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Master of Business Administration- MBA Semester 4 MF0017 Merchant Banking and Financial Services - 4 Credits (Book ID: B1318) Assignment Set- 1 (60 Marks) Note: Each Question carries 10 marks. Answer all the questions. Q1. Discuss the role of a custodian of shares. Answer: - A custodian is a financial institution that takes the legal responsibility for a customers securities which implies management as well as safekeeping. The financial institution can be a trust company or a bank. A mutual fund's custodian should act as the mutual fund's transfer agent, maintaining records of shareholder transactions and balances. As a mutual fund is basically a large pool of funds from several different investors, it requires an intermediary custodian to hold and safeguard the securities that are jointly owned by all the fund's investors. This structure diminishes the risk of dishonest activity by separating the fund managers from the physical securities and investor records. Q2. What are the provisions for prevention of fraudulent and unfair trade practices by SEBI regulations? Answer : - The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 authorises SEBI to investigate into cases of market fraudulent and unfair trade practices. The regulations prohibit market manipulation, misleading statements to increase sale or purchase of securities, unfair trade practices relating to securities. The SEBI can conduct investigation by an investigating officer regarding conduct and affairs of any person dealing, buying, and selling securities. The investigating officer prepares a report based on this information. The SEBI can take action for cancellation or suspension of registration of an intermediary based on this report. Fraud is any act, expression or concealment committed by a person or his agent while dealing with securities in order to prompt the deal in securities. The regulations prohibit the dealing in securities in fraudulent method, it prohibits market manipulation, misleading statements that promote sale of securities and unfair trade practice related to securities. Any dealing in securities shall be considered to be fraudulent or an unfair trade practice if it involves fraud. The following are considered as fraudulent or an unfair trade practice if it: Indulges in an act which creates misleading or false impression of trading in securities market. Advances or agrees to advance any money to any person to induce other person to buy any security in any issue with an intention of securing the minimum subscription to such issue. Pays, offers, or agrees to pay directly or indirectly to any person, any money for inducing such person for dealing in any security with the object of depression or causing fluctuation in the price of such security. Acts to manipulate the price of security. Publishes reports, dealing in securities which are not true. Sells and deals with stolen security whether in physical or dematerialised form. Advertises misleading or containing information in a distorted manner which can influence the decision of the investors. Spread false or misleading news which induces sale or purchase of securities. For restricting unethical trading practices, SEBI propagated the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulation, 1995. Q3. Explain the different life insurance products.

Answer : -Life insurance is a policy that people purchase from a life insurance company. This can be a way of protecting the family and its financial stability after one's death. The following are the different types of the conventional life insurance products: Term Insurance. Whole Life Insurance. Endowment Insurance. Annuities. Term insurance: - A term insurance is a temporary insurance. Term insurance provides life insurance protection for a specific period only. If the policy holder dies during the selected period, the benefits are payable to the estate or named beneficiary as mentioned in the policy. In case the policy holder survives till the end of the selected term, the policy expires without providing any benefits to the policy holder. Whole life insurance: - The whole life insurance policies are intended to provide life insurance protection over one's lifetime. The benefits are only payable to the policy holder after his death. The different whole life policies are as follows: Ordinary whole life insurance. Limited payment whole life insurance. Convertible whole life insurance. Endowment insurance : - Endowment policy gives assurance that the benefits under the policy will be given to the beneficiaries on the death of the policy holder within the selected term or on its maturity date. The Endowment insurance is paid out whether or not the policy holder lives after a certain period. Annuities : - An annuity is a series of periodic payments. This is an insurance policy, under which the insurer agrees to pay the policy holder a series of regular periodical payments for a fixed period of time or during someone's life time. Annuities can be classified on the basis of the following aspects: The number of lives covered. The beginning of the payment of annuity. Q4. Describe the deposit products and loan products. Answer : -Deposit products : -Deposits are a major component of banking demand and time liabilities and it enables the banks to expand its loan functions. Bank deposits are structured to serve the different needs of its various customers. Some customers deposit money in the bank when they have extra income. The purpose is to keep the money safe for future needs. Some customers deposit money to accumulate savings with interest to meet their future needs. Businessmen deposit their sale proceeds of business in the bank and meet their required expense by withdrawing money through cheques. Banks offer different types of deposit accounts to suit their customer requirements. Deposit accounts are classified into two types, demand deposits and term deposits: 1. Demand deposit Demand deposits are repayable to the depositors on demand. There are two types of demand deposits: Current deposits In current deposits withdrawal are permitted by cheques in favour of self and other parties. The payee can endorse the cheques in favour of third parties. The current deposits do not bear interest thus banks are not permitted to pay interest or brokerage to depositors. The banks can charge incidental expenses from the depositors, if the accounts do not maintain sufficient balances. Third party cheques and bills collection and purchase facilities can be granted to the accountholders as per mutually agreed arrangements and charges. The accountholders are provided with periodical statements of accounts for records and reconciliation by the banks. The current deposit is not intended at savings of the depositors. It is for the convenience of the depositors who handle cash/payments regularly. The current deposit suits the requirements of those customers whose banking transactions are numerous on every banking day.

These deposits are maintained by businessmen who deposit their sale incomes and issue cheques to those whom they have a liability to pay for their day to day business operations. Saving deposits Saving deposit encourage saving habits among the depositors. The saving bank deposits can be done with a cheque book facility to withdraw cash and make payments and with noncheque book facility where the account holders have withdrawal facility only at the drawee bank branch through a withdrawal form. Withdrawals are permitted on demand on presentation of cheque or withdrawal form. To encourage savings, banks impose restrictions such as withdrawal within a given period, the minimum balance to be maintained, and number of withdrawals and so on. In case of violations of these restrictions, the bank can levy fee/service charge. The interest on saving deposit is regulated by the RBI and the interest is computed on the daily balance in the saving deposit. 2. Term deposit Term deposit, also known as fixed deposit, is a deposit held at a financial institution for a specified term. The term deposit can be withdrawn only after the end of the term or by providing prior notice. This is a safe investment and is preferred by low-risk investors. Recurring Deposit A recurring deposit is a deposit in which a specific amount is invested in the bank on monthly basis for a fixed rate of return. The deposit has a fixed term. At the end of the term the principal sum and the interest obtained during that period is returned to the investors. Certificate of Deposits The certificate of deposit (CD) is a short or medium term debt instrument offered by banks. The investor deposits funds for a specified period that ranges from one month to five years. It is low risk and low return investment. The CDs are secure form of investment as it is insured by government agencies. Loan products : - A loan is granted for a specified time period. The borrower is given the amount in lump sum or in installments. Loans are granted against or in exchange of the ownership of different types of tangible items. The securities against which banks lend are commodities, debts, financial instruments, real estate, automobiles, consumer durable goods, and documents of title. There are various types of loan products available for corporate or non corporate clients in India. The loan products are designed according to the need of the client and the products available with the lending bank. Retail loans The retail loan is designed for small entrepreneurs and individuals who are involved in profitable commercial activity and have the capability to repay the loan. Loans are granted keeping in mind the repaying capacity of the borrower. The repaying capacity is judged through the cash income available with the borrower for the repayment of the loan. The credit facilities provided by banks to customers are mainly of two types. They are fund based and non-fund based. Fund-based credit facilities Fund-based credit facilities provide funds to borrowers for working capital and for capital expenditure or project finance which includes deferred payment guarantee. The working capital finance facility is granted for a short period usually for one year and is renewed over from year to year depending on assessment of the requirements of the borrowers. The working capital finance facilities are provided in different ways through cash credit, overdraft, demand loan and bills purchased/discounted. Cash credit Cash credit facility is a unique credit facility provided by banks in India. It is a running account for drawing of funds with features such as credit limit, actual drawls and drawing power. The borrower can draw funds within the specified credit limit sanctioned by the banks against the security of the inventory (stock) and receivables (book debts) which are guaranteed

by the borrower. The borrower submits monthly statements of the charged assets and the bank allows him to draw cash within the drawing power. The drawing power is the value of the pledged assets minus the stipulated margin that the cash credit account can sustain. Overdraft Overdraft is the process of drawing funds from a current account in excess of credit balance. The drawings can be made till a sanctioned limit and interest is charged on the daily debit balance in the account. The overdrafts are payable on demand and the limits can be renewed annually. The important overdrafts are: Clean Clean overdraft is given to parties which are financially sound and reputed for integrity against personal security. These advances are not supported by tangible security so the banks impose limitations on such advances. Parties having secured advance facilities are preferred while screening the requests for clean advances. The facility is granted for a short period. The bank takes guarantees from people who are credit worthy before granting this facility. Secured Secured overdraft is a standby credit facility that is secured by assets such as term deposits, savings deposits, bonds and property. The interest is charged on daily overdrawn amount. Demand loan A demand loan is a one-time facility which is subjected to periodic principal repayment along with the monthly or quarterly interest payment. The loan is a fixed amount advanced to the borrower for a specific purpose and usually for one year. A demand loan for consumption is a contract where the lender provides consumable goods to a borrower. The borrower is required to return the goods of equivalent type, quality and quantity within a specified period. Loans for consumption are sanctioned against the following: Against own deposits Banks grants loans up to 90 percent of the deposit amount which includes interest component accumulated on the deposit. There is exception in certain cases where loan is granted up to 85 percent of the deposit amount. Against third party deposits Apart from the providing loans to the depositors, banks grant loans to third parties. The rate of interest charged on such loans is two per cent over the deposit rate. Against gold and jewellery Banks provides loans against gold jewellery. Any individual owning gold jewellery singly or jointly is eligible of the loan. The person must be introduced to the bank suitably. The loan is granted to meet expenses on consumption needs such as educational, medical, marriage and so on. The loans for consumption needs are repayable in 12 months. Term loans Term loans are granted by banks for capital expenditure such as acquisition of fixed assets for setting up a new unit, expansion or modernisation of an existing one. The term loan for acquiring assets are: For consumer durables Banks provide term loans for financing consumer durables. A permanent salaried individual is eligible to avail for this facility. For home loans Home loans are offered to customers by banks to construct a house, buy a flat or house, or renovate the house. The eligibility criteria, maximum loan amount, security and insurance are specified by the banks. Non-fund credit facility The non-fund credit facility does not involve outlay of funds. They are also known as off-balance (liability) items as they act as a commitment to honour certain promises. The outlay of funds is dependent on the transfer of the commitments (contingent liability). Letters of credit and bank guarantees are included in this facility.

Letter of credit (L/C) A letter of credit is an arrangement in which a bank (issuer), at the request of a customer (opener of L/C), undertakes to pay the named beneficiary (seller) by a specified date, against the presentment of the specified documents, the value of goods/services. The L/C involves three parties, namely, the issuing bank, opener (buyer) and the beneficiary (seller). The seller supplies goods to the buyer and tenders the consignment documents to the issuing bank against its undertaking in the L/C. The issuing bank makes the payment of the bills and recovers the payment from the buyer. Guarantees Banks issue guarantees on behalf of obligators as a security for due fulfillment of the contract by them in favour of beneficiaries. The issuing bank charges commission depending on the amount and validity period of the guarantee.

Q5. Discuss about the two important credit rating agencies in India. Answer: - Ratings from the important rating agencies are important to some level because investors look to them as expert assessments of credit risk. Independent assessments in the form of credit ratings and a wide range of financial instruments are provided by the credit rating agencies. The CRAs apply a powerful influence upon the financial system. Let us now discuss about the two important credit rating agencies: 1. CRISIL: - Credit Rating Information Services of India Limited (CRISIL) is India's leading rating company and has played a vital role in India's economic growth. The CRISIL rating is the only rating agency in India to function on the basis of sectoral proficiency. The formation of the world's first regional credit rating agency was due to the pioneer work of CRISIL. Let us study about the main functions of CRISIL. Ratings : - It is the only rating agency in India to function on the basis of sectoral proficiency. The agency has urbanised new ratings methodologies for debt instruments and pioneering structures across sectors. The CRISIL ratings provide technical expertise to clients all over the world and have helped set up ratings agencies in different countries. The CRISIL ratings play a principal role in the maturity of the debt markets in India. Research: - CRISIL provides investigation, study, planning and research on the Indian economy. It also focuses on industries and companies to over 500 Indian and international clients in the corporate, consulting, financial, and public sectors. The following are the extended services related to research: CRISIL fund services It provides fund assessment services and risk solutions to the mutual fund industry. The centre for economic research It implements economic principles to live business applications and provide standards and analyses for India's policy and business decision makers. Investment research outsourcing CRISIL acquired a leading global equity research and analytics company. It offers investment research services to the world's leading investment banks and financial institutions and has added equity research as one of its services. Advisory: - CRISIL provides advisory services in the following areas: CRISIL infrastructure advisory It facilitates the governments and leading organisations by providing plan, policy, regulatory and transaction level guidance. Investment and risk management services CRISIL risk solutions suggest integrated risk management solutions with guidance in the areas of credit and market risk to banks and corporates. 2. ICRA: - The Investment Information and Credit Rating Agency of India (ICRA) has been promoted to meet the requirements of the banks, financial institutions and mutual funds in India providing them with credit education, credit research, risk management software and consulting services. It also provide assistance to investors and issuers in

making well informed decisions and assist them in raising funds in large amounts and low cost. It provides banks, shareholders, and brokers with a marketing tool which enable them in placing debt with investors. The ICRA provides three types of services rating services, information services and advisory services. Rating services - The rating services comprise rating of debt instruments and credit assessment which include long-term instruments such as bonds, medium-term instruments such as fixed deposits and short-term instruments such as commercial paper programs. Structured and sector-specific debt obligations such as instruments published by power, telecom and infrastructure companies are also rated by ICRA. Other services offered by the ICRA include the following: o Corporate governance rating. o Insurance companies claims paying ability rating. o Line of credit rating. o Credit assessment of companies. Information services - The information services department of the ICRA focuses on providing genuine data and value-added products used by intermediaries, financial institutions, banks, institutional and individual investors. Value added services comprise of equity grading, corporate reports, equity evaluation and industry specific publications. Earnings Prospects and Risk Analysis (EPRA) The EPRA range of information services are ordered with a view to providing genuine information on the virtual quality in diverse corporates. The relative quality of equity, growth, stability and composition of its earnings is assessed by analyzing the core fundamentals that would affect its future performance over the medium-term. The EPRA includes the following: Equity grading The equity grading process commences at the request of the prospective issuer, on receipt of the required information from him, and culminates in an opinion from the ICRA, expressed symbolically as an equity grade. A team of analysts takes up the work of collection of data and information from the books, reports and records of the concern and meets with its executives. The support in-house research and the database of the ICRA as well as secondary data are also availed of. The ICRA reserves the right to make public such equity change in equity grade. Equity assessment The equity assessment process commences at the request of an investor and the consent of the company being assessed. ICRA may or may not disclose the investors identity to the company depending upon the investors preference. The rest of the assessment process is similar to the equity grading process, except that the end result is not in the form of a symbol but as an assessment report specific to the investors need and intended to he used by the investor only. Advisory services ICRAs foray into advisory services represents an organic growth of the cumulative expertise built by ICRA in different industries and sectors. ICRA advisory services offers independent, objective and high quality consulting services to organizations with an interest in India, with the fundamental aim of improving the quality of decision making. It is active in the areas of Strategy consulting, Risk Management and Policy Formulation. Q6. Describe issue management in merchant banking. Answer: - Issue management A major function of merchant banking is issue management. The issue can be through offer of sale or private placements, prospectus, and so on. The issue management includes the following functions with respect to issue through prospectus: o To obtain approval for the issue from the SEBI.

To arrange underwriting for the proposed issue. To draft and finalise the prospectus and to obtain clearance from the stock exchange, auditors, underwriters and registrar of companies. o To select registrar of the issue, advertising agencies, underwriters, bankers and brokers to the issue and finalise the charges to be paid to the registrar. o To arrange press conferences, and investors and brokers through advertising agency. o To finalise the terms of issue to make the issue more attractive. Issue Management: Intermediaries The primary market intermediaries are the merchant bankers, underwriters to issue and brokers to issues. The merchant bankers are the issue managers who bring the issues to the primary market investors. Issue management is a tedious job and is closely regulated by SEBI. In many countries, the regulators implement a licensing mechanism for issue management. Issue management is one of the important fee-based services provided by financial institutions. There are few large-scale and specialised issue management agencies in the country. The growth of stock market and opening up of economy has increased the scope of issue management activity. SEBI has laid guidelines as ground rules relating to new issue management activities to protect the investors interest and for development of market. The guidelines are in addition to the companys law requirements for the issue of capital. Merchant bankers as lead managers : - Merchant banker is the person who arranges or assists in funds from investors through stocks, bonds or shares on behalf of the issuer for corporate establishment or for expansion purpose of the corporate firms. The main merchant banker is the lead manager. The lead manager can have associate merchant bankers to the issue. The merchant banker is a channel between the issuer and investors. As per SEBI, merchant banker is anyone who is engaged in business of issue management by making arrangements related to buying, selling or subscribing securities or providing corporate advisory service related to issue management. The importance of merchant bankers as sponsors of capital issues is seen in their major services such as determining the composition of securities types to be issues, draft of prospectus, appointment of registrars, arrangement of underwriters, selection of brokers and advertising agents, and so on. The role of merchant bankers in the process of capital issues is very important. All public issues must be managed by merchant bankers who function as lead managers. o o Assignment Set- 2 (60 Marks) Q1. Give examples of various venture capital funds that are present and examples of some business ventures that have been successful with venture capital financing. Answer: - Amended SEBI Venture Capital Funds (VCFs) regulation, 1996: According to this regulation, a VCF is a fund established in the form of a trust or company. The VCF must include body corporate and must be registered with the SEBI. It must have a large amount of capital raised in the manner mentioned in the regulation and also must invests in VCUs in accordance with the regulation. The main elements of the VCF relate to following: Registration with SEBI. Investment conditions or restrictions. General obligations. Inspection and investigation. Action in default. SEBI Foreign Venture Capital Investors (FVCIs) Regulations, 2000 : -A FVCI is an investor who is established outside the India and is advised to make investment in VCFs or

in VCUs in India. To make an investment in India a FVCI has to register with SEBI as per the regulation. The main elements of FVCIs relate to the following: Registration. Investment criteria. General obligation. Inspection and audit. Action in default. Players or schemes : - The categories of sponsors of VCFs in India are central financial institutions such as IDBI and SIDBI, state level financial institutions, banks, private and foreign sector institutions. Examples of business ventures: Gujarat Venture Finance Ltd. GVFL, started in July 1990, was one of the first VC funds set up under the World Bank initiative.Mr. Vishnu Varshney, who had a background in equity investment, project planning andimplementation, and turn-around was selected by the parent company Gujarat IndustrialInvestment Corporation (GIIC) to run GVFL. Mr. Varshney, a senior project manager with GIIC,helped set up GVFL. He was joined and assisted early on by a very competent deputy, J MTrivedi another GIIC project manager. After a year of putting together GFVL and initiating thework, Varshney was the first venture capitalist in India to be selected to undergo the World Bank sponsored eighteen-week internship in the US. He worked at Hambro International EquityPartners in Boston in the US and attended a training program in 1991 organized by the NationalVenture Capital association in the US. Later on, he was one of the founding members of theIndian Venture Capital Association (IVCA) and served as Secretary and Chairman of theAssociation. Trivedi also was an early intern in a New York early stage VC partnership Lawrence, Smith and Horey.Key investors in GVFLs funds were GIIC, the Industrial Development Bank of India, the Commonwealth Development Corporation, the Small Industries Development Bank of India, anda few private and public sector Gujarati companies, many of whom had close relationships toGIIC. Even in the late 1990s, when many VC firms shifted towards later stage investments and private equity, GVFL remained loyal to its initial goal of stimulating entrepreneurship byinvesting in seed stage innovative start-ups. GVFL adopted a hands on approach believing it should work hand-in-hand with the entrepreneur. GVFL was pioneering in a number of ways. Itconvinced the parents and lead investors to invest all over India as well as across industries.The first fund (Gujarat Venture Capital Fund 1990) was targeted at start-up companies basedon new and untried or closely held technologies, innovative products or processes and services.Since there was no experience in India to build on, GVFL took extra time to invest the funds.The broad based fund was invested in over 25 companies. The total fund size was 240 million Rs.and the fund had an intended life span of 15 years. Exhibit 1 shows the details of the fund. As of 1999, the fund was fully invested and pay-outs to investors had started.Following the success of GVCF-1990, in terms of identifying promising VC investmentopportunities, GVCF-1995 was launched. Investors included many of the investors of the earlier fund. The second fund was invested nationwide and shifted in focus towards funding new as wellas small to medium sized companies with a sustainable competitive edge. Total fund size was600 million Rs. and the life span was 12 years. By the end of 1998, 240 million Rs. had beeninvested in 15 companies.The third fund (GVCF 1997) was started in 1997 with an emphasis on the IT industry. Thefund had a size of 400 million Rs. and a life span of 12 years. The fund focused on Software andInformation Technology- an area where India has established strong core competencies on aglobal level. Four investments totaling 71 million Rs. had been made by the end of 1998 Q2. Mutual fund schemes can be identified by investment objective, List one scheme within each category.

Answer: - On the basis of investment objective: - Mutual funds are also classified based on the objectives of the fund. The investor can invest in mutual funds based on these objectives: Growth funds This scheme is also referred to as equity schemes. The objective is to provide capital appreciation over medium to long term. A large portion of the fund is invested in equities for long term. Income funds This scheme is also referred to as debt schemes. The objective is to provide investors a regular income. Therefore, investments are made in fixed income securities such as corporate debentures and bonds. Unlike the growth scheme, the capital appreciation is limited. Balanced schemes This scheme provides appreciation and income. The company periodically distributes a part of the capital gains earned. This scheme invests in shares and fixed income securities. The proportion specified in the offer documents is usually 50:50. Money market funds The objective of this scheme is to provide the investor income, preserve capital and easy liquidity. In this scheme, the investors money is safer since investments are made in short term financial instruments. These are also called liquid funds. Load funds This scheme is also referred to as sales load. The investor pays the sum (known as front end load) at the time of purchase which is used to compensate an intermediary such as brokers, investment advisers, and financial planners. Recently the SEBI has slashed the entry load and funds should not charge entry load if you go directly to a fund. In another directive it has issued instructions that no distinction should be made among unit holders on the amount of subscription while charging exit loads (back end load). Some mutual funds do not charge any exit load. No load funds This scheme does not have a front end load or back end sales charge. No sales charges are applied to any load funds. However, they do have costs. The objective is to reduce the expense on the investors bank or brokerage statement. This is because the fees are paid from the funds assets to the investment advisers instead of the broker who sells the funds. Gilt funds These funds invest completely in government securities. Government securities do not have any default risk. NAVs of these schemes also vary due to alteration in interest rates and supplementary economic factors as is the case with income or debt oriented schemes. Index funds Index funds imitate the portfolio of a selected index such as the BSE Sensitive Index, S&P NSE, Index (Nifty) etc, These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the risk or fall in the index, though not exactly by the same percentage. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges. Q3. What are the advantages of leasing to a company? Answer: - Advantages of leasing Leasing has many advantages for the lessee as well as for the lessor. Lease financing offers the following benefits to the lessee: One hundred percent finance without immediate down payment for huge investments, except for his margin money investment. Facilitates the availability and use of equipments without the necessary blocking of capital funds. Acts as a less costly financing alternative as compared to other source of finance. Offers restriction free financing without any unduly restrictive covenants. Enhances the working capital position. Provides finance without diluting the ownership or control of the lessor. Offers tax benefits which depend on the structure of the lease.

Enables lessee to pay rentals from the funds generated from operations as lease structure can be made flexible to suit the cash flow. When compared to term loan and institutional financing, lease finance can be arranged fast and documentation is simple and without much formalities. The lessor being the owner of the asset bears the risk of obsolescence and the lessee is free on this score. This gives the option to the lessee to replace the equipment with latest technology The following are the benefits offered by lease financing to the lessor: The lessors ownership is fully secured as he is the owner and can always take possession in case of default by the lessee. Tax benefits are provided on the depreciation value and there is a scope for him to avail more depreciation benefits by tax planning. High profit is expected as the rate of return increases Return on equity is elevated by leveraging results in low equity base which enhance the earnings per share. High growth potential is maintained even during periods of depression.

Q4. What is the provision of green shoe option and how is it used by companies to stabilize prices? Answer : - Green Shoe Option (GSO) is an option where a company can retain a part of the over-subscribed capital by issuing additional shares. Oversubscription is a situation when a new stock issue has more buyers than shares to meet their orders. This excess demand over supply increases the share price. There is another situation called undersubscription. In undersubscription, a new stock issue has fewer buyers than the shares available. An issuing company appoints a stabilizing agent, which is usually an underwriter or a lead manager, to purchase shares from the open market using the funds collected from the over-subscription of shares. The stabilizing agent stabilizes the price for a period of 30 days from the date of listing as authorised by the SEBI. Green shoe option agreement allows the underwriters to sell 15 percent more shares to the investors than planned by the issuer in an underwriting. Some issuers do not include green shoe options in their underwriting contracts under certain circumstances where the issuer funds a particular project with a fixed amount of price and does not require more funds than quoted earlier. The green shoe option is also known as over-allotment option. The over-allotment refers to allocation of shares in excess of the size of the public issue made by the stabilizing agent out of shares borrowed from the promoters in pursuance of a GSO exercised by the issuing company. Q5. What do you understand by insider trading? What are the SEBI rules and regulations to prevent insider trading? Answer: - An insider is a person who is connected with a company and who is expected to have access to unpublished sensitive information with respect to securities of the company. A person who has access to unpublished information which deals in securities and is involved in violations of the provisions will be guilty of insider trading. Insiders have access to confidential information of a company due to the position occupied by them in the company. They are in a position to manipulate the share prices to their own advantage and make huge profits. These actions cause major fluctuations in the prices of the securities. Considering the fact that the actions of insiders cause devastating effects on the functioning of stock exchange, SEBI has issued regulations to control such practices. Another problem that the stock market faces is unofficial trading in shares before listing of new companies. The company is not guilty of insider trading if the acquisition of shares was as per SEBI Substantial Acquisition of Shares and Takeover Regulations. If SEBI suspects that any person has violated the regulations of prohibition of insider trading, it can initiate an inquiry. For the prevention of insider trading, SEBI has introduced a policy on disclosure and internal procedure.

According to this policy: All listed companies and organisations associated with the securities markets have to frame a code of conduct for internal procedure as per the specified model. Any person holding more than five per cent shares in any listed company has to disclose the number of shares held by him to the company, within 54 working days. Every listed company must disclose the information received about the initial and continual disclosures within five days to all the respective stock exchanges. Any person other than a company violating the disclosure provisions would be liable for action under the SEBI Act. SEBI has prescribed a model code of conduct for prevention of insider trading for listed companies. According to this model, the listed company appoints a compliance officer who reports to the managing director and is responsible for setting the policies and procedures, monitoring adherence to the rules for the preservation of price sensitive information, pre-clearance of designated employees trade, monitoring of trades and implementation of the code of conduct. Preservation of price sensitive information is done by the employees and directors. They have to maintain confidentiality of all price sensitive information. The information must not be passed to any person directly or indirectly. The employees and directors of the organisation must not use the price sensitive information to buy or sell securities whether for their own account or their relatives account or clients account. Q6. A company wishes to take machinery on lease. Study the lease options available to the company. Answer: - There are formalities and legal documents involved in lease transactions. It is mandatory to document the lease agreement properly and formalise the deal. Purposes : -The lease document provides evidence of indebtedness, security and, evidence regarding terms and conditions between the lessor and lessee. It also helps the leasing companies to take legal action in case of default. Legal rights : - One of the requirements of lease agreement is that the persons executing the contract must have legal right to do so. The document must be in a disciplined and predefined format, properly stamped, and witnessed. It is also necessary to register the document with the appropriate authorities. Lease approval process : - The lease approval process is as follows: The lessee receives a letter of offer mentioning the terms of the lease facility. Lessee signs and returns a copy of offer letter within a stipulated time and then passes a resolution at a Board meeting accepting the offer. The lessor obtains attendant lease documents from the lessee. The attendant lease documents include purchase order, invoice, bill of sale from supplier, delivery note and so on. The insurance of the leased asset is processed regardless of who pays the premium. The policies must be in the custody of the lessor. The policies are renewed before the expiry date. Contents of the lease agreement : - The following are some of the important elements in a lease agreement are: Details of the lessor and lessee, and their addresses. Term of the lease. Lease rent and the mode of payment. Details of property leased its location and identification. Effective date of commencement of the rent agreement and the duration. Lease rent and the mode of payment. Declaration by the lessor that he is either the owner of the property or is duly authorised by the owner to give the property on lease. Security deposit amount paid, whether it is interest-free or not, and the circumstances when it is refundable.

 Advance rent payable, if any, and the mode of its adjustment. Grounds for termination of the agreement. Notice period required for termination of the lease. Rent escalation clause regarding the rate of increase of rent. The other elements depend upon the commercial terms which have been agreed upon by the parties. There is no bar on the number of years a lease can be given by the lessor to the lessee. Registration must be done if a lease of property is given for more than one year. The stamp duty to be paid depends on the rates in each area in the country. Leasing business equipment and tools preserves capital and provides flexibility but may cost you more in the long run. Advantages of Leasing Equipment Less initial expense. The primary advantage of leasing business equipment is that it allows you to acquire assets with minimal initial expenditures. Because equipment leases rarely require a down payment, you can obtain the goods you need without significantly affecting your cash flow. Tax deductible. Lease payments can usually be deducted as business expenses on your tax return, reducing the net cost of your lease. Flexible terms. Leases are usually easier to obtain and have more flexible terms than loans for buying equipment. This can be a significant advantage if you have bad credit or need to negotiate a longer payment plan to lower your costs. Easier to upgrade equipment. Leasing allows businesses to address the problem of obsolescence. If you use your lease to obtain items that may be outdated in a short period of time, such as computers or other high-tech equipment, a lease passes the burden of obsolescence onto the lessor. You are free to lease new, higher-end equipment after your lease expires. Disadvantages of Leasing Equipment Higher overall cost. Leasing an item is almost always more expensive than purchasing it. For example, a 3-year lease on a computer worth $4,000, at a standard rate of $40/month per $1,000, will cost you a total of $5,760. If you had bought it outright, you would have paid only $4,000. You don't own it. You don't build equity in the equipment. Unless the equipment has become obsolete by the end of the lease, this lack of ownership is a significant disadvantage. Obligation to pay for entire lease term. You are obligated to make payments for the entire lease period even if you stop using the equipment. Some leases give you the option to cancel the lease if your business changes direction and the equipment you leased is no longer necessary, but large early termination fees always apply.