UNIT-5 LAW OF CORPORATE FINANCE

UNIT-5 SHORT NOTES

QUESTION-1 Explain in brief:Deep Discount Bond., Commercial Paper.
Partly convertible Debenture. , Bearer Debenture. Contractual Rights of Member.
Beneficial Owner. I.D.R., World Bank

1. Deep Discount Bond:

• A deep discount bond is a type of bond issued at a significant discount to its face value. The bond does not pay periodic interest but is redeemed at face value at maturity. The difference between the issue price and the face value is the return earned by the bondholder.
• Example: If a bond is issued for ₹500 but its face value is ₹1,000, the bondholder will receive ₹1,000 at maturity, thus earning ₹500 as interest.

2. Commercial Paper (CP):

• Commercial Paper is an unsecured, short-term debt instrument issued by corporations, typically with maturities ranging from a few days to a year. It is used for raising funds to meet short-term financial needs, such as working capital. Commercial paper is typically issued at a discount to face value and does not require collateral.
• Example: A company may issue a CP to raise funds for inventory purchases or other operational expenses.

3. Partly Convertible Debenture (PCD):

• A Partly Convertible Debenture is a debenture that can be partially converted into equity shares of the company after a specific period. The rest of the debenture remains non-convertible and is redeemed by the company. This allows the holder to benefit from the company’s growth while still receiving regular interest income on the non-convertible portion.
• Example: A ₹1,000 debenture might be partly converted into 100 shares of the company, with the remaining amount paid in cash at maturity.

4. Bearer Debenture:

• A Bearer Debenture is a type of debenture that is not registered in the name of the owner. The holder of the physical certificate is considered the owner, and the debenture can be transferred easily by delivery. Bearer debentures are not subject to the same formalities as registered debentures, making them more flexible but riskier due to the lack of a registered owner.
• Example: A bearer debenture holder can sell or transfer the debenture by simply handing over the certificate to another person.

5. Contractual Rights of a Member:

• The contractual rights of a member in a company refer to the rights that a shareholder or member holds as per the company’s memorandum and articles of association. These rights include the right to vote at general meetings, receive dividends, inspect company records, transfer shares, and receive a share of the company’s assets if the company is liquidated.
• Example: A shareholder has the right to vote on important resolutions such as mergers, changes in capital structure, or director appointments.

6. Beneficial Owner:

• A Beneficial Owner is the person who enjoys the benefits of ownership of securities, such as dividends or voting rights, even though the securities are held in the name of another person (such as a nominee or trustee). The beneficial owner has the right to direct or influence the voting and other decisions regarding the securities.
• Example: A person who holds shares in the name of a nominee or a trustee but receives the dividends and has control over the shares is considered the beneficial owner.

7. Indian Depository Receipt (IDR):

• An Indian Depository Receipt (IDR) is a financial instrument issued by a depository in India that represents the shares of a foreign company. It allows Indian investors to invest in foreign companies’ stocks without directly purchasing shares from foreign markets.
• Example: A foreign company can issue IDRs in India, enabling Indian investors to trade them on Indian stock exchanges.

8. World Bank:

• The World Bank is an international financial institution that provides loans and grants to the governments of low and middle-income countries for the purpose of pursuing capital projects. The World Bank aims to reduce poverty and support economic development around the world by providing financial and technical assistance.
• Example: The World Bank may provide funding for infrastructure projects such as roads, schools, or hospitals in developing countries to stimulate growth and development.

Question-2 write short notes on following (a)Equity Share (b) Buy-back of Shares (c) Partly Convertible Debenture (d) FloatingCharge (e) Transmission of Shares (f) Statutory Rights of a Mender (g) Life Insurance Company (h) International Monetary Fund.

(a) Equity Share:

• Definition: Equity shares, also known as ordinary shares, represent ownership in a company. Equity shareholders are entitled to a share of the company’s profits through dividends and have voting rights at the company’s annual general meetings (AGMs).
• Key Features:
  • Ownership: Equity shareholders are the true owners of the company.
  • Voting Rights: Shareholders have the right to vote on major corporate decisions.
  • Dividends: Dividends are paid out of the company’s profits, but there is no fixed dividend, and they are not guaranteed.
  • Risk: They face the highest risk as, in case of liquidation, they are paid after debt holders.

(b) Buy-back of Shares:

• Definition: The buy-back of shares refers to the process where a company repurchases its own shares from the existing shareholders. It is usually done when the company has excess cash or believes its shares are undervalued.
• Key Features:
  • Purpose: To increase earnings per share (EPS), utilize surplus cash, and improve shareholder value.
  • Regulation: Governed by the provisions of Section 68 of the Companies Act, 2013.
  • Effects: Reduces the number of outstanding shares, which may increase the share price and improve financial ratios like EPS.

(c) Partly Convertible Debenture:

• Definition: A partly convertible debenture (PCD) is a type of debenture that can be converted into equity shares after a certain period, while the remaining part remains as a traditional debenture.
• Key Features:
  • Convertible Portion: Only a part of the debenture can be converted into equity shares.
  • Fixed Interest: The non-convertible portion continues to earn interest until redemption.
  • Advantages: Provides a steady income to the investor along with potential equity participation.
  • Risk: The risk is lower compared to equity but higher than fully convertible debentures.

(d) Floating Charge:

• Definition: A floating charge is a type of security interest on a company’s assets that allows the company to use or dispose of the assets in the normal course of business until a triggering event occurs, such as liquidation.
• Key Features:
  • Assets Involved: Typically covers a company’s assets like stock, inventory, or receivables.
  • Flexibility: Unlike fixed charges, a floating charge does not attach to specific assets initially and allows the company to use the assets.
  • Trigger: Upon certain events like liquidation or default, the charge “crystallizes” into a fixed charge, and the lender can take control of the assets.

(e) Transmission of Shares:

• Definition: The transmission of shares refers to the transfer of shares from one person to another, typically due to events like death or bankruptcy. This differs from a transfer, which involves voluntary action.
• Key Features:
  • Involuntary Transfer: It occurs by law rather than by the choice of the shareholder.
  • Legal Process: For example, upon the death of a shareholder, the shares are transferred to the legal heirs or beneficiaries.
  • No Consideration: Unlike a sale or transfer of shares, there is no exchange of money in transmission.

(f) Statutory Rights of a Member:

• Definition: Statutory rights refer to the rights granted to a member of a company as per the legal provisions under the Companies Act, 2013.
• Key Features:
  • Right to Vote: Members have the right to vote at general meetings, including decisions on major issues like amendments to the articles of association.
  • Right to Receive Dividends: Members are entitled to receive dividends as per the company’s profit distribution policy.
  • Right to Inspect Records: Members can inspect the company’s books, records, and financial statements.
  • Right to Transfer Shares: Members can transfer their shares, subject to the terms and conditions laid out in the company’s articles of association.

(g) Life Insurance Company:

• Definition: A life insurance company is a financial institution that provides life insurance policies to individuals. These policies offer financial protection to the policyholder’s family in case of their death.
• Key Features:
  • Premium Payment: Policyholders pay regular premiums to the company.
  • Risk Coverage: The company provides a lump sum payment (sum assured) to the policyholder’s nominee upon death or maturity.
  • Types of Policies: Includes term life insurance, endowment policies, and whole life insurance.
  • Regulation: Life insurance companies are regulated by the Insurance Regulatory and Development Authority of India (IRDAI).

(h) International Monetary Fund (IMF):

• Definition: The International Monetary Fund (IMF) is an international financial institution established to promote global economic stability and growth. It provides financial assistance to countries facing balance of payments problems.
• Key Features:
  • Purpose: The IMF aims to stabilize exchange rates and facilitate international trade by providing short-term financial assistance to member countries.
  • Members: It has 190 member countries.
  • Functions: Offers financial assistance, policy advice, and technical assistance to countries facing financial crises or economic instability.
  • Conditionality: Countries seeking IMF assistance must agree to economic reforms and policy adjustments outlined by the IMF.

Question- Write short notes on following: (a) Indian Depository Receipt (b) Collective Investment Scheme (c) Statutory Rights of Members (d) Internet Reconstruction (e) Partly Convertible Debenture ( f Commercial Paper (g) Time Share Investment (h) Brokerage

(a) Indian Depository Receipt (IDR):

• Definition: An Indian Depository Receipt (IDR) is a financial instrument issued by a domestic depository in India, representing foreign company shares. IDRs allow Indian investors to invest in foreign companies without the need for trading on foreign exchanges.
• Key Features:
  • Foreign Investment: Provides Indian investors access to foreign companies’ shares.
  • Regulation: Governed by the Securities and Exchange Board of India (SEBI) and the Companies Act, 2013.
  • Trading: IDRs are traded on Indian stock exchanges, making it easier for Indian investors to diversify internationally.

(b) Collective Investment Scheme:

• Definition: A Collective Investment Scheme (CIS) is a pooling of funds from multiple investors to invest in securities such as stocks, bonds, or real estate. The aim is to generate returns for the investors.
• Key Features:
  • Investment Pool: Money from multiple investors is pooled together for collective investment in various securities.
  • Regulation: Regulated by SEBI in India to ensure transparency, fairness, and investor protection.
  • Types: Includes mutual funds, hedge funds, and real estate investment trusts (REITs).
  • Benefits: Diversification of risk, professional management, and accessibility for small investors.

(c) Statutory Rights of Members:

• Definition: Statutory rights refer to the rights granted by law to members (shareholders) of a company as per the Companies Act, 2013.
• Key Features:
  • Right to Vote: Members can vote at general meetings on important matters like board appointments or changes to the company’s articles.
  • Right to Dividends: Shareholders are entitled to a share of the company’s profits through dividends.
  • Right to Transfer Shares: Shareholders have the right to transfer their shares, subject to the company’s articles.
  • Right to Inspect Records: Members can inspect the company’s financial records and other documents, ensuring transparency.

(d) Internet Reconstruction:

• Definition: Internet reconstruction involves the restructuring or reorganization of a company’s online presence, systems, and services to improve its operations and market position. It can refer to redesigning websites, improving e-commerce platforms, or upgrading IT infrastructure.
• Key Features:
  • Revamping Online Presence: Involves redesigning and updating the company’s digital platforms, such as websites and mobile apps.
  • Technological Upgrades: Includes improving backend infrastructure for smoother operations and customer experiences.
  • Cost and Efficiency: Aims to reduce costs and increase operational efficiency while enhancing user engagement.

(e) Partly Convertible Debenture:

• Definition: A partly convertible debenture (PCD) is a type of debt instrument issued by companies, where only a portion of the debenture can be converted into equity shares after a specified period, while the remaining portion remains as a traditional debenture.
• Key Features:
  • Convertible Portion: Only part of the debenture can be converted into shares, offering a balance of fixed interest income and potential equity ownership.
  • Fixed Interest: The non-convertible portion continues to earn interest like a regular debenture.
  • Risk: Provides a lower risk compared to full equity investments, as part of the debenture remains as fixed-income debt.

(f) Commercial Paper:

• Definition: A commercial paper (CP) is a short-term, unsecured promissory note issued by corporations to raise funds for working capital requirements or other short-term financial needs.
• Key Features:
  • Unsecured: CPs are issued without collateral, based on the issuer’s creditworthiness.
  • Maturity Period: Typically, commercial papers have a maturity period ranging from 7 days to one year.
  • Issuer: Generally issued by large corporations, financial institutions, and banks.
  • Regulation: In India, the Reserve Bank of India (RBI) regulates the issuance of commercial paper.

(g) Time Share Investment:

• Definition: A time-share investment is a real estate arrangement where multiple individuals or entities own a share of a property for specific periods each year. It’s often used for vacation homes or resorts.
• Key Features:
  • Ownership Rights: Investors own the right to use the property for a specified time each year.
  • Costs: Investors pay for the use of the property, typically covering maintenance costs and annual fees.
  • Vacation Homes: Popular in the hospitality industry for vacation properties.
  • Risks: Limited flexibility, potential for low resale value, and hidden costs can pose challenges.

(h) Brokerage:

• Definition: Brokerage refers to the fee charged by a broker for facilitating the buying and selling of financial securities on behalf of clients.
• Key Features:
  • Types of Brokerage: May include flat fee, percentage of transaction amount, or tiered pricing based on trade volume.
  • Brokerage Firms: Typically charged by stockbrokers, real estate agents, and insurance agents.
  • Regulation: Brokerages are regulated by financial authorities such as SEBI in India to ensure fair practices.
  • Payment Methods: Can be charged as a one-time payment per transaction or an ongoing service fee.

Question- Explain the following in brief: (a)Buy-back of Shares (b Brokerage Fully Convertible Debenture ( a ) Authorised Share Capital (e) L.D.R. (f) A.D.R. (g) Depositories in India (h) LI.C.

a) Buy-back of Shares:

• Definition: Buy-back of shares refers to the process in which a company repurchases its own shares from the existing shareholders, usually at a premium price. This is done to reduce the number of shares in circulation, thus increasing the value of the remaining shares.
• Purpose: Companies may buy back shares to improve earnings per share (EPS), utilize surplus cash, or prevent hostile takeovers.
• Regulation: The Companies Act, 2013 governs buy-back procedures in India. It requires shareholder approval and compliance with statutory limits on the amount and the price at which shares can be repurchased.

(b) Brokerage:

• Definition: Brokerage refers to the fee or commission charged by a broker for executing a trade on behalf of a client. This fee can vary based on the type of transaction, asset class, or volume of trade.
• Types: The two common types of brokerage are flat fee brokerage (fixed fee per transaction) and percentage-based brokerage (a percentage of the trade value).
• Regulation: In India, brokers are regulated by the Securities and Exchange Board of India (SEBI) to ensure fair practices and transparency in transactions.

(c) Fully Convertible Debenture (FCD):

• Definition: A Fully Convertible Debenture (FCD) is a type of debenture that can be fully converted into equity shares of the issuing company at a specified conversion price and after a certain period. The investor has the option to convert the debenture into shares instead of receiving interest payments.
• Key Features:
  • Conversion: Investors have the right to convert the entire debenture amount into equity shares, which provides potential for capital appreciation.
  • Risk: It carries lower risk compared to equity since it is initially issued as a debt instrument.
  • Benefits: Investors can gain from the company’s growth by converting their debt into equity.

(d) Authorised Share Capital:

• Definition: Authorized share capital refers to the maximum amount of capital a company is authorized to raise through the issuance of shares, as specified in its memorandum of association.
• Key Features:
  • Limit: The company cannot issue shares beyond this authorized limit unless it alters the memorandum to increase the capital.
  • Flexibility: Companies may issue shares up to this limit at their discretion.
  • Regulation: The amount is regulated by the Companies Act, 2013, which requires the company to maintain its authorized share capital in accordance with the memorandum.

(e) L.D.R. (Long-Duration Receivables):

• Definition: L.D.R. refers to debts or receivables that are due for collection over an extended period, typically more than one year. These receivables are considered long-term assets on a company’s balance sheet.
• Key Features:
  • Credit Risk: Long-duration receivables carry higher risk as they are due for a long time, and the company may face difficulties in collecting these payments.
  • Accounting: They are categorized as non-current assets on the balance sheet, unlike short-term receivables that are expected to be collected within one year.

(f) A.D.R. (American Depository Receipt):

• Definition: An American Depository Receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a foreign company’s shares. It allows U.S. investors to invest in foreign companies’ stocks without dealing directly with foreign markets.
• Key Features:
  • Conversion: Each ADR represents a fixed number of shares in the foreign company.
  • Trading: ADRs are traded on U.S. stock exchanges like any other stock, making it easier for U.S. investors to gain exposure to foreign companies.
  • Regulation: ADRs are subject to regulations by the U.S. Securities and Exchange Commission (SEC).

(g) Depositories in India:

• Definition: A depository is a financial institution that holds securities like shares, debentures, and bonds in electronic form for investors. It provides services such as dematerialization and rematerialization of securities.
• Key Features:
  • Institutions: The two main depositories in India are National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
  • Benefits: They reduce risks associated with physical certificates, such as theft, loss, or damage, and facilitate smooth transactions.
  • Role: Depositories act as intermediaries between investors, stock exchanges, and companies.

(h) L.I.C. (Life Insurance Corporation of India):

• Definition: The Life Insurance Corporation of India (LIC) is the largest state-owned insurance company in India. It offers various life insurance products, including term insurance, endowment policies, and pension plans.
• Key Features:
  • Establishment: LIC was established in 1956 by the Government of India to provide life insurance to the masses and offer long-term financial security.
  • Products: It offers a wide range of insurance policies, including traditional life policies and unit-linked insurance plans (ULIPs).
  • Regulation: LIC operates under the Insurance Regulatory and Development Authority of India (IRDAI) and is governed by the LIC Act, 1956.

Question- Explain the following in brief: (a) Book Building process
( b) L i f e Insurance Company (c) Floating Charge (d) Indian DepositoryReceipt
(e) Preference in Payment (f) Collective Investment Scheme (g) Brokerage
(h) Nomination of Director.

(a) Book Building Process:

• Definition: The book building process is a method used by companies to price their securities during an Initial Public Offering (IPO) or follow-on public offering (FPO). It is a systematic process of generating, capturing, and recording investor demand for securities during the offering period.
• How it works: Investors place bids for the shares at different price levels within a defined price band. The final price is determined based on the demand and bids received. This method helps to determine the optimal price for the issue, providing a market-driven approach to pricing.
• Purpose: It helps in pricing the securities efficiently, reduces the risk of underpricing, and ensures transparency.

(b) Life Insurance Company:

• Definition: A Life Insurance Company is a firm that provides life insurance policies to individuals, ensuring financial protection to their families in case of death or disability.
• Key Features:
  • Products: Life insurance companies offer various life insurance products such as term insurance, endowment plans, and unit-linked insurance plans (ULIPs).
  • Regulation: Life insurance companies in India are regulated by the Insurance Regulatory and Development Authority of India (IRDAI).
  • Role: They help individuals secure financial independence and provide financial security to dependents in case of unforeseen events.

(c) Floating Charge:

• Definition: A floating charge is a type of security interest over a company’s assets, which allows the company to use or dispose of its assets in the normal course of business. The charge “floats” over the assets until a specified event occurs (such as default), after which it “crystallizes” into a fixed charge.
• Key Features:
  • Flexibility: A floating charge gives the company flexibility to use its assets without requiring consent from the lender.
  • Crystallization: Upon default, the floating charge becomes a fixed charge, and the lender can take control of the assets.
  • Ranking: It ranks lower than fixed charges in terms of priority in case of liquidation.

(d) Indian Depository Receipt (IDR):

• Definition: An Indian Depository Receipt (IDR) is a financial instrument that allows foreign companies to list their shares on Indian stock exchanges. It represents the shares of a foreign company and is issued by an Indian depository.
• Key Features:
  • Trading: IDRs are traded on Indian exchanges like any other domestic security.
  • Purpose: IDRs allow Indian investors to invest in foreign companies without directly purchasing foreign shares.
  • Regulation: The Securities and Exchange Board of India (SEBI) regulates the issuance and trading of IDRs.

(e) Preference in Payment:

• Definition: Preference in payment refers to the order in which different types of creditors or investors receive payments in case of liquidation of a company. Certain stakeholders, such as secured creditors or preference shareholders, have priority over others, such as equity shareholders, in the event of liquidation.
• Key Features:
  • Priority: Secured creditors and preference shareholders are paid before equity shareholders.
  • Order of Payment: The payment priority follows the legal provisions under the Companies Act and the terms of the debt agreements.
  • Impact: Preference in payment ensures that investors and creditors with higher security interests are protected in times of financial distress.

(f) Collective Investment Scheme:

• Definition: A Collective Investment Scheme (CIS) is a form of investment where funds are pooled together from various investors to invest in a range of securities or assets. These schemes are typically managed by asset management companies.
• Key Features:
  • Pooling of Funds: Investors pool their money to invest in diversified portfolios, which may include stocks, bonds, or other assets.
  • Management: A fund manager or investment advisor is responsible for managing the investments.
  • Types: Common examples include mutual funds, hedge funds, and venture capital funds.
  • Regulation: CIS is regulated by the Securities and Exchange Board of India (SEBI) in India.

(g) Brokerage:

• Definition: Brokerage refers to the fee or commission charged by a broker for executing buy or sell orders on behalf of clients in the financial markets.
• Key Features:
  • Fee Structure: Brokers may charge a flat fee per transaction or a percentage of the trade value.
  • Role: Brokers act as intermediaries between investors and the stock exchange or other trading platforms.
  • Regulation: Brokerage firms are regulated by the Securities and Exchange Board of India (SEBI) in India to ensure fair practices and transparency in financial markets.

(h) Nomination of Director:

• Definition: Nomination of directors refers to the process of selecting individuals to serve on the board of directors of a company. Nominated directors are typically appointed by major shareholders, creditors, or government entities.
• Key Features:
  • Role of Nominated Directors: Nominated directors represent the interests of the party that nominates them, such as financial institutions or government agencies.
  • Board Composition: Nominated directors contribute to decision-making and governance, but they often have a duty to act in the best interest of the company as a whole.
  • Legal Framework: The Companies Act, 2013, specifies the procedures for the appointment and removal of directors, including nominated directors.

Questions- Write short notes on following: (a) Non-opting equity shares (b) Buy back of shares(c) Floating charges(d) Convertible debentures (e) Transmission of security (f) Corporate membership rights(g) Mutual (h) Creditor self proration

(a) Non-opting Equity Shares:

• Definition: Non-opting equity shares refer to the shares of a company where the shareholder does not exercise or opt for any additional rights, such as voting or rights issues, at the time of issue. These shares typically do not offer the holder extra privileges, and their dividends and benefits are distributed in accordance with the regular equity shareholder norms.
• Key Features:
  • Limited Control: Non-opting shareholders do not have the opportunity to exercise any special rights during specific corporate events, such as new issue of shares.
  • Regular Benefits: They are entitled to standard benefits such as dividends and any growth in share value.

(b) Buy-back of Shares:

• Definition: A buy-back of shares is a process where a company repurchases its own shares from the shareholders. This is often done to reduce the number of outstanding shares in the market, which can potentially increase earnings per share (EPS) and improve share value.
• Key Features:
  • Legal Framework: Under the Companies Act, 2013, buy-backs are regulated and must adhere to the company’s share capital provisions and certain conditions specified by SEBI.
  • Motivation: Companies may buy back shares to consolidate ownership, prevent hostile takeovers, or improve financial ratios.

(c) Floating Charges:

• Definition: A floating charge is a form of security interest where a lender or creditor has a claim over a company’s assets, which are subject to change and fluctuate over time, such as inventory or receivables. It “floats” over the assets until a specified event, such as default, occurs, at which point it becomes a fixed charge.
• Key Features:
  • Flexibility: Companies are allowed to use and sell assets under a floating charge in the normal course of business.
  • Crystallization: Upon default or other specified conditions, a floating charge crystallizes into a fixed charge, and the lender gains control over the assets.
  • Priority: A floating charge has lower priority than a fixed charge during liquidation.

(d) Convertible Debentures:

• Definition: Convertible debentures are a type of debt instrument that can be converted into equity shares of the issuing company after a specified period or under certain conditions. They combine features of both debt and equity.
• Key Features:
  • Interest Payments: Convertible debentures pay regular interest until conversion, but holders can choose to convert them into equity at a later date.
  • Conversion Terms: The terms for conversion, including the conversion ratio and conversion price, are predefined.
  • Investor Benefit: Investors may benefit from the company’s growth potential, as they have the option to convert to equity at favorable terms.

(e) Transmission of Securities:

• Definition: Transmission of securities refers to the process through which the ownership of securities (such as shares or bonds) is transferred upon the death, insolvency, or incapacity of the shareholder to another person or entity as per the legal provisions.
• Key Features:
  • No Transfer Involved: Unlike transfer, the transmission process does not involve the sale or purchase but rather a legal process to reflect the change of ownership.
  • Required Documentation: Legal heirs or representatives must submit documents such as a death certificate, succession certificate, or will to initiate the transmission process.

(f) Corporate Membership Rights:

• Definition: Corporate membership rights refer to the rights that a corporate entity (such as a company) possesses as a member of another company. These rights include voting rights, rights to dividends, and other benefits as specified in the company’s articles of association.
• Key Features:
  • Voting Rights: Corporate members are usually entitled to vote on resolutions at annual general meetings (AGMs) or extraordinary general meetings (EGMs).
  • Dividends: They receive dividends based on their holdings, similar to individual shareholders.
  • Transferability: These rights are typically transferable in the same manner as individual shareholder rights.

(g) Mutual Fund:

• Definition: A mutual fund is a pool of funds collected from various investors to invest in a diversified portfolio of securities such as stocks, bonds, and money market instruments. The fund is managed by a professional asset management company (AMC).
• Key Features:
  • Diversification: Mutual funds offer diversification, reducing the risk for individual investors by investing in a variety of securities.
  • Types: There are various types of mutual funds, such as equity, debt, hybrid, and index funds.
  • Liquidity: Mutual funds provide liquidity as they can be bought and sold on any business day.
  • Regulation: In India, mutual funds are regulated by SEBI.

(h) Creditor Self-Protection:

• Definition: Creditor self-protection refers to the strategies employed by creditors to safeguard their interests while lending to a company or individual. This involves various legal and contractual mechanisms to ensure that the creditor can recover the loan amount in case of default.
• Key Features:
  • Security Interests: Creditors may ask for collateral or guarantees to secure the loan.
  • Covenants: Lenders may include financial covenants or restrictions in the loan agreement to ensure that the borrower maintains a certain financial position or performance level.
  • Legal Recourse: In the event of non-payment, creditors may use legal recourse such as initiating bankruptcy or liquidation proceedings, attaching assets, or claiming through courts.
  • Due Diligence: Creditors conduct thorough due diligence on the borrower’s financial health before disbursing loans to minimize risk.