Printable P6B FSCM Case Study Digest by ICAI

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FINAL COURSE
(Revised Scheme of Education and Training)
ELECTIVE PAPER : 6B
Financial Services and
Capital Markets
CASE STUDY DIGEST
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
© The Institute of Chartered Accountants of India
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This Case Study Digest has been prepared by the faculty of the Board of Studies. The
objective of this digest is to provide good number of case studies for practice to the
students to enable them to strengthen their preparation in the subject. In case students
need any clarifications or have any suggestions to make for further improvement of the
material contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and analysis in a manner useful for the
students. However, the digest has not been specifically discussed by the Council of the
Institute or any of its Committees and the views expressed herein may not be taken to
necessarily represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this book.
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recording, or otherwise, without prior permission, in writing, from the publisher.
Edition : February, 2021
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Published by : The Publication Department on behalf of The

Institute of Chartered Accountants of India, ICAI
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Preface
Under the new scheme of Education and Training, at Final level of Chartered Accountancy
Course, an Elective paper 6B – Financial Services and Capital Markets (FSCM) had been
introduced. The basic objective of introduction of this paper is to enable the students to gain
knowledge of financial services rendered by intermediaries and banks and their role and
activities in the financial market in general and capital markets in particular; and to acquire the
ability to apply such knowledge to address issues in practical scenarios.
To achieve this aim, the study material of FSCM is already there. However, a need is felt to
acquaint the students about the practical issues in financial services and capital markets
through case studies. In this respect, a case study digest has been prepared to help the
students to have a practical outlook in the areas of financial services and capital markets.
The paper aims at specialisation of the subject which can be achieved both with conceptual
clarity of the various topics covered in the syllabus as well as dissemination of the acquired
knowledge in the practical scenario. Keeping this purpose in mind, the capability of the
students in this paper is tested through case studies in the form of an open book examination.
Furthermore, it is advisable to be very thorough with the concepts of FSCM discussed in the
November, 2020 edition of the Study Material before attempting the case studies given in the
digest. The students are also requested to update themselves about the latest happenings in
this field by referring to academic updates in ‘Students Journal’ published by the Board of
Studies, the monthly journal ‘The Chartered Accountant’, and financial newspapers such as
Economic Times, Mint, Business Line, Business Standard etc.
After obtaining conceptual clarity from the Study Material, the students should try to attempt
the case studies independently before referring the answers. In this way, they will be able to
identify the gaps in the preparation for the examination and will, thus, be able to hone their
application and analytical skills to face the examination with confidence.
The Board of Studies (BoS) has developed the Case Study Digest to help the students with
better understanding of the subject. The case studies given herein are application oriented
and test the conceptual clarity of the topics in practical scenarios. Each case study is a mix of
Multiple Choice Questions (MCQs) and descriptive questions in the ratio of 40:60.

The solutions to the questions asked in the case studies have been worked out on the basis of
certain assumptions/views derived from the facts given in the question or language used in the
question. In some cases, answers have also been given by taking into the account the latest
happenings in a particular field. It may also be possible to work out the solution to the case
studies in a different manner based on the assumptions made or views taken.
Although, sincere efforts have been made to keep the case study digest error free, it is
possible that some errors might have inadvertently crept in. In this respect, students are
encouraged to highlight any mistake they may notice while going through the digest by
bringing it to the attention of the Director of Studies.
W ishing you happy reading!
iv

CASE STUDY 1
State National Bank is a scheduled commercial bank having branches all over India. The
Balance Sheet of the bank is at INR 20,000 crore. Year 2019 was a positive year, where the
deposits increased by 19% and significant improvement in Net Interest Earned (NEA) Ratio was
achieved. This was the result of right mix of sector-based diversification and robust management
of stressed cases.
The strategy meeting of the Board of Directors was held in the last week of December 2019.
The Board lauded the management for their performance in spite of challenging atmosphere in
the domestic environment owing to slowdown in sectors like auto and real estate and growing
uncertainty in the international market coupled with Brexit, Trade wars, Climate Change and
other geo political events.
The Board evaluated the strategy demonstrated by the senior managerial personnel on the
growth plan for the year 2020. The plan stipulated aggressive growth in deposits and CASA
(Current Account-Saving Account) balances through existing branch networks through
competitive saving and term deposit rates. Further the strategy carved out an elaborate plan on
exposure increase to Real Estate, Consumer loans, Credit Cards products and Personal Loans.
After deliberate discussion, the Board opined that the bank should adopt a conservative
approach for the year 2020. This approach will safeguard bank from riskier exposures to
troubled sectors and any slowdown or recessionary headwinds that may arise during the year.
However the Board was on keen on moving ahead with expansion of deposits and CASA base
so as to strengthen the Balance sheet of the bank and also popularize the franchise in the
investment space.
The treasury head of the Bank, Anurjit Sen, however pointed out that the approach could lead
to severe asset liability mismatches. On one hand, there would be growing deposits and CASA
balances and on the other hand due to conservative approach there would not be enough loan
opportunities for lending. The situation will give rise to high liquidity balances on the banks
Balance Sheet.
Anurjit also suggested that the surplus liquidity balances could be deployed in money market
instruments to manage the asset liability gaps.
The Board held further discussion over the risk as well as the solution submitted by Anurjit and
agreed that the surplus liquidity be managed by using money market instruments.
The Board once again thanked the attendees and concluded the meeting with best wishes for
year 2020.

1.2 FINANCIAL SERVICES AND CAPITAL MARKETS
I. Multiple Choice Questions

1. State National Bank acquires 6.45 GS 2029 on auction by RBI of Face value of INR 200
crores. The Bond was issued for a period of 10 years on 7 October 2019 with maturity
date fixed as 7 October 2029. The coupon rate of the Bond was fixed at 6.45% per
annum. Coupon to be paid semi annually on 7 October and 7 April each calender year.
Determine the amount of interest to be received on the bond holding on the first coupon
payment date.
(a) 64,676,712.33
(b) 129,353,424.66
(c) 65,575,000.00
(d) 64,500,000.00
2. A 91 day Treasury bill was issued by Government of India on 8 January 2020 maturing
on 9 April 2020. 2020 is a leap year i.e February 2020 has 29 days. The day convention
for yield computation for this Treasury Bill is
(a) 364
(b) 365
(c) 360
(d) 366
3. Which of the below money market instrument is not issued on a front-ended negotiable,
i.e issued at discount and payable at face value on maturity?
(a) Commercial Paper
(b) Certificate of Deposit
(c) Short Term deposit
(d) Treasury Bill
4. What is the minimum amount of bid for a Treasury bill instrument?
(a) INR 25,000
(b) INR 250,000
(c) INR 10,000
(d) INR 100,000

CASE STUDIES 1.3
5. The State National Bank subscribed to the issue of a Certificate of Deposit issued by
Gramin Commercial Bank for a period of 1 year. The CD with denominated face value of
INR 100,000/- each was issued at a discount of 8.25%. 6 Months, hence, the Bank is
considering to sell its Gramin Commercial Bank CD holdings in the secondary market.
Determine the price at which the CD was issued and what amount shall the bank expect
on sale on each CD assuming there has been no change in the market yield. (8.25% p.a.)
(a) Issue price INR 95,875; expected sale price 91,750
(b) Issue price INR 91,750; expected sale price 95,875
(c) Issue price INR 95,875; expected sale price 97,937
(d) Issue price INR 97,937; expected sale price 94,785
II. Descriptive Questions

6. What are the various instruments/products available in the Indian Money Market for
Banks to manage the liquidity position? Describe in brief.
7. On 09th January 2020, Anurjit Sen, observes following on the quotes on the NDS OM
screen for the T Bills available for trading.
Security Description Maturity Date LTP
070 DCMB 17032020 17/03/2020 99.0743
091 DTB 30012020 30/01/2020 99.7217
364 DTB 17092020 17/09/2020 96.5472
091 DTB 09042020 09/04/2020 98.7663
182 DTB 09072020 09/07/2020 97.4845
091 DTB 06022020 06/02/2020 99.6331
364 DTB 04062020 04/06/2020 97.9796
364 DTB 20032020 20/03/2020 99.0330
364 DTB 20082020 20/08/2020 96.9248
182 DTB 30012020 30/01/2020 99.7217
The Bank expects the following surplus liquidity levels for the upcoming months of 2020.
Month Liquidity Levels in INR (Crores)
Quarter 1 2020 3,500
Quarter 2 2020 3,500
Quarter 3 2020 1,500
Quarter 4 2020 4,500

How shall Anurjit manage the surplus liquidity on the Bank’s Balance Sheet using Money
Market Instruments for the next:
(i) 3 months and
(ii) 6 months
(iii) Also compute the effective yield (in percentage terms) earned on the selected
Treasury Bills under both (i) and (ii)
8. As of 31 March 2020, the deposit and CASA positions of the State National Bank is as
follows.
CRR – 4%
SLR – 18.25%
Sr No. Type Balance in INR Crores
1 Saving Bank 3,900
2 Current Account 3,800
3 Time Deposits 8,200
The Reserve Ratios as laid down in the monetary policy of RBI is as follows:
The G Sec holding portfolio stood as below
Security Type Maturity Value in
INR Crores
6.45 GS 2029 Central Government Bonds 07 Oct 2029 398
7.57 GS 2033 Central Government Bonds 17 June 2033 425
6.97 GS 2026 Central Government Bonds 06 Sep 2026 655
7.17 GS 2028 Central Government Bonds 08 Jan 2028 455
7.40 GS 2035 Central Government Bonds 09 Sep 2035 580
7.73 GS 2034 Central Government Bonds 19 Dec 2034 380
091DTB09042020 Treasury Bill 09 April 2020 225
091DTB09072020 Treasury Bill 09 July 2020 105
091DTB10122020 Treasury Bill 09 April 2020 90
Total 3,313
(i) Briefly explain about CRR and SLR and their requirements with respect to RBI.
(ii) What is the obligation of State National Bank based on the above information.The
actual balance of CRR obligation deposited by the bank with RBI is INR 300
crores. What is the shortfall in CRR Obligation.

CASE STUDIES 1.5
(iii) The State National Bank’s Liquidity position at the moment does not look feasible
to arrange the shortfall. How can the bank make for the shortfall without liquidating
any of the Bond/T bill holdings?
ANSWERS TO CASE STUDY 1
I. Answers to Multiple Choice Questions

1. (d) Principal amount of Bonds purchase for coupon computation = 200 crores
Rate of Interest = 6.45 % per annum
Coupon payment date = 7 April 2020.
No of days for coupon computation:
October 2019 - 23
November 2019 - 30
December 2019 - 30
January 2020 - 30
February 2020 - 30
March 2020 - 30
April 2020 -7
Total = 180
(For Indian G sec bonds the day count convention is 30 / 360, thus number of
days in a month is taken as 30 and number of days in a year is takes in 360)
Interest amount = INR 200 crores x 6.45% x 180/360
= INR 64,500,000
2. (d)
3. (c)
4. (a)
5. (b) Issue price = Face value – (Face Value x Discount Yield x Duration of the CD in
months /12)
Issue Price = 100,000 – (100,000 x 8.25% x 12 / 12)
Issue price = INR 91,750

Expected Sale price = Issue Price + (Face Value – Issue Price)/Duration of the
CD in months) x No of months passed the issue date
Expected Sale price = 91,750 + (100,000– 91,750)/12) x 6
Expected Sale price = 91,750 + (8,250)/12) x 6
Expected Sale price = 91,750 + 4,125
Expected Sale price = INR 95,875
II. Answers to Descriptive Questions

6. Various money market instruments are available in Indian Money Market for Banks to
manage their liquidity positions. Major among them are described in brief as follows:
Call/Notice Money:
Call money market or Interbank call market, is a market for scheduled commercial banks,
primary dealers, Mutual Funds lend or borrow for short maturities ranging from Overnight
to 14 days for their day to day liquidity management. Under Notice market funds are
transacted for a period of 2 days – 14 days. The interest rate is market driven and
sensitive to the demand and supply forces.
Treasury Bills (TB’s):
T-Bills are short term money market instruments issued by Reserve Bank of India on
behalf of Government of India. T-Bills are issued at a discount for periods of 91 days,
182 days and 364 days. T-Bills are approved securities for the purpose of Statutory
Liquidity Ratio (SLR). T-Bills are highly liquid and available in Primary as well secondary
market. Further T-Bills are eligible for the SLR Obligation.
Certificate of Deposits:
Certificate of Deposits are negotiable term-deposits accepted by commercial banks at a
market rate. Certificate of Deposits are at a discount for maturities ranging from 7 days
to one year. Banks and Financial Institution can issue Certificate of Deposits on Floating
rate basis.
Commercial Paper:
Commercial Papers are unsecured negotiable notes issued by highly rated corporate
entities for meeting their working capital requirements maturities ranging from 7 days to
one year. Its market has picked up considerably in India due to interest rate differential
in the interbank and commercial lending rate.
7. T-Bills are short term money market instruments issued by Reserve Bank of India on
behalf of Government of India.

CASE STUDIES 1.7
(i) As per the table above we see a surplus liquidity of INR 3500 crores in the first 3
months of year 2020.
Of the all treasury bills listed on the NDS OM screen the most suitable shall be
the one maturing in 3 months from 9th January 2020 i.e near 9 April 2020.
091DTB09042020 has a maturity date of 9th April 2020 and is the most suitable
T bill instrument for managing the surplus liquidity for State National Bank.
Therefore, Anurjit should purchase T Bill 091DTB09042020 for value INR 3500
crores.
(ii) As per the table above we see a surplus liquidity of INR 3500 crores in the first 3
months of year 2020 and INR 3500 crores in the next 3 months. For managing the
liquidity Anurjit shall have to deploy the requisite funds.
Of the all treasury bills listed on the NDS OM screen the most suitable shall be
the one maturing in 6 months from 9th January 2020 i.e near 9th July 2020.
091DTB09072020 has a maturity date of 9th July 2020 and is the most suitable T
bill instrument for managing the surplus liquidity for State National Bank.
Therefore Anurjit should purchase T Bill 091DTB09072020 for value INR 3500
crores on 9 Jan 2020.
(iii) The yield earned on T Bill purchase can be ascertained using the below formula
Yield = (Face Value – Purchase Price)/Purchase Price x 364/No of Days to
Maturity x 100
This yield earned on T bill purchase on each of the cases are calculated as below:
For 3 months
= (100-98.7663)/98.7663 x 364/91 x 100
= 5%
For 6 months
= (100-97.4845)/97.4845 x 364/182 x 100
= 5.16 %
8. (i) Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are fixed reserve
requirements which the banks are required to maintain with Reserve Bank of India
(RBI)
Cash Reserve Ratio (CRR): Cash Reserve Ratio is the proportion of the total
deposits which the bank is required place with RBI. The current rate of CRR
prescribed by RBI is 3%. However, the practical questions have been solved by

taking the CRR as 4% as given in the case study. And, it may change based on
the decisions of the monetary policy decisions which are announced every two
months by RBI.
Statutory Liquidity Ratio (SLR): Statutory Liquidity Ratio is the proportion of the
total deposits which the bank is required maintain in asset classed approved by
RBI. Government Securities, T-Bills qualify for SLR requirements. The current rate
of CRR prescribed by RBI is 18 % .However, the practical questions have been
solved taking the SLR as 18.25% as given in the case study.
(ii) The Total deposits balances of the Bank is INR 15,900 crores. Thus the CRR
requirement is 4 % of INR 15,900 crores which is INR 636 crores.
The SLR requirement is 18.25% of INR 15,900 crores which is INR 2,901.75 crores.
Based on the deposit balances and CRR requirement of the State National Bank
is INR 636 crores. Thus there is shortfall of INR 336 crore which is to be fulfilled
by placing INR 336 crores with Reserve Bank of India.
(iii) The State National Bank has to fulfil a shortfall obligation of INR 336 Crores.
Keeping in view the tight liquidity position, the bank can consider selling the Tbill
or Government Bonds holding to meet the shortfall.
Since the Bank do not wish to sell Bond / T Bill holdings, the Bank can consider
borrowing on REPO basis using one of the Bonds or Tbills as underlying for the
REPO borrowing. The current SLR requirement is INR 2901.75 Crores. The
Government security holding of the Bank in excess of SLR requirement is
INR 411.25 crores (3313 – 2901.75).
The Bank can borrow from other Banks/Financial institutions in the money market
by undertaking a REPO (Repurchase obligation) transaction to raise funds to the
tune of INR 336 crore and place the same with RBI to meet the CRR requirement.
The REPO transaction can be entered for a maturity until the liquidity position of
the Bank is expected to ease.

CASE STUDY 2
PQR Ltd. is engaged in the steel sector. It needs money from time to time to meet its working
capital needs. It is considering fulfilling its short term fund requirements by issuing commercial
papers (CPs). It has decided not to approach the banks for short term loans. Instead it is inclined
towards opting for commercial papers for fulfilling its working capital requirements.
The banks are witnessing a loss of demand for working capital loans from companies as interest
rates on commercial paper fall below the reverse repo rate, the rate at which banks put their
surplus money with the Reserve Bank of India (RBI).
Some of the companies such as HDFC Ltd, Godrej Industries, Aditya Birla Finance and
NABARD are raising cheap funds. It shows the transmission of lower rates being pushed by
the central bank and the choice of companies who are cash-rich to invest it in mutual funds
rather than keeping it in new projects.
CP rates in the secondary market have significantly dropped due to high liquidity and reduced
issuances. Much of the collapse in money market rates has been attributed to the huge flow of
cash due to RBI’s purchase of US dollars (under a rupee-dollar swap arrangement), which
aggregated about a hundred billion since the start of the pandemic, taking the reserves to a
record $578.5 billion.
The Dollar-Rupee Swap was a liquidity management tool that is operated through a swap
(exchange) between the US Dollar and the Rupee; aimed to facilitate comfortable liquidity
situation in the economy. Therefore, rupee was exchanged for dollar and the participants in the
swap were the identified banks. What made the new facility unique was its connection with
foreign currency management and at the same time dealing with the liquidity of rupee in the
financial system. In the swap arrangement, the RBI conducted auction for getting dollars from
banks while exchanging rupees. The rate at which dollar was exchanged for rupee was based
on the spot exchange rate on the auction day. The swap was for a period of three years. On
that day when the swap period of three years will end, the banks have to buy back dollars from
the RBI while paying rupee back.
Companies are not in a hurry to initiate any new investment. In fact, they are raising from the
capital market either for meeting their working capital requirements or to pay existing bank loans.
Burgeoning liquidity is putting challenge for commercial banks in terms of pricing of assets &
liabilities. According to data from CARE Ratings, the average liquidity surplus in the banking
system rose further to ` 5.31 lakh crore in November 2020, compared to ` 4.03 lakh crore in
the previous month and ` 2.33 lakh crore in November 2019.

Commercial papers issued by Godrej Industries, yielded 3.28-3.30% with three-month maturities
earlier in the month of November 2020. India’s largest home financier HDFC Ltd.’s three-month
CPs have yielded 3.26%. Further, the NABARD’s papers are yielding 17 basis points lower than
the reverse repo rate. The reverse repo is now at 3.35%.
The RBI, though hesitant in reducing the interest rates due to rising prices, has promised to
keep the rates low with abundant liquidity aimed at transmission and smooth passing of
government’s borrowing.
Although the central bank aims to boost investments, companies left with spare capacities are
saving cash and waiting to see a push in demand before investing to create fresh capacities.
However, the objective of the RBI to keep the interest rate low is working. Now that the investors
have started parking their money and the debt capital market is witnessing vibrancy, the
certainty on availability of funds at competitive rates has improved.
Now, the question is what should be the RBI’s stance with relation to this situation. The experts
are expecting the RBI to tighten liquidity in the upcoming monetary policy and control the easy
liquidity that was made available during the year. The central bank was urged to reduce excess
liquidity up to ` 3 lakh crore through monetary interventions to stabilise the money markets. In
response to that, RBI has intervened to reduce excess liquidity to the extent of ` 2 lakh crore
through a reverse repo auction resulting in an enhancement in shorter duration rates including
the tri-party repo rates, sovereign treasury bills, and inter-bank call money rate.

1. Reverse Repo rate is …….
(a) the rate at which RBI lends to commercial banks
(b) the rate at which commercial banks lends to RBI
(c) the rate at which commercial banks lends to companies
(d) the rate at which commercial banks lends to NBFCs
2. What makes the dollar swap arrangement as one of its kind?
(a) Dealing with excess rupee liquidity in the financial system
(b) Foreign currency management
(c) Both (a) and (b)
(d) None of the above

CASE STUDIES 2.3
3. The entire approved amount of CP should be raised within a period of ………from the
date on which issuer opens the issue for subscription.
(a) two weeks
(b) three weeks
(c) four weeks
(d) one week
4. Which among the following is not an advantage of commercial papers to its issuer?
(a) Access to short term funding
(b) Low interest expenses
(c) less recognition among investors in comparison to other money market
instruments
(d) higher yield than other short term money market instruments
5. Which among the following is not a traditional credit policy instrument of RBI to curtail
excess liquidity?
(a) Increase Cash Reserve Ratio
(b) Increase Statutory Liquidity Ratio
(c) Sale of Securities
(d) Rupee Dollar Swap by buying rupees from the banks and giving them dollars in
exchange
6. How tenable is banks fear for the lack of demand for working capital loans from
companies? Why there is a growing demand for commercial papers and the reasons
for its interest rate being lower than the reverse repo rate. Explain by referring to the
facts given in the case study and the current investment scenario in the money market.
7. Why do RBI gone for swapping rupee for dollars from the commercial banks? What
was the intention? What were the risks inherent in that strategy? Has it bode well for
RBI? Explain by referring to the case study and the recent instances in this respect.
8. What is the reason behind RBI’s decision to go ahead with its reverse repo auction?
How it decreases excess liquidity?


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

6. Banks fear that working capital loan demand from companies may fall. This is
because interest rates on commercial papers have fallen below reverse repo rate.
The reason for fall in the rate of commercial paper is because of the excessive
liquidity in the banking system. And, excess liquidity is boosted owing to record
foreign inflows, as foreign portfolio investors are pumping in huge money hoping for
a good future in the Indian economy. Furthermore, in order to check excess liquidity,
RBI has also recently increases the reverse repo rate.
Another major factor which contributed to the excess liquidity in the banking system
is the RBI’s rupee dollar swap arrangement under which the RBI purchased dollar
from the commercial banks in exchange of dollars.
Moreover, the mutual funds do not have access to interbank rates, as they cannot
invest their money for a short term with the RBI in the reverse repo market like banks
can. So, they don’t have a choice but to keep on buying these short-term commercial
papers. Because of this, the rates have been decreased so much that investors are
buying Commercial Papers even below the RBI’s reverse repo rate.
Another reason for the fall in short-term interest rates in the money market is the
restricted supply of treasury bills. Since the net supply is less, T-bill rates have also
reduced, causing a corresponding reduction in the overall money market rates.

CASE STUDIES 2.5
7. By buying dollars from the commercial banks and selling rupees to them, the RBI, in
effect, has hoped that the rupee will depreciate as a direct result of this foreign
exchange market intervention, and a weaker domestic currency (as supply of rupees
has increased), by making exports more attractive and imports more expensive.
However, the downside of this strategy is that it may make the rupee volatile and
also encourage investors to switch from one financial market to another for short
term financial gains, thus inducing excessive exchange rate movements and capital
flows, increasing economic and financial market uncertainty, with little chances for
any upside gains.
In effect, the RBI has operated like a hedge fund, taking on considerable interest rate
and exchange rate risk, as defined by both the tenure and structure of the swaps.
The RBI placed its bet on both on a falling rupee interest rate and a rising dollar
interest rate, in addition to betting against a significant depreciation of the rupee, all
within a three-year period. This was a very risky bet at that time and, if it would not
have paid off, it would have suffered considerable financial loss. The swap
arrangement in a way amounts to a form of “quantitative easing" through the back
door.
This strategy worked well for the RBI initially but as the rupee fell to ` 74/$ because
of the global dollar shortage, the RBI on March 12, 2020, announced a US
Dollar/Rupee swap by selling dollars to commercial banks and taking rupees from
them to help the rupee to recover against dollar. The step was taken to ease pressure
on the rupee, which was marching towards its record low.
8. The reason behind RBI’s decision to go ahead with its reverse repo auction is to take
from banks the excess cash that has pushed the overnight rates way below the
reverse repo rate, which banks get for parking excess cash with the banker of last
resort. On a review of the evolving liquidity and financial conditions, it may have
decided to restore normal liquidity management operations in a phased manner. The
central bank may also be concerned about the potential instability in the financial
system due to short-term rates remaining low for long.
Reverse Repo is a mechanism through which commercial banks park their excess
money with the RBI. So, if large amount of money goes into the RBI’s kitty, then
commercial banks will have somewhat less funds which will be helpful to ward off the
present problem of too much liquidity in the banking system. The reduction of excess
liquidity will increase the demand for short term money market instruments which will

help the short term interest rates to go up, for example, on commercial papers that
has long traded much below than the benchmark rate. This will also help to increase
the demand for working capital loans from banks.

CASE STUDY 3
D M LIMITED
Balance Sheet as at 31stMarch, 2019
Particulars As at 31st March,

2019
(` In Crores )
A EQUITY AND LIABILITIES
1 Shareholders’ funds
(a) Share capital 1,200.00
(b) Reserves and surplus 2,410.00
(c) Money received against share warrants 0
3,610.00
2 Share application money pending allotment
3 Non-current liabilities
(a) Long-term borrowings 320.00
(b) Deferred tax liabilities (net) -
(c) Other long-term liabilities 80.00
(d) Long-term provisions 30.00
430.00
4 Current liabilities
(a) Short-term borrowings 25.50
(b) Trade payable 490.50
(c) Other current liabilities 5.85
(d) Short-term provisions 8.45
530.30
4,570.30

B ASSETS
1 Non-current assets
(a) Fixed assets
(i) Tangible assets 2,210.95
(ii) Intangible assets 150.00
(iii) Capital work-in-progress -
(iv) Intangible assets under development -
(v) Fixed assets held for sale -
2,360.95
(b) Non-current investments 372.00
(c) Deferred tax assets (net) -
(d) Long-term loans and advances 310.00
(e) Other non-current assets 102.85
784.85
2 Current assets
(a) Current investments 12.25
(b) Inventories 410.90
(c) Trade receivables 295.35
(d) Cash and cash equivalents 670.50
(e) Short-term loans and advances 35.50
(f) Other current assets 1,424.50
4,570.30
Notes:
1. Company Issued 10% p.a. Bonds in 2005 at discount of 5% for total amount of
` 10,00,00,000/- (` Ten Crores) redeemable in 2025 i.e. for 20 years and interest is
payable on yearly basis. Out of ` 10 Crores bonds company issued ` 1 Crore bonds
under Call Protection.
2. Current interest rates are about to 7.5 % p.a.
3. Share capital is fully paid up at ` 10 each.

CASE STUDIES 3.3
4. D M Limited`s Shares are trading at BSE and NSE.

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

1. The task of SEBI is mainly……………
(a) Safeguard and looking into the interest of company.
(b) To promote the development and to regulate the securities market.
(c) (a) and (b) Both
(d) None of the above.
2. Full form of BRLM is _______________
(a) Book Running Lead Manager.
(b) Book Reader Lead Management.

(c) Book Runner Lead Management.

(d) Book Reader Lead Manager.
3. What is the maximum upto which D M Limited can buy back?
(a) ` 400 Crores.
(b) ` 600 Crores.
(c) ` 902.50 Crores.
(d) ` 670.50 Crores.
4. What will be the last date of buy-back if D M Limited buy back its shares amounting to `
110 Crores?
(a) 14th July, 2020
(b) 14th June, 2020
(c) 15th June, 2020
(d) 15th July, 2020
5. Total bidding period of public issue is
(a) Minimum 3 and maximum 10 days
(b) Minimum 3 and maximum 7 working Days
(c) Minimum 3 and maximum 10 working days
(d) Minimum 3 and maximum 7 days.

6. DM Limited wants suggestion as to how it can reduce its interest cost from 1st April,
2020 on Bond issued in 2005 for 20 Years. Advice DM Limited and calculate how much
interest cost can be reduced for one year. And calculate the yield to maturity if one
investors purchase bond at the time of issue of bonds for face value of `10,000/-.
7. Draw flowchart to explain the Book building process.
8. D M Limited wants to buy back its shares from market. Give the answer of following
questions to complete the buy-back process with SEBI rules and regulations.
- What is the maximum amount by which D M Limited can buy-back its shares
from the open market?

CASE STUDIES 3.5
- What is the maximum amount that D M Limited can buy back without passing
special resolution in general meeting and instead of passing special resolution
for that what D M Limited have to do?
- If D M Limited buy-back its shares by passing special resolution, then what
are the disclosures requirements have been fulfilled? Explain.
- If D M Limited buy-back the shares with its maximum limit via tender offer,
what will be the cash and cash equivalent and share capital after completion
of buy-back?
1. (b)
2. (a)
3. (b)
4. (b)
5. (c)
6. A “call feature,” if specified in the trust indenture, allows the bond issuer to “call in” the
bonds and repay them at a predetermined price before maturity. Bond issuers use this
feature to protect themselves from paying more interest than they have to for the money
they are borrowing. Companies call in bonds when general interest rates are lower than
the coupon rate on the bond, thereby retiring expensive debt and refinancing it at a lower
rate. Thus, by availing the call features for ` 1 crore, D M Limited can reduce interest
cost on bonds.
And by doing call feature D M Limited can save ` 2,50,000/- per year and reduce its
interest costs.
This is because after call in option of ` 1 crore bond, company issued new bonds at
current interest rate of 7.5% P.A. which is before 10% P.A. paid. So, saving of 2.5%
interest on 1 crore is ` 2,50,000/- per year.

Redemption Value – Purchase Price

Period of Holding
=YTM Coupon rate + * 100
(Redemption Value + Purchase Price ) / 2
10000 – 9500
YTM
= 1000 + 20 * 100
(10,000 + 9500 ) / 2
1000 + 25
YTM = * 100
9750
YTM = 0.105128 * 100
YTM = 10.5128 %
7. Flowchart of Book Building Process
Company Plans an IPO via book-build route
Appoints a merchant banker

as book runner
Issues a draft prospectus (containing all mandatory company

disclosures other than price
Draft prospectus filed

simultaneously with concerned
authority (SEBI)
Book runner appoints syndicate members and registered

intermediaries to garner subscription
Price discovery begins through the

bidding process
At the close of bidding, book runner and company decide upon

allocation and allotments

CASE STUDIES 3.7
8. - Any amount less than ` 360 Crores (15% of paid up capital and free reserves)
can be bought-back from the open market by D M Limited.
- D M Limited can buy back its shares upto ` 240 Crores without passing special
resolution in general meeting and for the same it has pass resolution only in board
meeting.
- Disclosures under sub-section 3 of section 68 of the Companies Act—

(i) a full and complete disclosure of all material facts;
(ii) the necessity for the buy-back;
(iii) the class of shares or securities intended to be purchased under the buy-
back;
(iv) the amount to be invested under the buy-back; and
(v) the time-limit for completion of buy-back

(vi) the explanatory statement to be annexed with the notice for the general
meeting pursuant to section 102 of the Companies Act shall contain
mandatory disclosures mentioned therein
- Maximum amount of buy-back is ` 600 Crores and so after that share capital will
be ` 1180 Crores and Cash and cash equivalent will be ` 70.50 crores.
Explanation of the answer:

Conditions and requirements for buy-back of shares and specified securities:
The maximum limit of any buy-back shall be twenty-five per cent or less of the aggregate
of paid-up capital and free reserves of the company:
In respect of the buy-back of equity shares in any financial year, the reference to twenty-
five per cent in this regulation shall be construed with respect to its total paid-up equity
capital in that financial year.
So, maximum amount of buy back is 25 % of (share capital ` 1200 crores plus free
reserves ` 1200 crores) ` 2400 crores and 25% of the same is ` 600 crores.
Price of tender offer is ` 300 per share i.e. given in the question.

So, number of shares is 2 crores (600 crores / ` 300).

So, paid up capital should be reduced by 20 crore ` i.e 2 crore * ` 10 paid up and
cash and cash equivalent is reduced by ` 600 crores i.e. 70.50 crores (670.50 - 600)

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

Sr. Particulars ` in Crore

No.
1 Equity Share Capital (Shares of ` 10 each fully paid up) - 330
2 Reserve and Surplus:
General Reserve 240 -
Securities Premium Account 90 -
P&L Account 90 -
Infrastructure development Reserve 180 600
3 Loan Funds 1800
4 Cash 150
5 Earnings after tax for the year 561
The funds for the Buyback will be sourced from current balances of cash and cash equivalents
and/or internal accruals of the Company. The Company does not intend to raise additional debt
for the explicit purposes of the Buyback. Borrowed funds will not be used for the Buyback.
This Buyback is not likely to cause any material impact on the earnings of the Company, except
for the cost of financing the Buyback, being a reduction in the treasury income that the Company
could have otherwise earned on the funds deployed.
The prevailing PE ratio of the company considering market value of the company’s share is 1.47
and in order to induce the existing shareholders to offer their share for buy back, it can be
decided to offer a price of 20% over market price. You are also informed that the Infrastructure
Development Reserve is created to satisfy Income-tax Act requirements.
The Buyback will not result in any benefit to the Promoter and Promoter Group or any Directors
except to the extent of the cash consideration received by them from the Company pursuant to
their respective participation in the Buyback in their capacity as Equity Shareholders of the
Company, and the change in their shareholding as per the response received in the Buyback,
as a result of the extinguishment of Equity Shares, which will lead to reduction in the equity
share capital of the Company post the Buyback.

1. Buyback of share also called as,
(a) Initial Public Offer
(b) Follow-on Public offer
(c) Share Purchase
(d Share Re-purchase

CASE STUDIES 4.3
2. Identify which one is the correct effect of buyback.

(a) ROA Increase and ROE Increase
(b) ROA Increase and ROE Decrease
(c) ROA Decrease and ROE Decrease
(d) ROA Decrease and ROE Increase
3. When a company purchases its own shares out of free reserves, a sum equal to nominal
value of shares so purchased shall be transferred to ………
(a) Revenue redemption reserve
(b) Capital redemption reserve
(c) Buyback reserve
(d) No reserve to be created as shares purchased out of free reserves
4. Every buyback needs to be completed within …….. from the date of passing the special
resolution or the resolution passed by the board of directors
(a) 12 Months
(b) 6 Months
(c) 9 Months
(d) 3 Months
5. No buy back shall be made within a period of 1 year reckoned from the date of
__________.
(a) Board meeting in which buy back is approved
(b) General meeting in which special resolution passed
(c) Closure of a previous offer of buy back
(d) General meeting in which ordinary resolution passed

6. Compute Buyback price offered by Vikas Limited.
7. Compute the maximum number of shares that can be bought back in the light of above
information.
8. Compute the maximum number of shares that can be bought back under a situation
where the loan funds of the company were ` 1200 crores instead of ` 1800 crores.


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

6. Note 1 Market price of Vikas Limited:
Market price = PE ratio x EPS
EPS = Earnings after tax/No. Of Shares
No. of Shares = 330 Crores/ ` 10 = 33 Crores
EPS = `561 Crore/33 Crores = ` 17
Market price = 1.47 x 17 = ` 25
Note 2 Buyback price:
Buyback price is 20% over market price.
So, Buyback Price = ` 25 x 1.20 = ` 30
7. Computation of maximum no. of shares for Buyback considering Share Outstanding Test,
Resource Test and Debt to Equity Ratio Test:
1. Shares Outstanding Test:
Particulars Shares in crores
Number of Shares outstanding 33
25% of the Shares outstanding 8.25
2. Resource Test:
Particulars
Paid up capital (in Crores) 330
Free Reserves (in Crores)* 420
Shareholders’ funds (in Crores) 750

CASE STUDIES 4.5
25% of Shareholders funds (in Crores) 187.5

Buyback price per share ` 30
Number of shares can be bought back 6.25 crores shares
*Free Reserves for the
Purpose of buyback (in crores) = General Reserve + Securities Premium + P&L
Account
= 240 + 90+90 = 420
3. Debt Equity Ratio Test:
Particulars
Loan Funds (in crores) 1800
Minimum Equity to be maintained after buy back in the ratio of 2:1 (in 900
crores)
Present equity shareholders funds (in crores) 750
Number of shares that can be bought back NIL
Considering the Debt Equity Ratio test, in the light of given information, Vikas
Limited cannot buy back any number of shares.
8. Computation of maximum no. of shares for Buyback considering Share Outstanding Test,
Resource Test and Debt to Equity Ratio Test considering Loan funds 1200 crores:
1. Shares Outstanding Test:
Particulars Shares in crores
Number of Shares outstanding 33
25% of the Shares outstanding 8.25
2. Resource Test:
Particulars
Paid up capital (in Crores) 330
Free Reserves (in Crores) 420
Shareholders’ funds (in Crores) 750
25% of Shareholders funds (in Crores) 187.5
Buyback price per share ` 30
Number of shares can be bought back 6.25 crores shares
3. Debt Equity Ratio Test:
Particulars
Loan Funds (in crores) 1200

Minimum Equity to be maintained after buy back in the ratio of 600

2:1 (in crores)
Present equity shareholders funds (in crores) 750
The company has stated that it has surplus funds therefore it is presumed that buy back
is out of free reserves or securities premium and hence a sum equal to the nominal value
of the shares bought back shall be transferred to Capital Redemption Reserve (CRR).
Utilization of CRR is restricted to issuance of fully paid up bonus shares only. It means
CRR is not available for distribution as dividend. Hence CRR is not a free reserve.
Therefore, for calculation of future equity i.e. share capital and free reserve, amount
transferred to CRR on buy back has to be excluded from present equity. And, the amount
to be transferred to CRR has to be calculated on the face value and not the buyback
price.
Based on the above explaination, the amount to be transferred to CRR and the maximum
equity to be bought back has been calculated as below:
Suppose amount equivalent to nominal value of bought back shares transferred to CRR
account is ‘X’ and maximum permitted buy back of equity is ‘Y’.
Equation 1
Maximum Permissible buy back of equity = (Present equity-Nominal value of Buy back
transfer to CRR) – Minimum Equity to be maintained
Y = (750-X)-600
Y = 150 – X………………………………………Equation 1
Equation 2
Nominal value of shares
bought – back to be transferred to CRR = (Maximum buy-back/offer price of Buy back) x
Nominal value
X = (Y/30) x 10
X = Y/3
3X = Y……………………………………………Equation 2
By solving above two equations we get,
X = ` 37.5 Crores
Y = ` 112.5 Crores
Maximum no. of shares that can be bought back =112.5 / 30
= 3.75 Crores

CASE STUDY 5
Prakash Cement Limited (PCL) is a leading player in the Indian building materials space, with
a manufacturing and marketing presence in almost the whole of India. With 15 cement
manufacturing units, over 80 ready mix concrete plants, over 5,500 talented employees, a vast
distribution network of 40,000+ dealers & retailers and a countrywide spread of sales offices, it
contributes tremendously to the landscape of the country. For over 70 years, Prakash Cement
Ltd. has been synonymous with cement, establishing its reputation as a pioneer organization
that consistently sets new benchmarks in research and innovative product development. The
summarized financials of the company for the last few years are as follows:
Dec'2019 Dec'2018 Dec'2017 Dec'2016 Dec'2015
12 Months 12 Months 12 Months 12 Months 12 Months
NET SALES 15656.65 14801.35 13284.6 11158.34 11796.83
EBIT 2117.69 1583.49 1400.66 924.55 1004.46
EBT 2031.47 1494.29 1298.36 851.68 937.14
Profit and Loss for the Year 1358.91 1506.63 915.45 645.21 744.74
Total Current Assets 9425.24 8353.31 7155.96 3910.06 3709.18
Total Current Liabilities 5560.82 5497.39 5464.22 4726.01 4362.28
NET CURRENT ASSETS 3864.42 2855.92 1691.74 -815.95 -653.1
Considering the huge growth potential of the company especially the fillip the cement sector has
got after the recent spurt in the real estate deals post pandemic, many large investors such as
the institutional investors and High Net Worth Individuals (HNIs) are considering “block deals”
in Prakash Cement Ltd.
Block deal is a trading transaction of which the minimum order size for its execution is ` 10
Crore, executed through a single transaction, on the special "Block Deal window". Market
regulator SEBI (Securities and Exchange Broad of India) has also made it mandatory for the
stock brokers to disclose on a daily basis the block deals made through Data Upload Software
(DUS).
Block deal takes place when two parties agree to buy or sell securities at an agreed price
between themselves and inform the stock exchange. The orders in a block deal are not visible
to the people who trade from normal trade window. The stock exchanges are required to disclose
the information on block deals to the public on the same day after market hours. This should
contain information like name of the scrip, scrip code, name of the client, quantity of shares
bought and sold, traded price and so on.

According to SEBI, to facilitate block deals, stock exchanges provide a separate trading window
only for 15 minutes in the morning and 15 minutes in the afternoon on all trading days in the
equity segment. The transaction price of a share ranges from +1% to -1% of the previous day’s
closing or the current market price. These transactions take place on delivery basis. As per the
SEBI guidelines, shares transacted under the block deal window should not be squared off or
reversed. Further, the stock exchanges are required to disclose the information on block deals.
So, a block deal is a special window where pre-arranged trades between two parties can be
executed. The news of a block deal often provides a boost to the stock, although for a very short
term. For instance, the share price of Kotak Mahindra Bank rallied as much as 11 per cent in
three sessions in June 2020 when its promoter Uday Kotak sold a part of his shares through a
block deal. Hindustan Unilever (HUL), HDFC Life and Crompton Greaves also witnessed similar
trends during block deals in 2020.
Investors with prior knowledge of the block deal can buy the shares or take bullish positions in
the stock just a session or two before such a deal. Once the deal is done, they sell these shares
and make quick profits. However, such buying right before the deal disturbs the entry price for
the buyer since the prevailing market price determines the share price for a block deal. SEBI
rules require the price quoted in such a deal to be within 1 per cent of the market price.
Furthermore, another company by the name Rainbow Paints Ltd. was incorporated in the year
2002. To begin with it started in the manufacture of lower-end Cement paints, and gradually
expanded its range to cover most segments of water-based paints like Exterior Emulsions,
Interior Emulsions, Distempers, Primers, etc. From an early age, the Company spread its
footprints across the country, with the rapid expansion of its reach across India. Today, the
Company stands out as one of the strongest contenders in the Indian paint industry, being rated
as an innovative paint manufacturer, which keeps coming out with unique products never before
offered in the country. The summarized financials of the company for the last few years are as
follows:
Dec'2019 Dec'2018 Dec'2017 Dec'2016
NET SALES 624.79 535.63 413.8 289.21
EBIT 73.02 38.67 7.38 -14.92
EBT 67.43 34.02 3.58 -17.58
Profit and Loss for the Year 47.81 27.17 3.89 -15.87
Total Current Assets 199.28 200.53 166.97 137.22
Total Current Liabilities 179.4 164.7 129.6 96.79
NET CURRENT ASSETS 19.89 35.82 37.37 40.43

CASE STUDIES 5.3
Moreover, it has recently made a fantastic debut in the stock exchange. The shares kick started
trading with a bumper premium of 75 percent over its issue price, given the strong IPO
subscription and Budget-driven bullish market sentiment. The stock opened at ` 2500 on the
BSE, against the public issue price of ` 1,500, while the opening price on the National Stock
Exchange was at ` 2600, a 75 percent premium.
This prompted some institutional investors to enter into “bulk deals” to take advantage of the
company’s rising share prices. However, it was alleged by foreign institutional investors that
some investors having prior knowledge of the deal are trying to make quick profits out of them.
Bulk deal is a trading transaction in which the total quantity bought or sold is more than 0.5% of
the number of equity shares of a listed company. Another feature of bulk deal is that it can be
traded through the normal trading window provided by brokers in the entire trading hours in a
day. Bulk deals are driven by market and take place throughout the trading day. The stock
broker, who facilitates the trade, is required to reveal to the stock exchange about the bulk deals
on a daily basis through DUS.
Bulk orders are visible to everyone. If the bulk deal takes place through a single transaction, it
should be informed to the exchange immediately upon the closing of the deal. If it takes place
through multiple transactions, it should be informed to the exchange within one hour from the
closing of the trading.
On the other hand, block deals are increasingly becoming a challenge for India’s foreign portfolio
investors (FPIs). It has been pointed out by experts that some institutional investors and
domestic brokerages who are aware of such deals, are trying to make quick profits out of them.
Several FPIs, including two large US-based public institutions, reportedly raised complaints with
market regulator Securities and Exchange Board of India (SEBI) in early December 2020.
Further, some foreign fund grouping, the Asian Securities Industry and Financial Markets
Association (ASIFMA) that represents big FPIs such as Citi, CLSA and Amundi, has made
multiple representations to SEBI between August and October, 2020.
The experts are suggesting that India should adopt a similar framework used in the developed
markets, such as the US and the UK, where there is a special window and pricing freedom. It
was also pointed out that the best way to do it is by increasing the price band allowed for block
deals from 1 per cent currently to 5-6 per cent. It will reduce the risk considerably.


1. ……… is a prospectus which enables an issuer to make a series of issues within a period
of 1 year without the need of filing a fresh prospectus every time.
(a) Red Herring Prospectus
(b) Shelf Prospectus
(c) Abridged Prospectus
(d) Letter of Offer
2. Which among the following is a risk management mechanism in a secondary capital
market?
(a) Laying down trading rules and regulations for broker members.
(b) Setting up market surveillance systems to curb excess volatility.
(c) Setting up a clearing corporation to guarantee financial settlement of all trades
and thereby reduce credit risk in the settlement system.
(d) All of the above
3. BSE Sensex fell to 12% during the morning session on Monday. The stock trading will
be halted for ………….
(a) 45 minutes
(b) 60 minutes
(c) 1 hour 15 minutes
(d) 15 minutes
4. An investor buys 200 shares @ ` 1000 each on Tuesday and sell those shares @ 1500
each on the same day. As per the present T + 2 settlements, his netting obligation will
be calculated on ………….
(a) Tuesday itself
(b) Wednesday
(c) Thursday
(d) Friday

CASE STUDIES 5.5
5. ……… is a facility given to the investors in which they can invest in shares by part
financing from the bank.
(a) Short Selling
(b) Securities Lending and Borrowing
(c) Margin Trading
(d) Market Making

6. State the difference between block deals and bulk deals. Do block deals increases the
market price of shares in the short term? Explain by citing recent instances.
7. How such deals give such rise to manipulations in the stock market giving benefit to only
a few investors? Discuss with reference to examples.
8. Why is it difficult to nab the culprits in block deal transactions? If SEBI bans such deals
what may be the adverse effects? What other remedial measures can be taken by the
market regulator to curb such instances in future and to keep the faith of foreign portfolio
investors in the Indian stock market?

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

6. Block Deal is a transaction of a minimum order size of ` 10 crore between two parties,
wherein they agree to buy or sell shares at an agreed price among themselves. The deal
takes place through a separate trading window. Block deal windows shall be available
on all trading days in Equity segment as follows –

(a) Morning Block Deal Window - This window shall operate between 08:45 AM to
09:00 AM.
(b) Afternoon Block Deal Window - This window shall operate between 02:05 PM to
2:20 PM.
Every trade has to result in delivery.
Rules set by the Securities and Exchange Board of India state that the price of a share
ordered at the window should range within +1% to -1% of the current market price or the
previous day's closing price. Block deals are not visible to the regular market as they
happen in a separate window.
A Bulk Deal is a trade where total quantity of shares bought or sold is more than 0.5%
of the number of shares of a listed company. Bulk deals happen during normal trading
window provided by the broker. The broker who manages the bulk deal trade has to
provide the details of the transaction to the stock exchanges whenever they happen.
Unlike block deals, bulk deal orders are visible to everyone.
A block deal is a special window where pre-arranged trades between two parties can be
executed. The news of a block deal often provides a boost to the stock, although for a
very short term. For example, the share price of Kotak Mahindra Bank rallied as much as
11 per cent in three sessions in June 2020 when its promoter Uday Kotak sold a part of
his shares through a block deal. Hindustan Unilever (HUL), HDFC Life and Crompton
Greaves also witnessed similar trends during block deals in 2020.
7. Investors with prior knowledge of a block deal can buy the shares or take bullish positions
in the stock just a session or two before such a deal. Once the deal is executed, they
typically sell these shares, making quick profits. However, buying shares right before
such deal increases the entry price for the buyer since the prevailing market price
determines the share price for a block deal.
On the other hand, transactions that happen at a steep discount or premium are usually
done through a bulk trade window. In this window, trades are executed through normal
order matching mechanism.
For example, seller X and buyer Y are planning to transact in 20 lakh shares of ABC Ltd
at ` 1,500 each — which is a 10 per cent discount to the current market price. Now, X
will punch an order to sell 20 lakh shares at ` 1,500 while Y will place a corresponding
buy order at the same price and same quantity.

CASE STUDIES 5.7
Now, if a trader knows about the deal beforehand, he would enter a buy order at an
identical price. That way he could end up getting a part of the shares that X was meant
to offer to Y and hence Y would end up with less number of shares than anticipated.
8. In these transactions, it is difficult to ascertain who leaked the data since these deals
involve investment bankers, lawyers and multiple brokerages (to execute the trades).
If SEBI bans such deals after finding any large scale wrongdoing in the block trading
route, the regulator may choose to abolish the window like they did in the late 1990s. In
1999, SEBI banned all pre-negotiated deals which meant there was no special window
for such large trades. This meant higher price leakage (i.e. release of information
regarding prices selectively or not before official public announcement) and decrease in
the number of shares for buyers. It led to much confusion and encouraged manipulation
such as synchronized trade execution.
Synchronized trade is a kind of transaction where the seller and buyer of a particular
stock execute the trade for almost the same quantity and price at the same time. It is
important to note that in such a trade, sellers never lose ownership or control over the
security that they trade in.
In most of the case such trades are involuntary. But at times, by matching the buy and
sell orders, a trader or a group of traders, can trade amongst themselves in high volumes
and can intentionally manipulate various indicators of a security like its price, volume,
etc.
So, the bottom line is that transparency in the capital market would lead to better
allocation of resources economy wise.
Thus, the need is to boost transparency in the capital market, and taking strong action
on all types of insider trading by the market regulator. As per SEBI norms of 2005 which
was updated in 2017 investors intending to buy and sell large chunks of shares are
allowed to opt for block deals. The deals are supposed to take place through a separate
trading window, in a specific time slot, with the shares priced within 1% of market prices.
Further, block deals on the bourses have significant advantages as they do clear transfer
of large blocks of securities without distorting or destabilizing prices.
So, it is now the time to further revise block deal rules, to bring them on par with those in
mature capital markets. After all, block deals can sometimes be misused, and there is a
need to tighten the rules to deter underhand practices that can discourage big foreign
portfolio investors from gainfully putting faith in the India growth story going forward. And
forward-looking regulation is the key.

Furthermore, India may adopt a similar framework used in the developed markets, such
as the US and the UK, where there is a special window and pricing freedom. One way to
do it is to increase the price band allowed for block deals from 1 per cent currently to
5-6 per cent. It will reduce the risk of manipulation of stocks considerably.

CASE STUDY 6
D K M BANK LIMITED is one of the most reputed banks in the banking industry. The facility of
opening current account, cash credit account, loan account and various other services are being
provided by D K M Bank Limited. One of the reputed companies i.e. ABC Limited has its current
account and cash credit account held with D K M Bank Limited and it also keeps fixed deposits
of ` 10 lakhs. Once ABC Limited faces working capital crisis during business operation and it
took a cash credit limit of ` 2.80 Crores and continues to renew it every year. Seven Directors
are there in ABC Limited. Out of those seven directors, two directors are husband and wife i.e.
Mr. and Mrs. Beem. ABC Limited has a very big company on an international level and also
have branches out of India. ABC Limited also engaged in import and export of goods in
innovative products and because of that ABC Limited faces Transaction Risk, Translation Risk
and Economic Risk during the course of imports and exports. Also, ABC Limited knows that due
to their innovative products, receivables and other current assets level takes time. As initial
Receivable level may go up if the product has competition in the market, it may not be so in
case of an innovative product.
D K M BANK LIMITED has to fulfill all the guidelines of Reserve Bank of India. Every time, they
have to satisfy the requirements of CRR and SLR. D K M Bank Limited also interested to
purchase treasury bills (TBs) issued by RBI as and when it is issued for 91 days or 182 days or
364 days. TBs are issued in lots of minimum ` twenty-five thousand. The treasury bills are
repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai. For
treasury bills, the day count is taken as 364 days for a year. After considering all the things, D
K M Bank Limited invested in Treasury Bills.
D K M Limited have to maintain a certain portion of their deposits in the form of liquid assets
like cash, gold and non-mortgage securities etc. The current CRR and SLR rate are 3% and
18% respectively.
ABC LIMITED arranged one seminar for the directors, employees and their families who are 55
years or above to give information about the reverse mortgage scheme of bank. In that seminar,
following points have been discussed:
− A reverse mortgage is a loan available to homeowners, 60 year or older, that allows them
to convert part of the equity in their homes into cash.
− The payout is generally for a fixed term of 15-20 years, after which the borrower or legal
heirs (on death) can release the house by either repaying the loan or the company settles

the amount by selling the house. Any excess in the process is paid to borrower or legal
heirs as the case may be.
− Interest rate on these loans is usually in the range of 2.75-3% above the base rate.
− The main risks associated with Reverse Mortgage for lenders are - If the person lives for
longer life, then it is quite difficult to source long term funds to match with asset’s value,
Drop in the value of assets, Interest Rate Risk, Legal risk etc.
− Reasons for failure of Reverse Mortgage to take off are - Tendency of Indians to treat
their property as family heritage, love and respect from their kins, no guarantee of lifetime
income, if someone who sustained the entire term of say, 20 years, he runs the risk of
losing the house if he is not able to repay the loan etc.
1. ABC limited exports goods worth USD 100,000 to Singapore and payment is due on
150th day from the date of export. What type of risk this transaction faces?
(a) Transaction Risk.
(b) Economic Risk.

(c) (a) and (b) both.
2. For an innovative product, it can be assumed for its inventory and receivable that
(a) Inventory level may go up but Receivable level may not go up.
(b) Inventory level may go up and Receivable level may also go up.
(c) Inventory level may not go up but Receivable level go up.
(d) Inventory level may not go up and Receivable level may also not go up.
3. D K M Bank Limited has to keep statutory liquidity of ` 1950 Crores to fulfil the RBI
Requirement of SLR. It has gold worth ` 700 Crores, Mortgage tax free bonds worth
` 410 Crores, Other tax free bonds issued by government of ` 350 Crores and Tax free
bonds of ` 150 Crores issued by ABC Limited. Now how much cash or other liquid asset
required by D K M Bank Limited to fulfill the statutory liquidity requirements of RBI?
(a) ` 490 Crores.
(b) ` 900 Crores.

CASE STUDIES 6.3
(c) ` 750 Crores.

(d) ` 690 Crores.
4. RBI issued treasury bills for 182 days at a discount of 2.5%. The face value is ` 100. D
K M Bank Limited purchased it for the minimum amount prescribed for treasury bill. Also
RBI repaid it on time. Calculate the yield for the same.
(a) 5.1282
(b) 1.2785
(c) 1.2500
(d) 5.0000
5. Mr. and Mrs. Been has got one shop in a posh area of Chennai. They want money in
monthly installment from bank under reverse mortgage scheme. Value of that property is
` 39 lakhs. What will be the monthly maximum amount that they can get from the bank
under reverse mortgage.
(a) ` 50,000
(b) `0
(c) 60-75% of ` 50,000
6. ABC Limited has a fixed deposit of ` 10 lacs maturing on 31st August, 2020.The fixed
deposit was made on 1st September 2019 and the interest rate was 6.5% p.a. payable
monthly. Now, on 1st August, 2020 the company requires a fund of ` 5 lacs. What the
company can do? What options are available with the company? How much interest can
be earned under each option by the company? Explain with calculations. Advice ABC
Ltd. about the option to be selected.
7. The transactions of the ABC Limited’s Cash Credit (CC) Account in D K M Bank Limited
are as follows (` In Lakhs) with Drawing Power of ` 280 Lakhs.
Based on the following data, calculate the opportunity cost from 01.04.2019 to
30.04.2019 at 8% p.a. for D K M Bank Limited and advise them how to get benefit as per
RBI norms.

Date Particulars Withdrawal Deposits Balance

01/04/2019 To Electricity
Bill paid 15 15
03/04/2019 To Purchase
Payment 20 35
08/04/2019 By sales payment
Received 25 10
12/04/2019 To Raw material
Payment 80 90
13/04/2019 To Legal and Professional
Fees 5 95
18/04/2019 To Salary paid 20 115
22/04/2019 By sales
Proceed 15 100
23/04/2019 By sales
Proceed 10 90
26/04/2019 By Purchase
Payment 25 115
30/04/2019 By sale proceed 35 80
8. One of the Indian couple who were employees of ABC Limited is residing in a posh area
of Mumbai, and they have only one residential property of their own having value around
` 45 lakhs. Age of the husband is around 63 years and the wife is 61 years old. They
have no scope of earning and their monthly house hold expenses are ` 40,000/- (appx.)
per month. Advice the couple as to what they can do to receive some monthly amount by
availing the reverse mortgage route; at what interest rate; the consequences for the life
and what will happen after their death. What is the maximum amount can they get if all
the conditions are satisfied? And if they live for more than 22 to 23 years over and above
63 years and 61 years respectively, then what will happen after that? Advice the couple
with all the benefits and limitations for the same.

CASE STUDIES 6.5

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

6. ABC Ltd. has two options:
IF COMPANY TAKES LOAN AND IF COMPANY CLOSES ITS FIXED
CONTINUE WITH FIXED DEPOSIT DEPOSITS PREMATURELY
(Option 2) (Option 1)
MONTH Cumulative Amt. as Int. Amt. as Cumulative Amt. Int. Amt. as
per Int. Rate 6.5% per 6.5% p.a. as per Int. Rate per 5.5% p.a.
5.5%
Sep-19 1,000,000 5,417 1,000,000 4,583
Oct-19 1,005,417 5,446 1,004,583 4,604
Nov-19 1,010,863 5,476 1,009,188 4,625
Dec-19 1,016,339 5,505 1,013,813 4,647
Jan-20 1,021,844 5,535 1,018,460 4,668
Feb-20 1,027,379 5,565 1,023,128 4,689
Mar-20 1,032,944 5,595 1,027,817 4,711
Apr-20 1,038,539 5,625 1,032,528 4,732
May-20 1,044,164 5,656 1,037,260 4,754
Jun-20 1,049,820 5,687 1,042,014 4,776
Jul-20 1,055,507 5,717 1,046,790 4,798
Aug-20 1,061,224 5,748 1,051,588 -
1,066,972
66,972 51,587

One option is - company have to close its fixed deposits prematurely and in that process
it loses 1% interest. If company exercise this option, it will earn interest of ` 51,587/-
(calculation as above) as company have to close full fixed deposits.
Second option is - company have to take overdraft facility for ` 5 Lakhs against security
of FD for ` 10 Lakhs and it can earn net interest income of ` 63,847 [` 66972 – 3125
(500000*7.5%*1/12)]
Therefore, ABC Ltd. should select option 2 as it can earn more interest by ` 12,260
(63847 – 51587) than option one. Because if fixed deposits are closed before maturity
then interest will be reduced by 1%. On the other hand, in option 2, overdraft facility on
fixed deposit will be having 1% higher interest than the interest on fixed deposit it is
receiving at 6.5%.
7. Calculation of Opportunity cost is as under:
Date Limit approved Balance in Idle Fund Days Opportunity

to the company company`s Cost
CC account
(` In Lakhs) (` In lakhs) (` In Lakhs) (` In Lakhs)
01/04/2019 280 15 265 2 0.1162
03/04/2019 280 35 245 5 0.2685
08/04/2019 280 10 270 4 0.2367
12/04/2019 280 90 190 1 0.0416
13/04/2019 280 95 185 5 0.2027
18/04/2019 280 115 165 4 0.1447
22/04/2019 280 100 180 1 0.0395
23/04/2019 280 90 190 3 0.1249
26/04/2019 280 115 165 4 0.1447
30/04/2019 280 80 200 1 0.0438
Total 30 1.3633
As per above table D K M Bank Limited have opportunity cost of ` 1,36,330/- (appx.)
which is losses due to non-utilization of cash credit limit by customer.
Now, because of this opportunity cost and as per RBI rules D K M Bank Limited have to
give Working Capital Demand Loan (WCDL) for ` 224 lakhs (80 % of ` 280 lakhs) and
the remaining 20% limit can be availed through cash credit route. And by giving (WCDL)
facility to the customer, the bank has to specify repayment schedule to the customer.

CASE STUDIES 6.7
8. In India, it is the National Housing Bank (NHB), who formulated the basic structure of this
reverse mortgage financial product. In a regular mortgage, the borrower takes loan from
the bank and gives his property to the bank against collateral. Thereafter, he returns the
loan amount by paying the principal and interest amount to the bank at regular intervals,
say monthly. However, reverse mortgage works in a different way. Here, the homeowner
gives his property to the bank and receives payment based on the percentage of the
value of the home. Payment may be received either in lump sum cash, regular monthly
cash payment, a line of credit (where the homeowner decides when and how much to
borrow), or a combination of these options. So couple can opt for this option to get regular
monthly income.
The payout is generally for a fixed term of 15-20 years, after which the borrower or legal
heirs (on death) can release the house by either repaying the loan or the company settles
the amount by selling the house. Any excess in the process is paid to borrower or legal
heirs as the case may be.
A Reverse Mortgage is meant for asset rich but cash poor senior citizens. A reverse
mortgage is a loan available to homeowners, 60 year or older, that allows them to convert
part of the equity in their homes into cash. A reverse mortgage is a type of mortgage in
which an owner of a house can borrow money against the value of his home. The owner
can receive money in the form of fixed monthly payment or a line of credit.
As per above scheme, the couple has fulfilled all the conditions and so they can get
monthly income by accepting reverse mortgage at the rate of 2.75 to 3% above the base
rate. Thus amount can be taken at the rate of base rate plus 2.75 to 3%.
If all the conditions of bank and reverse mortgage are satisfied, then the couple can get
the maximum monthly payments upto ` 50,000/-. The maximum lump-sum payment shall
be restricted to 50% of the total eligible amount of loan subject to a cap of `15 lakh, to
be used for medical treatment for self, spouse and dependants, if any. The balance loan
amount would be eligible for periodic payments.
Reverse mortgage amount of monthly payment will be maximum of 20 years and after
that as per terms and conditions couple has to repay all the loan amount or otherwise
they lose their house.
Some of the reasons why the couple may not opt for Reverse Mortgage are as follows:
(1) Tendency of the Indian couple to treat their property as family heritage and the
property is sold only as a last resort.

(2) The property holders are seen as an important people in the society.
(3) There is no guarantee of life time income which most senior citizens consider in
their retired life.
(4) As soon as the term of the loan is over, the liability of repayment arises. Therefore,
if the couple has sustained the entire term of say, 20 years, they run the risk of
losing the house if they are not able to repay the loan.

CASE STUDY 7
XYZ Mutual Fund has been constituted as a trust on December 27, 2019 in accordance with the
provisions of the Indian Trusts Act, 1882. The Deed of Trust has been registered under the
Indian Registration Act, 1908. The Mutual Fund was registered with SEBI on January 18, 2020.
They attribute their success thus far to their 3 founding principles:
Outside-in view – Communicate with customers in their language to assist them in taking the
right investment decision.
Long-term wealth creation – Encourage investors to create a long-term investment strategy and
play a critical role in their wealth management.
Long-term relationship – Build relationships beyond finances
XYZ Mutual Fund is a professionally managed investment fund that pools money from many
investors to purchase securities. Within a short span of time it becomes very popular amongst
various investors. It provides comprehensive suite of savings and investment products across
asset classes, which provide income and wealth creation opportunities to large retail and
institutional customer.
The single most important factor that drives XYZ Mutual Fund is its belief to give the investors
the chance to profitably invest in the financial market, without constantly worrying about the
market swings. To realize this belief, XYZ Mutual Fund has set up the infrastructure required to
conduct all the fundamental research and back it up with effective analysis. Their strong
emphasis on managing and controlling portfolio risk avoids chasing the latest "fads" and trends.
ABC Ltd. has entrusted a sum of ` 10 Lakh as the initial contribution towards the corpus of the
Mutual Fund. PQR limited looks after the operation and investment of Mutual Fund. PQR limited
may undertake any other business activities including activities in the nature of management
and advisory services to offshore funds, financial consultancy and exchange of research on
commercial basis etc., subject to receipt of necessary regulatory approvals. In accordance with
SEBI (Mutual Funds) Regulations, 1996, activities of PQR Ltd. are reviewed by CID Ltd. The
Board of Directors of the PQR Ltd. and CID Ltd. comprises eminent personalities with varied
experience.
It has launched its new scheme recently. This scheme mainly invest (appx. 85%) its funds in
equity & equity related instruments of top 100 company in terms of full market capitalization.
This scheme has 1,05,00,000 outstanding units. NAV published on February 18, 2020 is ` 15
per unit. On February 19, 2020, XYZ mutual fund has sold investments worth costing
` 2,50,00,000 at ` 2,75,00,000. On the same day, XYZ Mutual Fund purchased investments
worth ` 1,50,00,000 whose market value at the end of day is ` 1,51,15,000. Market value of
investment sold was ` 2,74,50,000 on February 18, 2020. Current Assets and Current Liability

on February 18, 2020 was ` 85,00,000 and ` 10,00,000 respectively. Market value of other
investment as on February 19, 2020 is increased by 1% as compared to February 18, 2020.
XYZ mutual fund is willing to buy back ("redeem") their shares from their investor at the net
asset value (NAV) computed that day based upon the prices of the securities owned by the fund.
The cut-off timing for the redemption is 3:00 PM. The average expenses ratio (including
management fees) amounted to 2.65% which also included GST.

1. Which is not the type of Mutual Fund on the basis of “Structure”.
(a) Equity Schemes
(b) Debt Schemes
(c) Open Ended Funds
(d) and b) both
2. Minimum Networth requirement of AMC as per SEBI (Mutual Funds) Regulations, 1996?
(a) ` 50 Million
(b) ` 50 Billion
(c) ` 50 lakhs
(d) ` 50 Crore
3. Which ratio measures excess return generated per unit of risk in the portfolio.
(a) Sharpe Ratio
(b) Treynor Ratio
(c) Jensen’s Alpha
(d) Sortino Ratio
4. CAMEL stands for -
(a) Cost, Assets, Management, Earning and Liquidity
(b) Cost, Assets, Managers, Earning and Liquidity
(c) Cost, Assurance, Managers, Earning and Liquidity
(d) Capital, Assets, Management, Earning and Liquidity
5. Liquid fund invests in debt and money market securities with maturity:
(a) Upto 1 day
(b) Upto 10 days

CASE STUDIES 7.3
(c) Upto 91 days

(d) Upto 100 days

6. Compute NAV as on February 19, 2020.
7. Identify category of this Mutual Fund scheme along with reason.
8. Identify Sponsor, Trustee and AMC of Mutual Fund scheme along with reason.
9. One Investor has redeemed 5000 units on 3:30 PM on February 19, 2020. Calculate
redemption value.

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

6. Note 1: Market Value of Investment of XYZ Mutual Fund on February 18, 2020:
Market Value of Investment held by Fund + Value of Current Asset − Value of Current Liabilities & Provisions
NAV per unit =
No. of Units on the Valuation date
Market Value of Investment held by Fund + ` 85,00,000 – ` 10,00,000

15 =
1,05,00,000
Market Value of Investment held by Fund = (1,05,00,000 x 15) – (75,00,000)

= ` 15,75,00,000 – ` 75,00,000
= ` 15,00,00,000
Note 2: Market Value of Investment of XYZ Mutual Fund on February 19, 2020:
Particulars `
Market Value of Investment held by Fund on February 18, 2020 15,00,00,000
Less: Market Value of Investment sold on February 19, 2020 2,74,50,000
12,25,50,000

Add: Increase in Market value by 1% on February 19, 2020 12,25,500

Add: Market Value of Investment purchased on February 19, 2020 1,51,15,000
Market Value of Investment held by Fund on February 19, 2020 13,88,90,500
Note 3: Current Liabilities:

As there in no information about change in Current Liability, it assumed that there is no
change as compared to February 18, 2020.
Current Liabilities: ` 10,00,000
Note 4: Current Assets:
Particulars `
Current Assets as on February 18, 2020 85,00,000
Add: Sale Value of Investment 2,75,00,000
Less: Purchase Value of Investment 1,50,00,000
Current Assets as on February 19, 2020 2,10,00,000
Market Value of Investment held by Fund + Value of Current Asset − Value of Current Liabilities & Provisions
NAV per unit =
No. of Units on the Valuation date
` 13,88,90,500 + ` 2,10,00,000 − ` 10,00,000

=
1,05,00,000
NAV per unit as on February 19, 2020 = 15.1324

7. Large cap funds invests (80% or more) in equity & equity related instruments of large cap
companies. Large cap companies are top 100 companies in terms of full market
capitalization.
XYZ Mutual fund invest (appx. 85%) its funds in equity & equity related instruments of
top 100 company in terms of full market capitalization. So it will consider as Large Cap
Fund.
8. Sponsor: ABC Ltd. Trustee: CID Ltd. AMC: PQR Ltd.
9. On October 19, 2020, SEBI restored the NAV cut-off timings for both subscription and
redemption for all mutual fund schemes other than those categorized as debt schemes
and conservative hybrid fund to 3.00 p.m. However, w.e.f. November 9, 2020, SEBI
brings back the cut-off time to 3 pm for debt and conservative hybrid funds as well.
As investor has redeemed units after cut off time (after 3:00 PM), current date NAV will
not be taken for calculation of redemption value. Units will be redeemed at NAV of
February 20,2020.

CASE STUDY 8
Fiduciary Asset Management Company launched two new open ended schemes under the flag
ship fund Fiduciary Mutual Fund. The extract of the fund information document is laid below.
Name of the Scheme Fiduciary Equity Growth Fund Fiduciary Active Bond Fund
Issue size INR 100 crores INR 200 Crores
Theme Equity Debt
Plans (i) Growth Growth
(ii) Dividend
Entry Load Nil Nil
Exit Load Nil Nil
Expense Ratio 2% 1.75%
Switch option Yes Not Applicable
Face Value of Unit ` 10/- ` 10/-
Risk Moderately High Low
Trustee IBDI Trusteeship Services

Principal Stock Exchange National Stock exchange
Registrar and Transfer Agent Zintech Investment Services Pvt Ltd
Asset Management Company Fiduciary Asset Management Company
Fund Manager Equity: Pankaj Agarwal
Debt: Sudhir Shah
Banking Partners ICICI
HDFC
Axis
Disclaimer: Please refer to the Scheme Information Document (SID) for the detailed asset
allocation and investment strategy. Portfolio allocation is based on prevailing market conditions
and is subject to change depending on funds manager’s view of the equity markets. Fiduciary

Asset Management Company is not liable for loss or shortfall resulting from the operation of the
schemes.
Long Term Capital gains on equity-oriented fund are taxed at 10% on gains greater than ` 1
lakh without indexation subject to payment of STT.
Mutual Fund Investments are subject to market risks, read all the scheme related documents
carefully.
Mutual Fund does not assure a profit or guarantee protection against loss in a declining market.
The Prospectus mentioned above is not based on any judgments of the future return of the debt
and equity markets / sectors or of any individual security and should not be construed as promise
on minimum returns and/or safeguard of capital. Information gathered and material used for the
prospectus is believed to be from reliable sources. Fiduciary Asset Management Company
however does not warrant the accuracy, reasonableness and/or completeness of any such
information. The illustration do not purport to represent the performance of any security or
investments. Nothing contained herein shall amount to an offer, invitation, advertisement,
promotion or sponsor of any product or services. In view of individual nature of tax
consequences, each investor is advised to consult his/her own professional tax advisor before
taking any investment decision. Lastly, Mutual Fund does not assure profits.
The launch was successful, and both the schemes received positive response from the
investors. The investor funds was duly received in the bank accounts. Leading market brokers
were empanelled for market investment activity. ICICI Securities was appointed as custodian
for holding the scheme portfolio. Fund accounting was outsourced to Intelenet Global Services.
1. Mr Rajiv enrolled for a SIP saving programme out of his monthly savings for an amount
of ` 5000/- month at the beginning of every month in a growth scheme of a leading
mutual fund. The NAV of the scheme at the beginning of each month is given as below:
Month NAV in INR at the beginning of the month

1 10
2 10.22
3 10.35
4 10.56
5 11.1
NAV at the end of the 5th month is ` 11.15

CASE STUDIES 8.3
What is the value of the scheme holding of Mr. Rajiv at the end of five months under this
SIP saving plan.
(a) ` 25,000.00
(b) ` 30,536.65
(c) ` 26,718.34
(d) ` 22,324.44
2. In case of (1) above, what is the annualised rate of return at the end of the fifth month on
the scheme unit holdings of Mr. Rajiv assuming that an investment of INR 25000/- was
made at the beginning of the first month instead of monthly SIP of INR 5000/-
(a) 27.6%
(b) 25.4%
(c) 11.5%
(d) 22.8%
3. What is the minimum lock in period for an open ended equity linked saving scheme
(ELSS) with tax benefit?
(a) Six Months
(b) One Year
(c) Three Years
(d) Five Years
4. For which of the following funds, the NAV is published on Sunday as well?
(a) Equity Fund
(b) Debt Fund
(c) Index Fund
(d) Liquid Fund
5. Mr. Khanna is evaluating investment in equity scheme of a mutual fund and want to
evaluate his choice based on the risk reward ratio offered by various schemes available
in market.
Four schemes as indicated below were proposed by his investment advisor:

Magnum Middleton
Active India Advantage
Scheme Growth Opportunity
Growth Fund India Fund
Fund Fund
Annual return (%) 15 12.5 13 14
Beta 1.2 0.8 0.9 1.1
The equity market gave a return on 13.5%. Currently sovereign yields are running at 7%.
Determine which scheme offers the best Alpha (Jenson Alpha) for Mr. Khanna
(a) Magnum Growth Fund
(b) Active India Growth Fund
(c) Middleton Opportunity Fund
(d) Advantage India Fund
6. The portfolio managers took charge of the investment task and began deploying funds in
the market.
Fiduciary Equity Growth Fund
At the end of the three months (on date 31 March 2020) the position of the portfolio for
the Equity Growth Fund looked as below:
Asset class Cost (INR Crores) Market Value (INR Crores)

Blue chip stocks 34 38
Large Cap 33 32
Mid Cap 23 30
Cash and Bank balance 10 10
In these three months the realised gain on sales of stocks was INR 4 crores and realised
loss on sale of stocks was INR 3.5 crores.
The Asset Management Company charged 2% of the initial subscription received for fund
expenses including Investment Management and Advisory fees.
There were no redemptions from investors. Further a fresh subscription of INR 11 crores
was received at the end of three months.
Compute the Net Asset Value per unit of the fund as of 31 March 2020.

CASE STUDIES 8.5
Draft the basic Balance Sheet of the Equity Growth Fund as on 31 March 2020 (end of
three months)
7. At the end of the three months (on date 31 March 2020) the position of the portfolio for
the Equity Growth Fund looked as below
Fiduciary Active Bond Fund
Asset class Cost (INR Crores) Market Value (INR Crores)

Corporate Bonds 75 75
Government Securities 105 105
Cash and Bank balance 20 20
In these three months the Realised interest on Corporate and Government Securities
was INR 0.875 crores.
The Asset Management Company charged 1.75% of the initial subscription received for
fund expenses including Investment Management and Advisory fees.
There were no redemptions from investors. Further a fresh subscription of INR 100 crores
was received at the end of three months.
Draft the Balance Sheet of the Equity Growth Fund as on 31 March 2020 (end of three months)
Also compute the Net Asset Value per unit of the fund as of 31 March 2020.
8. What are the various advantages of investment in mutual fund to investors.
1. (c) The unit holding from the amount invested every month at the respective NAV can
be computed as below
Month (1) Investment in INR (2) NAV (3) No of Units (4) [2 /3]
1 5,000 10 500.00
2 5,000 10.22 489.24
3 5,000 10.35 483.09
4 5,000 10.56 473.48

5 5,000 11.1 450.45

Total 25,000 2,396.26
Value of the scheme holding = No of units x closing NAV

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

Growth Growth Fund Opportunity India Fund
Fund Fund
Annual return 15 12.5 13 14
Beta 1.2 0.8 0.9 1.1
Market Return 13.5 13.5 13.5 13.5
Risk Free Return 7 7 7 7
Expected Return 14.8 12.2 12.85 14.15
Jenson’s Alpha 0.2 0.3 0.15 -0.15
Thus, Active Growth Fund has the best alpha.

CASE STUDIES 8.7
6. Net Asset Value per unit of the Fund is computed as below:

NAV = Market Value of Investments + Value of Current Assets – Value of Current
Liabilities and Provisions/No of Units on the valuation date before redemption or creation
of Units
NAV = (38+32+30) + (10)/10
NAV = 110/10
NAV = 11 per Unit
Balance Sheet of the Equity Growth Fund
Particulars Amount in INR crores

Sources of Funds
Unit Capital 110
Unit Premium 1
Reserves and Surplus
P&L – Account -
Unrealised Gain reserve 10
Total 121
Application of Funds
Equity Shares
- Blue chip stocks 38
- Large Cap 32
- Mid Cap 30
Cash and Bank 21
Total 121

Working Notes:
Unit Capital:
Particulars (A) Subscription NAV No of Unit Capital Unit

Amount (Cr.) per Unit Units (face value premium
(B) (C) Issued x No of Reserve
(D): B/C Units) (E) (B-E)
Initial Offer 100 10 10 100 -
Further subscription 11 11 1 10 1
at end of 3 month
110 1
Calculation of P&L Account:

Net Realised Gain on sale of stock : 0.5 crores (4 – 3.5)
Less: Asset Management fee
for 3 months (2% x 100 cr x 3/12) : 0.5 crores = Nil
Asset class Cost (INR Crores) Market Value (INR Crores) Unrealised Gain
Blue chip stocks 34 38 4
Large Cap 33 32 -1
Mid Cap 23 30 7
Total 10
7. Net Asset Value per unit of the Fund is computed as below:

NAV = Market Value of Investments + Value of Current Assets – Value of Current
Liabilities and Provisions/No of Units on the valuation date before redemption or creation
of Units
NAV = (75+105) + (20)/20
NAV = 200/20
NAV = INR 10 per Unit
Working for No of Units: Issue size/Face value of units
: 200/10
: 20

CASE STUDIES 8.9
Balance Sheet of the Equity Growth Fund
Particulars Amount in INR crores

Sources of Funds
Unit Capital 300
Unit Premium 0
Reserves and Surplus
P&L – Account -
Total 300
Application of Funds
Corporate Bonds 75
Government Securities 105
Cash and Bank balance 120
Total 300
Working Notes:
Unit Capital: Initial 200 crores issued at NAV of `10/- per unit and 100 crores from the
fresh subscription of 11 crores issued at the NAV of ` 10/- per unit (NAV at 31 March
2020).
Unit premium: Fresh INR subscription of 11 crores divided by per unit NAV of ` 11/-. Unit
Capital 10 crores and Unit Premium 1 crore. (Surplus over face value)
Calculation of P&L Account:
Net Realised Interest : 0.875 crores
Less Asset Management fee
for 3 months (1.75% x 200 cr x 3/12) : 0.875 crores
: Nil
Unrealised gain :Also Nil
8. (i) Professional Expertise: It is impossible for an individual investor to replicate the
expertise and skills of a professional portfolio manager. Through the mutual funds,
investors can afford professional fund managers for analysis, tracking, reshuffling
the portfolio with changing market dynamics in the investment world.

Operational/ Transaction Ease: Making an investment in mutual fund is simple,

transparent and investor friendly compared to purchasing stocks in primary and
secondary market through brokers and other intermediaries.
(ii) Accessibility: Mutual Funds are easy to access, through distributors, online,
acceptance centres, banks etc. Systematic Investment Plans allows periodic and
disciplined investment in mutual funds through auto debit in the bank account.
(i) Ticket Size: All ticket size are available, from as small as ` 5,000/- to
multiples of crores.
(ii) Liquidity: The liquidation of mutual fund investment is simple and
convenient process. The application for redemption can be made online or
via physical forms. Systematic Withdrawal Plans allows periodic
withdrawals for regular liquidity needs of the investors.
(iii) Option of multiple funds: A wide range of funds/schemes and products are
available with the market with all fund houses to suit the investors needs.
Investors can pick from wide range of schemes and plan to suit their
investment goals and risk appetite.

CASE STUDY 9
Three friends, Aman, Amar and Armaan, were meeting after a long time, enjoying coffee in Cafe
Coffee Day. Aman is an IT consultant working with Tata Consultancy Services. Amar is a
business man and runs a firm engaged in manufacturing and sale of toys. Armaan is a finance
professional working with an investment firm.
The casual talk over coffee suddenly turned into discussion on mutual funds. Both Aman and
Amar were looking forward for investment in mutual funds. Being inclined to equity schemes,
Amar has been constantly gathering knowledge about Mid-cap funds and ELSS schemes while
Aman was inclined to hybrid schemes.
Aman: "Amar, which category of scheme do you prefer?"
Amar: "I prefer equity schemes. They deliver highest returns. I am particularly interested in Mid-
cap Funds and ELSS schemes. As far as I know, Mid-Cap funds are open ended schemes and
invests 55% or more of total assets in stocks of companies ranked between 50 and 100 by full
market capitalisation. On the other hand, ELSS schemes offer tax benefit with a lock-in period
of 5 years. And you ??"
Aman : "To me, hybrid schemes are better. They invest equally in equity and debt instruments.
A good example is Balanced Hybrid Fund. It allows arbitrage too. Amar, why don't you consider
Equity Savings Scheme ? It is similar to ELSS Scheme. Armaan, which scheme do you like?"
Armaan: '"Well, there is no such perfect scheme. To select a particular mutual fund, we need to
consider various factors such as past performance, PE ratio, expense ratio, size and age of fund
etc."
Aman: "Fair enough. Armaan, I need some information. I heard in news about Kotak Nifty ETF.
What exactly is an ETF? I heard Infrastructure Investment Trusts are like ETF in some sense. "
Armaan: "An ETF stands for Exchange Traded Fund. It is a basket of securities that reflects the
composition of an Index, like Nifty 50. Investors can trade ETFs throughout the trading day. Well
Infrastructure Investment Trusts, INVITs as they are called, are like ETFin some sense. But they
are entirely a different concept...."
Armaan received a call from office in mid of discussion and had to leave immediately for an
urgent work in office. The two friends continued their discussion.
Amar: "How about closed ended mutual fund schemes"?
Aman: "Frankly, I don't know much about them. From hearsay, I know that unlike open ended
schemes, they do not imply corpus size volatility for AMC."

Amar: "Hmmm.. "

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

1. Based on advice from Armaan, Aman collected data for two mid-cap mutual funds ABC
and XYZ from their annual reports for the financial year ended March 31, 2020:
Expenses ABC Fund XYZ Fund

Management fee 1,50,00,000 1,60,00,000
Trustee fees 12,00,000 10,00,000
GST on management fee and Trustee fees 29,16,000 30,60,000
Custodian service charges 18,00,000 21,00,000
Registrar Service Charges 6,00,000 5,50,000

CASE STUDIES 9.3
Auditor's remuneration 6,74,485 7,86,453

Brokerage expense 40,97,740 38,75,497
Commission to distributors 82,14,723 75,64,219
Other operating expenses 2,38,564 3,92,137
Total 3,47,41,512 3,53,28,306
Net assets ABC Fund XYZ Fund
At 01/04/2019 80,42,10,196 81,50,90,257
At 31/03/2020 1,01,64,96,712 1,01,74,36,911
Expense ratio of a similar fund DEF is 3.33

In the light of above, which statement is correct in terms of expense ratio?
(a) If ABC had assets equal to XYZ, ABC would have underperformed XYZ.
(b) If XYZ had assets equal to ABC, XYZ would have outperformed ABC.
(c) DEF outperforms both ABC and XYZ.
(d) All of the above.
2. Continuing his evaluation, Aman computed following statistical ratios to look at point to
point returns:
Ratio ABC Fund XYZ Fund

Sharpe Ratio 0.54 0.58
Sortino Ratio 0.81 0.42
Jensen Alpha 0.40 -0.04
Annualised Return 7.50 7.36
Risk free rate is 5%. Market return is 8%. Which of the following conclusions by Aman is
not correct?
(a) Negative volatility of XYZ returns exceeds its total volatility.
(b) If the annualised return of both ABC and XYZ is equal, total return variability is
higher in case of ABC.
(c) ABC fund is more suitable for investment in terms of Treynor ratio.
(d) Systematic risk is higher in case of ABC fund.

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

(a) Statement 1.
(b) Statement 2.
(c) Statement 3.
(d) Statement 4.
4. Aman was curious to know more about ETF and INVITs. He dropped a message to
Armaan seeking information about them. Armaan replied on email. Based on his reply,
Aman called upon an AMFI Agent and asked to suggest ETFs and INVITs for investment.
Which statements by AMFI agent is correct?
(a) "There are many options available for ETFs. They allow investors to have
exposure to index similar to futures. You can directly buy ETF units on NSE F&O
Segment."
(b) "You can invest in INVITs provided you meet the minimum investment amount
requirements of SEBI. Why don't you invest in REITs? Just like INVITs, REITs
invest in infrastructure assets."
(c) "The performance of PSR Realty Fund has been really impressive.
PSR Realty fund is a real estate mutual fund. It invests in securities of companies
having investments in properties. This way, it is similar to a REIT or INVIT. "
(d) If you looking for ETF, you can think considering closed ended mutual funds
also. Similar to ETF, Closed ended funds trade on exchange intraday.
5. In his presentation, Armaan made following statements about money market mutual
funds. Which of the following statements, do you think, will be only be accepted by his
manager, Raman?
(a) Money Market Mutual Funds are closed ended debt schemes set up specifically
for the purpose of mobilisation of short-term funds. The resources mobilised by
MMMFs are invested exclusively in various money market instruments having
maturity upto 1 year such as Treasury bills, Commercial Paper, call money, etc.
(b) Money market mutual fund provides principal preservation while yielding a high
return. They are generally the safest and most secure of mutual fund investments.
Akin to a high-yield bank account, they are entirely risk free.

CASE STUDIES 9.5
(c) Money market mutual funds offer the advantage of high liquidity, expertise of a
professional fund manager, access to capital markets and diversification of short
term assets.
(d) Money market mutual funds set up by banks are subject to reserve requirements
as these funds are invested in money market instruments

6. Discuss the soundness of the statements made by Aman and Amar with respect to their
preference for mutual fund schemes.
7. Discuss whether Aman is correct as regards to :
(a) Corpus size volatility in case of close ended schemes.
(b) Infrastructure Investment Trusts.
8. Which securities do you think will Armaan suggest to Mr. Ramen. Enumerate their salient
characteristics.

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

Total Expenses 3,47,41,512 3,53,28,306
Less: Brokerage expenses 40,97,740 38,75,497
Expenses for expense ratio (A) 3,06,43,772 3,14,52,809
Net assets as at 01/04/2019 (a) 80,42,10,196 81,50,90,257
Net assets as at 31/03/2020 (b) 1,01,64,96,712 1,01,74,36,911
Average Value of assets during the period 91,03,53,454 91,62,63,584
(B)=(a+b)/2
Expense ratio (A/B) 3.3661 3.4327

ABC has outperformed XYZ as its expense ratio is lower. However, expense ratio
of DEF is 3.32 which is lower than both ABC and XYZ. Hence DEF has
outperformed both ABC and XYZ.
If ABC had assets equal to XYZ, expense ratio of ABC would have been 3.34 and
it would have still outperformed XYZ. Hence statement a is incorrect
If XYZ had assets equal to ABC, expense ratio of XYZ would have 3.455 and it
would have still underperformed ABC. Hence statement b is incorrect.
Statement d is incorrect as both a and b are incorrect.
2. (d) Statement a is correct.
Sharpe ratio is computed using standard deviation which is a measure of
total volatility. It is equal to :
Annualised Return - Risk free return
Sharpe Ratio =
Annualised Standard Deviation
Sortino Ratio uses downside deviation which is a measure of negative volatility. It is
equal to :
Sortino Ratio =
Downside Deviation
The numerator in both Sharpe and Sortino Ratio is same. Only denominator
differs.
Since Sortino Ratio of XYZ (0.42) is less than Sharpe Ratio (0.58), numerator
being equal, it implies that denominator is higher in case of Sortino Ratio which is
nothing but negative volatility. Hence, Negative volatility of XYZ returns exceeds
its total volatility.
Statement b is correct. If the annualised return of both ABC and XYZ is equal,
the numerator becomes equal. Higher denominator leads to lower Sharpe Ratio
for ABC. Higher denominator is nothing but higher standard deviation which is a
measure of total return variability.
Statement c is correct. Treynor Ratio measures excess return generated per
unit of systematic risk in the portfolio. It is similar to Sharpe ratio except that
denominator is portfolio beta which is a measure of systematic risk.

CASE STUDIES 9.7

Treynor Ratio =
Portfolio Beta
We need to use Jensen Alpha statistics to compute fund beta. Jensen Alpha is
the difference between a fund’s actual return and those that could have been made
on a benchmark portfolio with the same risk- i.e. beta.
Therefore Jensen Alpha = Return of Portfolio - Expected Return where

Expected return = Risk Free Return + Portfolio Beta (Market Return – Risk
Free Return)
Accordingly,
ABC Fund XYZ Fund

Risk free Rate (given) (A) 5.00 5.00
Market return (given) (B) 8.00 8.00
Excess Return (C) = (B-A) 3.00 3.00
Jensen Alpha (given) (D) 0.40 -0.04
Annualised Return (given) (E) 7.50 7.36
Expected Return (F)=(E-D) 7.10 7.40
Fund Beta (G)=( F - A)/C 0.70 0.80
Treynor Ratio (E-A)/G 3.57 2.95
Since the Treynor Ratio of ABC Fund is higher, ABC fund is more suitable for
investment in terms of Treynor ratio.
Statement d is incorrect. Systematic risk is measured by portfolio beta. Beta of
ABC fund (0.7) is lower than XYZ fund (0.8), hence systematic risk is lower in
case of ABC fund as compared to XYZ.
3. (c) Statement 3 is incorrect because Commercial Paper are unsecured, though
issued by high rated corporate entities.
4. (d) Statement a is incorrect. Though ETFs allow investors to have exposure to index
similar to futures, they trade on cash market of NSE and one can buy ETF units
on NSE Capital segment.

Statement b is incorrect. It is true that an individual can invest in INVITs provided

the minimum investment amount requirements of SEBI are met. However, REITs
invest in revenue generating real estate assets and not infrastructure assets."
Statement c is incorrect. REIT or INVIT do not invest in securities of companies.
Rather, they invest in revenue generating real estate assets and or infrastructure
assets directly or indirectly through a Special Purpose Vehicle (SPV).
Statement d is correct. It is true that both ETF and closed ended funds
trade on exchange intraday.
5. (d) Statement a is incorrect. Money Market Mutual Funds are not closed ended debt
schemes. Rather they are open ended schemes.
Statement b is incorrect. Its true that money market mutual fund provides
principal preservation but they yield a modest return. They are very much safer
but they are not entirely risk free.
Statement c is incorrect. Money market mutual funds offer the advantage of
access to money markets and not capital markets.

6. The soundness of statements by Amar and Aman relating to their preference for mutual
fund schemes are discussed below:
Amar
"Mid-Cap funds are open ended schemes and invests 55% or more of total assets in
stocks of companies ranked between 50 and 100 by full market capitalization. On the
other hand, ELSS schemes offer tax benefit with a lock- in period of 5 years."
Amar is correct to the extent that Mid-cap funds are open ended schemes.
However:
• Mid cap stocks have been defined as companies ranked 101st to 250th in terms
of full market capitalisation and not between 50 and 100 as what Amar say.
• Mid-Cap funds invests 65% (not 55%) of total assets in mid-cap stocks.
• ELSS schemes offer tax benefit with a lock-in period of 3 years and not 5 years.

CASE STUDIES 9.9
Aman
"To me, hybrid schemes are better. They invest equally in equity and debt instruments. A good
example is Balanced Hybrid Fund. It allows arbitrage too. Amar, why don't you consider Equity
Savings Scheme ? It is similar to ELSS Scheme"
Aman is correct when he says that an example of hybrid scheme is Balanced Hybrid Fund.
However:
• Hybrid schemes do invest in both debt and equity but not necessarily equally
as mentioned by Aman. The percentage varies depending upon the type of hybrid
scheme.
• Arbitrage is not permitted for Balanced Hybrid Fund.
• Equity Savings Scheme (ESS)(a hybrid scheme) is not similar to ELSS Scheme
(an equity scheme). ESS invests in equity, arbitrage and debt as against ELSS
which invests in equity only. The equity investment in ESS is minimum 65% while
in ELSS, minimum investment is 80%. Also unlike ELSS, it does not offer tax
benefit.
7. a. Aman is correct. Unlike open ended schemes, closed ended schemes do not
imply corpus size volatility for AMC.
Open ended schemes, are available for purchase from the AMC and redemption
with the AMC on an on-going basis, round the year on all working days, till it is
wound up. Fund size increases when investors purchase units from the AMC and
fund size comes down when investors redeem units. This implies corpus size
volatility.
On the other hand, Close ended funds are available for subscription only during
the New Fund Offer (NFO) period and not beyond that. The initial subscription
amount is collected from investors and the fund is ‘closed’ after the NFO
closure date i.e. no further purchase is allowed. There is no redemption possible
with the AMC. Hence from the AMC’s perspective, the fund corpus size is stable.
b. Aman is correct with respect to Infrastructure Investment Trusts. They are
similar to ETF to the extent that they are pooled investment vehicles and are listed
at the stock exchange.

8. Since Mr. Ramen is looking for government securities in money market that offer inflation
linked returns, Armaan is likely to suggest Capital indexed bonds to Mr. Ramen. Their
salient characteristics are as follows:
1. Capital Indexed bonds are issued at face value
2. Interest Rate is reckoned as % over Inflation benchmark may be WPI or CPI
at the time of issuance.
3. The tenor of the security is fixed.
4. The security is redeemed at face value on its maturity date.

CASE STUDY 10
Aditya is a credit rating analyst with FAIR Ratings, a reputed credit rating agency in India. FAIR
Ratings not only provides grading and rating services but also conducts analytical studies and
surveys on the economy, money market and corporate performances. The manager of Aditya
asked Aditya to study ABC India Limited and gather relevant information.
ABC India Limited is an Indian banking and financial services company headquartered in
Mumbai. As of March 31, 2019, the Bank’s distribution network was at 500 branches across 264
cities.
Business
The bank is divided into two divisions:
The Consumer Bank
This division is retail-focused and the clients served are individuals and small businesses. The
product offered by this division include advances, deposits, mortgages, personal loans, wealth
management services, trade credit, business finance and cash management services. The Bank
recorded 23% growth in the retail deposits in the previous year.
The Wholesale Bank
The wholesale bank’s clients are large corporations, government and financial institutions. The
products and services include working capital and term Loans as well as trade credit, cash
management, supply chain financing, foreign exchange, and investment banking services. The
Wholesale Banking business recorded a healthy 29% percent growth.
Risk Architecture of the bank
The key risks that the Bank is broadly exposed to in the course of its business are Credit Risk,
Liquidity Risk, Market Risk, and Operational Risk. The Board of Directors assumes the oversight
responsibility for all the risks assumed by the Bank and specific Board Committees have been
constituted to facilitate focussed risk management. The Board has in place approved Risk
Strategy and Policies whose implementation is supervised by the Risk Management Committee.
The committee periodically reviews the risk levels and ensures timely action for the risk
identified.
Credit Risk
Credit Risk is defined as the possibility of losses associated with diminution in the credit quality
of borrowers or counter parties. Losses stem from outright default or reduction in portfolio value.
The Bank has sufficient policies, procedures and systems for managing credit risk in both its
retail and wholesale businesses.
Given the granularity of individual exposures, risk management in Retail business is largely on
a portfolio basis across various products and customer segments. The factors considered while

sanctioning retail loans include income, demographics, credit history of the borrower and the
tenure of the loan.
Risk in Wholesale business is managed on an individual as well as portfolio basis. Credit risk is
managed by capping exposures on the basis of borrower group, industry, credit rating grades
and country amongst others. This is backed by portfolio diversification, stringent credit approval
processes and periodic post-disbursement monitoring and remedial measures.
Market and Liquidity risk
Market risk stems from the movement in interest rates, foreign exchange rates, credit spreads
and equity prices. Liquidity Risk is the risk that a bank may not be able to meet its short term
financial obligations due to an asset– liability mismatch or interest rate fluctuations. The bank
is structurally exposed to market risks and liquidity risks because of statutory liquidity ratio
requirement as well as capital and liquidity requirements. These risks are managed through a
well-defined Board approved Investment Policy, Asset Liability Management Policy and Market
Risk Policy. The risk measures include position limits, gap limits, tenor restrictions and
sensitivity limits.
Operational Risk
This is the risk of loss resulting from inadequate or failed internal processes, people and systems
or from external events. This could include fraud or other misconduct by employees or outsiders,
unauthorised transactions by employees and third parties, misreporting or non-reporting with
respect to statutory, legal or regulatory reporting and disclosure obligations, operational errors
including clerical and record keeping and system failures. To manage operational risks, the
Bank has put in place a system of internal controls, systems and procedures to monitor
transactions, key back-up procedures and undertakes regular contingency planning. The
governance and framework for managing operational risks is defined in the Operational Risk
Management Policy.
Recent developments
1. The bank announced the launch of its first Collateralized Loan Obligation.
The bank pooled 80% of its institutional loan and assigned all the future receivables from
them to a SPV as collateral. The institutional loans, represent ` 450 crores bank loans
to 10 companies from various sectors with existing track record of repayment and
average residual maturity of about 3 years. The SPV here is close-ended debt scheme
under the PQR Securities Fund, a mutual fund registered with SEBI. The Scheme offers
three classes of units:
• The Class A units (senior tranche) representing 60% of collateral, being offered
for investment are rated AAA(SO) by CARE. The Class A units will be offered to
institutional investors through the book-building process.

CASE STUDIES 10.3
• The Class B units (Mezzanine tranche) representing 25%, are rated A+ (SO) by
CARE and would be subscribed by the XYZ Bank subject to regulatory approvals.
Class B is subordinate to Class A.
• The Class C units (equity tranche) representing 15%, unrated would be
subscribed by PQR. Class C is subordinate to both Class A and Class B.
• Under the Scheme, each unit will have a face value of ` 50 lacs with a minimum
investment of ` 2 crore.
2. The bank has a 10-year, unsecured, 8% bond of DEF Limited with ` 10 crores par value.
Last year, the credit rating of the bond was downgraded to BB. Discussion is going on
between ABC Bank Limited and MNC Bank to buy a credit default swap.
3. The bank is considering purchasing a bond issued by Government of Nigeria.
Aditya prepared a report on his findings and mailed it to his manager. Next day, his
manager called a meeting to have a discussion with Aditya on his report.

1. Aditya performed a financial analysis of ABC Bank Limited and few other banks using
the CAMEL framework. Banks were ranked as follows:
Bank C A M E L Average Rank
ABC Bank Limited 1 2 2 1 2.5 1.7 1
JKL Bank 3 1 4 4 1 2.6 3
NGO Bank 2 4 1 3 2.5 2.5 2
TMG Bank 4 3 3 2 3 3 4
In the light of above, which statement is correct?

(a) ABC Bank scores highest in terms of Credit worthiness.
(b) JKL Bank scores lowest in Employment Level.
(c) NGO Bank scores par with ABC in Leverage.
(d) TMG Bank scores higher than NGO Bank in Asset quality.
2. Aditya noted that the CLO launched by ABC Limited is a form of Cashflow CDO. It differs
from a Synthetic CDO. Which statement is correct for unfunded synthetic CDO?
(a) Unfunded synthetic CDO comprises of Credit Linked Notes (CLN) only.
(b) Unfunded synthetic CDO comprises of Credit Default Swap (CDS) only.
(c) Unfunded synthetic CDO comprises partially Credit Default Swap and partially
CLN.


3. While studying the annual report, Aditya noted that the ABC bank has originated on an
average ` 1500 crores of home loans last year.
Following are the details pertaining to one such home loan advanced by ABC Bank:
• Original Home Value ` 1.2 crore, Loan to Value 80%, Home Loan `96 lakhs
• Outstanding loan 90 lacs, Current home value ` 84 lacs,
• Probability of Default 50%.

The recovery rate and expected loss on home loan is:
(a) 87.5% and ` 6,00,000
(b) 70% and ` 3,00,000
(c) 93.33% and ` 3,00,000
(d) 100% and ` 12,00,000
4. Which of the following statement is correct with respect to Credit Default Swap (CDS) on
10 year unsecured 8% corporate bond of DEF Limited?
(a) In case a Credit Default Swap (CDS) is entered into, the cost of CDS will be lower.
(b) In case a Credit Default Swap (CDS) is entered into, it will be a naked CDS.
(c) In case a Credit Default Swap (CDS) is entered into, credit risk will be eliminated.
(d) In case a Credit Default Swap (CDS) is entered into, MNC Bank will make profit
as long as DEF does not default on the bond.
5. Which of the following statements by Aditya about country risk in purchasing bond from
Government of Nigeria is correct?
(a) The bond carry liquidity risk as the Nigerian government may fail to make timely
payments on the bond it issued or actually default on its bond obligations.
(b) The bond carry exchange risk as bonds are priced in local currency and country
may inflate their way out of debts by simply issuing more currency, making the
debt less valuable.
(c) The bond carry repricing risk as in case of distress, Nigerian government may
renegotiate terms of the bond resulting in new bond value.
(d) The bond carry transfer risk as in case of a political instability, change in
regime could affect how well an interim or new government may pay its debt.

CASE STUDIES 10.5

6. In his report, Aditya mentions, "Just like other financial products, Collateralized Loan
Obligations (CLO) are also subject to various types of risk." What do you think which
risks Aditya is talking about? Explain.
7. Structure a credit default swap between ABC Bank Limited and MNC bank.
8. Aditya commented that ABC Bank Limited is subject to credit risk of 10 year, unsecured
8% bond of DEF Limited. The manager asked him to categorise the risk for better credit
analysis. You are required to help Aditya to determine the categories of the credit risk
with respect to the aforesaid bond.

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

Amount of exposure (loan to be written off) 90,00,000
Current Home Value 84,00,000
Recovery amount (home to be sold) 84,00,000
Recovery rate (Amount recovered/Loan outstanding*100) 0.9333
Default Probability 0.50
Expected Loss (Default risk*Amount of Exposure*(1-Recovery Rate) 3,00,000

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

6. It is true that just like other financial products, Collateralized Loan Obligations (CLO) are
also subject to various types of risk. These risks include:
1. Default Risk: Also called ‘credit risk’, it emanates from the default of underlying
party to the instruments. The prime sufferers of these types of risks are equity or
junior tranche.
2. Interest Rate Risk: Also called Basis risk and mainly arises due to different basis
of interest rates. For example, asset may be based on floating interest rate but
the liability may be based on fixed interest rates.
3. Liquidity Risk: Another major type of risk by which CDOs are affected is liquidity
risks as there may be mismatch in coupon receipts and payments.
4. Prepayment Risk: This risk results from unscheduled or unexpected repayment of
principal amount underlying the security. Generally, this risk arises in case assets
are subject to fixed rate of interest and the debtors have a call option.

CASE STUDIES 10.7
5. Reinvestment Risk: This risk is generic in nature as the CDO manager may not
find adequate opportunity to reinvest the proceeds when allowed for substitutions.
6. Foreign Exchange Risk: Sometimes CDOs are comprised of debts and
loans from countries other than the country of issue. In such a case, in addition to
above mentioned risks, CDOs are also subject to the foreign exchange rate risk.
7. A Credit default swap (CDS) can be structured as follows:
1. ABC Bank Limited buys Credit Default Swap (CDS) from MNC Bank for the 10
year, unsecured 8% corporate bond of DEF Limited amounting Rs 10 crores.
2. Here, ABC Bank Limited is the buyer of CDS as it needs protection against default
by DEF Limited on its corporate bond. DEF Limited is the reference entity, the
entity owing the bond obligation and MNC Bank is the writer or seller of the CDS.
3. ABC Bank Ltd will pay periodic premium to MNC Bank.
4. In case DEF Limited defaults on bond, ABC Bank Limited will receive one time
payment and CDS contract is terminated
8. With respect to 10 year 8% corporate bond of DEF Limited, the three categories of credit
risk can be explained as under:
1. Default Risk
Default risk is the risk that borrowers default, meaning that they fail to comply with
their obligations to service debt. Default triggers a total or partial loss of
any amount lent to the counter party. Default Risk can be measured by probability
of default. It depends on credit worthiness of a borrower which in turn depends
upon various factors such as management of organization, size of business,
strength and reputation of promoters etc.
In case of 10 year 8% corporate bond of DEF Limited, the rating downgrade
indicates greater probability of default by DEF in making the promised payments
of interest or principal and hence subject to default risk.
2. Exposure Risk
Exposure risk arises from the fact that future exposures (the size of amount due)
are subject to uncertainty. Since only future exposures will trigger losses in the
event of default, and since future exposures are uncertain, there is exposure risk.
Bonds usually have a fixed maturity date and fixed interest payment schedules
but they are subject to exposure risk since a bond issuer facing financial distress
may seek to renegotiate or modify terms of the bond, as part of debt restructuring.

3. Recovery risk
Economically, the amount of recoveries is not known in advance. It depends on
the quality of collateral or guarantees backing the instrument and economic
conditions of borrowers. Recovery risk refers to such uncertainty that arises at the
time of default.
Debt ranks ahead of all types of equity with respect to priority of payment within
the debt component of the capital structure, there can be varying levels of
seniority. Which bond will have priority of claim in the event of default
depends upon the classification of bonds. Higher priority of claim implies higher
recovery rate in the event of default.
With respect to priority of claims, secured bonds ranks ahead of unsecured bonds,
and within unsecured bonds, senior bonds ranks ahead of subordinated bonds. In
the typical case, all of an issuer’s bonds have the same probability of default due
to cross-default provisions in most indentures.
Since the DEF corporate bond is unsecured, it faces high recovery risk in the
event of default.

CASE STUDY 11
Venus Plc is an investment and trading company based in United Kingdom primarily owned by
Venture capitalists, Private Investors and Family offices. Venus is primarily focused on Debt
market across Latin America and Sub Saharan Africa. Venus recorded a corpus of USD 200
million (net of provisions) as at the end of December 2020. The company primarily takes
exposures in gilts of the target investee country and gradually brings the corporate bond and
commercial papers under their investment umbrella.
The Investment team at Venus comprises of veteran Portfolio Managers and Traders with vast
experience in banking and investment space across global markets. Venus had planned to
explore Debt Markets in Asia and Eastern Europe. However, the outbreak of Covid-19 pandemic
averted any actual investment activity.
In the last Investment Board meeting of year 2020, Mr. Thomas Bridges, senior Portfolio
Manager and Head of Global Credit Trading appraised the Covid-19 situation across Investee
countries and target markets. Mr. Bridges pointed out that the recent arrival of the second wave
across Europe with advent of winter is worrisome however remarkable recovery rate in emerging
economies throws a new light of optimism. With the successful vaccines trials and roll out of
vaccination program across the globe a steep recovery in the economic activities across sectors
is expected.
Mr. Bridges proposed to consider investment opportunities in Asia and laid down a plan to be
taken up in the beginning of 2021 after the team returns from year end holidays.
The plan consists of taking exposure in Sovereign bonds of target countries in Asia and
gradually diverse in Corporate Bond segment.
The overview of various countries presented in the plan was as follows:
Country S&P Moody’s Fitch Gsec yield (10 yr) Geo Political Outlook
India BBB- Baa3 BBB- 5.93% Stable
Sri Lanka CCC+ Caa1 CCC 7.95% unstable
Bangladesh BB- Ba3 BB- 5.85% Stable
Pakistan B- B3 B- 10.1% unstable
The Board deliberated over the plan laid down by Mr. Bridges. After a detailed discussion on
the risk and rewards, geo political outlook, Regulatory constraints and Operational and Legal
hurdles the Board unanimously agreed to work on the plan to execute the investments in India

in the first quarter of 2021. The other countries were kept out of the purview due to unstable
geo-political outlook and undesirable ratings by leading rating agencies.
Member of Credit Trading team were put to task to research and analyze for potential investee
corporates in India in sectors with strong potential for Debt Investments for various horizon.
On 31 March 2021, the next Investment Board Team was held and after months of thorough
analysis and risk evaluation of the potential corporates in India, the Credit Trading team short
listed below target investees in India.
Local
Agency
Corporate Security Sector Coupon Yield Maturity Rating ISIN
HOUSING AND URBAN DEVELOPMENT
CORPORATION LIMITED SR F-2020 4.78 LOA
HUDL 28FB24 FVRS10LAC Housing 4.78% 4.78% 28-Feb-24 AAA INE031A08822
BHARAT SANCHAR NIGAM LIMITED SR I 6.79 LOA
BSNL 23SP30 FVRS10LAC Telecom 6.79% 6.84% 23-Sep-30 AAA INE103D08021
RELIANCE INDUSTRIES LIMITED SERIES H 8.95 Energy and
RIL NCD 09NV28 FVRS10LAC Materials 8.95% 6.35% 09-Nov-28 AAA INE002A08542
NATIONAL HIGHWAYS AUTHORITY OF INDIA SR
NHAI VIII 7.03 BD 15DC40 FVRS10LAC Infra 7.03% 6.99% 15-Dec-40 AAA INE906B07IH3
NTPC LIMITED SR 72 5.45 BD 15OT25
NTPC FVRS10LAC LOAUPTO21DC20 Power 5.45% 5.38% 15-Oct-25 AAA INE733E08163
The Board appraised the team for their efforts and commended Mr. Bridges effort in lead running the
Asia proposal.

1. When would Venus Plc receive the first coupon payment on their HUDL Bond and what
would be the amount of the Coupon?
(a) 28 Aug 2021; INR 47,407,123.29
(b) 28 Feb 2022; INR 95,600,000
(c) 28 Feb 2021; INR 47,407,123.29
(d) 28 Aug 2021; INR 39,287,671.23

CASE STUDIES 11.3
2. Venus Plc has entered into a Credit Default Swap. Which of the following would Venus
Plc would not be able to achieve through Credit Default Swap.
(a) Hedging Default Risk

(b) Arbitrage
(c) Speculation
(d) Hedging Interest Rate Risk

3. When do the exchange traded Equity and Index Futures and Options contracts expire in
India?
(a) Last working day of the month
(b) Two working days before the last working day of the month.
(c) Last working Thursday of the month.
(d) Last working Friday of the month.

4. Phantom Capital, an Equity trading house entered into 80 short future contracts of Nifty
50 at 11380 on 12th March 2020. The contract expired on last Thursday of March and the
closing of Nifty 50 index was 11320.
Determine the Profit/(Loss) on settlement for Phantom. (Ignore transaction cost. Nifty
Future Lot size: 75)
(a) Loss of INR 360,000
(b) Profit if INR 4,800
(c) Profit of INR 4,500
(d) Profit of INR 360,000
5. Mr. Suthar is a professional derivative trader who has expertise in Option trading
strategies. When market witnesses high volatility due to impeding news event like
elections results, RBI Monetary policy etc., he writes (Sell) Options on NSE Nifty 50
Index. He speculates that the actual market volatility would subside after the new event.
There was a speculation in the market about Finance ministry making important
announcement about FPI participation in the equity markets. The Nifty 50 index was
trading at 12750 at the beginning of the month. Taking advantage of the high volatility,
Mr. Suthar sold 30 lots of current month Call at strike price of 12750 at INR 120 and 30
lots of current month put at strike price of 12500 at INR 45.

No major announcement was made by the Finance Ministry. The settlement price for
Nifty 50 index on the expiry date of the contract was 12444.
Determine the Profit/(Loss) made by Mr. Suthar on his speculation.

(Ignore transaction cost. Nifty Option Lot size: 75)
(a) Profit of INR 371,250
(b) Loss of INR 168,750

(c) Profit of INR 357,750
(d) Loss of INR 371,750
6. What are the various types of risks that Venus Plc faces while making an investment in
any of the above securities issued by Indian Corporates? Describe in brief and also
suggest what financial products can be used to manage such risks.
7. Draft a graph of the Interest rate curve reflecting the Indian Corporate Bond market and
comment on the trend.
8. Venus Plc makes an investment in HUDL by purchasing 4.78% HUDL Bond of INR 200
crore at face value on 31 March 2021 in the Corporate Bond segment of National Stock
Exchange of India (NSE). The Bond pays semi annual coupon.
(i) What is the amount of US Dollars does Venus Inc needs to remit to purchase the
HUDL Bonds in the Bond market segment of NSE. (Assume Foreign Exchange
rate is INR 73 per dollar and no brokerage or duties or taxes to be paid)
(ii) Determine the amount of total premium to be paid by Venus if it enters into a
Credit Default Swap to cover the default risk on the BSNL Bond if the price for the
CDS is quoted as 50 bps.

CASE STUDIES 11.5
1. (a) Principal amount of Bonds purchase for coupon computation = 200 crores
Rate of Interest = 4.78 % per annum

The coupon is paid semi annually. Maturity date of the Bond is 28 February 2024.
Thus semi annual rolls shall be 28 Feb and 28 Aug every year.
Since the HUDL Bonds were acquired on 31 March 2021 the next coupon date
shall be 28 August 2021
No of days for coupon computation:
March 2021– 31
April 2021– 30
May 2021 - 31
June 2021 - 30
July 2021 - 31
August 2021 - 28
Total = 181
Interest amount = INR 200 crores x 4.78% x 181/365
= INR 47,407,123.29
2. (d)
3. (c)
4. (d) Profit and (Loss) on settlement of a short future contract shall be computed as
follows
(Trade Price - Settlement Price) x No of Lots x Lot Size
(11380-11320) x 80 x 75
= INR 360,000 (Profit)

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

Lot Size 75 75
Quantity 30 30
Strike Price 12750 12500
Settlement price 12444 12444
In the money /Out of the Money Out of the money In the money
Exercise value per unit Nil since out of the money 12500 -12444 = 6
Exercise value total (A) - 6 x 75 (Lot Size) x
30 (No of Lots)
= INR 13,500
Premium per unit 120 45
Premium value total (B) 120 x 75 (Lot Size) x 30 45 x 75 x 30
(No of Lots) = INR 101,250
= INR 270,000
Net Gain on settlement (B-A) INR 270,000 INR 87,750
Thus total gain on speculation: INR 270,000 + INR 87,750 = INR 357,750

CASE STUDIES 11.7
6. The various types of risks associated with investments in Debt securities and the financial
products that can be used to manage such risks are described as below:
Default Risk: It is the risk that the issuer of the Bond/Debenture may be unable to make
timely payment of interest and principal on the Bond/Debenture or comply with any other
economic term/bond indenture of the security like Put Option, conversion etc. It is also
referred as Credit Risk.
Venus Plc can buy a credit default swap from a Market maker in India to protect against
the default risk. In case of default by the issuer the Market marker shall make settle the
face value of the security less any realized value from the issuer.
Interest Rate Risk: This can be defined as the risk emerging from an adverse change in
the interest rate prevalent in the market so as to affect the yield on the existing
instruments. A good case would be an upswing in the prevailing interest rate scenario
leading to a situation where the Venus’s money is locked at lower interest rates;if it had
waited and invested in the changed interest rate scenario, it would have earned more.
Venus can enter into an interest rate swap agreement with any primary dealer in the
Indian market to hedge against the adverse interest rate movement. Since the target
securities are fixed coupon bonds/debentures, the swap shall be Pay Fixed/Receipt Float
interest rate swap with the same maturity as that of the underlying security.
Reinvestment Rate Risk: This risk can be defined as the probability of a fall in the interest
rates leading to inability of Venus Plc to reinvest the interest cashflows at higher or same
rates similar to present levels.
Although products like Forward rate agreements and Floors exist, they are either not
available or not liquid in the Indian Market.
7. Based on the information provided for the various target securities the yield for various
maturities can be ascertained and drafted on a chart. Further since all the securities have
the same rating (AAA) no adjustment is required for various securities.

Corporate Security Coupon Yield Maturity Residual

Maturity
as of 31
Mar 21
(rounded
in in Yrs)
HUDL HOUSING AND URBAN 4.78% 4.78% 28-Feb-24 3

DEVELOPMENT
CORPORATION LIMITED
SR F-2020 4.78 LOA
28FB24 FVRS10LAC
BSNL BHARAT SANCHAR NIGAM 6.79% 6.84% 23-Sep-30 9

LIMITED SR I 6.79 LOA
23SP30 FVRS10LAC
RIL RELIANCE INDUSTRIES 8.95% 6.35% 09-Nov-28 8

LIMITED SERIES H 8.95
NCD 09NV28 FVRS10LAC
NHAI NATIONAL HIGHWAYS 7.03% 6.99% 15-Dec-40 20

AUTHORITY OF INDIA SR
VIII 7.03 BD 15DC40
FVRS10LAC
NTPC NTPC LIMITED SR 72 5.45 5.45% 5.38% 15-Oct-25 5

BD 15OT25 FVRS10LAC
LOAUPTO21DC20
Thus the yield table in ascending maturity shall be as follows
Tenure Yield
3 4.78%
5 5.38%
8 6.35%
9 6.84%
20 6.99%

CASE STUDIES 11.9
Yield
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
- 5 10 15 20 25
We see that the interest rate curve is gradually sloping upwards towardslonger maturities.
Below interpretation can be made
1. The market expects higher interest rates in future.
2. The market factors in the risk associated with longer maturity bonds like likelihood
of default, inflation, macro factors.
3. Expectation of growth and stronger economy.
8. (i) Since the bonds have been purchased at face value, the yield and the coupon rate
for the HUDL is the same i.e. at 4.78%. Therefore, to acquire HUDL Bonds of the
Face Value of INR 200 crore, Venus shall have to remit US dollars equivalent to
Gross Price of the Bond as on the date of acquisition.
Gross Price: Market Value (same as FV in this case) + Accrued Interest
: INR 200 crore + INR 8,119,452 (See workings)

: INR 2,008,119,452
Amount to be remitted in US dollars: INR 2,008,119,452/FX Rate
: INR 2,008,119,452/73
: USD 27,508,485.64

Working for Accrued Interest:

Coupon dates: 28th Feb and 28thAugust. (Semi Annual rolls based on Bond
Maturity)
Last Coupon paid Date: 28th Feb 2021.
No of days for accrued interest: 28th Feb 2021 to 31st March 2021 = 31 Days
Accrued Interest: INR 200 cr x 4.78% x 31/365

Accrued Interest: INR 8,119,452
(ii) The Credit Default Swap for HUDL Bond is quoted at 50 bps which is 0.50% p.a.
Thus the total premium payable for the swap during the residual life of the Bond
shall be as follows
=Face Value x 50 bps p.a x Residual tenure of the bond.
=INR 200 cr x 0.50% x 3 years

=INR 3 crores.
The amount of INR 50 lacs (out of the total premium amount of INR 3 crores) shall
be paid semi annually.

CASE STUDY 12
Vishika graduated from All India Commerce College in year 2017. She and her friend, Aradhya
decided to on a trip to Sikkim before striving to enter into working world. They booked air tickets
and third Thursday of December 2017, they were in Sikkim. They were very excited and thrilled.
They visited various sights they had planned. They experienced local food and culture as well
as bought some souvenirs for their near and dear ones.
It was Tuesday night and both Vishika and Aradhya were packing their stuff to return to Delhi
next day. Aradhya felt very tired so she went to sleep after packing while Vishika continued.
While sorting things in her handbag, Vishika found something - there were some fallen leaves
she had collected on her sightseeing. Luckily she got a stamp pad on the hotel room study table.
She pulled out a clean unruled sheet of paper from her travel journal and pressed fallen leaves
soaked in stamp pad ink against it. Vishika was smiling wholeheartedly looking at the sheet for
it was not just a sheet but a beautiful creation of art. She posted the art on Facebook and slept.
Next morning, when she opened her Facebook page, all she could find was bounties of
appreciation and some people even requested to buy her art. She showed it to Aradhya who
too was moved by the beauty of the creation. The entire return journey was a discussion
between the two friends and they landed Delhi with a decision to set up a business of
personalised items using recycled materials.
Since then, it has been 5 years and they are proud owners of a firm, Vrikshya. Vrikshya has
been getting bulk orders and generating handsome revenue. With an employee count of 100
under the leadership of Vishika and Aradhya, the firm has so far witnessed growth and profits.
It’s May 2019. Both Vishika and Aradhya are studying firm MIS and they realise that as the
business has expanded, they had less time available to focus on credit control. Collections from
accounts receivable has deteriorated and despite high profits, firm is using more of overdraft
facility to pay for business expenses that became due sooner than they get paid. They need
cash flow to pay employees, vendors and cover other business expenses. At first, they decided
to approach their bank for assistance.
Based on the firm performance record, the bank was ready to sanction a fund- based working
capital limit of 2 crores and interest rate is Base Rate +2% p.a, payable at monthly basis.
However, somewhere in her mind, Aradhya was not convinced with idea of cash credit from
bank and insisted to look for other alternatives. They referred a local firm specialising in credit
management consultancy. It suggested that they either employ a credit admin or factor accounts
receivable. Factoring was new to both Vishika and Aradhya. The local firm suggested Expert
Associates to Vrikshya partners for factoring services. Expert Associates was known to provide
factoring services involving advancing 80% of the receivables at 12% p.a. and 2% factoring
commission.

While the discussion was going on, Vishika received a call from her team that Vrikshya has
received an international order, big enough in terms of contribution to profits.

1. Projected figures as per CMA report for Vrikshya are : sales of ` 8 crores, total current
assets of ` 5 crores, and other current liabilities of ` 2 crores. In the light of this, which
statement is correct, assuming no current bank borrowing?
(a) The fund- based working capital limit of 20 lacs is in congruence with turnover
method.
(b) The fund- based working capital limit of 20 lacs is in congruence with Method 1
as per Maximum Permissible Banking Finance.
(c) The fund- based working capital limit of 20 lacs is in congruence with Method 2
as per Maximum Permissible Banking Finance
2. Using the following figures, the gross working capital for Vrikshya is:
Trade receivables 40,00,000
Cash and cash equivalents 5,00,000
Trade Payables 14,00,000
Short term provisions 2,00,000
Short term borrowings 2,00,000
(a) ` 31,00,000
(b) ` 29,00,000
(c) ` 27,00,000
(d) ` 45,00,000
(iii) All the following statements are correct about two factor international factoring except?
(a) The responsibilities relating to book- keeping and collection of debts remain
vested with the import factor.
(b) Import factor provides the credit protection in case of financial inability on the part
of any of the debtors.
(c) Factoring commission is shared by export factor with import factor at mutually
agreed rate.
(d) The export factor bases his credit decision on the financing standing of the availing
bank.

CASE STUDIES 12.3
4. Another firm, Truefactor Financial Services agreed to factor Vrikshya receivables

involving advance 80% of the receivables at 10% p.a. and 2% factoring commission.
Following information is available:
• Annual credit sales 1.2 crore and average collection period 50 days
• The past experience indicates that bad debt losses are around 2% of credit sales
• The factoring is expected to save 50,000 in administration costs and also to
eliminate all bad debt losses.
• Assume 365 days in a year
The amount remitted to Vrikshya is:
(a) 12,82,192
(b) 13,15,068
(c) 12,64,628
(d) 11,53,973
5. Net factoring cost in case of Truefactor Financial Services above is:
(a) 5.95%
(b) 6.19%
(c) (18.94)%
(d) (2.56)%

6. While discussing about factoring, the manager of the local firm specialising in credit
management consultancy mentions:
“In factoring, the factor not only finance trade debts but also performs various other
functions”. Justify this statement.
7. Following information is available:
• Total credit sales of Vrikshya for last year were ` 6.40 crores and average
collection period is 50 days. Sales are expected to increase by 20% over the next
year.
• Employs a good credit admin would cost 13,00,000 per annum to the business. It
is estimated that the average collection period can then be reduced to 45.
• Availing factoring services from Expert associates will reduce average collection
period to 30.

• Current overdraft rates are 11% per annum.

You have to determine whether it is financially beneficial for Vrikshya to factor its
accounts receivables for the next year, as compared to employing a credit admin.
Assume that there are 360 days in a year.
8. Vrikshya received an international order, big enough in terms of contribution to profits.
The factoring firm, Expert Associates, specialised in domestic factoring only. This led the
firm partners to approach Global Associates, a firm specialising in international factoring
services to understand factoring in context of international orders.
As a team member of the Global Associates, prepare a summary of the distinct
advantages of factoring over other methods of finance/facilities provided to an exporter.

1. (d) To determine the correct answer, we need to compute working capital limit under
the given methods.
Under the Turnover method, 25% of the projected sales is the working capital
requirement. Turnover method also says that 5% of the sales would be the
net working capital. The limit would be 20% of the sales. Therefore, the working
capital limit under turnover method would be computed as follows:
Projected sales 8,00,00,000

Working capital requirement (25%of sales) 2,00,00,000
Minimum margin money (5% of sales) 40,00,000
Fund based working capital limit (20% of sales) 1,60,00,000
Hence, Statement a is incorrect.
Under method 1 of maximum permissible banking finance, the borrower has
to arrange 25% of working capital gap as margin. Therefore, the working capital
limit would be computed as follows:
Projected current assets 5,00,00,000

Projected current liabilities 2,00,00,000
Working capital gap (X) 3,00,00,000
25% of X (Y) 75,00,000
Maximum Permissible banking finance (X-Y) 2,25,00,000

CASE STUDIES 12.5
Hence, Statement b is incorrect.

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

Estimated current liabilities 2,00,00,000
Working capital gap (X) 3,00,00,000
25% of total current assets(Y) 1,25,00,000
Maximum Permissible banking finance (X-Y) 1,75,00,000
Hence, statement c is incorrect.

So, Statement d is correct.
2. (d) A company’s investment in total current assets signifies the Working Capital. So,
Gross working capital is equal to total current assets. Gross Working Capital for
Vrikshya is computed as follows:
Trade receivables 40,00,000

Cash and cash equivalents 5,00,000
Total current assets/Gross working Capital 45,00,000
Option a is incorrect as it reduces trade payables from total current assets. Option
b is incorrect as it reduces trade payables and short term provisions from total
current assets.
Option c is incorrect as it represents net working capital
3. ( d) financing upon the financing standing of the availing bank happens in forfaiting.
4. (c) The calculation is as under:
Annual credit sales 1,20,00,000
Average collection period 50
Average level of receivables (1,20,00,000*50/365) 16,43,836
Receivables advanced by factor (80%) (A) 13,15,068
Factoring Commission @2% of 16,43,836 (B) 32,877
Amount available for advance (13,15,068-32,877) 12,82,191
Factoring interest @10% (12,82,192*10%*50/365)(C) 17,564
Amount remitted to Vrikshya (A-B-C) 12,64,627

5. (b) The calculation is as under:

Amount remitted to Vrikshya as calculated above (X) 12,64,627
Factoring cost for 50 days:
Factoring Commission 32,877
Factoring interest 17,564
Total 50,441
Factoring cost for the year (50,441*365/50)(A) 3,68,219
Less: Costs saved
Bad debts (2% of 1,20,00,000) (B) 2,40,000
Administration costs (C) 50,000
Net factoring cost (A-B-C) 78,219
Net factoring cost (%)(78,219/12,64,627*100) 6.19
Option a is incorrect as it calculates net factoring cost on 80% of receivables

and not the amount remitted to client.
Option c is incorrect as it nets annual costs of bad debts and administration
against the factoring cost for 50 days.
Option d is incorrect as it nets bad debt cost for 50 days and annual
administration costs against the factoring cost for 50 days.

6. It is true that a factor not only finance trade debts but also performs various other
functions. These functions include:
(i) Maintenance/administration of sales ledger: The factor maintains the clients’
sales ledgers. On transacting a sales deal, an invoice is sent to the customer
and a copy of the same is sent to the factor. The factor also gives periodic reports
to the client.
(ii) Collection facility: The factor undertakes to collect the receivables on behalf
of the client relieving him of the problems involved in collection and enables
him to concentrate on other important functional areas of the business. It also
enables the client to reduce the cost of collection by way of savings in manpower,
time and efforts.
(iii) Credit Control and Credit Protection: Assumptions of credit risk is one of the
most important functions of the factor. This service is provided where debts are
factored without recourse. The factor in consultation with the client fixes credit
limits for approved customers.

CASE STUDIES 12.7
(iv) Advisory Services: By virtue of their specialized knowledge and experience in

finance and credit dealings and access to extensive credit information; factors can
provide the following information services to the clients:
a. Customer’s perception of the client’s products, changing in marketing
strategies, emerging trends etc.
b. Audit of the procedures followed for invoicing, delivery and dealing with
sales returns.
c. Introduction to the credit department of bank/subsidiaries of banks
engaged in leasing, hire-purchase, merchant banking.
7. We need to perform two distinct calculations - one which calculates the cost of factoring
and one which calculates the cost without factoring. Then, the difference between the
two calculations will be the cost /benefit of factoring.
A. Cost of factoring
Credit Sales for last year 6,40,00,000

Expected New credit sales level 7,68,00,000
Expected average collection period 30
Receivables advanced by factor (80%) 51,20,000
Factoring Commission (64,00,000*2%) 1,28,000
Amount available for advance (51,20,000-1,28,000) 49,92,000
Factoring interest @12% (49,92,000*12%*30/360) 49,920
20% still financed by overdraft 12,80,000
Overdraft interest (12,80,000*11%*30/360) 11,733
Annual cost
Factoring Commission (1,28,000*360/30) 15,36,000
Factoring Interest charges (49,920*360/30) 5,99,040
Overdraft charges (11,733*360/30) 1,40,800
Total (A) 22,75,840
B. Cost in case of factoring services not availed

Credit Sales for last year 6,40,00,000
Expected New credit sales level 7,68,00,000
Expected average collection period 45


Overdraft interest 10,56,000
Credit admin cost 13,00,000
Total (B) 23,56,000
Since the cost of factoring is less than the Cost in case of factoring services not availed
it is financially beneficial to employ the services of a factor.
8. Summary of the distinct advantages of factoring over other methods of finance/facilities
provided to an exporter:
(i) Immediate finance up to a certain percentage (say 75-80 percent) of the eligible
export receivable. This pre-payment facility is available without a letter of credit
– simply on the strength of the invoice(s) representing the shipment of goods.
(ii) Credit checking of all the prospective debtors in importing countries, through own
databases of the export factor or by taking assistance from his counterpart(s) in
importing countries known as import factor or established credit rating agencies.
(iii) Maintenance of entire sales ledger of the exporter including undertaking asset
management functions. Constant liaison is maintained with the debtors in
importing countries and collections are effected in a diplomatic but efficient
manner, ensuring faster payment and safeguarding of financial costs.
(iv) Accordingly, bad debt protection up to full extent (100 percent) on all
approved sales to agreed debtors ensuring total predictability of cash flows.
(v) Efficient and fast communication system through letters, e-mail, and telephone or
in person in the buyer’s language and in line with the national business practices.
(vi) Consultancy services in areas relating to special conditions and regulations as
applicable to the importing countries.

CASE STUDY 13
Phoenix Autos Ltd is a company engaged in assembly and distribution of Large Motor Vehicles
(LMV). The company sources orders for such vehicles through network of marketing agents.
Based on the order, requisite auto parts are imported from European suppliers and assembled
into LMVs and delivered to the clients.
The outbreak of COVID 19 pandemic had an adverse impact on the business volume. The
outbreak not only caused operational hindrances for supply from Europe but also low demand
in the Indian Auto Market.
With hopes of success trials on vaccination and relief in lockdown measures, the auto segment
is promising growth and potential. The market expects more and people to buy own vehicles or
use private transport for their day to day conveyance needs rather public transport options which
are crowded and pose contamination risk.
Gravita India, an Uttar Pradesh based start up seeds an idea of using technology to connect
with professional working class in Delhi-Gurgaon-NOIDA route for their daily conveyance needs.
Gravitas has launched an App where such professionals can provide info about their work
timings, location etc so that they can be aggregated for conveyance through Private vehicles.
Gravita intends to ply 20 seater Air-conditioned luxury private Vans for such professionals for
their daily work commute. The Vans are designed to provide wifi, laptop charging point and
privacy curtains to that the executives can utilize the commuting hours for work, calls, emails
etc.
Gravita approaches Phoenix Autos for procuring 30 such Vans for their start up. After
understanding the requirement of Gravita, Phoenix proposes a Daimler C 42 a 20 seaterluxury
Van which shall be imported from Germany and assembled and delivered in India by Phoenix.
Gravita likes the proposal and agrees on the design, layout and cost for the Vans.
Gravita informs Phoenix about two issues faced by them:
(i) They are located in a special economic zone and therefore exempted from Taxation, thus
they cannot claim depreciation or any tax benefit on the Vans.
(ii) They do not have enough capital to pay upright for purchase of these Vans.
Gravita therefore propose if these Vans can be provided under a lease instead of an outright
sale.
Phoenix Autos was not very comfortable with the idea as they have never done leasing of
vehicles before. However, the company could not afford to loose business from Gravitas. They
agree to respond to Gravita on the proposal after checking with their financial advisor.

Gravitas approaches you for your advice on leasing the vehicles to Gravitas. Below information
is provided to you.
Model Daimler C-42 20”
Cost of Import of parts for each Van EUR 30,000 (FX Rates EURUSD: 1.200
USDINR: 75)
Import Duty 30%
Other technical cost of Assembly per Van INR 300,000*
Overheads per Van INR 30,000
Local taxes per Van INR 20,000
Taxation rate for Phoenix 25% Corporate Tax
Rate of Depreciation 25% SLM
Estimated Life 4 years
The Phoenix Auto received a rebate of an amount equal to the Other technical cost of Assemble
from the State Government as part of the Make in India initiative. The rebate is received as soon
as the VANs are dispatched from the Assemble workshop.
A leading NBFC has agreed to provide finance to Phoenix @ 12% p.a. over hypothecation of Vans.

1. In the instance above what would have been the annual lease payable if Phoenix Auto is
located in a special economic zone as well with no taxation for 4 years.
(a) INR 1,373,456.79
(b) INR 1,112,500.00
(c) INR 1,407,123.29
(d) INR 1,465,261.77
2. Under a Hire Purchase transaction, the ownership title of the asset is with
(a) Seller
(b) Buyer
(c) Both
(d) Financing bank/NBFC
3. From a Lessors’ perspective the lease financing proposal should be accepted only if
(a) Computed IRR of cashflows is more than the required cut-off rate or Cost of
Capital
(b) Computed IRR of cashflows is more than the pre tax cost of borrowing.
(c) Computed NPV of the cashflows is negative.

CASE STUDIES 13.3
(d) Computed NPV of the cashflows is more than the sum of Initial Cashflow and
Terminal Cashflow.
4. What would be revised profit margin for Phoenix Auto if Gravita India agrees to pay not
more than INR 1,020,000 as annual lease for each Van.
(a) 19.57%
(b) 17%
(c) 22.89%
(d) 18.57%
5. What is the lowest annual lease Phoenix Auto can quote to Gravitas so as to not incur
any loss on the transaction.
(a) INR 796,465.43
(b) INR 769,645.43
(c) INR 769,465.43
(d) INR 764,965.43

6. Describe an Operating Lease and a Financial lease.
Which of these would you suggest to Phoenix and Gravitas to facilitate their transaction?
7. Determine the sale price of each Van to be quoted by Phoenix to Gravitas under an
outright sale agreement assuming they intend to make a profit margin of 20% on sale
price.
8. What the annual lease per Van shall Phoenix charge to Gravitas so as to no economic
impact if an outright sale would have been executed. Assume lease is payable at the end
of each year and life of each Van is 4 year.

1. (d) Let the annual lease payable be z. The lease rentals can be determined in the
following manner.
Please note that the discounting rate is 12 % p.a. which is cost of financing since
no tax benefit can be availed.
Sale Price = z X (DCF @ 12% p.a.)
4,450,000 = (z) x 3.037

z = 4,450,000/3.037
z = 1,465,261.77
INR 1,465,261.77
2. (b)
3. (a)
4. (d) With the decrease in the annual lease payable by Gravita India, the equivalent
Sale Price is computed as follows:
Sale Price = (Annual Lease + Annual tax benefit on Interest and Depreciation) X
(DCF @ 9% p.a.)
Sale Price = (1,020,000 + 106800+222500) x 3.24 (From DCF table) (see
workings for Question 3)
Sale Price = (1,349,300) x 3.24
Sale Price = 4,371,732
Revised Profit Margin = (Sale Price – Cost of Assemble)/Sale Price
Revised Profit Margin = (4,371,732 – 3,560,000 (from 2))/4,371,732
Revised Profit Margin = 18.57%
5. (c) Let the annual lease payable be z such that there is no profit margin on the
transaction. The lease rentals can be determined in the following manner.
Please note that the discounting rate is 9 % p.a. which is post tax cost of financing,
i.e. 12% x (1- 25%).
Cost of Assemble = (z + Annual tax benefit on Interest and Depreciation) X (DCF
@ 9%p.a.)
3,560,000 = (z + 106800+222500) x 3.24 (From DCF table) (see workings)
3,560,000 = (z + 329300) x 3.24
3,560,000 = 3.24z + 1,066,932
z = (3,560,000 – 1,066,932)/3.24
z = 769,465.43
Thus the annual lease to be quoted for not incurring any loss on the transaction
is INR 769,465.43

6. Operating Lease:In Operating lease the primary lease period is short and the lessor
would not be able to realize the full cost of the equipment/asset and other incidental
charges thereon during the initial lease period. Besides the cost of the equipment/asset,
the lessor also bears insurance, maintenance and repair cost etc. The lessee acquires

CASE STUDIES 13.5
the right to use the asset for a short duration. Agreements of operating lease generally
provide for an option to the lessee/lessor to terminate the lease after due notice. These
agreements may generally be preferred by the lessee in the following circumstances:
When the long term suitability of the asset is uncertain.
• When the asset is subject to rapid obsolescence.
• When the asset is required for immediate use to tide over a temporary problem.
Financial Lease: As against the temporary nature of an Operating lease agreement,
Financial lease agreement is a long-term agreement, which is generally the full economic
life of the leased asset. Under this arrangement, lessor is assured to realize the cost of
purchasing the leased asset, cost of financing it and other administrative expenses as
well as profit by way of lease rent during the initial (primary) period of leasing itself.
Financial lease involves transferring almost all the risk incidental to the lease except the
legal title to the lessee against his irrevocable undertaking to make unconditional
payment to the lessor as per agreed schedule. This is a close ended arrangement with
no option to lessee to terminate the lease agreement subsequently. In such lease, the
lessee bears insurance, maintenance and other related costs. The choice of asset and
its supplier is generally left to the lessee.
Based on the assessment of the case, Finance lease is suitable for this transaction.
Below points accentuate the conclusion.
1. Gravita intend to acquire the Vans but handicapped by finance and taxation
aspects.
2. Gravita’s long term requirement of the Vans (covering the life of the Vans, 4 years,
based on 25% SLM depreciation.
3. The configuration and design of the Vans has been customized as per Gravita’s
requirement.
7. The calculation of the cost of assemble of each Van by Phoenix Auto as below (in INR):
Cost of Import of Part in INR: To arrive at the Cost of Import of Parts which is quoted
in EURO we need to apply the EUR USD exchange rate on the EURO amount. This
would provide us with the USD equivalent of the Cost. Then we apply the USDINR Rate
on such USD equivalent amount to determine the INR equivalent amount of the Cost of
Import of the parts.
EUR Amount: EUR 30,000
USD Amount = EUR 30,000 X EUR USD FX Rate
= 30000 x 1.2
= USD 36,000
INR Amount = USD Amount x USDINR Fx rate
= USD 36,000 x 75 = 2,700,000

Cost of Import of Part in INR : INR 2,700,000

Import Duty 30% x2,700,000 : 810,000
Overheads and Local Taxes : 50,000
Cost of each Van (Total) : 3,560,000
Sale Price with 20% margin : Cost/(100%-20%)
: 3,560,000/80%
: 4,450,000
Thus, sale price for each Van is INR 4,450,000.
(Please note Other technical cost of Assembly is not added as the same is being rebated
by the State Government).
8. Let the annual lease payable be z. The lease rentals can be determined in the following
manner.
Please note that the discounting rate is 9 % p.a. which is post tax cost of financing,
i.e. 12% x (1- 25%). Also use the sale price/Cost price as per solution of (7)
Sale Price = (z +Annual tax benefit on Interest and Depreciation) X (DCF @ 9% p.a.)
4,450,000 = (z + 106800+222500) x 3.24 (From DCF table) (see workings)
4,450,000 = (z + 329300) x 3.24
4,450,000 = 3.24z + 1,066,932
z = (4,450,000 – 1,066,932)/3.24
z = 1,044,156.79
Thus the annual lease payable is INR 1,044,156.79
Working 1 Annual tax benefit on interest
Interest cost : Cost of assemble x 12% p.a.
: 3,560,000 x 12%
: 427,200
Tax benefit on interest = 427,200 x 25% (Tax rate for Phoenix) = 106,800
Working 2 Annual tax benefit on Depreciation
Annual Depreciation : Cost of Assemble x SLM Depreciation rate
: 3,560,000 x 25%
: 890,000
Tax benefit on Depreciation = 890,000 x 25% (Tax rate for Phoenix) = 222,500

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

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

CASE STUDIES 14.3
Sudeep stated:
"The lease is an operating lease as the scan system does not get transferred to Arogyam at the
end of lease. Also, as per Bower-Herringer-Williamson Method, the operating advantage of
purchase exceeds that of leasing. These two suggest that buying the machine would be the
correct decision ".
Pradeep thoroughly reviewed the calculations. He remarked, "The calculations are arithmetically
correct but some aspects have been left out to support the evaluation."
After analysing the case at his own level using the internal rate of return approach, he e-mailed
procurement department:
"Based on our study, we conclude that it would be preferable to lease the scan system rather
than buy it. The cost of leasing comes out to be less than the cost of borrowing and buying. By
leasing, following advantages will accrue to the chain:
• Leasing would avoid Arogyam's own capital being locked up, since it would be the lessor
who would buy and own the equipment.
• Lease payments are tax deductible and hence score over borrowing.
• Further leasing is convenient in the sense it is similar to car rental."

1. If Arogyam decides to borrow money from ACE bank for one machine, the principal
component repaid under second loan instalment will be:
(a) 7,36,813
(b) 16,98,014
(c) 6,63,796
(d) 10,34,218
2. Sudeep mentioned that as per Bower-Herringer-Williamson Method, the operating
advantage of purchase exceeds that of lease. The financial advantage of leasing per
machine is:
(a) 17,55,423
(b) 9,30,929
(c) 67,352.
(d) 7,86,092.
3. Which of the following statements is not correct?
(a) Since lease rentals are tax deductible, operating leases offer tax benefits.

(b) By employing ‘sale and lease back’ arrangement, the lessee may overcome a
financial crisis by immediately arranging cash resources for some emergent
application or for working capital.
(c) In finance leases, the lessee is safeguarded against the risk of obsolescence.
(d) The lessor earns commission in addition to rentals under Sales-Aid- Lease
4. Pradeep used internal rate of return approach to determine whether leasing is
preferable. He started with 7% rate at which net present value of cash flows computed
for IRR comes out to 2,14,703 while for 8% it comes out to 1,69,550. The IRR is close
to:
(a) 7.55%
(b) 7.44%
(c) 7.80%
(d) 8.78%
5. Incremental tax saving due to leasing over borrowing for year 12 is:
(a) 3,76,200
(b) 3,65,026
(c) 3,73,007
(d) 3,68,218

6. Sudeep stated that the lease offered by SAGE is an operating lease.
Based on the information provided, discuss whether Sudeep is correct or not. No
calculations required.
7. Discuss the soundness of advantages offered in advice by Pradeep.
8. Vinay wanted to know if they can negotiate on the lease rental. So he asked Pradeep to
determine the break even lease rental per machine for Arogyam. The cost of capital is
7.8%. Tax rate is 22%. Given that the system will constitute a separate block for
depreciation purpose and depreciation is allowed @40% on reducing balance
method, help Pradeep compute the before tax break even lease rental (BELR).

CASE STUDIES 14.5

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

Present Value of lease payments 90,69,071
Financial advantage of leasing 9,30,929

Option a is incorrect as it considers PVIFA (10%,12) which would have been

appropriate if payments were made at the end of the year.
Option c is incorrect as it correctly considers PVIFA for 0-11 years but at the
rate of 7.8%. The correct discounting rate is 10% and not 7.8%.
Option d is incorrect as it considers PVIFA (7.8%,12) which is incorrect with
respect to both rate and time period.
3. ( c) Finance lease does not safeguard against risk of obsolescence since they are
usually long term arrangements and there are high chances that the lessee will
be stuck with obsolete asset during the time of lease. This benefit is offered by
operating lease.
4. (a) Using interpolation formula, IRR comes out to:
−2,14,703
7% + * (8% − 7%) =
7.55%
−2,14,703 − 1,69,550
5. (d) Incremental tax saving of leasing over borrowing in year 12 can be computed as
follows:
Tax benefits associated with leasing
Lease rental paid at the beginning of year 12 12,10,000
Tax benefit on above lease rental (A) 2,66,200
Tax benefits associated with borrowing and buying
Depreciation for year 12 0
Tax Benefit on depreciation (B) 0
Short term capital gain on disposal (WDV12-Residual value) 4,63,720
Tax loss on STCG (C) 1,02,018
Total (D=B-C) -1,02,018
Incremental tax saving on leasing (A-D) 3,68,218

6. Sudeep is not correct. Non-transfer of scan system at the end of lease period
does not render the lease in itself as operating lease. In fact, based on the information
provided, lease from GE appears to fall under category of finance lease. The reasons
are as follows:
1. Lease is irrevocable.
2. Lease term covers the full economic life of the system i.e.12 years
3. Lessee has to bear the insurance and maintenance costs associated with the
scan system, though the legal title is not transferred.

CASE STUDIES 14.7
7. The following points are relevant:

1. Leasing will not lock up own capital is not an advantage which relates only
to leasing; any form of finance, including the bank loan, would free up own
capital. Leasing does not preserve or conserve a firm's capital any more than
borrowing does.
2. It is true that lease rentals are tax deductible but the interest on borrowing is also
tax deductible.
3. The rental car is not an appropriate example to use, as it is an example of an
operating lease rather than a finance lease.
8. To determine the before tax break even lease rental, let us assume the break even lease
rental to be BL.
At break even:
Cost of machine - Present Value of Scrap Value - Present Value of Tax shield on
Depreciation - Present value of tax benefit on gain on disposal - Present Value of Lease
rental + Present Value of Tax benefit on Lease Rental =0
For computing PV except on lease rentals, rate for discounting should be cost of capital
(7.8%). For lease rentals, appropriate rate is cost of debt (10%)
The individual components can be computed as follows:
Present Value of Scrap Value
Amount in `
Scrap Value (A) 5,00,000
Present Value of Scrap Value 2,03,000
(PVF (7.8%,12) *A
PVF (7.8%,12) from table given in study is 0.4060
Present Value of tax benefit on depreciation
Year Depreciation for the year Present Value factor @7.8% PV
@40%
1 40,00,000 0.9276 37,10,400
2 24,00,000 0.8605 20,65,200
3 14,40,000 0.7983 11,49,552
4 8,64,000 0.7405 6,39,792
5 5,18,400 0.6869 3,56,089
6 3,11,040 0.6372 1,98,195
7 1,86,624 0.5911 1,10,313
8 1,11,974 0.5483 61,396
9 67,185 0.5087 34,177
10 40,311 0.4719 19,023

11 24,186 0.4377 10,586

Total 83,54,723
PV of Tax benefit 83,54,723*22% 18,38,039
Since the scan system forms a separate block, no depreciation is allowed for year of
disposal as block cease to exist.
Present Value of tax benefit on gain or loss on disposal
Amount in `
Written down value at beginning of year 12 (given) 36,280
Scrap value 5,00,000
Short term capital gain -4,63,720
Tax Benefit(A) -1,02,018
Present Value (PVF (7.8%,12) *A -41,419
PVF (7.8%,12) from table given in study is 0.4060
The capital gain/loss from depreciable assets is always treated as short term
irrespective of the holding period.
Present Value of lease rental
Since the lease rentals are payable in advance, we need to consider the present
value factors for year 0 to 11.
From the given table, PVIFA for year 0-11 is equal to PVIFA (10%,12) - PVF (10%,12) +
PVF(10%,0) = (6.8137 - 0.3186 + 1) = 7.4951
So, PV of lease rental = BL*7.4951
Present Value of Tax shield of lease rental
Tax benefit = BL*0.22
Tax benefit on lease rental will accrue at the end of the year. We need to consider
the present value factors for year 1 to 12.
From the given table, PVIFA for year 1-12 is equal to 7.6148
So, PV of tax shield on lease rental = BL*0.22*7.6148
Putting these altogether in the equation discussed before, we get:
100,00,000 - 2,03,000 - 18,38,039 + 41,419 - BL*7.4951 + BL*0.22*7.6148 = 0. or
BL*5.8198 = 80,00,380 or
BL = 13,74,683

CASE STUDY 15
ABC Ltd., a company involved in precision engineering was incorporated on August, 1993 at
Bangalore. Mayank Gehrotra is the CEO & Managing Director of the company. ABC Ltd. designs
and builds highly engineered products for Automation and Aerospace. With its impeccable
design, engineering and manufacturing facilities in America, Europe and India, the company is
able to meet customers' requirements in many countries. ABC Ltd. has 1000 employees across
all of its locations. There are 50 companies in the ABC Ltd. corporate family.
Everything was going well in the company. However, in a surprising development capital market
regulator ordered the impounding of about ` 5 crore from ABC Ltd. Managing Director and CEO
Mayank Gehrotra in an insider trading case.
The reason for this impounding order was that a sum of ` 5 crore being the notional loss avoided
on account of trades carried out during the period when the price sensitive information is
unpublished. The watchdog had conducted an investigation into possible insider trading in the
shares of ABC Ltd. during the period from August-November 2018.
During the probe, it was found that Gehrotra, being the CEO and Managing Director of ABC
Ltd., had traded the company's shares while being in possession of UPSI (Unpublished Price
Sensitive Information).
It was observed that the consolidated quarterly financial results of ABC Ltd. were communicated
to the stock exchanges after the trading hours on November 11, 2016, and ABC shares fell on
the immediate succeeding trading day on November 15, 2016.
It was also alleged that Gehrotra, having traded on the basis of UPSI, avoided loss on account
of fall in price of shares due to the announcement of the said quarterly consolidated financial
results of ABC. Therefore, the amount of loss avoided by Gehrotra in aggregate, including
interest through trading in shares of ABC, amounted to over ` 5 crore.
It was, prima facie, observed that the pre-trading approval was not taken for the required number
of shares for which sale order was placed. Further, a designated person shall not apply for pre-
clearance of any proposed trade if such person is in possession of UPSI even if the trading
window is open, the watchdog said in its order.
Since Gehrotra was the managing director and 'a connected person', prima facie, he violated
the provisions of PIT (Prohibition of Insider Trading) Regulations, the order said. In view of the
above, it can be said that Gehrotra engaged in insider trading, which helped him to avoid loss
due to a fall in stock prices of the company after the consolidated quarterly report of the company
was published.
Insider trading takes place when the buyer happens to have additional information about stock
performance that is not available to the general public. It can be both legal and illegal, depending

on when the trade is taking place. It is deemed unethical when trading happens when the
information is still private, tilting the trade in favour of one party. These types of trading may
result in severe consequences and may attract penalty from regulators. SEBI being the regulator
keeps close monitoring to track such trades to prevent few traders from manipulating the
market.
In the case of ABC Ltd., the regulator was investigating a case from 2016. SEBI introduced the
Prohibition of Insider Trading Regulations in 2015, which categorically mentions that insider
trading is an unethical practice, practiced, by those in possession of certain unpublished
information relating to a company to profit at the cost of providing loss to general investors who
don’t have the knowledge of such information. It has listed the following people in its monitoring
list in connection with any insider trading activity:
• Directors of the company
• Key personnel in Managerial positions
• People in the positions of Vice Presidents, General Managers, Dy. General Managers,
Asst. General Managers
• Employees who can access the sensitive financial informations. Every employee of
Finance, Legal & Company Secretarial, HR & IT departments will come under its ambit.
• All Personal Assistants and Secretaries to the Directors and Other Senior Officials
• Dependents of all the employees as mentioned in the above categorization
Impounding order by SEBI in insider trading case is announced against MD and CEO of ABC
Ltd. as per the above list of people. The order says that the MD and CEO of ABC Ltd. had used
the UPSI knowledge to trade stocks to avoid a loss that occurred the following day when stock
prices fell after company’s performance report was published.
On November 11, 2016, company’s financial performance report was shared with the exchange
after trading hours, following which stock prices of ABC shares tumbled on November 15. In the
case of ABC CEO, no pre-trading approval was taken, which led to the inquiry and subsequent
seizing order for ABC Ltd.
Brief financials of the company
NAME MARCH- MARCH- MARCH- MARCH- MARCH-

20 19 18 17 16
Assets 781.05 1,017.61 1,032.33 1,008.91 580.01
Liabilities 781.05 1,017.61 1,032.33 1,008.91 580.01
Equity 6.34 6.34 6.34 6.34 6.34
Gross Profit 142.56 133.41 98.50 97.20 74.30

CASE STUDIES 15.3
Net Profit -207.74 32.30 3.79 15.32 1.29

Cash From Operating Activities 114.84 86.72 53.72 51.58 0.00
NPM (%) -36.46 5.45 0.78 3.03 0.29
Revenue 569.63 592.15 483.92 505.03 431.37
Expenses 427.07 458.74 385.42 407.83 357.07
ROE (%) -55.67 8.65 1.01 4.10 0.34
Shareholding Summary for ABC Ltd.

Type Holding
Promoter 48.8
MF 10.6
FII 14.4
Public 26.1

1. It was alleged that Gehrotra, having traded on the basis of UPSI, …….. on account of fall
in price of shares due to the announcement of the said quarterly consolidated financial
results of ABC.
(a) avoided loss
(b) made loss
(c) avoided profit
(d) None of the above
2. A ………. shall not apply for pre-clearance of any proposed trade if such person is in
possession of UPSI even if the trading window is open.
(a) CEO
(b) MD
(c) Chairman
(d) Designated Person
3. The reason Mayank Gehrotra violated the provisions of SEBI (Prohibition of Insider
Trading) Regulations, 2015 was ………….
(a) Delayed pre-trading approval was taken for the required number of shares for
which the sale order was placed.

(b) Pre-trading approval was not taken for the required number of shares for which
the sale order was placed.
(c) Post-trading approval was taken for the required number of shares for which the
sale order was placed.
(d) No approval was taken at all for the required number of shares for which the sale
order was placed.
4. Which among the following is not a connected person as per the SEBI (Prohibition of
Insider Trading) Regulations, 2015?
(a) a holding company
(b) an investment company
(c) a best friend
(d) an official of a stock exchange
5. An insider who is continuously in possession of unpublished price sensitive information
is entitled to formulate a trading plan and present it to the ………… for approval.
(a) Stock Exchange
(b) SEBI
(c) Compliance Officer
(d) Audit Committee

6. What were the charges leveled against the MD and CEO of ABC Ltd.? Were the charges
tenable? Explain briefly.
7. How could have Mayank Gehrotra avoid being implicated in the insider trading case?
Discuss with reference to SEBI (Prohibition of Insider Trading) Regulations, 2015.
8. Is there any obligation imposed on the CEO and the MD under the SEBI (Prohibition of
Insider Trading) Regulations, 2015? If yes, then explain briefly with the help of the SEBI
Regulations.

CASE STUDIES 15.5

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

6. On an investigation by the market regulator, it was found that the CEO and Managing
Director of ABC Ltd., had traded the company's shares while being in possession of
UPSI. The reason given was that the consolidated quarterly financial results of ABC Ltd.
were communicated to the stock exchanges after the trading hours on November 11,
2016, and ABC shares fell on the immediate succeeding trading day on November 15,
2016. And, the MD traded on the company’s shares before they become public i.e. shared
to the stock exchanges and avoided loss on account of that.
In view of the above, the charges seems to be tenable. Since Mr. Gehrotra was the
managing director and 'a connected person', prima facie, he violated the provisions of
PIT (Prohibition of Insider Trading) Regulations. Therefore, it can be said that he
engaged in insider trading, which helped him to avoid loss due to a fall in stock prices of
the company after its consolidated quarterly report was published.
7. Mr. Mayank Gehrotra (or, in fact in any insider) could take the following steps to avoid
being implicated in a insider trading case:
(i) An insider shall not communicate or allow anyone access to any unpublished price
sensitive information related to a company except where such information is
required for legal purpose or fulfilment of any legal obligation.
(ii) No insider shall trade in securities that are listed or proposed to be listed on a
stock exchange when in possession of unpublished price sensitive information
(iii) An insider shall be entitled to formulate a trading plan and present it to the
compliance officer for approval and public disclosure pursuant to which trades
may be carried out on his behalf in accordance with such plan.

(iv) The trading plan once approved shall be irrevocable and the insider shall
mandatorily have to implement the plan, without being entitled to either deviate
from it or to execute any trade in the securities outside the scope of the trading
plan.
8. Obligations imposed on the CEO and the MD under regulation 7(1) and 7(2) of the SEBI
(Prohibition of Insider Trading) Regulations, 2015 are as follows:
(i) Initial Disclosure - Every promoter, member of the promoter group, key
managerial personnel and director of every company whose securities are listed
on any recognised stock exchange shall disclose his holding of securities of the
company as on the date of these regulations taking effect, to the company within
thirty days of these regulations taking effect.
Every person on appointment as a key managerial personnel or a director of the
company or upon becoming a promoter or member of the promoter group shall
disclose his holding of securities of the company as on the date of appointment or
becoming a promoter, to the company within seven days of such appointment or
becoming a promoter.
(ii) Continual Disclosures - Every promoter member of the promoter group
designated person and director of every company shall disclose to the company
the number of such securities acquired or disposed of within two trading days of
such transaction if the value of the securities traded, whether in one transaction
or a series of transactions over any calendar quarter, aggregates to a traded value
in excess of ten lakh rupees or such other value as may be specified.
Every company shall notify the particulars of such trading to the stock exchange
on which the securities are listed within two trading days of receipt of the
disclosure or from becoming aware of such information.

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CASE STUDIES 2.3

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CASE STUDIES 2.5