Chapter 21: International Equity and Debt Products (CAIIB – Paper 2)
1. Which international body provides guidelines for capital adequacy for banks trading in international debt and equity products?
A. International Monetary Fund (IMF)
B. World Bank
C. Basel Committee on Banking Supervision (BCBS)
D. Securities and Exchange Commission (SEC)
The Basel Committee on Banking Supervision provides international guidelines on capital adequacy and risk management for banks, including those dealing with international equity and debt products.
2. Under which framework must banks report their international exposures to regulators?
A. COREP/FINREP reporting standards
B. GAAP accounting standards
C. IFRS for SMEs
D. Basel III leverage ratio only
COREP (Common Reporting) and FINREP (Financial Reporting) are EU frameworks used for reporting banks’ international exposures to regulators.
3. Which of the following regulators governs the issuance of international bonds by Indian companies?
A. RBI and Basel Committee
B. SEBI and IMF
C. World Bank only
D. Securities and Exchange Board of India (SEBI)
SEBI regulates the issuance of international bonds (also called Masala Bonds or Foreign Currency Bonds) by Indian companies and ensures compliance with disclosure norms.
4. Which regulation ensures banks maintain risk-weighted capital for international equity and debt exposures?
A. IFRS 9
B. Basel III capital adequacy norms
C. FEMA 1999
D. Companies Act 2013
Basel III capital adequacy norms require banks to hold capital against risk-weighted assets, including international equity and debt exposures.
5. Which Indian authority provides guidelines for foreign investment in Indian equity and debt markets?
A. Reserve Bank of India (RBI) and SEBI
B. Ministry of Finance only
C. IMF and World Bank
D. Basel Committee only
RBI regulates the foreign inflow/outflow, and SEBI provides regulations for investment in Indian equity and debt markets by foreign investors.
6. What is a Global Depository Receipt (GDR)?
A. A domestic bond issued by Indian banks
B. A government security listed abroad
C. A negotiable certificate representing shares of a foreign company traded internationally
D. A derivative instrument for currency hedging
A GDR is a negotiable certificate issued by a depository bank that represents shares of a foreign company, allowing them to be traded internationally.
7. Which Indian regulator governs the issuance of GDRs by Indian companies?
A. Ministry of Corporate Affairs (MCA)
B. Securities and Exchange Board of India (SEBI)
C. Reserve Bank of India (RBI)
D. Insurance Regulatory and Development Authority (IRDAI)
SEBI regulates the issuance of GDRs by Indian companies, including disclosure, pricing, and investor protection norms.
8. Which statement correctly describes the trading of GDRs?
A. GDRs can only be traded on domestic Indian stock exchanges
B. GDRs are not backed by underlying shares
C. GDRs can be converted into bonds only
D. GDRs are listed and traded on international stock exchanges and represent underlying equity shares
GDRs are traded on international exchanges like London, Luxembourg, or Singapore, and each GDR represents underlying equity shares of the issuing company.
9. What is the primary benefit for an Indian company issuing GDRs?
A. Access to foreign capital and global investors
B. Avoiding corporate taxes in India
C. Hedging currency risk automatically
D. Exemption from SEBI regulations
Issuing GDRs allows Indian companies to raise capital from foreign investors, enhancing liquidity and international visibility.
10. Which risk is specifically associated with investing in GDRs?
A. Credit risk of the domestic bank only
B. Commodity price risk
C. Currency exchange risk and international market volatility
D. Inflation risk in the domestic economy only
GDRs involve currency exchange risk and are subject to international market volatility, which affects both pricing and returns for investors.
11. What is an Indian Depository Receipt (IDR)?
A. A certificate representing foreign government bonds traded in India
B. A negotiable instrument representing shares of a foreign company listed on Indian stock exchanges
C. A derivative instrument for hedging foreign exchange risk
D. A bond issued by Indian companies abroad
An IDR is a negotiable instrument issued by a depository in India representing shares of a foreign company, allowing Indian investors to invest in foreign equities.
12. Which Indian regulator governs the issuance of IDRs?
A. Securities and Exchange Board of India (SEBI)
B. Reserve Bank of India (RBI)
C. Ministry of Finance
D. Indian Banks' Association (IBA)
SEBI regulates the issuance of Indian Depository Receipts, including approval, disclosure requirements, and listing on Indian stock exchanges.
13. What is a key benefit of IDRs for foreign companies?
A. Exemption from foreign exchange regulations
B. Automatic listing on all global stock exchanges
C. Access to Indian capital market and Indian investors
D. Hedging interest rate risk in India
Foreign companies issue IDRs to raise capital from Indian investors, enhancing visibility and liquidity in the Indian market.
14. Which of the following is true about trading of IDRs?
A. IDRs are traded only in foreign exchanges
B. IDRs can be converted into GDRs automatically
C. IDRs do not represent any underlying equity shares
D. IDRs are listed and traded on Indian stock exchanges and represent underlying foreign equity shares
IDRs are listed on Indian stock exchanges and represent underlying equity shares of foreign companies, allowing Indian investors to participate in foreign equities.
15. Which risk is primarily associated with investing in IDRs?
A. Currency fluctuation and foreign market volatility
B. Credit risk of domestic banks only
C. Inflation risk in Indian economy only
D. Commodity price risk
Investing in IDRs involves currency risk and is subject to foreign market volatility, impacting the value of returns for Indian investors.
16. What are External Commercial Borrowings (ECBs)?
A. Loans borrowed from domestic banks only
B. Short-term loans provided by the Reserve Bank of India
C. Commercial loans in foreign currency raised by Indian companies from foreign lenders
D. Government grants provided for infrastructure projects
ECBs are loans raised by Indian companies from foreign lenders in foreign currency for financing various purposes, including capital expenditure, refinancing, and working capital.
17. Which Indian authority regulates the raising of ECBs?
A. Reserve Bank of India (RBI)
B. Securities and Exchange Board of India (SEBI)
C. Ministry of Finance
D. Department of Industrial Policy & Promotion (DPIIT)
The RBI regulates ECBs under the FEMA framework, including limits, eligible borrowers, and end-uses of funds.
18. Which of the following is a common purpose for which Indian companies raise ECBs?
A. Only for short-term trade financing
B. Capital expenditure, refinancing existing debt, and long-term projects
C. Speculative investment in stock markets
D. Government subsidies and grants
ECBs are typically used for capital expenditure, refinancing existing loans, and financing long-term projects, rather than short-term or speculative purposes.
19. What is a common type of lender for ECBs?
A. Domestic cooperative banks
B. Indian mutual funds
C. Reserve Bank of India only
D. International banks, financial institutions, and foreign investors
ECBs are provided by international banks, financial institutions, and foreign investors to Indian companies in compliance with RBI regulations.
20. Which of the following is true regarding the end-use restrictions on ECBs?
A. ECBs cannot be used for real estate speculation and stock market investments
B. ECBs can be freely used for any domestic purpose without restriction
C. ECBs must always be repaid within 6 months
D. ECBs are only allowed for government-backed projects
RBI specifies that ECBs cannot be used for prohibited purposes like real estate speculation or trading in the stock market; they must be used for approved purposes.
21. What are trade credits in international finance?
A. Loans provided by domestic banks to foreign governments
B. Equity investment in foreign companies
C. Short-term credit extended by exporters to importers for the purchase of goods and services
D. Government-backed bonds for infrastructure projects
Trade credits are short-term credits provided by exporters to importers to facilitate the purchase of goods and services, allowing deferred payment.
22. Who primarily provides trade credits?
A. Exporters to foreign importers
B. Domestic banks to local companies only
C. Foreign governments to exporters
D. International stock exchanges
Trade credits are primarily provided by exporters to importers, allowing the buyer to defer payment while the exporter ships goods or services.
23. Which of the following is a key risk associated with trade credits?
A. Interest rate risk in domestic loans only
B. Commodity price risk
C. Regulatory risk in foreign stock markets
D. Credit risk of the importer and currency risk
Trade credits involve credit risk (the importer may default) and currency risk if payment is in foreign currency, impacting the exporter’s returns.
24. How is trade credit usually documented?
A. As a GDR or IDR
B. Through invoices, bills of exchange, or letters of credit
C. As ECB agreements only
D. Through stock exchange listing
Trade credits are documented using commercial instruments like invoices, bills of exchange, and sometimes backed by letters of credit to secure payment.
25. Which of the following best describes the benefit of trade credits for importers?
A. Delayed payment allows better cash flow management
B. Complete exemption from foreign exchange regulations
C. Guaranteed profit on exports
D. Automatic insurance against currency risk
Trade credits allow importers to defer payments, which helps manage cash flow and working capital efficiently.
26. What are Rupee Denominated Bonds (RDBs)?
A. Bonds issued by foreign governments in USD
B. Derivative contracts for hedging currency risk
C. Bonds issued outside India but denominated in Indian Rupees
D. Domestic government bonds traded only in Indian stock exchanges
RDBs are bonds issued by Indian entities or corporates outside India, but the principal and interest are denominated in Indian Rupees, allowing foreign investors to invest in INR instruments.
27. Which regulator governs the issuance of RDBs by Indian companies?
A. Reserve Bank of India (RBI)
B. Securities and Exchange Board of India (SEBI) only
C. Ministry of Finance only
D. International Monetary Fund (IMF)
RBI regulates RDBs under the FEMA framework, including limits on issuance, eligible investors, and reporting requirements.
28. What is a primary advantage of RDBs for foreign investors?
A. Exemption from all Indian taxes
B. Investment in Indian Rupees without currency conversion risk
C. Guaranteed return in foreign currency
D. Trading only on domestic exchanges
RDBs allow foreign investors to invest in Indian Rupees directly, eliminating currency conversion risk and providing access to Indian capital markets.
29. Which of the following is true regarding RDB issuance?
A. RDBs can only be issued to domestic banks
B. RDBs are always backed by government guarantees
C. RDBs are denominated in USD but settled in INR
D. RDBs are issued to foreign investors but denominated in Indian Rupees
RDBs are aimed at foreign investors but denominated in Indian Rupees, allowing investment in INR instruments while raising foreign capital.
30. Which risk is associated with RDBs for the issuer?
A. Exchange rate risk for repatriating funds in foreign currency
B. Commodity price risk only
C. Interest rate risk in foreign markets only
D. Regulatory risk outside India only
Issuers of RDBs face exchange rate risk when converting funds raised in INR into foreign currency or repatriating returns, even though the bonds are denominated in Indian Rupees.
31. What is a Foreign Currency Convertible Bond (FCCB)?
A. A domestic bond issued only to Indian investors
B. A bond issued in Indian Rupees convertible to shares of foreign companies
C. A bond issued in foreign currency that can be converted into equity shares of the issuing company
D. A government security listed on domestic exchanges
FCCBs are bonds issued in foreign currency by companies which investors can later convert into equity shares of the issuer, providing both debt and potential equity returns.
32. Which Indian regulator governs the issuance of FCCBs?
A. Reserve Bank of India (RBI) and SEBI
B. Ministry of Finance only
C. Ministry of Corporate Affairs only
D. Department of Industrial Policy & Promotion (DPIIT)
SEBI and RBI regulate FCCBs under FEMA and SEBI guidelines to ensure proper disclosure, issuance, and investor protection.
33. What is the primary advantage of FCCBs for issuing companies?
A. Guaranteed domestic investors only
B. Raising foreign capital at lower interest rates with optional equity conversion
C. Exemption from corporate taxes in India
D. Hedging commodity price risk automatically
FCCBs allow companies to raise funds from foreign investors at relatively lower interest rates, with the option to convert debt into equity, reducing repayment burden.
34. What is a Eurobond?
A. A bond issued by European governments only
B. A bond denominated in Euro and issued domestically
C. A bond issued only to Indian investors in foreign currency
D. A bond issued in a currency different from the country of issuance, usually to international investors
Eurobonds are bonds issued in a currency not native to the country where it is issued, allowing access to international investors.
35. Which of the following is true about the risks of FCCBs and Eurobonds?
A. Currency risk and interest rate risk are significant
B. They carry only domestic market risk
C. No risk due to RBI guarantees
D. They are completely risk-free for foreign investors
FCCBs and Eurobonds carry currency risk, interest rate risk, and international market volatility for both issuer and investors.
36. Which Indian law governs foreign investment in FCCBs?
A. Companies Act 2013 only
B. Foreign Exchange Management Act (FEMA) and SEBI guidelines
C. Income Tax Act 1961 only
D. RBI Act 1934 only
FCCBs are regulated under FEMA and SEBI rules, specifying limits, approval, and reporting requirements for foreign investment in bonds.
37. Which of the following statements is true about conversion in FCCBs?
A. Conversion is mandatory immediately upon issuance
B. Conversion is only allowed after 10 years
C. Conversion into equity shares is optional for investors at a predetermined price
D. FCCBs cannot be converted into shares
FCCBs give investors the option to convert bonds into equity shares of the issuing company at a predetermined price within a specified time.
38. Which of the following best describes the investor base for Eurobonds?
A. Only domestic investors in the issuer’s country
B. Only institutional investors in Europe
C. Only government entities
D. International investors seeking diversification across borders
Eurobonds are aimed at international investors to diversify portfolios and raise capital outside the issuer’s domestic market.
39. What is a key difference between FCCBs and RDBs?
A. RDBs are convertible into equity while FCCBs are not
B. FCCBs are convertible into equity; RDBs are not convertible but denominated in INR
C. RDBs are always issued domestically; FCCBs are only issued in India
D. FCCBs are denominated in INR; RDBs in foreign currency
FCCBs allow conversion into equity and are issued in foreign currency, whereas RDBs are denominated in Indian Rupees and not convertible.
40. Which risk is common to both FCCBs and Eurobonds?
A. Currency exchange risk and interest rate risk
B. Only domestic regulatory risk
C. Commodity price risk only
D. No risk due to international guarantees
Both FCCBs and Eurobonds are subject to currency exchange fluctuations and interest rate risk, affecting returns for issuers and investors.
