Masters in Business Administration-MBA Semester III

MF0008 – Merchant Banking & Financial Services – 2 Credits

Assignment Set-1

Note: Each question carries 10 Marks. Answer all the questions.

Bring out an overview of Indian financial system post 1950 period.

The economy of India is the eleventh largest economy in the world by nominal GDP and the
fourth largest by purchasing power parity (PPP).Following strong economic reforms from the
socialist inspired economy of a post-independence Indian nation, the country began to develop a
fast-paced economic growth, as free market principles were initiated in 1990 for international
competition and foreign investment. India is an emerging economic power with a very large pool
of human and natural resources, and a growing large pool of skilled professionals. Economists
predict that by 2020, India will be among the leading economies of the world.
Pre-colonial

The citizens of the Indus Valley civilization a permanent settlement that flourished between 2800
BC and 1800 BC, practiced agriculture, domesticated animals, used uniform weights and
measures, made tools and weapons, and traded with other cities. Evidence of well planned streets,
a drainage system and water supply reveals their knowledge of urban planning, which included
the world's first urban sanitation systems and the existence of a form of municipal government.
The 1872 census revealed that 99.3% of the population of the region constituting present-day
India resided in villages, whose economies were largely isolated and self-sustaining, with
agriculture the predominant occupation. This satisfied the food requirements of the village and
provided raw materials for hand-based industries, such as textiles, food processing and crafts.
Although many kingdoms and rulers issued coins, barter was prevalent. Villages paid a portion of
their agricultural produce as revenue to the rulers, while its craftsmen received a part of the crops
at harvest time for their services.

Religion, especially Hinduism, and the caste and the joint family systems, played an influential
role in shaping economic activities. The caste system functioned much like medieval European
guilds, ensuring the division of labour, providing for the training of apprentices and, in some
cases, allowing manufacturers to achieve narrow specialization. For instance, in certain regions,
producing each variety of cloth was the specialty of a particular sub-caste.
Textiles such as muslin, Calicos, shawls, and agricultural products such as pepper, cinnamon,
opium and indigo were exported to Europe, the Middle East and South East Asia in return for
gold and silver.

Assessment of India's pre-colonial economy is mostly qualitative, owing to the lack of

quantitative information. One estimate puts the revenue of Akbar's Mughal Empire in 1600 at
£17.5 million, in contrast with the total revenue of Great Britain in 1800, which totalled £16
million. India, by the time of the arrival of the British, was a largely traditional agrarian economy
with a dominant subsistence sector dependent on primitive technology. It existed alongside a
competitively developed network of commerce, manufacturing and credit. After the decline of
the Mughals, western, central and parts of south and north India were integrated and administered by
the Maratha Empire. The Maratha Empire's budget in 1740s, at its peak, was 100 million. After
the loss at Panipat, the Maratha Empire disintegrated into confederate states of Gwalior, Baroda,
Indore, Jhansi, Nagpur, Pune and Kolhapur. Gwalior state had a budget of 30M. However, at this
time, British East India company entered the Indian political theatre. Until 1857, when India was
firmly under the British crown, the country remained in a state of political instability due to
internecine wars and conflicts.
Colonial Calcutta, which was the economic hub of British India, saw increased industrial activity during
World War II. Company rule in India brought a major change in the taxation environment from
revenue taxes to property taxes, resulting in mass impoverishment and destitution of majority of
farmers and led to numerous famines. The economic policies of the British Raj effectively
bankrupted India's large handicrafts industry and caused a massive drain of India's resources.
Indian Nationalists employed the successful Swadeshi movement, as strategy to diminish British
economic superiority by boycotting British products and the reviving the market for domestic-
made products and production techniques. India had become a strong market for superior finished
European goods. This was because of vast gains made by the Industrial revolution in Europe, the
effects of which was deprived to Colonial India.

The Nationalists had hoped to revive the domestic industries that were badly effected by policies
implemented by British Raj which had made them uncompetitive to British made goods.
An estimate by Cambridge University historian Angus Maddison reveals that "India's share of the
world income fell from 22.6% in 1700, comparable to Europe's share of 23.3%, to a low of 3.8%
in 1952". It also created an institutional environment that, on paper, guaranteed property rights
among the colonizers, encouraged free trade, and created a single currency with fixed exchange
rates, standardized weights and measures, capital markets. It also established a well developed
system of railways and telegraphs, a civil service that aimed to be free from political interference,
a common-law and an adversarial legal system.[41] India's colonisation by the British coincided
with major changes in the world economy—industrialisation, and significant growth in
production and trade. However, at the end of colonial rule, India inherited an economy that was
one of the poorest in the developing world,[42] with industrial development stalled, agriculture
unable to feed a rapidly growing population, India had one of the world's lowest life expectancies,
and low rates for literacy.

The impact of the British rule on India's economy is a controversial topic. Leaders of the Indian
independence movement, and left-nationalist economic historians have blamed colonial rule for
the dismal state of India's economy in its aftermath and that financial strength required for
Industrial development in Europe was derived from the wealth taken from Colonies in Asia and
Africa. At the same time right-wing historians have countered that India's low economic
performance was due to various sectors being in a state of growth and decline due to changes
brought in by colonialism and a world that was moving towards industrialization and economic
integration

2. Explain latest monetary policy of RBI?

1.The Monetary Policy for 2010-11 is set against a rather complex economic backdrop. Although
the situation is more reassuring than it was a quarter ago, uncertainty about the shape and pace of
global recovery persists. Private spending in advanced economies continues to be constrained and
inflation remains generally subdued making it likely that fiscal and monetary stimuli in these
economies will continue for an extended period. Emerging market economies (EMEs) are
significantly ahead on the recovery curve, but some of them are also facing inflationary pressures.
2. India’s growth-inflation dynamics are in contrast to the overall global scenario. The economy is
recovering rapidly from the growth slowdown but inflationary pressures, which were triggered by
supply side factors, are now developing into a wider inflationary process. As the domestic balance
of risks shifts from growth slowdown to inflation, our policy stance must recognise and respond
to this transition. While global policy co-ordination was critical in dealing with a worldwide
crisis, the exit process will necessarily be differentiated on the basis of the macroeconomic
condition in each country. India’s rapid turnaround after the crisis induced slowdown evidences
the resilience of our economy and our financial sector. However, this should not divert us from
the need to bring back into focus the twin challenges of macroeconomic stability and financial
sector development.
3. This statement is organised in two parts. Part A covers Monetary Policy and is divided into
four Sections: Section I provides an overview of global and domestic macroeconomic
developments; Section II sets out the outlook and projections for growth, inflation and monetary
aggregates; Section III explains the stance of monetary policy; and Section IV specifies the
monetary measures.Part B covers Developmental and Regulatory Policies and is organised into
six sections: Financial Stability (Section I), Interest Rate Policy (Section II), Financial Markets
(Section III), Credit Delivery and Financial Inclusion (Section IV), Regulatory and Supervisory
Measures for Commercial Banks (Section V) and Institutional Developments (Section VI).
4. Part A of this Statement should be read and understood together with the detailed review in
Macroeconomic and Monetary Developments released by the Reserve Bank.

3. Explain the recent SEBI guidelines for merchant bankers?

Merchant banking may be defined as an ‘institution which covers a wide range of activities such
as underwriting of shares, portfolio management, project counseling, insurance etc…They render
all these services for a fee ORIGIN : The term merchant banking originated from the London who
started financing foreign trade through acceptance of bills Later they helped government of under
developed countries to raise long term funds Later these merchants formed an association which
is now called ”Merchant Banking and Securities House Association”
Recent SEBI guidelines for merchant bankers:
Merchant Bankers have been barred from undertaking activities other than related to the securities
market. The SEBI (Merchant Bankers) Regulations, 1992 have been amended on December 19,
1997 to provide that: the applicant should be a fit and proper person;
a merchant banker has to seek separate registration for its underwriting or portfolio management
activities; the categorisation of merchant bankers I, II, III and IV has been dispensed with;
a merchant banker, other than a bank or a public financial institution, has been prohibited from
carrying any activities not pertaining to the securities market; and
the applicant should be a body corporate other than non-banking finance company.
The Merchant Bankers Regulations were amended on January 21, 1998 to provide time upto June
30, 1998 to sever its activities or hive off its activities not pertaining to the securities market. The
Reserve Bank of India has exempted merchant banking companies from the provisions of Reserve
Bank of India Act, 1934 relating to compulsory registration (section 451A), maintenance of liquid
assets (section 451B), creation of reserve fund (section 451C ) and all the provisions of the recent
Directions relating to deposit acceptance and prudential norms.

Merchant banking companies, to be eligible for the above exemption, are required to satisfy the
following conditions:
Such companies are registered with the SEBI under section 12 of the SEBI Act, 1992 and are
carrying on the business of merchant banker in accordance with the Rules / Regulations framed
by the SEBI; they acquire securities only as part of their merchant banking business;
they do not carry on any other financial activities as mentioned in section 451 (c ) of the RBI Act,
1934; they do not accept / hold public deposits
 Masters in Business Administration-MBA Semester III
MF0008 – Merchant Banking & Financial Services – 2 Credits
Assignment Set-2

Note: Each question carries 10 Marks. Answer all the questions.

1. Explain the listing, trading and settlement issues in industrial securities market?

The industrial securities market refers to the market which deals in equities and debentures of the
corporates. It is further divided into primary market and secondary market. Primary market (new issue
market):- deals with 'new securities', that is, securities which were not previously available and are offered to
the investing public for the first time. It is the market for raising fresh capital in the form of shares and
debentures. It provides the issuing company with additional funds for starting a new enterprise or for either
expansion or diversification of an existing one, and thus its contribution to company financing is direct. The new
offerings by the companies are made either as an initial public offering (IPO) or rights issue.
Secondary market/ stock market (old issues market or stock exchange):- is the market for buying
and selling securities of the existing companies. Under this, securities are traded after being
initially offered to the public in the primary market and/or listed on the stock exchange. The stock
exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and
reflects the trends in the economy through fluctuations in the prices of various securities. It been
defined as, "a body of individuals, whether incorporated or not, constituted for the purpose of
assisting, regulating and controlling the business of buying, selling and dealing in securities".
Listing on stock exchanges enables the shareholders to monitor the movement of the share prices
in an effective manner. This assist them to take prudent decisions on whether to retain their
holdings or sell off or even accumulate further. However, to list the securities on a stock
exchange, the issuing company has to go through set norms and procedures

2. Explain the role of credit rating agencies?

A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types
of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the
underlying debt are also given ratings.

In most cases, the issuers of securities are companies, special purpose entities, state and local
governments, non-profit organizations, or national governments issuing debt-like securities (i.e.,
bonds) that can be traded on a secondary market. A credit rating for an issuer takes into
consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the
interest rate applied to the particular security being issued. (In contrast to CRAs, a company that
issues credit scores for individual credit-worthiness is generally called a credit bureau or
consumer credit reporting agency.)

The value of such ratings has been widely questioned after the 2007/2009 financial crisis. In 2003
the U.S. Securities and Exchange Commission submitted a report to Congress detailing plans to
launch an investigation into the anti-competitive practices of credit rating agencies and issues
including conflicts of interest.

Agencies that assign credit ratings for corporations include:

A. M. Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
Fitch Ratings (U.S.)
Moody's Investors Service (U.S.)
Standard & Poor's (U.S.)
Egan-Jones Rating Company (U.S.)
Japan Credit Rating Agency (Japan)
Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments
For investors, credit rating agencies increase the range of investment alternatives and provide
independent, easy-to-use measurements of relative credit risk; this generally increases the
efficiency of the market, lowering costs for both borrowers and lenders. This in turn increases the
total supply of risk capital in the economy, leading to stronger growth. It also opens the capital
markets to categories of borrower who might otherwise be shut out altogether: small
governments, startup companies, hospitals, and universities

3. Explain call money market in India?

The call money market is a mechanism that allows both dealers and brokers to locate and borrow
funds that can be used for investment needs. The funds located through the money market can be
utilized to provide financing for the purchase of securities that can be added to the portfolio of the
investment firm, or as a resource that will cover the margin accounts of the firm’s clients.
As a means of securing financing for credit needs, the call money market provides a range of
options. Chief among them is the ability to create and manage what is referred to as a call money
loan. The call money loan essentially works in the same manner as a day to day loan. Call money
loans provide funds that can be used to conduct transactions between banks, or with other money
market dealers. Generally, these types of loans are paid off in a short period of time, allowing the
broker to move on to secure new loans and continue to process orders on behalf of their clients.
The loans may be secured or unsecured, depending on the terms and conditions of the loan, along
with the duration and the credit rating of the debtor.

Individual investors generally do not participate directly in the call money market. Instead, the
investor will work through a brokerage firm. The broker will determine the best avenue to take in
financing an investment, based on the individual circumstances of the client. This process is
actually to the advantage of the investor, since the broker will be aware of sources of funding that
may or may not be readily accessible to individuals who are looking for financial support to build
a portfolio.

The call money market crosses international lines, with funding opportunities located in a number
of countries around the world. Because of the inclusion of international banking institutions, the
role of the brokerage firm becomes even more vital to the individual investor. Brokers will be
aware of applicable banking laws, and how those laws could impact the transaction. This
knowledge regarding participants in the call money market allows the firm to pick and choose
among possible avenues for funding with a level of efficiency that would be difficult for the individual
 Masters in Business Administration-MBA Semester III
MF0006 – International Financial Management – 2 Credits
Assignment Set-1 (30 Marks)
Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Give possible reasons by which the companies are encouraged to be an MNC?

Some of the possible reasons are

• To broaden markets: Saturated home markets ask for market development abroad (Coca Cola, Mac Donald’s
etc.). Multinationals seek new markets to fill product gaps in foreign markets where excess returns can be
earned.
• To seek raw materials: Multinationals secure the necessary raw materials required to sustain primary business
line (Exxon; Wal Mart).
Multinationals also seek to obtain easy access to oil exploration, mining, and manufacturing in many developing
nations.

• To seek new technologies: Multinationals seek leading scientific and design ideas.
• To seek production efficiencies by shifting to low cost regions (GE).
• To avoid political hurdles such as import quota, regulatory measures of governments, trade barriers, etc.
• To diversify i.e. to cushion the impact of adverse economic events.
• To postpone payment of domestic taxes.
• To counter foreign investments by competitors.

Multiple operating environments: Multinationals operate under a diverse pattern of consumer preferences,
distribution channels, legal frameworks and financial infrastructures.
Political demands; political risks: Multinationals have to mesh corporate strategy with host country industrial
development policies; thus there is a potential for conflict.
Global competitive game: Multiple market access and various global scale economies allow companies new
competitive strategic options.
Currency fluctuations (foreign exchange risk): The economic performance of a multinational is measured in
multiple currencies which result in accounting, transaction and economic exposure.

Q.2 What do you mean by International Trade Flows? Also explain various factors affecting
international trade flows.

International Trade Flows International trade is the exchange of goods and services across international
boundaries. The world trade in goods and services has grown much faster than world GDP since 1960,global
trade has grown twice as fast as the global GDP. The share of international trade in national economies has ,
in the most cases, increased dramatically over the past few decades, In most countries, international trade
represents a significant share of GDP.
Factors Affecting International Trade Flows
• Impact of Inflation:
A relative increase in a country’s inflation rate will decrease itscurrent account, as imports increase and exports
decrease.
• Impact of National Income:
A relative increase in a country’s income level will decrease its current account, as imports increase.
• Impact of Government Restrictions:
A gover nm e nt ma y re duc e i ts c ount r y’s imports by imposing a tariff on imported goods, or by
enforcing a quota. Some trade restrictions may be imposed on certain products for health and safety reasons.
• Impact of Exchange Rates:
If a country’s currency begins to rise in value, its current account balance will decrease as imports increase
and exports decrease

Q.3 (a) Define Swaps. Also explain various types of swaps.

 
Swaps
A swap is an agreement to exchange cash flows at specified future times according to certain specified
rules. The two counter parties in a swap agree to exchange or swap cashflows at periodic intervals The different
kinds of swaps are:
• Interest Rate Swap– An exchange of fixed-rate interest payment for floating-rate interest payments.
•Currency Swap– An exchange of interest payments and principal in one currency for interest payment and
principal in another currency.
•Cr oss Cur re nc y Int e re s t Ra t e Swa p – An e xc ha nge of f loa ti ng ra t e i nte r e st payment and
principal in one currency for fixed rate interest payment and principal in another currency.

(b) Define foreign bonds with their salient features.

Foreign Bonds
A country’s foreign bond market is that market in which the bonds of issuers not domiciled in that country are
sold and traded. For example, the bonds of a German company issued in the U.s. or traded on the U.S.
secondary markets would by part of the U.S. foreign bondmarket. The definition of “foreign” refers
to the nationality of the issuer in relation to the market place. For example, a US dollar bond sold in the
United States by the Swedish car pr oduc e r Vol vo is cl a s si fi e d as a f ore i gn bond whi le one i s s ue d
by Ge ne r al M ot or s i s domestic bond.
Features of the Foreign Bonds:

1. Foreign bonds are sold in the currency of the local economy.2. Foreign bonds are subject to the
regulations governing all securities traded in the national market and sometimes special regulations
governing foreign borrowers (e.g., additional registration).3. Foreign bonds provide foreign companies access to
funds they often use to finance their operations in the country where they sell the bonds.4. Foreign bonds are
regulated by the domestic market authorities. The issuer must satisfy all regulations of the country in
which it issues the bonds.
 Masters in Business Administration-MBA Semester III
MF0006 – International Financial Management
Assignment Set- 2

Q.1 (a) Explain the responsibilities of IMF.

IMF is the central institution of the international monetary system. The responsibilities of IMFare:
• To promote international monetary co-operation: prevent or manages financial crises.
•To facilitate expansion and balanced growth of international trade.
• To promote exchange rate stability.
• To assist in establishing multilateral system of payment.
• To lend to member countries experiencing balance of payment difficulties.
The IMF gets its resources from the quota countries’ pay when they join the IMF and from periodic increases
in this quota. The quotas determine a country’s voting power and the amount of financing it can
receive from the IMF.

(b) Describe two types of exchange rates.

Floating Exchange Rate (Flexible) Regimes:
A fl e x ib le ex c ha n g e ra t e sy st e m is on e where the value of the currency is not offi cially fixed but
exchange market in this system, currencies are allowed to:
• Appreciate – when currency becomes more valuable relative to other.
• Depreciate – when the currency becomes less valuable relative to others.
Fixed Exchange Rate Regimes: a fixed exchange rate system is one where the value of th e c u rre nc y is set
by offi c ia l gov e rn me n t p olic y. T he e xc h an g e ra te is d e te rm in e d b y government actions designed
to keep rates the same over time. The currencies are altered
by the government:
• Revaluation – Government action to increase the value of domestic currency relative to other.
• Devaluation – Government action to decrease the value of domestic currency.

Q.2   Illustrate Political Exposure in Foreign Exchange Market?

 
Management of Political Exposure
Political risk stems from political action taken by political actors that affect business. The political
actors may be the members of the government, political parties, public interest groups that are trying
to affect the political process, supra-government entities (e.g. WTO,NAFTA) or other corporations that might act
in a political way. Political action has a direct bearing when political actors change laws, regulations, etc. or take
other actions that directly affect business. An example of such direct effect is the nationalization of
business. The indirect effect of political action occurs when the political actors change the
economic environment, the attitudes of the population, or some other factor that then indirectly affects
specific businesses. An example of such indirect effect is when the local business lobbies the government
against the entry of foreign companies. Country risk and political risk are sometimes used interchangeably.
Country risk comprises all the socio-political and economic factors which determine the degree and
level of ris kassociated with undertaking business transactions in particular country; the likelihood
thatchanges in the business environment will occur that reduce the profitability of doing businessin a
country.Examples of political risk:
1) Nationalization:
Nationalization is the appropriation of private assets by a nationalgovernment.
2) Creeping Expropriation:
 Creeping expropriation occurs when the government changes the rules and makes profit impossible. An
example: The host government may require that the company sell its products only to the local enterprises and
that export opportunities are not pursued. This limits the profit potential of company.
3) Contract Repudiation:
Here, the terms of operating arrangements are changed of renegotiated once their operations are in
place and have proved successful. Thus a d d iti on a l ta x e s m a y be im p osed . C omp a n ie s w it h
la rg e fi x e d inv e st m en t s a re vulnerable due to the “hostage” effect. They cannot credible
threaten to withdraw. Companies with stable technologies are vulnerable because locals could take over the
operation without need for continuing foreign technology transfer.
4) Poli ti c a l Pr e ss ur e i n a De m oc r a ti c Sys t em :
Spread of democracy increases popular criticism of foreign investors. Opposition parties may use attacks
on foreign investors as nationalistic position to gain voter support (but pro-business opposition ca n a lso a s
ta riff inc re a se s). Th e re is e v ide n ce m a ny b e lie ve t h at su p p re ssive authoritarian regimes are
more favorable to business.
5) Threats from Local Business:
Local business interests use political connections to secure favorable treatment over foreign companies
or resist market liberalization. Many local business people become wealthy during the period of protected
markets and do not want to eliminate protectionist policies. As a result of lobbying by local business,
government may require foreign investors to have local partners or make laws that keep foreigners entirely
away from some “critical” sectors or enact licensing procedures that delay investment. When liberalization
occurs, local business still tries to create adverse political conditions. They try to prevent foreign
companies form winning government contracts, or try to slow licensing and other approvals for foreign
companies to decrease their relative efficiency. 

Q.3 Explain Trade deficits and Trade surplus in regard to Balance of Payments.
 
Trade Deficits
The trade balance is the difference between a country’s output and its domestic demand-the difference between what goods
and services a country produce and how many goods and services it buys from abroad. A
trade deficit occurs when, during a certain period, a nation imports more goods and services than it exports. A trade
surplus occurs when a nation exports more goods and services than it imports .According to the BOP identity
(Current Account+ Capital Account = Change in Official Reserve Accounts), any trade deficit must be offset by
surpluses on other accounts. Since the official reserves are limited, a surplus on the Official Reserve Account
(which means selling of the foreign exchange reserves by the central bank) can at best be a temporary measure.
Thus the trade deficit must be “financed” by foreign income or transfers, or by a capital account surplus. A capital
account surplus consists of capital purchases (stocks, b o n d s e t c . ) b y f o r e i g n n a t i o n a l s . A c a p i t a l a c c o u n t
s u r p l u s ( a n i n c r e a s e i n n e t f o r e i g n investment) may result in an increase in the net outflow of income
(dividend, interest) to foreign nationals could have intergenerational effects: they shift consumption over time, and future
generations have to pay for the consumption by the present generation. However atrade deficit can also lead to higher
consumption in the future, if for example, it is used to finance profitable domestic investment, which generates
returns in excess of what is paid tothe foreign nationals on their investments in the country. Such a situation may
arise if acountry experiences a gain in productivity as a result of these investments.A trade surplus implies an increase
in the net international investment of residents of thecountry and shifting of consumption to future rather than
current generations. Even tradesurpluses can be undesirable for a country. An example where a trade surplus
was notbeneficial for the country is Japan in the 1990s. The positive trade balance that Japan hadwas  partly  due  to  the
protectionist  measures  that  were  adopted  by  the  Japanesegovernment. These measures caused the price of goods in
Japan to be much higher thatwhat they would have been, had import been freely allowed. The foreign currency that
theJapanese companies earned overseas were kept abroad and not converted into yen in order to keep the value of the yes
low and maintain the competitiveness of Japanese exports.How ever, a weak yen also prevented Japa nese
consumers from importing goods fromabroad and benefiting from trade surplus. The foreign exchange earned abroad as
a resultof the trade surplus was party squandered by spending it on real estate purchases in the United States that
often proved unprofitable.
 Master of Business Administration (MBA) – Semester 4
MF0009 – Insurance & Risk Management – 2 Credits (Book ID: MF0009)
Assignment Set – 1 (30 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

“Risk can be classified into several distinct categories”. Explain.

Risk is defined as uncertainty concerning the occurrence of a loss. Objective Risk: the relative variation of actual loss
from expected loss. Objective risk declines as the number
of exposures increases. More specifically, objective risk varies inversely with the square root of the number of
cases under observation.
•Subjective Risk :uncertainty based on a person’s mental condition or state of mind.
Categories of Risk:
•Pure and Speculative risks •Types of Pure Risk –Personal risk •Risk of premature death or disability
•Risk of insufficient income on retirement
•Risk of unemployment
–Property risk •Direct Loss •Indirect or consequential loss –Liability risk •Fundamental and Particular Risks.
Risk can be also categoried as following:
1. Operational Risk: Risks of loss due to improper process implementation, failed system or some external
events risks. Examples can be Failure to address priority conflicts, Insufficient resources or No proper subject
training etc.
2. Schedule Risk: Project schedule get slip when project tasks and schedule release risks are not addressed
properly. Schedule risks mainly affect on project and finally on company economy and may lead to project
failure
3. Budget Risk: Wrong budget estimation or Project scope expansion leads to Budget / Cost Risk. This risk
may lead to either a delay in the delivery of the project or sometimes even an incomplete closure of the project.
4. Business Risk: Non-availability of contracts or purchase order at the start of the project or delay in receiving
proper inputs from the customer or business analyst may lead to business risks.
5. Technical Environment Risk: These are the risks related to the environment under which both the client and
the customer work. For example, constantly changing development or production or testing environment can
lead to this risk.
6. Information Security Risk: The risks related to the security of information like confidentiality or integrity of
customer’s personal / business data. The Access rights / privileges failure will lead to leakage of confidential
data.
7. Programmatic Risks: The external risks beyond the operational limits. These are outside the control of the
program. These external events can be Running out of fund or Changing customer product strategy and priority
or Government rule changes etc.
8. Infrastructure Risk: Improper planning of infrastructure / resources may lead to risks related to slow network
connectivity or complete failure of connectivity at both the client and the customer sites. So, it is important to do
proper planning of infrastructure for the efficient development of a project.
9. Quality and Process Risk: This risk occures due to Iincorrect application of process tailoring and deviation
guidelines
New employees allocated to the project not trained in the quality processes and procedures adopted by the
organization
10. Resource Risk: This risk depends on factors like Schedule, Staff, Budget and Facilities. Improper
management of any of these factors leads to resource risk.
11. Supplier Risk: This type of risk may occurs when some third party supplier is involved in the development
of the project. This risk occurs due to the uncertain or inadequate capability of supplier.
12. Technology Risk: It is related to the complete change in technology or introduction of a new technology.
13. Technical and Architectural Risk: These types of risks generally generally leads to failure of functionality
and performance. It addresses the hardware and software tools & supporting equipments used in the project.
The risk for this category may be due to — Capacity, Suitability, usability, Familiarity, Reliability, System
Support and deliverability.
2) Identify common misconceptions about risk management and explain why these misconceptions are
developed.

Three common misconceptions about risk management are:

Downside: The first misconception is that risk is only about downside. The fact is, for risk to exist, positive and
negative implications must coexist equally. Saying that risk is measurable only in the context of negative
outcomes would be no different from saying that a balance sheet contains only liabilities and no assets.
Event drive: The second misconception is that the definition of risk can be dependent only upon the occurrence
of an event. As human beings, we undergo the aging process day-to-day and, inevitably, we die. Even if the
passage of time is the only cause of our death, the risk of mortality statistically increases on a daily basis. There
may never be a single event that raises the risk factor, but risk still exists without the presence of any significant
precipitating event.
Insurance: The third misconception is that risk is an item that affects businesses only in the context of
insurance. Risk occurs everywhere. For example, any issue that involves governance and compliance is
fundamentally based upon risk

3) What are the social values of insurance? What are the social costs? Explain.

In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a
contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to
another, in exchange for payment. An insurer is a company selling the insurance; an insured or policyholder is
the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to
be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of
appraising and controlling risk, has evolved as a discrete field of study and practice.
The social values of insurance are:
Risk Cover - Life today is full of uncertainties; in this scenario Life Insurance ensures that your loved ones
continue to enjoy a good quality of life against any unforeseen event.
Planning for life stage needs - Life Insurance not only provides for financial support in the event of untimely
death but also acts as a long term investment. You can meet your goals, be it your children's education, their
marriage, building your dream home or planning a relaxed retired life, according to your life stage and risk
appetite. Traditional life insurance policies i.e. traditional endowment plans, offer in-built guarantees and
defined maturity benefits through variety of product options such as Money Back, Guaranteed Cash Values,
Guaranteed Maturity Values.

Protection against rising health expenses - Life Insurers through riders or stand alone health insurance plans
offer the benefits of protection against critical diseases and hospitalization expenses. This benefit has assumed
critical importance given the increasing incidence of lifestyle diseases and escalating medical costs.
Builds the habit of thrift - Life Insurance is a long-term contract where as policyholder, you have to pay a fixed
amount at a defined periodicity. This builds the habit of long-term savings. Regular savings over a long period
ensures that a decent corpus is built to meet financial needs at various life stages.
Safe and profitable long-term investment - Life Insurance is a highly regulated sector. IRDA, the regulatory
body, through various rules and regulations ensures that the safety of the policyholder's money is the primary
responsibility of all stakeholders. Life Insurance being a long-term savings instrument, also ensures that the life
insurers focus on returns over a long-term and do not take risky investment decisions for short term gains.
Assured income through annuities - Life Insurance is one of the best instruments for retirement planning. The
money saved during the earning life span is utilized to provide a steady source of income during the retired
phase of life.

Protection plus savings over a long term - Since traditional policies are viewed both by the distributors as well
as the customers as a long term commitment; these policies help the policyholders meet the dual need of
protection and long term wealth creation efficiently.
Growth through dividends - Traditional policies offer an opportunity to participate in the economic growth
without taking the investment risk. The investment income is distributed among the policyholders through
annual announcement of dividends/bonus.
Facility of loans without affecting the policy benefits - Policyholders have the option of taking loan against the
policy. This helps you meet your unplanned life stage needs without adversely affecting the benefits of the
policy they have bought.
Tax Benefits-Insurance plans provide attractive tax-benefits for both at the time of entry and exit under most of
the plans.

Mortgage Redemption- Insurance acts as an effective tool to cover mortgages and loans taken by the
policyholders so that, in case of any unforeseen event, the burden of repayment does not fall on the bereaved
family
Social cost, in economics, is generally defined in opposition to "private cost". In economics, theorists model
individual decision-making as measurement of costs and benefits. Rational choice theory often assumes that
individuals consider only the costs they themselves bear when making decisions, not the costs that may be
borne by others.

With pure private goods, the costs carried by the individuals involved are the only economically meaningful
costs. The choice to purchase a glass of lemonade at a lemonade stand has little consequence for anyone other
than the seller or the buyer. The costs involved in this economic activity are the costs of the lemons and the
sugar and the water that are ingredients to the lemonade, the opportunity cost of the labour to combine them into
lemonade, as well as any transaction costs, such as walking to the stand.
If there is a negative externality, then social costs will be greater than private costs. Environmental pollution is
an example of a social cost that is seldom borne completely by the polluter, thereby creating a negative
externality. If there is a positive externality, then one will have higher social benefits than private benefits. For
example, when a supplier of educational services indirectly benefits society as a whole but only receives
payment for the direct benefit received by the recipient of the education: the benefit to society of an educated
populace is a positive externality. In either case, economists refer to this as market failure because resources
will be allocated inefficiently. In the case of negative externalities, private agents will engage in too much of the
activity; in the case of positive externalites, they will engage in too little. (The marginal rate of transformation
in production will not be equal to the marginal rate of substitution in consumption due to the effect of the
externality and as a result Pareto optimality will not occur—see welfare economics for an explanation.)

Master of Business Administration MBA Semester 4

MF0009 Insurance and Risk Management
Assignment Set 2

Q.1.What is the nature of actuarial practice? Discuss the actuarial modeling principles?

Nature of Actuarial Practice

The primary focus of actuarial work is on the financial and economic consequences of events involving risk and uncertainty.
Actuarial practice involves the management of these implications and their associated uncertainties. To gain insights about future
possibilities, the actuary depends on observation and the wisdom gained through prior experience. The actuary uses these
observations and this experience when constructing validating and applying models. Actuarial models are constructed to aid in
the assessment of the financial and economic consequences associated with phenomena that are subject to uncertainty with
respect to occurrence, timing, or severity. This requires: a) Understanding the conditions and processes under which past
observations were obtained. b) Anticipating changes in those conditions that will affect future experience. c) Evaluating the
quality of the available data. d) Bringing judgment to bear on the modeling process. e) Validating the work as it progresses. f)
Estimating the uncertainty inherent in the modeling process itself.

Actuarial Modeling Principles

Principles abstract the key elements of the scientific framework. Principles are not prescriptions that specify how actuarial work
is to be done, but are statements grounded in observations and experience. The concept of actuarial risk defines the subject matter
of actuarial science. An actuarial risk is a phenomenon that has economic consequences and is subject to uncertainty with respect
to one or more of the actuarial risk variables occurrence, timing and severity.

Principle of Modeling or Actuarial risks

 This provides assurance that actuarial risk can be analyzed and that estimates of future behavior can be obtained. Actuarial risks
can be stochastically modeled based on assumptions about the probability that will apply to the actuarial risk variables in the
future, including assumptions about the future environment.
A model described by this principle together with a present value model, if applicable, is called an actuarial model. Actuarial
assumptions are those upon which an actuarial model is based. An actuarial model can be constructed using data from prior
experiments, data from related phenomena or judgment. Such a model can be validated by comparing its results to the actual
outcomes to the phenomena being modeled. In certain circumstances, the actuary choice of assumptions may be constrained by
regulations or by professional standards.
In general, an actuarial model utilizes a present value model if it is intended to determine economic values. A present value model
included in an actuarial model is often based on assumptions concerning aspects of the future environment, such as interest rates
and inflation rates. The present value model can reflect the judgment of the actuary constructing the model or that of the actuary
client. Although all actuarial risk is subject to timing considerations, a present value model directly addresses timing risk and is
used if the time dimension is significant.
Most actuarial models are representations of collection of related actuarial risks. For example, the actuarial risk of claims under
Rs.100, 000 life insurance policies issued to selected 45-year-old male sand the actuarial risk of claims under Rs.200, 000 policies
for similarly selected insured can usually be represented by the same actuarial model. The economic consequences in effect act as
a scaling factor that relates these separate phenomena and allows the same model to apply to both. In other words, the economic
consequences suggest exposure measures. This observation applies to most actuarial models, although the economic
consequences and exposure measures may not be in exact proportion.

Principle of Exposure
For most actuarial models there exist one or more exposure measures that are approximately proportional to the economic
consequences of one or more collections of the actuarial risks being modeled. The degree of accuracy of a mathematical model is
based on a comparison of values calculated using the model with known values. As time passes and more known values are
available for comparison, the degree of accuracy of the model may change. In the case of a model that is initially validated only
judgmentally, it may become possible to determine the degree of accuracy. Actuarial modeling involves a feedback mechanism.
As additional data emerge or the environment changes, the model may need to be changed.
Principle of continued validity of Actuarial models
The change over time in the degree of accuracy of an initially valid actuarial model depends upon changes in the:
a. Nature of the right to receive or the duty to make a payment
b.Various environments (for example, regulatory, judicial, social, financial, and economic) within which the modeled events
occur financial, economic) within which the modeled events occur.
c. Sufficiency and quality of the data available to validate the model.
d. Actuary understands the environment.

2) Discuss the various methods of reinsurance. Explain with suitable examples.

Reinsurance is insurance that is purchased by an insurance company (reinsurer) from an insurer as a means of
risk management, to transfer risk from the insurer to the reinsurer. The reinsurer and the insurer enter into a
reinsurance agreement which details the conditions upon which the reinsurer would pay the insurer's losses (in
terms of excess of loss or proportional to loss). The reinsurer is paid a reinsurance premium by the insurer, and
the insurer issues thousands of policies.

For example, assume an insurer sells one thousand policies, each with a $1 million policy limit. Theoretically,
the insurer could lose $1 million on each policy – totaling to $1 billion. It may be better to pass some potential
risk to a reinsurance company (reinsurer) as this will minimize the insurer's risk.

There are two basic methods of reinsurance:

Facultative Reinsurance is specific reinsurance covering a single risk. The reinsurer is reinsuring one insured on
a specific policy. Each facultative risk is submitted by the insurer to the reinsurer.
Treaty Reinsurance is a method of reinsurance requiring the insurer and the reinsurer to formulate and execute a
reinsurance contract. The reinsurer then covers all the insurance policies coming within the scope of that
contract. There are two basic methods of treaty reinsurance:
Quota Share Treaty Reinsurance, and Excess of Loss Treaty Reinsurance.
In the past 30 years there has been a major shift from Quota Share to Excess of Loss in the property and
casualty fields.

Almost all insurance companies have a reinsurance program. The ultimate goal of that program is to reduce
their exposure to loss by passing the exposure to loss to a reinsurer or a group of reinsurers. Therefore, they are
'transferring some of the risk to the reinsurer or a group of reinsurers'. Insurance, which is regulated at the state
level (in the USA), permits an insurer only to issue policies with a maximum limit of 10% of their surplus (net
worth), unless those policies are reinsured

3) What are the critical issues in bancassurance.

The Bank Insurance Model ('BIM'), also sometimes known as 'Bancassurance', is the term used to describe the
partnership or relationship between a bank and an insurance company whereby the insurance company uses the
bank sales channel in order to sell insurance products.
BIM allows the insurance company to maintain smaller direct sales teams as their products are sold through the
bank to bank customers by bank staff. Bank staff and tellers, rather than an insurance salesperson, become the point of
sale/point of contact for the customer. Bank staff are advised and supported by the insurance company through product
information, marketing campaigns and sales training.
Both the bank and insurance company share the commission. Insurance policies are processed and administered
by the insurance company. BIM differs from 'Classic' or Traditional Insurance Model (TIM) in that TIM insurance
companies tend to have larger insurance sales teams and generally work with brokers and third party agents such as
MAIC. An additional approach, the Hybrid Insurance Model (HIM), is a mix between BIM and TIM. HIM insurance
companies may have a sales force, may use brokers and agents and may have a partnership with a bank.
BIM is extremely popular in European countries such as Spain, France and Austria.
The usage of the term picked up as banks and insurance companies merged and banks sought to provide
insurance, especially in markets that have been liberalised recently. It is a controversial idea, and many feel it
gives banks too great a control over the financial industry or creates too much competition with existing
insurers.

In some countries, bank insurance is still largely prohibited, but it was recently legalized in countries such as the
United States, when the Glass-Steag all Act was repealed after the passage of the Gramm-Leach-Bliley Act. But
revenues have been modest and flat in recent years, and most insurance sales in U.S. banks are for mortgage
insurance, life insurance or property insurance related to loans. But China recently allowed banks to buy
insurers and vice versa, stimulating the bancassurance product, and some major global insurers in China have
seen the bancassurance product greatly expand sales to individuals across several product lines.
MAIC Privat bancassurance is a wealth management process pioneered by Lombard International Assurance and
now used globally. The concept combines private banking and investment management services with the
sophisticated use of life assurance as a financial planning structure to achieve fiscal advantages and security for
wealthy investors and their families.

In addition the Treasury function may also have a Proprietary Trading desk that conducts trading
activities for the bank's own account and capital, an Asset liability management or ALM desk
that manages the risk of interest rate mismatch and liquidity; and a Transfer Pricing or Pooling
function that prices liquidity for business lines (the liability and asset sales teams) within the
bank.
Banks may or may not disclose the prices they charge for Treasury Management products

Q.2 What is Qualified Institutional Placement? Do you think it is injustice on retail

investors of the Company?

Qualified institutional placement (QIP) is a capital raising tool, primarily used in India, whereby
a listed company can issue equity shares, fully and partly convertible debentures, or any
securities other than warrants which are convertible to equity shares to a Qualified Institutional
Buyer (QIB). Apart from preferential allotment, this is the only other speedy method of private placement
whereby a listed company can issue shares or convertible securities to a select group of persons.
QIP scores over other methods because the issuing firm does not have to undergo elaborate
procedural requirements to raise this capital. The Securities and Exchange Board of India (SEBI) introduced the
QIP process through a circular issued on May 8, 2006[1], to prevent listed companies in India from developing
an excessive dependence on foreign capital. Prior to the innovation of the qualified institutional
placement, there was concern from Indian market regulators and authorities that Indian
companies were accessing international funding via issuing securities, such as American
depository receipts (ADRs), in outside markets. The complications associated with raising
capital in the domestic markets had led many companies to look at tapping the overseas markets.
This was seen as an undesirable export of the domestic equity market, so the QIP guidelines
were introduced to encourage Indian companies to raise funds domestically instead of tapping
over seas markets.
In India Therefore, in order to encourage domestic securities placements (instead of foreign
currency convertible bonds (FCCBs) and global or American depository receipts (GDRs or
ADRs)), the Securities Exchange Board of India (SEBI) has with effect from May 8, 2006
inserted Chapter XIIIA into the SEBI (Disclosure & Investor Protection) Guidelines, 2000 (the
DIP Guidelines), to provide guidelines for Qualified Institutional Placements (the QIP Scheme).
The QIP Scheme is open to investments made by “Qualified Institutional Buyers” (which
includes public financial institutions, mutual funds, foreign institutional investors, venture capital
funds and foreign venture capital funds registered with the SEBI) in any issue of equity shares/
fully convertible debentures/ partly convertible debentures or any securities other than warrants,
which are convertible into or exchangeable with equity shares at a later date (Securities).
Pursuant to the QIP Scheme, the Securities may be issued by the issuer at a price that shall be no
lower than the higher of the average of the weekly high and low of the closing prices of the
related shares quoted on the stock exchange (i) during the preceding six months; or (ii) the
preceding two weeks. The issuing company may issue the Securities only on the basis of a
placement document and a merchant banker needs to be appointed for such purpose. There are
certain obligations which are to be undertaken by the merchant banker. The minimum number of
QIP allottees shall not be less than two when the aggregate issue size is less than or equal to Rs
250 crore; and not less than five, where the issue size is greater than Rs 250 crore. However, no
single allottee shall be allotted more than 50 per cent of the aggregate issue size. The aggregate
of proposed placement under the QIP Scheme and all previous placements made in the same
financial year by the company shall not exceed five times the net worth of the issuer as per the
audited balance sheet of the previous financial year. The Securities allotted pursuant to the QIP
Scheme shall not be sold by the allottees for a period of one year from the date of allotment
except on a recognized stock exchange. This provision allows the allottees an exit mechanism on
the stock exchange without having to wait for a minimum period of one year, which would have
been the lock–in period had they subscribed to such shares pursuant to a preferential allotment.

Q.3 What is risk involved in investment in debt funds where more than 90% investment is
in Government bonds? Which short term option (90days) you will choose for your
Company for investment of liquid surplus and why.

The following is a list of services generally offered by banks and utilised by larger businesses
and corporations:
Account Reconcilement Services: Balancing a checkbook can be a difficult process for a
very large business, since it issues so many checks it can take a lot of human monitoring to
understand which checks have not cleared and therefore what the company's true balance is. To
address this, banks have developed a system which allows companies to upload a list of all the
checks that they issue on a daily basis, so that at the end of the month the bank statement will
show not only which checks have cleared, but also which have not. More recently, banks have
used this system to prevent checks from being fraudulently cashed if they are not on the list, a
process known aspositive pay.
Advanced Web Services: Most banks have an Internet-based system which is more
advanced than the one available to consumers. This enables managers to create and authorize
special internal logon credentials, allowing employees to send wires and access other cash
management features normally not found on the consumer web site.
Armored Car Services (Cash Collection Services): Large retailers who collect a great deal
of cash may have the bank pick this cash up via an armored car company, instead of asking its
employees to deposit the cash.

Automated Clearing House: services are usually offered by the cash management
division of a bank. The Automated Clearing House is an electronic system used to transfer funds
between banks. Companies use this to pay others, especially employees (this is how direct
deposit works). Certain companies also use it to collect funds from customers (this is generally
how automatic payment plans work). This system is criticized by some consumer advocacy
groups, because under this system banks assume that the company initiating the debit is correct
until proven otherwise.

Balance Reporting Services: Corporate clients who actively manage their cash balances
usually subscribe to secure web-based reporting of their account and transaction information at
their lead bank. These sophisticated compilations of banking activity may include balances in
foreign currencies, as well as those at other banks. They include information on cash positions as
well as 'float' (e.g., checks in the process of collection). Finally, they offer transaction-specific
details on all forms of payment activity, including deposits, checks, wire transfers in and out,
ACH (automated clearinghouse debits and credits), investments, etc.
Cash Concentration Services: Large or national chain retailers often are in areas where
their primary bank does not have branches. Therefore, they open bank accounts at various local
banks in the area. To prevent funds in these accounts from being idle and not earning sufficient
interest, many of these companies have an agreement set with their primary bank, whereby their
primary bank uses the Automated Clearing House to electronically "pull" the money from these
banks into a single interest-bearing bank account.

Lockbox - Retail: services: Often companies (such as utilities) which receive a large
number of payments via checks in the mail have the bank set up a post office box for them, open
their mail, and deposit any checks found. This is referred to as a "lockbox" service.

Lockbox - Wholesale: services: are for companies with small numbers of payments,
sometimes with detailed requirements for processing. This might be a company like a dentist's
office or small manufacturing company.

Positive Pay: Positive pay is a service whereby the company electronically shares its
check register of all written checks with the bank. The bank therefore will only pay checks listed
in that register, with exactly the same specifications as listed in the register (amount, payee,
serial number, etc.). This system dramatically reduces check fraud.

Reverse Positive Pay: Reverse positive pay is similar to positive pay, but the process is
reversed, with the company, not the bank, maintaining the list of checks issued. When checks are
presented for payment and clear through the Federal Reserve System, the Federal Reserve
prepares a file of the checks' account numbers, serial numbers, and dollar amounts and sends the
file to the bank. In reverse positive pay, the bank sends that file to the company, where the
company compares the information to its internal records. The company lets the bank know
which checks match its internal information, and the bank pays those items. The bank then
researches the checks that do not match, corrects any misreads or encoding errors, and
determines if any items are fraudulent. The bank pays only "true" exceptions, that is, those that
can be reconciled with the company's files.

Sweep accounts: are typically offered by the cash management division of a bank. Under
this system, excess funds from a company's bank accounts are automatically moved into a money
market mutual fund overnight, and then moved back the next morning. This allows them to earn
interest overnight. This is the primary use of money market mutual funds

Zero Balance Accounting: can be thought of as somewhat of a hack. Companies with

large numbers of stores or locations can very often be confused if all those stores are depositing
into a single bank account. Traditionally, it would be impossible to know which deposits were
from which stores without seeking to view images of those deposits. To help correct this
problem, banks developed a system where each store is given their own bank account, but all the
money deposited into the individual store accounts are automatically moved or swept into the
company's main bank account. This allows the company to look at individual statements for each
store. U.S. banks are almost all converting their systems so that companies can tell which store
made a particular deposit, even if these deposits are all deposited into a single account.
Therefore, zero balance accounting is being used less frequently.

Wire Transfer: A wire transfer is an electronic transfer of funds. Wire transfers can be
done by a simple bank account transfer, or by a transfer of cash at a cash office. Bank wire
transfers are often the most expedient method for transferring funds between bank accounts. A
bank wire transfer is a message to the receiving bank requesting them to effect payment in
accordance with the instructions given. The message also includes settlement instructions. The
actual wire transfer itself is virtually instantaneous, requiring no longer for transmission than a
telephone call.

Controlled Disbursement: This is another product offered by banks under Cash

Management Services. The bank provides a daily report, typically early in the day, that provides
the amount of disbursements that will be charged to the customer's account. This early
knowledge of daily funds requirement allows the customer to invest any surplus in intraday
investment opportunities, typically money market investments. This is different from delayed
disbursements, where payments are issued through a remote branch of a bank and customer is
able to delay the payment due to increased float time
 Masters in Business Administration-MBA Semester III
MF0007 – Treasury Management – 2 Credits
Assignment Set-2

Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Give any three measures taken by RBI in the recent past (1 year) to liberalise exchange
control?

The three measures taken by RBI in the recent past (1 year) to liberalise exchange control are:
1. The Committee has focused on moving towards a policy content supported with procedures
that would enable individuals to undertake foreign exchange transactions, with operational ease
as is in the case of rupee transactions.
2. Noted for guidance for future. It may also be noted that a variety of measures have been taken
both to liberalise facilities as well as carry out relaxation in procedures for foreign exchange
transactions involving individuals. Some of them are:
Simplification of exchange release of foreign exchange upto USD 10,000 for private travel in
any calendar year. Procedural simplification of any permitted current account transaction upto USD 5,000
without documentary requirements. Release of foreign exchange upto USD 100,000 on the basis of self-
certification towards study abroad, medical treatment overseas, employment abroad, emigration and towards
maintenance of close relatives.
Use of International Credit Card upto sanctioned credit limit for meeting expenses/making
purchases while abroad and for purchase of books and other items through Internet.
3. Though there has been a move away from micro regulation of transactions and authorised
dealers (ADs) were given the freedom and responsibility on appropriate documentation for
current account transactions, room for improvement will be continuously explored.
Greater focus is being placed on monitoring flows and analysis of data under various Auto Route
facilities.

Q.2 Explain various objectives of liquidity management by Banks. What steps Banks can
take to meet the impending shortage of liquidity?

Measuring and managing the liquidity needs are vital for effective operation of commercial
banks. By assuring a bank's ability to meet its liabilities as they become due, liquidity
management can reduce the probability of an adverse situation developing. The importance of
liquidity transcends individual institutions, as liquidity shortfall in one institution can have
repercussions on the entire system. Bank managements should measure, not only the liquidity
positions of banks on an ongoing basis, but also examine how liquidity requirements are likely to
evolve under different conditions.
Banks are in the business of maturity transformation. They lend for longer time periods, as
borrowers normally prefer a longer time frame. But their liabilities are typically short term in
nature, as lenders normally prefer a shorter time frame (liquidity preference). This results in
long-term interest rates typically exceeding short-term rates. Hence, the incentive for banks for
performing the function of financial intermediation is the difference between interest receipt and
interest cost which is called the interest spread. It is implicit, therefore, that banks will have a
mismatched balance sheet, with liabilities greater than assets in short term, and with assets
greater than liabilities in the medium and long term. These mismatches, which represent liquidity
risk, are with respect to various time horizons. Hence, the overwhelming concern of a bank is to
maintain adequate liquidity.
Liquidity has been defined as the ability of an institution to replace liability run off and fund
asset growth promptly and at a reasonable price. Maintenance of superfluous liquidity will,
however, impact profitability adversely. It can also be defined as the comprehensive ability of a
bank to meet liabilities exactly when they fall due or when depositors want their money back.
This is a heart of the banking operations and distinguishes a bank from other entities.

Objectives and Methodology of the Study

Though Basel Capital Accord and subsequent RBI guidelines have given a structure for
Liquidity Management and Asset Liability Management (ALM) in banks, the Indian banking
system has not enforced the guidelines in total. The banks have formed Asset-Liability
Committees (ALCO) as per the guidelines; but these committees rarely meet to take decisions.
Taking this as a base, this research article attempts to find out the status of Liquidity
Management in State Bank of India with the help of "Cash Flow Approach" methodology for
controlling liquidity risk

Q.3 What is operating cycle? How does it affect working capital management? What are
other major factors that influence working capital management?

Operating cycle is the average time between purchasing or acquiring inventory and receiving
cash proceeds from its sale. Decisions relating to working capital and short term financing are
referred to as working capital management. These involve managing the relationship between a
firm's short-term assets and its short-term liabilities. The goal of working capital management is
to ensure that the firm is able to continue its operations and that it has sufficient cash flow to
satisfy both maturing short-term debt and upcoming operational expenses.

Decision criteria
By definition, working capital management entails short term decisions - generally, relating to
the next one year period - which are "reversible". These decisions are therefore not taken on the
same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based
on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the net number of days
from the outlay of cash for raw material to receiving payment from the customer. As a
management tool, this metric makes explicit the inter-relatedness of decisions relating to
inventories, accounts receivable and payable, and cash. Because this number effectively
corresponds to the time that the firm's cash is tied up in operations and unavailable for other
activities, management generally aims at a low net count.
In this context, the most useful measure of profitability is Return on capital (ROC). The result is
shown as a percentage, determined by dividing relevant income for the 12 months by capital
employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is
enhanced when, and if, the return on capital, which results from working capital management,
exceeds the cost of capital, which results from capital investment decisions as above. ROC
measures are therefore useful as a management tool, in that they link short-term policy with
long-term decision making. See Economic value added (EVA).
Management of working capital
Guided by the above criteria, management will use a combination of policies and techniques for
the management of working capital. These policies aim at managing the current assets (generally
cash and cash equivalents, inventories and debtors) and the short term financing, such that cash
flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to meet day to day
expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for uninterrupted production
but reduces the investment in raw materials - and minimizes reordering costs - and hence
increases cash flow. Besides this, the lead times in production should be lowered to reduce Work
in Progress (WIP) and similarly, the Finished Goods should be kept on as low level as possible to
avoid over production - see Supply chain management; Just In Time (JIT); Economic order
quantity (EOQ); Economic production quantity

Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract
customers, such that any impact on cash flows and the cash conversion cycle will be offset by
increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances
Short term financing. Identify the appropriate source of financing, given the cash conversion
cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be
necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through
"factoring"
 Master of Business Administration – MBA Semester 4
MB0036 – Strategic Management & Business Policy
Assignment Set- 1

Note: Each question carries 10 Marks. Answer all the questions.

1. Explain the different circumstances under which a suitable growth strategy should be selected by any company
to improve its performance (i.e., intensive, integrative or diversification growth). You may select an example of
your choice to substantiate your views (10 marks).
Strategies to Improve Sales
There are three alternatives to improve the sales performance of a business unit, to fill the gap
between actual sales and targeted sales:
a) Intensive growth
b) Integrative growth
c) Diversification growth
a) Intensive Growth:
It refers to the process of identifying opportunities to achieve further growth within the company’s current
businesses. To achieve intensive growth, the management should first evaluate the available opportunities
to improve the performance of its existing current
businesses.
It may find three options:
· To penetrate into existing markets
· To develop new markets
· To develop new products
At times, it may be possible to gain more market share with the current products in their current markets
through a market penetration strategy. For instance, SONY introduced TV sets with Trinitron picture tubes into
the market in 1996 priced at a premium of Rs.10,000 and above over the market through a niche market
capture strategy. They gradually lowered the prices to market levels. However, it also simultaneously launched
higher-end products (high-technology products) to maintain its global image as a technology leader. By
lowering the prices of TVs with Trinitron picture tubes, the company could successfully penetrate into the
market in 1996 priced at a premium of Rs.10,000 and above over the market through a niche market capture
strategy. They gradually lowered the prices to market levels. However, it also simultaneously launched
higher-end products (high-technology products) to maintain its global image as a technology leader. By
lowering the prices of TVs with Trinitron picture tubes, the company could successfully penetrate into the
markets to add new customers to its customer base.
Market Development Strategy is to explore the possibility to find or develop new markets for its
current products (from the northern region to the eastern region etc.). Most multinational companies have
been entering Indian markets with this strategy, to develop markets globally. However, care should be taken
to ensure that these new markets are not low density or saturated markets, which could lead to price
pressures.
Product Development Strategy involves consideration of new products of potential interest to its
current markets (e.g. Gramaphone Records to Musical Productions to CDs)– as part of a
Diversifications trategy.

b) Integrative Growth:
It refers to the process of identifying opportunities to develop or acquire businesses that are related to the
company’s current businesses. More often, the business processes have to be integrated for linear growth
in the profits. The corporate plan may be designed to undertake backward, forward or horizontal integration
within the industry.
If a company operating in music systems takes over the manufacturing business of its plastic material
supplier, it would be able to gain more control over the market or generate more profit. (BackwardIntegr
ation)
Alternatively, if this company acquires some of its most profitably operating intermediaries such as
wholesalers or retailers, it is forward integration. If the company legally takes over or acquires the business of
any of its leading competitors, it is called horizontal integration (however, if this competitor is weak, it might be
counter-productive due to dilution of brand image).
c) Diversification Growth:
It refers to the process of identifying opportunities to develop or acquire businesses that are not related to
the company’s current businesses. This makes sense when such opportunities outside the present
businesses are identified with attractive returns and that industry has business strengths to be successful.
In most cases, this is planned with new products that have technological or marketing synergies with
existing businesses to cater to a different group of customers (Concentric Diversification).
A printing press might shift over to offset printing with computerised content generation to appeal to higher-
end customers and also add new application areas ( Horizontal Diversification ) – or even sell stationery.
Alternatively, the company might choose new businesses that have nothing to do with the current
technology, products or markets (Conglomerate Diversification).
The classic examples for this would be engineering and textile firms setting up software
development centres or Call Centres with new service clients.

2. What are the components of a good Business Plan and briefly explain the importance of
each.(10 marks).

The format of a Business Plan is something that has been developed and refined over the years and is
something that should not be changed. Like a good recipe, a business plan needs to include certain
ingredients to make it work.
When you create a business plan, don't attempt to recreate its format. Those reviewing this type of
document have expectations you must meet. If they do not see those crucial decision-making components,
they'll see no reason to proceed with their review of your business plan, no matter how great your business
idea.
Executive Summary Section
Every business plan must begin with an Executive Summary section. A well-written Executive Summary is
critical to the success of the rest of the document. Here is where you need to capture the attention of your
audience so that they will be compelled to read on. Remember, it's a summary, so each and every word
must be carefully selected and presented.
Use the Executive Summary section of your business plan to accurately describe the nature of
your business venture including the need that you plan to fill. Show the reasons why people need
your product or service. Show this by including a brief analysis of the characteristics of your
potential market.
Describe the organization of your business including your management team. Also, briefly describe your
sales and marketing plan or approach. Finally include the numbers that those reviewing your business plan
want to see - the amount of capital you seek, the carefully calculated sales projections and your plan to
repay the loan. If you've captured your audience so far they'll read on. Otherwise, they'll close the document and

add your business plan to the heap of other rejected ideas.

Devote the balance of your business plan to providing details of the items outlined in the
Executive Summary.
The Business Section
Be sure to include the legal name, physical address and detailed description of the nature of your business.
It's important to keep the description easy to read using common terminology. Never assume that those
reading your business plan have the same level of technical knowledge that you do. Describe how you plan
to better serve your market than your competition is currently doing.
Market Analysis Section
An analysis of the market shows that you have done your homework. This section is basically a summary of
your Marketing Plan. It needs to show the demand for your product or service, the proposed market, trends
within the industry, a description of your pricing plan and packaging and a description of your company
policies.
Financing Section
The Financing section must show that you are as committed to your business venture as you expect those
reading your business plan to be. Show the amount of personal funds you are contributing and their source.
Also include the amount of capital you need and your plan to repay this debt. Include all pertinent financial
worksheets in this section: annual income projections, a break-even worksheet, projected cash flow
statements and a balance sheet.
Management Section

Outline your organizational structure and management team here. Include the legal structure of your
business whether it is a partnership, corporation or limited liability corporation. Include resumes and
biographies of key players on your management team. Show staffing projection data for the next few years.
By now you're probably thinking that you don't need Business Plan just yet. Well you do, and there is
business plan building software that can help you through this immense project. These software packages
are easy to use and affordable. Use one today and produce a professional- quality Business Plan -
including all critical components - tomorrow!

3. You wish to start a new venture to manufacture auto components. Explain different
stages in the process of starting this new business. (10 marks).
Sol.
Every business starts out as an idea. This idea usually involves the invention of a new product, or revolves
around a better way of making and marketing an existing one. While many would argue that the idea stage
is not a stage at all, it is actually a turning point, as business adviser Mike Pendrith points out. After this, you
as a business builder must refine this idea into a money- making reality. Here in this case supposing we are
to start a new venture of manufacturing auto components and also to market them. We will see here in the
following paragraphs different stages of achieving the same goal.
1. Idea Researching
In this stage, you are researching your idea. The object of your research is to find out who is marketing the
same product or service in your area, and how successful the marketer has been. You can accomplish this
by a Google search on the Internet, launching a test- marketing campaign, or conducting surveys. Also, you
are attempting to find what the level of interest is in the products (or services) you wish to market.
Here as the main goal is to start a company that manufactures the auto components, we are to make a
research on all the auto companies which are procuring the spares from the outside vendors. And also the
competitors who are all marketing that, their existence and also how successful they are.
As part of the initial research process, it is important to consider the legal requirements of selling your
product or service. According to the Biz Ed website, examine the legal ramifications of your business. Know
the tax laws governing your business. If insurance is a requirement, prepare to budget for it. Also, be aware
of any safety laws governing you as an employer. Hence we are also to make a research on the feasible
area where we can start our organization and licenses that we need to take keeping in mind the
environmental factors as well.

2. Business Plan Formulation

You must write a business plan. As Pendrith points out, this is crucial if you want funding, such as a small
business loan or grant, or if you wish to lease a building. At this stage, Pendrith advises, you need to
consult with an attorney or business adviser for assistance.
In the business plan you typically include following heads:
i)
Executive Summary
ii) Company and Product Description
iii) Market Description
iv) Equipment and Materials
v) Operations
vi) Management and Ownership
vii) Financial Information and Start-Up Timeline
viii) Risks and Their Mitigation

3. Financial Planning
Financial planning involves thinking about the financial costs of starting and maintaining your business.
According to the Biz Ed website, you should consider such issues as the costs of running the business; the
prices you wish to charge your customers; cash flow control; and how you wish to set up financial reserves
in case of an emergency or an event causing significant loss to the business. This includes the planning of
whether to take any loans or make personal investments in the company.
4. Advertising Campaign
Decide how you will market your product. Consider your budget and your target audience. Make up
business cards with your logo on it, your name and the name of your business. Make sure that they are of
the most professional quality. Utilizing print, the newspaper, the Internet, radio or TV is also wise,
considering, of course, the size of your advertising budget.
Here in this case more than TV, a better advertising media will be road side sign boards placed close to the
auto companies for getting the deals to manufacture their spares. As TV is useful only to reach the common
man and he is not our target customer. Hence sign boards is the feasible solution and also pamphlets
circulated across the pioneers. This apart personal marketing is much more suggested.
5. Preparing for Launch
Advertise for employees. This also requires adequate planning. Think about what you look for in an
employee. Be specific about the requisite skills and experience you are seeking. Then begin requesting
resumes and setting up interviews, making hiring decisions based on the standards you have set.

In this case we will be looking for a few candidates in managerial position who must be
good in managing things apart from minimal technical knowledge.
Lower level people at the shopfloor people. They need to have real time experience in
the shop floor activities.
The employees apart, one needs to plan on the plant and machinery as well.
Thus these are all the stages that I would consider performing if incase I plan to start a
manufacturing unit producing automobile components.

4. Explain the process of due Diligence and why it is necessary.(10 marks).

Sol.
Due diligence
Of course, your commercial partner will need some reassurance about the quality of the offer you are
making to them. If you are involved in licensing technology or seeking commercial support for your research
you are likely to hear of ‘due diligence.’ When a future partner is considering whether or not to license
technology, to buy a share of patent rights, or to support your research, they will need to satisfy themselves
that it is a viable proposition. The process of assessing the viability, risk, potential liabilities and commercial
prospects of a project is known as ‘due diligence.’ Indeed, if a potential partner seems not to be interested
in this kind of issues, it may actually raise questions about their commitment to the project or the credibility
of their business plan, particularly if the relationship assumes some degree of risk and investment on their
part. Generally, due diligence will involve assessing the overall commercial operations, cash flow, assets
and liabilities of a business that is being purchased or otherwise financially supported. You would think
twice about purchasing a business if you found that it was burdened with debts, or was about to be involved
in difficult litigation, or if there were doubts about whether it really owned its assets. The same applies to a
potential investment involving intellectual property. For instance, a potential commercial partner would not
want to invest in patented technology only to find out that patent renewal fees have not been paid and the
patent has lapsed, or to find out that the patent was being opposed by another company, or to find that
there is prior art available that calls into question its validity. It may transpire that a student, a contractor or a
visiting researcher could actually be legally entitled to some or all of the patent rights. Even a serious level
of uncertainty or doubt could be enough to deter a potential partner, especially if they have run into this kind
of difficulty before. Due diligence may also involve searching for information about the full range of IP rights
that might impact on the relevant technology – for instance, to check whether you have later filed patent
applications on improvements to the original patented technology, that may limit the value of their
investment in the original technology. Other intellectual property rights – such as related trade mark or
design registrations, or key trade secrets or copyright material (such as manuals or software) – may also
need to be identified or located, as these may also affect the commercial partner’s interests in the
technology. For example, they may be unwilling to take out a licence for your patent without getting access
to the software you have developed for a related process. They may want the right to use your trade mark in
association with the patented technology.
So in a due diligence process, your commercial partner may undertake a range of checks and
need various forms of information. These may include:
· Checks on external records, such as patent registers and patent databases, including foreign
patents;
· Searches of patent databases for conflicting technology;
· Independent advice from patent attorneys on issues such as patent ownership, patent validity
and scope of patent claims;
· Checks on employment contracts, confidentiality arrangements, and contracts with other parties
that may interfere with the exercise of IP rights;
· Details of the patent prosecution such as examiners’ reports and other opinions;
· Details of any legal challenges to the patent, and the way the proceedings were resolved;
· Checks on laboratory notebooks in the event that the validity of US patents is of concern to the commercial partner
(this also provides reassurance as to claims of ownership of the patent);

· Surveys of the activity of competitors and owners of competing technology, and possibilities of
conflict; and
· Analysis of freedom to operate issues.
In preparing to licence your technology, you should consider in advance these kind of due diligence issues.
If you can anticipate and provide comprehensive answers to these questions, you will be able more
effectively to reassure your commercial partner, and you will be in a stronger negotiating position in
negotiating licence terms. It should also speed up the licensing negotiations, and ultimately the
commercialization of your intellectual property.

5. Is Corporate Social Responsibility necessary and how does it benefit a company and its
shareholders? (10 marks).
Sol.
Corporate social responsibility(CSR), also known as corporate responsibility, corporate citizenship, responsible
business, sustainable responsible business(SRB), or corporate social performance,[1] is a form of corporate self-
regulation integrated into a business model.
Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor
and ensure its support to law, ethical standards, and international norms. Consequently, business would
embrace responsibility for the impact of its activities on the environment, consumers, employees,
communities, stakeholders and all other members of the public sphere. Furthermore, CSR-focused
businesses would proactively promote the public interest by encouraging community growth and
development, and voluntarily eliminating practices that harm the public sphere, regardless of legality.
Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making, and the
honoring of a triple bottom line: people, planet, profit.
The practice of CSR is much debated and criticized. Proponents argue that there is a strong business case
for CSR, in that corporations benefit in multiple ways by operating with a perspective broader and longer
than their own immediate, short-term profits. Critics argue that CSR distracts from the fundamental
economic role of businesses; others argue that it is nothing more than superficial window-dressing; others
yet argue that it is an attempt to pre-empt the role of governments as a watchdog over powerful
multinational corporations. Corporate Social Responsibility has been redefined throughout the years.
However, it essentially is titled to aid to an organization's mission as well as a guide to what the company
stands for and will uphold to its consumers. Development business ethics is one of the forms of applied ethics that
examines ethical

principles and moral or ethical problems that can arise in a business environment.
In the increasingly conscience-focused marketplaces of the 21st century, the demand for more ethical
business processes and actions (known as ethicism) is increasing. Simultaneously, pressure is applied on
industry to improve business ethics through new public initiatives and laws (e.g. higher UK road tax for
higher-emission vehicles).
Business ethics can be both a normative and a descriptive discipline. As a corporate practice and a career
specialization, the field is primarily normative. In academia, descriptive approaches are also taken. The
range and quantity of business ethical issues reflects the degree to which business is perceived to be at
odds with non-economic social values. Historically, interest in business ethics accelerated dramatically
during the 1980s and 1990s, both within major corporations and within academia. For example, today most
major corporate websites lay emphasis on commitment to promoting non-economic social values under a
variety of headings (e.g. ethics codes, social responsibility charters). In some cases, corporations have re-
branded their core values in the light of business ethical considerations (e.g. BP's "beyond petroleum"
environmental tilt).
The term "CSR" came in to common use in the early 1970s, after many multinational corporations formed,
although it was seldom abbreviated. The term stakeholder, meaning those on whom an organization's
activities have an impact, was used to describe corporate owners beyond shareholders as a result of an
infISO 26000 is the recognized international standard for CSR (currently a Draft International

Standard). Public sector organizations (the United Nations for example) adhere to the triple

luential book by R Freeman in 1984.

bottom line (TBL). It is widely accepted that CSR adheres to similar principles but with no formal act of
legislation. The UN has developed the Principles for Responsible Investment as guidelines for investing
entities.
Potential business benefits
The scale and nature of the benefits of CSR for an organization can vary depending on the nature of the
enterprise, and are difficult to quantify, though there is a large body of literature exhorting business to adopt
measures beyond financial ones (e.g.,D eming's Fourteen Points,balanced
scorecards). Orlitzky, Schmidt, and Rynes found a correlation between social/environmental
performance and financial performance. However, businesses may not be looking at short-run
financial returns when developing their CSR strategy.
The definition of CSR used within an organization can vary from the strict "stakeholder impacts"
definition used by many CSR advocates and will often include charitable efforts and
volunteering. CSR may be based within the human resources, business developmentor public
relations departments of an organization,[11] or may be given a separate unit reporting to the CEO
or in some cases directly to theboard. Some companies may implement CSR-type values
without a clearly defined team or program.
The business case for CSR within a company will likely rest on one or more of these arguments:
Human resources
A CSR program can be an aid torecruitm ent andretention,[12] particularly within the competitive
graduate student market. Potential recruits often ask about a firm's CSR policy during an
interview, and having a comprehensive policy can give an advantage. CSR can also help improve the
perception of a company among its staff, particularly when staff can become involved through payroll
giving,fundrais ing activities or community volunteering. See alsoCorporate Social Enterperneurship where
by CSR can also be driven by employees' personal values, inaddition to the more obvious economic and governmental
drivers.

Risk management
Managingris k is a central part of many corporate strategies. Reputations that take decades to build up can
be ruined in hours through incidents such as corruption scandals or environmental accidents. These can
also draw unwanted attention from regulators, courts, governments and media. Building a genuine culture of
'doing the right thing' within a corporation can offset these risks.[13]
Brand differentiation
In crowded marketplaces, companies strive for a unique selling proposition that can separate them from the
competition in the minds of consumers. CSR can play a role in building customer loyalty based on
distinctive ethical values.[14] Several majorbrands, such as The Co-operative
Group, The Body Shopand American Apparel[15] are built on ethical values. Business service
organizations can benefit too from building a reputation for integrity and best practice.
License to operate
Corporations are keen to avoid interference in their business throughtaxation orregulations. By taking
substantive voluntary steps, they can persuade governments and the wider public that they are taking
issues such as health and safety, diversity, or the environment seriously as good corporate citizens with
respect to labour standards and impacts on the environment
Stakeholder priorities
Increasingly, corporations are motivated to become more socially responsible because their most important
stakeholders expect them to understand and address the social and community issues that are relevant to
them. Understanding what causes are important to employees is usually the first priority because of the
many interrelated business benefits that can be derived from increased employee engagement (i.e. more
loyalty, improved recruitment, increased retention, higher productivity, and so on). Key external
stakeholders include customers, consumers, investors (particularly institutional investors), communities in
the areas where the corporation operates its facilities, regulators, academics, and the media.

6. Distinguish between a Financial Investor and a Strategic Investor explaining the role
they play in a Company. (10 marks).
Sol.
In the not so distant past, there was little difference between financial and strategic investors. Investors of
all colors sought to safeguard their investment by taking over as many management functions as they
could. Additionally, investments were small and shareholders few. A firm resembled a household and the
number of people involved – in ownership and in management – was correspondingly limited. People
invested in industries they were acquainted with first hand. As markets grew, the scales of industrial
 production (and of service provision) expanded. A single investor (or a small group of investors) could no
longer accommodate the needs even of a single firm. As knowledge increased and specialization ensued –
it was no longer feasible or possible to micro-manage a firm one invested in. Actually, separate businesses
of money making and business management emerged. An investor was expected to excel in obtaining high
yields on his capital – not in industrial management or in marketing. A manager was expected to manage,
not to be capable of personally tackling the various and varying tasks of the business that he managed.
Thus, two classes of investors emerged. One type supplied firms with capital. The other type supplied them
with know-how, technology, management skills, marketing techniques, intellectual property, clientele and a
vision, a sense of direction.
In many cases, the strategic investor also provided the necessary funding. But, more and more, a
separation was maintained. Venture capital and risk capital funds, for instance, are purely financial
investors. So are, to a growing extent, investment banks and other financial institutions. The financial
investor represents the past. Its money is the result of past - right and wrong - decisions. Its orientation is
short term: an "exit strategy" is sought as soon as feasible. For "exit strategy" read quick profits. The
financial investor is always on the lookout, searching for willing buyers for his stake. The stock exchange is
a popular exit strategy. The financial investor has little interest in the company's management. Optimally, his
money buys for him not only a good product and a good market, but also a good management. But his
interpretation of the rolls and functions of "good management" are very different to that offered by the
strategic investor. The financial investor is satisfied with a management team which maximizes value. The
price of his shares is the most important indication of success. This is "bottom line" short termism which
also characterizes operators in the capital markets. Invested in so many ventures and companies, the
financial investor has no interest, nor the resources to get seriously involved in any one of them. Micro-
management is left to others - but, in many cases, so is macro-management. The financial investor
participates in quarterly or annual general shareholders meetings. This is the extent of its involvement.
The strategic investor, on the other hand, represents the real long term accumulator of value. Paradoxically,
it is the strategic investor that has the greater influence on the value of the company's shares. The quality of
management, the rate of the introduction of new products, the success or failure of marketing strategies, the
level of customer satisfaction, the education of the workforce - all depend on the strategic investor. That
there is a strong relationship between the quality and decisions of the strategic investor and the share price
is small wonder. The strategic investor represents a discounted future in the same manner that shares do.
Indeed, gradually, the balance between financial investors and strategic investors is shifting in favour of the
latter. People understand that money is abundant and what is in short supply is good management.
Given the ability to create a brand, to generate profits, to issue new products and to acquire new

clients - money is abundant.

These are the functions normally reserved to financial investors:
Financial Management
The financial investor is expected to take over the financial management of the firm and to directly appoint
the senior management and, especially, the management echelons, which directly deal with the finances of
the firm.
1. To regulate, supervise and implement a timely, full and accurate set of accounting books of the firm reflecting
all its activities in a manner commensurate with the relevant legislation and regulation in the territories of
operations of the firm and with internal guidelines set from time to time by the Board of Directors of the firm.
This is usually achieved both during a Due Diligence process and later, as financial management is
implemented.
2. To implement continuous financial audit and control systems to monitor the performance of the firm, its flow of
funds, the adherence to the budget, the expenditures, the income, the cost of sales and other budgetary
items.
3. To timely, regularly and duly prepare and present to the Board of Directors financial statements and reports
as required by all pertinent laws and regulations in the territories of the operations of the firm and as
deemed necessary and demanded from time to time by the Board of Directors of the Firm

4. To comply with all reporting, accounting and audit requirements imposed by the capital markets or regulatory
bodies of capital markets in which the securities of the firm are traded or are about to be traded or otherwise
listed.
5. To prepare and present for the approval of the Board of Directors an annual budget, other budgets, financial
plans, business plans, feasibility studies, investment memoranda and all other financial and business
documents as may be required from time to time by the Board of Directors of the Firm.
6. To alert the Board of Directors and to warn it regarding any irregularity, lack of compliance, lack of
adherence, lacunas and problems whether actual or potential concerning the financial systems, the financial
operations, the financing plans, the accounting, the audits, the budgets and any other matter of a financial
nature or which could or does have a financial implication.
7. To collaborate and coordinate the activities of outside suppliers of financial services hired or contracted by
the firm, including accountants, auditors, financial consultants, underwriters and brokers, the banking
system and other financial venues.
8. To maintain a working relationship and to develop additional relationships with banks, financial institutions
and capital markets with the aim of securing the funds necessary for the operations of the firm, the
attainment of its development plans and its investments.
9. To fully computerize all the above activities in a combined hardware-software and communications system
which will integrate into the systems of other members of the group of companies.
10. Otherwise, to initiate and engage in all manner of activities, whether financial or of other nature, conducive
to the financial health, the growth prospects and the fulfillment of investment plans of the firm to the best of
his ability and with the appropriate dedication of the time and efforts required.
Collection and Credit Assessment
1. To construct and implement credit risk assessment tools, questionnaires, quantitative methods, data
gathering methods and venues in order to properly evaluate and predict the credit risk rating of a client,
distributor, or supplier.
2. To constantly monitor and analyse the payment morale, regularity, non-payment and non- performance
events, etc. – in order to determine the changes in the credit risk rating of said factors.
3. To analyse receivables and collectibles on a regular and timely basis.
4. To improve the collection methods in order to reduce the amounts of arrears and overdue
payments, or the average period of such arrears and overdue payments.
5. To collaborate with legal institutions, law enforcement agencies and private collection firms in assuring the
timely flow and payment of all due payments, arrears and overdue payments and other collectibles.
6. To coordinate an educational campaign to ensure the voluntary collaboration of the
clients, distributors and other debtors in the timely and orderly payment of their dues.
The strategic investor is, usually, put in charge of the following:
Project Planning and Project Management
 Master Of Business Administration-MBA Semester 4
MB0036- Strategic management & Business Policy
Assignment Set-2
Note: Each question carries 10 Marks. Answer all the questions.
1. What is the purpose of a Business Plan? Explain the features of the component of the
Plan dealing with the Company and its product description.(10 marks)
Sol.
A good business plan will help attract necessary financing by demonstrating the feasibility of
your venture and the level of thought and professionalism you bring to the task.
The first step in planning a new business venture is to establish goals that you seek to achieve with the business.
You can establish these goals in a number of ways, but an inclusive and ordered process like an organizational
strategic planning session or a comprehensive neighborhood planning process may be best. The board of
directors of your organization should review and approve the goals, because these goals will influence the
direction of the organization and require the allocation of valuable staff and financial resources. Your goals will
serve as a filter to screen a wide range of possible business opportunities. If you fail to establish clear goals early
in the process, your organization may spend substantial time and resources pursuing potential business ventures
that may be financially viable but do not serve the mission of your organization in other important ways. A liquor
store on the corner may be a clear money-maker; however, it may not be the retail to assist your community
desires.
The following are examples of goals you may seek to achieve through the creation of a new
business venture:
Revenue Generation – Your organization may hope to create a business that will generate

sufficient net income or profit to finance other programs, activities or services provided by your
organization.
Employment Creation – A new business venture may create job opportunities for community
residents or the constituency served by your organization.
Neighborhood Development Strategy – A new business venture might serve as an anchor to a
deteriorating neighborhood commercial area, attract additional businesses to the area and fill a gap in existing
retail services. You may need to find a use for a vacant commercial property that blights a strategic area of your
neighborhood. Or your business might focus on the rehabilitation of dilapidated single family homes in the
community.
Whenever possible, goals should have quantifiable outcomes such as “to generate a minimum of $50,000 of net
income or profit within three years”; “to employ at least 15 community residents within two years in new
permanent jobs at a livable wage”; “to occupy and support a minimum of 10,000 square feet of neighborhood
commercial space”; or “to rehabilitate 50 single-family houses over three years.” Clearly defined and quantifiable
goals provide objective measurements to screen potential business opportunities. They also establish clear
criteria to evaluate the success of the business venture.
Establish Goals
Once you have identified goals for a new business venture, the next step in the business planning process is to
identify and select the right business. Many organizations may find themselves starting at this point in the
process. Business opportunities may have been dropped at your doorstep. Perhaps an entrepreneurial member
of the board of directors or a community resident has approached your organization with an idea for a new
business, or a neighborhood business has closed or moved out of the area, taking jobs and leaving a vacant
facility behind. Even if this is the case, we recommend that you take a step back and set goals. Failing to do so
could result in a waste of valuable time and resources pursuing an idea that may seem feasible, but fails to
accomplish important goals or to meet the mission of your organization.

Depending on the goals you have set, you might take several approaches to identify potential
business opportunities.
Local Market Study: Whether your goal is to revitalize or fill space in a neighborhood
commercial district or to rehabilitate vacant housing stock, you should conduct a local market study. A good
market study will measure the level of existing goods and services provided in the area, and assess the capacity
of the area to support existing and additional commercial or home- ownership activity. This assessment is based
on the shopping and traffic patterns of the area and the demographic and socio-economic characteristics of the
community. A bad or insufficient market study could encourage your organization to pursue a business destined
to fail, with potentially disastrous results for the organization as a whole. Through a market study you will be able
to identify gaps in existing products and services and unsatisfied demand for additional or expanded products
and services. If your organization does not have staff capacity to conduct a market study, you might hire a
consultant or solicit the assistance of business administration students from a local college or university.
Conducting a solid and thorough market study up front will provide essential information for your final business
plan.
Analysis of Local and Regional Industry Trends: Another method of investigating potential
business opportunities is to research local and regional business and industry trends. You may be able to identify
which business or industrial sectors are growing or declining in your city, metropolitan area or region. The
regional or metropolitan area planning agency for your area is a good source of data on industry trends.
Internal Capacity: The board, staff or membership of your organization may possess
knowledge and skills in a particular business sector or industry. Your organization may wish to draw upon this
internal expertise in selecting potential business opportunities.

Internal Purchasing Needs / Collaborative Procurement: Perhaps, your organization

frequently purchases a particular service or product. If nearby affiliate organizations also use this service or
product, this may present a business opportunity. Examples of such products or services include printing or
copying services, travel services, transportation services, property management services, office supplies,
catering services, and other products. You will still need to conduct a complete market study to determine the
demand for this product or service beyond your internal needs or the needs of your partners or affiliates.
Identify Business Opportunities
Buying an Existing Business: Rather than starting a new business, you may wish to consider
purchasing an existing business. Perhaps a local retail or small light manufacturing business that has been an
anchor to the local retail area or a much-needed source of jobs in the neighborhood is for sale. Its closure would
mean the loss of jobs and services for your neighborhood. Your organization might consider purchasing and
taking over the enterprise instead of starting a new business. If you decide to pursue this option, you still need to
go through the steps of creating a business plan. However, before moving ahead, these are just a few important
areas to research in assessing the business you plan to purchase:
Be sure to conduct a thorough review of the financial statements for the past three to five years to determine the
current fiscal status and recent financial trends, the validity of the accounts receivable and the status of the
accounts payable. Are all the required licenses and permits in place and can they be transferred to a new owner?
Also look at the quality of key employees who, because of their expertise, may need to remain with the business.

2. Write short notes on :

a) sales projections (10 marks).
Sol.
Sales Projections
Present an estimate of how many people you expect will purchase your product or service. Your estimate should
be based on the size of your market, the characteristics of your customers and the share of the market you will
gain over your competition. Project how many units you will sell at a specified price over several years. The initial
year should be broken down in monthly or quarterly increments. Account for initial presentation and market
penetration of your product and any seasonal variations in sales, if appropriate.
Steps for Developing Sales Projections
Your business plan is not just a funding tool, but also a blueprint for how your business should
operate. The following are steps for developing sales projections.
Step I:
Estimate
For each product or service, estimate the number of people who are likely to buy and when they will buy it. You
can get this information from asking your likely customers about their possible use of your business, or you can
base your estimates on your knowledge of the market.
Step 2:
Use a Calendar
Estimate your sales and number of customers served during one week. Using the totals for a week, make
projections for each month. For the first few months, keep in mind that business will start off slowly before people
become more aware of your business. Use will most likely increase

as people learn about your products and services. Seasonal variations may affect your business as well. You will
use these numbers to project your equipment, supply and staffing needs, as well as income.
Cost Account Heads:
· Organizational Start up Costs
· Product Design/Development
· Research & Development
· Legal/Licensing Expenses
· Property & Facilities
· Land/Building Purchase
· Initial Lease Deposit
· Building Repairs/Improvements
· Equipment/Machinery
· Production-related
· Administrative/Office Equip.
· Materials & Supplies
· Personnel
· Key Employees
· Contract Labour/Temps
· Training Expenses
· Marketing Expenses
· Advertisements
· Brochures/Literature/Other

· Insurance Premiums
· Distributor Contracts
· Contingency (5%)
Expenses:
Costs of Goods Sold
· Materials/Supplies
· Labor
· Rent
· Utilities
· Insurance
· Admin. Exp. (PT Sec.)
· Legal & Accounting
· Marketing
· Equipment Maintenance/Supplies
· Facility Maintenance
· Fees/Miscellaneous
Debt / Equity Investment:
· Equipment Loan
· Building Rehabilitation Loan
· Grants
· Owner Equity
Expenses
· Cost of Goods Sold

· Wages & Benefits

· Materials
· Supplies
Overhead Expenses:
· Rent
· Utilities
· Building Maintenance/Security
· Marketing
· Accounting
· Legal
· Administrative Expense
· Interest Expense
· Depreciation
The Business Priorities are based upon six top-level objectives; these are:
· To make Business data available both to decision-makers and as much as possible available in
the public domain;
· To ensure all holders of Business information are able to participate.
· To ensure that the data available through the NETWORK are of known quality;
· To ensure that the NETWORK Gateway gives access to data on Location and species used to
inform decisions affecting Business at local, regional, national and international levels;
· To promote knowledge, use and awareness of the NETWORK;
· To enhance the skills base and expertise needed to support and develop the NETWORK.

3. What factors are to be taken into account in a crisis communications strategy?(10

marks).
Sol.
The following items should be taken into account in the crisis communications strategy:
· Communications should be timely and honest.
· To the extent possible, an audience should hear news from the organization first.
· Communications should provide objective and subjective assessments.
· All employees should be informed at approximately the same time.
· Give bad news all at once – do not sugarcoat it.
· Provide opportunity for audiences to ask questions, if possible.
· Provide regular updates and let audiences know when the next update will be issued.
· Treat audiences as you would like to be treated.
· Communicate in a manner appropriate to circumstances:
– Face-to-face meetings (individual and group)
– News conferences
– Voice mail/email
– Company Intranet and Internet sites
– Toll-free hotline
– Special newsletter
– Announcements using local/national media.
Preplanning for communications is critical. Drafts of message templates, scripts, and statements
can be crafted in advance for threats identified in the Risk Assessment

Procedures to ensure that communications can be distributed at short notice should also be established,
particularly when using resources such as Intranet and Internet sites and toll-free hotlines.
Official Spokesperson
The organization should designate a single primary spokesperson, with back-ups identified, who will
manage/disseminate crisis communications to the media and others. This individual should be trained in media
relations prior to a crisis. All information should be funneled through a single source to assure that the messages
being delivered are consistent.
It should be stressed that personnel should be informed quickly regarding where to refer calls from the media and
that only authorized company spokespeople are authorized to speak to the media. In some situations, an
appropriately trained site spokesperson may also be necessary.

4. What elements should be included in a Marketing Plan under Due Diligence while
seeking investment in for your Company? (10 marks).
Sol.
The Process of Due Diligence
A business which wants to attract foreign investments must present a business plan. But a business plan is the
equivalent of a visit card. The introduction is very important – but, once the foreign investor has expressed
interest, a second, more serious, more onerous and more tedious process commences: Due Diligence.
"Due Diligence" is a legal term (borrowed from the securities industry). It means, essentially, to make sure that all
the facts regarding the firm are available and have been independently verified. In some respects, it is very
similar to an audit. All the documents of the firm are assembled and reviewed, the management is interviewed
and a team of financial experts, lawyers and accountants descends on the firm to analyze it.
First Rule:
The firm must appoint ONE due diligence coordinator. This person interfaces with all outside due diligence
teams. He collects all the materials requested and oversees all the activities which make up the due diligence
process.
The firm must have ONE VOICE. Only one person represents the company, answers questions, makes
presentations and serves as a coordinator when the DD teams wish to interview people connected to the firm.
Second Rule:
Brief your workers. Give them the big picture. Why is the company raising funds, who are the investors, how will
the future of the firm (and their personal future) look if the investor comes in. Both employees and management
must realize that this is a top priority. They must be instructed not to lie. They must know the DD coordinator and
the company’s spokesman in the DD process. The DD is a process which is more structured than the preparation
of a Business Plan. It is confined both in time and in subjects: Legal, Financial, Technical, Marketing, Controls.

5. Distinguish between Joint Ventures and Licensing, explaining the relative advantages
and disadvantages of each.(10 marks).
Sol.
Licensing and Assigning IP rights
One basic choice is whether you should actively exploit your IP rights yourself, or to keep your IP rights and
license them to others to use, or sell or assign the rights to another person. You can, in principle, make different
choices in different countries for exploiting IP rights for the same underlying invention. If you are based in
Malaysia, you could in theory decide to exploit your patent yourself in the East Asian region, grant a licence a
Canadian company to use the invention in North America, and sell or assign the rights in Europe to a Danish
company – whether or not this is the best approach in practice is a different matter, of course.
A licence is a grant of permission made by the patent owner to another to exercise any specified rights as
agreed. Licensing is a good way for an owner to benefit from their work as they retain ownership of the patented
invention while granting permission to others to use it and gaining benefits, such as financial royalties, from that
use. However, it normally requires the owner of the invention to invest time and resources in monitoring the
licensed use, and in maintaining and enforcing the underlying IP right.
The patent right normally includes the right to exclude others from making, using, selling or importing the
patented product, and similar rights concerning patented processes. The license can therefore cover the use of
the patented invention in many different ways For instance, licences can be exclusive or non-exclusive. If a
patent owner grants anon-exclus ive licence to Company A to make and sell their patented invention in Malaysia,
the patent owner would still be able to also grant Company B another non-exclusive for the same rights and the
same time period in Malaysia. In contrast, if a patent owner granted anexclus ive licence to Company A to make
and sell the invention in Malaysia, they would not be able to give a licence to
anyone else in Malaysia while the licence with Company A remained in force.
Licenses are normally confined to a particular geographical area – typically, the jurisdiction in which particular IP
rights have effect. You can grant different exclusive licences for different territories at the same time. For
example, a patent owner can grant an exclusive licence to make and sell their patented invention in Malaysia for
the term of the patent, and grant a separate exclusive licence to manufacture and sell their patented invention in
India for the term of the patent.
Separate licences can be granted for different ways of using the same technology. For example, if an inventor
creates a new form of pharmaceutical delivery, she could grant an exclusive licence to one company to use the
technology for an arthritis drug, a separate exclusive licence to another company to use it for relief of cold
symptoms, and a further exclusive licence to a third company to use it for veterinary pharmaceuticals.
A licence is merely the grant of permission to undertake some of the actions covered by intellectual property
rights, and the patent holder retains ownership and control of the basic patent.
It should be remembered that the person who makes an invention can be different to the person who owns the
patent rights in that invention. If an inventor assigns their patent rights to someone else they no longer own those
rights. Indeed, they can be in infringement of the patent right if they continue to use it.
Patent licences and assignments of patent rights do not have to cover all patent rights together.
Licences are often limited to specific rights, territories and time periods. For example, a patent owner could
exclusively licence only their importation right to a company for the territory of Indonesia for 12 months. If an
inventor owns patents on the same invention in five different countries, they could assign (or sell) these patents to
five different owners in each of those countries. Portions of a patent right can also be assigned – so that in order
to finance your invention, you might choose to sell a half-share to a commercial partner.
If you assign your rights, you normally lose any possibility of further licensing or commercially exploiting your
intellectual property rights. Therefore, the amount you charge for an assignment is usually considerably higher
than the royalty fee you would charge for a patent licence. When assigning the rights, you might seek to negotiate
a licence from the new owner to ensure that you can continue to use your invention. For instance, you might
negotiate an arrangement that gives you licence to use the patented invention in the event that you come up with
an improvement on your original invention and this falls within the scope of the assigned patent. Equally, the new
owner of the assigned patent might want to get access to your subsequent improvements on the invention.
Which model of commercialisation is best for you?
Each new technology and associated package of IP rights is potentially difference, and the mechanism you
choose for commercialisation should take into account the particular features of the technology. One basic
consideration is to what extent you, as originator of the technology, wish to be involved and to invest in the
subsequent development of the technology. You will need to compare the advantages and disadvantages of each
model of commercialisation. Generally speaking, the higher degree of risk and commitment of finance and
resources you can invest, the higher the degree of control you can secure over exploitation of the technology
invention, and the higher the financial return to your institution may be.
There are many possible variations on each of these general models, and in practice they can overlap. In
deciding which model of commercialisation is best for you, it is always a good idea to seek commercial or legal
advice.
Remember that IPRs alone do not guarantee you a financial return on your invention. You need to make good
commercial decisions to benefit financially from your intellectual property rights. Properly managed, intellectual
property rights should not be a burden but should yield a return from your hard work in creating an invention.
Advantages of Joint ventures:
•
Provide companies with the opportunity to gain new capacity and expertise
•
Allow companies to enter related businesses or new geographic markets or gain new
technological knowledge

•
access to greater resources, including specialised staff and technology
•
sharing of risks with a venture partner
•
Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of
what you do, thus limiting both your commitment and the business' exposure.
•
In the era of divestiture and consolidation, JV’s offer a creative way for companies to exit
from non-core businesses.
•
Companies can gradually separate a business from the rest of the organisation, and eventually, sell it to the other
parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.

6. You wish to commercialize your invention. What factors would you weigh in choosing an
appropriate course? (10 marks).
Sol.
Following are the ways to commercialize my invention.
Licensing and Assignment - Defined
The difference between licensing and selling your invention is comparable to leasing vs. selling house. When you
sell your house, you transfer your title, making someone else in charge of and liable for the house from that point
on. When you sell your invention, the scenario is the same, except that the process is called “assigning” rather
than selling. You, the inventor would be the “assignor” and the person receiving the title or ownership of the
patent would be the “assignee.” Instead of selling, though, you may choose to rent out your house. In this case,
you retain the title to the house and give someone permission to use it for a limited period of time. In
consideration for this, they pay you on a monthly, yearly or other basis. The terms of this lease are entirely up to
you and the person leasing your house. It is up to you to negotiate within the boundaries of the law.
When you license an invention, it’s nearly the same as leasing. You’re offering a manufacturer, for example, the
right to manufacture and sell your invention for a period of time, and in consideration for this they pay you on a
quarterly basis. In this case you are the “licensor” and the company is the “licensee.” It is up to the parties to
negotiate the terms of the license within the boundaries of antitrust laws and other regulations that would affect
licenses and similar business arrangements.
Should I Sell or License?

You will generally have a better chance of licensing your invention instead of assigning (selling)
your rights for two reasons:
First, it is initially hard to ascertain what the eventual value of an invention will be. This will almost invariably result
in a win/lose situation. If the value is estimated high, the inventor wins and the company loses. On the other
hand, if the estimates are low, the inventor loses out.
Second, companies don’t like to pay cash up front unless they absolutely have to. Generally, when a company
makes a commitment to manufacture and promote an invention, they are already anticipating a substantial
financial commitment for tooling, manufacturing setup, engineering expenses, advance purchases of raw
materials, marketing, and promotional expenses. A company that is savvy with licensing negotiations will state
that the more money they pay the inventor up front, the fewer resources they will have available to put into the
promotion. This is a hard point to argue against, particularly if you’re interested in the long- range commercial
success of your invention.
At this point, Inventors have often already incurred substantial initial expenses for patenting, prototyping and
research, and need to be reimbursed as soon as possible. Therefore, the inventor can argue that the potential
licensees should at least reimburse them for these out-of-pocket expenses. After all, these are expenses the
company would have normally paid if they had developed such a product on their own. At that point, the company
may very well come back to the table and agree to reimburse you for such initial expenses. However, they may
want to make it an advance against future royalties. Bear in mind that all negotiations are unique and this is just
an example.

There are too many sad stories of inventors pouring money into inventions that can never provide a return on
their investment. Inventors always take a risk when they spend time and money on an idea and if they’re lucky,
it’ll pay off quite well. The lesson is to minimize your risks so you can bail out or put the project on hold if
warranted. It will save you time, money, and the personal energy you’ll need for future successes.