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Dibrugarh University BCOM 6th Semester CBCS
2022
COMMERCE
(Financial Statement Analysis)
Paper: DSE-602 (GR-I)
Full Marks: 80
Pass Marks: 32
Time: 3 hours.
The figures in the margin indicate full marks for the questions.
1. Write True or False: 1x5=5
(a) Financial statement in ordinary sense means a statement relating to financial matter.
Ans:- True.
(b) Debt equity ratio is a solvency ratio.
Ans:- True.
(c) CRR stands for Cash Reserve Ratio.
Ans:- True.
(d) IFRS-10 is associated with consolidation and joint ventures.
Ans:- False.
(e) Corporate social responsibility reporting is not mandatory for any business in India.
Ans:- False.
2. Fill in the blanks: 1x3=3
(a) Creditors are always interested in knowing the _______ of the business. (financial soundness / earning capacity / solvency position.)
Ans:- solvency position.
(b) Ratio of net profit before interest and taxes to sales is _______ ratio. (net profit / profit / operative profit)
Ans:- operative profit.
(c) Cash certificates are _______. (time liabilities / demand liabilities / time and demand liabilities)
Ans:- time liabilities.
3. Write short notes on any four of the following: 4x4=16
(a) Objectives of financial statement analysis.
(b) Solvency ratio.
(c) Inter-firm comparison.
(d) Worth of equities.
(e) Corporate Governance.
Ans:-
(a) Objectives of Financial Statement Analysis:
1. Assessing Financial Health : Determine the financial stability and viability of a company by analyzing its financial statements to understand its ability to meet its obligations and sustain operations.
2. Performance Evaluation : Evaluate the company's performance over a specific period, assessing profitability, efficiency, and effectiveness in generating returns for shareholders.
3. Decision Making : Assist stakeholders (investors, creditors, management) in making informed decisions regarding investment, lending, or operational strategies based on the analysis of financial statements.
4. Forecasting and Planning : Use historical financial data to forecast future performance and aid in strategic planning, budgeting, and goal setting.
5. Identifying Trends : Detect trends in financial performance and operational efficiency over time, enabling management to implement corrective actions or capitalize on opportunities.
(b) Solvency Ratio:
Solvency ratios assess a company's ability to meet its long-term financial obligations. They provide insights into the company's ability to sustain operations and remain solvent in the long run. Common solvency ratios include:
1. Debt-to-Equity Ratio : Measures the proportion of debt to equity used to finance the company's assets. A lower ratio indicates lower financial risk.
2. Interest Coverage Ratio : Indicates how easily a company can pay interest expenses on its outstanding debt. Higher ratios imply better ability to cover interest payments.
3. Debt Ratio : Measures the proportion of a company's assets financed by debt. A lower ratio indicates lower financial risk and higher solvency.
4. Debt Service Coverage Ratio (DSCR) : Evaluates a company's ability to meet its debt obligations by comparing its operating income to its debt obligations.
(c) Inter-firm Comparison:
Inter-firm comparison involves analyzing and comparing financial data of one company with that of other companies in the same industry or sector. This analysis helps in:
1. Benchmarking Performance : Comparing financial ratios, profitability, efficiency, and other metrics to industry peers helps identify relative strengths and weaknesses.
2. Identifying Best Practices : Studying successful companies within the industry can reveal best practices and strategies that can be adopted to improve performance.
3. Assessing Competitive Positioning : Understanding how a company stacks up against its competitors in terms of financial performance, market share, and operational efficiency aids in strategic decision-making.
4. Spotting Trends and Anomalies : Inter-firm comparison allows identification of trends, outliers, and anomalies in financial data that may require further investigation or action.
(d) Worth of Equities: The worth of equities refers to the valuation of a company's equity or ownership interests in terms of its market value, book value, or intrinsic value. It can be evaluated through various methods:
1. Market Capitalization : Market capitalization is calculated by multiplying the current market price per share by the total number of outstanding shares. It represents the total market value of a company's equity.
2. Book Value per Share : Book value per share is calculated by dividing the total shareholder's equity by the total number of outstanding shares. It represents the net asset value per share if all assets were liquidated and all liabilities paid off.
3. Discounted Cash Flow (DCF) Analysis : DCF analysis estimates the present value of future cash flows generated by the company. The equity worth is determined by discounting these cash flows to their present value.
4. Comparable Company Analysis (CCA) : CCA involves comparing the valuation multiples (such as price-to-earnings ratio, price-to-book ratio) of the company with similar publicly traded companies to determine its equity worth.
5. Intrinsic Valuation : Intrinsic valuation methods, such as discounted earnings or discounted dividend models, estimate the true worth of a company's equity based on its fundamental characteristics and future earning potential.
(e) Corporate Governance: Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It encompasses the relationships among stakeholders and determines the company's objectives, strategy, and performance. Objectives of corporate governance include:
1. Enhancing Transparency and Accountability : Corporate governance frameworks promote transparency by ensuring accurate and timely disclosure of financial and non-financial information to stakeholders. They also establish mechanisms for holding management accountable for their actions.
2. Protecting Shareholder Interests : Corporate governance structures aim to safeguard the interests of shareholders by ensuring fair treatment, equitable distribution of profits, and protection of minority shareholders' rights.
3. Effective Risk Management : Good corporate governance practices incorporate risk management processes to identify, assess, and mitigate various risks, including financial, operational, legal, and reputational risks.
4. Promoting Ethical Conduct : Corporate governance frameworks establish ethical standards and codes of conduct for directors, executives, and employees to ensure integrity, honesty, and fairness in all business dealings.
5. Strengthening Board Oversight : A key aspect of corporate governance is the composition and functioning of the board of directors. Effective boards provide oversight, strategic guidance, and decision-making authority to ensure the company's long-term success and sustainability.
4. (a) What is ratio analysis? What are its characteristics? State the limitations of ratio analysis. 2+6+6=14
Ans:- Ratio analysis is a financial analysis technique used to evaluate various aspects of a company's performance, financial health, and efficiency by comparing different financial ratios derived from its financial statements. These ratios provide insights into the company's liquidity, profitability, solvency, efficiency, and overall financial condition. Ratio analysis involves calculating and interpreting key financial ratios to assess the company's strengths, weaknesses, and trends over time.
Characteristics of Ratio Analysis:
1. Quantitative Analysis : Ratio analysis involves the use of numerical data derived from financial statements, such as the balance sheet, income statement, and cash flow statement, to calculate ratios that reflect different aspects of the company's financial performance.
2. Comparative Analysis : Ratios are compared with industry benchmarks, historical data, or competitors' ratios to evaluate the company's performance relative to its peers or over different periods.
3. Standardization : Ratios provide a standardized measure that facilitates comparison across companies of different sizes, industries, or geographical locations.
4. Decision Support Tool : Ratio analysis aids stakeholders, including investors, creditors, management, and analysts, in making informed decisions regarding investment, lending, creditworthiness, operational efficiency, and strategic planning.
5. Diagnostic Tool : Ratios help identify financial strengths and weaknesses, pinpointing areas that require attention or improvement within the company's operations or financial management.
6. Trend Analysis : Ratio analysis allows for the analysis of trends over time, helping to identify patterns, changes, or anomalies in the company's financial performance.
Limitations of Ratio Analysis:
1. Limited Information : Ratio analysis relies solely on financial data and may not capture qualitative aspects such as management competency, market dynamics, or external factors impacting the company's performance.
2. Historical Data : Ratios are based on historical financial statements and may not reflect current or future market conditions, making them less predictive in dynamic environments.
3. Accounting Policies : Differences in accounting policies and practices between companies or changes in accounting standards can distort ratio comparisons and limit their usefulness.
4. Size and Industry Variations : Ratios may not be directly comparable across companies of different sizes or industries due to variations in business models, capital structures, and operating environments.
5. Manipulation : Financial ratios can be manipulated through creative accounting techniques or financial engineering, undermining their reliability and accuracy.
6. Lack of Context : Ratios provide numerical values without context, requiring interpretation and analysis to understand their implications and significance.
7. Single Point Analysis : Isolating individual ratios without considering their interrelationships or the company's overall financial context may lead to misinterpretation or incomplete assessment.
Despite these limitations, ratio analysis remains a valuable tool for financial analysis when used judiciously in conjunction with other qualitative and quantitative methods to gain a comprehensive understanding of a company's financial performance and position.
Or
(b) Dibrugarh Tea Ltd. presents its Profit and Loss A/c for the year ending 31st March, 2022 and a Balance Sheet as on that date as follow:
Profit and Loss A/c for the year ending 31st March, 2022
Balance Sheet as on 31st March, 2022
The company has paid 20% dividend to equity shareholders and preference dividend has also been paid. Tax rate is 30%. The equity shares are quoted in stock exchange at Rs. 40 per share. Compute the following:
(a) Liquid Ratio.
(b) Debt-Equity Ratio.
(c) Dividend Coverage Ratio.
(d) Debtors Turnover Ratio.
(e) Working Capital Turnover Ratio.
(f) Net Profit Ratio.
(g) Return on Investment Ratio.
Ans:- Let's calculate each of the ratios step by step:
(a) Liquid Ratio:
Liquid Ratio = (Liquid Assets) / (Current Liabilities)
Liquid Assets = Inventory + Debtors + Bank
Current Liabilities = Trade Creditors + Outstanding Expenses
Using the given values:
Liquid Assets = 30,000 (Inventory) + 8,000 (Debtors) + 2,000 (Bank) = 40,000
Current Liabilities = 40,000 (Trade Creditors) + 25,000 (Outstanding Expenses) = 65,000
Liquid Ratio = 40,000 / 65,000 = 0.615
(b) Debt-Equity Ratio:
Debt-Equity Ratio = (Total Debt) / (Total Equity)
Total Debt = 6% Debentures
Total Equity = Equity Shares + Preference Shares + Reserves
Using the given values:
Total Debt = 40,000 (6% Debentures)
Total Equity = 20,000 (Equity Shares) + 20,000 (Preference Shares) + 15,000 (Reserve) = 55,000
Debt-Equity Ratio = 40,000 / 55,000 = 0.727
(c) Dividend Coverage Ratio:
Dividend Coverage Ratio = (Net Profit - Dividends) / Dividends
Net Profit = 50,000
Dividends = Dividend on Equity Shares + Dividend on Preference Shares
Dividend on Equity Shares = 20% of (20,000 * 10) = 40,000
Dividend on Preference Shares = 20% of (20,000 * 100) = 40,000
Total Dividends = 40,000 (Equity) + 40,000 (Preference) = 80,000
Dividend Coverage Ratio = (50,000 - 80,000) / 80,000 = -0.375 (Negative indicates insufficient profit to cover dividends)
(d) Debtors Turnover Ratio:
Debtors Turnover Ratio = Sales / Average Debtors
Average Debtors = (Debtors at the beginning of the year + Debtors at the end of the year) / 2
Debtors at the beginning of the year = Debtors at the end of the year = 8,000
Average Debtors = (8,000 + 8,000) / 2 = 8,000
Sales = 2,00,000
Debtors Turnover Ratio = 2,00,000 / 8,000 = 25
(e) Working Capital Turnover Ratio:
Working Capital Turnover Ratio = Sales / Working Capital
Working Capital = Current Assets - Current Liabilities
Using the given values:
Current Assets = Inventory + Debtors + Bank = 30,000 + 8,000 + 2,000 = 40,000
Current Liabilities = Trade Creditors + Outstanding Expenses = 40,000 + 25,000 = 65,000
Working Capital = 40,000 - 65,000 = -25,000 (Negative working capital, which is unusual)
Working Capital Turnover Ratio = Sales / Working Capital = 2,00,000 / (-25,000) = -8
(f) Net Profit Ratio:
Net Profit Ratio = (Net Profit / Sales) * 100
Using the given values:
Net Profit = 50,000
Sales = 2,00,000
Net Profit Ratio = (50,000 / 2,00,000) * 100 = 25%
(g) Return on Investment Ratio:
Return on Investment Ratio = (Net Profit / Total Investment) * 100
Total Investment = Equity Shares + Preference Shares + Reserves + Debentures
Using the given values:
Total Investment = 20,000 (Equity Shares) + 20,000 (Preference Shares) + 15,000 (Reserve) + 40,000 (Debentures) = 95,000
Return on Investment Ratio = (50,000 / 95,000) * 100 ≈ 52.63%
These are the calculated ratios based on the provided financial data.
5. (a) The following information are available for a firm:
(1) Gross Profit Ratio – 25%.
(2) Net Profit / Sales – 20%.
(3) Stock Turnover – 10.
(4) Net Profit / Capital – 1/5.
(5) Capital / Total Liabilities – 1/2.
(6) Fixed Assets / Capital – 5/4.
(7) Fixed Assets / Current Assets – 5/7.
(8) Fixed Assets – Rs. 10,00,000.
(9) Closing Stock – Rs. 1,00,000.
Find out: 2x7=14
(a) Cost of Sales.
(b) Gross Profit.
(c) Net Profit.
(d) Current Assets.
(e) Capital.
(f) Total Liabilities.
(g) Opening Stock.
Ans:- Let's solve each part step by step:
(a) Cost of Sales:
Cost of Sales = Sales - Gross Profit
Given Gross Profit Ratio = 25%
So, Gross Profit Ratio = Gross Profit / Sales
=> 25/100 = Gross Profit / Sales
=> Gross Profit = (25/100) * Sales
Also, Net Profit / Sales = 20%
=> 20/100 = Net Profit / Sales
=> Net Profit = (20/100) * Sales
Given Gross Profit = Sales - Cost of Sales
=> (25/100) * Sales = Sales - Cost of Sales
=> Cost of Sales = Sales - (25/100) * Sales
=> Cost of Sales = (100 - 25)/100 * Sales
=> Cost of Sales = (75/100) * Sales
(b) Gross Profit:
Gross Profit = Sales - Cost of Sales
(c) Net Profit:
Net Profit = Net Profit / Sales * Sales
(d) Current Assets:
Current Assets = Stock Turnover * Cost of Sales + Closing Stock
(e) Capital:
Capital = Net Profit / (Net Profit / Capital)
(f) Total Liabilities:
Total Liabilities = Capital / (Capital / Total Liabilities)
(g) Opening Stock:
To find the opening stock, we can use the formula:
Opening Stock = Closing Stock - (Cost of Sales / Stock Turnover)
Now let's plug in the given values and calculate each part accordingly.
Or
(b) “Financial reporting should be a part of the Annual Report of the Companies and it is the best way to provide information to its shareholders.” Considering this statement, write a brief note on financial statement and its types.
Ans:- Financial reporting is an essential aspect of corporate governance and transparency, providing shareholders and other stakeholders with crucial information about a company's financial performance, position, and cash flows. Financial reporting typically encompasses the preparation and presentation of financial statements, which serve as the primary means of communicating a company's financial health and operating results to external parties.
Financial statements are formal records that outline the financial activities of a business entity and are prepared in accordance with generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). These statements provide a snapshot of the company's financial position and performance over a specific period, typically quarterly or annually.
There are four main types of financial statements:
1. Income Statement (Profit and Loss Statement) : This statement presents the revenues, expenses, and resulting net income or loss for a specific period. It reflects the company's ability to generate profits from its core operations.
2. Balance Sheet (Statement of Financial Position) : The balance sheet provides a snapshot of a company's financial position at a particular point in time, detailing its assets, liabilities, and shareholders' equity. It demonstrates the company's solvency and liquidity by showing what the company owns (assets), owes (liabilities), and what remains for shareholders (equity).
3. Cash Flow Statement : This statement tracks the inflows and outflows of cash and cash equivalents during a specific period, categorizing cash flows into operating, investing, and financing activities. It helps stakeholders assess the company's ability to generate cash and meet its financial obligations.
4. Statement of Changes in Equity (Statement of Shareholders' Equity) : This statement outlines the changes in shareholders' equity over a particular period, including contributions, distributions, net income or loss, and other adjustments. It provides insights into how shareholder equity has evolved due to various transactions and events.
Each type of financial statement serves a distinct purpose, collectively offering a comprehensive view of a company's financial performance, position, and cash flows. By including these statements in the annual report, companies fulfill their obligation to provide transparent and reliable financial information to shareholders, enabling informed decision-making and fostering trust and confidence in the organization.
6. (a) What do you mean by financial statement analysis? Discuss three objectives of financial statement analysis. 4+10=14
Ans:- Financial statement analysis refers to the process of evaluating and interpreting a company's financial statements to gain insights into its financial performance, position, and potential future prospects. It involves examining various financial metrics, ratios, trends, and other indicators to assess the company's overall financial health and effectiveness of its operations. Financial statement analysis is crucial for investors, creditors, management, regulators, and other stakeholders to make informed decisions regarding the company.
Objectives of financial statement analysis include:
1. Assessing Financial Performance : One of the primary objectives is to evaluate how well a company has performed financially over a specific period. This involves analyzing profitability ratios, such as return on assets (ROA) and return on equity (ROE), to determine the company's ability to generate profits from its assets and equity.
2. Evaluating Financial Position : Financial statement analysis aims to assess the company's financial position by examining its liquidity, solvency, and leverage. Key metrics such as the current ratio, quick ratio, and debt-to-equity ratio provide insights into the company's ability to meet short-term and long-term obligations and its overall financial stability.
3. Forecasting Future Performance : Another objective is to use historical financial data to forecast the company's future financial performance and potential growth prospects. By identifying trends, patterns, and key drivers of performance, analysts can make informed projections about the company's future earnings, cash flows, and valuation.
4. Comparing Performance : Financial statement analysis enables comparison of the company's financial performance with its competitors, industry benchmarks, and historical performance. This comparative analysis helps identify relative strengths and weaknesses, benchmark performance against industry standards, and identify areas for improvement.
5. Identifying Risk Factors : Analysts use financial statement analysis to identify and assess various financial risks, including operational, market, credit, and liquidity risks. By identifying potential red flags and vulnerabilities in the company's financial statements, stakeholders can take proactive measures to mitigate risks and safeguard their investments.
6. Making Investment Decisions : Investors use financial statement analysis to make informed investment decisions, including buying, holding, or selling securities issued by the company. By assessing the company's financial health, growth potential, and valuation metrics, investors can allocate their capital effectively and optimize their investment portfolios.
7. Supporting Managerial Decision-Making : Financial statement analysis provides valuable insights to management for strategic planning, performance evaluation, and resource allocation decisions. By identifying areas of improvement and monitoring key performance indicators, management can make data-driven decisions to enhance operational efficiency and maximize shareholder value.
Or
(b) Give a brief note on mandatory and voluntary disclosures on Corporate Social Responsibility Reporting. 14
Ans:- Corporate Social Responsibility (CSR) reporting involves the disclosure of a company's initiatives, activities, and impacts related to its social, environmental, and ethical responsibilities. These disclosures can be categorized into mandatory and voluntary disclosures:
1. Mandatory Disclosures :
Mandatory CSR reporting refers to the disclosure requirements mandated by government regulations, stock exchanges, or other regulatory bodies. Many countries have introduced laws or regulations that require certain companies to disclose their CSR activities and impacts in their annual reports or separate CSR reports. These regulations often specify the scope of CSR activities to be reported, reporting formats, and disclosure timelines. Mandatory disclosures ensure that companies fulfill their legal obligations and provide stakeholders with transparent information about their CSR performance.
2. Voluntary Disclosures :
Voluntary CSR reporting refers to disclosures that companies choose to make beyond the mandatory requirements. While mandatory disclosures provide a baseline level of transparency, voluntary disclosures allow companies to go above and beyond regulatory requirements to demonstrate their commitment to CSR and sustainability. Companies may voluntarily disclose additional information about their CSR strategies, goals, performance metrics, stakeholder engagement efforts, and social or environmental impacts. Voluntary disclosures help enhance corporate reputation, build trust with stakeholders, attract socially responsible investors, and differentiate the company in the marketplace.
Key components of CSR reporting may include:
- CSR Strategy and Policies : Companies disclose their CSR mission, values, and guiding principles, as well as policies related to environmental stewardship, social responsibility, and ethical business conduct.
- Stakeholder Engagement : Companies report on their engagement with various stakeholders, including employees, customers, suppliers, communities, and advocacy groups, to understand their expectations and address their concerns.
- CSR Initiatives and Programs : Companies disclose specific CSR initiatives, projects, and programs implemented to address social, environmental, and economic issues. This may include initiatives related to environmental sustainability, employee well-being, community development, diversity and inclusion, and human rights.
- Performance Metrics and Indicators : Companies report on key performance indicators (KPIs) and metrics used to measure the effectiveness and impact of their CSR initiatives. Common metrics may include greenhouse gas emissions, energy consumption, waste generation, employee turnover, community investments, and philanthropic contributions.
- Third-Party Assurance and Verification : Some companies choose to obtain third-party assurance or verification of their CSR reporting to enhance credibility and trustworthiness. Independent audits or certifications can provide stakeholders with confidence in the accuracy and reliability of the reported information.
Overall, mandatory and voluntary CSR disclosures play a critical role in promoting transparency, accountability, and stakeholder engagement, driving corporate sustainability and responsible business practices.
7. (a) Discuss the new standards of corporate governance under the Companies Act, 2013. 14
Ans:- The Companies Act, 2013 introduced significant reforms and new standards of corporate governance in India with the aim of enhancing transparency, accountability, and investor protection. Some of the key provisions and standards of corporate governance under the Companies Act, 2013 include:
1. Composition of Board of Directors :
- The Act mandates the appointment of independent directors, ensuring that a certain percentage of the board consists of independent directors to bring objectivity and impartiality to decision-making.
- It specifies the criteria for determining the independence of directors, including absence of any material relationship with the company, its promoters, or management.
2. Roles and Responsibilities of Directors :
- The Act clarifies the roles, duties, and responsibilities of directors, including fiduciary duties, duty of care and diligence, duty to act in the best interests of the company, and duty to avoid conflicts of interest.
- Directors are required to act in good faith, exercise due diligence, and comply with applicable laws, regulations, and ethical standards.
3. Board Committees :
- The Act mandates certain board committees, such as the Audit Committee, Nomination and Remuneration Committee, and Stakeholders Relationship Committee, to oversee specific aspects of corporate governance and provide independent oversight.
- These committees are comprised of independent directors and are responsible for areas such as financial reporting, nomination and remuneration of directors, and addressing grievances of stakeholders.
4. Enhanced Disclosure Requirements :
- The Act imposes stricter disclosure requirements, requiring companies to disclose detailed information about their financial performance, governance practices, related-party transactions, and risk management processes.
- Enhanced disclosures aim to provide shareholders and other stakeholders with comprehensive information to make informed decisions and assess the company's performance and governance practices.
5. Shareholder Rights :
- The Act strengthens shareholder rights and protections, including provisions for electronic voting, shareholders' right to inspect corporate records, and mechanisms for redressal of grievances and protection against oppression and mismanagement.
- It encourages greater shareholder activism and engagement in corporate governance matters.
6. Corporate Social Responsibility (CSR) :
- The Act introduces mandatory CSR provisions for certain classes of companies, requiring them to spend a specified percentage of their profits on CSR activities.
- Companies are required to establish a CSR committee, formulate a CSR policy, and report on their CSR activities in their annual reports.
7. Penalties and Enforcement :
- The Act imposes penalties for non-compliance with corporate governance requirements, including fines, imprisonment, and disqualification of directors.
- Regulatory authorities such as the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA) oversee enforcement and compliance with corporate governance standards.
Overall, the Companies Act, 2013 represents a significant overhaul of corporate governance norms in India, aiming to foster transparency, accountability, and responsible business practices among companies, thereby enhancing investor confidence and promoting sustainable growth.
Or
(b) What is a Non-Banking Financial Company? Discuss the RBI guidelines on regulatory framework of NBFC. 4+10=14
Ans:- A Non-Banking Financial Company (NBFC) is a financial institution that provides various banking services and financial products similar to traditional banks but does not hold a banking license. NBFCs play a crucial role in the financial system by offering credit, investment, advisory, and other financial services to individuals, businesses, and other entities. They operate under the purview of regulatory authorities such as the Reserve Bank of India (RBI) and are subject to specific regulatory guidelines to ensure stability, transparency, and consumer protection.
RBI Guidelines on Regulatory Framework of NBFCs:
1. Registration and Regulation :
- NBFCs are required to obtain registration from the RBI to operate legally. They must comply with the regulatory framework prescribed by the RBI, including prudential norms, capital adequacy requirements, and reporting obligations.
- The RBI categorizes NBFCs into different types based on their activities, such as asset finance companies, loan companies, investment companies, and infrastructure finance companies.
2. Minimum Net Owned Fund (NOF) :
- NBFCs are required to maintain a minimum level of Net Owned Fund (NOF) as prescribed by the RBI. NOF represents the company's capital base and reflects its ability to absorb losses and meet financial obligations.
- The minimum NOF requirement varies depending on the type of NBFC and its activities.
3. Capital Adequacy Ratio (CAR) :
- NBFCs are required to maintain a minimum Capital Adequacy Ratio (CAR) to ensure financial stability and solvency. CAR is a measure of the company's capital relative to its risk-weighted assets and is calculated as the ratio of capital to risk-weighted assets.
- The RBI specifies the minimum CAR requirement for NBFCs based on their risk profile and activities.
4. Prudential Norms :
- NBFCs are required to adhere to prudential norms prescribed by the RBI, including norms related to asset classification, provisioning, income recognition, and exposure limits.
- Prudential norms help ensure the quality of assets, mitigate credit risk, and maintain financial soundness.
5. Corporate Governance :
- NBFCs are expected to maintain high standards of corporate governance, including the composition and functioning of the board of directors, internal controls, risk management systems, and transparency in disclosures.
- The RBI emphasizes the role of the board of directors and senior management in overseeing the company's operations and ensuring compliance with regulatory requirements.
6. Regulatory Reporting and Supervision :
- NBFCs are required to submit periodic reports and returns to the RBI, providing information on their financial condition, operations, and compliance with regulatory norms.
- The RBI conducts supervision and inspection of NBFCs to assess their compliance with regulatory requirements, identify risks, and take necessary corrective measures to maintain financial stability.
7. Financial Markets: Overview of stock markets, bond markets, commodity markets, and foreign exchange markets. Functions, participants, and instruments traded in financial markets. Market efficiency hypothesis and behavioral finance theories.
8. Investment Analysis: Fundamental analysis vs. technical analysis in investment decision-making. Portfolio management strategies, including diversification, asset allocation, and risk management. Valuation techniques for stocks, bonds, real estate, and other investment assets.
9. Financial Institutions: Commercial banks, investment banks, insurance companies, and pension funds: roles and functions. Central banks and monetary policy tools for managing money supply and interest rates.Shadow banking system and its implications for financial stability.
Overall, the RBI guidelines on the regulatory framework of NBFCs aim to promote financial stability, protect the interests of depositors and investors, and maintain the integrity and efficiency of the financial system. These guidelines ensure that NBFCs operate prudently, manage risks effectively, and contribute to the overall development of the economy.
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