Master of Business Administration – MBA Semester 4-SMU

MF0008 – Merchant Banking & Financial Services

Assignment Set-1 & Set-2

Submitted by : Anuj Kumar

Reg No : 520926567
LC Code :1822
Date of Submission :22-11-2010
 Masters in Business Administration-MBA Semester III
MF0008 – Merchant Banking & Financial Services – 2 Credits
Assignment Set-1

Note: Each question carries 10 Marks. Answer all the questions.

1. Bring out an overview of Indian financial system post 1950 period.

The economy of India is the eleventh largest economy in the world by nominal GDP and the
fourth largest by purchasing power parity (PPP).Following strong economic reforms from the
socialist inspired economy of a post-independence Indian nation, the country began to develop a
fast-paced economic growth, as free market principles were initiated in 1990 for international
competition and foreign investment. India is an emerging economic power with a very large pool
of human and natural resources, and a growing large pool of skilled professionals. Economists
predict that by 2020, India will be among the leading economies of the world.

Pre-colonial
The citizens of the Indus Valley civilisation, a permanent settlement that flourished between 2800
BC and 1800 BC, practiced agriculture, domesticated animals, used uniform weights and
measures, made tools and weapons, and traded with other cities. Evidence of well planned streets,
a drainage system and water supply reveals their knowledge of urban planning, which included
the world's first urban sanitation systems and the existence of a form of municipal government.
The 1872 census revealed that 99.3% of the population of the region constituting present-day
India resided in villages, whose economies were largely isolated and self-sustaining, with
agriculture the predominant occupation. This satisfied the food requirements of the village and
provided raw materials for hand-based industries, such as textiles, food processing and crafts.
Although many kingdoms and rulers issued coins, barter was prevalent. Villages paid a portion of
their agricultural produce as revenue to the rulers, while its craftsmen received a part of the crops
at harvest time for their services.

Religion, especially Hinduism, and the caste and the joint family systems, played an influential
role in shaping economic activities. The caste system functioned much like medieval European
guilds, ensuring the division of labour, providing for the training of apprentices and, in some
cases, allowing manufacturers to achieve narrow specialization. For instance, in certain regions,
producing each variety of cloth was the specialty of a particular sub-caste.

Textiles such as muslin, Calicos, shawls, and agricultural products such as pepper, cinnamon,
opium and indigo were exported to Europe, the Middle East and South East Asia in return for
gold and silver.
Assessment of India's pre-colonial economy is mostly qualitative, owing to the lack of
quantitative information. One estimate puts the revenue of Akbar's Mughal Empire in 1600 at
£17.5 million, in contrast with the total revenue of Great Britain in 1800, which totalled £16
million. India, by the time of the arrival of the British, was a largely traditional agrarian economy
with a dominant subsistence sector dependent on primitive technology. It existed alongside a
competitively developed network of commerce, manufacturing and credit. After the decline of the
Mughals, western, central and parts of south and north India were integrated and administered by
the Maratha Empire. The Maratha Empire's budget in 1740s, at its peak, was 100 million. After
the loss at Panipat, the Maratha Empire disintegrated into confederate states of Gwalior, Baroda,
Indore, Jhansi, Nagpur, Pune and Kolhapur. Gwalior state had a budget of 30M. However, at this
time, British East India company entered the Indian political theatre. Until 1857, when India was
firmly under the British crown, the country remained in a state of political instability due to
internecine wars and conflicts.

Colonial

Calcutta, which was the economic hub of British India, saw increased industrial activity during
World War II. Company rule in India brought a major change in the taxation environment from
revenue taxes to property taxes, resulting in mass impoverishment and destitution of majority of
farmers and led to numerous famines. The economic policies of the British Raj effectively
bankrupted India's large handicrafts industry and caused a massive drain of India's resources.
Indian Nationalists employed the successful Swadeshi movement, as strategy to diminish British
economic superiority by boycotting British products and the reviving the market for domestic-
made products and production techniques. India had become a strong market for superior finished
European goods. This was because of vast gains made by the Industrial revolution in Europe, the
effects of which was deprived to Colonial India.
The Nationalists had hoped to revive the domestic industries that were badly effected by policies
implemented by British Raj which had made them uncompetitive to British made goods.
An estimate by Cambridge University historian Angus Maddison reveals that "India's share of the
world income fell from 22.6% in 1700, comparable to Europe's share of 23.3%, to a low of 3.8%
in 1952". It also created an institutional environment that, on paper, guaranteed property rights
among the colonizers, encouraged free trade, and created a single currency with fixed exchange
rates, standardized weights and measures, capital markets. It also established a well developed
system of railways and telegraphs, a civil service that aimed to be free from political interference,
a common-law and an adversarial legal system.[41] India's colonisation by the British coincided
with major changes in the world economy—industrialisation, and significant growth in
production and trade. However, at the end of colonial rule, India inherited an economy that was
one of the poorest in the developing world,[42] with industrial development stalled, agriculture
unable to feed a rapidly growing population, India had one of the world's lowest life expectancies,
and low rates for literacy.
The impact of the British rule on India's economy is a controversial topic. Leaders of the Indian
independence movement, and left-nationalist economic historians have blamed colonial rule for
the dismal state of India's economy in its aftermath and that financial strength required for
Industrial development in Europe was derived from the wealth taken from Colonies in Asia and
Africa. At the same time right-wing historians have countered that India's low economic
performance was due to various sectors being in a state of growth and decline due to changes
brought in by colonialism and a world that was moving towards industrialization and economic
integration.
2. Explain latest monetary policy of RBI?

The Monetary Policy for 2010-11 is set against a rather complex economic backdrop. Although
the situation is more reassuring than it was a quarter ago, uncertainty about the shape and pace of
global recovery persists. Private spending in advanced economies continues to be constrained and
inflation remains generally subdued making it likely that fiscal and monetary stimuli in these
economies will continue for an extended period. Emerging market economies (EMEs) are
significantly ahead on the recovery curve, but some of them are also facing inflationary pressures.

2. India’s growth-inflation dynamics are in contrast to the overall global scenario. The economy is
recovering rapidly from the growth slowdown but inflationary pressures, which were triggered by
supply side factors, are now developing into a wider inflationary process. As the domestic balance
of risks shifts from growth slowdown to inflation, our policy stance must recognise and respond
to this transition. While global policy co-ordination was critical in dealing with a worldwide
crisis, the exit process will necessarily be differentiated on the basis of the macroeconomic
condition in each country. India’s rapid turnaround after the crisis induced slowdown evidences
the resilience of our economy and our financial sector. However, this should not divert us from
the need to bring back into focus the twin challenges of macroeconomic stability and financial
sector development.

3. This statement is organised in two parts. Part A covers Monetary Policy and is divided into
four Sections: Section I provides an overview of global and domestic macroeconomic
developments; Section II sets out the outlook and projections for growth, inflation and monetary
aggregates; Section III explains the stance of monetary policy; and Section IV specifies the
monetary measures.Part B covers Developmental and Regulatory Policies and is organised into
six sections: Financial Stability (Section I), Interest Rate Policy (Section II), Financial Markets
(Section III), Credit Delivery and Financial Inclusion (Section IV), Regulatory and Supervisory
Measures for Commercial Banks (Section V) and Institutional Developments (Section VI).

4. Part A of this Statement should be read and understood together with the detailed review in
Macroeconomic and Monetary Developments released by the Reserve Bank.
3. Explain the recent SEBI guidelines for merchant bankers?

Merchant banking may be defined as an ‘institution which covers a wide range of activities such
as underwriting of shares, portfolio management, project counseling, insurance etc…They render
all these services for a fee ORIGIN : The term merchant banking originated from the London who
started financing foreign trade through acceptance of bills Later they helped government of under
developed countries to raise long term funds Later these merchants formed an association which
is now called ”Merchant Banking and Securities House Association”

Recent SEBI guidelines for merchant bankers:

Merchant Bankers have been barred from undertaking activities other than related to the securities
market. The SEBI (Merchant Bankers) Regulations, 1992 have been amended on December 19,
1997 to provide that:

the applicant should be a fit and proper person;

a merchant banker has to seek separate registration for its underwriting or portfolio management
activities;
the categorisation of merchant bankers I, II, III and IV has been dispensed with;
a merchant banker, other than a bank or a public financial institution, has been prohibited from
carrying any activities not pertaining to the securities market; and
the applicant should be a body corporate other than non-banking finance company.
The Merchant Bankers Regulations were amended on January 21, 1998 to provide time upto June
30, 1998 to sever its activities or hive off its activities not pertaining to the securities market. The
Reserve Bank of India has exempted merchant banking companies from the provisions of Reserve
Bank of India Act, 1934 relating to compulsory registration (section 451A), maintenance of liquid
assets (section 451B), creation of reserve fund (section 451C ) and all the provisions of the recent
Directions relating to deposit acceptance and prudential norms.
Merchant banking companies, to be eligible for the above exemption, are required to satisfy the
following conditions:

Such companies are registered with the SEBI under section 12 of the SEBI Act, 1992 and are
carrying on the business of merchant banker in accordance with the Rules / Regulations framed
by the SEBI;
they acquire securities only as part of their merchant banking business;
they do not carry on any other financial activities as mentioned in section 451 (c ) of the RBI Act,
1934;
they do not accept / hold public deposits.
 Masters in Business Administration-MBA Semester III
MF0008 – Merchant Banking & Financial Services – 2 Credits
Assignment Set-2

Note: Each question carries 10 Marks. Answer all the questions.

1. Explain the listing, trading and settlement issues in industrial securities market?

The industrial securities market refers to the market which deals in equities and debentures of the
corporates. It is further divided into primary market and secondary market.
Primary market (new issue market):- deals with 'new securities', that is, securities which were not
previously available and are offered to the investing public for the first time. It is the market for
raising fresh capital in the form of shares and debentures. It provides the issuing company with
additional funds for starting a new enterprise or for either expansion or diversification of an
existing one, and thus its contribution to company financing is direct. The new offerings by the
companies are made either as an initial public offering (IPO) or rights issue.

Secondary market/ stock market (old issues market or stock exchange):- is the market for buying
and selling securities of the existing companies. Under this, securities are traded after being
initially offered to the public in the primary market and/or listed on the stock exchange. The stock
exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and
reflects the trends in the economy through fluctuations in the prices of various securities. It been
defined as, "a body of individuals, whether incorporated or not, constituted for the purpose of
assisting, regulating and controlling the business of buying, selling and dealing in securities".
Listing on stock exchanges enables the shareholders to monitor the movement of the share prices
in an effective manner. This assist them to take prudent decisions on whether to retain their
holdings or sell off or even accumulate further. However, to list the securities on a stock
exchange, the issuing company has to go through set norms and procedures
2. Explain the role of credit rating agencies?

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types
of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the
underlying debt are also given ratings.
In most cases, the issuers of securities are companies, special purpose entities, state and local
governments, non-profit organizations, or national governments issuing debt-like securities (i.e.,
bonds) that can be traded on a secondary market. A credit rating for an issuer takes into
consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the
interest rate applied to the particular security being issued. (In contrast to CRAs, a company that
issues credit scores for individual credit-worthiness is generally called a credit bureau or
consumer credit reporting agency.)
The value of such ratings has been widely questioned after the 2007/2009 financial crisis. In 2003
the U.S. Securities and Exchange Commission submitted a report to Congress detailing plans to
launch an investigation into the anti-competitive practices of credit rating agencies and issues
including conflicts of interest.

Agencies that assign credit ratings for corporations include:

A. M. Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
Fitch Ratings (U.S.)
Moody's Investors Service (U.S.)
Standard & Poor's (U.S.)
Egan-Jones Rating Company (U.S.)
Japan Credit Rating Agency (Japan)

Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments.
For investors, credit rating agencies increase the range of investment alternatives and provide
independent, easy-to-use measurements of relative credit risk; this generally increases the
efficiency of the market, lowering costs for both borrowers and lenders. This in turn increases the
total supply of risk capital in the economy, leading to stronger growth. It also opens the capital
markets to categories of borrower who might otherwise be shut out altogether: small
governments, startup companies, hospitals, and universities.
3. Explain call money market in India?

The call money market is a mechanism that allows both dealers and brokers to locate and borrow
funds that can be used for investment needs. The funds located through the money market can be
utilized to provide financing for the purchase of securities that can be added to the portfolio of the
investment firm, or as a resource that will cover the margin accounts of the firm’s clients.

As a means of securing financing for credit needs, the call money market provides a range of
options. Chief among them is the ability to create and manage what is referred to as a call money
loan. The call money loan essentially works in the same manner as a day to day loan. Call money
loans provide funds that can be used to conduct transactions between banks, or with other money
market dealers. Generally, these types of loans are paid off in a short period of time, allowing the
broker to move on to secure new loans and continue to process orders on behalf of their clients.
The loans may be secured or unsecured, depending on the terms and conditions of the loan, along
with the duration and the credit rating of the debtor.

Individual investors generally do not participate directly in the call money market. Instead, the
investor will work through a brokerage firm. The broker will determine the best avenue to take in
financing an investment, based on the individual circumstances of the client. This process is
actually to the advantage of the investor, since the broker will be aware of sources of funding that
may or may not be readily accessible to individuals who are looking for financial support to build
a portfolio.

The call money market crosses international lines, with funding opportunities located in a number
of countries around the world. Because of the inclusion of international banking institutions, the
role of the brokerage firm becomes even more vital to the individual investor. Brokers will be
aware of applicable banking laws, and how those laws could impact the transaction. This
knowledge regarding participants in the call money market allows the firm to pick and choose
among possible avenues for funding with a level of efficiency that would be difficult for the
individual.