – Exercise value of In the money
Options
In the given case the settlement price of the expiration date is 12,444
For the Call option, the Strike Price is higher than the settlement price. Therefore it has
expired Out of the money and has thus no exercise value.
For the Put option, the Strike Price is higher than the settlement price. Therefore it has
expired In the money and thus the exercise value shall be Strike Price – Settlement Price
= 12,500-12,444 = 6
Profit and (Loss) on settlement of the option contract shall be computed as follows:
Contract CALL PUT

Lot Size 75 75

Quantity 30 30

Strike Price 12750 12500

Settlement price 12444 12444

In the money /Out of the

Out of the money In the money
Money
Nil since out of the 12500 -12444
Exercise value per unit
money =6
Exercise value total (A) - 6 x 75 (Lot
Size) x
30 (No of Lots)

© The Institute of Chartered Accountants of India

 = INR 13,500

Premium per unit 120 45

Premium value total (B) 120 x 75 (Lot Size) x 45 x 75 x 30

30 = INR
(No of Lots) 101,250
= INR 270,000
Net Gain on settlement INR 270,000 INR 87,750
(B-A)
Thus total gain on speculation: INR 270,000 + INR 87,750 = INR 357,750

CASE STUDY 16

Factoring is a kind of financial service in which a business organization sells its Bills Receivables to
another person, called a factor, at a discount in order to meet its working capital requirements. A
factor can be a bank or a Non-Banking Financial Company (NBFC) or any organization registered
under the Companies Act. Factoring helps businesses to convert their receivables quickly and handle
cash-flow problems conveniently and in time.
The Factoring Regulation Amendment Act, 2021 encourages the NBFCs and other companies to
enter the factoring businesses and help small businesses to sustain themselves during these arduous
times. This initiative will help to reduce the overall cost to raise funds and allow small businesses to
generate cashflows even at tough times. The facility of providing liquidity to support MSMEs has been
an important part of the government’s plans and policies to provide some relief from the
consequences of the pandemic. This encouragement to the MSMEs is significant as they are a vital
part of employment generation in the rural and urban areas.
Presently, because of various issues, the factoring credit consists of only 2.6 percent of total formal
small and medium scale credit finance in India. According to one estimate, only 10% of the receivable
market is presently covered under the bill discounting system while the rest is covered under
conventional cash credit overdraft arrangements with financial institutions. The MSMEs generally get
late payments against their bills, they struggle to meet their working capital requirements and it
obstructs the efficiency of their operations and proper functioning. The objective of the act is to correct
that.
It is also worthwhile to mention that China adopted Factoring in a huge manner a decade ago and
they are the leader of the world as far as the number of MSMEs are concerned. They have embraced
debtor financing where the company sells accounts receivables at a discount to free current debts
and look for capital for easy functioning of the business. The banking and e-commerce sector has
found this to be a viable business model across various industries.
Large companies, especially the e-commerce one form in-house financing or Factoring company as
a subsidiary to financially aid large number of small and medium enterprise clients, with enormous
amounts of receivables in the ledger. This form of factoring is called double factoring.
Double factoring aid suppliers in meeting their cash flow needs and also increases the liquidity of the
assets of in-house factoring entities. The costs of funding reduce significantly from that of a bank and
prove beneficial in the long run.

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 Factoring is a significant part of strengthening the economy in the present situation. NBFCs can come
to the rescue of the liquidity crunched MSMEs and support them with their financing needs.
In the current environment where access to finance is critical to jumpstarting economic growth, the
recent
Factoring Regulation Amendment Act may play a key role in bridging the gap and helping Indian
businesses push forward into 2022.
In the case of other countries, it has been witnessed in the past that a freer approach to factoring
takes the pressure from the lending institutions which means more availability of capital for the
businesses that require it. In the long run, the ramifications are visible. The Factoring Regulation
Amendment Act isn’t just going to help businesses come out of the pandemic-induced crisis situation.
As we venture into the next decade, the increased access to capital will support Indian businesses to
uplift economic growth.
In a move that will provide enhanced liquidity support to the Micro, Small, and Medium Enterprises
(MSME), the Act has removed the threshold limit for NBFCs to get into the factoring business. As per
the Factoring Regulation Act, 2011, both financial assets of an NBFC in the factoring business and
its factoring business income should be more than 50 percent of its gross assets and net income.
The removal of the above-mentioned criteria is expected to prove advantageous for both NBFCs as
well as small businesses, which had been suffering due to lack of liquidity after the advent of the
pandemic. While it broadens the scope for the NBFCs, small businesses will get the working capital
they want thereby contributing to the economic recovery.
The significance and necessity for the amendment act can be determined from the following:
(i) The amendment tends to permit the non-NBFC factors and other entities for factoring that would
increase the opportunities for the small businesses by providing funds, reducing the cost of
funds, helping the small businesses the flow of credit facilities, and faster payments against
receivables.
(ii) The amendment act to change certain provisions through which the challenges faced by the
MSMEs regarding the delayed receivables would be curbed and furthermore, these
amendments would aid in substantial and stable functioning of the working capital cycle and
healthier cash flow.
(iii) Moreover, with the new Factoring Regulation Act, there will be more NBFCs for MSMEs to
arrange working capital through Bill discounting, thereby curtailing the working capital cycle by
helping them to enter into new transactions. Further, before the coming of the Act, there are
only 7 Factoring companies in India and with this act, the objective of the Government is to
boost the number of companies offering to factor to over 9,500.
(iv) Also, the amendments liberalize the restrictive provisions of the Act and also ensure that a
strong regulatory oversight mechanism is placed through the Reserve Bank.
CASE STUDIES 16.3

The factoring Act, 2011 was enacted to provide for and regulate assignment of receivables by making
provision for registration there for and rights and obligations of parties to contract for assignment of
receivables and for matters connected therewith or incidental thereto.
However, under the 2011 act, the MSMEs faced liquidity crunch by getting delayed payment against
their bills for supplying to various buyers. Because of this, there working capital gets locked and that
hamper their production activities, the Parliamentary Committee had stated in their report.

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 Therefore, the amendments were suggested by the Government which aims to solve the problems of
MSMEs & allow more classification of NBFCs to allow their foray into the factoring business. Factoring
credit constitutes only 2.6% of the total official MSME Credit in India. It is estimated that only 10% of
the receivable market is currently covered under the official bill discounting method, while the rest
comes under conventional cash credit overdraft arrangements with banks.
And, considering good amount of growth in the past few years, the factoring market only accounts for
0.2% of the GDP of India, which is very low as compared to some emerging economies like China
and Brazil. Further, the universal factoring market is expected to reach
9.2 trillion dollars by 2025.
I. Multiple Choice Questions
1. In ………., the factoring agency does not provide any advance to the firm.
(a) maturity factoring
(b) advance factoring
(c) full factoring
(d) undisclosed factoring
2. Assumptions of ………. is one of the most important functions of the factor.
(a) Interest rate risk
(b) credit risk
(c) liquidity risk
(d) default risk
3. The factoring process helps in reducing the ………... period.
(a) average receivables collection
(b) average payable collection
(c) total operating cycle
(d) both (a) and (c)
4. Which among the following should be done to expand the factoring market in India?
(a) Do away with stamp duty or at least reduce it.
(b) Incorporate a separate company which will give a true and fair credit appraisal report and
which will cover all aspect of client’s information and their accounts.
(c) Work shop and seminars should be organized by factoring companies to enhance
awareness and usefulness of the factoring process. (d) All of the above
5. A new company that is granted Certificate of Registration (CoR) by the RBI as NBFCFactor
shall commence business within ……..from the date of grant of CoR by the RBI.
(a) three months
(b) six months
(c) nine months
(d) twelve months

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 ANSWERS TO THE CASE STUDY 16

I. Answers to the Multiple Choice Questions

1. (a)
2. (b)
3. (d)
4. (d)
5. (b)

CASE STUDY 17

Vishika graduated from All India Commerce College in year 2017. She and her friend, Aradhya
decided to on a trip to Sikkim before striving to enter into working world. They booked air tickets and
third Thursday of December 2017, they were in Sikkim. They were very excited and thrilled. They
visited various sights they had planned. They experienced local food and culture as well as bought
some souvenirs for their near and dear ones.

It was Tuesday night and both Vishika and Aradhya were packing their stuff to return to Delhi next
day. Aradhya felt very tired so she went to sleep after packing while Vishika continued. While sorting
things in her handbag, Vishika found something - there were some fallen leaves she had collected
on her sightseeing. Luckily she got a stamp pad on the hotel room study table. She pulled out a clean
unruled sheet of paper from her travel journal and pressed fallen leaves soaked in stamp pad ink
against it. Vishika was smiling wholeheartedly looking at the sheet for it was not just a sheet but a
beautiful creation of art. She posted the art on Facebook and slept. Next morning, when she opened
her Facebook page, all she could find was bounties of appreciation and some people even requested
to buy her art. She showed it to Aradhya who too was moved by the beauty of the creation. The entire
return journey was a discussion between the two friends and they landed Delhi with a decision to set
up a business of personalised items using recycled materials.
Since then, it has been 5 years and they are proud owners of a firm, Vrikshya. Vrikshya has been
getting bulk orders and generating handsome revenue. With an employee count of 100 under the
leadership of Vishika and Aradhya, the firm has so far witnessed growth and profits.
It’s May 2019. Both Vishika and Aradhya are studying firm MIS and they realise that as the business
has expanded, they had less time available to focus on credit control. Collections from accounts
receivable has deteriorated and despite high profits, firm is using more of overdraft facility to pay for
business expenses that became due sooner than they get paid. They need cash flow to pay
employees, vendors and cover other business expenses. At first, they decided to approach their bank
for assistance.

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 Based on the firm performance record, the bank was ready to sanction a fund- based working capital
limit of 2 crores and interest rate is Base Rate +2% p.a, payable at monthly basis.
However, somewhere in her mind, Aradhya was not convinced with idea of cash credit from bank and
insisted to look for other alternatives. They referred a local firm specialising in credit management
consultancy. It suggested that they either employ a credit admin or factor accounts receivable.
Factoring was new to both Vishika and Aradhya. The local firm suggested Expert Associates to
Vrikshya partners for factoring services. Expert Associates was known to provide factoring services
involving advancing 80% of the receivables at 12% p.a. and 2% factoring commission.
While the discussion was going on, Vishika received a call from her team that Vrikshya has received
an international order, big enough in terms of contribution to profits.
I. Multiple Choice Questions
1. Projected figures as per CMA report for Vrikshya are : sales of ` 8 crores, total current assets
of ` 5 crores, and other current liabilities of ` 2 crores. In the light of this, which statement is
correct, assuming no current bank borrowing?
(a) The fund- based working capital limit of 20 lacs is in congruence with turnover method.
(b) The fund- based working capital limit of 20 lacs is in congruence with Method 1 as per
Maximum Permissible Banking Finance.
(c) The fund- based working capital limit of 20 lacs is in congruence with Method 2
as per Maximum Permissible Banking Finance (d) None of the above.
2. Using the following figures, the gross working capital for Vrikshya is:
Trade receivables 40,00,000
Cash and cash equivalents 5,00,000
Trade Payables 14,00,000
Short term provisions 2,00,000
Short term borrowings 2,00,000
(a) ` 31,00,000 (b) ` 29,00,000
(c) ` 27,00,000
(d) ` 45,00,000
(iii) All the following statements are correct about two factor international factoring except?
(a) The responsibilities relating to book- keeping and collection of debts remain vested with
the import factor.
(b) Import factor provides the credit protection in case of financial inability on the part of any
of the debtors.
(c) Factoring commission is shared by export factor with import factor at mutually agreed
rate.
(d) The export factor bases his credit decision on the financing standing of the availing bank.
4. Another firm, Truefactor Financial Services agreed to factor Vrikshya receivables involving
advance 80% of the receivables at 10% p.a. and 2% factoring commission. Following
information is available:

• Annual credit sales 1.2 crore and average collection period 50 days

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 • The past experience indicates that bad debt losses are around 2% of credit sales

• The factoring is expected to save 50,000 in administration costs and also to eliminate all
bad debt losses.

• Assume 365 days in a year

The amount remitted to Vrikshya is:
(a) 12,82,192 (b) 13,15,068
(c) 12,64,628
(d) 11,53,973
5. Net factoring cost in case of Truefactor Financial Services above is:
(a) 5.95%
(b) 6.19%
(c) (18.94)%
(d) (2.56)%
ANSWERS TO CASE STUDY 17
I. Answers to Multiple Choice Questions
1. (d) To determine the correct answer, we need to compute working capital limit under the given
methods.
Under the Turnover method, 25% of the projected sales is the working capital
requirement. Turnover method also says that 5% of the sales would be the net working
capital. The limit would be 20% of the sales. Therefore, the working capital limit under
turnover method would be computed as follows:
Projected sales 8,00,00,000

Working capital requirement (25%of sales) 2,00,00,000

Minimum margin money (5% of sales) 40,00,000
Fund based working capital limit (20% of sales)
1,60,00,000
Hence, Statement a is incorrect.
Under method 1 of maximum permissible banking finance, the borrower has to
arrange 25% of working capital gap as margin. Therefore, the working capital limit would
be computed as follows:
Projected current assets 5,00,00,000

Projected current liabilities 2,00,00,000

Working capital gap (X) 3,00,00,000
25% of X (Y) 75,00,000
Maximum Permissible banking finance (X-Y) 2,25,00,000
Hence, Statement b is incorrect.

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 Under method 2 of maximum permissible banking finance, the borrower has to
arrange 25% of Total Current Assets (TCA) as margin. Therefore, the working capital limit
would be computed as follows:
Estimated current assets 5,00,00,000

Estimated current liabilities 2,00,00,000

Working capital gap (X) 3,00,00,000
25% of total current assets(Y) 1,25,00,000
Maximum Permissible banking finance (X-Y) 1,75,00,000
Hence, statement c is incorrect.
So, Statement d is correct.
2. (d) A company’s investment in total current assets signifies the Working Capital. So, Gross
working capital is equal to total current assets. Gross Working Capital for Vrikshya is computed
as follows:
Trade receivables 40,00,000

Cash and cash equivalents 5,00,000

Total current assets/Gross working Capital 45,00,000
Option a is incorrect as it reduces trade payables from total current assets. Option b is
incorrect as it reduces trade payables and short term provisions from total current assets.
Option c is incorrect as it represents net working capital
3. (d) financing upon the financing standing of the availing bank happens in forfaiting.
4. (c) The calculation is as under:
Annual credit sales 1,20,00,000

Average collection period 50

Average level of receivables (1,20,00,000*50/365) 16,43,836

Receivables advanced by factor (80%) (A) 13,15,068

Factoring Commission @2% of 16,43,836 (B) 32,877

Amount available for advance (13,15,068-32,877) 12,82,191

Factoring interest @10% (12,82,192*10%*50/365)(C) 17,564

Amount remitted to Vrikshya (A-B-C) 12,64,627

5. (b) The calculation is as under:
Amount remitted to Vrikshya as calculated above 12,64,627
(X)
Factoring cost for 50 days:
Factoring Commission 32,877
Factoring interest 17,564

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 Total 50,441
Factoring cost for the year (50,441*365/50)(A) 3,68,219
Less: Costs saved
Bad debts (2% of 1,20,00,000) (B) 2,40,000
Administration costs (C) 50,000
Net factoring cost (A-B-C) 78,219
Net factoring cost (%)(78,219/12,64,627*100) 6.19
Option a is incorrect as it calculates net factoring cost on 80% of receivables and not the
amount remitted to client.
Option c is incorrect as it nets annual costs of bad debts and administration against the
factoring cost for 50 days.
Option d is incorrect as it nets bad debt cost for 50 days and annual administration costs
against the factoring cost for 50 days.
CASE STUDY 18

Phoenix Autos Ltd is a company engaged in assembly and distribution of Large Motor Vehicles (LMV).
The company sources orders for such vehicles through network of marketing agents. Based on the
order, requisite auto parts are imported from European suppliers and assembled into LMVs and
delivered to the clients.
The outbreak of COVID 19 pandemic had an adverse impact on the business volume. The outbreak
not only caused operational hindrances for supply from Europe but also low demand in the Indian
Auto Market.
With hopes of success trials on vaccination and relief in lockdown measures, the auto segment is
promising growth and potential. The market expects more and people to buy own vehicles or use
private transport for their day to day conveyance needs rather public transport options which are
crowded and pose contamination risk.
Gravita India, an Uttar Pradesh based start up seeds an idea of using technology to connect with
professional working class in Delhi-Gurgaon-NOIDA route for their daily conveyance needs. Gravitas
has launched an App where such professionals can provide info about their work timings, location etc
so that they can be aggregated for conveyance through Private vehicles.
Gravita intends to ply 20 seater Air-conditioned luxury private Vans for such professionals for their
daily work commute. The Vans are designed to provide wifi, laptop charging point and privacy curtains
to that the executives can utilize the commuting hours for work, calls, emails etc.
Gravita approaches Phoenix Autos for procuring 30 such Vans for their start up. After understanding
the requirement of Gravita, Phoenix proposes a Daimler C 42 a 20 seaterluxury Van which shall be
imported from Germany and assembled and delivered in India by Phoenix.
Gravita likes the proposal and agrees on the design, layout and cost for the Vans.
Gravita informs Phoenix about two issues faced by them:

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 (i) They are located in a special economic zone and therefore exempted from Taxation, thus they
cannot claim depreciation or any tax benefit on the Vans.
(ii) They do not have enough capital to pay upright for purchase of these Vans.
Gravita therefore propose if these Vans can be provided under a lease instead of an outright sale.
Phoenix Autos was not very comfortable with the idea as they have never done leasing of vehicles
before. However, the company could not afford to loose business from Gravitas. They agree to
respond to Gravita on the proposal after checking with their financial advisor.
Gravitas approaches you for your advice on leasing the vehicles to Gravitas. Below information is
provided to you.
Model Daimler C-42 20”
Cost of Import of parts for each Van EUR 30,000 (FX Rates EURUSD:
1.200
USDINR: 75)
Import Duty 30%
Other technical cost of Assembly per INR 300,000*
Van
Overheads per Van INR 30,000
Local taxes per Van INR 20,000
Taxation rate for Phoenix 25% Corporate Tax
Rate of Depreciation 25% SLM
Estimated Life 4 years
The Phoenix Auto received a rebate of an amount equal to the Other technical cost of Assemble from
the State Government as part of the Make in India initiative. The rebate is received as soon as the
VANs are dispatched from the Assemble workshop.
A leading NBFC has agreed to provide finance to Phoenix @ 12% p.a. over hypothecation of Vans.
I. Multiple Choice Questions
1. In the instance above what would have been the annual lease payable if Phoenix Auto is located
in a special economic zone as well with no taxation for 4 years.
(a) INR 1,373,456.79
(b) INR 1,112,500.00 (c) INR 1,407,123.29
(d) INR 1,465,261.77
2. Under a Hire Purchase transaction, the ownership title of the asset is with (a) Seller (b) Buyer
(c) Both
(d) Financing bank/NBFC
3. From a Lessors’ perspective the lease financing proposal should be accepted only if
(a) Computed IRR of cashflows is more than the required cut-off rate or Cost of Capital
(b) Computed IRR of cashflows is more than the pre tax cost of borrowing.
(c) Computed NPV of the cashflows is negative.
CASE STUDIES 18.3

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 (d) Computed NPV of the cashflows is more than the sum of Initial Cashflow and Terminal
Cashflow.
4. What would be revised profit margin for Phoenix Auto if Gravita India agrees to pay not more
than INR 1,020,000 as annual lease for each Van.
(a) 19.57%
(b) 17%
(c) 22.89%
(d) 18.57%
5. What is the lowest annual lease Phoenix Auto can quote to Gravitas so as to not incur any loss
on the transaction.
(a) INR 796,465.43
(b) INR 769,645.43
(c) INR 769,465.43
(d) INR 764,965.43

ANSWERS TO CASE STUDY 18

I. Answers to Multiple Choice Questions

1. (d) Let the annual lease payable be z. The lease rentals can be determined in the following
manner.
Please note that the discounting rate is 12 % p.a. which is cost of financing since no tax
benefit can be availed.
Sale Price = z X (DCF @ 12% p.a.)
4,450,000 = (z) x 3.037
z = 4,450,000/3.037 z = 1,465,261.77
INR 1,465,261.77
2. (b)
3. (a)
4. (d) With the decrease in the annual lease payable by Gravita India, the equivalent Sale Price
is computed as follows:
Sale Price = (Annual Lease + Annual tax benefit on Interest and Depreciation) X (DCF @
9% p.a.)
Sale Price = (1,020,000 + 106800+222500) x 3.24 (From DCF table) (see workings for
Question 3)
Sale Price = (1,349,300) x 3.24
Sale Price = 4,371,732
Revised Profit Margin = (Sale Price – Cost of Assemble)/Sale Price

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 Revised Profit Margin = (4,371,732 – 3,560,000 (from 2))/4,371,732 Revised Profit
Margin = 18.57%
5. (c) Let the annual lease payable be z such that there is no profit margin on the transaction. The
lease rentals can be determined in the following manner.
Please note that the discounting rate is 9 % p.a. which is post tax cost of financing, i.e.
12% x (1- 25%).
Cost of Assemble = (z + Annual tax benefit on Interest and Depreciation) X (DCF @
9%p.a.)
3,560,000 = (z + 106800+222500) x 3.24 (From DCF table) (see workings)
3,560,000 = (z + 329300) x 3.24 3,560,000 =
3.24z + 1,066,932 z = (3,560,000 –
1,066,932)/3.24 z = 769,465.43
Thus the annual lease to be quoted for not incurring any loss on the transaction is INR
769,465.43
CASE STUDY 19

Arogyam Healthcare is a leading healthcare services provider in India. The chain offers
comprehensive, seamless and integrated world class treatment across various specialties through a
network of 15 hospitals.
On November 12, Monday, the procurement department of the healthcare received a request for
purchase of three fourth generation CT scan machines for the radiology facilities of the three
hospitals. With an inclination towards "Made in India" products as well as based on positive reviews,
the procurement department shortlisted "Techno ACT", SAGE indigenous CT scan system. The
department contacted sales team of SAGE India for the scanner quotation.
On November 14, Vinay Sood, procurement manager of Arogyam received an e-mail from a sales
executive of SAGE Sales department which read as:
"Dear Sir,
Thanks for your interest in our Techno ACT, a "Made in India" scan system. We are excited to hear
from you.
In response to your query, the machine costs ` 1 crore per piece. We can offer you two customised
alternatives:
You can pay 30 percent down and the remaining balance through loan from BDA Bank. BDA Bank
offers financing on favourable terms to our customers. The loan is available at 10 percent interest with
nine annual instalments of ` 12,15,484. Instalments are payable at the end of the year. The system
can be used in the hospitals for twelve years, after which it can be sold for scrap for ` 5,00,000.
You can lease the same machine for twelve years at an annual rent of ` 12,10,000, the first payment
of which is due on delivery. The lease is irrevocable. You will be responsible for the insurance and
maintenance costs during the lease.
We can also arrange AMC from our preferred service provider for which annual maintenance costs
comes out to ` 8,00,000.
We hope the information provided in it answers your query. However, please do not hesitate to contact
us for further clarification if need be.

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 We look forward to your patronage.
Warmest Regards
Mrunal Das
Sales Executive, SAGE India"
Vinay approached ACE Bank to discuss financing of the scan system. From time to time, ACE Bank
has been funding the working capital of Arogyam as well as providing term loans for purchasing
medical equipments. For scanner, the ACE Bank was ready to provide term loan at 11% per annum
repayable in ten equal instalments of ` 16,98,014.
To decide which alternative is best, Vinay forwarded the SAGE e-mail to Capital Budgeting team,
together with ACE bank loan offer details for their evaluation on the most favourable alternative.
The team is headed by Pradeep Singh. Pradeep was then busy on a project financing assignment
and the plain reading of mail convinced him that the evaluation requires some major calculations to
be performed. So he assigned the task of evaluating the alternatives to Sudeep, an intern working
under Pradeep on probation.
Two days later, Pradeep called Sudeep and asked him about his findings. Sudeep showed his
calculations to Pradeep. An excerpt from Sudeep's working is presented below:
Year Cost of 1,00,00,000 Scrap 5,00,000
machine Value
WDV at the Depreciation WDV at the Present Present
beginning of for the year end of year Value Value
the year @40% factor factor@7.8
@10% %
(A) (B)=A*40% (C)= A-B
1 1,00,00,000 40,00,000 60,00,000 0.9091 0.9276
2 60,00,000 24,00,000 36,00,000 0.8264 0.8605
3 36,00,000 14,40,000 21,60,000 0.7513 0.7983
4 21,60,000 8,64,000 12,96,000 0.6830 0.7405
5 12,96,000 5,18,400 7,77,600 0.6209 0.6869
6 7,77,600 3,11,040 4,66,560 0.5645 0.6372
7 4,66,560 1,86,624 2,79,936 0.5132 0.5911
8 2,79,936 1,11,974 1,67,962 0.4665 0.5483
9 1,67,962 67,185 1,00,777 0.4241 0.5087
10 1,00,777 40,311 60,466 0.3855 0.4719
11 60,466 24,186 36,280 0.3505 0.4377
12 36,280 14,512 21,768 0.3186 0.4060
6.8137 7.6148

Sudeep stated:

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 "The lease is an operating lease as the scan system does not get transferred to Arogyam at the end
of lease. Also, as per Bower-Herringer-Williamson Method, the operating advantage of purchase
exceeds that of leasing. These two suggest that buying the machine would be the correct decision ".
Pradeep thoroughly reviewed the calculations. He remarked, "The calculations are arithmetically
correct but some aspects have been left out to support the evaluation."
After analysing the case at his own level using the internal rate of return approach, he e-mailed
procurement department:
"Based on our study, we conclude that it would be preferable to lease the scan system rather than
buy it. The cost of leasing comes out to be less than the cost of borrowing and buying. By leasing,
following advantages will accrue to the chain:

• Leasing would avoid Arogyam's own capital being locked up, since it would be the lessor who
would buy and own the equipment.

• Lease payments are tax deductible and hence score over borrowing.

• Further leasing is convenient in the sense it is similar to car rental."

I. Multiple Choice Questions

1. If Arogyam decides to borrow money from ACE bank for one machine, the principal component
repaid under second loan instalment will be:
(a) 7,36,813
(b) 16,98,014
(c) 6,63,796
(d) 10,34,218
2. Sudeep mentioned that as per Bower-Herringer-Williamson Method, the operating advantage
of purchase exceeds that of lease. The financial advantage of leasing per machine is:
(a) 17,55,423
(b) 9,30,929 (c) 67,352.
(d) 7,86,092.
3. Which of the following statements is not correct?
(a) Since lease rentals are tax deductible, operating leases offer tax benefits.
(b) By employing ‘sale and lease back’ arrangement, the lessee may overcome a financial
crisis by immediately arranging cash resources for some emergent application or for
working capital.
(c) In finance leases, the lessee is safeguarded against the risk of obsolescence.
(d) The lessor earns commission in addition to rentals under Sales-Aid- Lease
4. Pradeep used internal rate of return approach to determine whether leasing is preferable.
He started with 7% rate at which net present value of cash flows computed for IRR comes out
to 2,14,703 while for 8% it comes out to 1,69,550. The IRR is close to:
(a) 7.55% (b) 7.44%

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 (c) 7.80%
(d) 8.78%

5. Incremental tax saving due to leasing over borrowing for year 12 is:
(a) 3,76,200
(b) 3,65,026
(c) 3,73,007
(d) 3,68,218

ANSWERS TO CASE STUDY 19

I. Answers to Multiple Choice Questions
1. (c) Loan if taken= ` 100,00,000 Interest rate=11% p.a.
First instalment is payable at the end of the year.
Loan Repayment schedule can be prepared as follows
Year Principal Instalment Interest Principal
Outstanding component Component
(A) (B) @11% (D) = B-C
(C) = A*11%
1 1,00,00,000 16,98,014 11,00,000 5,98,014
2 94,01,986 16,98,014 10,34,218 6,63,796
3 87,38,190 16,98,014 9,61,201 7,36,813
4 80,01,377 16,98,014 8,80,152 8,17,862
5 71,83,515 16,98,014 7,90,187 9,07,827
6 62,75,688 16,98,014 6,90,326 10,07,688
7 52,67,999 16,98,014 5,79,480 11,18,534
8 41,49,465 16,98,014 4,56,441 12,41,573
9 29,07,892 16,98,014 3,19,868 13,78,146
10 15,29,746 16,98,014 1,68,272 15,29,747
69,80,145 1,00,00,000
2. (b) Financial advantage is computed by comparing the cost of machine
with the
discounted value of lease payments (gross), the rate of discount being the gross cost of
debt. In our case, gross cost of debt is 10%
Computation of present value of lease payments: Lease Payment = 12,10,000
PVIFA for year 0-11 as computed in Question 3 = 7.4951
PV = 12,10,000*7.4951 =90,69,071
Financial Advantage (disadvantage) of leasing

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 Cost of machine 1,00,00,000

Present Value of lease payments 90,69,071

Financial advantage of leasing 9,30,929
Option a is incorrect as it considers PVIFA (10%,12) which would have been appropriate
if payments were made at the end of the year.
Option c is incorrect as it correctly considers PVIFA for 0-11 years but at the rate of 7.8%.
The correct discounting rate is 10% and not 7.8%.
Option d is incorrect as it considers PVIFA (7.8%,12) which is incorrect with respect to
both rate and time period.
3. (c) Finance lease does not safeguard against risk of obsolescence since they are usually long
term arrangements and there are high chances that the lessee will be stuck with obsolete asset
during the time of lease. This benefit is offered by operating lease.
4. (a) Using interpolation formula, IRR comes out to:

7% + * (8% −7%) = 7.55%

5. (d) Incremental tax saving of leasing over borrowing in year 12 can be computed as
follows:
Tax benefits associated with leasing
Lease rental paid at the beginning of year 12,10,000
12
Tax benefit on above lease rental (A) 2,66,200
Tax benefits associated with borrowing
and buying 0
Depreciation for year 12
Tax Benefit on depreciation (B) 0
Short term capital gain on disposal 4,63,720
(WDV12-Residual value)
Tax loss on STCG (C) 1,02,018
Total (D=B-C) -1,02,018
Incremental tax saving on leasing (A-D) 3,68,218
CASE STUDY 20

ABC Ltd., a company involved in precision engineering was incorporated on August, 1993 at
Bangalore. Mayank Gehrotra is the CEO & Managing Director of the company. ABC Ltd. designs and
builds highly engineered products for Automation and Aerospace. With its impeccable design,
engineering and manufacturing facilities in America, Europe and India, the company is able to meet
customers' requirements in many countries. ABC Ltd. has 1000 employees across all of its locations.
There are 50 companies in the ABC Ltd. corporate family.

Everything was going well in the company. However, in a surprising development capital market
regulator ordered the impounding of about ` 5 crore from ABC Ltd. Managing Director and CEO
Mayank Gehrotra in an insider trading case.

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 The reason for this impounding order was that a sum of ` 5 crore being the notional loss avoided on
account of trades carried out during the period when the price sensitive information is unpublished.
The watchdog had conducted an investigation into possible insider trading in the shares of ABC Ltd.
during the
period from August-November 2018.
During the probe, it was found that Gehrotra, being the CEO and Managing Director of ABC Ltd., had
traded the company's shares while being in possession of UPSI (Unpublished Price Sensitive
Information).

It was observed that the consolidated quarterly financial results of ABC Ltd. were communicated to
the stock exchanges after the trading hours on November 11, 2016, and ABC shares fell on the
immediate succeeding trading day on November 15, 2016.
It was also alleged that Gehrotra, having traded on the basis of UPSI, avoided loss on account of fall
in price of shares due to the announcement of the said quarterly consolidated financial results of ABC.
Therefore, the amount of loss avoided by Gehrotra in aggregate, including interest through trading in
shares of ABC, amounted to over ` 5 crore.
It was, prima facie, observed that the pre-trading approval was not taken for the required number of
shares for which sale order was placed. Further, a designated person shall not apply for preclearance
of any proposed trade if such person is in possession of UPSI even if the trading window is open, the
watchdog said in its order.
Since Gehrotra was the managing director and 'a connected person', prima facie, he violated the
provisions of PIT (Prohibition of Insider Trading) Regulations, the order said. In view of the above, it
can be said that Gehrotra engaged in insider trading, which helped him to avoid loss due to a fall in
stock prices of the company after the consolidated quarterly report of the company was published.
Insider trading takes place when the buyer happens to have additional information about stock
performance that is not available to the general public. It can be both legal and illegal, depending on
when the trade is taking place. It is deemed unethical when trading happens when the information is
still private, tilting the trade in favour of one party. These types of trading may result in severe
consequences and may attract penalty from regulators. SEBI being the regulator keeps close
monitoring to track such trades to prevent few traders from manipulating the market.
In the case of ABC Ltd., the regulator was investigating a case from 2016. SEBI introduced the
Prohibition of Insider Trading Regulations in 2015, which categorically mentions that insider trading
is an unethical practice, practiced, by those in possession of certain unpublished information relating
to a company to profit at the cost of providing loss to general investors who don’t have the knowledge
of such information. It has listed the following people in its monitoring list in connection with any insider
trading activity:

• Directors of the company

• Key personnel in Managerial positions

• People in the positions of Vice Presidents, General Managers, Dy. General Managers, Asst.
General Managers

• Employees who can access the sensitive financial informations. Every employee of Finance,
Legal & Company Secretarial, HR & IT departments will come under its ambit.
• All Personal Assistants and Secretaries to the Directors and Other Senior Officials

• Dependents of all the employees as mentioned in the above categorization

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 Impounding order by SEBI in insider trading case is announced against MD and CEO of ABC Ltd. as
per the above list of people. The order says that the MD and CEO of ABC Ltd. had used the UPSI
knowledge to trade stocks to avoid a loss that occurred the following day when stock prices fell after
company’s performance report was published.
On November 11, 2016, company’s financial performance report was shared with the exchange after
trading hours, following which stock prices of ABC shares tumbled on November 15. In the case of
ABC CEO, no pre-trading approval was taken, which led to the inquiry and subsequent seizing order
for ABC Ltd.
Brief financials of the company
NAME MARCH- MARCH- MARCH- MARCH- MARCH-
20 19 18 17 16

Assets 781.05 1,017.61 1,032.33 1,008.91 580.01

Liabilities 781.05 1,017.61 1,032.33 1,008.91 580.01

Equity 6.34 6.34 6.34 6.34 6.34
Gross Profit 142.56 133.41 98.50 97.20 74.30
Net Profit -207.74 32.30 3.79 15.32 1.29

Cash From 114.84 86.72 53.72 51.58 0.00

Operating
Activities
NPM (%) -36.46 5.45 0.78 3.03 0.29
Revenue 569.63 592.15 483.92 505.03 431.37
Expenses 427.07 458.74 385.42 407.83 357.07
ROE (%) -55.67 8.65 1.01 4.10 0.34
Shareholding Summary for ABC Ltd.
Type Holding
Promoter 48.8
MF 10.6
FII 14.4
Public 26.1

I. Multiple Choice Questions

1. It was alleged that Gehrotra, having traded on the basis of UPSI, …….. on account of fall in
price of shares due to the announcement of the said quarterly consolidated financial results of
ABC.
(a) avoided loss
(b) made loss
(c) avoided profit
(d) None of the above

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 2. A ………. shall not apply for pre-clearance of any proposed trade if such person is in possession
of UPSI even if the trading window is open.
(a) CEO
(b) MD
(c) Chairman
(d) Designated Person
3. The reason Mayank Gehrotra violated the provisions of SEBI (Prohibition of Insider Trading)
Regulations, 2015 was ………….
(a) Delayed pre-trading approval was taken for the required number of shares for which the
sale order was placed.
(b) Pre-trading approval was not taken for the required number of shares for which the sale
order was placed.
(c) Post-trading approval was taken for the required number of shares for which the sale
order was placed.
(d) No approval was taken at all for the required number of shares for which the sale order
was placed.
4. Which among the following is not a connected person as per the SEBI (Prohibition of Insider
Trading) Regulations, 2015?
(a) a holding company
(b) an investment company
(c) a best friend
(d) an official of a stock exchange
5. An insider who is continuously in possession of unpublished price sensitive information is
entitled to formulate a trading plan and present it to the ………… for approval.
(a) Stock Exchange
(b) SEBI
(c) Compliance Officer
(d) Audit Committee

ANSWERS TO CASE STUDY 20

I. Answers to Multiple Choice Questions

1. (a)
2. (d)

3. (b)

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