Unit ko samjho · NISM Series IX
Introduction to the Merchant Banking
20 questions is unit mein
Sawaal aur jawaab English mein hain, kyunki NISM ka exam paper bhi English mein hota hai.
Is unit mein kya hai
- Which activity falls directly within the regulatory meaning of merchant banking in India?
- Which service is more characteristic of commercial banking than securities issue management?
- What does loan syndication primarily arrange for a large borrowing requirement?
- How does a private placement generally differ from an offer made to the public?
- Which receipt most directly represents income from a merchant banker’s agreed transaction-advisory service?
- Which SEBI regulations specifically establish the registration framework for merchant bankers?
- A company wants advice on the balance between borrowing and equity funding. Which assignment best describes this requirement?
- A young company has uncertain near-term cash flows. It wants funding without mandatory periodic interest payments. Which route best fits this stated requirement?
- What should an engagement letter most directly clarify before a merchant banker starts a transaction assignment?
- A founder wants investor introductions, valuation support and term negotiation for a private equity round. Which role best matches these needs?
- An investor’s offer provides a higher valuation but stronger control rights. What should the issuer’s adviser compare?
- Management proposes buying the business it currently operates from its owners. What transaction is being considered?
- A company raises a new loan solely to repay an existing loan nearing maturity. What is the main financing purpose?
- Which professional is primarily engaged to provide a formal external opinion on financial statements in an issue process?
- A company receives underwriting support for its issue. Which outcome is NOT guaranteed merely by that support?
- An issuer pays for issue management but investors need reliable disclosures. Which approach best reconciles the merchant banker’s responsibilities?
- A company has ₹60 crore debt and ₹40 crore equity. It raises ₹20 crore fresh equity and repays ₹15 crore debt. What debt-equity ratio results?
- An advisory contract charges ₹8 lakh plus 0.5% of funds raised above ₹40 crore. What fee applies to a ₹70 crore raise?
- A founder owns 60 of 100 shares and will not subscribe. How many new shares can be issued while retaining at least 50% ownership?
- An adviser introduces an investor but has no commitment to subscribe. The investor later withdraws. The issuer demands that the adviser fund the shortfall. What governs this demand?
Zaroori ideas
Practice bank se · 1
Which activity falls directly within the regulatory meaning of merchant banking in India?
Managing a securities issue is merchant banking because the regulatory definition covers issue management and related advisory work. Remember: Issue management is central to the regulatory definition of merchant banking.
Hint Common mistake: Assuming every activity with the word banking belongs to merchant banking. Think about arranging the sale or subscription of securities.
IX-016Practice bank se · 2
Which service is more characteristic of commercial banking than securities issue management?
Accepting repayable deposits is characteristic of commercial banking rather than securities issue management. Remember: Deposit taking and issue management are different financial functions.
Hint Common mistake: Treating commercial banking and merchant banking as interchangeable. Compare routine borrowing-and-lending services with capital-market transaction services.
IX-017Practice bank se · 3
What does loan syndication primarily arrange for a large borrowing requirement?
Loan syndication arranges financing from several lenders for a borrower’s funding requirement. Remember: Syndication brings multiple lenders into a financing arrangement.
Hint Common mistake: Confusing a lender group with a group of share buyers. Think about sharing one financing requirement across participating institutions.
IX-018Practice bank se · 4
How does a private placement generally differ from an offer made to the public?
A private placement approaches selected investors rather than offering securities to the public at large. Remember: Private placement describes a targeted route for offering securities.
Hint Common mistake: Assuming a targeted offer is free from legal requirements. Compare who is invited to subscribe, not whether regulation exists.
IX-019Practice bank se · 5
Which receipt most directly represents income from a merchant banker’s agreed transaction-advisory service?
An advisory fee pays for the merchant banker’s agreed professional service. Remember: Service income should be distinguished from investor funds and investment returns.
Hint Common mistake: Counting every transaction-related cash receipt as the adviser’s income. Separate compensation for a service from investment and funding cash flows.
IX-020Practice bank se · 6
Which SEBI regulations specifically establish the registration framework for merchant bankers?
The SEBI (Merchant Bankers) Regulations, 1992 establish the registration framework specifically for merchant bankers. Remember: Each intermediary must be checked against its own registration framework.
Hint Common mistake: Using another intermediary’s regulations because both operate in securities markets. Match the intermediary’s activity with its dedicated regulatory framework.
IX-021Practice bank se · 7
A company wants advice on the balance between borrowing and equity funding. Which assignment best describes this requirement?
Capital-structure advisory addresses the mix of debt and equity used to finance a company. Remember: Capital structure concerns how the business is financed.
Hint Common mistake: Confusing financing design with routine transaction administration. Think about the mix of financing sources on the balance sheet.
IX-022Practice bank se · 8
A young company has uncertain near-term cash flows. It wants funding without mandatory periodic interest payments. Which route best fits this stated requirement?
Ordinary equity fits because it does not create mandatory periodic interest payments, although it dilutes ownership. Remember: Financing choices involve both payment obligations and ownership effects.
Hint Common mistake: Ignoring repayment and interest obligations when comparing debt with equity. Identify which financing instrument makes the investor an owner.
IX-023Practice bank se · 9
What should an engagement letter most directly clarify before a merchant banker starts a transaction assignment?
The engagement letter should clarify the agreed work and fee terms so each party understands the assignment. Remember: Clear engagement terms define the adviser’s responsibilities and compensation.
Hint Common mistake: Leaving commercial responsibilities unstated until the transaction closes. Think about preventing disagreement between a client and its adviser.
IX-024Practice bank se · 10
A founder wants investor introductions, valuation support and term negotiation for a private equity round. Which role best matches these needs?
A transaction adviser can support investor selection, valuation and negotiation for the proposed financing round. Remember: Private equity advisory can cover more than introducing an investor.
Hint Common mistake: Assuming the adviser’s role ends once an investor is introduced. Look for coordinated advice across the financing transaction.
IX-025Practice bank se · 11
An investor’s offer provides a higher valuation but stronger control rights. What should the issuer’s adviser compare?
The adviser should compare both economic terms and governance rights because either can materially affect existing owners. Remember: A financing proposal cannot be assessed from valuation alone.
Hint Common mistake: Choosing the highest headline valuation without reviewing attached rights. Consider what each party receives beyond a quoted valuation.
IX-026Practice bank se · 12
Management proposes buying the business it currently operates from its owners. What transaction is being considered?
A management buyout occurs when the business’s management acquires ownership from its existing owners. Remember: The identity of the acquiring group defines a management buyout.
Hint Common mistake: Confusing a change in share structure with a change in ownership. Identify who is acquiring the business, rather than the method of payment.
IX-027Practice bank se · 13
A company raises a new loan solely to repay an existing loan nearing maturity. What is the main financing purpose?
This is refinancing because the new borrowing replaces an existing debt obligation. Remember: Refinancing replaces existing finance rather than necessarily adding a new operating asset.
Hint Common mistake: Assuming every new loan finances business expansion. Trace the use of the new borrowing rather than its source.
IX-028Practice bank se · 14
Which professional is primarily engaged to provide a formal external opinion on financial statements in an issue process?
The statutory auditor provides the formal audit opinion on the financial statements within the applicable audit framework. Remember: An issue involves specialist roles that should not be confused with one another.
Hint Common mistake: Assuming the merchant banker personally performs every specialist function. Distinguish financial assurance from marketing and application processing.
IX-029Practice bank se · 15
A company receives underwriting support for its issue. Which outcome is NOT guaranteed merely by that support?
Underwriting does not guarantee a higher post-listing share price because its commitment concerns subscription under agreed terms. Remember: Underwriting is not a guarantee of secondary-market returns.
Hint Common mistake: Treating subscription support as protection against investment losses. Separate the issue’s subscription arrangements from later secondary-market performance.
IX-030Practice bank se · 16
An issuer pays for issue management but investors need reliable disclosures. Which approach best reconciles the merchant banker’s responsibilities?
The merchant banker must serve the mandate without compromising investor-oriented disclosure and conduct duties. Remember: Commercial engagement does not override the merchant banker’s professional obligations.
Hint Common mistake: Assuming the paying client can require misleading disclosures. Payment by a client does not remove duties owed under the regulatory framework.
IX-031Practice bank se · 17
A company has ₹60 crore debt and ₹40 crore equity. It raises ₹20 crore fresh equity and repays ₹15 crore debt. What debt-equity ratio results?
The resulting debt-equity ratio is 0.75 because debt falls to ₹45 crore and equity rises to ₹60 crore. Debt = ₹60 crore − ₹15 crore = ₹45 crore. Equity = ₹40 crore + ₹20 crore = ₹60 crore. Ratio = ₹45 crore ÷ ₹60 crore = 0.75, ignoring issue costs. Remember: Financing and repayment in the same transaction can change both parts of a leverage ratio.
Hint Common mistake: Updating the equity balance without also applying the specified debt repayment. Update the equity raised and debt repaid as two separate balance-sheet changes.
IX-032Practice bank se · 18
An advisory contract charges ₹8 lakh plus 0.5% of funds raised above ₹40 crore. What fee applies to a ₹70 crore raise?
The fee is ₹23 lakh because the variable charge applies only above the stated threshold. Chargeable excess = ₹70 crore − ₹40 crore = ₹30 crore. Variable fee = 0.5% × ₹30 crore = ₹15 lakh. Total fee = ₹8 lakh + ₹15 lakh = ₹23 lakh, ignoring taxes. Remember: A transaction fee must be calculated using the contract’s specified base.
Hint Common mistake: Applying a success fee to the full transaction when the agreement uses only an excess amount. First identify the amount to which the variable fee actually applies.
IX-033Practice bank se · 19
A founder owns 60 of 100 shares and will not subscribe. How many new shares can be issued while retaining at least 50% ownership?
At most 20 new shares can be issued because the founder must retain at least half the enlarged capital. 60 ÷ (100 + new shares) ≥ 0.50. The largest total is 120 shares, so the maximum new issue is 120 − 100 = 20 shares. Remember: Dilution changes ownership by changing the total shares outstanding.
Hint Common mistake: Applying the target percentage only to the old share capital. The founder’s share count stays fixed while the total share count increases.
IX-034Practice bank se · 20
An adviser introduces an investor but has no commitment to subscribe. The investor later withdraws. The issuer demands that the adviser fund the shortfall. What governs this demand?
The demand depends on an actual underwriting obligation because an introduction mandate alone does not commit the adviser to fund the shortfall. Remember: An advisory assignment should not be confused with an underwriting commitment.
Hint Common mistake: Assuming every adviser automatically bears the issuer’s subscription risk. Distinguish arranging a transaction from committing one’s own subscription support.
IX-035