CA Final May 2023 Suggested Answers Paper 6B Financial Services and Capital Markets (Old Scheme)

FOR CA FINAL EXAM PREPARATION

CA Final 2023
Suggested Answers ·
Paper 6B Financial
Services and Capital
Markets (Old Scheme)
EXAM YEAR TYPE

CA Final 2023 Suggested Answers
SUBJECT DATE

Paper 6B Financial Services and Capital Markets (Old Scheme) May 2023

Notes · Sample Papers · Previous Year Papers · Mock Tests

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This Suggested Answer hosted on the website do not constitute the basis for evaluation of the
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student’s answers in the examination. The answers are prepared by the Faculty of the Board of

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Studies with a view to assist the students in their education. Alternate Answers have been
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aerrorg or omission is noticed, the same may be brought to the attention of the Director of Board
incorporated, wherever necessary. While due care is taken in preparation of the answers, if any

of Studies. The Council of the Institute is not in anyway responsible for the correctness or

otherwise of the answers published herein.

Further, in the Elective Papers which are Case Study based, the solutions have been worked

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out on the basis of certain assumptions/views derived from the facts given in the question or

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. to work out the solution to the case studies
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language used in the question. It may be possible

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in a different manner based on the assumptions

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2 FINAL EXAMINATION: MAY, 2023

PAPER 6B: FINANCIAL SERVICES AND CAPITAL MARKETS - ELECTIVE PAPER
The Question Paper comprises five case study questions. The candidates are required to
answer any four case study questions out of five.
While answering the multiple-choice question, candidates are required to indicate the alphabet
of their choice in capital letters.
In case, any candidate answers extra question(s)/ sub-question(s) over and above the
required number, then only the requisite number of questions first answered in the
answer book shall be valued and subsequent extra question (s) answered shall be
ignored.
CASE STUDY - 1
Amar Mohan Asset Management Company (AMAMC) is promoted by a leading business group
known as ALPHAS. In addition to AMAMC, ALPHA5 has two financial services companies and
one software company named FinoServe Ltd. (FSL). FSL is a leader in utility software business
and generates surplus cash each year as it earns on an average 40% EBITDA margins. Surplus
cash of FSL is frequently invested in various mutual fund schemes in addition to investment in
fixed deposit schemes of reputed banks.
1. AMAMC
AMAMC is one of the largest asset management companies. It has launched many mutual
fund schemes over the last few years. However, the management of AMAMC feels that
Assets Under Management (AUM) are not increasing as per the target and hence it has
been decided to launch a few more schemes.
The following schemes are under consideration:
• Attractive Investment Prospects in India Fund, which will invest in equities of relatively
lesser-known companies.
• Hidden Treasures of India Fund, which will invest in unlisted companies in India.
• AMAMC Mid and Small Cap Fund, which will invest at least 80% of the funds in Mid
and Small Cap companies.
• AMAMC Value Fund, which will invest in companies that are relatively lower priced
compared to their peers.
• Focused Forty Multi-Cap Fund, wherein AMAMC will invest in a maximum of 40
companies across Large, Mid and Small Cap companies.

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 3

The Head of Fixed Income Securities, Mr. Goutham Prashanth, feels that AMAMC
must also launch new Debt Funds to cater to investors looking for safety. He has

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come up with the following suggested Funds:
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AMAMC Constant Maturity G-Sec Fund, which will invest primarily (90% or more) in
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securities issued by Central Government.
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• AMAMC
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Ultra Short Term Fund, which will invest in securities with duration of 3 to 6

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duration of 5 years.
• AMAMC Long Duration Fund, which will invest in securities with average portfolio
duration of 7.5 years.
One of the flagship Debt Fund schemes of AMAMC is AMAMC Ultra Liquid Fund. The Debt
Fund was launched with the objective of providing investors looking to park their funds
safely for a short period of time with an attractive option, wherein they could earn higher

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returns as compared to fixed deposits. The Debt Fund delivered an annualized yield of

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around 6%, as against other funds in the category which delivered a yield of around 4.5%.

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Consequently, inflows into the funds, particularly from corporates, were very high. The

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AUM of this Debt Fund was in excess of INR 25,000 crore. The Debt Fund earned superior

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return because the fund manager, Mr. Shailesh Mohan, invested a large portion of the Debt

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Fund in longer dated securities that generated a higher yield. This did not impact the Debt
Fund liquidity as it could easily meet redemption requests with new inflows. While he has
taken care not to invest in any instrument which has a rating of less than A minus, there
has been a tendency to invest in A-rated debt instruments compared to AA or AAA rated
debt instruments to increase returns. Mr. Shailesh Mohan always believed that he is ahead
of the game and would pull off relatively higher yields without compromising on any risks.
Meanwhile, Mr. Vinod Shastri, the head of a large Investment Bank has requested Mr.
Shailesh Mohan to invest in 90-day commercial paper being issued by one of its client

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Wind Water Solutions Ltd. (WWSL), which is shortly going for an IPO. Mr. Vinod Shastri

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assured Mr. Shailesh Mohan that all ground work has been done, and the IPO proposal is

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just awaiting SEBI approval and would hit the markets soon. As an added incentive, the

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commercial paper, with the face value of INR 100,000 would be offered at an issue price

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of INR 95,000 to AMAMC, redeemable at par. Mr. Shyam Trivedi, who has recently taken

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over as a Compliance Officer of AMAMC has called for a meeting to discuss new fund

a offers, the performance of existing Funds and the proposal to invest in commercial paper
of WWSL.

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4 FINAL EXAMINATION: MAY, 2023

2. FSL
FSL is in the process of identifying Funds that are either actively managed or passively
managed. After making analysis of such fund, a decision would be made to invest either
in both types of Funds or only one type of Fund. You have been hired to make a reasoned
analysis between Passive Fund and Active Funds selected by FSL as it does not h ave in-
house expertise. One of the relatives of the marketing manager of FSL is a software
engineer. Her name is Saloni Reddy. Saloni is aged 23 and has been working for the last
two years in a reputed software company and has accumulated a large sum of money from
her employment. The marketing manager has come to know that you have been hired for
making analysis of actively managed and passively managed Funds. He requested you to
also suggest Saloni about the right type of mutual fund for making investment considering
that she does not want to pay higher fees to the Fund and wants return to be aligned with
either return of NIFTY or SENSEX.
FSL has made investment in number of mutual funds. The CFO of FSL requested you to
evaluate the risk-adjusted performance of the Large-Cap, Mid-Cap, and Balanced Funds
from January l, 2022 to December 31, 2022. The relevant market data pertaining to the
return and the risk of the Funds selected and for the identified period are presented below.
Particulars Large Cap Fund Mid Cap Fund Balanced Fund
Annualized Return 17.50% 16.00% 14%
Annualized Risk:  10.20% 9.50% 7.50%
Risk-Free Rate (R f) 5.23% 5.23% 5.23%
Annualized Return of NIFTY 12% 10% 11%
Beta with respect to NIFTY 1.25 1.11 0.92
Multiple Choice Questions
1.1 What is the annualized yield earned by AMAMC if it decides to invest in the Commercial
paper of WWSL?
(A) 5%
(B) 20%
(C) 23%
(D) 5.26% (2 Marks)
1.2 Based on the information given in the Case Study, which of the following is correct about
schemes of AMAMC with respect to getting SEBl's approval?
(A) Hidden Treasures of India Fund, which will invest entirely in unlisted companies in
India, is likely to get SEBI's approval.

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 5

(B) AMAMC Mid and Small Cap Fund, which will invest at least 80% of the funds in Mid
and Small Cap companies, is likely to get SEBI's approval.

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(C) Focused Forty Multi-Cap Fund in the Focused Fund category, wherein the AMAMC

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will invest in a maximum of 40 companies across Large, Mid and Small Cap

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(D) SEBI.is likely to reject all Funds listed in (A), (B) and (C) above. e m
companies, is likely to get SEBI's approval.

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(2 Marks)
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1.3 Which
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(A) Long Duration Fund needs to invest in securities with maturity of more than 5 years

(B) Long Duration Fund needs to invest in securities such that the average Macaulay
Duration is greater than 7 years.
(C) Long Duration Fund needs to invest in securities such that the average Macaulay
Duration is 5 to 7 years.
(D) Long Duration Fund needs to invest in securities such that the average Macaulay

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Duration is 3 to 5 years. (2 Marks)

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1.4 The fund manager of AMAMC Ultra Liquid fund, Mr. Shailesh Mohan, is generating

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consistent returns. According to you, which of the following is the most appropriate answer

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about the risks to which investments made by Mr. Shailesh Mohan are exposed to?

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(A) Liquidity Risk and Credit risk
(B) Credit Risk and Reinvestment Risk
(C) Credit and Market risk
(D) Credit, Market Risk and Liquidity Risk (2 Marks)
1.5 An investor is looking to invest in a Fund for at least 3 years that can provide safety of
capital and generate returns in excess of a fixed deposit. Which of the following Funds
could meet the requirement of this investor?

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(A) AMAMC Value Fund, which will invest in companies that are relatively lower priced

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(B) AMAMC Constant Maturity G-Sec Fund, which will invest primarily (90%.or more) in
compared to their peers.

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securities issued by Central Government.
(C) AMAMC Ultra Short Term Fund, which will invest in securitieslwith
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a (D) AMAMC Long Duration Fund, which will invest in securities with average portfolio
duration of 7.5 years. (2 Marks)

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6 FINAL EXAMINATION: MAY, 2023

1.6 On account of persistent high inflation, it is expected that the RBI will go for a 50 basis
point hike in the Repo rate. Assuming all other things to be constant, evaluate the impact
of increase in the Repo rate on the following Funds?
(A) AMAMC Long Duration Fund, which invests in securities with average portfolio
duration of 7.5 years.
(B) AMAMC Constant Maturity G-Sec Fund, which will invest primarily (90% or more) in
securities issued by Central Government.
(C) AMAMC Value Fund, which will invest in companies that are relatively lower priced
compared to their peers. (3 Marks)
1.7 In your opinion, should AMAMC Ultra Liquid Fund invest in Commercial Paper of WWSL?
Why or Why not? (2 Marks)
1.8 Evaluate the merits of investing in a Passive Index Fund vis-a-vis an Actively Managed
Fund. Explain the differences from the point of view of liquidity, safety and returns.
(3 Marks)
1.9 Based on the information given in the Case Study, what would be your suggestion to
Saloni? (1 Mark)
1.10 Based on the information given in the Case Study, calculate and comment on two risk -
adjusted performances of the investments made by FSL in Large-Cap, Mid-Cap and
Balanced Fund. (6 Marks)
ANSWER TO CASE STUDY 1
1.1 None of the option is correct*
1.2 (D)
1.3 (B)
1.4 (D)
1.5 (B)
*If 360 days is taken, answer will be 21.05. If 365 days is taken, answer will be 21.35.
1.6 (A) AMAMC Long Duration Found holds securities such that the Macaulay Duration of
the portfolio is 7.5 years. If interest rate is hiked by 50 basis points or 0.5% , then the
Bond portfolio is likely to go down by 3.75% (increase in rate x portfolio duration).
Thus, the NAV of this fund will go down by 3.75% on interest rates increasing by 50
bps.

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 7

(B) A G-Sec Fund provides protection against Credit risk as Governments do not default
if the loan is in Domestic currency. Constant Maturity Fund provides maximum

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protection against interest rate changes, but it is not absolute, or guaranteed. The

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fund tries to actively manage its portfolio by keeping the Macaulay Duration constant,

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thereby reducing the impact of interest rate changes on the fund’s overall value. A

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Constant Maturity G-Sec Fund is the best option for investors looking for safety of
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l(C)a A Value Fund is an Equity oriented Fund. The performance of an equity fund dependsa g
capital and decent returns above fixed deposits.

ag on many factors. However, everything else being constant, increase in interest rates
increases cost of borrowings for a company, thus impacting its profit negatively. Also,
higher interest rates wean away a part of liquidity into debt, reducing liquidity for
equity. Both these factors result in pulling down the value of stocks. As a result, a
Value fund will see a fall in its NAV if interest rates go up.
Alternative Solution
Rate hikes are considered negative for debt mutual funds. The prices of bonds fall when

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the rates go up as bond yields and prices have an inverse relationship. Simply put, debt
mutual funds offer paltry returns when rates are going up. When the apex bank holds or
cuts rates, they offer higher returns.
m rate on the following funds is as below:
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However, the impact of increase in the
(A) AMAMC Long Duration Fund
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when interest rates rise. However, smart investors sense an opportunity when the
interest rates are nearing their peak.
(B) AMAMC Constant Maturity G-Sec Fund – Gilt funds invest in government securities
with little credit risk. However, they do not see inflows in case of a rate hike.
Investments in gilt funds are generally done for tactical purposes with relatively
shorter time frames. Such investors may still be worried about the possible upward

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movement in bond yields.

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(C) AMAMC Value Fund – With increase in repo rate, value funds will be more cheaply

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available. Smart investors will sense this opportunity and invests in these value funds

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when these are available cheap.

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1.7 AMAMC Ultra Liquid Fund should not invest in Wind Water Solutions

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yield is very attractive. That itself is a sign of underlying risk.
investment mandate for the fund is to invest money for short periods. While it is projected
that this funding is bridge finance and Wind Water will pay off the money from IPO
proceeds, the capital market regulator SEBI has not yet approved the IPO. It is also not

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8 FINAL EXAMINATION: MAY, 2023

certain that the IPO will be successful. Thus, investment in the commercial paper should
be considered only after it is approved by the SEBI and the IPO is wholly underwritten.
1.8 The merits of investing in a Passive Index Fund vis-à-vis an Actively managed fund can be
better understood by highlighting the differences between them which are as fol lows:
1. Nature: Active investing is a hands-on approach where the fund manager is fully
involved in the investment process. The professional fund manager buys stocks, sells
them, studies the market, looks for opportunities, and more.
In passive investing, on the other hand, the fund manager has a negligible role in
selecting stocks and market timing as the scheme seeks to replicate the benchmark
returns by investing in securities in the same proportion as in the index.
2. Expense Ratio: Passive Index funds have lower expense ratio in comparison to
active funds.
3. Returns: Passive index funds follow a benchmark and deliver returns like the total
returns of the securities represented in the benchmark prior to expense ratio and
tracking error. However, actively managed funds can be relatively more volatile. They
leverage the knowledge and experience of the fund manager to generate favourable
returns. They primarily aim to beat the benchmark and may offer higher returns.
4. Risk: Passive mutual funds eliminate unsystematic risks like stock picking and
portfolio manager selection via rule-based investing as per the weight of stocks in the
benchmark. Active funds may be relatively riskier depending on the type of Fund. For
instance, an active equity fund can carry a higher risk than an active debt fund.
Alternative Solution
A Passive Index Fund mimics an Index. It attempts to replicate the Index. For example, a
Nifty Index Fund will want to hold the same 50 stocks in the same proportion in which the
stock has weight in the index. For example, if Stock A has 3% weight in Index, then the
Index Fund will invest 3% of its funds in that stock. As a result, the returns on the passive
index fund will be near identical to the returns on the index.
An Active Fund is managed by a Fund manager, who keeps buying / selling securities as
per the investment mandate, he/ she may earn much higher returns than the benchmark
of the fund (outperform) or lower than the benchmark (underperform). Thus, a Fund
manager of a fund whose Benchmark is Nifty, may not buy all the 50 stocks in the same
proportion. The fund manager may buy just 30 companies that constitute the Nifty and
maybe another 10 stocks outside the Nifty, in varying proportions, to beat Index returns.
1.9 If Saloni does not want to pay higher fees to the Fund and wants to align with either return
of NIFTY or SENSEX, she is advised to invest in either Index Funds or Exchange Traded
Funds.

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 9

1.10

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Large Cap Fund Mid Cap Balanced

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Fund Fund

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Sharpe Ratio

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Annualized Return – Risk Free 17.50 -5.23/10.20 16-5.23/9.50 14-5.23/7.50

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Rate/Annualized Risk
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= 1.20 = 1.13 = 1.17

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Treynor Ratio
Return of Nifty – 12-5.23/1.25 10-5.23/1.11 11-5.23/0.92
Free Rate /Beta = 5.416 = 4.297 = 6.272
Comment: On a whole large cap gives a better performance in comparison to midcap &
balanced fund. However, balanced fund gives the best performance in terms of Treynor
Ratio.
Alternative Solution
Large Cap Mid Cap Small Cap
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Sharpe Ratio

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Annualized Return – Risk 17.50 -5.23/10.20 16-5.23/9.50 14-5.23/7.50

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Free Rate /Annualized Risk = 1.20 = 1.13 = 1.17

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Jensen Alpha 17.50-13.69 16-10.52 14-10.54
= Return of Portfolio - = 5.48 = 3.46
Expected Return
Here, in Jensen Alpha, mid cap gives best performance followed by large cap & then small
cap.
CASE STUDY - 2
Rajesh and Vijay run a plastic manufacturing company at Manesar in Haryana. The company is
named RV Plastics Ltd. (RVPL) and it sells its products to leading car manufacturer s in India.
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Both Rajesh and Vijay hold 80% of equity shares in the Company in equal proportion and the

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c. o Planned IPO of RVPL m
remaining equity shares are held by others. The Company has been consistently recording

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double digit growth both in topline and bottom line.

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The Company has decided to go for an IPO, and for this purpose it has appointed Battiwala and
Bang (B&B) as its lead manager, who would prepare a business plan and advice RVPL on IPO
related matters. The Company wants to raise INR 25 crores from the planned IPO, by issuing
25 lakh equity shares of the face value of INR 10 each, at a premium of INR 90 per share. This
is equal to 25% of the shareholding of Rajesh and Vijay before the planned IPO. However , to

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10 FINAL EXAMINATION: MAY, 2023

take care of the market fluctuations and to ensure that the issue does not fail, B&B suggested
the Company to go for a Book-Building issue, with a price range of INR 95 to 110 per share.
The minimum number of shares that could be applied for was 150 shares. The IPO was over-
subscribed by 5 times.
The retail segment, for which 35% of the shares are reserved, was over subscribed 5 times.
Price-wise breakups of applications received in the retail sector are given below:
Price (INR) Number of Shares
110 3,25,000
105 5,00,000
100 15,00,000
95 12,00,000
Cut-off price Balance Shares

Like many retail investors who applied, Raju applied for 5,000 shares at INR 110 per share,
Ram applied for 1,000 shares at INR 100 per share and Ramana applied for 500 shares at the
Cut-Off price. For Cut-Off price calculation, assume same proportion of shares at various price
level in the non-retail segment as in the retail segment.
Buy or Lease
The movement of plastic material within RVPL's Plant is currently manual. Thus, the workers
carry the material in small trolleys. The Company is evaluating the proposal to procure and
install an 'Automated Material Handling System' (AMHS) with 5-year life for INR 150 lakhs,
including delivery and installation costs. Further details in this respect are:
• RVPL can borrow the required INR 150 lakhs and then acquire the AMHS.
• The Company's cost of capital is 12%.
• After five years of use, the estimated residual value of the AMHS is INR 40 lakhs.
• If RVPL owns the AMHS, the estimated maintenance cost of the equipment is INR 10 lakhs
per annum.
• Alternatively, RVPL can lease the AMHS from ABC Equipment Leasing Company for five
years for an annual rental charge of INR 40 lakhs. The lease rental is payable at the end
of the year, but the lessor owns the equipment at the end of the lease agreement.
• The lease contract stipulates that the lessor will maintain the equipment at no additional
charge to RVPL.
• The depreciation rate applicable to the AMHS is 20% on the diminishing value method.
RVPL's marginal tax rate applicable is 30%, and the lease qualifies as a guideline lease.

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 11

Credit Rating of Debt Securities of RVPL
RVPL's strong focus on financial capital coupled with financial discipline and prudence are

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reflected in the strong credit ratings ascribed by rating agencies. The leading credit rating

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agency reaffirmed the rating of AA for Non-Convertible Debentures (NCD) of RVPL. The ratings

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and yields of debt securities issued by RVPL and its comparison with the GOI bonds are

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presented below.
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RVPL GOI Bonds

aInstrument Credit
rating
Yield to Instrument
Maturity
Credit
rating
Yield to
Maturity
3-year NCD AA 9.60% 3-year Government AAA 6.30%
Bond
10-year Debenture A 12.50% 10-Year Government AAA 9.50%
Bond

Treasury Management

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RVPL' s treasury is focused on providing liquidity to the business at the optimal risk -adjusted

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cost. There is a system of frequent monitoring of the financial markets to assess financing and

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investment opportunities to raise fund at optimized costs and deliver superior returns. The

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treasury of RVPL regularly calculates the forward rates. The information gathered from the

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market indicates the following rates:
• One year and two-year treasury rates of 6 % and 7% respectively.
One of the juniors working in the treasury has decided to go for few years in a bank's treasury
in order to get a full exposure. He is preparing for the written exam. He has approached you for
your help in understanding computation of the dirty price. Relevant information in this respect is
given as under:
Bharat Bank of India enters into a Repo for 30 days with Hindustan Bank of India in I0% GOI

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bond at a rate of 6.25% for INR 10 crores. The quoted clean price is INR 98.50, initial margin is

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3%, and days of accrued interest is 250.
m Multiple Choice Questions .
c. o 2.1 Which of the following is correct regarding the total issued capital of RVPL
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(A) INR 10 crore
(B) INR 100 crore
(C) INR 15 crore
(D) INR 150 crore (2 Marks)

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12 FINAL EXAMINATION: MAY, 2023

2.2 Which of the following is correct about the number of shares for which investors opted for
the Cut-Off price?
(A) 8,75,000 shares
(B) 8,50,000 shares
(C) 9,00,000 shares
(D) Data on how many shares were applied by non-retail segment at the Cut-Off price is
required to answer this question. (2 Marks)
2.3 Which of the following statements is true?
(A) Raju will get allotment of shares in the Retail category.
(B) Ram will get allotment of shares in the Retail category.
(C) Ramana will get allotment of shares in the Retail category.
(D) All the three investors will get allotment in the Retail category. (2 Marks)
2.4 Based on the information given in the Case Study, what is the one year forward Treasury
rate?
(A) 7.5%
(B) 7.8%
(C) 8.01%
(D) 8.8% (2 Marks)
2.5 Based on the information given in the Case Study, what would be the dirty price of the
transaction between Bharat Bank of India and Hindustan Bank of India? (Assume 30/360
convention).
(A) INR 104.44
(B) INR 105.44
(C) INR 103.44
(D) INR 106.44 (2 Marks)
2.6 What is the Cut-Off price at which shares of RVPL would be allotted to retail investors?
Support your answer with a detailed calculation showing the amount that can be raised at
each price level. Also compute total number of shares and percentage of shares both under
retail and non-retail category at the identified Cut-Off price. (6 Marks)

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 13

2.7 Based on the information given in the Case Study, evaluate the proposal and decide
whether to acquire the AMHS through lease or buy. (5 Marks)

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2.8 Based on the information given in the Case Study, calculate the implied probability of

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default of RVPL's 3-year NCDs and I0-year Debenture. (4 Marks)

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ANSWER TO CASE STUDY 2

s e g
a
2.2 l(B) a
2.1 (C)

a2.3g (C)
2.4 (C)
2.5 (B)
2.6 Proposed issue size is 25 lakh shares.
Subscribed 125 lakhs shares.

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Total application received for 1.25 crore shares.

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Assumption - Same proportion of shares at various prices for non-Retail category as that

s
of Retail category.
Share Application Received
g l a
Retail a Non-Retail
35% 65%
4375000 8125000

Application Retail Non-Retail Proportion Total Amount Total
Shares Shares Shares

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110 325000 749113.4752 0.092198582 118152482.3 1074113.475

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105 500000 1152482.27 0.141843972 173510638.3
495744680.9 m
1652482.27

s e 4957446.809
em la 3965957.447
100 1500000 3457446.809 0.425531915

las 95 1200000 2765957.447 0.340425532
a g
376765957.4

ag Cut Off 850000 - -

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14 FINAL EXAMINATION: MAY, 2023

Analysis of retail portion
Excluding Cut Off Price Including Cut Off Price
Rate Application Amount Required % of amount Amount Require % of amount
for shares in credit if retail raised to in credit d retail raised to
in retail raised at portion in amount if raised portion amount
category this rate credit required at this in credit required
(` in rate (` In
crores) crores)
110 325000 3.575 9.625 0.371428571 12.925 9.625 1.342857143
105 500000 8.6625 9.1875 0.942857143 17.5875 9.1875 1.914285714
100 1500000 23.25 8.75 2.657142857 31.75 8.75 3.628571429
95 1200000 33.4875 8.3125 4.028571429 41.5625 8.3125 5
Cut Off 850000
Price

Analysis of Non-Retail portion
Rate App. For Non- Amount in Cr. Required Non- % of amount
Retail if Raised at Retail Proportion raised to amount
Category this rate in Cr. required
110 749113.4752 8.240248227 17.875 0.460992908
105 1152482.27 19.96675532 17.0625 1.170212766
100 3457446.809 53.59042553 16.25 3.29787234
95 2765957.447 77.1875 15.4375 5
Analysis as per Weighted Average of application received.
Total Shares Total Amount
110 325000 35750000
105 500000 52500000
100 1500000 150000000
95 1200000 114000000
Total 3525000 352250000
Weighted Average 99.92907801
In view of the above, the cut off price shall be ` 100 because weighted average price
is 99.93 i.e., ` 100. If ` 100 is decided as cut of price then the Pro rata in Retail category
shall be 3.63:1 and in non-Retail category it shall be 3.3:1. At ` 100, the company shall
raise 25 cr. as the required amount. Total no. of shares issued in retail category is 875000
and 1625000 in non-retail category.

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 15

But, if 105 is selected as cut off price then, pro rata in retail category is 1.91:1 and in
nonretail pro rata, it shall be 1.17:1. Cut of price is well above the weighted average price.

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Retail category not oversubscribed without cut off price bids.

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Alternative Solution

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Cut off price will be the highest price at which the company will be able to raise its required

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amount of funding, which is ` 25 crores. We know the total number of shares that have
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l a s
been applied for at various price levels in the other categories is same as the proportion in
a g
ag
which retail investors have applied.
110 105 100 95 No. Of
Shares
Retail Investors 3,25,000 5,00,000 15,00,000 12,00,000 35,25,000
Cumulative Share 3,25,000 8,25,000 23,25,000
applied if this rate
selected as issue
price

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% 9.22% 14.18% 42.55% 34.04%
Cut Off Price
. co 8,50,000

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Applications

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Total No. Of Share 43,75,000

ag
Applied in retail
category i.e.
Retail category 43,75,000
Oversubscription 5
times
Shares to be 16,25,000
issued in Non-
Retail Category –
65% of 25 lakh

om
shares

m c.81,25,000
c. o
Number of shares 7,49,113 11,52,482 34,57,447 27,65,957

em
applied in non-

em la s
retail Category

las Cumulative Share 7,49,113 19,01,595 53,59,042
a g
81,25,000

g
applied in non-

a retail Category if
this rate selected
as issue price

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16 FINAL EXAMINATION: MAY, 2023

Oversubscribed 5 81,25,000
times
Total number of 10,74,113 27,26,595 76,84,042 1,16,50,000
shares applied for +8,50,000 +8,50,000 +8,50,000 + 8,50,000
across all
categories
Total Amount 11.82 28.62 76.84 110.67
received if the rate
is selected as
issue price (` in
crore) [retail + non-
retail excluding
Cut off Shares] (A)
Add amount from 9.35 8.93 8.50 8.08
investors who
have chosen to cut
off (B) (` in crore)
Total amount that 21.17 37.55 85.34 118.75
can be
raised(A+B) (` in
crore)
At ` 105, the company can raise ` 37.55 cr. Thus, the cut off price will be ` 105.
Retail Non-Retail
Shares Considered as applied for ` 105 3,25,000 + 5,00,000 749113 + 1152482
(Excluding Cut off price shares) = 8,25,000 = 19,01,595
Shares applied for, agreeing for any cut-off 8,50,000 -
price
Total number of shares applied @ 105 16,75,000 19,01,595
Total no. of Shares to be issued 8,75,000 16,25,000
% pro rata 1.914% 1.170%
2.7 PV of Cash outflow under lease Option.
Year Lease Rental after tax [email protected]% [12% (1-0.30)] Total PV
(1-5) 40,00,000(1-0.30) 3.951 1,10,62,800
= 28,00,000

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 17

Cash Flow under Borrowing option
5 equal instalments

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` 1,50,00,000 /3.605 (PVIFA 12%)

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= 41,60,887.66 Or 41,60,888
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(1)seDebts and Interest Payments
Working Notes:

la Year Loans a g
ag Instalment
Loan at the Interest
beginning
Principal Bal.at the
end
1 41,60,888 1,50,00,000 18,00,000 23,60,888 1,26,39,112
2 41,60,888 1,26,39,112 15,16,693 26,44,195 99,94,917
3 41,60,888 99,94,917 11,99,390 29,61,498 70,33,419
4 41,60,888 70,33,419 8,44,010 33,16,878 37,16,541
5 41,60,888 37,16,541 4,45,985 37,14,903* -

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* Difference is coming because of rounding off.

em Depreciation
(2) Calculation of Depreciation
Year
s
la X 0.20 30,00,000
Calculation
1
2 a g
1,50,00,000
1,20,00,000X 0.20 24,00,000
3 96,00,000 X 0.20 19,20,000
4 76,80,000 X 0.20 15,36,000
5 61,44,000 X 0.20 12,28,800

Book value of AMHS = 61,44,000 -12,28,800
= 49,15,200

o m
c
Tax Advantage
m Loan Interest Depreciation Maintenance Net Cash PVIF @ . Total PV
c. o em
Year

em la s
Instalment Outflow 8.4%

las g
1 41,60,888 5,40,000 9,00,000 3,00,000 24,20,888 0.923 22,34,480

g
2 41,60,888 4,55,008 7,20,000
a 3,00,000 26,85,880 0.851 22,85,684

a 3
4
41,60,888 3,59,817
41,60,888 2,53,203
5,76,000
4,60,800
3,00,000
3,00,000
29,25,071
31,46,885
0.785
0.724
22,96,180
22,78,344
5 41,60,888 1,33,796 3,68,640 3,00,000 33,58,452 0.668 22,43,446
1,13,38,134

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18 FINAL EXAMINATION: MAY, 2023

Less: PV Salvage value adjusted for Tax savings on loss of Sale of Plant 28,55,406
(` 40,00,000 x 0.668 =26,72,000+(1,83,406 #)
[See Working Note on Depreciation]
# 49,15,200 - 40,00,000
=9,15,200 X 0.30 X 0.668
= 1,83,406
Total PV of Cash out Flow 84,82,728

Decision: PV of Cash outflow of lease option is greater than the borrowing option.
Therefore, buy through borrowing is recommended.
2.8 Probability of Default of 3-year NCD
(1+ Riskfree Bond rate %) (1+ 0.0630) (1.0630)
=1- =1- =1-
(1+ Risk adjusted bond rate%) (1+ 0.0960) (1.0960)

= 1 – 0.9699 = 0.0301 = 3.01%
Probability of Default of 10-year debenture
(1+ 0.0950) (1.0950)
=1- =1-
(1+ 0.1250) (1.1250)

= 1 – 0.9733 = 0.0267 or 2.67%
CASE STUDY - 3
ABC Ltd. is listed on BSE and is located in Mumbai. The current quoted price of ABC Ltd. is
INR 40. The Company is part of a fast rising group called Sigma Group that has interest in
diversified business. The promoters of the Sigma group have now been recognized for their
ethical practices and fair treatment to stakeholders. The Sigma Group follows the best practices
in corporate governance. ABC Ltd. has a robust treasury management and has been working
as a profit-centre under the mandate of the Board. You have recently joined the treasury team.
The chief of treasury has given the following information:
(A) An extract of a newspaper that reads as under:
"The Union Finance Minister of country Z is contemplating measures to increase GDP
growth rate of country Z by following a liberal fiscal policy. This is likely to increase the
fiscal deficit by more than 200 basis points as a percentage of GDP. The Finance Minister
wants the central bank to further compliment the growth strategy by adopting an
accommodative monetary policy with a bias towards low interest rates."
(B) ABC Ltd. has made investment in a callable bond with a call price of INR 1080, and the
current price of which is INR 990. If the yield curve shifts up by 0.5% then the bond price

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 19

will fall to INR 950, and if the yield curve shifts down by 0.5%, the bond price will rise to
INR 1040.

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The chief of treasury wants you to prepare a brief note on (A) above and help him in computing

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effective duration in case of (B) above. In addition to the above, you are supposed to cover on

.
the implications of short and long option positions. Currently major currency risks are being
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hedged using currency forwards. In future, ABC Ltd. may plan to use currency futures and
la s
a s
currency options after comprehensive analysis of the currency derivatives. ABC Ltd. wants to

l a g
a• g need not support in hedging date-for-date and amount-for-amount currency exposures,
use a currency derivative that has the following characteristics and meets certain objectives
listed below:

• is ready to offer margins if required,
• is comfortable with position of under hedge or over hedge,
• prefers liquidity,
• any payment in the nature of expenses at the time of entering into the contract would not

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be appreciated.

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After ABC Ltd., the next well-performing company of the Sigma Group is MSW which is a leading

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coated steel producer in domestic and international markets, with one galvanizing line and two

a s
color coating lines. MSW is located at 180 km from Nasik. It is also home to first-of-its-kind
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appliance grade color coating line, primarily producing steel for refrigerators, air conditioners,
a
washing machines and other home appliances.
American Depository Receipt (ADR) plan of ABC Ltd.
ABC Ltd. plans to start a chain of Supermarkets in the US under the brand FRIS, which stands
for "Find Real India Stores". The Super-markets will stock all ingredients that are used in Indian
kitchen, items that are normally used in Indian household items as well as exclusive Indian art
and craft items.
ABC Ltd. plans to fund this business by coming up with an ADR issue. 1 ADR will be convertible
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into 2 equity shares of ABC Ltd. ABC Ltd. plans to raise USD 50 million, pricing each ADR at

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USD 10. This will dilute the ownership of existing shareholders to the extent of 25%. In other

se
words, they will now be holding only 75% of the total shares issued by ABC Ltd. The USD/INR

s em l a
rate has been stable at INR 80 per USD for the last 2 months and is expected to be around the

la The FRIS brand becomes hugely popular with the Indian Diaspora. a
same level in the foreseeable future.
g
ag Standalone US operations
clocked revenues of USD 120 million and a net profit of USD 30 million. This encouraged the
management to consider an expansion into traditional Indian Jewelry. The Company plans to
curate designs from various popular Jewelry Stores across India that will help resident Indians

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20 FINAL EXAMINATION: MAY, 2023

in the US to buy their favourite Jewelry without having to wait for a trip to India. However, this
will increase money blocked in working capital. Considering that exclusive Jewelry Stores will
need to be opened up, management envisages that an addition USD 50 million of investment is
required. The Company estimates that profitability from Jewelry will have the same margins as
its current business. Great Grade Gold and Jewelry Inc. (GGGJ) is willing to invest USD 25
million in ABC Ltd., provided it is allotted ADR at USD 10, the same price as that of the ADR.
The remaining USD 25 million needs to be funded from internal accruals. An investment banker,
Mr. Lucky Rogers, suggested that the Company must approach a VC. However, he has also
informed that VC would want to control at least 20% of ownership and a seat on the Board.
MSW
MSW uses large quantities of fine-grade quality Zinc for galvanizing purposes. It purchases
required Zinc quantity from a plant located in Visakhapatnam, and the Visakhapatnam Plant
procures the Zinc Ore from a mining company in Rajasthan.
MSW requires at least 100 tons of zinc a year, and the average price per ton of zinc in the spot
market is INR 2,70,000 per ton. The existing zinc inventory would be sufficient for the next 12
months. MSW production projection indicates the need for 100 tons of Zinc for the next year
(2023) of operations. MSW managers are concerned about the zinc miners’ possible labour
unrest and strike which is likely to raise zinc prices in world markets and affect MSW’s
operations negatively. It has been decided to hedge against increasing prices of zinc. The Multi
Commodity Exchange trades standard zinc futures contracts of 5 tons each. Traded price of
zinc future contract in January 2022 was INR 280 per kg, the spot price at that date was about
INR 270 per kg.
MSW Minority Investment in XYX Ltd.
MSW has a minority interest in XYX Limited which is listed on NSE. XYX reported EBITDA of
INR 1000 million and PAT of INR 300 million. XYX has 10 million outstanding shares. The
current market price of the XYX stock is INR 600 per share. The XYX is planning to repurchase
1 million shares. After the share repurchase, the profitability of XYX will not change.
Multiple Choice Questions
3.1 Suppose zinc future contracts deliverable in Mumbai are trading at INR 280 per kg, and
zinc future contracts deliverable at Ahmedabad are trading at INR 282 per kg. Given the
information about price of zinc future, which of the following is correct regarding the type
of basis risk and the amount of basis risk per kg?
(A) Simple basis risk and INR 2 per kg
(B) Arbitrage basis risk and INR 2 per kg
(C) Speculative basis risk and INR 2 per kg

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 21

(D) Locational basis risk and INR 2 per kg (2 Marks)
3.2 After share repurchase by XYX, what would be the revised EPS of XYX?

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(A) INR 30.00

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(B) INR 36.33
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(D)seINR 34.33
(C) INR 33.33
(2 Marks) la
s
a
3.3glWhat would be the effective duration of the callable bond mentioned, in the Case Study?
ag
a (A) 8.33 years
(B) 8 Years
(C) 9.09 years
(D) 10 years (2 Marks)
3.4 Assuming ABC Ltd, has created a long position on put USD/INR currency option to hedge

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dollar receivables. Which one of the following is correct with respect to underlying position

co
under the long put USD/INR currency option?

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(A) Long USD
(B) Short USD

l a s
(C) Long INR
(D) Short INR a g (2 Marks)
3.5 Based on the information given in the Case Study, which currency derivative would be the
most appropriate for ABC Ltd.
(A) Currency Future
(B) Currency Forward
(C) Currency Swap
(D) Currency Option
o m (2 Marks)

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3.6 Compute the number of shares issued by ABC Ltd. before going for the ADR. (3 Marks)

m e
will be the extent of dilution of shareholders, who were holdingsshares before the
a
ABC Ltd. decides to go for VC Funding and also select GGGJ as preferential shareholder,

s e g l
l a ADR issue?
a
(3 Marks)

ag 3.8 (A) What position and how many contracts in zinc future would provide hedge against
rising prices of zinc? (2 Marks)
(B) What would be the contract value of Zinc Future contracts used for hedging? (1 Mark)

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22 FINAL EXAMINATION: MAY, 2023

(C) What would be the profit/loss if MSW closes out future position in Dec. 2022 at INR
285? (1 Mark)
(D) Suppose zinc futures contract used for hedging requires an initial margin of 5% of
the contract value and the maintenance margin of 3%. What change in the futures
price will lead to a margin call? What happens if MSW fails to meet the margin call?
(2 Marks)
3.9 What would be the impact of an increase in fiscal deficit on the economy of country Z
assuming no change in other macro-economic factors? (3 Marks)
ANSWER TO CASE STUDY 3
3.1 (D)
3.2 (C)
3.3 (C)
3.4 (B)
3.5 (A)
3.6 1 ADR = 2 shares
Price of ADR 10 USD
Size of ADR issue 50 million
No. of ADRs being issued (50 million/10 USD) 5 million
Thus, equivalent number of shares 10 million
Or 1 crore shares
Dilution because of this issue 25%
Let shares held by original owners be X
Shares issued for ADR 1 crore
Shares after Issue X+1
Dilution is 25%
Thus, X/X + 1 = 0.75
X = 0.75X + 0.75
X – 0.75X = 0.75
0.25X = 0.75
Or X = 0.75/0.25
= 3 crores

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 23

3.7

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Shares before ADR 3 Cr

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Shares issued in respect of ADR 1 Cr

c o m
Terms of. issue of shares to Great Grade e
Number of shares after ADR, before issuing shares to Great Grade 4 Cr

emto be invested la s
s
laIssue price per ADR a g
g
Amount 25 MM USD

a No. of ADR to be issued 10 USD
2.5 MM
No. of equivalent shares 5 MM or 0.5 Cr.
Total Shares to be issued to VC (4 Cr + 0.5 Cr) 4.5 Cr.
VC will take 20% stake
Thus, shares held by original shareholders, holders of ADR and
Great Grade, will come to 80%.

Total shares issued, after ADR, VC funding.c
om
Thus, shares to be issued to VC (4.5 crores x 20/80) 1.125 Cr.

e mCr.
and having Great Grade 5.625

s
a (3/5.625 x 100)
as preferrential partner = 4.5 Cr. + 1.125

g l
a
% holding by original shareholders 53.33%
Extent of dilution (100% – 53.33%) 46.67%
3.8 (A) MSW need to create a long position in Zinc Future.
Quantity of zinc to be purchased = 100 tons. Each future contract is of 5 tonnes. This
means 20 contracts to be bought.
(B) MSW is required to buy 20 contracts at a price of ` 280 per kg. It means ` 2,80,000
per ton. And, for one contract, it would be ` 14,00,000 (2,80,000 x 5). Therefore, the
value of 20 contracts = 20 x ` 14,00,000 = ` 280 lakhs.

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(C) When MSW closed out the future position in December 2022, the price is ` 285 per

c. o m
kg. It means 2,85,000 per tonne, and for 1 contract, it would be ` 2,85,000 x 5

se
= ` 14,25,000. Therefore, the value of 20 contracts would be ` 285 lakhs i.e., 20 x

s em la
` 14,25,000. So, the profit will be ` 14,25,000 – ` 14,00,000 = ` 25,000.

la a g
(D) The total initial margin required is 5% of 280 lakhs = ` 14 lakhs. Maintenance Margin

ag is 3% of ` 280 lakhs = ` 8.40 lakhs. Thus, there will be a margin call when ` 5,60,000
or more has been taken out from the margin account for MTM settlement. This will
occur when the price of zinc decreases by ` 5,600 per ton (5,60,000/20 = 28,000 or
28000/5 = 5,600), or ` 5.6 per kg. or more.

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24 FINAL EXAMINATION: MAY, 2023

If MSW receive a margin call, it must ensure that it increase the equity in its Margin Trading
Facility (MTF) account. Firstly, the brokers notify on margin calls via text or email. Once
the margin call gets issued, it has a predetermined number of days to fix the issue .
Investors should pay the debt and interest amount as per the signed agreement. The
number of days will differ from broker to broker. Failure in doing so will allow the broker to
sell off its positions to recuperate the loan amount. If it waits and the prices fall even further,
recovering the debt against the collateral would deem unobtainable.
3.9 If there is no change in other macro-economic factors, the impact of an increase in fiscal
deficit on the economy of country Z would in long term be negative. The reason is that
higher fiscal deficit will lead to more expenditure on the part of government. And the
government will in most probability manage this by resorting to higher borrowings which
will put more pressure on the exchequer. For instance, when the government continues
borrowing and stops printing currency notes, there is an upwards pressure on interest
rates. Increased interest rates then result in increased production costs which lead to
higher prices.
On the other hand, if higher fiscal deficit is complemented by adopting an accommodative
monetary policy with a bias towards low interest rates as given in the case study, then it
would have a positive impact on the economy of country Z. Fiscal deficits can help a slow
economy, especially if the money is spent on productive assets that create investment and
job opportunities. However, in this case, it cannot be assumed that there is no change in
other macro-economic factors.
Alternative Solution
Fiscal deficit is the extent by which Government revenues fall short of government
expenditure. It is the amount which government will have to borrow, so that it can pay for
all the expenses it has budgeted. It is expressed as a percentage of GDP.
The government can either borrow from the market, or from RBI. If it borrows from the
market, it will result in increase in interest rates. This is because government is safest
borrower. It is also the largest borrower. Thus, a lot of money available for lending with
banks, other financial institutions and retail investor are diverted to government. With
lesser amount available for private sector, competition for funds will push up interest rates.
The government can borrow from RBI. This effectively result in printing of more money by
RBI. With more money supply without corresponding increase in demand, inflation will
shoot up.
High inflation will result in depreciation of currency. Thus, foreign institutional investors
(foreign investors who have invested their capital in Indian markets to earn returns) will
immediately pull money out of the economy, as their returns are calculated in USD terms.
This will further impact the value of domestic currency.

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 25

A higher fiscal deficit means, higher government debt. This can result in downgrade of
credit rating of the country. All the above factors can negatively impact economic growth

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of a country.

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CASE STUDY - 4

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Good Perform Ltd. (GPL) is a holding company and has set up four entities which operate in

s e la
printing, banking, private equity and infrastructure sectors. Manaank Publications Ltd. (MPL) is

l a
in printing business, Right Bank Ltd. (RBL) is in banking and Clear Waters (CW) in private equity
a g
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funding business. Delhi Engineering Company Ltd. (DECL) operates in infrastructure segment
and is also listed. Currently, infrastructure team of DECL is considering a proposal for
construction of a road project in Public Private Partnership (PPP) mode. The project finance
team is estimating one-time Viability Gap Funding (VGF) of the likely PPP project.
DECL
In December 2022, DECL announced its offer of rights issue of 3 million shares in the ratio of
1:1 for INR 200 per equity share; the entire amount is payable on application. Assuming a full
subscription, DECL would mobilize INR 600 million. The issue opened on December 12, 2022

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and closed on December 23, 2022. Mr. Sinha, Chairman and Managing Director of DECL, said

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that the fund raised through the rights issue would help the Company reach the target debt

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reduction, and also help the Company's working capital requirements. Before the rights offering,

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DECL had issued and fully subscribed 3 million shares of INR 10 face value. Current market

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price of DECL's share is INR 250. You have been approached to estimate theoretical ex-right
price, and explain differences between 'rights offer' and typical issue of common shares through
the FPO.
MPL
It is one of the leading publishers of text books that are specifically written for class XII students
of a particular state. Mr. Ravindra Mantri is the proprietor of MPL. The books are very popular
amongst the students as well as teachers because of their simplicity, small size and low price,
apart from being examination oriented. For many years, MPL have followed a very lean model.

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The publication works with certain authors, who send the soft copy of the content to Mr. Mantri,

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who in turn forwards it to Sai Graphics which is a separate entity that does end-to-end printing
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of all types'. On receiving the soft copy, Sai Kumar, the proprietor of Sai Graphics, processes

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the content up to the binding stage and the "ready for sale" books are delivered to the office-

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cum-godown of MPL. The Company then calls and informs a few wholesale distributors with

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whom they have been working for many years. The wholesalers in turn send their delivery vans

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to collect the text books in bulk from the office-cum-godown of MPL. Stock at godown is
a negligible, as books are printed based on orders received from distributors, who collect the
books as soon as they are available. However, books are supplied on credit. Mr. Mantri then
visits the offices of the wholesale distributors and collects the money. Typically, I-month of credit
is granted. There are no retail sales at the office. Thus, the operating expenses of MPL are just

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26 FINAL EXAMINATION: MAY, 2023

rent for their office-cum-godown and salary of two employees. This comes to INR 50,000 per
month. There are no sales executives, as the books are popular. Given its model, the costs
involve payment of royalty to authors @ 10% of the Maximum Retail Price (MRP) of the books,
and printing expenses. Royalty is paid on actual number of books sold. It is typically settled at
the end of the year after all accounts with wholesalers are settled.
MPL supplies books to wholesalers at a trade discount of 30%. It keeps a margin of 100% of
cost of printing and production, to meet its operating expenses and earn a decent profit for itself.
An amount equal to 1 % of sales is always held in cash and cash equivalents. Last two years
performances have been adversely impacted as result of COVID. Colleges were closed, classes
were held online and the exam pattern was changed. Mr. Mantri feels that many students were
able to pass the exams without having to read text books. Wholesalers started delaying payment
and the debtors have been piling up since then. Today, average collection period has reached
60 days. This is causing strain on the publications, as Mr. Mantri is very prompt with his payment
to Sai Graphics. Printing bills are cleared within 2 days of delivery of books by Sai Graphics.
There is no short-term borrowing. Working capital locked in the business has shot up because
of high debtors. Mr. Mantri is evaluating a working capital loan from Jai Hind Bank (JHB). Interest
is likely to be 14% p.a. Mr. Mantri seeks your advice on how to resolve this issue. The following
information is made available to you:
• Net Sales FY 2022-23: INR 5 crore
• Normal Credit Period: 30 days
• Current Collection period: 60 days
• Bad Debts: Given its strong relationships, MPL did not have bad debts earlier. However,
Mr. Mantri feels that he will have to be prepared to lose 2% of debtors as write -offs.
Mr. Mantri feels that sales for FY 2023-24 will go up by 20%, but he is not comfortable spending
time on collections. He estimates that he is spending about INR 10,000 per month because of
collection related efforts. One of his entrepreneur friends suggested Factoring as a model to Mr.
Mantri. Factoring services are available on the following terms:
The Factor will pay 80% of receivables upfront@ 12% p.a. but will charge commission of 1 %.
If Credit rating of debtors is available, the Factor will consider a 200 basis point difference in
interest rates. Factoring will be on a non-recourse basis. The Factor uses 360 days a year for
calculation.
RBL
RBL has a large base of depositors. It has built a strong brand for itself through its efficient
service, strong relationship with depositors as well as borrowers, apart from offering competitive
rates of interest. Interest rates on deposits are at least 50 basis points higher than competing
banks, while lending rates are at least 50 basis points lower than competing banks. RBL offers

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 27

traditional products such as savings bank Accounts, fixed deposits (FD) for various periods and
current accounts on the liabilities side. Products on the asset side are largely term loans of 5

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years, gold loans, overdrafts and personal loans.

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RBL is unlisted and closely held, but Priyanka Deshpande, the majority share -holder and

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Managing Director, wants to go for an IPO in the next 3 years and wants the financials of RBL
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to look attractive for prospective investors. She is targeting an ambitious and aggressive growth

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for the Bank so that rich valuation can be achieved. Tanushree Mathur, the Chief Financial
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Officer of RBL, suggests that RBL can increase its profitability by increasing its Net Interest
Margins. She suggests that RBL should offer home loans of 15 to 20 year, which can earn higher
interest rates. However, to gain market share, RBL will have to offer rates that are 50 basis
points lower than home loan rates offered by competing banks. While the current going rates
for 20 year home loans is 8.5% p.a., Tanushree proposes that home loans should be offered at
an aggressive fixed interest rate of 8% p.a.
Mehak Agarwal, who is heading the Treasury Department of RBL, says that she can compensate
for this loss of interest by sourcing the funds required for home loans from the money market at

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much lower rates. In fact, Mehak asserts that Net Interest Margins will increase as the rate of

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borrowing in the money market is much lower than the rates at which RBL accepts fixed

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deposits. Mehak is confident of borrowing at 4% p.a. from the Call and Notice Money market,

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which is lower than 6% offered on a 5-year FD.

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Priyanka is thrilled that her vision is finally taking shape. For the first year, Priyanka plans to
disburse home loans of INR 100 crore, taking this number to INR 250 crore and INR 500 crore
in the second year and third year, when the IPO is planned. She visualizes herself on the cover
page of business magazines as the lady who revolutionized banking.
CW
Ms. Kavita is the Chief Investment Officer of CW. The private equity firm CW searches for
privately held firms with excellent growth potential and whose owners are willing to sell a fraction
of ownership. It is now competing to acquire stake in a local logistics company named Pro-Fast

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Logistics Private Limited, a fast-growing end-to-end service provider with supply chain logistics.

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Pro-Fast was incorporated by Mr. Bansal ten years ago. In addition to cargo services, Pro-Fast

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also ensures warehousing, inventory management and transportation network. The Company

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has established partners and an associate network spanning domestic and international

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borders. Thus, they bring logistics services that are fast, convenient and reliable. Pro-Fast

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ensures flexibility, scalability, and economic feasibility in carrying out the logistics requirements
a of their clients. In December 2022, Ms. Kavita contacted Mr. Bansal, and the two decided to
discuss the possible investment in Pro-Fast. Mr. Bansal decided to solicit an offer from CW in
response to Ms. Kavita's request. CW is willing to invest INR 20 million today and exit after 5
years at EBITDA multiple of 12 times.

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28 FINAL EXAMINATION: MAY, 2023

• The expected EBITDA after five years from now is INR 50 million
• CW expects 40% IRR from this investment.
Multiple Choice Questions
4.1 The cost of printing and production, as a percentage of MRP, of MPL is:
(A) 14%
(B) 20% '
(C) 30%
(D) Insufficient information to calculate (2 Marks)
4.2 The amount of money, that is stuck in debtors, for FY 2022-23 rounded off to nearest INR
in Iakhs, for which Mr. Mantri will have to take a working capital loan is -
(A) INR 37 lakhs
(B) INR 40:'lakhs
(C) INR 84 lakhs
(D) INR 83 lakhs (2 Marks)
4.3 The net amount of money that Mr. Mantri will receive, from the Factor services if he opts
for factoring in 2023-24, will be:
(A) INR 77.60 lakhs
(B) INR 65.60 lakhs
(C) INR 68.0 lakhs
(D) INR 80 lakhs (2 Marks)
4.4 Which of the following is correct regarding VGF in a PPP project?
(A) It is designed to provide capital support to PPP projects which would not otherwise
be financially viable.
(B) It is designed to discourage private participation in infrastructure projects.
(C) It is meant to absorb the risk in PPP projects which would not make otherwise
sustainable.
(D) It is profit sharing mechanism between government agency and private parties in a
PPP Project. (2 Marks)
4.5 In case of factoring, which of the following statements do you agree with?
(A) A higher Credit rating will result in lower interest rates.
(B) A lower Credit rating will result in lower interest rates.

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 29

(C) Credit Rating has no bearing on interest rates.
(D) Credit Rating does not matter if Factoring is on a non-recourse Basis. (2 Marks)

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4.6 (A) Based on the information given in the Case Study, evaluate the growth strategy of

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RBL from the point of profitability, liquidity and risk Management. (3 Marks)

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(B) Why are interest rates in the Call and Notice Money market are generally lower than

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the interest rates offered on fixed deposits? (2 Marks)
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a4.7g Based on the information given in the Case Study, answer the following questions:
(C) Are the interest rates in the Call and Notice Money market always lower than the
interest rates offered on fixed deposits? (1 Mark)

(A) What will be the value of Prof-Fast after 5 years? (1 Marks)
(B) If CW invests INR 20 million today, what percentage of stake should they have in Pro-
Fast assuming a 40% IRR? (2 Marks)
(C) What would be the estimated difference in Pre-Money and Post Money valuation as
per CW's expected return of 40% IRR? (1 Mark)

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o and typical issue of common shares
c
4.8 (A) What would be the ex-right price of DECL's shares? (2 Marks)

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(B) What is the difference between 'rights-offer'
through FPO?
s e (3 Marks)

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ANSWER TO CASE STUDY 4
4.1 (C)
4.2 (A)
4.3 None of the option is correct *
4.4 (A)
4.5 (A)
*The answer is ` 77,42,000.

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4.6 (A) Profitability

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Short term profitability may be affected because of low lending rate in comparison to

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other banks. However, high loan tenure of 15-20 years may lead to higher interest

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earnings in long term. Further, compensating the loss of interest by sourcing the funds

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from money markets at lower rates may not bring much fillip to the profitability position

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as only interest expense is reduced. Overall profitability depends upon the whether
a RBL will be able to attract customers with low interest rate on a consistent basis for
a long period of time.

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30 FINAL EXAMINATION: MAY, 2023

Liquidity
RBL should safeguard against laxity in scrutinizing the home loan applications of
home buyers in quest for customer building and higher profitability because if they
fail to pay their interest and principal on time that will jeopardize the liquidity situation
of the company.
Apart from the mismatches in assets and liabilities, the inherent weaknesses of the
banks to reasonably forecast their liquidity position had often pushed some of them
to the state of severe liquidity crunch.
Risk Management
RBL should install a proper risk management process by scrutinizing the loan
applications of the home buyers very thoroughly so that the company may not find
itself in a tight liquidity situation in future. Gradually, RBL should think of decreasing
the deposit rate and increasing the lending rates in line with other banks once their
customer base is enhanced.
Furthermore, the interest rate in the market is market driven and is highly sensitive to
the forces of demand and supply. Within one fortnight, rates are known to have moved
very high and may even touch a level as low as 0.50% to 1%. Intra-day variations are
also quite large. Hence, the participants in the markets are exposed to a high degree
of interest rate risk.
The call money rates have been fluctuating widely, going up to 70 per cent and
dropping to around 3 per cent in the recent past.
Also, one of the most important factors contributing to volatility in the market is
mismatches in assets and liabilities created by the banks.
(B) Call money market (or markets for overnight) is a market where banks borrow and
lend for a period of 1 day. Notice money market is market for securities with maturity
less than 14 days. Typically, large institutions borrow large amounts for a small period
of time. The tenure is low and consequently, risk is also lower. Hence, interest rates
are lower.
First Alternative Answer
Interest rates in the call and notice money market are generally lower than the interest
rate offered on fixed deposits because of the following reasons:
(i) Call and notice money markets are subject to lower interest rates because of
the underlying assets, and because they are dependent on the applicable
market interest rates.
(ii) They are safe and come with low risk.

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 31

Second Alternative Answer
The interest rates are purely determined by demand and supply position available

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with Discount and Finance House of India (DFHI). Normally, it is low since supply

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exceeds demand. However, during closing period of banks, when the demand

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increases for meeting margins, the rates shoot up significantly.

ethemCall and Money market.
(C) No, when liquidity becomes tight, the interest rates can shoot up to very high level in
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4.7 l(A)
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ag = ` 50 million x 12 = ` 600 million
The value of Prof-Fast after 5 years

(B) Exit Value = 12 x ` 50 million = ` 600 million
Post Money Valuation
= 600/ (1.40) ^5 = 600/5.37824
= ` 111.56 million
Equity Percentage that CW should have in Pro-Fast

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= ` 20 million/` 111.56 million

emValuation – Funds Invested
= 17.93%

s
la million – ` 50 million = ` 61.56 million
(C) Pre money valuation = Post Money

g
So, estimated differenceain Pre-Money and Post Money valuation.
= ` 111.56

= 111.56 – 61.56 = 50 million
4.8 (A) Ex Right Price
= 30,00,000 shares x ` 250 + 30,00,000 shares x ` 200/30,00,000 shares + 30,00,000
shares
= ` 75,00,00,000 + ` 60,00,00,000/60,00,000 shares

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= ` 225

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(B) The differences between ‘rights-offer’ and typical issue of common shares through

etomsubscribe. So,
FPO are as follows:

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1. In the rights issue, only the existing shareholders are allowed

la 2. Further, in right issue, the allotment would be in a
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the shareholding pattern does not get significantly altered.

ag proportion to the existing
shareholding pattern on the record date. So, one does not have to worry about
over subscription.
3. The FPO is usually at the prevailing rates (or at a 5% discount) so that the

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32 FINAL EXAMINATION: MAY, 2023

existing shareholder’s interests do not get hurt. But the rights issue is usually a
significant discount from the prevailing market rate to encourage subscription
and enable the existing shareholders to save taxes by booking paper losses.
4. This discount in prices in a right issue leads to a significant fall in the share price
of the company post record date. But, now since the investors have more shares,
their wealth post right issue does not alter. And this fall gives room for booking
of paper losses and getting tax shields.
5. But this also has a downside. If a company issues rights shares (at a significant
discount) then the existing shareholders must invest in the company, else they
will suffer a significant dilution of stakes and capital losses.
CASE STUDY - 5
Mr. Mahindra, Chief Financial Officer of Excel Finance Limited (EFL), joined the Company only
a month ago and has been given the additional responsibility of statutory compliances. EFL is
listed on both NSE and BSE and is ranked 350 based on market capitalisation. Mr. Mahindra
has more than two decades of experience at various levels of accounting and financial reporting
function in large corporates. EFL's company secretary and chief compliance officer left the
Company a year ago due to health issues. The Company is in the process of finding a suitable
candidate for the position. After reviewing individual profiles of board members, Mr. Mahindra
came to know that one of the directors Mr. Anish Thakur is a company secretary.
(A) Immediately after assuming office Mr. Mahindra has carried out a detailed review of
compliances and certain issues have been identified that need special attention. Such
issues are given below:
(i) A fraud was committed by Mr. Shark who is a KMP. However, this event was not
reported to the stock exchange as it was found to be immaterial by the then
compliance officer.
(ii) On one occasion, no independent director was present in the meeting of the Audit
Committee of the Board (ACB), and on two occasions, only one independent director
was present in the ACB meeting.
(iii) One of the independent directors has resigned in the past and the matter was reported
within 21 days counted from the date of resignation.
(iv) The Chairman of the Board of EFL Mr. Mahendra Nath is father of the MD and CEO
Mr. Bakshi.
(v) There is only one single woman independent director on the Board of EFL.
(B) During FY 2021, financial markets globally witnessed a low-interest rate environment and
abundant liquidity. Taking the benefits of low interest rates before the turn in the interest

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 33

rate cycle, EFL successfully refinanced its liabilities by borrowing in foreign currency. The
credit rating of EFL was improved by two notches which enabled the company to borrow

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at competitive prices.

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The Company raised USD 10 million at an interest rate of 2% annually on April 1, 2021

.
from a global lender. The exchange rate of USD/INR on April 1, 2021 was INR 66.50 per
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USD. Due to inflationary pressure, the exchange rate USD/INR rose to INR 72.50 per USD

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on March 31, 2022. The Company did not foresee such a huge depreciation in the rupee.
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The Company could have borrowed the equivalent INR amount from a bank on April 1,
2021 at 10.50%.
(C) EFL has invested INR 100 crore in Collateralized Debt Obligations (CDOs), Mr. Mahindra
asked his colleague to prepare a report indicating the risk-return profile of the CDOs.
Relevant extracts of the report are given below.
Debt/ Rating YTM Recovery Probability Price Coupon Tranche
Maturity Rate of Default INR Rate
Senior -1 AAA 8.00% 99% 0.02% 99.66 7.00% 50.00%
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3 Years

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Senior -2 AAA 8.00% 98%

s 90%
2 Years
Mezzanine BBB
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10.00%
l a 2.00% 103.78 11.00% 10.00%
5 Years
Junior B
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12.00% 80% 4.00% ? 12.00% 5.00%
4 Years
Mr. Mahindra wants that every team member in the treasury should develop expertise in
CDOs as these instruments have given good returns in the past. You have been
approached to prepare a note on the functioning of CDOs so that new members also can
be trained. He also wants your inputs on CDO vs. Assets Backed Securities (ABS) backed

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by retail loans with a focus on the process of credit quality analysis of the underlying.

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(D) The promoters of EFL also run a very old family business of stock broking which is named

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as Goldline FinTech Ltd. (GFT). GFT is one of India's largest broking entities, which

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provides end-to-end solutions for all capital market related activity. Apart from serving as

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a broker with both NSE and BSE, it has a separate trading desk that carries out trades on

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behalf of the entity. GFT has a Portfolio Management Services (PMS) license and it offers

ag PMS to its clients with a minimum investment size of one crore. It is also a Depository
Participant with NSDL. GFT has seen rapid growth over the last decade and is rated as
one of the most respected and trust-worthy brokerage house in India. The growth has come
at a huge cost, as GFT has invested significant Capex into building infrastructure. Having
hired some of the best professionals, its operating costs have also shot up. The

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34 FINAL EXAMINATION: MAY, 2023

management is aware that it needs to increase its revenues to remain profitable, but
markets have slowed down over the last two years, resulting in strain on resources of GFT.
GFT has an army of smart dealers punching trades on its behalf, but Mr. Mani has been a
star trader. Whatever trades he has executed have resulted in huge profits for the entity.
The CEO of GFT calls Mr. Mani for a meeting, in which he gives Mr. Mani the mandate to
increasing its profits through trading. Thereafter Mr. Mani’s trading limits were increased
and he was given all operational freedom. In addition, a 20% share in profits is offered to
Mr. Mani, on all profits earned by him for GFT, but Mr. Mani does not have to bear any
share of the losses that his trades might lead to. Encouraged by this offer, Mr. Mani spends
a lot of time researching potential multi-baggers. He zeroes in on JPC Agrotech. Mr. Mani
realizes that this company is a turnaround candidate and there is sufficient liquidity in the
counter to take up large positions and benefit from the turnaround. JPC Agrotech is
currently trading at INR 60 on the BSE. Given the liberty offered to him, Mr. Mani starts
accumulating shares of JPC Agrotech. He purchases a large quantity of shares, but to his
bad luck, the price of JPC Agrotech kept falling and is now trading at INR 45. Mr. Mani
wants to average cost of buying and hence buys more quantity but he finds that there is
no money in the bank to fund the purchase. To ensure that he does not lose the
opportunity, Mr. Mani enters into a deal with WeHelp Investment and Finance Ltd. wherein
WeHelp agrees to extend a loan to GFT on pledging of shares. Mr. Mani pledges the
shares of JPC Agrotech to avail of the loan and invests the entire amount in purchase of
additional shares of JPC Agrotech. Mr. Mani is happy that his average cost is now INR 50,
on account of larger quantity bought at a lower price. He feels that it is just a matter of time
before the share price of JPC bounces back. He was visualizing a hefty bonus payment on
account of his smart move.
To his dismay, information about change in fertilizer policy impacted the share prices of all
Agrotech companies and the price of JPC Agrotech dipped sharply to INR 35. Mr. Mani
does a quick study and arrives at a conclusion that the new policy is actually beneficial to
JPC Agrotech, which will now be instrumental in the share prices going up. He rushes to
WeHelp Finance to get some more funding.
Unfortunately, the CEO of WeHelp tells Mr. Mani that they are no longer in a position to
fund him and that they have already sold the shares pledged by Mr. Mani towards margin
payment. Mr. Mani is devastated and he explains to the CEO as to why JPC Agrotech is
such a great Investment idea. The CEO, while in agreement with Mr. Mani's analysis, says
that he cannot provide funds without security. When Mr. Mani forcefully argues that JPC
Agrotech is a great investment, the CEO gives a proposal to Mr. Mani. He says that, since
GFT is a DP and thus has access to shares of its clients in its Demat accounts, Mr. Mani
could pledge those shares and use the funds to buy more shares of JPC. Seeing no other
alternative and confident that the shares will bounce back, Mr. Mani pledges shares
belonging to clients with WeHelp and borrows another large amount from WeHelp and buys
more shares of JPC Agrotech.

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 35

Within a few days, shares of JPC Agrotech further tanked to INR 25. WeHelp sells all the
shares pledged by Mr. Mani. This information becomes public and investors, not finding

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their shares in their Demat account, file complaints and cases with the regulator and in the

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court.

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Within a few days, GFT is stripped of all its licenses and the management is faced with

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criminal charges. Mr. Mani is fired. GFT applies for insolvency.
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Over the next few days, JPC Agrotech reports stellar results. The industry suddenly takes
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cognizance of its unique position to benefit from the new policy. The share price touches
the upper circuit every day and is now trading at INR 95 with a lot more buying interest
from Flis likely to take the stock price past INR 100. Mr. Mani, meanwhile, has been
arrested and is sulking in Jail, but is happy that his stand has been vindicated. He had
identified a true multi-bagger. It was not in his destiny to make money from it.
Multiple Choice Questions
5.1 Which of the following is incorrect about the CDO?
(A) A CDO creates fixed income securities with widely different risk characteristics from

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a pool of risky assets.

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(B) A CDO is called synthetic CDO if the risky assets in the underlying pool are Credit

em the total risks associated with the pool of
Default Swap (CDS).
(C) A CDO neither reduces risk norsincreases
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aassociated with the pool of risky assets.
risky assets.
(D) A CDO reduces total risk (2 Marks)
5.2 Which of the following is correct with respect to appointment of Mr. Anish Thakur as a
compliance officer of EFL?
(A) The appointment cannot be done as it is against regulations of SEBI.
(B) The appointment can be done as there is no restrictions prescribed in the regulations
of SEBI

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(C) The appointment is not covered by the SEBI regulations.

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(D) The appointment is possible after taking approval of the Ministry of Corporate Affairs.

em l a se (2 Marks)
las g
a the date of resignation
5.3 Which of the following is correct with respect to resignation of the independent director?

ag (A) Disclosure to stock exchange done by EFL within 21 days from
is in compliance of the regulation.
(B) Disclosure to the stock exchange should have been done by EFL within 7 days from
the date of resignation.

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36 FINAL EXAMINATION: MAY, 2023

(C) Disclosure to the stock exchange should have been done by EFL within 14 days from
the date of resignation.
(D) Only detailed reasons given by the independent director is required to disclose to the
stock exchange and there is no need to get confirmation from the independent
director that no other material reasons exist. (2 Marks)
5.4 Which of the following is correct with respect to the position of chairman of the Board of
EFL?
(A) The chairman can be executive director.
(B) The chairman can be related to the MD & CEO.
(C) The chairman shall not be related to the MD & CEO.
(D) The chairman shall be non-independent director. (2 Marks)
5.5 Which of the following is correct about the appointment of a woman director on the Board
of EFL?
(A) When a woman independent director has been appointed there is no need to appoint
an additional woman director.
(B) Despite that a woman independent director has been appointed there is a need to
appoint an additional woman director.
(C) Minimum three-woman directors including one independent directors must be on the
Board.
(D) There is no need to appoint a woman director if after reasonable search no suitable
candidate could be found. (2 Marks)
5.6 (A) What is the cost of borrowing USD 10 million from the global lender? (1 Mark)
(B) Determine the amount of loss/gain because of borrowing in foreign currency from
global lender instead of a bank. (1 Mark)
5.7 Given that the probability of default of junior debt is 4%, and expected recovery is 80%,
what would be its expected loss? (3 Marks)
5.8 In what context ABS backed by retail loans is similar to a COO? Do you see any difference
in the process of analysis of credit quality of underlying assets in a COO and an ABS
backed by retail loans? (3 Marks)
5.9 Do you think non-reporting of fraud event of Mr. Shark, on materiality ground, to the stock
exchange was right? (2 Marks)
5.10 What are the key issues in case of GFT that highlights the need for risk management?
(5 Marks)

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 37

ANSWER TO CASE STUDY 5
5.1 (D)
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5.2 (B)

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5.3 (B)
5.4 (C) m

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5.5 (A)
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a (A) Amount borrowed in USD = USD 10 million
5.6
Amount borrowed in INR at Spot Rate (66.50 x 10 million) = INR 665 million
Interest on USD for period (1/4/21 to 31/3/22) = USD 0.20 million
Amount repayable on 31/3/22 = USD 10.20 million
Applicable Spot Rate = INR 72.50

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Amount repayable in INR (10.20 million x 72.50) = INR 739.50 million

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Interest Cost (739.50 – 665.00) = INR 74.50 million
Interest Cost in % = INR 74.50/665 m
s efrom a bank @10.50% (665 million x 10.50%)
x 100 = 11.20%

= INR 69.825 million ag
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(B) If equivalent loan has been taken

Thus, loss due to loan from a global lender (74.50 – 69.825) = INR 4.675 million
Or 11.20% - 10.5% = 0.70%
5.7 Total investment in junior debt is 5% of total investment in CDOs whch is ` 100 crore.
Therefore, investment in junior debt is ` 5 Crore.
Loss Given Default (LGD) is = Exposure at Risk x (1 – Recovery Rate) = ` 5 crore x
(1 – 0.8) = ` 1 crore.
o m
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Therefore, expected loss = probability of default x LGD = 4% of ` 1 crore = ` 4 lakhs.

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by the sale of

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gin CDO is different from
pool of risky assets by a financial institution to a SPV which issues CDO and/or ABS.

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The process of analysis of credit quality of the underlying assets
an ABS backed by retail loans.
• Every asset in a CDO analysis requires detailed and specific analysis while in ABS it
is done collectively.

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38 FINAL EXAMINATION: MAY, 2023

• Credit rating is typically available for the underlying in a CDO and the same is not
available for each underlying asset.
Alternative Solution
An asset-backed security (ABS) is a type of investment that is backed by a pool of debt,
such as auto loans or home loans. So, it is a type of investment that offers returns based
on the repayment of debt owed by a pool of consumers.
On the other hand, a collateralized debt obligation (CDO) is a version of an ABS that may
include mortgages as well as other types of assets.
In either case, the owner of such a product makes money, directly or indirectly, from the
repayment of principal and interest by the pool of consumers whose loans have been
packaged to create that security.
5.9 No, it was not right. In fact, it is a violation of sub-regulation (4) of regulation 30 of SEBI
(LODR) Regulations, 2015.
Moreover, as per Regulation 5 of SEBI (LODR) Regulations, 2015, it is the obligation of
the listed entity to ensure that a Key Managerial Person (KMP) complies with the
responsibilities or obligations, if any, assigned to them under these regulations.
Furthermore, as per Regulation 6 of SEBI (LODR) Regulations, 2015, the compliance
officer shall be responsible for co-ordination with and reporting to the Board, recognized
stock exchange(s) and depositories with respect to compliance with rules, regulations and
other directives of these authorities in manner as specified from time to time.
So, in view of the above, the non-reporting of fraud event of Mr. Shark, on materiality
ground, to the stock exchange was not right.
5.10 The issues which have gone wrong and need risk management are as follows:
1. Proprietary Trading should not be allowed for PMS and broking firms.
2. Lack of internal controls.
3. No limit on trading by dealers.
4. Unhindered leverage.
5. Pledging client assets for proprietary trade.
Alternative Solution
Key issues in GFT that highlights the need for Risk Management
(i) Investing of significant Capex into building infrastructure. It could have done slowly
and gradually.

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PAPER – 6B: FINANCIAL SERVICES & CAPITAL MARKETS 39

(ii) Operational freedom to Mr. Mani mandating that he does not have to share any of the
losses that his trades might lead to. Mandating losses would have act as a check on

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the activities of Mr. Mani.

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(iii) Pledging of shares of JPC Agrotech to avail loan to purchase additional shares of

m wrongdoing by pledging the shares of its clients in its Demat account to las
JPC Agrotech.
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(iv) Practice
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ag (v) Not
more funds for further investment in the shares of JPC Agrotech.
exercising enough patience to hold on to the shares of JPC Agrotech for a longer
period to avail of the benefit of increase in its share price ultimately. Further, a proper
study of the time of its likely increase in future is lacking. Also, a consultation with
other professionals in its field would have helped.

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