Unit 3: Financial services
Financial Markets and Services notes · PTU syllabus (BBA 522-18)
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Unit summary
Financial services companies help businesses acquire assets, raise funds and manage risk. This unit covers leasing and its types, lease versus buy versus hire purchase, mutual funds, merchant banking, credit rating and venture capital, with SEBI guidelines.
After this unit you can
- Explain leasing, its types, and compare lease, buy and hire purchase
- Explain mutual fund concepts and schemes
- Explain merchant banking and credit rating
- Explain venture capital and the relevant SEBI guidelines
PTU syllabus topics
- Leasing meaning
- features and types
- lease vs. buy vs. hire purchase
- mutual fund concept and schemes
- merchant banking scope and SEBI guidelines
- credit rating types and agencies
- venture capital and SEBI guidelines
Ownership
Stays with lessor
Passes to hirer after last instalment
Depreciation claimed by
Lessor
Hirer
Payments
Lease rentals
Instalments of price plus interest
Option to buy
Not always
Yes, built in
Topic 1
Leasing
A lease is a contract in which the owner (lessor) allows another party (lessee) to use an asset for a period in return for periodic rentals. Types: finance lease (long-term, most risks and rewards pass to the lessee) and operating lease (short-term, cancellable); also sale and lease-back and leveraged lease.
Ownership
Remains with the lessor
Passes to the hirer after the last instalment
Depreciation claimed by
Lessor
Hirer
Payments
Lease rentals
Instalments including interest
Purchase option
Not necessarily
Built in
Lease vs buy decision: compare the present value of lease rentals (after tax) with the present value of the cost of buying (loan repayments and tax savings on depreciation and interest); choose the lower-cost option.
Topic 2
Mutual funds
A mutual fund pools money from many investors and invests it in securities, managed by professionals. Structure: sponsor, trust, asset management company (AMC) and custodian, regulated by SEBI.
By structure
Open-ended, close-ended, interval
By asset
Equity, debt, hybrid, money market
Special
Index funds, ETFs, ELSS (tax-saving), sectoral, fund of funds
Benefits: diversification, professional management, liquidity, small investments (SIPs) and regulation. Performance is measured by NAV (net asset value per unit).
Topic 3
Merchant banking and credit rating
- Merchant bankers manage public issues (lead managers), underwrite issues, advise on project finance, mergers and restructuring, and handle private placements. SEBI (Merchant Bankers) Regulations require registration, capital adequacy and a code of conduct.
- Credit rating is an opinion on the ability of a borrower to repay a debt instrument on time. Agencies in India: CRISIL, ICRA, CARE, India Ratings, Acuité, Brickwork, Infomerics. Long-term scale: AAA (highest safety) down to D (default).
Topic 4
Venture capital
Venture capital is long-term equity finance for new, innovative, high-risk, high-growth businesses, along with management support. Stages: seed, start-up, early, expansion and exit (IPO or sale). SEBI regulates venture capital and private equity funds as Alternative Investment Funds (AIFs) under the AIF Regulations, 2012.
Key terms
- Finance lease
- Long-term lease transferring most risks and rewards to the lessee
- Hire purchase
- Instalment buying where ownership passes at the end
- NAV
- Net asset value per unit of a mutual fund
- Merchant banker
- Manages issues and advises on capital raising
- Credit rating
- Opinion on the ability to repay debt
Quick revision
- Lease: ownership with lessor; HP: ownership passes at the end.
- Mutual fund: sponsor, trust, AMC, custodian; NAV.
- Rating agencies: CRISIL, ICRA, CARE and others; AAA highest.
- Venture capital funds are AIFs under SEBI.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Differentiate between a finance lease and an operating lease.
- Q2.Differentiate between lease and hire purchase.
- Q3.What is NAV?
- Q4.Name four credit rating agencies in India.
- Q5.What is venture capital?
Long-answer questions
- Q1.Explain leasing, its types and the lease-versus-buy decision.
- Q2.Explain the structure and types of mutual fund schemes.
- Q3.Explain merchant banking and credit rating in India.
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