Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis-II - Question Paper

Annexure I

Year
2001-02
2002-03
2003-04
2004-05
2005-06

PAT
20.26
129.33
96.75
127.35
127.16

Net worth
1007.54
1067.58
1181.33
1281.15
1371.12

Debt
1638.71
1340.20
1355.40
1682.42
1946.82




Annexure II









END OF part D



part E : Caselets (50 Marks)

· This part consists of ques. with serial number seven - 12.

· ans all ques..

· Marks are indicated against every ques..

· Do not spend more than 80 - 90 minutes on part E.

Caselet 1

learn the caselet carefully and ans the subsequent questions:


7.
With respect to the caselet, explain the process of Margin trading with an example.

(9 marks)
< ans >

8.
Delineate the risk involved in the margin trading.

(9 marks)
< ans >

The margin trading and securities lending in India is governed by the Securities Contracts (Regulation) Rules, 1957. The provisions of this Act were interpreted to suggest that the rules did not permit brokers to take up fund-based businesses. In this context, SEBI examined these provisions. It later took a view in the year 1997 that a broker cannot perform this business as his `prime activity.' It was interpreted that a broker could lend/borrow money only if it was incidental to securities transactions. SEBI followed up by issuing a clarification during the identical year. The situation in the post-clarification period presented a confused picture as a few brokers started doing the margin trading, whereas a few others still needed assurances for conducting the business. Later in the year 2001, the capital market witnessed major reforms with the implementation of compulsory rolling settlement on T+5 basis and the banning of replaced Carry Forward System (MCFS), Automated Lending and Borrowing Mechanism (ALBM), The Borrowing and Lending Securities Scheme (BLESS). As a result, such developments created even more uncertainties in the minds of brokers who felt that the rules of the game should be more organized and explicit.

The brokers are still not very clear about their role and stakes in this business. The number of participating brokers is still very low. SEBI needs to bring clarity in the regulations concerning the role of brokers vis-à-vis margin trading and securities lending. With regard to the banking system, the very fact that the ceiling limit of 5% is to be maintained along with individual ceiling limits of Rs. 10 lakh and Rs. 20 lakh for demat securities is a clear indication that the RBI has not been able to look beyond the existing scope of securities business even under the changed circumstances. Necessary homework to integrate the potential of margin trading and securities lending and relate the identical to the banks' balance sheets is an exercise that remains to be completed. Individually, a majority of banks have also not evinced the necessary dynamism in formulating the internal guidelines and for establishing systems to implement and manage the margin trading. a few have already reached the 5% ceiling limit and have little room for doing this business. The clients are exposed to very high levels of risk due to lack of info. The current bullish market patterns are similar to the 1 that was witnessed in the 1990s. provided this experience, the Indian capital market needs to infuse more confidence for furthering margin trading and securities lending. Clearly, the banking system is not poised to aid this business. The lead has to come from the brokers' community with adequate clarity and safeguards should be given by SEBI to ensure smooth conduct of this business. Apparently the small step, which could be a ‘giant leap' for the business in India, is yet to be taken.

Earning:   Approval pending.