Amity CampusUttar PradeshIndia 201303

ASSIGNMENTSPROGRAM: MFC

SEMESTER-IIISubject Name : Strategic Financial ManagementStudy COUNTRY : Sudan LCPermanent Enrollment Number (PEN) : MFC001652014-2016014Roll Number : AMF 302 (T)Student Name : SOMAIA TAMBAL YOUSIF ELMALIK

INSTRUCTIONSa) Students are required to submit all three assignment sets.

ASSIGNMENT DETAILS MARKSAssignment A Five Subjective Questions 10Assignment B Three Subjective Questions + Case Study 10Assignment C Objective or one line Questions 10

b) Total weightage given to these assignments is 30%. OR 30 Marksc) All assignments are to be completed as typed in word/pdf.d) All questions are required to be attempted.e) All the three assignments are to be completed by due dates and need to

be submitted for evaluation by Amity University.f) The students have to attached a scan signature in the form.

Signature :

Date : _________________________________( √ ) Tick mark in front of the assignments submitted

Assignment ‘A’ √ Assignment ‘B’ √ Assignment ‘C’ √

Strategic Financial Management

ASSIGNMENT- A

Attempt these five analytical questions

Q1. Explain the term offer document? AnswerA due diligence process should focus at least on the following issues: • Legal issues: These include examining documents of asset ownership and

associated liabilities; and whether the target company is in compliance with government regulations.

The Merchant Banker as advised by SEBI is required to ensure that the rejected documents kept in the custody of the Registrar/Merchant Banker are sent back to the shareholders through Registered Post.

Besides forfeiture of escrow account, SEBI can also take separate action against the acquirer which may include prosecution/barring the acquirer from entering the capital market for a specified period.

After the Transaction is completed, all papers and documents relating to it are to be turned to the ‗Comptroller and Auditor General of India‘, to enable to undertaken an evaluation of the disinvestments, for pacing it in Parliament and releasing it to the public. Transfer pricing refers to the setting, analysis, documentation, and adjustment of

charges made between related parties for good, services, or use of property (including intangible property). Transfer prices among components of an enterprise may be used to reflect allocation of resources

Many systems impose penalties where the tax authority has adjusted related party prices. Some tax systems provide that taxpayers may avoid such penalties by preparing documentation in advance regarding prices charged between the taxpayer and related parties. Some systems require that such documentation be prepared in advance in all cases.

Defining the exact costs of each expense category can be somewhat difficult since, at the time of the LCC study, nearly all costs are unknown. However, through the use of reasonable, consistent, and well-documented assumptions, a credible LCCA can be prepared.

I. OFFER DOCUMENT SUBMISSION REQUIREMENTS a. Time Frame

The circular of 5th December 2002, which was distributed to all Licensed Dealing Members, the Stock Exchange, Investment Advisers, and Listed Companies, refers. You are reminded that the circular requires draft prospectuses or documents to be submitted to the Commission at least 6 weeks before the proposed date for the opening of an offer. This does not mean that the Commission will take 6 weeks to process the application in each case. The processing time may be more or less than 6 weeks depending on how much review has to be done. It will also depend to a great extent on the nature of the document, the gravity of the issues raised, and how quickly sponsors respond to issues that will be raised during the process. In every case the Commission will endeavor to act as quickly as possible. b. Prospectus and Supporting Documents An application for the approval of an offer document shall be addressed to the Director General of the SEC. Every application for approval shall be accompanied with two draft offer documents for review and examination. After the review has been completed, ten copies of the final draft offer document shall be submitted for onward submission to the members of the Approvals Committee. Copies of the following documents should be submitted with the draft prospectus/document: * All resolutions passed by shareholders in respect to the offer and the company.* Revolution report on assets.* Share price valuation * Company regulations* Audited financial statement for the relevant period.* Certificate of incorporation and contentment of Business. * An Escrow account agreement.* Any other documents that may have been referenced in the prospectus as available for inspection during offer period.

Q2. Explain the difference between mutual fund structure of India, United kingdom(UK) & United States of America (USA)

AnswerAlthough historians may differ on the exact genesis of mutual funds, the origin of mutual funds can be traced back to a little more than one & half century ago. In 1822, King William of the Netherlands formed “Societe Generale de Belique”, at Brussells, which appears to be the first mutual fund. It was intended to facilitate small investments in foreign government loans, which then offered more security and returns than the home industry.Collective Investment Vehicle:Historically, mutual funds in UK and USA began as private enterprise, known as investment trust. An investment trust would be founded by a single individual who used his financial abilities and judgment for the benefit of a group and who, in turn for his advice and counsel, was allowed to retain a percentage of profits made from the group’s joint investments. Over a period of time, mutual fund industry has undergone numerous changes. Mutual funds evolved in response to the market conditions marking notable changes in their organization structure and the economics of the industry.2. Mutual fund industry in UK:The very first investment trust, Foreign & Colonial, set out its investment aims “to give investors of moderate means, the same advantage as the large capitalist” in its prospectus of 1868. 1880s was the period of boom for this innovative investment opportunity in UK.Though some investment trusts failed during the British crash of 1890, most of them survived. By 1900 there were more than 100 investment trusts, many of them are still around. These investment trusts are close-ended funds.During the first period of its operation (till mid-1920s) mutual funds were informative and experimental conditions. They were incorporated under the Companies Act.Investment managers enjoyed huge powers about the sale and purchase of securities. The years from 1900 to 1914 were marked by an increasing tendency on the part of British investment manager to invest their clients’ funds in American securities, especially in stocks and bonds of American railways.With the advent of the First World War, this situation changed drastically. From 1914-1918, British mutual funds sold a large proportion of their American investments, and a large part of the money obtained from the sale of American stocks and bonds was promptly invested in the war loans of the British government. Though less remunerative, yet this strategy enabled the survival of the industry.Unit Trusts:In United States many small investors lost their fortunes in the years following the Wall Street crash of 1929. But not even one investment trust failed during those troubled years (1890s) in UK. However, some structural changes started taking place in the industry.

The most important one was the emergence of unit trusts. Unit trusts are created by a trust deed. The first unit trust appeared in 1931, shortly after the Wall Street crash. It was a period when income was much more important consideration than growth. Unit trusts conform to the basic pattern of open-ended investment funds in UK.Investment trusts continued to be popular with private investor’s right up until the middle of 1960s. The unit trust industry expanded rapidly till October 1987 crash. By January, 1988 there were almost 1200 unit trusts managed by more than 160 groups. These trusts became popular mainly because of the range of investment opportunities they made available to the investors.The stock market crash at the end of 1987 brought significant changes to the unit trust industry. The other main event affecting the unit trust industry during and after post 1988 is the implementation of the Financial Services Act. The Financial Services Act brought the investors’ greater protection and larger number of restrictions on the industry.The dominance of equity funds in the industry. In the last decade, lot of changes have been observed in the industry. Increased investor sophistication, wealth and power have led to significant influence on the growth of mutual fund market.Investors are demanding better levels of services, transparency in prices and more product variety. On the political front there is a drive for lower costs and standardization to encourage savings.The competition in UK fund industry has increased due to low entry barriers encouraging new players. The increased level of competition is putting pressures on prices. There has been a trend in the industry to focus on core activities and outsource the rest.The pace of changes is very rapid, resulting in steep increase in volumes. New products are launched, and newer distribution methods are explored.The mutual fund industry in UK is witnessing a restructuring wave and the outcome is powerful brand leaders.3. Mutual fund industry in US:The origin of mutual funds in the USA could be traced to the private trustee system in Boston during the second half of 19th century. One of the first investment trusts, the Boston Personal Property Trust, was organized in 1893.It advertised that it “was organized for the purpose of giving persons of small means an opportunity to invest in diversified lists of securities held by a trust which was managed by professional trustees which is a regular line of business in Boston.”It was the Alexander Fund established in Philadelphia in 1907 by W. Wallace Alexander that seems to have originated many of the ideas adopted by mutual funds. Like 1924s M.I.T. and State Street Investors mutual funds, the Alexander fund began as an investment vehicle for a small circle of friends and eventually expanded to include the general public. As the United States economy grew, investment companies were formed in Boston, New York and many other states.In the USA, mutual fund industry evolved in three phases:a. Pre-1940,

b. 1940-1970, andc. 1970 to the present.The first stage i.e. period before 1940 was the stage of infancy of the mutual fund industry. Mutual funds, in those days, were small and dissimilar to the extent that these entities were not even given the status of a separate industry.Close-ended funds were the dominant form of mutual funds to mobilize money (in 1929 assets mobilized under close ended schemes accounted for 95% of the total assets of the industry). However, by the end of 1940s the share of close-ended funds started shrinking in favour of open- ended fund.In the second stage, assets managed by mutual funds witnessed rapid and steady growth and mutual fund evolved into an established industry.Assets under management were $450 mn. In 1940, it rose to $47.6 bn. by the end of 1970 (see Baumol, et ai, 1970). During this phase open-ended funds became the dominant form of mutual funds.The most striking feature of the phase (1970 to present) has been the innovation in the investment objectives. Till this phase most of the money was mobilized under the objective of providing the benefit of diversification in equity investing. “While there were five types of funds offered in 1970, there were 22 different types in 1987.The money market mutual fund is considered the most innovative launch of that time, as this product was quite different in contrast with the then existing equity products and was, in many respects very close to the products offered by banks.It widened the scope of competition for mutual funds with banks on account of similarity in the product. Another important happening of that time was the innovative steps taken by the funds to improve the quality of investor servicing. An example can be given of the exchange privilege given to the investors to shift from one fundto another. Another significant development post-1970s has been the reduction or elimination of sales loads, thereby increasing the mobility of investors.The total assets under management by the end of 1997 were $ 4465 billion managed by 6900 funds. The breakup of assets as on 31st Dec. 1997 is shown in the chart below:The decade 1990-2000 was particularly favourable to mutual fund industry in USA as by the end of 2000 the assets managed by the industry increased to $ 7 trillion. The increased demand for mutual funds in the 1990s led to the creation of a large number of new mutual funds.The number rose from around 2900 at the beginning of the decade to about 8200 by the end of 2000. As stocks and other financial assets earned relatively high returns in 1990s, households shifted their asset allocation away from real estates and other tangible assets to financial assets.During this shift, households showed an increasing preference to investment through mutual funds than buying securities directly. The number of households owning mutual funds reached to 50.6 million in 2000 as against 23.4 million in 1990.World equity funds were also an important element in the growth of mutual funds, as investors increasingly sought to diversify their financial assets through overseas

investments. With the rising demand for mutual funds in the 1990s, fund companies and distribution companies developed new outlets for selling mutual funds and expanded traditional sales channels.Many funds primarily marketed directly to investors turned increasingly to third parties and intermediaries for distribution. Funds that were traditionally sold through a sales force of brokers shifted increasingly to non-traditional sources of sales such as employee-sponsored pension plans, banks and life insurance companies in the 1990s.4. Mutual Fund Industry in India – The Background:In India, the setting up of Unit Trust of India (UTI) in 1964 marked the advent of mutual fund industry. Unit Trust of India was set up by an act of Parliament. Detailed debate had taken place in the Parliament before this institution saw the light of the day.Discussion in Parliament… Highlights On why should there be a Mutual fund?…the objectives of establishing the unit trusts are many and varied, but basically it is an attempt to mobilize the savings of the small investors—… Investment in the securities market for a person who is not well versed in the operations of the money and the equity markets is not easy. Amongst the middle class there are few who watch the share market or watch for investment opportunities. For one thing, the man who knows something about these things has not got the money and for another, the man who knows nothing about this is afraid to invest in securities not knowing what will happen to his money.The share market while it does play an important role in promoting investments reduces or drives away any desire on the part of persons in the middle and lower income groups to invest in securities because of the scares that are created owing to the operations by what are called bulls and bears.…..apart from mobilizing the resources of the people and giving an impetus to the industry, another useful purpose for which it is going to perform in times of crisis is to give support to the faltering stock exchange…On why it be in Public Sector?…… an institution which is not financially strong and accepted to general public cannot hope to succeed or make any major contribution to our economic growth and progress……… a desire on the part of the people that the savings of the community must be controlled by the state and not by the individuals.…… in view of the socialist economy which we are aiming at, I think it is necessary that a trust like this should be in state sector. There are many reasons for people to complain about the working of the state sector enterprises – corruption, maladministration and all that.In spite of that, I do not think in this country people have very great faith in private sector banks and other investment institutions. Comparatively speaking, I have a feeling that people have more assurance in the banking and other investment institutions if they are in the public sector….

… after this moment gathers momentum and people develop confidence, then perhaps there may be some justification for starting more such trusts in the public sector or have some in the public sector and some in the private sector.UTI was regulated since its inception by the UTI Act, 1963 and regulations framed there under. UTI was established as a corporate body. The general superintendence, direction and management of the affairs and business of this corporate body vested in a board of trustees. An executive committee was formed with a view to effectively supervise the asset management functions. The members of the executive committee were drawn from the board of trustees. The executive committee reported to the board.In matters involving public interest the Central Government and the Reserve Bank of India had powers to give directions. The day to day functioning of UTI was left to the chairman and the operating management reporting to him.Impetus to Equity Market: The purpose of establishing the Unit Trust of India was to give a fillip to equity market. In the wake of the Indo-China war of 1961, there was shortage of savings going into industrial investment for economic development.There was a need to mobilize adequate amount of risk capital for industrial enterprises. The household savings were sought to be channelized into the primary and secondary share markets through units.However, in the initial years, the emphasis in UTI was on income products. Master Share launched in 1986 ushered in the equity-oriented schemes in India. Unit Trust of India launched a variety of innovative products suited to meet diverse needs of investors, virtually the complete life cycle of the investors.5. Evolution of mutual fund industry in India:The Association of Mutual Funds in India (AMFI) has officially classified the four decades of mutual funds in India into four phases. The first phase during the years 1963-1987 saw UTI consolidating its position by offering a variety of products and extending its reach throughout the country.The next phase (1987-93) marked the arrival of mutual funds sponsored by public sector banks and financial institutions. The third phase began in 1993 with the arrival of private sector players, both Indian and foreign. The fourth phase started with SEBI (Mutual Fund) Regulations, 1996.In 1986 public sector banks and financial institutions were given permission to establish mutual funds. State Bank of India established the first mutual fund. SBI preferred to adopt the trust route and set up the mutual fund as a trust under the Indian Trusts Act, 1882. This choice was purely accidental. Other mutual funds followed the SBI model. The trust formed under the Indian Trust Act came to be the accepted legal form of mutual funds in India.A new era in the mutual fund industry began with the permission granted for the entry of private sector funds in 1993. Foreign asset management companies were allowed to enter the mutual fund business.

In the year 1992, there were nine mutual funds, all in the public sector. In 2003 there were thirty-three asset management companies covering Indian public sector, private sector, and joint ventures with foreign players.There are funds sponsored by nationalized banks, public sector financial institutions, Indian private sector, joint ventures predominantly Indian, joint ventures predominantly foreign and pure foreign players representing a wide diversity of ownership of sponsors and asset management companies (AMCs). The foreign players have come from USA, Canada, UK, Europe and a few countries in the east.6. The current developments in the mutual fund industry in India: Over the past decade, the industry has evolved in terms of the practices followed and the usage of technology. Mutual fund investors have come to receive an unparalleled array of products and wide range of services. Wave of mergers and acquisitions. Consolidation in the Industry:A large number of mergers, acquisitions and takeovers have been reported in the Indian mutual fund industry in the recent past. The mergers and takeovers in the mutual funds industry in India occurred both at the level of individual schemes as well as at the level of asset management companies. The schemes of Indian Bank mutual fund were transferred to Tata Mutual Fund.Anagram Wellington mutual fund, which had launched only one scheme, wound up its operations and redemption amount was paid to unitholders. Credit Capital Asset Management Company took over two schemes of BOI Asset Management Company.Cazenove Fund Management of the UK exited by selling its stake in Cholamandalam Cazenove AMC. Dundee Asset Management Company exited the Indian mutual fund industry. Sundaram Finance bought out the stake of Newton Investment Management in the Sundaram Newton Asset Management Company. Very recently Templeton mutual fund acquired Kothari-Pioneer; and HDFC acquired Zurich fund.Unit holding pattern: There were a total of 3.08 crore investor’s accounts holding units worth Rs. 100,594 crore as on March 31, 2002. Individuals accounted for 98% of total number of investors and contributed about 56% of total assets. Corporate and institutions that formed only 1.46% of the total number of investors, contributed 44% of the net assets in the industry.Status of Unit Trust of India: On 31st August 2002, the government decided to split the Unit Trust of India into UTI-I and UTI-II. UTI-I comprises of US-64 and assured return schemes managed by government-appointed administrator and a team of advisers nominated by the govern-ment. UTI-II manages other net asset value (NAV) based schemes. It is a SEBI compliant mutual fund with a professional team running it.Best practices in the mutual fund industry in India: Over the years, the Indian mutual fund industry has evolved an interesting mechanism to usher in practices that are conducive to the long-term survival and growth. The players in the industry have come together voluntarily and have established the Association of

Mutual Funds in India (AMFI). This association continuously interacts with the regulator, government and other entities.The purpose of the ongoing dialogue is to underscore issues of significance to the industry and to establish a platform to arrive at decisions that incorporate multiple views, concerns and perspectives. This process has proved to be beneficial. Indian mutual fund industry can legitimately take pride in following acclaimed best practices. Within AMFI there are a number of committees each focusing on best practices in defined areas.In July 2000, AMFI launched a mutual fund testing and certification programme for mutual fund agents, distributor advisors and employees. A certification committee was constituted to prepare a framework for certification that included preparation of syllabus, workbook, examination modules, test procedures, eligibility standards, educational programmes, and a comprehensive registration process.AMFI’s various committees have studied issues such as methodology for valuation, proper benchmarking for performance evaluation in mutual funds, fixation of sale and repurchase prices, advertisement code, operational procedures on unclaimed redemptions & dividends, disclosure norms, pension funds, launch of new products, professional trustee framework for mutual funds, AMFI as a self-regulatory organization (SRO), non-performing assets, securities trading by employees, etc. Recently, the industry has taken a stand that the agents should not entice investors by sharing part of the commission upfront with the investors.Influence of the technology on the Indian mutual fund industry:Majority of the mutual funds have their own website to enhance communication with the present and the prospective unit’s holders. These websites provide basic information relating to offer document, NAV of various schemes, investor education material, in-formation about the key employees of the fund, portfolio composition, etc.Some of the mutual funds enable buying and redeeming of units online for clients in select locations. Mutual funds have begun to use electronic fund transfer method to remit the dividends and redemption proceeds.However, the most significant influence of technology is seen in servicing investors. In particular, agencies such as UTI Investor Services Ltd., Karvy Securities, Computer Age Management Services and Datamatics have made huge investments to cope with the volume of investor servicing transactions at acceptable speed and quality. Beside the investments in technology, these processing centres claim to have advanced methods of quality control in investor services.Recognizing the risk of system failure in the automated environment, many mutual funds and service providers have established disaster management backup systems in alternate locations. As a daily routine, the entire data set is backed-up in the disaster management system.Securities and Exchange Board of India has asked the mutual funds to create a tech-nology platform for integrating investment decisions, trading and execution, audit trail, and risk management in an automated environment with minimum human interventions.

UTI Mutual Fund is the first mutual fund to have seamlessly integrated all these functions across all its schemes in a comprehensive manner. It is expected that other mutual funds would also establish similar systems in the near future.

Q3. What do you mean by Net Assets Value (NAV) ? Explain with the help of and example?

Answer

Net asset value(NAV) is the value of a fund's asset less the value of its liabilities per unit.

NAV = (Value of Assets-Value of Liabilities)/number of units outstanding

Description: NAV is often associated with mutual funds, and helps an investor determine if the fund is overvalued or undervalued. When we talk of open-end funds, NAV is crucial. NAV gives the fund's value that an investor will be entitled to at the time of withdrawal of investment. In case of a close-end fund, which is a mutual fund with fixed number of units, price per unit is determined by market and is either below or above the NAV.

Most commonly used in reference to mutual or closed-end funds, net asset value (NAV) measures the value of a fund's assets, minus its liabilities. NAV is typically calculated on a per-share basis.

How it works/Example:

A fund's NAV fluctuates along with the value of its underlying investments. The formula for NAV is:

NAV = (Market Value of All Securities Held by Fund + Cash and Equivalent Holdings - Fund Liabilities) / Total Fund Shares Outstanding

Let's assume at the close of trading yesterday that a particular mutual fund held $10,500,000 worth of securities, $2,000,000 of cash, and $500,000 of liabilities. If the fund had 1,000,000 shares outstanding, then yesterday's NAV would be:

NAV = ($10,500,000 + $2,000,000 - $500,000) / 1,000,000 = $12.00

A fund's NAV will change daily as the value of a fund's securities, cash held, liabilities, and the number of shares outstanding fluctuate.

Q4. Mention the criteria of Non Performing Assets (NPA)?Mention its provision?

Answer

The assets of the banks which don’t perform (that is – don’t bring any return) are called Non Performing Assets (NPA) or bad loans. Bank’s assets are the loans and advances given to customers. If customers don’t pay either interest or part of principal or both, the loan turns into bad loan.

According to RBI, terms loans on which interest or installment of principal remain overdue for a period of more than 90 days from the end of a particular quarter is called a Non-performing Asset. However, in terms of Agriculture / Farm Loans; the NPA is defined as under:

For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (installment / interest) is not paid for 2 crop seasons , it would be termed as a NPA.

For Long Duration Crops, the above would be 1 Crop season from the due date.

Provisioning Coverage Ratio

For every loan given out, the banks to keep aside some extra funds to cover up losses if something goes wrong with those loans. This is called provisioning. Provisioning Coverage Ratio (PCR) refers to the funds to be set aside by the banks as fraction to the loans.

Standard Asset

If the borrower regularly pays his dues regularly and on time; bank will call such loan as its “Standard Asset”. As per the norms, banks have to make a general provision of 0.40% for all loans and advances except that given towards agriculture and small and medium enterprise (SME) sector.

However, if things go wrong and loans turn into bad loans, the PCR would increase depending up the classification of the NPA as discussed in next section.

Classification of the NPAs

Banks are required to classify nonperforming assets further into three main categories (Sub-standard, doubtful and loss) based on the period for which the asset has remained non performing. This is as per transition of a loan from standard loan to loss asset as follows:

If the borrower does not pay dues for 90 days after end of a quarter; the loan becomes an NPA and it is termed as “Special Mention Account”. If this loan remains SMA for a period less than or equal to 12 months; it is termed as Sub-standard Asset. In this case, bank has to make provisioning as follows:

15% of outstanding amount in case of Secured loans

25% of outstanding amount in case of Unsecured loans

If sub-standard asset remains so for a period of 12 more months; it would be termed as “Doubtful asset”. This remains so till end of 3rd year. In this case, the bank need to make provisioning as follows:

Up to one year: 25% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans

1-3 years: 40% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans

more than 3 years: 100% of outstanding amount in case of Secured loans; 100% of outstanding amount in case of Unsecured loans

If the loan is not repaid even after it remains sub-standard asset for more than 3 years, it may be identified as unrecoverable by internal / external audit and it would be called loss asset. An NPA can declared loss only if it has been identified to be so by internal or external auditors.

Example of NPA

We suppose that a party was disbursed a loan on January 1, 2010. Its due date is June 1, 2010. But the party does not make a payment. So

It will be an Standard Asset from January 1, 2010 till June 1, 2010 (Due Date)

It will be a Special Mention Account From June 2, 2010 till August 29, 2010 (90 days)

It will be Sub-standard from August 30, 2010 till August 29, 2011

It will be doubtful from August 30, 2011 till August 29, 2012

It may remain doubtful Asset for a period of 3 years, beginning from 12 months of being an NPA, but once the auditors identify it as a loss, it will be assigned a loss asset; however, the period may be anything above 3 years.

Implications of the NPAs on Banks

The most important implication of the NPA is that a bank can neither credit the income nor debit to loss, unless either recovered or identified as loss. If a borrower has multiple accounts, all accounts would be considered NPA if one account becomes NPA.

Gross NPA and Net NPA

The NPA may be Gross NPA or Net NPA. In simple words, Gross NPA is the amount which is outstanding in the books, regardless of any interest recorded and debited. However, Net NPA is Gross NPA less interest debited to borrowal account and not recovered or recognized as income. RBI has prescribed a formula for deciding the Gross NPA and Net NPA.

NPA and SARFAESI Act

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act has provisions for the banks to take legal recourse to recover their dues. When a borrower makes any default in repayment and his account is classified as NPA; the secured creditor has to issue notice to the borrower giving him 60 days to pay his dues. If the dues are not paid, the bank can take possession of the assets and can also give it on lease or sell it; as per provisions of the SAFAESI Act.

Reselling of NPAs

If a bad loan remains NPA for at least two years, the bank can also resale the same to the Asset Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL).  These sales are only on Cash Basis and the purchasing bank/ company would have to keep the accounts for at least 15 months before it sells to other bank. They purchase such loans on low amounts and try to recover as much as possible from the defaulters. Their revenue is difference between the purchased amount and recovered amount.

Q5. What do you mean by financial planning? Mention various important approaches ?

Answer

Financial planning is the backbone of the business planning and

corporate planning. It helps in defining the feasible area of operation for

all types of activities and thereby defines the overall planning framework.

Outcomes of the financial planning are the financial objectives, financial

decision-making and financial measures for the evaluation of the

corporate performance. Financial objectives are to be decided at the

very out set so that rest of the decisions can be taken accordingly. The

objectives need to be consistent with the corporate mission and

corporate objectives. There is a general belief that profit maximization is

the main financial objective. In reality it is not. Profit may be an important

consideration but not its maximization. According to Drucker, profit is the

least imperfect measure of organizational efficiency and should remain

the main consideration of a firm to cover the cost of survival and to

support the future expansion plans. But profit maximization as a financial

objective suffers from multiple limitations. Firstly the level of operation for

long run profit maximization may not match with the optimum levels

under short run profit maximization goal. In that case, if one assigns

more importance to short

run profit maximization and avoids many activities like skill development,

training programme, machine maintenance and after sales service, long run survival even may be at a stake and long run profit maximization

may become a day dreaming concept. In the reverse case, short run

shortcomings may have telling effects on the organizational performance

and hence long run profit maximization may gradually become an

impossible proposition in comparison to stronger competitor‘s

performances.

Profit maximization also ignores an important aspect of strategic

planning. Risk consideration has rarely been incorporated in the profit

maximization rule. As a result two projects with same expected profit are

equally good under profit consideration. Under the profit cum risk

consideration the project with lesser variability will be preferred by the

investor than the one with higher variability. Higher variability means

higher risk and lower variability means lower risk. Problem becomes

more involved when both expected profits and their variability are

unequal and reversibly ordered. Decision making based on usual

expected profit consideration will be of limited use for such situations. It

is also worth pointing out that profit maximization objective does not take

into consideration effects of time, It treats inflows of equal magnitude to

be received at different time points as equal and thereby ignores the fact

that money values changes over time. Conceptually a benefit of an

amount Ak received in the k-th year cannot be identical with a series of

benefits received at the rate A for each of the k years. The later scheme

may be more beneficial for a firm than the former one. Unfortunately

profit maximization or benefit maximization approach fails to discriminate

between these two alternatives and remains indifferent.

Assignment B

Q.6 What kind of risk associated with mutual fund & how u can manage those risks?AnswerLike most investments, mutual funds have risk — you could lose money on your investment. The value of most mutual funds will change as the value of their investments goes up and down.The level of risk in a mutual fund depends on what it invests in. Usually, the higher the potential returns, the higher the risk will be. For example, stocks are generally riskier than bonds, so an equity fund tends to be riskier than a fixed income fund.Some specialty mutual funds focus on certain kinds of investments, such as emerging markets, to try to earn a higher return. These kinds of funds also tend to have a greater risk of a larger drop in value.

6 common types of risk

Type of risk Type of investment affected

How the fund could lose money

1. Market risk

All types The value of its investments decline because of unavoidable risks that affect the entire market

2. Liquidity risk

All types The fund can’t sell an investment that’s declining in value because there are no buyers.

3. Credit risk Fixed income securities If a bond issuer can’t repay a bond, it may end up being a worthless

investment.4. Interest rate risk

Fixed income securities The value of fixed income securities generally falls when interest rates rise.

5. Country risk

Foreign investments The value of a foreign investment declines because of political changes or instability in the country where the investment was issued.

6. Currency risk

Investments denominated in a currency other than the Canadian dollar

If the other currency declines against the Canadian dollar, the investment will lose value.

Assessing riskOne way to assess a fund’s level of risk is to look at how much its returns change from year to year. If the fund’s returns vary a lot, it may be considered higher risk because its performance can change quickly in either direction. how u can manage those risks?

Every business faces risks that could present threats to its success.Risk is defined as the probability of an event and its consequences. Risk management is the practice of using processes, methods and tools for managing these risks.Risk management focuses on identifying what could go wrong, evaluating which risks should be dealt with and implementing strategies to deal with those risks. Businesses that have identified the risks will be better prepared and have a more cost-effective way of dealing with them.This guide sets out how to identify the risks your business may face. It also looks at how to implement an effective risk management policy and program which can increase your business' chances of success and reduce the possibility of failure. The risk management process

The types of risk your business faces Strategic and compliance risks Financial and operational risks How to evaluate risks Use preventative measures for business continuity How to manage risks Choose the right insurance to protect against losses

The risk management processBusinesses face many risks, therefore risk management should be a central part of any business' strategic management. Risk management helps you to

identify and address the risks facing your business and in doing so increase the likelihood of successfully achieving your businesses objectives.A risk management process involves: methodically identifying the risks surrounding your business activities

assessing the likelihood of an event occurring understanding how to respond to these events putting systems in place to deal with the consequences monitoring the effectiveness of your risk management approaches

and controlsAs a result, the process of risk management: improves decision-making, planning and prioritisation

helps you allocate capital and resources more efficiently allows you to anticipate what may go wrong, minimising the amount

of firefighting you have to do or, in a worst-case scenario, preventing a disaster or serious financial loss

significantly improves the probability that you will deliver your business plan on time and to budget

Risk management becomes even more important if your business decides to try something new, for example launch a new product or enter new markets. Competitors following you into these markets, or breakthroughs in technology which make your product redundant, are two risks you may want to consider in cases such as these.The types of risk your business facesThe main categories of risk to consider are: strategic, for example a competitor coming on to the market

compliance, for example the introduction of new health and safety legislation

financial, for example non-payment by a customer or increased interest charges on a business loan

operational, for example the breakdown or theft of key equipmentThese categories are not rigid and some parts of your business may fall into more than one category. The risks attached to data protection, for example, could be considered when reviewing your operations or your business' compliance.Other risks include: environmental risks, including natural disasters

employee risk management, such as maintaining sufficient staff numbers and cover, employee safety and up-to-date skills

political and economic instability in any foreign markets you export goods to

health and safety risks

Strategic and compliance risksStrategic risks are those risks associated with operating in a particular industry.They include risks arising from: merger and acquisition activity

changes among customers or in demand industry changes research and development

For example you might consider the strategic risks of the possibility of a US company buying one of your Canadian competitors. This may give the US company a distribution arm in Canada. You may want to consider: whether there are any US companies which have the cash/share price to

do this whether there are any Canadian competitors who could be a takeover

target, perhaps because of financial difficulties whether the US company would lower prices or invest more in

research and developmentWhere there's a strong possibility of this happening, you should prepare some sort of response.Compliance riskCompliance risks are those associated with the need to comply with laws and regulations. They also apply to the need to act in a manner which investors and customers expect, for example, by ensuring proper corporate governance.You may need to consider whether employment or health and safety legislation could add to your overheads or force changes in your established ways of working.You may also want to consider legislative risks to your business. You should ask yourself whether the products or services you offer could be made less marketable by legislation or taxation – as has happened with tobacco and asbestos products. For example, concerns about the increase in obesity may prompt tougher food labelling regulations, which may push up costs or reduce the appeal of certain types of food.Financial and operational risksFinancial risks are associated with the financial structure of your business, the transactions your business makes and the financial systems you already have in place.Identifying financial risk involves examining your daily financial operations, especially cash flow. If your business is too dependent on a single customer and they are unable to pay you, this could have serious implications for your business' viability.You might examine:

the way you extend credit to new customers who owes you money the steps you can take to recover it insurance that can cover large or doubtful debts

Financial risk should take into account external factors such as interest rates and foreign exchange rates.Rate changes will affect your debt repayments and the competitiveness of your goods and services compared with those produced abroad.Operational risksOperational risks are associated with your business' operational and administrative procedures. These include: recruitment

supply chain accounting controls IT systems regulations board composition

You should examine these operations in turn, prioritise the risks and make provisions for such a risk happening. For example, if you are heavily reliant on one supplier for a key component you should consider what could happen if that supplier went out of business and source other suppliers to help you minimise the risk.IT risk and data protection are increasingly important to business. If hackers break into your IT systems, they could steal valuable data and even money from your bank account which at best would be embarrassing and at worst could put you out of business. A secure IT system employing encryption will safeguard commercial and customer information.How to evaluate risksRisk evaluation allows you to determine the significance of risks to the business and decide to accept the specific risk or take action to prevent or minimise it.To evaluate risks, it is worthwhile ranking these risks once you have identified them.This can be done by considering the consequence and probability of each risk. Many businesses find that assessing consequence and probability as high, medium or low is adequate for their needs.These can then be compared to your business plan - to determine which risks may affect your objectives - and evaluated in the light of legal requirements, costs and investor concerns. In some cases, the cost of mitigating a potential risk may be so high that doing nothing makes more business sense.

There are some tools you can use to help evaluate risks. You can plot on a risk map the significance and likelihood of the risk occurring. Each risk is rated on a scale of one to ten. If a risk is rated ten this means it is of major importance to the company. One is the least significant. The map allows you to visualise risks in relation to each other, gauge their extent and plan what type of controls should be implemented to mitigate the risks.Prioritising risks, however you do this, allows you to direct time and money toward the most important risks. You can put systems and controls in place to deal with the consequences of an event. This could involve defining a decision process and escalation procedures that your company would follow if an event occurred.Use preventative measures for business continuityRisk management involves putting processes, methods and tools in place to deal with the consequences of events you have identified as significant threats for your business. This could be something as simple as setting aside financial reserves to ease cash flow problems if they arise or ensuring effective computer backup and IT support procedures for dealing with a systems failure.Programs which deal with threats identified during risk assessment are often referred to as business continuity plans. These set out what you should do if a certain event happens, for example, if a fire destroys your office. You can't avoid all risk, but business continuity plans can minimise the disruption to your business.Risk assessments will change as your business grows or as a result of internal or external changes. This means that the processes you have put in place to manage your business risks should be regularly reviewed. Such reviews will identify improvements to the processes and equally they can indicate when a process is no longer necessary.How to manage risksThere are four ways of dealing with, or managing, each risk that you have identified. You can: accept it

transfer it reduce it eliminate it

For example, you may decide to accept a risk because the cost of eliminating it completely is too high. You might decide to transfer the risk, which is typically done with insurance. Or you may be able to reduce the risk by introducing new safety measures or eliminate it completely by changing the way you produce your product. When you have evaluated and

agreed on the actions and procedures to reduce the risk, these measures need to be put in place.Risk management is not a one-off exercise. Continuous monitoring and reviewing are crucial for the success of your risk management approach. Such monitoring ensures that risks have been correctly identified and assessed and appropriate controls put in place. It is also a way to learn from experience and make improvements to your risk management approach.All of this can be formalized in a risk management policy, setting out your business' approach to and appetite for risk and its approach to risk management. Risk management will be even more effective if you clearly assign responsibility for it to chosen employees. It is also a good idea to get commitment to risk management at the board level.Good risk management can improve the quality and returns of your business.Choose the right insurance to protect against lossesInsurance will not reduce your business' risks but you can use it as a financial tool to protect against losses associated with some risks. This means that in the event of a loss you will have some financial compensation. This can be crucial for your business' survival in the event of, say, a fire which destroys a factory.Some costs are uninsurable, such as the damage to a company's reputation. On the other hand, in some areas insurance is mandatory.Insurance companies increasingly want evidence that risk is being managed. Before they will provide cover, they want evidence of the effective operation of processes in place to minimise the likelihood of a claim. You can ask your insurance adviser for advice on appropriate processes.Insurance productsYou can use a business interruption policy, for example, to insure against loss of profit and higher overheads resulting from, say, damaged machinery.You may also want to consider: products liability insurance

key man insurance group life assurance

Liability insurance - public and products liability insurance - is designed to pay any compensation and legal costs that arise from negligence or breach of duty.Key man insurance is designed to cover you for the financial costs of losing key personnel.Group life assurance is provided by employers as part of a benefits package and pays out a lump sum to an employee's family should the employee die.

Q.7 Explain the types of mutual fund ? Explain the difference between Exchange trade fund & Index fund.Answer

These days you are hearing more and more about mutual funds as a means of investment. If you are like most people, you probably have most of your money in a bank savings account and your biggest investment may be your home. Apart from that, investing is probably something you simply do not have the time or knowledge to get involved in. You are not the only one. This is why investing through mutual funds has become such a popular way of investing.

What is a Mutual Fund?

A mutual fund is a pool of money from numerous investors who wish to save or make money just like you. Investing in a mutual fund can be a lot easier than buying and selling individual stocks and bonds on your own. Investors can sell their shares when they want.

Professional Management. Each fund's investments are chosen and monitored by qualified professionals who use this money to create a portfolio. That portfolio could consist of stocks, bonds, money market instruments or a combination of those.

Fund Ownership. As an investor, you own shares of the mutual fund, not the individual securities. Mutual funds permit you to invest small amounts of money, however much you would like, but even so, you can benefit from being involved in a large pool of cash invested by other people. All shareholders share in the fund' s gains and losses on an equal basis, proportionately to the amount they've invested.

Mutual Funds are Diversified

By investing in mutual funds, you could diversify your portfolio across a large number of securities so as to minimise risk. By spreading your money over numerous securities, which is what a mutual fund does, you need not worry about the fluctuation of the individual securities in the fund's portfolio.

Mutual Fund Objectives

There are many different types of mutual funds, each with its own set of goals. The investment objective is the goal that the fund manager sets for the mutual fund when deciding which stocks and bonds should be in the fund's portfolio.

For example, an objective of a growth stock fund might be: This fund invests primarily in the equity markets with the objective of providing long-term capital appreciation towards meeting your long-term financial needs such as retirement or a child' s education.

Depending on investment objectives, funds can be broadly classified in the following 5 types:

Aggressive growth means that you will be buying into stocks which have a chance for dramatic growth and may gain value rapidly. This type of investing carries a high element of risk with it since stocks with dramatic price appreciation potential often lose value quickly during downturns in the economy. It is a great option for investors who do not need their money within the next five years, but have a more long-term perspective. Do not choose this option when you are looking to conserve capital but rather when you can afford to potentially lose the value of your investment.

As with aggressive growth, growth seeks to achieve high returns; however, the portfolios will consist of a mixture of large-, medium- and small-sized companies. The fund portfolio chooses to invest in stable, well established, blue-chip companies together with a small portion in small and new businesses. The fund manager will pick, growth stocks which will use their profits grow, rather than to pay out dividends. It is a medium - long-term commitment, however, looking at past figures, sticking to growth funds for the long-term will almost always benefit you. They will be relatively volatile over the years so you need to be able to assume some risk and be patient.

A combination of growth and income funds, also known as balanced funds, are those that have a mix of goals. They seek to provide investors with current income while still offering the potential for growth. Some funds buy stocks and bonds so that the portfolio will generate income whilst still keeping ahead of inflation. They are able to achieve multiple objectives which may be exactly what you are looking for. Equities provide the growth potential, while

the exposure to fixed income securities provide stability to the portfolio during volatile times in the equity markets. Growth and income funds have a low-to-moderate stability along with a moderate potential for current income and growth. You need to be able to assume some risk to be comfortable with this type of fund objective.

That brings us to income funds. These funds will generally invest in a number of fixed-income securities. This will provide you with regular income. Retired investors could benefit from this type of fund because they would receive regular dividends. The fund manager will choose to buy debentures, company fixed deposits etc. in order to provide you with a steady income. Even though this is a stable option, it does not go without some risk. As interest-rates go up or down, the prices of income fund shares, particularly bonds, will move in the opposite direction. This makes income funds interest rate sensitive. Some conservative bond funds may not even be able to maintain your investments' buying power due to inflation.

The most cautious investor should opt for the money market mutual fund which aims at maintaining capital preservation. The word preservation already indicates that gains will not be an option even though the interest rates given on money market mutual funds could be higher than that of bank deposits. These funds will pose very little risk but will also not protect your initial investments' buying power. Inflation will eat up the buying power over the years when your money is not keeping up with inflation rates. They are, however, highly liquid so you would always be able to alter your investment strategy.

Closed-End Funds

A closed-end fund has a fixed number of shares outstanding and operates for a fixed duration (generally ranging from 3 to 15 years). The fund would be open for subscription only during a specified period and there is an even balance of buyers and sellers, so someone would have to be selling in order for you to be able to buy it. Closed-end funds are also listed on the stock exchange so it is traded just like other stocks on an exchange or over the counter. Usually the redemption is also specified which means that they terminate on specified dates when the investors can redeem their units.

Open-End Funds

An open-end fund is one that is available for subscription all through the year and is not listed on the stock exchanges. The majority of mutual funds are open-end funds. Investors have the flexibility to buy or sell any part of their investment at any time at a price linked to the fund's Net Asset Value.

Index Funds and ETFs

Index funds have been available in the U.S. since the 1970s; ETFs were first traded in the U.S. in 1993. Although the number of index funds and ETFs are close, ETFs cover about five times as many indexes. Some of the newer ETFs track some indexes that are more appropriate for an ETF structure than for an index fund. Consequently, an investor might only be able to track an index by using ETFs because there are no index funds available that can track that same index

Costs

ETFs and index funds each offer advantages and disadvantages for managing the costs of the underlying assets. In some cases, the difference in fees might favor one over the other. Investors can buy no-load index funds without incurring any transaction costs. Investors buying ETFs will have to pay brokerage commissions.

Tax Efficiency

capital gains that have to be distributed to the unit holders. (To learn more, read An Inside Look At ETF Construction.)

Dividends

The nature of ETFs requires them to accumulate dividends or interest received from the underlying securities until it is distributed to shareholders at the end of each quarter. Index funds invest their dividends or interest income immediately. (For more insight, read Advantages Of Exchange-Traded Funds.)

Rebalancing

An investor with a portfolio of index funds or ETFs occasionally rebalances the portfolio, selling some of the positions and purchasing others. A portfolio containing ETFs incurs commissions by buying and selling the ETFs. Because the investor typically trades in board lots, getting the exact weightings of each ETF desired is practically impossible. This is especially true for small portfolios. With index funds, an investor can achieve exact asset allocation weightings because the

investor can purchase fractional units. No-load funds have no transaction costs. (For more on this topic, read Rebalance Your Portfolio To Stay On Track.)

Dollar-Cost Averaging

The technique of using ETFs for dollar-cost averaging - spending a fixed dollar amount at regular intervals on a portfolio - is generally impractical. The commission costs and the extra cost involved in buying odd-lot shares makes this strategy very expensive to implement. Mutual funds are a more suitable investment vehicle for dollar-cost averaging.

Liquidity

A lack of liquidity on some ETFs, resulting in an increase in the bid-ask spread, adds to the cost of trading ETFs. Also, the less popular ETFs are not likely to have the same arbitrage interest of other ETFs, resulting in a potentially larger difference between market prices and net asset value (NAV). Investors in index funds can always get the NAV at the end of the day.

Q.8 what do you mean by portfolio management ? how you can evaluate performance of a portfolio of mutual fund?Answermanaging portfolios andassociated financial risk (for example, within large financial firmsincluding investment banks and stockbrokers). Some balance sheet items are much easier to value than others.Publicly traded stocks and bonds have prices that are quoted frequentlyand readily available. Other assets are harder to value. For instance,private firms that have no frequently quoted price. Additionally, financialinstruments that have prices that are partly dependent on theoreticalmodels of one kind or another are difficult to value. For example, optionsare generally valued using the Black-Scholes model while the liabilitiesof life assurance firms are valued using the theory of present value.Intangible business assets, like goodwill and intellectual property, areopen to a wide range of value interpretations. It is possible and conventional for financial professionals to make theirown estimates of the valuations of assets or liabilities that they areinterested in. Their calculations are of various kinds including analysesof companies that focus on price-to-book, price-to-earnings, price-tocash

flow and present value calculations, and analyses of bonds that focus on credit ratings, assessments of default risk, risk premium and levels of real interest rates. All of these approaches may be thought ofas creating estimates of value that compete for credibility with theprevailing share or bond prices, where applicable, and may or may notresult in buying or selling by market participants. Where the valuation isfor the purpose of a merger or acquisition the respective businessesmake available further detailed financial information, usually on thecompletion of a Non-disclosure agreement. Investing in mutual funds has an inherent risk assumed upon the ownership. However, performance of the mutual funds can be quantified with the mathematical calculation of the historical returns. The correlation of the potential risk and the potential returns constantly put forth the opportunities to invest in mutual funds and drive maximum potential returns with minimum underlying risk.

Risk adjusted returns

Risk adjusted returns are the calculative returns your funds make compared to the risk indicated over the period of time. If compared, a couple of mutual funds which drive the same percentage of returns over the same period of time, the lesser risk funds have a higher Risk Adjusted Returns.

Benchmark

Benchmarking is the measurement of quality of the funds against the standard measurements. It is a point of reference compared to the funds peer markets. Irrespective of the objectives of investment in mutual funds, benchmark helps you gauge the performance of your investment against the market competition. Considering historical returns against the market conditions will help you determine the relevance of the performance benchmark for your investments. However, historical return is not a reliable indicator of future results.

Relative Performance with peers

Relative performance with peers is a yardstick of the effectiveness of your mutual fund of the same category. Mutual Funds actively try to top the ranking of the fund universe. Intended towards a higher return for the determined period of value learning, the relative peer performance is recommended

Quality of stocks in the portfolio

Quality of stocks in the portfolio is reflected in its ability to drive superior returns on capital invested for a specific period of time. It is wise to check the industry leadership position of the mutual fund. Quality of the stocks in the portfolio would reflect in returns hence in the performance. Qualitative statistics and historical performance of mutual funds would help evaluating the performance.

Track record and competence of the fund manager

Your fund manager is an important person who makes investment decisions and stock selection in the portfolio. Understand your fund manager’s competence according to his/her fund management knowledge and ability. Your fund manager’s past performance would be a good parameter to track his/her record and could turn to be of a great value for your investments.

CASE STUDY The US-64 Controversy

“They have cheated us. I am telling everyone to sell. If they are stupid and offering Rs 14.25 for paper worth Rs 9, why should I let go of the opportunity?”

- An unhappy US-64 investor in 1998.

CAN OF WORMS

In 1998, investors of Unit Trust of India's (UTI) Unit Scheme-1964 (US-64) were shaken by media reports claiming that things were seriously wrong with the mutual fund major. For the first time in its 32 years of existence, US-64 faced depleting funds and redemptions exceeding the sales. Between July 1995 and March 1996, funds declined by Rs 3,104 crore. Analysts remarked that the depleting corpus coupled with the redemptions could soon result in a liquidity crisis.

Soon, reports regarding the lack of proper fund management and internal control systems at UTI added to the growing investor frenzy. By October 1998, US-64's equity component's market value had come down to Rs 4200 crore from its acquisition price of Rs 8200 crore. The net asset value (NAV) of US-64 also declined significantly during 1993-1996 due to turbulent stock market conditions. A Business Today survey cited US-64's NAV at Rs 9.68. The US-64 units, which were sold at Rs 14.55 and repurchased at Rs 14.25 in October 1998, thus were around 50% and 47%, above their estimated NAV.

Amidst growing concerns over the fate of US-64 investors, it became necessary for UTI to take immediate steps to put rest to the controversy.

CREATING TRUST

UTI was established through a Parliament Act in 1964, to channelise the nation's savings via mutual fund schemes. This was done as in the earlier days, raising the capital from markets was very difficult for the companies due to the public being very conservative and risk averse. By February 2001, UTI was managing funds worth Rs 64,250 crore through over 92 saving schemes such as US-64, Unit Linked Insurance Plan, Monthly Income Plan etc. UTI's distribution network was well spread out with 54 branch offices, 295 district representatives and about 75,000 agents across the country.

The first scheme introduced by UTI was the Unit Scheme-1964, popularly known as US-64. The fund's initial capital of Rs 5 crore was contributed by Reserve Bank of India (RBI), Financial Institutions, Life Insurance Corporation (LIC), State Bank of India (SBI) and other scheduled banks including few foreign banks. It was an open-ended scheme , promising an attractive income, ready liquidity and tax benefits. In the first year of its

launch, US-64 mobilized Rs 19 crore and offered a 6.1% dividend as compared to the prevailing bank deposit interest rates of 3.75 - 6%. This impressed the average Indian investor who until then considered bank deposits to be the safest and best investment opportunity. By October 2000, US-64 increased its capital base to Rs 15993 crore, spread over 2 crore unit holders all over the world.

However by the late 1990s, US-64 had emerged as an example for portfolio mismanagement. In 1998, UTI chairman P.S.Subramanyam revealed that the reserves of US-64 had turned negative by Rs 1098 crore. Immediately after the announcement, the Sensex fell by 224 points. A few days later, the Sensex went down further by 40 points, reaching a 22-month low under selling pressure by Foreign Institutional Investors (FIIs). This was widely believed to have reflected the adverse market sentiments about US-64. Nervous investors soon redeemed US-64 units worth Rs 580 crore. There was widespread panic across the country with intensive media coverage adding fuel to the controversy.

DISTRUST IN TRUST

Unlike the usual practice for mutual funds, UTI never declared the NAV of US-64 - only the purchase and sale prices for the units were announced. Analysts remarked that the practise of not declaring US-64's NAV in the initial years was justified as the scheme was formulated to attract the small investors into capital markets. The declaration of NAV at that time would not have been advisable, as heavy stock market fluctuations resulting in low NAV figures would have discouraged the investors. This seemed to have led to a mistaken feeling that the UTI and US-64 were somehow immune to the volatility of the Sensex.

Following the heavy redemption wave, it soon became public knowledge that the erosion of US-64's reserves was gradual. Internal audit reports of SEBI regarding US-64 established that there were serious flaws in the management of funds.

Till the 1980s, the equity component of US-64 never went beyond 30%. UTI acquired public sector unit (PSU) stocks under the 1992-97 disinvestment program of the union government. Around Rs 6000-7000 crore was invested in scripts such as MTNL, ONGC, IOC, HPCL & SAIL.A former UTI executive said, “Every chairman of the UTI wanted to prove himself by collecting increasingly larger amounts of money to US-64, and declaring high dividends.” This seemed to have resulted in US-64 forgetting its identity as an income scheme, supposed to provide fixed, regular returns by primarily investing in debt instruments.

Even a typical balanced fund (equal debt and equity) usually did not put more than 30% of its corpus into equity. A Business Today report claimed that eager to capitalise on the 1994 stock market boom, US-64 had recklessly increased its equity holdings. By the late 1990s the fund's portfolio comprised around 70% equity.

While the equity investments increased by 40%, UTI seemed to have ignored the risk factor involved with it. Most of the above investments fared very badly on the bourses,

causing huge losses to US-64. The management failed to offload the equities when the market started declining. While the book value of US-64's equity portfolio went up from Rs 7,943 crore (June 1994) to Rs 13,627 (June 1998), the market value had actually declined in the same period from Rs 18,334 crore to Rs 10,029 crore. Analysts remarked that UTI had been pumping money into scrips whose market value kept falling. Raising further questions about the fund management practices was the fact that there were hardly any ‘growth scrips'from the IT and pharma sectors in the equity portfolio.

In spite of all this, UTI was able to declare dividends as it was paying them out of its yearly income, its reserves and by selling the stocks that had appreciated. This kept the problem under wraps till the reserves turned negative and UTI could no longer afford to keep the sale and purchase prices artificially inflated.

Following the public outrage against the whole issue, UTI in collaboration with the government of India began the task of controlling the damage to US-64's image.

RESTORING THE TRUST

UTI realised that it had become compulsory to restructure US-64's portfolio and review its asset allocation policy. In October 1998, UTI constituted a committee under the chairmanship of Deepak Parekh, chairman, HDFC bank, to review the working of scheme and to recommend measures for bringing in more transparency and accountability in working of the scheme.

US-64's portfolio restructuring however was not as easy as market watchers deemed it to be. UTI could not freely offload the poor performing PSU stocks bought under the GoI disinvestment program, due to the fear of massive price erosions after such offloading. After much deliberation, a new scheme called SUS-99 was launched.

The scheme was formulated to help US-64 improve its NAV by an amount, which was the difference between the book value and the market value of those PSU holdings. The government bought the units of SUS-99 at a face value of Rs 4810 crore. For the other PSU stocks held prior to the disinvestment acquisitions, UTI decided to sell them through negotiations to the highest bidder. UTI also began working on the committee's recommendation to strengthen the capital base of the scheme by infusing fresh funds of Rs 500 crore. This was to be on a proportionate basis linked to the promoter's holding pattern in the fund.

The inclusion of the growth stocks in the portfolio was another step towards restoring US-64's image. Sen, Executive Director, UTI said, “The US-64 equity portfolio has been revamped since June. During the last nine months the new ones that have come to occupy a place among the Top 20 stocks from the (Satyam Computers, NIIT and Infosys) and FMCG (HLL, SmithKline Beecham and Reckitt & Colman) sectors. US-64 has reduced its weightage in the commodity stocks (Indian Rayon, GSFC, Tisco, ACC and Hindalco.)”

To control the redemptions and to attract further investments, the income distributed under US-64 was made tax-free for three years from 1999. To strengthen the focus on small investors and to reduce the tilt towards corporate investors, UTI decided that retail investors should be concentrated upon and their number should be increased in the scheme.

UTI also decided to have five additional trustees on its board. To enable trustees to assume higher degree of responsibility and exercise greater authority UTI decided to give emphasis on a proper system of performance evaluation of all schemes, marked-to-market valuation[5] of assets and evaluation of performance benchmarked to a market index. The management of US-64 was entrusted to an independent fund management group headed by an Executive Director. UTI made plans to ensure that full responsibility and accountability was achieved with support of a strong research team. Two independent sub-groups were formed to manage the equity and debt portion of US-64. An independent equity research cell was formed to provide market analysis and research reports.

TABLE IHOW THINGS WERE SET RIGHT

• PSU shares were transferred to a special unit scheme (SUS'99) subscribed by the government in 1998-99.• Core promoters such as the Industrial Development Bank of India added around Rs 450 crore to the unit capital, thus helping to bridge the reserves deficit of Rs 2,800 crore in 1998-99.• Portfolios were recast in the current quarter to capitalise on the stock surge as the BSE Sensex rose by 15%. Greater weightage was given to stocks such as HLL, Infosys, Ranbaxy, M&M and NIIT.• In US-64's case exposure to IT, FMCG and Pharma stocks rose from 20.45% to 22.09%. This was replicated across funds. Between June 1999 - September 1999, 21 out of UTI's 28 schemes have outperformed the Sensex.• UTI has become more proactive in fund management. For instance, it bought into Crest at between• Rs 200 and Rs 210 in October 1999. The stock was trading at Rs 340 in November 1999.• Stocks like Visual Software, Mastek and Gujarat Ambuja have entered the top 50 equity holding list. Scrips like Thermax, Thomas Cook and Carrier Aircon are out.• Complete exit from illiquid stocks such as Esab Industries. The divesture of around 83 stocks released estimated Rs 300-500 crore of extra investible cash.

Source: Business World, November 29, 1999.

UTI constituted an ad-hoc Asset Management Committee with 7 members comprising 5 outside professionals and 2 senior UTI officials. The committee's role was clearly defined and its scope covered the following areas:

• To ensure that US-64 complied with the regulations and guidelines and the prudential investment norms laid down by the UTI board of trustees from time to time.

• To review the scheme's performance regularly and guide fund managers on the future course of action to be adopted.

• To oversee the key issues such as product designing, marketing and investor servicing along with the recommendations to Board of Trustees.

One of the most important steps taken was the initiative to make US-64 scheme NAV driven by February 2002 and to increase gradually the spread between sale and repurchase price. The gap between sale and repurchase price of US-64 was to be maintained within a SEBI specified range. UTI announced that dividend policy of US-64 would be made more realistic and it would reflect the performance of the fund in the market. US-64 was to be fully SEBI regulated scheme with appropriate amendment to the UTI Act.

The real estate investments made by UTI for the US-64 portfolio were also a part of the controversy as they were against the SEBI guidelines for mutual funds. UTI had Rs 386 crore worth investments in real estate. UTI claimed that since its investments were made in real estate, it was safe and it could sell the assets whenever required. However, the value of the real estate in US-64's portfolio had gone down considerably over the years. The real estate investments were hence revalued and later transferred to the Development Reserve Fund of the trust according to the recommendations of the Deepak Parekh committee.

By December 1999, the investible funds of US-64 had increased by 60% to Rs 19,923 crore from Rs 12,433 crore in December 1998. The NAV had recovered from Rs 9.57 to Rs 16 by February 2000 after the committee recommendations were implemented

DEAD END SCHEME?

Though UTI started announcing the dividends according to the market conditions, this was not received well by the investors. They felt that though the dividend was tax-free, it was not appealing as most of the investors were senior citizens and they did not come under the tax bracket.

The statement in media by UTI chairman that trust would try to attract the corporate investors into the scheme was against the recommendation by the committee, which had adviced the trust to attract the retail investors into the scheme. This led to doubts about UTI's commitment towards the revival of the scheme.

However, led by improving NAV figures and image-building exercises on UTI's part, by 2000, US-64 was again termed as one of the best investment avenues by analysts and market researchers. UTI had become more proactive in fund management with its scrips

rising in value, restoring the confidence of the small investor in the scheme. The National Council of Applied Economic Research (NCAER) and SEBI surveys mentioned that US-64 was once again perceived as a safe investment by the middle class income groups.

However, the euphoria seemed to be short lived as in 2001, US-64 was involved in yet another scam due to its investments in the K-10 stocks . Talks of a drastically low NAV, inflated prices, increasing redemption and GoI bailouts appeared once again in the media. An Economic Times report claimed that there was a difference of over Rs 6000 crore between the NAV and the sale prices. Doubts were raised as to US-64 being an inherently weak scheme, which coupled with its mismanagement, had led to its downfall once again.

This however, was yet another story.

Source:www.icmrindia.org

QUESTIONS FOR DISCUSSION:

1. Explain in detail the reasons behind the problems faced by US-64 in the mid 1990s. Were these problems the sole responsibility of UTI? Give reasons to support your answer.

2. In 1998, the reserves of US-64 had turned negative by Rs. 1098 crore. Because of which the SENSE dropped heavily and increased selling pressures from Foreign Institutional Investors (FII). This resulted in decline in trust among investors and few nervous investors redeemed US-64 units worth Rs.580 crore. The reasons behind these problems were:

3.  4. a)High investment in Equity Stock:5. As a disinvestment plan of the union government, UTI invested huge sum

of money in public sector unit (PSU) such as MTNL, ONGC, IOC, HPCL and SAIL. The portion of equity in the portfolio of US-64 was around 30% in 1980s which increased to around 70% in 1990s. US-64did not take account the requirement of the small investors who wanted fixed, regular return swhich is generally achieved through investment in debt instrument.

6.7. b) Mismanagement of funds 8. The investment made on those stocks did not yield high return because

market value of the stock declined sharply and they did not off load the equities when the market started declining. More than that, the stock on which UTI invested was not growth stock rather they were injecting money on the stock whose value was declining. This practice raised question about further scam inside UIT .

9. c) Rules and regulation The investment details of UTI were kept very secret and NAV figures were not revealed. These gave huge opportunities to the management of US-64 to easily manipulate the funds to gain in short term. All the management was very keen to show short term gain to US-64, which made them mismanage the fund. The chairman of US-64 has an arbitrary power to personally decidean investment up to a huge Rs. 40 crore. Such liberalization was tailor-made for frauds.

10. Yes, I think these problems are the sole responsibility of UTI, because the improper fund management was the major issue regarding this problem. UTI invested largely in equity market instead of debt market, to offer high dividend to the investors. And even during the crisis period, UTI kept on giving dividends from its reserves, yearly income and sale of appreciated stocks. UTI had kept the sale and purchase price artificially inflated by injecting more and more money into its equity based portfolio.

11. Analyse the steps taken by UTI to restore investor confidence in US-64. Comment briefly on the efficacy of these steps.

AnswerSteps taken by UTI to restore investor confidence are:

A-Selling PSU stocks through negotiations to the highest bidder.B-Forming a committee to review and recommend members to increase transparency and accountability under the chairmanship of Dipak Parekh (chairman of HDFC) C-Using fresh funds to strengthen the capital base (around Rs 5 billion) D-Freeing tax in incomes for the next three years to attract more investors. E- Emphasizing on performance evaluation of all schemes. F-Formation of two independent groups to manage equity and debt portfolio

12. As a market analyst, would you term US-64 a safe mode of investment? Justify your stand with reasons.

Answer As a market analyst, I would not term US-64 as a safe mode of investment rather I would instruct investors tosell their US-64 units at least enough to break even on his investment in the scheme. Following are the reasonsto support my stand: They should sell the units enough to make them break even and hold on to left over units such that ifUTI sees any improvement in future the investors can make money out of it. UTI is repurchasing itsunits at Rs. 14.25 where as its book value is worth only Rs. 9. Hence, the investors should sell its unitsto UTI so that they can get Rs. 14.25 per unit. At present, for every buy back, UTI is actually incurring loss of Rs. 5.25. In addition to this, to paythe dividend of around 10 – 20 %, US-64 has to dip into its reserves. If the Sensex dips down, then thewhole reserve will deplete, which will put UTI again in crisis.Provided the current scenario, UTI might skip paying dividends later year to preserve the reserves,without the dividends there is no point in holding on to or purchasing units of US-64. UTI has been very reluctant to become NAV driven Mutual Fund and also has not made public itsinvestment strategies and actual NAV. Due to this, there is high chance that the top management mayagain involve in some fraud and government would again interfere and introduce yet another bail-outpackage to save UTI. There is high possibility that the repurchase price of US-64 units may not be same at current level of15.25 rather there is high chance that the repurchase price may fall in future.

Case SummaryTo conclude the whole case, US-64 was a money attracter, as it was able to attract money from retail investors as well as corporate investors since it was backed by government and was thought that Sensex had less effecton the price

of mutual fund schemes. But because of its non-transparent policies and involvement of huge money, top directors were involved in scam such as investing too much on non-growth stocks (directors were alleged of promoting those shares by taking bribes from those scrips), and involvement in K-10 case. These scams made government to interfere on the management of mutual funds and come up with bail-out packages to save the investors. It showed rays of hopes after taking many restructuring efforts by the government but still the faith was shaken with involvement on other high financial scams. At this point of time it was suggested that unit holders should sell its units to fund at least to make break even on their investment. Had the US-64 been based on NAV from the beginning, the situation would have come up in the surface at all. This case was a perfect example of effect of dividend policies, mismanagement of portfolio, effect of rulesand regulations, and involvement of top directors in financial scam.

ASSIGNMENT –CMULTIPLE CHOICE QUESTIONS

1. A systematic withdrawal plan is ideal for investors who a. Seek growth as the main objectiveb. Wish to benefit from market fluctuationsc. Prefer a regular income streamd. Not sure about themselves

2. Gilt funds invest ina. IT sectorb. AAA securitiesc. Money market securitiesd. Government bonds

3. Which of the following is recommended by Bogle for older investors in accumulation stage?a. 50% in equity and 50% in debtb. 60% in equity and 40% in debtc. 70% equity and 30% debt

d. 40% equity and 60% debt

4. Illiquid securities in a portfolioa. Cannot be transferred across schemesb. Cannot be more than 15% of net assetsc. Cannot be more than 20% of net assetsd. a and b are truee. a and c are true

5. Which of the following cannot invest in mutual funds?a. NRIsb. Charitable trustsc. FIIsd. Foreign investors

6. Which of the following is true for assured return schemes?a. Name and net worth of guarantor to be givenb. Performance of past assured return schemes to be givenc. Whether assurance in earlier scheme was met to be stated d. All of the above

7. Your friend in Dubai wants to invest in a mutual fund. She should be advised to reada. Trust deedb. SEBI regulationsc. Offer documentd. AMC balance sheete. All of the above

8. While deciding on asset allocation, an investor must consider a. The stage of his lifeb. The purpose of making investmentc. His risk appetited. All of the above

9. Mutual funds should be recommended asa. Investments to achieve long term goalsb. A get-rich quick option c. Investments to take advantage of stock marketd. All of the above

10. A fund manager who believes in the growth philosophy looks for companies witha. Above average earnings growthb. Large equity base

c. Likely to go for public issued. All of the above

11. An open ended fund can change its fundamental attributes by a. Allowing investors to exit after 6 monthsb. Allowing investors to exit at NAV without a loadc. With consent of 75% of investorsd. None of the above

12. Which of the following is not a SRO?a. BSEb. NSEc. AMFId. None of the above

13. Which of the following do not provide a guarantee on capital?a. PPFb. NSCc. Post office depositsd. Units of mutual funds

14. Which are the benchmarks used to evaluate fund performancea. Return on benchmarks like S&P and Sensexb. Return on other fundsc. Return on comparable instrumentsd. All of the above

15. Mutual funds can borrow:a. upto 25% of net assetsb. upto 20% of net assetsc. For period not exceeding 6 monthsd. Both a and ce. Both b and c

16. The second mutual fund to be set up in India after UTI wasa. Canbank Mutual Fundb. Kothari Pioneer Mutual Fundc. Morgan Stanley Mutual Fundd. SBI Mutual Fund

17. The following is the fund you would advice to an investor who wants to invest for one yeara. A debt fund with expense ratio of 1.15% and a entry load of 2% b. A debt fund with expense ratio of 1.2% and a entry load of 2.5% c. A debt fund with expense ratio of 1.5% and an entry load of 4%d. A debt fund with expense ratio of 0.5% and entry load of 3%

18. Mutual funds are described as ____ in the SEBI Regulations, 1996 a. Companies b. AMCsc. Trustsd. Agencies

19. What proportion of a mutual funds trustees have to be independent form the sponsor?a. 50%b. 2/3rd of trusteesc. 3/4th of the trusteesd. 60% of the trustees

20. Which of the following cannot be distributors of a mutual funda. Sponsorb. Associate of sponsorc. Associate of AMCd. Employees of AMC

21. Stock exchange can act as regulators of:a. SEBI registered mutual fundsb. Closed end funds listed on the exchangec. All sectoral fundsd. All equity mutual funds

22. A mutual fund cannot invest more than_____% of its net assets in un-rated debt of one issuer. Total investments in un-rated debt cannot exceed ____% of net assets.a. 10; 20b. 15; 25c. 10; 25d. 15; 20

23. Which of the following is an ideal allocation for a wealth preserving affluent investor?a. 50% equity; 50% debtb. 70% equity; 30% debtc. 30% equity; 70% debtd. 100% equity

24. If a 8% bond with face value of Rs. 1,000 is selling for Rs. 1,100 what is the current yield?a. 8%b. 7.27%

c. 7.8%d. 8.2%

25. If you maintain a flexible asset allocation you woulda. Rebalance debt and equity periodicallyb. Rebalance debt and equity frequentlyc. Generally avoid portfolio re-balancingd. Keep fixed percentage in debt and equity at all times.

26. Which of the following will NOT require financial planning?a. A 40 years old doctor with substantial savingsb. A retiree who is currently getting an income of 4,000 but would want

Rs. 10,000 a monthc. An old person wanting to transfer all his wealth to his grandchildrend. A young professional aged 26 years

27. What is the portfolio you will recommend to a young couple with two incomes and two children?a. 10% money market; 30% aggressive equity; 25% diversified equity;

35% bond fundsb. 40% aggressive equity; 30% money market; 30% bond fundc. 60% equity; 30% money market; 10% debtd. 70% bond funds; 30% equity funds

28. Financial planning is:a. Investing funds to achieve a highest possible rate of returnb. Resorting to tax planning to keep taxes as low as possiblec. Planning for retirement with maximum income possible d. Process of solving financial problems and reaching financial goals

29. You have just won a huge sum in a lottery. What should you ideal allocation be?a. Invest everything in sectoral funds, as NAV is very low.b. Invest in government bonds, as risk is low.c. Invest in money market funds and decide over the next few monthsd. Consider the impact of taxe. Both c and d

30. Which of the following is true for closed end funds?a. The fund offers buy and sell units at NAVb. The corpus of the fund is constant c. The net assets of fund does not changed. None of the above

31. Which of the following represents the transition phase?a. Investor has no need for investment income

b. Investor has a long term horizonc. Investor cannot take risksd. Investor’s financial goals are approaching.

32. P/E of which of these stocks is usually high?a. Value stocksb. Cyclical stocksc. Small cap stocksd. Growth stocks

33. If an AMC does not resolve in investor’s complaint, investor can appeal to:a. SEBIb. Ministry of Financec. Office of the public trusteed. Company Law Board

34. Mutual funds can lend funds in the form of a. Loansb. Promissory notesc. Securitiesd. None of the above

35. An offer document of an open ended fund has to be reviseda. Once in 3 yearsb. Not at allc. Every yeard. Once in two years

36. A FII can invest in a mutual fund through itsa. Non resident external accountb. Non resident ordinary accountc. Non resident rupee accountd. RBI current account

37. You invest Rs. 25,000 in a mutual fund. After 2 years you redeem your units at Rs. 32, 000. Ignoring indexation and surcharges, what is the capital gain tax on this transaction?a. Rs. 7,000b. Rs. 700c. Rs. 1,400d. Depends on the marginal rate of taxation

38. If a fund’s NAV is Rs. 12, what is the maximum sale price it can charge, according to SEBI regulations?a. Rs. 12.70b. Rs. 12.84

c. Rs. 13.68d. Rs. 11.16

39. Debt securities with less than 182 days to maturity are valued at a. Face valueb. YTM basisc. Accrual basisd. Duration basis

40. If a scheme holds more than 15% in illiquid securities, all securities above that limit have toa. Be valued at book valueb. Be valued at a discount of 25% c. Valued at cost priced. Assigned a value of zero

41. Ex-Marks of an equity fund measures itsa. performanceb. Riskc. Both the aboved. None of the above

42. Which of the following is untrue of an automatic reinvestment plan?a. The plan allows for automatic reinvestment of all income and capital

gainsb. Automatic reinvestment allows for accumulation of additional units of

the fundc. The major benefit of automatic reinvestment is compounding d. The benefit of automatic reinvestment is often lost on account of the

heavy load charge on the reinvestment

43. Retired investors shoulda. Not draw down on their capitalb. Not invest in securities which bear risk of capital erosionc. Continue holding a major portion of their holding in equity growth

fundsd. Never invest in equity

44. A criticism of rupee-cost averaging isa. Investment is for the same amount at regular intervals

b. Over a period of time, the average purchase price will work out lower than if one tries to guess the market highs and lows

c. It does not tell you when to but, sell or switch from one scheme to another

d. Rupee cost averaging has no serious shortcomings

45. A 55 year old investor, who is employed and earning well, can be said to be ina. Accumulation stageb. Transition stagec. Distribution staged. Inter-generational wealth transfer stage