PAPER - 6B

Mapping Sheet : Part A

FINANCIAL SERVICES &

CAPITAL MARKETS

By CA CFA(US) Narayana Murthy Puppala

 FSCM Mapping Sheet Part (A) CA CFA(US) Narayana Murthy Puppala

CHAPTER 1: GLOBAL FINANCIAL MARKETS

TOPIC / HEADING ICAI PAGE No.

1. Introduction to Global Financial Markets 1.1

1.1. Major types of financial markets (Stock market, Bond market, 1.2
Commodities market, Derivatives market)

1.2. Importance of Financial Markets 1.3

1.3. Size of the Global Financial Market 1.3

2. Role of Financial Market in Economic Development of a Country 1.4

2.1. Functions of Financial Markets (Puts savings into more productive use, 1.4
Determines the price of securities, Makes financial assets liquid, Lowers
the cost of transactions)

2.2. The linkages in financial flows 1.5

2.3. Contribution of market to economy (Credit Provision, Liquidity provision, 1.6

Risk management services) According to Baily and Elliott

3. Stakeholders in Financial Market (Domestic and Global) 1.7

3.1. Primary stakeholders in financial market (Shareholders, Lenders, 1.7

Companies, Mutual fund Organizations / holders / fund managers)

3.2. Service providers in financial market (Merchant Bankers, Brokers, 1.8

Underwriters, Depositories [NSDL & CSDL] ,Custodians)

3.3. Regulators in financial market (Securities and Exchange Board of India 1.10
(SEBI), Reserve Bank of India, Insurance Regulatory and Development
Authority of India (IRDAI), Pension Fund Regulatory and Development
Authority (PFRDA))

Outside India

● Securities Exchange Commission (SEC) in US. 1.10

● [Federal Reserve (Fed) in the USA’s], 1.11

● In USA, insurance is almost regulated by the individual state 1.11

governments. In Canada, Office of the Superintendent of Financial
Institutions Canada (OSFI)sets the minimum regulatory requirements
and expectations to support policyholder and creditor protection.

● The main law which governs the establishment, maintenance, and 1.12
termination of pension plans in the United States is the Employee
Retirement Income Security Act (ERISA).

● Administrators to facilitate the financial market (contd….) 1.12

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(….contd from previous page) (Association of Mutual funds of India

(AMFI), The Mutual Fund Dealers Association of Canada (MFDA),
Foreign Exchange Dealers Association of India (FEDAI), Fixed Income
Money Market and Derivative Association of India (FIMMDA),
Association of Investment Bankers of India (AIBI), Internationally,
International Association of Investment Bankers (IAIB)

4. Indian Financial Market Scenario 1.14

4.1. Money Market Instruments (Treasury Bills, Cash Management Bills, Call 1.15 - 1.16
Money, Notice Money and Term Money, Certificate of Deposits (CDs),
Commercial Papers (CPs))

4.2. Capital Market 1.16

● Indian Capital Market scenario (Equity Market) 1.16

● Historical Returns from Equity 1.18

CHAPTER 2:
IMPACT OF VARIOUS POLICIES OF FINANCIAL MARKETS
TOPIC / HEADING ICAI PAGE No.
1. Credit Policy of the Reserve Bank of India (RBI) 2.1

1.1. Meaning of Credit Policy 2.1

1.2. Objectives of Credit Policy 2.1

● Maintenance of Price Stability 2.1

● Achieving Economic Growth 2.2

● Exchange Rate Stability 2.2

● External Balance of payment equilibrium 2.2

● Adequate flow of credit to productive sectors 2.2

● Maintaining a moderate structure of interest rates to enhance 2.2

investments

1.3. Analytics of Credit Policy 2.2

● Interest Rate Channel 2.2

● Exchange Rate Channel 2.3

● Quantum Channel (relating to money supply and credit) 2.3

● Asset Price Channel 2.3

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1.4. Operating Procedure and Instruments 2.3

1.5. The instruments of Credit Policy 2.4

● Cash Reserve Ratio (CRR) 2.4

● Statutory Liquidity Ratio (SLR) [Fractional Reserve System] 2.4

● Liquidity Adjustment Facility (LAF), (Repo, Reverse Repo) 2.4

● Margin Standing Facility (MSF) 2.5

● Market Stabilization Scheme 2.5

● Open Market Operations 2.5

2. FED POLICY 2.6

2.1. the Federal Reserve System [Five general functions] 2.6

2.2. Fed Policy Tools 2.6

● Open Market Operations 2.6

● The Discount Rate 2.6

● Reserve Requirements 2.7

● Interest on Required Reserve Balances and Excess Balances 2.7

● Overnight Reverse Repurchase Agreement Facility 2.7

● Term Deposit Facility 2.7

2.3. Fed Funds Rate and its impact on Global Financial Market 2.7

3. COST INFLATION INDEX (CII) 2.8

3.1. Computation of Cost Inflation Index (Example) 2.8

3.2. Cost Inflation Index (CII) = CII for the year the asset was transferred or 2.8
sold / CII for the year the asset was acquired or bought.

4. CONSUMER PRICE INDEX (CPI) 2.9

4.1. Classification of Items 2.9

4.2. Issues relating to Consumer Price Index (CPI)[3 Issues] 2.10

5. WHOLESALE PRICE INDEX (WPI) 2.10

5.1. Main uses of WPI 2.10

5.2. Difference between Wholesale Price Index (WPI) and Consumer Price 2.11
Index (CPI)

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CHAPTER 3: CAPITAL MARKET - PRIMARY

TOPIC / HEADING ICAI PAGE No.
1. Basics of Capital Markets (Need, Evolution and Constituents) 3.2

1.1. Indian Capital Market – Before 1990’s 3.2

1.2. Indian Capital Market – After 1990’s [Mandate of SEBI] 3.3

1.3. Functions of the capital market 3.3

1.4. Major constituents of the capital market [14 constituents] 3.4

2. Segments of Capital Market 3.4

2.1. Primary Market[Initial public offering’ (IPO)] 3.4

2.2. Secondary Market 3.5

2.3. Primary Market vs. Secondary Market 3.5

2.4. The difference between primary market and secondary market 3.5

2.5. Similarities between Primary and Secondary Markets [Listing, Control by 3.5
Stock Exchanges]

2.6. Interrelationship between Primary Markets and Secondary Markets[two 3.6

dimensions]

2.7. Participants in the Capital Market[Investors, Stock Exchange, Depository, 3.6

Intermediaries]

3. Capital Market Instruments 3.7

3.1. Shares (Basic Features of Shares) 3.7

3.2. Preference Shares 3.8

3.3. Debentures/ Bonds [bond indenture or deed of trust] [Master loan 3.8
agreement-6 Agreement]

Yields and its Method of Calculation, Determinants of Bond Prices 3.9

Illustration 1 3.10

3.4. American Depository Receipt (ADRs) [Blue Sky Law] [NYSE or AMEX] 3.10

3.5. Global Depository Receipts (GDRs) 3.11

3.6. Derivatives [Futures, Options] 3.11

4. Aspects of Primary Market (New Issue Market) 3.12

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4.1. Different kinds of issue of securities (Public Issue[IPO,FPO], Right Issue 3.12
(RI),Composite Issue, Bonus Issue, Private Placement [Preferential issue,
QIP])

● Different types of Securities issued in the Primary Market [Diagram] 3.13

● A listed issuer may make qualified institutions placement if it satisfies 3.14

the following conditions

4.2. Types of Offer Documents (Draft offer document, Red herring prospectus, 3.15
Prospectus, Letter of offer, Abridged prospectus, Abridged letter of offer,
Shelf prospectus, Placement document)

● Key disclosure requirements of offer document 3.16

4.3. Issue Requirements 3.17

● An unlisted issuer making a Public Issue (i.e. IPO) is required to satisfy 3.17
the following provisions: Entry Norm I and II(Profitability Route, QIB
Route)

● A listed issuer making a public issue (i.e. FPO) is required to satisfy 3.18
the following requirements:

Certain other general conditions to be satisfied by the issuer with regard 3.18
to further public offer
4.4. Minimum Promoter’s contribution and lock‐in 3.18

4.5. IPO Grading [5 Grading] 3.19

● IPO grading process 3.19

● To arrive at an IPO Grade, following aspects are looked into by the 3.19
rating agencies.

4.6. Pricing of an Issue 3.20

4.7. Intermediaries to the Capital Market(Merchant Bankers / Lead Managers, 3.20

Underwriters, Bankers to an Issue, Brokers to an issue, Debenture
Trustees, Registrars to Issue, Portfolio Managers)

● Capital Market Intermediaries[Diagram] 3.22

4.8. Steps involved in public issue(16 Steps) 3.22

● Apart from the notice of offer to issue shares to public, prospectus 3.22
should also disclose:

4.9. Public Issue of Shares - Book Building Route(Book Building Method) 3.24

● Difference between fixed price method and Book Building methods of 3.25
the pricing of public issue.

● Price discovery under book building process 3.25

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● The Flowchart given as follows explains the book building process 3.27

● Some interesting facts about the book building process 3.28

4.10. Applications Supported by Blocked Amount (ASBA) 3.28

● The process of ASBA with example 3.29

4.11. What is a Green Shoe Option? 3.29

Illustration 1 3.30

4.12. Anchor Investors 3.30

● Who is an anchor investor? 3.30

● Why anchor investors are important? 3.30

● Guidelines for Anchor Investors [9 guidelines] 3.31

● Case Study of Inter Globe Aviation Ltd (Indigo Airlines) regarding 3.32
Anchor Investors

4.13. Private Placement of Shares 3.32

● Advantages of Private Placement 3.33

● Case Study on Private Placement 3.33

● Answer to the question raised above on the Case Study on Private 3.33
Placement

● Meaning of Public Issue, Meaning of Private Placement of Shares, 3.33 – 3.34

Advantages of Public Offerings, Disadvantages, Advantages of
Private Placements, Disadvantages of Private Placement

4.14. Disinvestment 3.34

● The primary objectives of the disinvestment programme of the Govt. 3.34

of India

4.15. Right Issue 3.35

● Procedure for allotment of right issue of shares 3.35

● Examples of recent Right Issues and their implications [Tata Power, 3.36
Mahindra & Mahindra Finance, PVR, Aditya Birla Fashion and Shriram
Transport]

4.16. Exit Offers (Delisting Offers and Strategic Issues) 3.36

3 different sets of provisions for delisting of equity shares 3.37

● Understanding delisting and the terms associated with it 3.37

What is reverse book building? 3.37

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How is exit price discovered? 3.38

What's next? 3.38

What is a counter-offer? 3.38

● Explained: Failure of Vedanta Delisting 3.38

failed to garner the number of shares required to complete its delisting 3.38
process

How does the delisting process work? 3.38

What were the problems in the Vedanta delisting? 3.39

Were unconfirmed bids the only reason the delisting failed? 3.39

CHAPTER 4: CAPITAL MARKET - SECONDARY

TOPIC / HEADING ICAI PAGE No.

1. Introduction to Secondary Market 4.2

● Functions of Secondary Market 4.2

2. Development of the Stock Market in India 4.3

3. Stock Market Organization in India (Stock Broking, Custodial Services, 4.4

Depository System)

SEBI Registered Market Intermediaries 4.7

4. Demutualization of Stock Exchanges 4.9

4.1. Advantages of Demutualization 4.9

5. Share Trading in Secondary Market 4.10

5.1. Share Trading by a Retail Investor (7 steps to conduct trade in secondary 4.10
market in India)

5.2. Buy Back of Shares 4.11

● What is a buyback? 4.11

● Effects of Buyback 4.12

● Why buybacks are being favoured by companies? [Legal 4.13

requirements to be satisfied in case of a Buyback]

● When investors should opt for buyback? 4.14

● Recent Buyback rush and its implications 4.15

● Delisting versus Buyback 4.16

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6. Stock Market and its Operations 4.16

6.1. Growth of Stock Exchanges 4.16

6.2. Characteristics of Stock Exchanges in India 4.17

6.3. Functions of Stock Exchanges 4.17

6.4. Basics of Stock Market Indices(Stock Market Index, Concept behind 4.18 – 4.19
Fluctuations of Index, Computation of Index)

7. Risk Management in Secondary Market 4.19

7.1. Trading Rules and Regulations 4.19

7.2. Circuit Breakers to curb excess volatility (Advantages and 4.20

Disadvantages)

7.3. Trading and Settlement (Trading day (T Day), Clearing activities (T+1 4.21 – 4.23
day), Netting explained, Settlement activities (T+2 Day), Pay-in and pay-
out of funds explained, Pay-in and pay-out of securities explained,
Initiative by SEBI recently to introduce T+1 Settlement, Feasibility of
SEBI’s recent twin track settlement system)

7.4. National Securities Clearing Corporation Limited (Custodians / Clearing 4.24

Members, Clearing Banks, Depositories)

7.5. Market Making System (Conditions to provide depth and continuity on 4.25
exchange)

● The obligations and responsibilities of Market Makers (as per BSE 4.25
website)

7.6. Securities Lending and Borrowing (SLB) (Merits of Stock Lending and 4.26
Borrowing)

7.7. Straight Through Processing (STP) 4.27

7.8. Margin Trading 4.27

7.9. Short Selling 4.28

● Risk inherent in short selling 4.29

8. Indian Debt Market 4.29

8.1. Indian debt market can mainly be classified into two categories: 4.29
(Government Securities Market (G-Sec Market), Bond Market)

● The secondary debt market in India can be broadly categorized 4.30

[Wholesale Debt Market, Retail Debt Market]

8.2. Benefits of an efficient Debt Market to the financial system and the 4.31
economy

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8.3. Different types of risks with regard to debt securities (Default Risk, 4.31
Interest Rate Risk, Reinvestment Rate Risk, Counter Party Risk, Price
Risk)

CHAPTER 5: MONEY MARKET

TOPIC / HEADING ICAI PAGE No.
1. Basics of Money Market 5.2

1.1. Discussion Points 5.3

1.2. Conceptual Framework 5.3

1.3. The Distinct Features of Money Market 5.3

1.4. Pre–Conditions for an Efficient Money Market 5.5

1.5. Rigidities in the Indian Money Market: (Most important rigidities in the 5.6
Indian Money Market)

1.6. Distinction between Capital and Money Market 5.7

1.7. The Participants 5.8

● The salient features of the organised money market in India are 5.8

2. Money Market Participants (Institutions) (Reserve Bank of India (RBI), 5.10

Scheduled Commercial Banks (SCBs), Co-operative Banks, Financial and
Investment Institutions, Corporates, Mutual Funds, Discount and Finance
House of India)

3. Money Market Instruments 5.11

3.1. Call / Notice money 5.12

3.2. Treasury Bills (TBs) 5.13

● Features of T-bills 5.15

● Additional Features 5.16

● Advantages to Investors 5.16

3.3. Commercial Bills 5.17

Example 5.18

● Advantages of a developed bill market 5.19

3.4. Certificate of Deposits (CDs) 5.19

Example 5.20

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3.5. Commercial Paper 5.21

● Role of RBI 5.22

● Timing of CP 5.22
● Denomination and size of CP 5.22

● Period of CP 5.22

● Mode of CP 5.23

● Negotiability of CP 5.23

● Underwriting/co-acceptance of CPs 5.23

● Issue expenses 5.23

● The issuer 5.23

● Benefits of Commercial Paper (Benefit to the issuer, Benefit to the 5.23

investor)

● Difference between Commercial Bill and Commercial Paper 5.24

4. Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR) 5.25

4.1. Cash Reserve Ratio (CRR) (with example) 5.25

4.2. Statutory Liquidity Ratio (SLR) (with example) 5.25

5. Determination of Interest Rates 5.26

5.1. Money Market – MIBOR (Thomson Reuters) 5.26

5.2. What is 'LIBOR'? 5.27

● BREAKING DOWN 'LIBOR' [Replacement of LIBOR with SOFR] 5.27

6. Money Market - Money Market Instruments: G Sec (Government Securities) 5.28

7. Recent Development in Money Market 5.29

7.1. Debt Securitisation 5.29

7.2. Money Market Mutual Funds (MMMFs): (Limit, Eligibility, Minimum rate 5.30
of return, Lock in period, Deployment of capital)

8. Repurchase Options (REPO), Reverse Repurchase Agreement (Reverse 5.30

Repo) and Ready Forward (RF) Contracts:

8.1. Difference between Repo and Reverse Repo 5.31

8.2. Characteristics of Repo 5.31

8.3. Role of 5.32

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● RBI Example 5.32

● Illustration 5.33

● The conditions imposed by RBI in regard to repo transactions 5.34

9. Day Count Convention 5.35

● The various types of day count conventions 5.35

● 30 / 360, Actual / 365, Actual / Actual, Actual / 360 5.35 – 5.36

● The day count convention method illustration 5.36

● SEBI has clarified certain aspects relating to Day Count Convention, 5.36

CHAPTER 6: INSTITUTIONS AND INTERMEDIARIES

TOPIC / HEADING ICAI PAGE No.
1. Depository 6.1

1.1. Benefits of a Depository System (To the Investors, To the Company, To 6.2
the Capital Market)

1.2. The Process of Depository System 6.3

2. Stock and Commodity Exchanges – Indian and Global 6.4

2.1. Growth of Stock Exchanges 6.4

(a) Leading Stock Exchanges in India 6.4

● Bombay Stock Exchange Limited 6.5

● National Stock Exchange 6.5

(b) Stock Exchanges Abroad(New York Stock Exchange (NYSE), 6.6

Nasdaq, London Stock Exchange)

● London Stock Exchange provides a range of services for 6.6

companies and investors:

2.2. Characteristics of Stock Exchanges in India 6.7

2.3. Functions of Stock Exchanges 6.7

2.4. Indian Commodity Exchanges: National Commodity & Derivatives 6.8

Exchange Limited (NCDEX),Multi Commodity Exchange (MCX), Indian
Commodity Exchange (ICEX),National Multi-Commodity Exchange of
India (NMCE)

2.5. International Commodity Exchanges: Chicago Mercantile Exchange 6.10

(CME),Chicago Board of Trade (CBOT),New York Mercantile Exchange

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(NYMEX),London Metal Exchange (LME),Intercontinental Exchange Inc.

(ICE)

3. Intermediaries in the Capital Market 6.11

3.1. Merchant Bankers 6.11

3.2. Registrars to an issue and Share Transfer Agents 6.11

3.3. Underwriters 6.12

3.4. Bankers to an issue 6.12

3.5. Debenture Trustee 6.12

Duties of the Debenture Trustee 6.13

3.6. Portfolio Managers 6.13

3.7. Stock brokers and sub-broker 6.14

● New Margin Rules for brokers and its implications 6.14

4. Institutional Investors 6.15

4.1. Commercial Banks 6.16

4.2. Insurance Companies 6.16

4.3. Mutual Funds 6.16

4.4. Pension Funds 6.17

4.5. Endowment Funds 6.17

4.6. Hedge Funds 6.17

5. Foreign Portfolio Investors (FPIs) 6.17

5.1. Who are FPIs? 6.17

5.2. Categorization of FPIs 6.18

5.3. An interesting fact about FPIs 6.19

5.4. Investment restrictions on FPIs 6.19

5.5. Recent Trends 6.20

6. Custodians 6.20

7. Clearing Houses 6.21

7.1. Role of Clearing Houses 6.21

7.2. Working of Clearing Houses Margins, which normally are in form of cash 6.22
or T-bills, can be categorised in 4 ways

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7.3. Trading Procedure of Clearing Houses 6.22

CHAPTER 7: COMMODITY MARKET

TOPIC / HEADING ICAI PAGE No.
1. Introduction 7.1

2. Role of Commodity Markets 7.2

2.1. Influence of commodity markets on prices 7.2

2.2. Negative Impact of Speculation 7.3

3. Commodity Market in India 7.3

3.1. Indian Commodity Markets 7.3

3.2. Problems with the Indian Commodity Markets 7.5

3.3. Way Forward 7.5

3.4. Regulatory scenario in India 7.5

4. Application of Derivative in Commodities 7.5

4.1. Difference between Commodity Markets and Financial Markets 7.5

4.2. Pre-requisites for Futures trading on a Commodity Exchange 7.6

4.3. Trading and Settlement Process 7.6

4.4. SEBI’s Approval for Option in Commodities 7.7

4.5. Important Terms to be understood in the context of the Commodity 7.7

Market

4.6. The Role of Derivatives 7.8

5. Global Commodities Exchanges 7.8

5.1. London Metal Exchange (LME) 7.8

5.2. Eurex Exchange 7.9

5.3. Chicago Mercantile Exchange (CME) Group 7.9

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CHAPTER 8:
BANKING AS SOURCE OF CAPITAL INCLUDING NBFCs
TOPIC / HEADING ICAI PAGE No.
1. Bank Loans in the Form of Working Capital Loan 8.1

1.1. Different products for Working Capital Loan in Indian Rupees 8.2

● Cash - Credit Account 8.2

● Bill Discounting 8.3

● Overdraft 8.4

● Factoring Services 8.5

● Dealer Financing 8.5

● Term Loan for working capital purpose 8.6

1.2. Different working capital product under Foreign Currency 8.6

● Buyer’s Credit 8.6

● Pre shipment credit in foreign currency 8.7

● Post Shipment Credit in Foreign Currency (PSCFC) 8.7

● Foreign Currency Non Resident Bank Loan [FCNR (B)] Loan 8.7

2. Bank Loan in the form of Term Loan 8.8

2.1. Trade Credit for capital goods purchase 8.8

3. Financing through Non-Banking Finance Companies 8.8

3.1. Loan against Property (LAP) 8.9

● The LAP fund can be used for the purpose 8.9

4. Project Financing 8.10

4.1. Determination of Project Cost & Means of Finance 8.10

4.2. Fixed Asset Cost determination (Land, Building, Plant and Machinery, 8.11
Furniture and Fixture, Information Technology

4.3. Margin Money for Working Capital 8.12

4.4. Evaluation of the project(2 Category) 8.13

4.5. Issues related to Project /Infrastructure Funding 8.13

(a) Technical Feasibility 8.14

(b) Financial Viability(Adjusted Present Value (APV) with illustration) 8.14

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(c) Bankability of Project 8.16

(d) Risk Analysis 8.16

● Construction Risk 8.16

● Post Construction Risk [Post Construction Risk Mitigants] 8.17

5. Working Capital Management (with example) 8.18

5.1. Gross Working Capital Concept 8.19

5.2. Net Working Capital Concept 8.19

5.3. Positive and Negative Working Capital 8.20

5.4. Factors Determining Working Capital Requirement (12 factors) 8.20

5.5. Assessment of Working Capital from the bank’s point of view(3 steps) 8.21

● Turn Over Method (with example) 8.22

● Maximum Permissible Bank Finance Method (MPBF) (Borrower 8.22

needs to adjust certain thing from the audited financials While filling
up Form II and Form III), Rules for making projections

● Cash Budget Method 8.24

6. Reverse mortgage 8.24

6.1. Regular RML 8.25

6.2. RMLeA and its superiority to RML 8.26

6.3. Risks associated with Reverse Mortgage 8.26

6.4. Reasons for failure of Reverse Mortgage to takeoff in India 8.26

CHAPTER 9: MUTUAL FUNDS

TOPIC / HEADING ICAI PAGE No.
1. Meaning 9.2

2. Evolution 9.3

2.1. History of Mutual Funds (Global) 9.3

2.2. Expansion 9.3

2.3. History of Mutual Funds in India 9.3

● First Phase – 1964-87 9.4

● Second Phase – 1987-1993 (Entry of Public Sector Funds) 9.4

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● Third Phase – 1993-2003 (Entry of Private Sector Funds) 9.4

● Fourth Phase – since February 2003 9.4

2.4. Mutual Fund Organization 9.5

3. Types of Mutual Funds 9.6

3.1. On the basis of Structure 9.6

● Open Ended Funds Close 9.6

● Ended Funds 9.7

3.2. On the basis of Investment Portfolio 9.7

● Equity Schemes 9.8

● Debt Schemes Hybrid 9.10

● Schemes Solution 9.12

● Oriented Schemes 9.13

● Other Schemes 9.13

3.3. SEBI Allowed Flexicap Plans in Relief to Fund Houses Facing Tight 9.14
Regulation

4. Net Asset Value (NAV) 9.14

5. Performance Measurement 9.15

5.1. Performance Measures 9.16

● Costs incurred by Mutual 9.16

● Fund Point to Point Returns 9.17

● Rolling Returns [Example of computation] 9.17

● Performance of a Liquid Fund over a 3-month period 9.17

● Performance of an Equity / Bond Fund over a 3-year period 9.18

5.2. Statistical Ratios 9.18

● Sharpe Ratio (Reward to Variability) 9.18

● Treynor Ratio 9.19

● Jensen’s Alpha 9.19

● Sortino Ratio 9.20

● Portfolio or Fund Alpha 9.21

● Computation of statistical ratios 9.21

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● Benchmarking 9.21

6. Advantages and Disadvantages of Mutual Fund 9.21

6.1. Advantages 9.21

6.2. Advantages typical of debt funds 9.22

6.3. Disadvantages of Mutual Fund 9.22

7. Factors Influencing the Selection of Mutual Funds 9.23

8. Signals Highlighting the Exit of the Investor from the Mutual Fund Scheme 9.23

9. Money Market Mutual Funds (MMMFS) 9.24

10. Separation of Distribution and Advisory Functions in the Mutual Fund Industry 9.25

11. Exchange Traded Funds (ETFS) 9.25

11.1. Introduction 9.25

11.2. Advantages of ETFs (Equity ETFs listed on NSE) 9.25

Equity ETFs listed on NSE 9.26

12. Real Estate Investment Trusts (REITs) 9.27

12.1. Introduction 9.27

12.2. Indian Context 9.28

12.3. Structure of investment trust 9.28

12.4. Stipulations to ensure transparency 9.29

● Distribution requirements 9.29

● Leverage restrictions (Structure of REIT) 9.29 – 9.30

13. Infrastructure Investment Trusts (INVITs) 9.31

13.1. SEBI allows unlisted InvITs to raise funds via right issues 9.33

14. Case Study: IL&FS default and handling by Mutual Funds 9.33

14.1. IL&FS: chronology of events 9.33

14.2. What was the issue with IL&FS? 9.36

14.3. Judgement by NCLAT 9.37

14.4. Learnings from the IL&FS case 9.38

15. Case Study: Loan against Securities Exposure to Essel Group Entities of 9.39
Mutual Funds

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CHAPTER 10: PRIVATE EQUITY

TOPIC / HEADING ICAI PAGE No.
1. Meaning of Private Equity (PE) 10.1

2. Classification of Private Equity 10.3

2.1. Venture Capital (VC) 10.3

● Introduction [Who stand to gain from Venture Capital (VC) funding?] 10.3

● Business Model for a VC [parameters] 10.4

● Types of Funding by a VC [5 Ways]- Seed Capital, Startup funding, 10.5 – 10.6

Early stage funding, Interim funding, Expansion funding

2.2. Angel Investor 10.6

2.3. Buyouts for a PE Leveraged 10.7

● Buy Outs (LBOs) Management 10.7

● Buy Outs (MBOs) 10.7

2.4. Hurdle rate 10.8

2.5. Paid in Capital 10.8

2.6. Term Sheet[Critical Terms that appear in a Term Sheet] 10.8

● Fee structure 10.8

● Harvest year, Down round, Methods for computing anti-dilution rights 10.8 – 10.9

● Up round, Break Fee, Exclusivity Agreement 10.10

3. Cost of Investing in Private Equity 10.10

4. Exit routes for a PE [IPO, Strategic Acquisition, Secondary Sale, Repurchase 10.10 – 10.11
by existing management (founder members), Liquidation

5. Valuation of Private Equity Transactions [Certain Terminologies] 10.11

5.1. Pre-money and post-money valuation 10.11

5.2. New Investment Amount* (Total shares post investment ÷ Shares issued 10.11
in new investment)

5.3. Ownership dilution 10.11

5.4. Liquidation Preference, Series A and B, ROI, Terminal Value, Tranches, 10.12
Deemed Liquidation

6. Private Equity Funds (Distribution of Returns in General Partner and Limited 10.12
Partners)

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● Conclusion 10.13

7. PE deals Score Over Reits as Realtors Eye Fast Money 10.13

CHAPTER 11: INVESTMENT BANKING

TOPIC / HEADING ICAI PAGE No.
1. Concept of Investment Banking 11.1

1.1. The main players in Investment Banking 11.2

1.2. Main areas of Investment Banking 11.2

● Corporate Finance [2 different functions] 11.2

● Sales 11.2

● Trading 11.3

● Research 11.3

● Syndicate 11.4

1.3. Commercial Banking vs. Investment Banking 11.4

● Commercial Banks 11.4

● Investment Banks 11.4

● Public Securities 11.5

● Fundamental differences between an investment bank and a 11.5

commercial bank

2. Functions of an Investment Bank 11.6

2.1. Issue of IPO [IPO process consists of two major phases] 11.6 -11.7

● Hiring the Managers 11.6

● Due Diligence and Drafting 11.7

2.2. Follow-on offering of stock 11.7

2.3. Issue of Debt [reasons for issuing bonds rather than stock] 11.7

2.4. Merger and Acquisitions (M&A) [Representing the target, Representing 11.8
the acquirer]

● Buy side Advisory [ Divided in 4 steps] 11.8

● Sell side Advisory [ Divided in 4 steps] 11.9

2.5. Private Placements 11.9

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2.6. Financial Restructurings 11.10

3. Challenges in Investment Banking 11.10

4. Developments in Investment Banking 11.11

5. Merchant Banking and Issue Management 11.12

5.1. Introduction 11.12

5.2. Responsibilities of Merchant Bankers as per SEBI ICDR Regulations 11.12

● Communication 11.12

● Compliance Certificate 11.12

● Copies of offer documents to be available to public 11.12

● Redressal of investor grievances 11.13

● Due diligence 11.13

● Audited financial statements in the offer document 11.13

5.3. Pre-Issue Management by Merchant Banker [Responsibilities of 11.13 – 11.16

Merchant Banker]

5.4. Post Issue Management by Merchant Bankers 11.16

● Allotment, refund and payment of interest 11.16

● Post-Issue Advertisements 11.16

● Post-Issue responsibilities of the lead manager(s) 11.17

● Post-issue reports 11.17

● Coordination with Intermediaries 11.17

● Underwriters 11.18

CHAPTER 12: CREDIT RATING

TOPIC / HEADING ICAI PAGE No.

1. What is Credit Rating? 12.1

2. Rating Services 12.2

2.1. Credit Rating 12.2

2.2. Information Services 12.3

2.3. Equity Research 12.3

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3. Objectives of Credit Rating 12.3

4. Types of Credit Rating 12.3

5. Uses of Credit Rating (For users ,For issuers) 12.4

6. Credit Rating Process [Steps] 12.4

7. Credit Rating Methodologies 12.7

(a) BUSINESS RISK (Strategic Risk, Compliance Risk, Operational Risk, 12.7
Reputational Risk)

(b) FINANCIAL RISK (Counter Party Risk, Political Risk, Interest Rate Risk, 12.8
Currency Risk)

(c) MANAGEMENT EVALUATION 12.9

(d) BUSINESS ENVIRONMENT ANALYSIS 12.9

8. Camel Model in Credit Rating [5 Aspects] 12.10

9. Rating Revisions 12.11

10. Credit Rating Agencies in India (CRISIL,ICRA, CARE, Fitch Ratings India (P) 12.11
Ltd.)

11. Credit Rating Agencies Abroad (Standard and Poor’s (S & P) Ratings, Fitch 12.12
Ratings, Moody’s Ratings)

12. Credit Rating Agencies and the us Sub-Prime Crisis [Mortgage-Backed 12.13
Securities (MBS), Collateralized Debt Obligations (CDO).

13. Limitations of Credit Rating 12.13

14. Contemporary Aspects in Credit Rating 12.14

14.1. SEBI telling rating agencies to disclose probability of default for issuers 12.14
they rate

14.2. RBI asking credit rating agencies to use artificial intelligence, social 12.15
media to catch stress signals

CHAPTER 13: TREASURY OPERATIONS

TOPIC / HEADING ICAI PAGE No.
1. Introduction 13.1

1.1. Functioning of Treasury Operations [Market Comprises in Treasury 13.2

operations]

1.2. Organization of Treasury 13.2

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● Front Office 13.3

● Back Office 13.4

● Mid-Office 13.4

1.3. Function of Integrated Treasury 13.5

● The Bank’s treasury function mainly involves 13.5

● Corporate Treasury Management functions 13.5

2. Raising and Deployment of Funds 13.6

2.1. Raising of Funds 13.6

2.2. Factoring 13.7

● Sovereign risks in international business are usually divided into three 13.7
broad categories

● Advantages of International Factoring 13.9

● Two- Factor System [ 4 parties, basic mechanism] 13.9 – 13.10

● The main functions of the export factor relate to 13.11

● The import factor is primarily engaged in the areas of 13.11

2.3. Deployment of Funds 13.11

3. Risk Management in Treasury Operations 13.11

3.1. Risk Management Framework they rate 13.11

● An effective risk management framework should comprise 13.12

3.2. Types of Risks 13.12

● Three major risks that banks and corporates are exposed 13.13

3.3. Techniques for Risk Measurement 13.14

3.4. Risk management limits 13.14

● Type of limits and its purposes [Exposure Limits, Cut Loss Limits, VaR 13.14
limits, FX limits, Counterparty limits]

● The risk management in Forex 13.15

3.5. Mitigation of Credit Risk 13.16

3.6. Risk Monitoring and Reporting 13.16

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CHAPTER 14: RISK MANAGEMENT

TOPIC / HEADING ICAI PAGE No.
1. Introduction 14.1

2. Types of Market Risks 14.2

2.1. Interest Rate Risk [various sources of interest rate risk] 14.2

2.2. Foreign Exchange Risk 14.2

2.3. Commodity Risk 14.3

2.4. Equity Risk 14.3

3. Early Signals [signals which may indicate that a firm is facing this same risk 14.3
which is explained ]

4. Credit Risk 14.4

4.1. Two Way Risk 14.4

4.2. Risk – Return Trade Off 14.4

● The trade-off between risk and return in the context of Credit Risk calls 14.5
for decisions

4.3. Credit Risk in Capital Market 14.5

(a) Categories of Credit Risk (Default Risk, Exposure Risk, Recovery 14.5
Risk-Collateral Risk, Third Party Guarantee Risk)

(b) Measurement of Credit Risk in Banking Transactions 14.6

(c) Factors Affecting the Credit Risk (Internal Factors, External Factors) 14.6

(d) Credit Risk Management in Banks 14.7

● Policy Framework 14.7

● Credit Rating Framework 14.7

● Credit Risk Models 14.7

● Portfolio Management and Risk Limits 14.8

● Managing Credit Risk in Interbank Exposure [key parameters] 14.8

● Credit Risk in Off Balance Sheet Exposure 14.8

● Country Risk (Transfer Risk, Sovereign Risk, Non Sovereign Risk, 14.8
Currency Risk, Macroeconomic and Structural Fragility Risk)

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CHAPTER 15: CREDIT DERIVATIVES

TOPIC / HEADING ICAI PAGE No.
1. The financial products are subject to following two types of risks: [Market Risk, 15.1
Credit Risk]

2. Collateralized Debt Obligations (CDOs) 15.2

2.1. Types of CDOs (Cash Flow Collateralized Debt Obligations (Cash 15.2
CDOs), Synthetic Collateralized Debt Obligations, Arbitrage CDOs)

● Synthetic CDOs Categorization 15.2

2.2. Risk involved in CDOs (Default Risk, Interest Rate Risk, Liquidity Risk, 15.3
Prepayment Risk, Reinvestment Risk, Foreign Exchange Risk)

3. Credit Default Swap (CDS) 15.3

3.1. Main Features of CDS 15.4

3.2. Uses of Credit Default Swap (Hedging, Arbitrage, Speculation) 15.4

3.3. Parties to CDS(The initial borrowers, Buyer, Seller) 15.5

3.4. Settlement of CDS(Physical Settlement, Cash Settlement) 15.5

3.5. CDS in India(Market Makers, Users) 15.5

4. Pricing of Credit Derivative Instruments [Probability Model, No Arbitrage 15.6

Model]

CHAPTER 16: LEASING

TOPIC / HEADING ICAI PAGE No.
1. Leasing 16.1

1.1. What is lease 16.1

1.2. Parties to a Lease Agreement 16.1

1.3. Lease vis-à-vis Hire Purchase 16.2

2. Types of Leasing (Operating Lease, Financial Lease, Sales and Lease Back 16.2
Leasing, Sales-Aid-Lease)

3. Advantages 16.3

4. Disadvantages 16.4

5. Evaluation of Lease 16.5

5.1. From Lessee’s Perspective(with example) 16.5

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● Present Value Analysis (Net Advantage of Leasing) 16.6

● Internal rate of return analysis 16.8

● Bower-Herringer-Williamson Method 16.9

● Selection of Discount Rate 16.9

5.2. From Lessor’s Perspective(NPV Method , IRR Method) 16.10

● Various types of Cash flows involved in financing decisions [Initial 16.11

Cash Outflow, Annual Cash Flows, Terminal Cash Flows]

6. Break Even Lease Rental (BELR) 16.11

6.1. Break Even Lease Rental (BELR) from Lessee’s point of view 16.11

6.2. Break Even Lease Rental (BELR) from Lessor’s point of View 16.11

● Illustration 16.12

7. Cross-Border Leasing [Equipment Loans to Foreign Buyers.] 16.13

Objectives of cross border leasing 16.15

8. Regulatory Aspects of Leasing 16.16

CHAPTER 17: FACTORING

TOPIC / HEADING ICAI PAGE No.

1. Introduction to Factoring 17.1

2. Definition and Mechanism 17.2

2.1. Definition and Concept (with example) 17.2

● “Factoring means an arrangement between a factor and his client 17.2

which includes at least two of the following services to be provided by
the factor:

2.2. Mechanism of Factoring 17.2

● Steps in the process of factoring 17.3

● Factoring charges are levied [Finance charges, Service fee] 17.3

3. Types / Forms of Factoring 17.4

4. Functions of a Factor 17.5

5. Benefits of Factoring 17.6

6. Reasons Inhibiting the Growth of Factoring in India 17.6

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7. Forfaiting 17.7

7.1. Difference between Forfaiting vs Export Factoring 17.7

8. Some illustrations in factoring 17.8

9. Regulatory aspects of Factoring 17.9

9.1. Provisions in brief from the Factoring Regulation Act, 2011 17.9

9.2. As per the Non-Banking Financial Company - Factors (Reserve Bank) 17.11
Directions, 2012

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