Que.1 Rating methodology is used by the major Indian credit rating agencies.

Explain the
main factors of that are analyzed in detail by the credit rating agencies.
Rating Methodology
Rating methodology used by the major Indian credit rating agencies is more or less the same. The
rating methodology involvesan assessment of all the aspects influencing the creditworthiness of
an issuer company e.g. business, financial and industryfeatures, operational competence, the ability
to manage, competitive position of the issuer and dedication to new venturesamong others. A
thorough analysis of the past financial statements is made to evaluate the performance and to
anticipate thefuture earnings. The ability of the company to fulfill the debt obligations over the term of
the instrument being rated is alsoassessed. As a matter of fact, it is the capability of the issuer to
fulfil obligations that determine the rating. While assessing theinstrument, the following are the main
factors that are analysed in detail by the credit rating agencies:(i) Business risk analysis(ii) Financial
analysis(iii) Management evaluation(iv) Geographical analysis(v) Regulatory and competitive
environment(vi) Fundamental analysisThese are explained as follows:
(i)
Business risk analysis:Business risk analysis focuses on analysing the industry hazards, market position of the company,
operating competence andlegal position of the company. The industry risk by taking into consideration
various factors like strength of the industry prospect, nature and basis of competition, demand and
supply position, structure of industry, pattern of business cycle etc. Howthe industry players are
competing with each other on the basis of price, product quality, distribution capabilities etc are
alsoanalysed. Industries with stable growth in demand and flexibility in the timing of capital outlays are
in a stronger position and,therefore, enjoy better credit rating. For example, a seasonal business like
hiring of vacation cottages or firms making winterclothesline.(ii)
Financial analysis:Financial analysis aims at determining the financial strength of the issuer company through ratio
analysis, cash flow analysisand study of the existing capital structure.The analytical framework
involves the analysis of business risk, technology risk, operational risk, industry risk, market
risk,financial risk and management risk. Business risk analysis covers industry analysis, operating
efficiency, market position of thecompany whereas financial risk covers accounting quality, existing
financial position, cash flows and financial flexibility.Under management risk analysis, an assessment is made
of the competence and risk appetite of the management. The CRAmight also look at the sufficiency of other
means of servicing debt in case the primary cash flows are insufficient: for instance,in a securitized
instrument, the credit enhancement and structure will be examined, while in case of a guaranteed
bond thecredit strength of the guarantor could drive the rating.
(iii)
Management evaluation:A companys performance is largely influenced by the aims and objectives of the management,
its plans and policies, ability
to prevail over adverse conditions, employees experience and skills, planning and control system
among others. The
managements strong points and weak points are evaluated for rating a debt instrument. For example,
if the vision of the
management is not clear about the big picture of the
firm at least five to fifteen years down the line, then the companys focusmay not be in proper place
and the performance will not be as per the expected level. Any companys performance is
significantly affected by the management goals, plans and strate
gies, capacity to overcome unfavourable conditions, staffs
own experience and skills, planning and control system etc. Rating exercise requires evaluation of the
management strengthsand weaknesses.
(iv)
Geographical analysis:Geographical analysis facilitates in ascertaining the locational advantages enjoyed by the issuer
company. An issuer companywhose business covers a large geographical region avail the advantage
of diversification and as a result, gets an improvedcredit rating. A company located in a backward area

may avail subsidies from the government and, hence have the advantageof lower cost of operation.
Smaller companies operations are limited in terms of product, geographical area and the number
ofcustomers. However, large companies enjoy the benefits of diversification owing to wide range of
products and customersspread over larger geographical area. For example, a local shoe manufacturer has an
exposure to a smaller market whereas anational level shoemaker has a wider reach to customer with better
distribution system in place.
(v)
Regulatory and competitive environment
:Credit rating agencies assess the composition and regulatory structure of the financial system in
which it operates. CRAs haveto assess the bearing of regulation/ deregulation on the issuer company,
while allotting rating symbols.
(vi)
Fundamental analysis:Fundamental analysis includes an analysis of liquidity management, profitability and financial position,
interest and tax ratessensitivity of the company. This includes an analysis of liquidity management,
profitability and financial position, interest andtax rates sensitivity of the company. Fundamental
analysis is undertaken for rating debt instruments of financial institutions, banks and non-banking
finance companies

Que.2 Give the meaning of the concept of venture capital funds. Explain the features of
venture capital fund.
Concept of Venture Capital Funds:Venture capital is the money provided by investors to start firms and small businesses with long-term
growth potential. This isa very important source of funding for start-ups that do not have access to
capital markets. It typically entails high risk for theinvestor, but it has the potential for above-average
returns.Venture capital can be defined as investment (long term) which is made in:
Ventures that are promoted by persons who though they are qualified and technically sound but
do not have any
entrepreneurial experience.
Projects which involves high degree of risk.
The concept of venture capital
financing is very old but todays changing business environment makes it more tempting for
businesses. The reason being, venture capital companies give risky capital to the entrepreneur
so that they can meet the
minimum requirements of the promoters contr
ibution. Venture capitalists not only provide the finance for risky business butalso provide valueadded services and business and managerial support. In situations where firms are not able to raise
finance by conventional means, like public issue, etc., the importance of venture capital is
greater.Thus, we can say that venture capital institutions are financial intermediaries between the
entrepreneurs who need institutionalcapital (as they are not ready for public finance) and investors
who are looking for higher returns.
Features of a Venture Capital Fund:As venture capital is provided for businesses which involve higher risk and also a higher rate of return,
it has some specificfeatures. These are:
(i)
Long-term investment:
Venture capital is provided for the long term. This is generally provided to high-risk businesses (small
and mediumenterprises) who cannot arrange funds from other sources of finance. Venture capital
is for that project which starts earningreturns after some time. Due to all these reasons, venture
capital is provided for the long term.

(ii)
Participation in equity capital:
Venture capital is always invested in equity capital (actual or potential). The reason for this is that the
venture capitalist cansell his part of equity when they start earning profit from their equity holding. In
the beginning, the equity capital of newventures is risky but when they start earning profits and
the market gains confidence in them, the venture capitalist can sell his portion of equity capital at a
profit.
(iii)
High risk:
Venture capital signifies equity investment (ownership participation) in highly risky projects which have
growth prospectiveand a projected high rate of return. Projects, in which markets have no earlier
experience of earning profits, are the target of theventure capitalists.
(iv)
Management participation:
Venture capital funds not only provide equity capital to the firms or businesses but also provide them
with various kinds ofservices like participation in management of the assisted business. Due to
this reason they are different from bankers. They arenot like other stock market investors who do not
participate in the management of companies but invest and trade in shares inthe stock market. In
this way, venture capital is different from investors (equity) also. Moreover, it is the combination
of bankers, stock market investors and entrepreneurs.

(v)
Liquid investment:
Investment made by venture capital fund is in equity portion of the company which makes it less
liquid. Funds cannot demandits money back anytime during the life of the assisted business. They get
their money back when the assisted business goes intoliquidation.
(vi)
Fulfils its social objectives:
Unlike several state and central-level government organizations, venture capitalists provide finance
with profit as their mainobjective. But venture capital funds help in generating new employment
opportunities and also help in the balanced growth ofthe economy by the development of new and
innovative business.
(vii)
Large scope of venture capital activities:
Venture capital is not merely a means for financing technology. It is beyond financing new technologyoriented companiesand businesses. It extends to involve the financing of small and medium
enterprises at their early stages of business and helpsthem establish in the market. So, it can be said
that the scope of venture capital activities is big.

Que.3 Hire purchase is one of the important concept. There are certain features of hire
purchase agreement so explain the points of it. Differentiate between hire purchase
and leasing.
Concept of Hire Purchase
In a hire purchase system, the buyer acquires the property by promising to pay in monthly, quarterly
and half-yearlyinstallments. The period of payment has to be fixed while signing the hire sale
agreement. Though the buyer acquires the assetafter signing the agreement, the title of ownership
remains with the vendor until the buyer pays the entire liability. When the buyer pays the entire
installment and any other obligation according to hire purchase agreement, only then the title
ofownership of goods would be transferred to the hirer. If the hirer makes any default in the payment
of any installment, the hirevendor has the right to re- posses the goods. In this case, the amount that

is already paid so far by the hirer will be forfeited.The hire purchase price of goods is normally higher
than the cash price of the good, because it includes interest on the balance payable amount charged
by the vendor as well as the cash price. Under this system, the vendor is responsible to repair
thegoods which are in possession of buyer provided that the buyer takes the utmost proper care of
the goods acquired. The risk isalso borne by the vendor until the payment of last installment. The
buyer has the right to return the goods to the vendor, if theyare not according to the terms and
condition of the hire purchase agreement. Generally, a higher purchase agreement has thefollowing
features:1.
The buyer (hirer) buys some goods from the hiree and the possession of the goods is immediately
given to the buyerwhile the ownership rests with the merchant (vendor).2.
This payment for goods is made in installments and this must be completed in a specific period of
time. In other words,we can say that hire purchase agreement is for a specific period of time.3.
The ownership of the asset transfer to the buyer when he pays the last instalment for it; till then
ownership lies with themerchant or vendor.4.
In this agreement hiree charges interest on flat rate.5.
The hiree or vender has the right to repossess the asset in case there is default in the payment of
installments from buyer side.6.
Each instalment paid by buyer includes the amount of interest as well as the repayment of the loan
amount or principalamount.7.
The hire purchaser generally makes a down payment (initial payment) in signing the agreement and
the balance of theamount along with the interest is paid in the installments at regular intervals.8.
The hire purchaser has the right to terminate the agreement at any time before the property so
passes.The preceding discussion makes it clear that in the case of hire purchase, goods are
immediately given to the buyer on the promise that he pays the cost of the goods (with interest) in
instalments and he gets the ownership of the goods after the last payment of installment till then
ownership lies with vendor. In hire purchase arrangement there are two parties: the buyer(hirer) and
the vendor (hiree).
Difference between Hire Purchase and Leasing
1. Ownership In leasing ownership is never transfer to the lessee even after the payment of last lease
rentals.But in hire purchase, after the payment of last installment ownership is transferred to the
buyerof the
goods.2. Repayment amount Generally in lease, repayment is called lease rentals and that in case of
hire purchase is calledinstallments.3. Advantage of taxdeductibilityIn lease financing lease rentals
are tax deductible expenses. However, in hire purchasearrangement only the amount of interest is
tax deductible not the
full installment.4. Depreciation Lessee cannot claim depreciation as he is not the owner of the asset. I
n hire purchase the buyercan have the claim of depreciation with other expenses.5. Realization
of salvagevalueLessee cannot realize salvage value of the leased asset after the end of the lease contract. Thehirer
can claim salvage value.6. Magnitude of fundsinvolvedIn leasing, magnitude of funds involved is very
large because these contracts are generally forcapital goods such as plant and machinery, ships,
among others. In the case of hire purchase,the magnitude of funds involved is low. Generally, these
contracts are for the purchase ofoffice equipments, automobiles, furniture among
others.7. Nature of Expenditure In lease, rentals paid by the lessee are entirely revenue expenditure o
f the lessee. But, onlyinterest element included in the HP installment is revenue
expenditure.8. Components Lease rental comprises two elements: (1) finance charge and (2) capital r
ecovery. In case ofHire Purchase, HP installments comprise three elements (1) normal trading
profit (2) financecharge and (3) recovery of cost goods/assets.

Que.4 Explain the concept of Depository receipts. Write down the difference between
American Depository Receipts (ADR) and Global Depository Receipts (GDR) also
mention the issues involved in ADR/GDR.
Depository Receipts
Depository receipts are securities that are traded in foreign currency. These receipts are issued by the
foreign bank orinstitution which acts as a depository of shares issued by a domestic
company.Depository receipts can be classified into sponsored and unsponsored ones.
1.
Sponsored depository receipts:
It is created by a single depository which is appointed by the issuing company underrules provided in
a deposit agreement. The issues of sponsored ADR/GDR require prior approval of the Ministry
ofFinance.
2.
Unsponsored depository receipts:
These are issued without any formal agreement between the issuing company andthe depository,
although the issuing company must consent to the creation of the ADR/GDR facility.
How does the depository work?
If an Indian company wants to raise funds from the investors in the United States it will have to list
itself in the US StockExchange (NASDAQ). Since the shares are in the denomination of Indian
rupees, these are not directly listed on the stockexchange of USA, hence, the depository works as an
intermediary. Here the Indian company releases and deposits the newshares with the depository. The
depository in turn issues the depository receipts to the investors in the US. A depository in theUS
generally will be an investment bank registered with the Securities and Exchange Commission
(SEC).As Securities and Exchange Board of India (SEBI) is the capital market regulator in India, SEC
is in the US. The depositorywill have a custodian in India where the new shares are deposited. The
custodian can be the Indian arm of the depository or anindependent company which provides the
related services to the US-based depository.Depository receipts can be of two forms

Global Depository Receipts (GDRs) and American Depository Receipts (ADRs).GDRs are usually
listed on a European stock exchange and ADRs on the US stock exchange.In case of issue of a
depository receipt by the Indian company, the dividend payment to the investor is made in terms of
Indianrupee, which is converted into dollars by the international depository, after deduction of
withholding tax.If a company wants to issue depository receipts, it has to conform to the following
regulations:
A resolution needs to be passed in the board meeting of the company f
or any such issue and file the same with the Registrarof Companies in Form No.23.
Approval must be obtained from the Ministry of Finance.
Ministry of Finance specifies the price range.
Final price is determined only at the last stage.
A red
-herring prospectus is issued by the company without specifying the price (a blank column is left for
the same).
Underwriter of the issue takes care of the marketing of issue.
The company issues the shares to the depository but these are delivered to the cus
todian.

Difference between ADRs and GDRs:The following are the main points of difference between ADRs and GDRs.(i)
The ADRs are issued by the companies to raise funds from the US markets and GDRs are issued by the companiesto
raise funds from international markets.(ii)
Even though both are negotiable instruments, ADRs are negotiable in the US markets only and GDRs
arenegotiable in international markets.(iii)
The GDRs can be used as a substitute of ADRs, but ADRs cannot be substituted for GDRs.(iv)
Companies prefer to issue GDRs in comparison to ADRs due to wider scope to access the
international markets byGDRs.(v)
ADRs are found in three forms from level-I to level-III, but GDRs are already called in high preference
receipt oflevel-II and level-III.
Parties involved in ADR/GDR issues:ADR/GDR issue involves various parties who have some specific role to play in the global
issue.These parties can be a single individual or a group of individuals and ingenuous endeavours are
required from them to make aglobal issue successful.(I)
Issuer company:
A company, which wants to tap the foreign market by raising foreign funds by way ofADR/GDR issue
is called issuer company. This company is responsible for making draft of the issue proposals as per
the regulations applicable to them.
(II)
L
ead manager:
Responsibility of marketing the issue lies with the lead manager. A lead manager: a) advise theissuer
company about the type of securities which the former can issue in the global market. These
securities can be equity, bonds, foreign currency convertible bonds (FCCBs); b) give suggestions

about the rate of interest, priceof the securities, market conditions, nature of investment conversion
price etc to the issuer company.
(III)
Co-managers/underwriters:
Underwriters assists the lead managers to perform their duties with regard to theglobal issue to make
it a successful effort.(IV)
Depository:
Depository is a bank authorized by the issuer company to raise funds by issuing
ADRs/GDRs.Depository is the overseas agent of the issuer company who performs the function of
issuing ADR/GDR to the
investors to compensate for shares allotted to them. Depositorys name appears in the register of
members of the
issuer company, as he is the registered owner of the shares.
(V)
Cu
stodian:
It is a banking company situated in India which acts as a custodian for the ordinary shares or
FCCBsof an Indian company and is appointed by the issuer company. Custodian has physical
possession of the shares(although its ownership rests with the investors) and it works in coordination
with the depository.
(VI)
Legal advisors:
Legal advisors actually help the issuer, lead manager, underwriters in giving legal advice invarious
documents published by them, viz., prospectus, various agreements etc.
(VII)
Auditors:
Various information need to be verified to be included in the prospectus, therefore, auditors
providereport of verified information about the issuer company. The auditors also participate in
the meetings for duediligence and provide a report on that as well

Que.5 What is Online Trading? Explain the process of online trading.

Online Trading
Online trading is one of the crucial financial services provided by financial institutions and merchant
bankers. For example,
Indiabulls Securities Limited is one of Indias foremost st
ock brokerage house having a pan India presence. The organization isa pioneer in providing online
stock trading platform in India and currently has a customer base of seven lakh customers.Online
trading is completed through Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
Market timings are
9 am to 4 pm and traders carry out trading in these markets. On a days trading, stock rise is
dependent and fluctuations are
linked to the trading on these exchanges. Online trading leads to smoother and quicker transaction
on these exchanges. Some5,000 companies were listed on the BSE and 1,650 companies were listed
on the NSE till December 2011. The governmentrecognized BSE in 1956. In 1995, in a span of fifty
days BSE was converted into an electronic trading system from an openoutcry floor trading exchange
system. In the new electronic trading system, there is an automated screen-based trading platform
which is known as BOLT (i.e. BSE online trading system) and at present it has an ability of eight
million orders a
day. This system enables an investor to trade from any part of the world. This system is the worlds
first centralized exchan

ge- based internet trading system called BSEWEBx.co.in. NSE was established by the efforts of
leading financial institutions, banks, insurance companies and few financialintermediaries on behalf
of the government and was incorporated in November 1992. It was the first ever exchange
withelectronic limit order book (called LOB), which permits trading in securities, has investor grievance
cell and investor
protection fund, supports gold ETFs, and uses satellite communication technology for trading (NEATNational Exchange forAutomatic Trading).These two exchanges are the backbone of the Indian
economy and their functionaries are movement setters to numerous otherstock exchanges across the
country and the world.Both NSE and BSE have switched over to computerized online trading system
from open outcry trading system. BSE hasBOLT (BSE Online Trading) and NSE has NEAT
(National Exchange Automated Trading). With these highly efficient onlinetrading systems, efficiency and
transparency of BSE and NSE have increased dramatically.
Process of Online Trading:Online trading can be defined as the procedure through which transaction of financial securities,
currencies and commoditiestakes place through the internet. Investors should use the right software
made available by several brokers for making onlinetransactions. Several leading online transaction
portals are available in India besides the ones provided by NSE and BSE. Thesettlement cycle
in India is T+2 days i.e. trade + 2 days. T+2 means the transactions done on the trade day, will be
resolved byexchange of money and securities on the second business day (excluding Saturday, Sundays, bank and
exchange tradingholidays). Pay-in and pay-out for securities settlement is done on a T+2 basis.The
trading and settlement process in India has been listed below:
Orders are placed at the trading depots by investors.
It is the responsibility of the broker houses to confirm the orders and then certify them to the
exchange (BSE or NSE as pe
r
the clients choice).
Order corresponding at the exchange.
Trade
confirmation information is provided by brokers to the investors.
The clearing corporation obtains the particulars of trade from the exchange.
The clearing corporation conveys the particulars of trade to clearing members/custodians who
validate it. Bas
ed on thevalidation, the clearing corporation decides the duties and responsibilities.
Understanding of duties and responsibilities and pay
-in advice of funds/ securities by the clearing corporation.
The clearing corporation orders the clearing banks
to make funds available by pay-in time.
The clearing corporation orders the depositories to make securities available by pay
-in-time.
Pay
-in of securities: The clearing corporation recommends the depository to debit pool account of
custodians/clearing
members and credit its (clearing corporations) account and depository does the same.
Pay
-in of funds: The clearing corporation recommends the clearing banks to debit account of
custodians/clearing membersand credit its account and clearing bank does the same.Hence, in online
trading, orders are executed through online trading platforms presented by various brokers. Orders
are
straightaway placed at a brokers site by the investors. The broker is responsible for carrying out the
orders on the stock
exchange and also makes payments on behalf of the clients. Besides, brokers also provide clients
with information related tocurrent market trends, news and charts through their online portals. This
helps the investor in taking correct decisions. In returnfor these services, brokers charge software

usage fees and trading commissions for their services. An investor is able to trade inmore than one
product/market through the same account and software

Q.6 Write short notes on:Depository ParticipantsBenefits of Depository SystemsAns:- (a)

Depository Participants
All the functions performed by depositories are actually executed by the depository participants (DPs).
All activities related torecording of allotment of securities, transfer of securities etc. are executed
through depository participants and no investor candirectly open an account with a depository.
A depository can enter into an agreement with various depository participants whowould work as
agents of the depository. Depository Participant works as an intermediary between the investor and
depositoryand they are called as agents of the depository. The Depositories Act, 1996, and SEBI
(Depository & Participants) Regulations,1996, specify the relationship between a depository and
depository participant. Any issue related to the governance ofrelationship between the depository and
DPs will be in accordance with the Depositories Act and SEBI regulations. Adepository participant is
always registered with SEBI and is a legal entity. Once a depository participant obtains
a certificationof registration with SEBI after that it can start giving its depositories-related services.
SEBI (Depository & Participants) Regulations, 1996, has prescribed a minimum net worth of `50 lakh
for the applicants who
are stockbrokers or Non-Banking Finance Companies (NBFCs), for granting a certificate of
registration to act as a depository participant.
For R&T agents, a minimum net worth of `10 crore is prescribed in addition to a grant of certificate of
registration by
SEBI.
A stockbroker can act as a depository participant in more than one depository but in that case the
stockbroker has to compl
ywith the criteria of each depository in order to maintain a specified net worth.
Similarly some other specifications are
given for the NBFCs when they work as depository participant on behalf of a person.
For R&T agents, the specifications for net worth are different and given in SEBI (D&P) Regulations,
1996
.Eligibility Criteria for becoming Depository Participants:
The eligibility criteria to become DPs have been prescribed by the SEBI (Depository & Participants)
Regulations, 1996, andthe by-laws of depositories. The DPs have to comply with the by-laws of
the respective depositories, for which membership issought.(i)
Basic Eligibility:
Persons belonging to one of the following categories are eligible to become a DP:1.
A public financial institution as defined in Section 4A of the Companies Act.2.
A bank included for the time being in the Second Schedule to the Reserve Bank of India Act, 1934.3.
A foreign bank operating in India with the approval of the Reserve Bank of India.4.
A State Financial Corporation established under the provisions of Section 3 of the State Financial
Corporations Act,1951.5.
An institution engaged in providing financial services, promoted jointly or severally by any of the
institutionsmentioned in the four above- mentioned clauses.6.
An R&T agent who has been granted a certificate of registration by SEBI.(ii)
Net worth:
SEBI (Depositories & Participants) Regulations, 1996, prescribe a minimum net worth criteria
fordifferent kinds of applicants:
For applicants who are stock brokers or non

-banking finance companies, the net worth should be `50 lakh, for granting acertificate of registration
to act as a DP.

For R&T agents, a minimum net worth of `10 crore is prescribed in addition to a grant of certificate of
registration by SEBI.
If a stockbroker seeks to act as a DP in more than one depository, he should comply with the
specified net worth criterion
separately for each such depository.
If an NBFC seeks to act as a DP on behalf of any other person, it needs to have a net worth of `50
crore in addition to the
networth specified by any other authority.
Code of Conduct for Participants:
The depository participants who have certificates shall abide by the following code of conduct issued
by SEBI on 1 October2003:1.
A participant shall make all efforts to protect the investors.2.
2. A participant shall maintain high standards of integrity in all its dealings with its clients and other
intermediaries, inthe conduct of its business.3.
3. A participant shall be prompt and diligent in opening of a beneficial owner account, dispatch of
thedematerialization request form, rematerialization request form and execution of debit instruction
slip, and in all otheractivities undertaken by him on behalf of the beneficial owners.4.
A participant shall endeavour to resolve all the complaints against it or in respect of the activities
carried out by it asquickly as possible, and not later than one month of receipt.5.
A participant shall not increase charges/ fees for the services rendered without proper advance notice
to the beneficialowners.6.
A participant shall not indulge in any unfair competition, which is likely to arm the interest of the other
participant orinvestors or is likely to place such other participants in a weak position while competing
for or executing anyassignment.7.
A participant shall not make any exaggerated statement whether oral or written to the clients either
about itsqualification or capacity to render certain services or about its achievements with regard to
services rendered to otherclients.8.
A participant shall not divulge to other clients, press or any other person any information about
its clients which hascome to its knowledge except with the approval / authorization of the clients
or when it is required to disclose theinformation under the requirements of any Act, Rules or
Regulations.9.
A participant shall co-operate with the Board as and when required.10.
Stock Exchanges
Benefits of a Depository System:In the depository system, the ownership and transfer of securities takes place by means of electronic
book entries. At theoutset, this system rids the capital market of the dangers related to handling
of paper. NSDL provides numerous direct andindirect benefits like: