AMIT BACHHAWAT TRAINING FORUM SEBI PAST UNCOMMON QUESTIONS OF JUNE 16/DEC 15

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1 AMIT BACHHAWAT TRAINING FORUM SEBI PAST UNCOMMON QUESTIONS OF JUNE 16/DEC 15 Question 1 (a) Massive Ltd. Came out with its IPO in November,2015 and offered shares of Rs.10 each at Rs.450 charging a premium of Rs.440. Shyam applied for 1,000 shares which had been allotted.on the last day, closing share price was Rs.418 and he was very upset about it. He looked at the prospectus of the company and found that company s IPO was not graded. So, he filed a complaint with SEBI stating that the company should be asked to refund the money to investors.assume that you are working with the SEBI,will you suggest that the said issue should be cancelled as there has been violation of SEBI rules and regulations.give your answer with reasons. (5 marks) Ans. IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI,to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity a shares at a later date.regulation 26(7) of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations,2009 provides that an issuer making an initial public offer may obtain grading for such offer from one or more credit rating agencies registered with the Board. A company cannot make an initial public offer,unless as on the date of registering prospectus or redherring prospectus with the Registrar of Companies, the issuer has obtained grading for the initial public offer from at least one credit rating agency registered with SEBI.This means IPO grading is mandatory for making an IPO. However,in February,2014 SEBI as above,the issue should not be cancelled for not taking grading for the issue. (b) Prime Ltd. Issued some warrants which allowed the holders to purchase, with one warrant,one equity share at Rs per share. The equity share was quoted at Rs.25 per share and the warrant was selling at Rs In this case, you are required to compute (4 marks) (i)the minimum price of warrant; and (ii) The warrant premium. Ans. (i) Minimum Price of warrant =(Market price of equity share Exercise price)x Exercise ratio (Rs.25 Rs18.275)x1.00=Rs (ii)warrant Premium=Market price of warrant Minimum price of warrant =Rs.9.50-Rs.6.725=Rs.2.77 (c) Manish owns 250 preference shares of Amaze Ltd. Which currently sells for Rs.77 per share and pays annual dividend of Rs.13 per share- (i) What is Manish s expected return- (ii) If Manish requires 13 % return, should he sell or buy more preference shares at the current price? (4 marks) Ans. (i) Expected return=dividend / Market Price =Rs.13/Rs.77=16.88 % (ii)given 13% return the stock is worth; Dividend/Required rate=13/.13=100 As the expected rate of % is greater than the required rate of return of 13 %, and the current market price of Rs.77 is less than Rs.100,the stock is undervalued and therefore,manish should buy more shares (d) A company is planning to issue deep discount bonds. As a financial advisor, you are required to suggest two important terms and conditions of issuing the said bond so as to minimize risk of the issuing company.

2 Ans. The following are the two important terms and conditions of issuing deep discount bond by a company; (i)the company or the person in control, or its promoter,has not been restrained or prohibited or debarred by SEBI from accessing the securities market or dealing in securities and such direction or order is in force. (ii)it has been made an application to one or more recognized stock exchanges for listing of such securities therein and if the application is made to more than one recognized stock exchanges,the issuer must choose one of them which has nationwide trading terminals as the designated stock exchange and it has obtained inprinciple approval for listing of its debt securities. Jai Ltd. Announced issue of bonus shares in the ratio of 1:3 (i.e., one share for every three shares held). At present the face value of share is Rs.10, current market price is Rs.621. In addition, it announced split of shares by reducing the face value from Rs.10 to Rs.2. Calculate the share price if all other things remain constant. What would have been the situation if split would have been done before the issue of bonus shares? (5 marks) (Dec 2015) When a share is split, there is no change in the value of share capital but only the face value of the shares and the number of shares will increase / decrease. In case of bonus issue, there would be an increase in the share capital and also the number of shares. On split of the shares from Rs.10 to Rs.2, total number of shares will be increased 5 times. On issue of bonus shares before split the market price of each share will change to 621 x ¾ = Rs If the split is made before the issue, the share price would be Rs /5 = Rs If the split is made before the issue, the share price would be Rs.621/5 = Rs Thereafter, Bonus share are issued at 3:1 (i.e. one share for every three shares held) Market Value of shares = x ¾ = Rs Hence,we can say, Splitting of Shares before or after or after issue of bonus shares do not have any impact on the price of the share. Benchmarked instruments and pure instruments. (2 marks) (Dec 2015) Benchmarked instruments There are certain debt instruments wherein the fixed the income earned is based on a benchmark. For instance, the floating Interest rate Bonds are benchmarked to either the LIBOR, MIBOR etc. Floating rate of interest simply means that the rate of interest is variable. A bond is considered indexed for inflation if the payments on the instruments are indexed by reference to the change in the value of a general price or wage index over the term of the instrument. Pure Instruments-Equity Shares, preference shares and debentures / bonds which were issue with their issued with their basic characteristics in tact without mixing features of other classes of instruments are called pure instruments.

3 Question Explain the Participants in the money market. (3 marks) (Dec 2015) There is large number of participants in the money market. They are:- (a) Government The government is the biggest player of the money market and is the biggest borrower of the money market. (b) Banks- The banking industry is another dominant player of the money market. They mobilize deposits and utilize the same for credit accommodation. (c) Financial Institutions - They undertake lending and borrowing of short term funds. The financial institutions do not have a very significant impact on the money market due to their large volumes. (d) Corporate Corporates raise short-term funds for meeting their working requirements when they transact in the money market. Other institutional players like mutual funds, foreign institutionals investors, etc. also transact in the money market. Other institutional players like mutual funds, foreign institutional investors, etc. also transact in the money market. Is there any advertisement code for mutual funds? Comment. (6 marks) (Dec 2015) Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 provides for advertisement code. The Advertisement code clauses are (a) Advertisements shall be accurate, true, fair, clear, complete, unambiguous and concise. (b) Advertisements shall not contain statements which are false, misleading, biased or deceptive, based on assumption / projections and shall not contain any testimonials or any criteria. (c) Advertisements shall not be so designed as likely to be misunderstood or likely to disguise the significance of any statement. Advertisements shall not contain statements which directly or by implication or by omission may mislead the investor. (d) Advertisement shall not carry any slogan that is exaggerated or unwarranted or slogan that is inconsistent with or unrelated to the nature and risk and return profile of the product. (e) No celebrities shall from part of the advertisement. (f) Advertisements shall not be so framed as to exploit the lack of experience or knowledge of the investors. Extensive use of technical or legal terminology or complex language and the inclusion of excessive details which may detract the investors should be avoided. (g) Advertisements shall contain information which is timely and consistent with the disclosures made in the scheme information document, Statement of Additional Information and the Key Information Memorandum. (h) No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons. (i) Advertisements shall be accompanied by a standard warning in legible fronts which states,,mutual Fund investments are subject to market risks, read all scheme related documents carefully. No addition or deletion of words shall be made to the standard warning.

4 In capital market, a trustee is having a number of rights and obligations. Is it correct? Describe the rightsand obligations of a trustee. (6 marks) (Dec 2015) The trustees play a pivotal role in management of the capital market. Yes in capital market, a trustee is having a number of rights and obligations. The following are the rights and obligations of trustees in capital market: (a) To satisfy himself that the property for which trustee is appointed does not contain any matter which is inconsistent with various provisions governing the capital market? (b) To satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the security holders. (c) To call for periodical status or performance reports. (d) To communicate promptly in case of defaults, if any, with regard to payment of dues. (e) To ensure that the settler does not commit any breach of the terms or covenants of the trust deed and take such reasonable steps as may be necessary to remedy any such breach. (f) To inform the settler immediately of any breach of the terms or covenants of the trust deed. (g) To ensure the implementation of the conditions regarding creation of security, if any, (h) To ensure that the assets of the settler and the guarantors, if any, are sufficient to discharge the interest and principal amount at all times and that such assets are free from encumbrances except those which are specifically agreed to by the parties. (i) To do such acts as are necessary in the event the security becomes enforceable. (j) To perform such acts as are necessary for the protection of the interest of the security holders and do all other acts as are necessary to resolve the grievances of the security holders. What do you understand by alternative investment fund? How they are different from mutual funds? (3 marks) (Dec 2015) Alternative investment fund means any fund established in India in the form of a trust, company, limited liability partnership or a body corporate which:- (I)Is a privately pooled investment vehicle that collects funds from investors, whether Indian or Foreign, for investing it in accordance with a defined investing policy for the benefit of its investors ; and (ii)is not covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of SEBI, which aims to regulate fund management activities. They differ from Mutual Funds in the following manner: (a) Mutual Fund is a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document while Alternative investment fund is a private fund not opened to the general public. (b) Mutual fund issues units to the investors in accordance with quantum of money invested by them whereas Alternative investment fund does not issue any units. (c) Investors of mutual funds are known as unit holders where as Alternative investment fund investors are known as owners. (d) The profits or losses are shared by the investors in proportion to their investments where as in Alternative investment fund the profits and losses are shared in the agreed ratio by the investors. (e) The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time whereas in Alternative investment fund there is one main purpose for which the fund is created. (f) A mutual fund is required to be registered with SEBI which regulates securities markets before it can collect funds from the public whereas Alternative investment fund is not covered under any SEBI regulations.

5 Somnath Ltd. Has a share capital of 50,000 equity shares of Rs.100 each. Market Value is Rs.250 per share. The company decides to make a rights issue to the existing shareholders in proportion of one new rights share of Rs.100 at a premium of Rs.30 per share for every 5 shares held. Calculate the value of rights. (6 marks) Value of Rights = = Fair Value of Share immediately prior to exercise of rights+proceeds from exercise of rights (250 x 50,000)+ (50,000 5 X 1 X 130) 50,000+10,000 No.of shares outstanding after the rights issue = Rs.250 Value of Rights= = Rs.20 Internal audit of stock brokers (4 marks) Sebi has authorized the Practicing Company Secretary to carry out complete internal audit of stock brokers on a half yearly basis by Chartered Accountants, company secretaries or cost and management accountants who are in practice and who do not have any conflict of interest.the scope of such audit covers, inter alia,the existence,scope and efficience of the internal control system, compliance with the provisions of the SEBI ACT,1992,Securities Contracts (Regulation) Act 1956, SEBI (Stock Brokers and Sub Brokers) Regulations, 1992, circulars issued by SEBI, agreements, KYC requirements, Bye Laws of the Exchanges, data security and insurance in respect of the operations of stock brokers /clearing members. The objective of internal audit are the following : (i)to ensure that the books of account, records (including telephone records and electronic records ) and documents are being maintained in manner required under SEBI Act, 1956 and SEBI (Stock brokers and Sub-brokers) Regulations, 1992 (ii)to ascertain as to whether adequate internal internal control systems, procedures and safeguards have been established and are being followed by the intermediary to fulfill its obligations within the scope of the audit. (iii)to ascertain as to whether any circumstances exist which would render the intermediary unfit or intelligible. (iv)to ascertain whether the provisions of the securities laws and the directions or circulars issued there under are being complied with. (v)to ascertain whether the provision of stock exchange bye-laws, notices,circulars,instructions or orders issued by stock exchanges are been complied with. (vi)to inquire into the complaints received from investors, clients, other market participants or any other person on any matter having a bearing on the activities of the stock broker.