CA FINAL

ELECTIVE PAPER 6B: FINANCIAL SERVICES AND

CAPITAL MARKET

Case Study
ABC Ltd. is a global leader in technology services and consulting. It has enable clients in
45 countries to create and execute strategies for their digital transformation. From
engineering to application development, knowledge management and business process
management, it helps their clients find the right problems to solve, and to solve these
effectively. Their team of 198,000+ innovators, across the globe, is differentiated by the
imagination, knowledge and experience, across industries and technologies that they
bring to every project they undertake.
Today, businesses operate in an unprecedentedly fluid environment. The technology
landscape is turning highly complex as it evolves to meet the demands of a competitive
marketplace and an experiential economy. At the same time, customers are increasingly
demanding simple, new, and convenient experiences.
ABC Consulting helps global corporations - in over 20 countries - develop unique
solutions to address their complex business challenges and create value through
sustainable innovation. As pragmatic consultants with an eye on execution, they help you
design and achieve market-leading performance roadmaps by combining creative thinking,
technology expertise, and global reach.
1. Details of Bonus Issue
The Company has allotted 1, 14, 84,72,332 fully paid-up equity shares of face value ` 5
each in June 2015 to the shareholders of the Company in proportion of 1:1 and
consequently, the number of shares increased from 1,14,84,72,332 to 2,29,69,44,664.
The Company allotted 57,42,36,166 fully paid up equity shares of face value ` 5 each in
December 2014 to the shareholders of the Company in proportion of 1:1 and
consequently, the number of shares increased from 57,42,36,166 to 1,14, 84,72,332.
It was on October 10, 2014, that the company had recommended a bonus issue of one
equity share for every equity share held (1:1 bonus issue).
It fixed December 3, 2014, as the record date for the purpose of allotment of bonus
shares / stock dividend.
The company has mentioned in the Board of Directors report that sufficient cash balance
has been kept by the company to meet its strategic objectives. The company presently
generates sufficient cash internally to finance all its operational, financing and investment
requirements.

© The Institute of Chartered Accountants of India 1

 Announcement date of Bonus Issue – 24/4/2015
Ex-Bonus Date – 15/6/2015
2. Questions:
(i) Determine the total number of subscribed shares of ABC Ltd. in November 2014.
(ii) Find out if there is any possibility of arbitrage opportunity both domestically and
internationally.
(iii) How market has reacted to the bonus announcement and what may be the reason
for the same.
(iv) Explain with reasons the effect of EPS on the Bonus Issue
(v) Discuss by referring to relevant regulations of SEBI the following:
(a) Board of Director’s meeting regarding bonus issue was held on 1 st April,
2015. Within what period the bonus issue shall be implemented. Also,
discuss the necessary approvals required in this respect.
(b) Basic earnings per share and diluted earnings per share are equal.
Discuss the reason for this effect.
(c) The company has decided to make a bonus issue. However, later it wants
to withdraw it. Can it do so?
(vi) Prices of ABC Ltd. on the Ex-Bonus date has been reduced drastically. What can
be reasons for this effect?
(vii) What does higher dividend payout on the part of ABC Ltd. indicates?
(viii) Whether it is feasible for the company to go for a buy-back offer? Discuss with
reference to the exhibits provided in the Case Study? What conditions will be
required to be fulfilled by ABC Ltd., if the company decides to go for the buyback?
Discuss with reference to SEBI Regulations.
(ix) What is the market price just before and after the ex-bonus date on both the stock
exchanges? Calculate P/E ratio considering closing prices just before and after
the ex-bonus date on both the stock exchanges and other figures as given in the
exhibit itself.
(x) Why the company is debt free? How the present capital structure of the company
is helping its cause?
(xi) What is the reason for company’s high cash reserves? What is the impact of high
cash holding?
(xii) Compute the financial ratios:
(a) Dividend Payout Ratio
(b) Net Foreign Earnings/ Earnings Ratio
(c) Research and Development Expenses/ Revenue Ratio
(d) Net Profit Ratio

© The Institute of Chartered Accountants of India 2

 3. Multi Choice Questions (MCQs)
(i) Ex-Bonus date is the date …………….
a) On which the share price is adjusted on stock exchanges.
b) On which the share price is decreased on stock exchanges.
c) On which the share price is increased on stock exchanges.
d) Which is before the record date.
(ii) Record Date is the ……………….
a) date on which company record the details of both the dividend payout and
bonus issue proceedings.
b) cut-off date fixed by a company to determine who is eligible to get bonus
shares.
c) date on which company record the details of bonus issue proceedings.
d) date fixed by a company to determine who has got the bonus shares of
the company.
(iii) Which among the following are the effects of Bonus Issue:
a) Share capital gets increased
b) Liquidity in the stock increases
c) Accumulated profits get reduced
d) All of the above
(iv) A listed company may issue bonus shares to its members if authorized by:
a) Memorandum of Association
b) Articles of Association
c) Both Memorandum and Articles of Association
d) None of the above
(v) The bonus shares shall be made out of
a) free reserves only
b) either free reserves or revaluation reserves
c) either free reserves or securities premium
d) either free reserves or revaluation reserves or capital reserves
(vi) In case if Rupee further depreciates vis-à-vis US $ in the beginning of the
year 2017 then the Net Profit of the company
a) is likely to increase for the fin year 2016-2017
b) is likely to decrease for the fin year 2016-2017
c) is likely to remain same for the fin year 2016-2017
d) is likely to increase for the fin year 2015-2016

© The Institute of Chartered Accountants of India 3

 Exhibit – 1
Balance Sheet
EQUITY AND LIABILITIES
Shareholders’ Funds 31st March, 2016 31st March, 2015
(In ` Crores) (In ` Crores)
Share capital 1,148 574
Reserve and Surplus 56,009 47,494
57,157 48,068
Non - Current Liabilities
Deferred tax liabilities (net) - -
Other long term liabilities 73 30
73 30
Current Liabilities
Trade Payables
Total outstanding dues of micro
Enterprises and small enterprises
Total outstanding dues of creditors
other micro enterprises and small
enterprises 623 124
Other current liabilities 6105 5546
Short term provisions 8809 8045
15,537 13,715
72,767 61,813
ASSETS
Non-Current Assets
Fixed Assets
Tangible assets 8248 7347
Capital work-in-progress 934 769
9182 8116
Non-current investments 11,111 6108
Deferred tax assets (net) 405 433
Long term loans and advances 5970 4378
Other non-current assets 2 26

© The Institute of Chartered Accountants of India 4

 Current Assets
Current investments 2 749
Trade Receivables 9,798 8,627
Cash and Cash Equivalents 29,176 27,722
Short term loans and advances 7,121 5,654
46,097 42,752
72,767 61,813
Relevant Profit and Loss details
Income from software services
And products (Turnover or Sales) 53,983 47,300
Profit for the year (Standalone) 15,786 12,164
Profit for the year (Consolidated) 13,678 12,372
Interim Dividend 2,297 1,723
Final Dividend 3,273 3,388
Total Dividend 5,570 5,111
Dividend Tax 1,134 1,034

Exhibit – 2

Details of Earning Per Share (EPS)

Earning per equity share 31 st March, 2016 31 st March, 2015 31 st March, 2014
Basic ` 68.73 ` 105.91 ` 178.39
Diluted ` 68.73 ` 105.91 ` 178.39
Number of shares used in computing earnings per share
Basic 2,29,69,44,664 1,14,84,72,332 57,14,02,566
Diluted 2,29,69,44,664 1,14,84,72,332 57,14,02,566

© The Institute of Chartered Accountants of India 5

 Exhibit 3

Details of Long term Liabilities

Particulars As at March 31,
2016 2015
(i) Gratuity obligation – unamortized amount relating - 3
to plan amendment.
(ii) Payable for acquisition of business 46 -
(iii) Rental deposits received from subsidiary 27 27
73 30

Exhibit 4

Research and development expenditure In ` Crore

2016 2015
Revenue expenditure 384 590
Capital expenditure 31 15
Total 415 605

Activity in foreign currency In ` Crore

2016 2015
Earnings 52,866 46,158
Expenditure 26,529 22,045
Net foreign exchange earnings (NFE) 26,337 24,113

© The Institute of Chartered Accountants of India 6

 Shareholding Pattern Exhibit 5

Category of Shareholder No. of shares at No. of shares at % of total No. of shares at the No. of shares at % of total % change
the beginning the beginning shares at the end (Demat) the end shares at during the
(Demat) (Physical) beginning (Physical) the end year at the
end
(A) Promoter and
Promoter group
Indian 15,02,15,636 13.11 29,28,06,199 12.77 (0.34)

Foreign Nil Nil

(B) Public Shareholding
Institutions
a) Mutual Funds 6,07,84,954 5.30 15,23,60,913 6.65 1.33
b) Banks/FIs 7,25435 0.06 10,88,363 0.05 (0.01)
c) Insurance Co. 11,19,10,924 9.77 24,74,20,991 10.79 1.02
d) FIIs 43,59,60,562 19,200 38.04 52,01,79,413 12,800 22.69 (15.35)
Non Institutions
a) Bodies corporate 92,55,388 25,600 0.81 1,76,76,850 51,200 0.77 (0.04)
b) Individuals
(i) individuals holding 6,45,97,620 9,83,912 5.64 11,17,72,259 7,37,345 4.88 (0.76)
nominal share capital upto
` 1 lakh

© The Institute of Chartered Accountants of India 7

ii) individuals holding 4,19,53,512 14,53,800 3.66 10,62,34,240 40,22,896 4.63 1.03
nominal share capital in
excess of ` 1 lakh
c) any other
• Foreign bodies – DR 4,85,371 0.04 2,15,185 0.01 (0.03)
• Foreign portfolio 5,86,37,491 5.12 40,40,52,549 17.63 12.51
investor
• NRI/OCB 1,75,52,821 3.205 1.53 3,49,74,684 6,410 1.53 (0.00)
• Trusts 78,32,920 0.68 1,80,14,430 0.79 0.11
(C) Shares held by 18,60,73,981 16.24 38,53,17,937 16.81 (0.61)
custodians for ADRs
Grand Total (A + B + C) 1,14,59,86,615 100 2,29,21,14,013 100 -

© The Institute of Chartered Accountants of India 8

 Exhibit – 6

Information regarding Share Prices at two leading Stock Exchanges - ESB and ESN for the month of June, 2015
(i) ESB:

Open Trade Number Of Traded

Price Date High Price Low Price Close Price
Price Value Trades Quantity

30-06-2015 993 993 983.1 985.35 129230976 4604 130902

29-06-2015 988 999 980 990.25 212449791 6250 214778

26-06-2015 995 1011.75 995 1006.1 178294230 4876 177156

25-06-2015 1000 1003 987.85 991.15 187042279 7375 187888

24-06-2015 1010 1013.4 991.6 995.1 152090723 6050 151837

23-06-2015 1025 1028 999.1 1001.15 220838190 7317 219714

22-06-2015 1009 1028.8 997.5 1024.4 191682161 6460 189597

19-06-2015 1005 1010.3 992.5 996.75 105756490 4277 105608

18-06-2015 1000.25 1005.95 996 1000.9 98427249 3690 98293

17-06-2015 1007 1020.4 993.3 995.8 201251242 7792 200684

16-06-2015 994 1002 985 999.45 123941839 4971 124572

© The Institute of Chartered Accountants of India 9

 15-06-2015 980 998.85 968.5 991.1 348704570 8291 352567

12-6-2015 2002 2024.5 1955.5 1976.65 730045102 11369 364406

11-6-2015 2035 2045 1997.05 2001.85 441009571 7132 219093

10-6-2015 2010 2039.7 1986 2026.2 213111531 5552 106086

9-6-2015 2013 2013 1985.1 1992.55 324305552 4726 162858

8-6-2015 2012 2020.25 1990 2000.25 112224311 5177 56073

5-6-2015 2039 2044 2009.15 2012.1 242291659 6928 119921

4-6-2015 2031 2056.6 2014.35 2028.05 176073740 6500 86442

3-6-2015 2020 2060 2008.25 2023.1 351489901 7107 174177

2-6-2015 2045 2054.8 2005.1 2008.8 279751806 6055 138784

1-6-2015 2030 2063 2023.3 2045.7 161866930 5558 79075

© The Institute of Chartered Accountants of India 10

(ii) ESN:

Close
Price Date Open Price High Price Low Price Trade Value Number Of Trades Traded Quantity
Price

30-06-2015 990 993.45 980 984.35 3065047324 71225 3106265

29-06-2015 987 999.5 982.5 990.15 2816829754 76492 2845334

26-06-2015 999 1011.6 998.1 1005.25 2675854600 63866 2660142

25-06-2015 999.2 1003.5 987.65 990.45 3536892263 75358 3558733

24-06-2015 1015 1015 991.2 995.1 3543930987 74881 3536847

23-06-2015 1025 1027.4 998.15 1000.4 3490994517 119559 3476058

22-06-2015 1004.9 1028.75 997 1023.85 2888003447 133708 2855434

19-06-2015 1010.3 1010.4 993.1 995.35 3331553919 97129 3335229

18-06-2015 1005.6 1007.95 995.8 1001.95 1740163420 40621 1737213

17-06-2015 1011 1021 992.2 995.7 3212615218 73928 3206034

16-06-2015 994.35 1003 985 999.35 2599482811 75473 2611722

15-06-2015 976.95 998.8 968 990.45 2592486854 84843 2618213

12-06-2015 2005 2025.55 1955.5 1975.05 4905085618 104931 2463231

© The Institute of Chartered Accountants of India 11

 11-06-2015 2035.95 2044.75 1995.05 1997.65 4639906733 69953 2307366

10-06-2015 1990 2039.35 1985 2026.5 3212123214 76174 1596460

09-06-2015 2003.75 2007.65 1983 1992.1 3766911108 81812 1890435

08-06-2015 2020 2024.65 1987 2000.05 3070769017 59889 1535262

05-06-2015 2030 2044 2008.15 2011.65 3094883382 61438 1531447

04-06-2015 2030 2055 2012.6 2028.05 3813250263 98562 1872366

03-06-2015 2018.2 2039.45 2008 2020.9 2775067935 50402 1373949

02-06-2015 2048.1 2055.1 2005 2008.65 2358331816 67384 1168285

01-06-2015 2032.8 2064 2023.25 2047.8 2931284913 62717 1431223

© The Institute of Chartered Accountants of India 12

 Exhibit - 7

Graphs of Prices of shares during the month of June 2015 at two leading Stock Exchange of India

Closing Price on ESN Opening Price on ESB

2500 2500

2000 2000

1500 1500

1000 1000

500 500

0 0

© The Institute of Chartered Accountants of India 13

 Exhibit - 8

International Perspective
Stock dividend of one ADS for every ADS held has been given. ABC Ltd. shares
are also listed on the New York Stock Exchange (NYSE). The detail structure of
the company’s share prices in NYSE for the month of June, 2015 has been given
as below:

Price Date Open Price High Price Low Price Close Price
1-6-2015 31.97 32.38 31.93 32.21
2-6-2015 31.76 31.88 31.56 31.82
3-6-2015 31.88 32.44 31.76 32.1
4-6-2015 31.83 31.98 31.41 31.65
5-6-2015 31.53 31.91 31.52 31.81
8-6-2015 31.53 31.62 31.46 31.52
9-6-2015 31.32 31.41 31.03 31.11
10-6-2015 31.59 31.81 31.45 31.72
11-6-2015 31.13 31.47 31.01 31.25
12-6-2015 30.66 31.05 30.59 31.02
15-06-2015 30.79 31.32 30.72 31.25
16-06-2015 31.15 31.91 31.15 31.84
17-06-2015 31.45 31.93 31.45 31.92
18-06-2015 31.86 32.42 31.86 32.17
19-06-2015 32.05 32.16 31.86 31.9
22-06-2015 32.38 32.72 32.25 32.53
23-06-2015 32.32 32.5 32.19 32.22
24-06-2015 31.96 32.18 31.48 31.52
25-06-2015 15.9 16.28 15.89 16.13
26-06-2015 16.26 16.31 16.11 16.17
29-06-2015 15.91 15.98 15.81 15.86
30-06-2015 15.94 15.97 15.66 15.85

© The Institute of Chartered Accountants of India 14

 Exhibit - 9

RBI Reference Rate for US $ during the month of June 2015

1.6.2015 63.6083
2.6.2015 63.8330
3.6.2015 63.8515
4.6.2015 64.1775
5.6.2015 63.8955
8.6.2015 64.1100
9.6.2015 63.9360
10.6.2015 63.8849
11.6.2015 63.8910
12.6.2015 64.0301
15.6.2015 64.0868
16.6.2015 64.1505
17.6.2015 64.1135
18.6.2015 63.8495
19.6.2015 63.8195
22.6.2015 63.5098
23.6.2015 63.6406
24.6.2015 63.6600
25.6.2015 63.6121
26.6.2015 63.6042
29.6.2015 63.9170
30.6.2015 63.7549

© The Institute of Chartered Accountants of India 15

 Exhibit – 10

Article published in leading Financial Daily on 24-04-2015

The board of directors of ABC Ltd sprang a surprise today by recommending a
bonus issue of shares in the ratio of 1:1 (one equity share for every equity share
held) and a stock dividend of one American Depositary Share (ADS) for every ADS
held.
It is the second 1: 1 bonus issue announced by the company in the last six months
as it had made a bonus issue only in December 2014.
It was on October 10, 2014, that the company had recommended a bonus issue of
one equity share for every equity share held (1 : 1 bonus issue) and a bonus issue,
viz., a stock dividend of one ADS for every ADS held. Subsequently, ABC Ltd fixed
December 3, 2014, as the record date for the purpose of allotment of bonus shares
/ stock dividend.
ABC Ltd’s board today has recommended a final dividend of ₹29.50 per share
(equivalent to ₹14.75 per share after 1:1 bonus issue, if approved by shareholders)
for the year ended March 31, 2015.
Acting swiftly to get the approval process completed, the company said its register
of members & share transfer books will remain closed from June 17 to June 22 for
the purpose of payment of final dividend & the AGM will be held on June 22.
The company’s equity base is at ₹574 crore as at the end of March 31, 2015. This
was after the bonus issue made in Dec last year. But despite the doubling of the
equity base, the company’s EPS at the end of last fiscal was at a healthy ₹102.33
as compared to ₹89.20 at the end of March 31, 2014. This gives it shares a P/E
ratio of about 20 (at the current value of around ₹2010) which does not look to be
very high compared to its peers such as DEF Ltd. (P/E of 23) and XYZ Ltd. (P/E of
25). The latter had implemented a 1:1 bonus issue and also a stock split of 2:1 (
face value of shares reduced to ₹5 from ₹10).
Despite the bonus announcement, the ABC Ltd. shares are down by about ₹ 120 to
₹ 2001 levels now. A deeper analysis of ABC Ltd. results would throw further
insight into its performance in terms of profitability ratio etc. compared to its peers
and explain the reasons for investor response.

© The Institute of Chartered Accountants of India 16

 ELECTIVE PAPER 6B – FINANCIAL SERVICES AND CAPITAL MARKET
SUGGESTED SOLUTION – CASE STUDY 1

(i) The total number of subscribed shares of ABC Ltd. in November 2014 is
57,42,36,166 fully paid equity shares.

(ii)

Price Date Closing Price at RBI Rate Amount in `

NYSE

1-6-2015 32.21 63.6083 2048.82

2-6-2015 31.82 63.8330 2031.17

3-6-2015 32.1 63.8515 2049.63

4-6-2015 31.65 64.1775 2031.22

5-6-2015 31.81 63.8955 2032.52

8-6-2015 31.52 64.1100 2020.74

9-6-2015 31.11 63.9360 1989.05

10-6-2015 31.72 63.8849 2026.43

11-6-2015 31.25 63.8910 1996.59

12-6-2015 31.02 64.0301 1986.21

15-6-2015 31.25 64.0868 2002.71

16-6-2015 31.84 64.1505 2042.55

17-6-2015 31.92 64.1135 2046.50

18-6-2015 32.17 63.8495 2054.04

19-6-2015 31.9 63.8195 2035.84

© The Institute of Chartered Accountants of India

1
 22-6-2015 32.53 63.5098 2065.97

23-6-2015 32.22 63.6406 2050.50

24-6-2015 31.52 63.6600 2006.56

25-6-2015 16.13 63.6121 1026.06

26-6-2015 16.17 63.6042 1028.72

29-6-2015 15.86 63.9170 1013.72

30-6-2015 15.85 63.7549 1010.52

From the above data and the given exhibit, it can be seen that arbitrage opportunity is not
possible in the domestic market. However, there is an arbitrage opportunity if domestic
investors can purchase shares after the date of bonus issue declaration and sell their shares
in the international market later after some days.

(iii) After the bonus announcement, the investors have not reacted positively. The shares are
down by about ` 120 to ` 2001 levels now. The reasons for this may be because the
company has pile up excess cash and it has not enough investment opportunities.

(iv) After the bonus issue, EPS will reduce. The reason is that after the bonus issue, the number
of shares will increase leading to increase in denominator while numerator i.e. Profit after
tax is same. This leads to fall in the value of EPS.

(v) (a) As per regulation 95 of SEBI (ICDR) Regulation, 2009, if an issuer after the approval
of its board of directors which does not require the shareholders’ approval for bonus
issue shall implement the bonus issue within fifteen days from the date of approval
of the issue by its board of directors.

However, where the issuer is required to seek shareholders’ approval for bonus
issue, the bonus issue shall be implemented within two months from the date of the
meeting of its board of directors wherein the decision to announce the bonus issue
was taken subject to shareholders’ approval.

(b) While calculating basic earnings per share, profit after tax after preference dividend
is divided by the total number of equity shares outstanding. On the other hand, in
the computation of diluted earnings per share, debt which can be converted into

© The Institute of Chartered Accountants of India

2
 equity in the future is also taken into account. Since, ABC Ltd. is a debt free
company; there is no convertible debt on its part. Therefore, basis earning per share
and diluted earnings per share are equal.

Further, as per Regulation 93 of SEBI (ICDR) Regulation, 2009 no company shall

make a bonus issue of equity shares unless it has made reservation for holders of
convertible debt instruments.

However, since ABC Ltd. is a debt free company, the above provision is not
applicable to it.

(c) It is clearly provided in the SEBI Regulations that once the decision to make a bonus
issue is announced, the issue cannot be withdrawn.

(vi) Prices of ABC Ltd. on the Ex-Bonus date has been reduced drastically. The basic reason is
that after the bonus issue, the prices of shares come down in the immediate period. For
instance, if the share price before bonus issue is Rs. 1000 and the company issues bonus
shares in the ratio of 1:1, the share price after the bonus issue will be Rs. 500. However, it
also means that the total market value (2 shares x Rs. 500 = 1000) remains the same.

(vii) It is generally considered prudent to pay dividend consistently even after the bonus issue.
Higher dividend payout on the part of ABC Ltd. indicates that existing shareholders will get
more dividend after the bonus issue.

For example, in the given case, the company issues bonus shares in the ratio of 1: 1. It
declared dividend of 10% which will be ` 1 on the face value of ` 10 in the previous year. In
the current year, it decides to maintain the dividend at 10%. Now, a shareholder with one
share will get an additional share. His total shares will be 2. And, he is eligible for total
dividend of ` 2 (` 1 x 2 shares). So, his dividend income will be doubled due to issue of
bonus shares.

Therefore, higher dividend payout on the part of ABC Ltd indicates willingness on the part of
company to keep the shareholders happy and increase their wealth. Also, the company can
utilize it’s excess cash reserves in this way.

(viii) It is definitely feasible for the company to go for buyback. As it has been given in the exhibit
1 that company’s cash reserves has increased from 27,722 in 2015 to 29,176 in 2016. So,
the company’s burgeoning cash reserves can be utilized for buyback.

© The Institute of Chartered Accountants of India

3
 ABC Ltd has to fulfill the following conditions as given in the SEBI Regulations if it decides
to go for the buyback:

(a) A company may buy-back its shares or other specified securities by any one of the
following methods:—

• From the existing security-holders on a proportionate basis through the

tender offer;

• From the open market through—

(i) book-building process,

(ii) Stock exchange;

• From odd-lot holders

However, it is to be noted that no offer of buy-back for fifteen per cent or more of the
paid up capital and free reserves of the company shall be made from the open
market.

(b) A company shall not buy-back its shares or other specified securities from any
person through negotiated deals, whether on or of the stock exchange or through
spot transactions or through any private arrangement.

(c) Any person or an insider shall not deal in securities of the company on the basis of
unpublished information relating to buy-back of shares or other specified Securities
of the company.

(d) A company shall not make any offer of buy-back within a period of one year reckoned
from the date of closure of the preceding offer of buy-back, if any.

(ix) The Market Price (MP) just before and after the ex-bonus date on both the stock exchanges
and calculation of Price Earnings Ratio (P/E) ratio is as follows:

Ex-bonus date – 15/6/2015

P/E Ratio = Market Price Per Share/Earning Per Share

If the EPS of 31st March, 2015 has been taken

ESB

(MP) just before the ex-bonus date i.e. on 12/6/2015 – 1976.65

P/E Ratio = 1976.65/52.96 = 37.32

© The Institute of Chartered Accountants of India

4
 (MP) just after the ex-bonus date i.e. on 16/6/2015 – 999.45

P/E Ratio = 999.45/52.96 = 18.87

ESN

(MP) just before the ex-bonus date i.e. on 12/6/2015 – 1975.05

P/E Ratio = 1975.05/52.96 = 37.29

(MP) just after the ex-bonus date i.e. on 16/6/2015 – 999.35

P/E Ratio = 999.35/52.96 = 18.87

If the EPS of 31st March, 2016 has been taken

ESB

(MP) just before the ex-bonus date i.e. on 12/6/2015 – 1976.65

P/E Ratio = 1976.65/68.93 = 28.68

(MP) just after the ex-bonus date i.e. on 16/6/2015 – 999.45

P/E Ratio = 999.45/68.93 = 14.50

ESN

(MP) just before the ex-bonus date i.e. on 12/6/2015 – 1975.05

P/E Ratio = 1975.05/68.73 = 28.73

(MP) just after the ex-bonus date i.e. on 16/6/2015 – 999.35

P/E Ratio = 999.35/68.73 = 14.54

(x) The company is debt free as it can be observed from the Balance Sheet of the company.
The reason for such non debt element in the capital structure of the company may be due to
the fact company has large cash reserved which can be utilized for short term working capital
requirements of the company. Further, the exclusion of debt in the capital structure reduces
the periodic interest cost on the part of the company. Also, there is the possibility of default
risk which may arise due to non-payment of interest and principal amount of loan.

(xi) As it has been given in the case study itself sufficient cash balance has been kept by the
company to meet its strategic objectives. The company presently generates sufficient cash
internally to finance all its operational, financing and investment requirements.

© The Institute of Chartered Accountants of India

5
 The impact of high cash holding is that the cash is underutilized and the company is losing
investment opportunities. So, ABC Ltd. may consider a buyback to utilize its cash pile.

(xii) Computation of financial ratios is given as below:

(a) Dividend Payout Ratio = Total dividend (including dividend tax)/Profit

after tax (consolidated)

2015 2016

6704/13678 x 100 6145/12372 x 100

= 49.01% = 49.67%

(b) Net Foreign Earnings/Earnings Ratio

2015 2016

26337/52866 x 100 24113/46158 x 100

= 49.8% = 52.2

(c) R & D Expenditure/Revenue

2015 2016

415/53983 x 100 605/47300

= 0.80 = 1.30

(d) Net Profit Ratio = Net Profit after tax(Standalone)/Net Sales x 100

2015 2016

15786/53983 x 100 12164/47300 x 100

= 29.24 = 25.71

Multiple Choice Questions

(i) (a)

(ii) (b)

(iii) (d)

(iv) (b)

(v) (c)

(vi) (a)

© The Institute of Chartered Accountants of India

6
 PAPER – 6B: FINANCIAL SERVICES AND CAPITAL MARKETS

Case Study 2

One fine morning Zahir woke with the beep sound of Whatsapp message in his mobile. Half woke up thinking it to
be some urgent message from his boss read the message (Exhibit 1) from his one friend Joseph who accidently
sent the same to him instead of Tahir.
Joseph who is lawyer by profession and employed with a leading law firm handling the legal matters listed
companies. Last year he was also handling a legal case of Rajendra Holidays.
Since Zahir has no interest in the Stock Market without understanding the message further forwarded the same to
his friend Kanjibhai (a jobber in stock market).
A few days later Zahir received a call from Kanjibhai inviting him on a party bash at coming Saturday at one of the
5 Star Hotel of the city. To the utter surprise of Zahir, Kanjibhai who never offered a cup of tea to anyone and
always in debt is organizing such a big party. Zahir called back Kanjibhai to know the exact of organizing such
party. Kanjibhai expressed there is no special occasion only few of his friends have been invited as a matter of
change from daily life.
On Saturday evening Zahir reached the venue of party where other friend were already there. On asking what is
reason for this party from all friends, Kanji told he made a huge profit from the stock market and after repaying his
old debts now he is buying a small office of his own to work as sub-broker.
During the party after consuming a lot of alcohol Kanji gone out of control and started shouting it is because Zahir
who made him rich. Since earlier one or two occasions Kanji had gone out of control after consuming alcohol no
one paid heed to his loose talks.
Next morning as a daily routine Zahir was enjoying reading a financial daily. One news (as per Exhibit 2) catches
his attention. Although Zahir had no interest in the Stock Market but the amount of penalty was enough to further
read the news (as per Exhibit 2).
Further he compiled some of actual information of these listed companies from website. (as per Exhibit 6)
Questions
After reading the news he approaches you requesting you to provide him a report on the under-mentioned five
questions.
(A) Why is it so difficult to monitor messages passed on through WhatsApp? What is the way out to track such
messages?
(B) What is the meaning of the term ‘insider’ and ‘unpublished price sensitive information’ in SEBI Guidelines?
What amendments have been made Government to curb the practice of Insider Trading?
(C) Whether Joseph can be called as insider trader or not?
(D) How the introduction of Automation or Insider Trading Management System (ITMS) seems to curb the menace
of insider trading?
(E) How the financials of the company given in the exhibit 1 depicts about the unfair role of insider trading in the
stock market and what course of action can be followed by such insiders on receiving such information?(Max. 6
marks for coverage on each point)
Note: Please use your name as ABC and your firm’s name as XYZ Consulting.
(F) Multi Choice Questions (MCQs)
(i) The following is not a systematic risk.
a) Business Risk
b) Purchasing Power Risk

© The Institute of Chartered Accountants of India

 c) Market Risk
d) Interest Rate Risk
(ii) Which of the following is not the real risk of a security.
a) Market Risk
b) Inflation Risk
c) Political Risk
d) Business Risk
(iii) When a Collateralized Debt Obligation (CDO) does not acquire original assets but does a ‘default swap’,
it is called ___________
a) Cash CDO
b) Market Value CDO
c) Swap CDO
d) Synthetic CDO
(iv) Which of the following Fund focuses on trends that are likely to result in the óut-performance’ by certain
sectoral funds.
a) Contra Fund
b) Index Fund
c) Thematic Fund
d) Hedge Fund
(v) Certificate of Deposit is a negotiable instrument.
a) Front-ended
b) Back-ended
c) Face Value
d) None of these
(vi) Once client have identified a particular target company to be acquired advisory services are provided in
which of the order.
a) Short-Listing→ Due Diligence → Preparing and Executing Term Sheet → Transaction Closure
b) Short-Listing→ Preparing and Executing Term Sheet → Due Diligence → Transaction Closure
c) Due Diligence → Short-Listing→ Preparing and Executing Term Sheet → Transaction Closure
d) Due Diligence→ Preparing and Executing Term Sheet → Short -Listing → Transaction Closure
(vii) The full form of SCSB is .
a) Self-Credited Syndicate Bank
b) Self-Created Syndicate Bank
c) Self- Certified Syndicate Bank
d) None of These
(viii) LME specializes in .
a) Gold and Silver
b) Ferrous and Non Ferrous Metals

© The Institute of Chartered Accountants of India

 c) Non Ferrous Metals
d) All of These
(ix) If the standard deviation of changes of spot and future prices of Copper are 4% and 6% respectively
and hedge ratio is 0.60 then, correlation coefficient among these prices shall be .
a) 0.25
b) 0.60
c) 0.75
d) 0.90
(x) In India is also known as headline inflation rate.
a) CII
b) CPI
c) WPI
d) None of These (Each MCQ carries 2 Marks)
Exhibit 1

Today
DR WADES
Forecast a loss of more than ` 50 cr.
CFDC BANK
The predicted profit of ` 3,900 cr and a GNPA of 1.25 per cent.
SIXES BANK
GNPA 5.03; NNPA: 2.30; NIM: 3.63 against 3.63; Slippages: ` 8,000 cr (majority were from outside
watch-list); Writeoff: ` 2,300 cr; CASA: 48.33 per cent.
ABCD STEEL
Gross sales ` 33,900 cr; Ebitda 7,000 cr; Ebit 5,400 cr; Exceptional items ` 4,000 cr; PBT ` 257
cr; PAT loss of ` 7 cr.
RAJENDRA HOLIDAYS
The message read “Rajendra holidays will declare a bonus today”.

Exhibit 2
A recent news report identifies a dozen messages that accurately predicted Second Quarter (Q2) earnings patterns
(and a bonus announcement in one case) for specific listed stocks. In each case, the messages were being passed
around, just before the results were officially announced. These messages were being circulated in private
Whatsapp groups frequented by equity traders. These were all big companies - in fact, more than half of the stocks
concerned are members of the Nifty-50.

© The Institute of Chartered Accountants of India

WhatsApp, an instant messaging service owned by Facebook, is a popular platform for all sorts of sensitive
communications. It is encrypted end-to-end, making it impossible for even the service provider to monitor content.
It is not easy given the end-to-end encryption but it is possible for example, to set up specialised units to track and
monitor such a medium. It is also possible for Sebi to set up an email id, for example, where such messages can
be anonymously forwarded for analysis. That would give the regulator some idea about the scale of the problem
and an opportunity to judge which messages are credible and actionable and worth following up.
India significantly toughened insider trading rules in early 2015, expanding what constitutes "unpublished price-
sensitive information" to include "any information" that is not "generally available" and that could have a market
impact.
The law also expanded the scope of who constitutes an "insider" to include "anyone in possession of or having
access to unpublished price-sensitive information" regardless of how they came "in possession of or had access
to such information".
Circulating "unpublished price-sensitive information" can result in penalties of up to 250 million rupees and a jail
term of up to 10 years. The monetary amount can be higher if it can be proven that an individual traded on such
information.
(Source: Extract from a leading Newspaper)
Exhibit 3
Consultation Paper by SEBI to curb unauthorized investment tips through social media
Last year, SEBI issued a consultation paper on curbing unauthorized investment tips through social media. So, it
proposed to ban unauthorised trading tips through SMSes, WhatsApp, Twitter, Facebook and other social media
platforms, as also games, competitions and leagues relating to securities market. It also proposed an overhaul of
regulations governing investment advisors.
Sebi also proposed to ban 'free trial' offers by investment advisors for their prospective clients and sought to make
it mandatory for even registered research analysts to provide their research reports for all class of investors at the
same time.
Sebi has also proposed a detailed 'advertisement code' for those providing investment advice to check misleading
advertisements promising unrealistic returns in the securities market.
Sebi has also proposed a re-look on the exemption from registration as an investment adviser, provided to mutual
fund distributors and other registered market intermediaries. Besides, banks, NBFCs and various corporate bodies
would have to set up a separate subsidiary for investment advisory services. Under current rules, such services
can be provided through a separate division or department.
Sebi has proposed a time period of three years for existing entities offering investment advisory services through
separate department or division to set up a separate subsidiary. Similar time period can be provided to the mutual
fund distributors and other registered market entities currently exempted from registration as investment advisors.
(Source: Extract from a leading Newspaper)

Exhibit 4
Need for Automation in insider trading
Establishing a database of connected persons is a huge task to be done in excel. Top it up with the pre-clearance,
monitoring of trading window for each trade for each connected person is an impossible task. Automation or Insider
Trading Management System enables entities to comply with the regulations and stay on top.
Insider Trading Management System (ITMS) is an enterprise-class web application which can automate and
address the challenge of complying with regulatory requirements specific to insider trading. It serves as a central
repository of insider related information for reporting and analytics.

© The Institute of Chartered Accountants of India

ITMS helps organizations easily capture details about "Insiders" and their relatives as per the policy definition. A
workflow enabled pre-dealing approval as well as post trade update mechanism brings efficiency to request
handling.
A configurable "Trading Window" and automated alerts & notifications add flexibility to the system.
ITMS Features
Insider Information Collection is a process to build the user and relatives information or who may be terms as
connected person. The tool provides for self-update of the profiles.
Trading window management includes configuration of blackout period and automated alerts and notification of
opening and closing of trading window.
Built-in work flows for the process including pre-trading request/approval/rejections, and post trading disclosures.
Provides a work-flow for employees to submit pre-trading requests, compliance officer can view all the pre-trading
approval requests in a central system, compare with restricted securities (grey list) and approve/reject the request.
Automatic reminders are generated from the system for initial and continual disclosures, post-trading updations.
(Source:http://www.riskpro.in/services/insider-trading-automation)
Exhibit 5
SOME OF THE PROVISIONS OF SECURITIES AND EXCHANGE BOARD OF INDIA (PROHIBITION OF
INSIDER TRADING) REGULATIONS, 2015
(d) "connected person" means,-
(i) any person who is or has during the six months prior to the concerned act been associated with a
company, directly or indirectly, in any capacity including by reason of frequent communication with its officers or
by being in any contractual, fiduciary or employment relationship or by being a director, officer or an employee of
the company or holds any position including a professional or business relationship between himself and the
company whether temporary or permanent, that allows such person, directly or indirectly, access to unpublished
price sensitive information or is reasonably expected to allow such access.
(ii) Without prejudice to the generality of the foregoing, the persons falling within the following categories
shall be deemed to be connected persons unless the contrary is established, -
(a) an immediate relative of connected persons specified in clause (i); or
(b) a holding company or associate company or subsidiary company; or
(c) an intermediary as specified in section 12 of the Act or an employee or director thereof; or
(d) an investment company, trustee company, asset management company or an employee or director
thereof; or
(e) an official of a stock exchange or of clearing house or corporation; or
(f) a member of board of trustees of a mutual fund or a member of the board of directors of the asset
management company of a mutual fund or is an employee thereof; or
(g) a member of the board of directors or an employee, of a public financial institution as defined in section
2 (72) of the Companies Act, 2013; or
(h) an official or an employee of a self-regulatory organization recognised or authorized by the Board; or
(i) a banker of the company; or
(j) a concern, firm, trust, Hindu undivided family, company or association of persons wherein a director of
a company or his immediate relative or banker of the company, has more than ten per cent. of the holding
or interest;

© The Institute of Chartered Accountants of India

(e) "generally available information" means information that is accessible to the public on a non-discriminatory
basis;
(f) “immediate relative” means a spouse of a person, and includes parent, sibling, and child of such person or of
the spouse, any of whom is either dependent financially on such person, or consults such person in taking
decisions relating to trading in securities;
(g) "insider" means any person who is:
i) a connected person; or
ii) in possession of or having access to unpublished price sensitive information;
(n) "unpublished price sensitive information" means any information, relating to a company or its securities, directly
or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect
the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: –
(i) financial results;
(ii) dividends;
(iii) change in capital structure;
(iv) mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other
transactions;
(v) changes in key managerial personnel; and
(vi) material events in accordance with the listing agreement.
Exhibit 6
Actuals
DR WADES
On a consolidated basis under Indian accounting standards, it posted a loss of ` 58 cr.
CFDC BANK
The lender posted a profit after tax of ` 3,894 cr. Its GNPA was 1.24 per cent.
SIXES BANK
GNPA is 5.03%; NNPA: 2.30 NIM: 3.63; Slippages: ` 3,519 cr; ` 2,300 cr; CASA: 48.33 per cent.
ABCD STEEL
Gross sales ` 34,800 cr; Ebitda 6,982 cr; Ebit ` 5,393 cr; Exceptional items ` 4,069 cr; PBT ` 259
cr; PAT loss of ` 7.17 cr.
RAJENDRA HOLIDAYS
1 for 2 bonus share issue announced.

© The Institute of Chartered Accountants of India

 ELECTIVE PAPER 6B: FINANCIAL SERVICES AND CAPITAL MARKET PAPER

SUGGESTED SOLUTION

Case Study 2

Note: Please note these solutions are for guidance purpose only.
XYZ Consulting
Dated:
Mr. Zahir
Sub: Report on the various issues raised during our meeting dated…….
The point-wise reply on the various issues raised by you is as follows:
(A) Although in WhatsApp, it is not easy due to end-to-end encryption to monitor the messages but it is
possible, to set up specialised units to track and monitor such a medium. It is also possible for Sebi to
set up an email id, for example, where such messages can be anonymously forwarded for analysis. That
would give the regulator some idea about the scale of problem and an opportunity to judge which
messages are credible and actionable and worth following up.
(B) As per SEBI Guidelines the meaning of the term ‘insider’ means any person who is:
(i) a connected person; or
(ii) in possession of or having access to unpublished price sensitive information;
and ‘unpublished price sensitive information’ is:
any information, relating to a company or its securities, directly or indirectly, that is not generally
available which upon becoming generally available, is likely to materially affect the price of the securities
and shall, ordinarily including but not restricted to, information relating to the following: –
(i) financial results;
(ii) dividends;
(iii) change in capital structure;
(iv) mergers, de-mergers, acquisitions, delistings, disposals and expansion of business and such other
transactions;
(v) changes in key managerial personnel; and
(vi) material events in accordance with the listing agreement.
To curb the practice of Insider Trading the law expanded the scope of who const itutes an "insider" to
include "anyone in possession of or having access to unpublished price -sensitive information"
regardless of how they came "in possession of or had access to such information".
Further circulating "unpublished price-sensitive information" can result in penalties of up to 250 million
rupees and a jail term of up to 10 years. The monetary amount can be higher if it can be proven that an
individual traded on such information.
(C) Since Joseph was in possession of unpublished price sensitive information and he has circulated the
data also, he can be called as ‘insider’.
(D) Insider Trading Management System (ITMS) serves as a central repository of insider related information
for reporting and analytics.

1
© The Institute of Chartered Accountants of India
 ITMS helps organizations easily capture details about "Insiders" and their relatives as per the policy
definition. A workflow enabled pre-dealing approval as well as post trade update mechanism brings
efficiency to request handling.
A configurable "Trading Window" and automated alerts & notifications add flexibility to the system.
(E) Since the difference between the actual information compiled and the information a s per the message
is almost minuscule there is a clear cut case of insider trading. Further following course of action can
be followed by such insiders on receiving such information.
Company Course of action might have been followed by Insider
DR WADES Since there is a prediction of loss. The insider will sell the shares he/ she own
before the information is made public as price will fall after the announcement
of results.
(Insider can take short position in the shares)
CFDC BANK Insider shall acquire the shares as bank is likely to post profit and very less
GNPA.
(Insider can take long position in the shares)
SIXES BANK Since the results likely to be announced are not good e.g. rising GNPA etc. it
is likely that the price of shares will fall. Hence insider shall sell his/ her shares.
(Insider can take short position in the shares)
ABCD STEEL Since there is likely announcement of losses, the share prices of the company
shall fall. Accordingly, the insider shall sell the share before such
announcement.
(Insider can take short position in the shares)
RAJENDRA Since after the announcement of bonus issue there is likely to be a rise in the
HOLIDAYS prices of the shares, the insider shall purchase the shares.
(Insider can take long position in the shares)
Thanks,
ABC

(Signature)
(F) Answers to Multi Choice Questions (MCQs)
(i) (a)
(ii) (d)
(iii) (d)
(iv) (c)
(v) (a)
(vi) (b)
(vii) (c)
(viii) (b)
(ix) (d)
(x) (c)

2
© The Institute of Chartered Accountants of India
 PAPER – 6B: FINANCIAL SERVICES AND CAPITAL MARKETS

Case Study 3

Recently SEBI has come out with a circular relating to categorization and rationalization of Mutual Fund Schemes.
(The Extract of some of the relevant portion is as per Exhibit – 1).
Description of some of the existing schemes is given as per Exhibits 2 to 6.

Questions

(A) As per the circular, the existing ‘type of scheme’ would be replaced with type of scheme as applicable to each
category of scheme. You are required to suggest the group in which each of the five existing schemes shall
be re-categorized with brief reasons in the following format.

Source Name of the Proposed Re-categorization Reasons for such

Scheme as per Re-categorization
the exhibit
Exhibit No. Scheme Category of Scheme
(4 marks for each of the five schemes)
(B) A mutual fund raised `150 lakhs on April 1, by issue of 15 lakh units at `10 per unit. The fund invested in
several capital market instruments to build a portfolio of `140 lakhs. Initial expense amounted to `8 lakhs.
During the month of April, the fund sold certain securities costing `45.75 lakhs for `48 lakhs and purchased
certain other securities for `42.4 lakhs. The fund management expenses for the month amounted to `6 lakhs
of which `50,000 was in arrears. The dividend earned was `2 lakhs. 80% of the realized earnings were
distributed. The market value of the portfolio on 30th April was `148.75 lakhs.

Suppose you as an investor subscribed to 1000 unit on April 1 and disposed it off at closing NAV on 30th April
then what will be your annual rate of earning. (10 Marks)

(C) Multiple Choice Questions

(i) In an open ended scheme, redemption period is ……….

a) Definite
b) Indefinite
c) 5 years
d) 10 years
(ii) Gilt Funds mainly invested in …………
a) Government Securities
b) Only in Debt Securities
c) Only in shares
d) Mix of debt and equity
(iii) ……… seeks to generate long term capital appreciation by investing in equity and equity related
instruments including equity derivatives as well as debt instruments.
a) Focused Fund

© The Institute of Chartered Accountants of India

 b) Arbitrage Fund
c) Index Funds
d) Dynamic Equity Funds
(iv) ………… is an offer document containing all the relevant details except that of price or number of shares
being offered.
a) Letter of Offer
b) Draft Offer Document
c) Abridged Prospectus
d) Red Herring Prospectus
(v) Index value on a particular date is calculated as
a) Index on previous day x Total market capitalization for current day/Total market capitalization of
the previous day
b) Index on current day x Total market capitalization for current day/Total market capitalization of
the previous day
c) Index on previous day x Total market capitalization for previous day/Total market capitalization of
the current day
d) Index on current day x Total market capitalization for previous day/Total market capitalization of
the current day
(vi) While Sharpe ratio measures ………., the Treynor Ratio measures only the …………
a) Total Risk; Systematic Risk
b) Unsystematic Risk; Systematic Risk
c) Systematic Risk; Unsystematic Risk
d) Systematic Risk; Total Risk
(vii) A bank rediscounted a commercial bill with a face of `100 @12% for 3 months. The sale value is `96.8.
The yield to the investor will be
a) 15.39%
b) 14.08%
c) 13.22%
d) 12.80
(viii) Market Makers comprises of
a) Commercial Banks
b) Mutual Funds
c) Insurance Companies
d) All of the above
(ix) The risk which arises due to possible change in spreads is called
a) Optionality Risk

© The Institute of Chartered Accountants of India

 b) Repricing Risk
c) Yield Curve Risk
d) Basis Risk
(x) The role of ………. is responsible for the delivery and settlement and consequent accounting entries for
all those transactions.
a) Front Office
b) Back Office
c) Mid-Office
d) Top Office
(10 x 2 = 20 Marks)

Exhibit 1

EXTRACTS FROM SEBI CIRCULAR

All Mutual Funds/Asset Management Companies (AMCs)/ Trustee Companies/Boards of Trustees of

Mutual Funds/ AMFI
Sir/ Madam,
Subject: Categorization and Rationalization of Mutual Fund Schemes
1. It is desirable that different schemes launched by a Mutual Fund are clearly distinct in terms of asset allocation,
investment strategy etc. Further, there is a need to bring in uniformity in the characteristics of similar type of
schemes launched by different Mutual Funds. This would ensure that an investor of Mutual Funds is able to
evaluate the different options available, before taking an informed decision to invest in a scheme.
2. In order to bring the desired uniformity in the practice, across Mutual Funds and to standardize the scheme
categories and characteristics of each category, the issue was discussed in Mutual Fund Advisory Committee
(MFAC). Accordingly, it has been decided to categorize the MF schemes as given below:
I. Categories of Schemes, Scheme Characteristics and Type of Scheme (Uniform Description of Schemes):
3. The Schemes would be broadly classified in the following groups:
a. Equity Schemes
b. Debt Schemes
c. Hybrid Schemes
d. Solution Oriented Schemes
e. Other Schemes
The details of the scheme categories under each of the aforesaid groups along with their characteristics and
uniform description are given in the Annexure.
4. As per the annexure, the existing ‘type of scheme’ (presently mentioned below the scheme name in the offer
documents/ advertisements/ marketing material/etc.) would be replaced with the type of scheme (given in the
third column of the tables in the Annexure) as applicable to each category of scheme. This will enhance the
existing disclosure. Hence, for the purpose of alignment of the existing schemes with the provisions of this

© The Institute of Chartered Accountants of India

 circular, change in “type of scheme” alone, would not be considered as a change in fundamental attribute.
5. In case of Solution oriented schemes, there will be specified period of lock in as stated in the Annexure.
However, the said lock- in period would not be applicable to any existing investment by an investor, registered
SIPs and incoming STPs in the existing solution oriented schemes as on the date on which such scheme is
getting realigned with the provisions of this circular.
6. The investment objective, investment strategy and benchmark of each scheme shall be suitably modified
(wherever applicable) to bring it in line with the categories of schemes listed above.
II. Definition of Large Cap, Mid Cap and Small Cap:
7. In order to ensure uniformity in respect of the investment universe for equity schemes, it has been decided
to define large cap, mid cap and small cap as follows:
a. Large Cap: 1st -100th company in terms of full market capitalization
b. Mid Cap: 101st -250th company in terms of full market capitalization
c. Small Cap: 251st company onwards in terms of full market capitalization
8. Mutual Funds would be required to adopt the list of stocks prepared by AMFI in this regard and AMFI would
adhere to the following points while preparing the list:
a. If a stock is listed on more than one recognized stock exchange, an average of full market capitalization of
the stock on all such stock exchanges, will be computed;
b. In case a stock is listed on only one of the recognized stock exchanges, the full market capitalization of
that stock on such an exchange will be considered.
c. This list would be uploaded on the AMFI website and the same would be updated every six months based
on the data as on the end of June and December of each year. The data shall be available on the AMFI
website within 5 calendar days from the end of the 6 months period.
9. Subsequent to any updation in the list, Mutual Funds would have to rebalance their portfolios (if required) in
line with updated list, within a period of one month.
Annexures to the SEBI Circular
A. Equity Schemes:

Category Scheme Characteristics Type of scheme (uniform description

of of scheme)
Schemes

Large & Mid Minimum investment in equity & equity related Large & Mid Cap Fund- An open ended
Cap Fund instruments of large cap companies- 35% of total equity scheme investing in both large cap
assets. Minimum investment in equity & equity and mid cap stocks
related instruments of mid cap stocks- 35% of total
assets.
Small cap Minimum investment in equity & equity related Small Cap Fund- An open ended equity
Fund instruments of small cap companies- 65% of total scheme predominantly investing in small
assets cap stocks
Dividend Scheme should predominantly invest in dividend An open ended equity scheme
Yield Fund yielding stocks. predominantly investing in dividend
yielding stocks
Minimum investment in equity- 65% of total assets
Focused A scheme focused on the number of stocks An open ended equity scheme investing
Fund (maximum 30) in maximum 30 stocks (mention where
Minimum investment in equity & equity related the scheme intends to focus, viz., multi

© The Institute of Chartered Accountants of India

 instruments - 65% of total assets cap, large cap, mid cap, small cap)
B. Debt Schemes
Category of Scheme Characteristics Type of scheme (uniform description of
Schemes scheme)
Ultra Short Investment in Debt & Money Market An open ended ultra-short term debt
Duration instruments such that the Macaulay duration of scheme investing in instruments with
Fund the portfolio is between 3 months - 6 months Macaulay duration between 3 months and 6
months.
Low Duration Investment in Debt & Money Market An open ended low duration debt scheme
Fund instruments such that the Macaulay duration of investing in instruments with Macaulay
the portfolio is between 6 months- 12 months duration between 6 months and 12 months.
Money Investment in Money Market instruments An open ended debt scheme investing in
Market Fund having maturity upto 1 year money market instruments

C. Hybrid Schemes

Category of Scheme Characteristics Type of scheme (uniform

Schemes description of scheme)
Dynamic Asset Investment in equity/ debt that is managed dynamically An open ended dynamic asset
Allocation or allocation fund
Balanced
Advantage
Arbitrage Fund Scheme following arbitrage strategy. Minimum An open ended scheme
investment in equity & equity related instruments- 65% investing in arbitrage
of total assets opportunities

D. Solution Oriented Schemes:

Category of Scheme Characteristics Type of scheme (uniform description of

Schemes scheme)
Retirement Scheme having a lock-in for at least 5 An open ended retirement solution oriented
Fund years or till retirement age whichever is scheme having a lock-in of 5 years or till
earlier retirement age (whichever is earlier)
Children’s Scheme having a lock-in for at least 5 An open ended fund for investment for children
Fund years or till the child attains age of having a lock-in for at least 5 years or till the child
majority whichever is earlier attains age of majority (whichever is earlier)
E. Other Schemes:

Category of Scheme Characteristics Type of scheme (uniform

Schemes description of scheme)
Index Funds/ Minimum investment in securities of a particular index An open-ended scheme
ETFs (which is being replicated/ tracked)- 95% of total assets replicating/ tracking index
FoFs (Overseas/ Minimum investment in the underlying fund- 95% of total An open ended fund of fund
Domestic) assets scheme investing in fund.

Exhibit 2

Dream Venue Focused 25 Fund Regular Plan

A newbie entrant, Dream Venue Focused 25 Fund Regular Plan has nevertheless managed an impressive show
for the last three years. Strong outperformance of the benchmark and category has allowed it to debut in the rating
scale with a four-star rating in 2016 and climb to five stars recently.

© The Institute of Chartered Accountants of India

Following the 'buy right, sit tight' philosophy of this fund house, this fund aims to own compact portfolios of quality
stocks with secular long-term growth prospects, with low portfolio churn. The fund prefers to restrict its holdings to
not more than 30 companies. It presently has 19 stocks in its portfolio. Furthermore, the fund has minimum
investment in equity and equity related instruments upto 65%
While it seldom takes cash calls, it has a slightly higher preference for mid-cap stocks than peers in this category.
In the last one year, its large-cap allocation has hovered at 80-90 per cent, while mid caps have accounted for 10-
20 per cent.
The fund's track record is as yet too limited to draw conclusions about performance. For one year, the returns are
a good 5 percentage points more than the benchmark returns and 3 percentage points more than the category
returns. On a three-year basis, the margins are 8 and 5 percentage points, respectively. However, the fund is yet
to encounter hostile markets like 2008 or even 2011 and hence its ability to manage choppy or falling markets is
as yet untested.
A fund worth watching in the large-cap space.

Exhibit 3

Dream Venue Ultra Short Term Bond Fund - Regular Plan

The Open Ended ultra-short Scheme seeks to generate optimal returns consistent with moderate levels of risk and
liquidity by investing in debt securities and money market securities such that the Macaulay Duration of the portfolio
is between 6 – 12 months. The Scheme seeks to generate optimal returns consistent with moderate levels of risk
and liquidity by investing in debt securities and money market securities
Exhibit 4

Dream Venue Dynamic Equity Fund - Regular Plan

The scheme seeks to generate long term capital appreciation by investing in equity and equity related instruments
including equity derivatives as well as debt instruments. The basic purpose of the scheme is to invest in equity/debt
that is managed dynamically. In other words, it is an open ended dynamic asset allocation fund.

The investment objective is to generate long term capital appreciation by investing in equity and equity related
instruments including equity derivatives, debt, money market instruments and units issued by REITs and InvITs.
However, there can be no assurance or guarantee that the investment objective of the Scheme would be achieved

Exhibit 5

CFDH RSF

Let’s take a look at the newest retirement fund, CFDH RSF. This fund’s equity plan, which comes with a five-year
lock-in period, is similar to an ELSS fund. “Since ELSS, with a lower lock-in period of three years, is available, why
go for a scheme with a higher lock-in period and also a 1% exit load, if redeemed before the age of 60,” asks
Jeewan Kumar, CEO, South Asia Capital. Such products are also costlier because of their small size—small
schemes charge a higher expense ratio. Except for ITU RBP, other schemes have much smaller assets under
management (AUM). FIPF’s AUM, for instance, is just Rs 339 crore. The expense ratio of these products will be
higher than the national pension scheme (NPS) but cheaper than insurance products.

The main advantage of mutual funds’ retirement products is that you don’t have to buy an annuity, as is the case
with the NPS or pension plans from insurance companies. Instead, you can opt for a systematic withdrawal plan
to meet your regular cash flow needs. Since a part of the withdrawal is your principal, it will be more tax-efficient
as well.

© The Institute of Chartered Accountants of India

Also, while the NPS restricts your equity exposure to 50%, with mutual fund products such as the CFDH RSF, you
can take a 100% equity exposure. However, these products do not come with the additional Rs 50,000 in deduction,
available to NPS. Mutual funds have asked for the extra tax benefit to be extended to their products, but whether
or not this happens, will be known only when the Budget is presented on 29 February.

Mutual funds’ pension products also offer greater liquidity, compared with the NPS or products from insurance
companies. You can withdraw your accumulated corpus after the lock-in period— 3-5 years—is over. You may
have to, however, pay a small exit load, if you want to withdraw your corpus but have not reached the retirement
age—58 or 60, depending on the product. Calculating the lock-in period also varies across funds. For instance, in
the case of HDFC RSF, the lock-in for each instalment is calculated from the date of investment. So, the money
you invest at the age of 59 can be withdrawn only at the age of 64.

Exhibit 6

ITU Nifty Index Funds

The principal investment objective of this scheme is to invest in stocks of companies comprising S&P CNX Nifty
Index and endeavour to achieve return equivalent to Nifty by passive investment The scheme is managed by
replicating the index in the same weightage as in the S&P CNX Nifty-Index with the intention of minimising the
performance differences between the scheme and the S&P CNX-Nifty Index in capital terms, subject to market
liquidity, costs of trading, management expenses and other factors which may cause tracking error. The scheme
alters the scrips/weights as and when the same are altered in the S&P CNX-Nifty Index.

© The Institute of Chartered Accountants of India

 ELECTIVE PAPER 6B: FINANCIAL SERVICES AND CAPITAL MARKET PAPER

SUGGESTED SOLUTION

Case Study 3

Note: Please note these solutions are for guidance purpose only.
Solution to (A)
Source Name of the Scheme Proposed Reasons for such
as per the exhibit Recategorization recategorization
Exhibit Scheme Category
No. of Scheme
2 Dream Venue Focused Equity Dream It is a scheme focused (restrict) its
25 Fund Regular Plan Focused holdings to not more than 30
Fund companies. Furthermore, the fund
has minimum investment in equity
and equity related instruments upto
65%

Source Name of the Scheme Proposed Reasons for such

as per the exhibit Recategorization recategorization
Exhibit Scheme Category
No. of Scheme
3 Dream Venue Ultra Debt Dream It is an Open Ended Ultra-Short
Short Term Bond Fund Ultra Short Scheme seeks to generate optimal
- Regular Plan Duration returns consistent with moderate
Fund levels of risk and liquidity by
investing in debt securities and
money market securities such that
the Macaulay Duration of the
portfolio is between 6 – 12 months.
However, in order to get itself
Recategorized as per the SEBI
circular, Macaulay Duration of the
portfolio shall be between 3 – 6
months.

Source Name of the Scheme Proposed Reasons for such

as per the exhibit Recategorisation recategorisation
Exhibit Scheme Category
No. of Scheme
4 Dream Venue Dynamic Hybrid Dynamic As it is already given in the exhibit
Equity Fund - Regular Asset that the scheme seeks to generate
Plan Allocation long term capital appreciation by
or investing in equity and equity related
Balanced instruments including equity
Advantage derivatives as well as debt

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© The Institute of Chartered Accountants of India
 instruments. Further, the basic
purpose of the scheme is to invest in
equity/debt that is managed
dynamically. In other words, it is an
open ended dynamic asset
allocation fund.
Source Name of the Scheme Proposed Reasons for such
as per the exhibit Recategorisation recategorisation
Exhibit Scheme Category
No. of Scheme
5 CFDH RSF Solution Retirement It is specifically given in the exhibit
Oriented Fund that it is a retirement funds. Further,
Schemes it is mentioned that the main
advantage of mutual funds’
retirement products is that you don’t
have to buy an annuity, as is the
case with the NPS or pension plans
from insurance companies. Instead,
you can opt for a systematic
withdrawal plan to meet your regular
cash flow needs. Since a part of the
withdrawal is your principal, it will be
more tax-efficient as well.

Source Name of the Scheme Proposed Reasons for such

as per the exhibit Recategorisation recategorisation
Exhibit Scheme Category of
No. Scheme
6 ITU Nifty Index Funds Other Index The principal investment objective of
Schemes Funds/ETFs this scheme is to invest in stocks of
companies comprising S&P CNX
Nifty Index and endeavour to
achieve return equivalent to Nifty by
passive investment. The scheme is
managed by replicating the index in
the same weightage as in the S&P
CNX Nifty-Index with the intention of
minimizing the performance
differences between the scheme
and the S&P CNX-Nifty Index in
capital terms, subject to market
liquidity, costs of trading,
management expenses and other
factors which may cause tracking
error.

2
© The Institute of Chartered Accountants of India
Solution to (B)
Amount in Rs. Amount in Rs. Amount in
lakhs lakhs Rs. lakhs
Opening Bank (150-140-8) 2.00
Add: Proceeds from sale of securities 48.00
Add: Dividend received 2.00 52.00
Deduct: Cost of securities purchased 42.40
Fund management expenses paid (6.0 - 0.5) 5.50
Capital gains distributed = 80% of (48.00 – 45.75) 1.80
Dividend distributed =80% of 2 1.60 51.30
Closing Bank 0.70
Closing market value of portfolio 148.75
149.45
Less: Arrears of expenses 0.50
Closing Net Assets 148.95
Number of units (Lakhs) 15.00
Closing NAV per unit 9.93

Rate of Earning
Amount
Income received (1.8+1.6)/15 0.23
Loss: Loss on disposal (10 - 9.93) 0.07
Net earning 0.16
Initial investment 10.00
Rate of earning (monthly) 1.6%
Rate of earning (Annual) 19.2%

Note: Alternatively, Rate of earning can also be computed on the basis of 1000 units. However, the final
answer shall remain the same.
Solution to (C)
Answers to Multiple Choice Questions
(i) (b)
(ii) (a)
(iii) (d)
(iv) (d)
(v) (a)
(vi) (a)
(vii) (c)
(viii) (a)
(ix) (d)
(x) (b)

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