Get AHSEC Class 12 Finance Chapter: AHSEC Class 12 Finance Chapter: 18 FEE-BASED FINANCIAL SERVICES Important Questions Answers 2025.
In this Post we have provided HS 2nd Year Finance Chapter: AHSEC Class 12 Finance Chapter: 18 FEE-BASED FINANCIAL SERVICES Important Notes with Marked/highlighted previous year questions asked in AHSEC Examination.
AHSEC Class 12 Finance Notes
AHSEC Class 12 Finance Chapter: 18 FEE-BASED FINANCIAL SERVICES
FEE-BASED FINANCIAL SERVICES
1. Write the meaning of financial services?
Ans: ‘Finance’ refers to money and credit, while ‘service’ represents something provided by one party to benefit another. Financial services refer to various things related to money and helping people with their financial needs. These services can include managing money, providing loans and assisting in investments. Basically, financial services are the things that experts and companies do to help others with their money matters. There are two main types of Financial Services:
(a) Fee-based financial services: one where people charge fees for their advice
(b) Fund-based financial services: the other where they provide money-related services directly.
2. What do you mean by Fee-based financial services? Explain with a suitable example.
or
What kind of services are provided by Fee-based financial services. Explain
Ans: Fee-based financial services involve firms or institutions that have specialized knowledge and practical experience in a specific field. These experts provide services related to their expertise and charge fees from clients for these services. In fee-based financial services, the experts or companies concentrate on one particular thing they are good at.
For example, credit rating agencies are experts in checking if a company can repay its debts. These agencies only do this job and don’t mix it with anything else. Some other fee-based services are stock broking, credit rating checks and merchant banking.
3. Define (a) stock
(b) broker (c) Stock Broking
Ans: (a) stock: A ‘stock’ is like a piece of a company that one can own, and it’s usually called a “share.” It is like a certificate, We can buy and sell it mainly on stock exchanges. The capital of a company is divided into small units which are called shares. There are two main types of shares: “equity shares” and “preference shares.”
(b) broker: A “broker” is the middleman who helps to connect people who want to buy stocks with those who want to sell them. Companies that make it easy to buy and sell stocks are called “stock brokers.” These brokers usually work for a company that helps many different people, both regular individuals and big organizations with their stock transactions.
(c) Stock Broking: Stock broking is a service where licensed experts called brokers assist us in buying or selling stocks. These brokers can only do this if they have permission from India’s stock exchange. They need a license from the Securities and Exchange Board of India (SEBI) to offer this service. SEBI provides safeguards to investors for a secure investment environment.
4. Discuss the functions and general duties of Stock Broker.
Ans: Functions of Stock Brokers:
i. Acting as Intermediaries: Stock brokers primarily assist investors in buying and selling securities, charging a fee known as brokerage. They act as intermediaries, connecting buyers and sellers on the stock exchange. Stock brokers work exclusively for their clients and earn a fee called a commission.
II. Providing Advice to Clients: Stock brokers offer market information and advice about well-performing stocks based on their expertise and analysis. They often have their own research teams to gather market information, helping clients make informed investment decisions.
iii. Offering Personalized Services: In addition to their basic functions, stock brokers provide personalized services such as financial planning, insurance guidance, retirement planning, tax services and even depository services.
iv. Enabling Margin Financing: Some major stock brokerage firms offer margin trading, allowing investors to buy more stocks than they can afford upfront. This involves borrowing money from the broker to purchase additional recommended stocks.
Additional Services: Stock brokers also extend various extra services to clients, including tax and insurance advice, portfolio analysis, access to IPO shares and assistance with financial planning.
General Duties of a Stock Broker:
i. Maintaining Fairness: Stock brokers must uphold high standards of honesty and fairness in all their business activities.
ii. Exercising Skill and Care: Stock brokers are expected to display skill, care and integrity when managing business transactions on behalf of their clients.
iii. Avoiding Manipulation: Stock brokers are prohibited from engaging in manipulative, fraudulent, or deceptive transactions on behalf of their clients.
iv. Complying with Regulations: Stock brakers are obligated to follow all the rules and regulations set by SEBI and other relevant authorities.
5. What is Credit Rating? List some examples of Credit Rating Agencies.
Ans: Credit Rating involves rating agencies evaluating how trustworthy borrowers are. They consider if borrowers can pay back interest and loan amounts on time. This evaluation can be for overall trustworthiness or for a specific debt or financial responsibility. The purpose of credit rating is to assist investors in deciding whether to invest in debt instruments issued by borrowing companies. In other words, credit rating is like a grade given by rating agencies to show how well a company can manage its debts. In India, there are many credit rating agencies, with some of the main ones being:
a. Credit Rating Information Services of India Ltd. (CRISIL), 1987.
b. Investment Information and Credit Rating Agencies of India. (ICRA), 1991.
c. Credit Analysis and Research Limited (CARE), 1993.
d. Duff Phelps Credit Rating India ia Pvt. Ltd., 1996.
e. Fitch Ratings India Ltd.
f. Onida Individual Credit Rating Agency (ONICRA) etc.
6. What are the different components of credit rating?
Ans: Credit rating consists of three main components:
(a) financial instruments
(b) customer rating
(c) borrower rating.
(a) Financial Instruments: This part involves rating different financial products. These products include bonds, which are like loans made by companies or governments; equity, which refers to shares of ownership in companies; and commercial paper, which are short-term loans issued by businesses.
(b) Customer Rating: This is about evaluating how trustworthy a customer is when they want to buy something on credit. It helps decide if they can pay back what they owe.
(c) Borrower Rating: This part focuses on assessing how reliable a borrower is when it comes to repaying loans or credit they’ve been given. Thus, credit rating involves looking at different financial parameters, checking if customers are able to pay their debts or not.
7. Discuss the factors to be considered for Credit Rating.
Ans: Factors Considered for Credit Rating: A range of factors influences the assessment of a rating (how a rating is given to a thing) for an instrument, organization, or individual. These factors include:
i. History of the Organization: Reviewing how the organization has done in the past, like its track record. ii. Accounting Quality: Evaluating the accuracy and reliability of the organization’s financial records.
iii. Liquidity Management: Assessing how effectively the organization handles its cash and to meet its assets obligations.
iv. Quality of Assets: Examining the value and quality of the organization’s owned assets.
V. Business Fundamentals: Understanding the basic strengths and weaknesses of the organization’s business.
vi. Profitability: Figuring out and Analyzing how much money the organization makes from its operations. vii. Return on Equity: Measuring how much profit the organization generates based on the money invested by its owners.
viii. Return on Investment: Evaluating the organization’s ability to make profits from its investments. ix. Capital Structure: Studying how the organization’s funding/capital is structured, including debt and equity.
X. Past Performance: Considering how well the organization has performed in the past. xi. Interest & Debt Coverage Ratios: Checking if the organization can easily pay its interest on debts and other financial obligations.
8. What are the steps involved in Credit Rating Process?
Ans: Credit Rating Process:
a. Application for Evaluation: A company asks a rating agency to check how well it can manage its debts on time.
b. Proposal Acceptance and Team Assignment: The agency agrees and forms a team to assess the company’s situation.
c. Information Gathering: The team collects important details about the company to see how creditworthy it is. They create a report.
d. Rating Report Creation: Based on the team’s analysis, the agency creates a rating score for the company.
e. Rating Submission: The agency shares the rating with the company. This score shows how good the company is at repaying debts.
f. Publicizing the Rating: The company tells its current and potential investors about the rating. They use symbols like AAA, AA, A, BBB, BB, B to show the credit level. g. Using the Rating: If the company agrees with the rating, it can use it to borrow money by issuing debt instruments.
h. Regular Review and Changes: The agency keeps checking on the company’s progress and can update the rating if things get better or worse.
Simply a company asks a rating agency to check how well it can handle debts. The agency’s team gathers info and makes a rating score. The company shares this score with investors. If the company agrees, they can use this rating to borrow money. The agency keeps an eye on the company’s progress and can update the rating over time.
9. What are the advantages and disadvantages of Credit Rating for Investors? [AHSEC 2024]
Ans: Advantages of Credit Rating for Investors:
(a) Informed Risk-taking: Investors in debt investments can make smarter decisions as credit ratings provide them with information to understand and manage risks.
(b) Affordable High-Quality Information: Credit rating agencies offer excellent information to investors at a reasonable cost.
(c) Encouraging Higher Returns: Investors are motivated to invest in companies that offer better returns.
(d) Reduced Dependence: Investors don’t have to rely heavily on brokers or merchant bankers for information.
(e) Quick Decision-Making: Investors can swiftly decide where to invest based on the rating information.
(f) Continuous Updated Information: Investors receive ongoing superior information.
Disadvantages of Credit Rating:
(a) Quality of Information Matters: The usefulness of ratings depends on the quality of information provided by the agency. Important details may be missing.
(b) Potential Bias: There’s a chance that ratings could be influenced by bias.
(c) Differing Ratings: Different agencies might assign different ratings to the same thing.
(d) Ratings Becoming Outdated: Ratings can become old quickly and new ones should be done at least every six months, though this doesn’t always happen.
(e) Opinions, Not Certainties: Credit ratings are just opinions of agencies and might not perfectly reflect a company’s actual status. Credit ratings apply to various types of investments, including commercial papers, debentures, bonds, equity shares, fixed deposits, individuals and companies in both money and capital markets.
10. Discuss the meaning and definition of Merchant Banker. Also write about its development in India. [AHSEC 2024]
Ans: Merchant banking goes back to the 13th century when family businesses combined banking with buying and selling goods. A merchant bank is like a financial helper for big companies and rich people. It helps them with things like finding money, giving advice about money and raising funds. In the past, these banks helped trade goods, so they’re called “merchant” banks. According to the SEBI (Merchant Bankers) Rules, 1992, a merchant banker is someone who works on arranging the sale, purchase, or subscription of securities and provides advice about it. Merchant Banking can be thought of as a place that does many things like taking care of customer services, managing investments, getting loans, giving advice and more. These places aren’t exactly merchants or traditional banks. They’re more like agencies that help with trade and investments. Merchant bankers are also known as ‘Investment Banking’ and ‘Accepting and Issuing Houses’. In India, National Grindlays Bank started merchant banking in 1967 and then City Bank in 1970. Nowadays, lots of banks, both Indian and foreign, along with private firms, do merchant banking. Some examples are State Bank of India, Bank of Baroda, J.M. Financial Consultants and V.B. Desai Consultants. Development of Merchant Banking in India: Merchant banking started quite some time ago when families did banking and trading together. These banks help big companies and wealthy people with financial stuff. They help them get money, give advice about it and raise funds. In the past, they even helped trade goods, so they’re called “merchant” banks. In 1967, National Grindlays Bank began merchant banking in India and City Bank started in 1970. Today, many banks and firms do merchant banking, like State Bank of India and Bank of Baroda, Canara bank, Union Bank of India, Punjab National bank, Bank of India, J.M. Financial Consultants, V.B.Desal Consultants etc.
11. What is the role/importance of Merchant Bankers?
Ans: Merchant bankers perform several important roles:
(a) Lead Manager in Securities Issuance: Merchant bankers take the lead in managing and organizing the issuance of securities like stocks and bands.
(b) Consultants for Public Share Issuance: They give advice and guidance when companies want to sell shares to the public.
(c) Underwriters for New Issues: Merchant bankers act as underwriters for new offerings, ensuring that unsold shares are bought, reducing risks for the issuing company.
(d) Guaranteeing Sales and Distribution: They guarantee the sale and distribution of securities, ensuring a smooth process.
(e) Providing Capital for High-Tech Firms: Merchant bankers offer funding to advanced technology. companies and ventures.
(f) Project Counseling and Financing: They assist with project planning and finance for various ventures.
(e) Syndication of Credit and Other Services: Merchant bankers help coordinate credit and other services among various parties.
(h) Offering Technical and Managerial Assistance: They provide expertise and support to corporate clients in technical and managerial matters. In simple words, merchant bankers play crucial roles like managing securities issuance, advising on share sales, guaranteeing sales, providing funding for technology firms, assisting with projects and finance, coordinating credit services and offering expert support to companies.
12. Discuss the functions of Merchant Bankers. 2024
Ans: The following are the functions of Merchant Bankers
(a) Assisting in Project Development: Merchant bankers provide valuable guidance in finding promising projects, creating feasibility studies, aiding investors in obtaining necessary licenses and helping with capital structure planning. They also support in forming foreign collaborations, provide insights into amalgamations, mergers and takeovers.
(b) Corporate Advice: Merchant bankers offer advice to corporations to enhance their performance and build a positive reputation among investors. They provide opinions, suggestions and detailed analyses of corporate laws applicable to businesses.
(c) Arranging Loans and Project Funding: Once a project is approved, merchant bankers assist in applying for Financial support from institutions. They offer expert advice on government policies, raw material availability, production planning and machinery requirements.
(d) Issue management: Merchant bankers aid corporate clients in conducting public share and debenture offerings. They help decide the size and timing of the offerings, assist in selecting bankers and brokers, manage the issuance process and prepare necessary documents and promotional materials.
(e) Providing Working Capital Support: Merchant bankers assist clients in obtaining financial support for meeting working capital needs from financial institutions. They help estimate the required working capital, aid in preparing applications and expedite documentation and formalities.
(f) Lease Financing: Some merchant bankers also offer lease financing services. Lease finance involves an arrangement between a lessor (banker) and a lessee (customer) where the banker provides equipment for the lessee’s use. Payments are made as rent at an agreed-upon rate and the equipment is returned to the lessor after the agreement term ends.
13. State whether True or False:
i. Credit Rating is a fee-based financial service. (Ans: True)
ii. Stock brokers are commission agents. (Ans: True)
iii. License for undertaking Stock broking is not essential. (Ans: False)
iv. Credit rating is done only to assess the ability to return credits of banks. (Ans: False)
V. Credit rating is done by the Commercial Banks. (Ans: False)
vi. Merchant banking is a non-banking activity. (Ans: True)
vii. ‘There is no difference between Merchant banking and Commercial Bank’. (Ans: False) vili. The first bank that started Merchant Banking in India is Grindlays Bank. (Ans: True) ix. Accepting deposits is the main function of a Merchant Banker. (Ans: False)
14. Differentiate between Commercial Banks and Merchant banker.
DIFFERENCES BETWEEN COMMERCIAL BANKS AND MERCHANT BANKERS
Ans:-
| Aspect | Commercial Banks | Merchant Bankers |
| Primary Function | Provide traditional banking services such as savings, loans, and deposits | Focus on offering financial advisory and investment banking services |
| Regulatory Oversight | Heavily regulated by central banks and financial authorities | Subject to fewer regulatory restrictions and more market-driven |
| Customer Base | Serve a wide range of retail and corporate clients | Primarily work with corporations, institutions, and high-net-worth individuals |
| Investment Activities | Limited involvement in equity and debt underwriting | Specialize in underwriting securities and facilitating capital raising |
| Deposit Services | Accept deposits from the public, which can be withdrawn on demand | Typically do not offer deposit services to the public |
| Risk Exposure | Typically carry lower risk due to diversified portfolio | May have higher risk exposure due to investment activities |
| Source of Income | Mainly earn income through interest on loans and fees | Generate revenue through fees, underwriting, and advisory services |
| Relationship with Clients | Transactional relationship with clients | Collaborative and advisory-based relationship with clients |
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