Glossary of Terms Used in the Budget & Economics for Bank PO

7/31/2019 Glossary of Terms Used in the Budget & Economics for Bank PO

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TERMS USED IN

BUDGETECONOMICS

BANKING AND FINANCEREGULATORY INSTITUTIONS IN

INDIABANKING LEGISLATION


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TERMS USED

IN THE

BUDGET


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4.ORIGIN OF THE TERM BUDGET

Origin from the French word Bougette. Means a

leather Briefcase / Wallet. First use of the term Budget dates back to 1733.

# A cartoon appeared in The Times :

# Showing the British PM and Chancellor ofExchequer opening a leather medicine sellers bag .

# With the caption The Budget opened .

The term Budget does not find a mention in our

Constitution . Instead referred to as Annual

Financial Statement for every financial year .


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5.FIRST BUDGET OF GOVT OF INDIA.

Presented by RK Shanmukham , the FM on

26th November 1947 & not on last day in Feb. Interim Budget was required since :

# The earlier assembly that passed the Budget

for the Year 1947-48 ceased to exist.# Because country divided in August 47.

No fresh taxes proposed.

Revenue 171 crores , Expenditure 197 crores. 2010-11 : Revenue 8.45 lac crores.

: Expenditure 12.57 lac crores.


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6.WHAT IS A GOVT BUDGET ?

A statement of revenue and expenditure

for a year

It is called the Annual Financial

Statement.

Families / Individuals also budget. In such

cases, the details remain with him. A Govts Budget is not.


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7.OBJECTIVES OF GOVT. OF INDIAS

BUDGET

Economic growth.

Social justice.

Price stability.


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8.Why Budget ?

To enable a Govt to function effectively. Discharge all its duties and obligations

to the citizens & the Country.

To do this Govt needs funds. Through the process of budgeting , the

Parliament authorizes the Govt to

collect funds.


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9.TERMS USED IN THE BUDGET

FISCAL YEAR.

The year for which the budgetpertains to.

In India 1st April to 31st March.


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10,COMPONENTS OF A BUDGET

# Revenue Account:

Does not create liability for repayment or

reduction in assets.

Can be both receipts & expenditure.# Receipts :

-- Are taxes , interest recd etc

# Expenditure :

-- is of a recurrent/consumption nature for

purchase of goods, salaries etc


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11.COMPONENTS OF A BUDGET Cont..

# Capital account:

Either creates a liability for repayment or willinvolve selling of government assets.

Can be both receipts & expenditure.

# Receipts are grouped under 3 heads1) Public debt :

-- External Debt (external borrowing)

-- Internal debt ( internal borrowing) comprising:

a) Treasury bills of less than 1 year tenure.

b) Ways & Means Advance given by RBI to meettemporary mismatches in inflow/outflow


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12.COMPONENTS OF A BUDGET Cont..

# Public debt contd

c) Market Stabilization Scheme which aresecurities issued by RBI & the proceedskept as reserve by them.

d) Securities against small savings fundappropriated.

2.Return of loans & advances .

3. Misc receipts comprising disinvestment.

# Expenditure :

-- Money spent on development projects /

buying of machinery/lasting assets etc.


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13. TYPES OF BUDGET DEFICITS

# Fiscal deficit:

Excess of expenditure on Revenue/ Capital accountminus revenue receipts + Non debt capital receipts

# Revenue Deficit :

Excess of expenditure on Revenue account over

Revenue receipts.# Primary deficit:

Deficit of expenditure over revenue without interestpayments.

# All terms are expressed as a % of GDP# Government debt/Budget deficit.

Accumulation of fiscal deficit . Stands at 82 % of GDP.


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# An example for a country :

Gross Domestic Product (GDP) =Rs.1,00,000/-

Rev. Receipts =Rs.10,000/-

1) Rev. Expenditure w/o interest =Rs.15,000/-

-- Interest payments ( Cap+Rev) =Rs.3000/-

2) Capital expenditure =Rs.2000/-

Total Expenditure 1 + 2 = Rs.20,000/-# Fiscal deficit ( Rs.20000 Rs.10000 ) = Rs.10,000/-

( 10 % of GDP )

# Revenue deficit ( Rs.18000-Rs.10000) = Rs.8000/-( 8 % of GDP)

# Primary deficit ( Rs .17000-Rs.10000 ) =Rs.7000/-

( 7 % of GDP )


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DEFICITS IN GOI 2011-12 BUDGET

Fiscal deficit : Rs.4.13laccrores.(4.6 % of GDP)

Revenue deficit : Rs. 3.07 laccrore.( 3.4 % of GDP )

Primary deficit : Rs. 1.44 laccrores.( 1.6 % of GDP )


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# Average annual GDP growth ( % )

1900-1950 = 1

1950-1980 = 3.5. 1980-2002 = 6

2002-2007 = 8.9

2008-2009 = 6# Population growth (1 %):

1901-1950 = 1

1951-1990 = 2

1991-2000 = 1.8

2001-2010 = 1.5


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# Literacy rates (%)

1950 = 17

1980 = 52 2000 = 65

2010 = 80 ( projected )

# Poverty (%) 1980 = 46

2000 = 26

2010 = 16

# Per Capita income ( PPP )

1980 = Rs.53,000 per year

2010 =Rs.1,38,000 per year


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# BUDGET IS AN ANNUAL FINACIAL STATEMENT

It is usually a white colored 10 page document.

It is divided into 3 parts :

# Consolidated Fund :

@ Represents all revenues raised by Govtmoney borrowed & receipts from loans.

@ Most important fund.

@ All Govt expenditure both revenue & capitalexcept exceptional items, met from this fund.

@ Prior approval from Parliament required.


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# Contingency fund :

Urgent/Unforeseen expenditure met from

this fund. Currently corpus is Rs.500 crores.

It is at the disposal of the President.

Amount withdrawn is replaced from theConsolidated Fund.

Expenditure incurred requires subsequent

parliamentary approval.


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# Public account:

An account where the Govt merely acts as

a custodian .

Example : PF, Small savings etc.

Funds do not belong to the Govt .

Have to be paid back to the rightful ownersat previously agreed dates.

Hence does not require parliamentaryapproval prior to disbursement.


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# Direct taxes :

Income tax , Corporate tax ,Wealth tax

-- Advantages :

Equitable distribution of wealth.

And hence progressive

Prevents distortions in resource allocation

Slows inflationary tendencies in boom times.

-- Disadvantages : Collection difficult.

Disincentive for investment if rates high


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# Other examples of direct tax :

Profession Tax

-- Tax on those in a profession .Decided byState Govts and collected by MunicipalCorporations

Securities Transaction Tax ( STT )

--Tax on what one pays or receives in a share

deal.

# Minimum Alternate tax :

If a companys tax liability is less than 10 % of

its profits , then it has to pay a minimum

alternate tax of 18 % of its book profits.


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# Indirect Taxes:

Excise/Customs duty, Sales/ Service tax.

-- Advantages :

Easy to collect.

-- Disadvantages : Equitable distribution impossible.

-- Hence regressive.

Can create inflationary trends.


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# Methods of levying excise duty :

Ad Valorem

-- By value. If Selling Price is Rs.1000 per unit &ED is 10 % , the duty collected will be Rs.100.

Specific rate :

-- Rs. 100/- per unit without considering sellingprice

# Customs duty/Sales tax ;

Normally by value


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# Value Added Tax (VAT) and CentralValue Added Tax (CENVAT):

Prevents cascading effects of taxationor tax on tax. # An example :

A " manufactures cotton cloth from

raw cotton bought at Rs.100/ kg .

Excise duty( ED ) on raw cotton- 10 % .

A' s input landed cost is Rs.110/-( Basic price of Rs.100/- + ED of

Rs.10/- )


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# VAT & CENVAT Cont.

His cost of production including profit

margin is 90/- kg.

His basic selling price is ,therefore, Rs.200/

kg ( Rs.110/-+ Rs.90/- ).Let us assume that

ED on cotton cloth is 10%

In case there is no CENVAT , A's final pricefor the customer will Rs.220/- kg ( Rs.200 +

ED of 10% )


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# VAT & CCENVAT Cont.

In a CENVAT situation

-- A is allowed to take credit for the exciseduty he has paid on his input of Rawcotton .In this case it is Rs.10/-

The selling price can be reduced to Rs.190( Rs.200 minus credit of Rs.10/- paid as EDon raw cotton )

His final price will be Rs.209/-( Basic Priceof Rs.190/- + ED of 10 % )


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# Due to CENVAT,customer does notpay:

The ED paid by A on his input of rawcotton, i.e., Rs.10/kg

Nor the cascading effect of paying ED

on ED.i.e10 %( ED on A's final product )on ED of Rs.10/- paid by A on his inputof raw cotton.

However no legal binding on the sellerto pass on this benefit to the customer.


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# Non-Tax revenue: Interest/Dividends/profits received etc.

# Transfer payments:

Payments by the Government without

receiving any service or goods in return# Plan Expenditure: Those incurred on 5 year plan projects

Like Agriculture, Rural development,Energy, Social Services, infrastructure etc


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# Non plan expenditure: Those incurred on items not included in

the 5 year plan / schemes. Examples :-- Defense revenue expenditure.-- Pensions.

-- Defense capital expenditure.# Interest Subvention : Interest subsidy given by GOI to private

borrowers .For example: Housing Loans


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# Inclusive Growth :

Ensuring that all strata of society receive the

benefits of economic progress. No longer a political slogan.

GOI Schemes aimed at in Inclusive Growth :

-- Bharat Nirman Build Infrastructure.

-- Mahatma Gandhi Rural EmploymentGuarantee scheme ( NREGS )

-- Jawaharlal Nehru Urban Renewal Mission

(JNURM)


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# Financial Inclusion :

The business of providing financial services(savings investment, credit & insurance) tothose not served by the formal financialsystem.

To ensure a Bank A/C for every Indian citizen.

To ensure cheap & timely credit to Aam

Admi.

Cover all villages with a population of 2000and above by March 2012.73,000 suchvillages

# Financial Inclusion (BS dt 17/3/11)


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# Financial Inclusion..(BS dt 17/3/11)

Only 40 % of the population have bank

accounts. If MFI included , 47 %.

Only 38 % of 87,051 branches of

scheduled banks are in rural areas.

I.E only 32919 branches for 6,00,000

villages.

Implications for the Job market.


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# Take Out Financing :

A method of financing for long term gestationprojects , say , 15 yrs and above.

Commercial Banks initially grant the loan in

the medium term , say ,5 to 7 years.

Another financial institution takes it over

afterwards for the rest of the loan tenure .Like IDFC.

Liability taken off the original lenders books.


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# Resources transferred to States :

Proportion of GOI tax receipts transferred to

States. GOI transfers to States to support their Plans.

Maybe in the form of Grants transferred , in

particular , for implementing GOI sponsoredschemes.


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TERMS USED

IN

ECONOMICS


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FAMOUS ECONOMISTS.

Adam Smith Wealth Of Nations.

Thomas Maltheus Theory of

population. Keynes-- Keynesian economics.

Paul Samulson . Amrtaya Sen .


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A. GROSS DOMESTIC PRODUCT ( GDP )

Total market value of all final goods and services

currently produced in the country with noduplication.

POINTS TO BE NOTED about GDP:

# A monetary measure

# Only final goods and services to be included.

# Only currently produced goods & services to be

included.

# Only domestically produced goods to be included.

# No duplication.


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# What is meant by no duplication ?

A makes cotton cloth out of raw cotton.

Raw cotton is Rs.1/-kg and cotton cloth isRs.2/kg

In fiscal 2008-09, A buys Rs.1000/- worth ofraw cotton & sells Rs.2000/- of cotton cloth.

GDP will be :

-- Rs. 2000/-

If on the other hand, he converts only the rawcotton to Rs.1000/- of cotton cloth , GDP is :

-- Rs. 1500 ( Rs.1000/- cotton cloth + Rs.500/-of raw cotton that went to stock )


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COMPONENTS OF GDP.

@ Net Exports

@ Consumption by domestic households. Called privatefinal consumption expenditure.

@ Value of new capital goods produced and

increase in Inventories of raw material/Work inprocess/unsold finish goods. Called Gross privateinvestment.

@ Purchases by Government .


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# COMPONENTS NOT CONSIDERED IN GDP

Buying and selling of securities.

Government transfer payments.

Private transfer payments.

Sale of used goods.

Non-market goods and services.

Implication for a country like Indiawhich is agricultural.

Illegal activities.


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METHODS OF COMPUTING GDP.

Value added method ( Output ) :

# Net value addition of each segment ofindustry.

Income method :# In simple terms it means salaries,profits, interest, rent etc.

Expenditure method:# Expenditure by individuals/households ,Government,purchase of capital goods


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Gross National Product ( GNP ):

# GDP + Net factor income from abroad (NFI).

-- NFI is excess of interest, rent, salary, profitsoriginating abroad & remitted to India oversimilar payments to foreign nationals in India

Nominal GNP :

# Calculated at market prices for the year.

Real GNP :

# GNP adjusted for a base year. Currently 1999-2000.

Net National product(NNP)at market prices:

# GNP Depreciation on assets.

Net National product at factor cost or National


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et at o a p oduct at acto cost o at o aIncome :

# NNP minus Government taxes.

Per Capita income :# National Income divided by the population.

Personal disposable income :

# Personal Income minus income tax.

# Does not include miscellaneous receipts by Govt byits administrative actions.

National disposable income :

# Sum of all incomes recd by residents available forconsumption and saving.

# Includes net current transfer payments from abroad# These transfers are not non factor income.


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# Revenue or Current account convertibility :

Allows free inflows/outflows for all purposes other than

for capital purposes such as investments ,loans, sale offixed assets.

In other words, it allows residents to make and receive

trade-related payments, travel, medical, education etc.

# Capital account convertibility:

The freedom to convert local financial assets into

foreign financial assets and vice versa at market

determined rates of exchange whatever be its nature

# FDI


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# FDI : Foreign Direct Investment. In lasting assets.# FII :

Foreign Institutional Investment. In the securitiesmarket.

# Nominal exchange rate: The rate at which the currency of One country can

be traded for that of another.# Real exchange rateor purchasing power parity( PPP ) :

The rate at which goods/services of one country canbe traded for that of another.

# Deficit financing or monetization of deficit : In simple words , it means the GOI will print notes to

bridge the deficit. The dangers ?


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# Tax-GDP ratio :

Proportion of taxes collected by a

Government with respect to GDPexpressed in % terms.

# Inflation : Sustained increase in prices because

of increase in purchasing powerwithout equivalent increase inproduction.

S fl i


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# Stagflation.

A situation where economic stagnation and

inflation occur simultaneously.# Deflation :

A situation completely opposite of Inflation .

# Recession : 2 continuous qtrs of negative GDP growth.

Economists categorize recession into V,U,L

and W depending on the way it appears in agraph.


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# Recession..

W shaped is also called double dip recession.

In W shaped recession, an economy gets out ofrecession , recovers but then slides back intorecession and then recovers in cyclical upward/downward movements.

There are concerns that that the Greek crisiscan lead to double dip recession.

# Unchecked recession leads to :

Depression. Historical example of depression. US depression of 1930s.


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# Gross Capital Formation :

Additions to fixed assets by Govt ,

Businesses & Individuals/Households

less value of assets disposed of or

scrapped. Called gross because depreciation

not taken into consideration while

calculating value of assets notdisposed off.


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FINANCIALANDBANKING

TERMS

# C h i ( CRR )


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# Cash reserve ratio ( CRR ) :

Money to be parked with RBI by

Banks compulsorily. Used to control

liquidity available in the system.

# Statutory liquidity ratio ( SLR ) : % to be held compulsorily by banks in

Govt. Securities. Used to (1) control

liquidity in the banking system &

create market for public sector debt.

# REPO :


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Is the rate at which RBI lends money to banks on

short term basis Max 1 month.

# Reverse REPO :

Is the rate at which RBI accepts funds from banks

on short term basis.

# CRR/SLR/REPO/ REVERSE REPO are called:

Monetary policies of the Govt announced once in

three months by RBi.

# Taxes , both direct and indirect are :

Fiscal policies of the Govt announced once in a

year through the annual budget.

C ll k t


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Call money market :

# Inter-bank market where banks lend each

other money to meet their immediate liquidityrequirements.

# Will be short term.

# Interest rates are demand dependent. Noceiling. Can be even be 100 % per annum in anextreme liquidity crisis situation. .

Stock Market ;# A market where shares of listed companiesare bought & sold .

# D bl t t


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# Double entry system.

A system of accounting where each

transaction in a company is

represented by 2 entries in the

account books. One is a debit entry & the other is a

credit entry.

Evolved by FLB Pacioli , an Italian in

15th Century


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# Trial balance :

An accounting statement of the debits &

credits in the various accounting heads in aCompany. Total of debits have to match withtotal of credits.

# Profit & Loss Account :

An accounting statement of expenditure &income of a Company over a period of time ,say , a financial year.

# Balance Sheet : An accounting statement of the assets &

liabilities of a Company as on a particular date.

# Sundry Creditors :


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# Sundry Creditors :

Those to whom a Company owes money

# Sundry Debtors : Those from whom a Company has to receive

money.

# Work-In-Process or Progress : Represents the monetary value of inventories

fed into the production process but not

converted to finished goods

# Wholesale price index ( WPI )


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# Wholesale price index ( WPI ) :

General index capturing price

movements.

Base year currently 2004-05

Tracks 676 items. Weightage assigned: Primary

articles 22%, fuel & power 14 %,manufactured products 64 %.

Inflation calculated on WPI.


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# Dearness allowance ( DA ) :


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# Dearness allowance ( DA ) :

Monetary compensation given to employees both inGovt & Private sector to adjust for price increases &decreases. Included for the purpose of PF/ Gratuity/and Retirement benefits.

# Public limited company :

A separate legal entity. Liability limited to extent of share holding.

Must have min 7 share holders. No cap on Max.

May or may not be listed in the stock exchange. Regulated by Registrar of Companies and SEBI if

listed.

# Private limited company :


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Separate legal entity.

Max 50 members. Min 2.

No invitation to public to invest. Hence cannot be trade in Stock

Exchanges

Liability limited to extent of share holding.

Regulated by Registrar of Companies.

# Partnerships :

Unlimited liability.

Personal assets can be attached.

Not a separate legal entity.

Not regulated by Registrar of Companies

# LTD Li bilit P t hi


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# LTD Liability Partnerships.

Introduced on 1st April 09. Separate legal entity.

Liability limited to extent ofshare holding.

# Authorized capital :


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# Authorized capital :

Capital authorized by Registrar ofCompanies

# Subscribed capital :

Capital agreed to be given by prospectiveshare holders.

# Paid up capital :

Capital actually paid by the subscribers .

# Memorandum of Association :

States main/subsidiary/ ancillary objects.

A statutory document under CompanysAct

# Articles of association :


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# Articles of association :

Contains rules/regulations for routine conduct of

business: Typically cover the issuing of shares, voting and

dividend rights attached to different classes of

share, restrictions on the transfer of shares, the

rules of board meetings and shareholder

meetings, and other similar issues.

A statutory document under Companys Act.

# Components of Foreign exchange reserves :


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# Components of Foreign exchange reserves :

FDI.

FII.

FEI.

NRI Remittances.

Excess of exports of goods & services over imports.

# Where does GOI hold its FE reserves :

Overseas assets like Govt bonds, Treasury bills:

Bonds long term while treasury bills short term.

# Components included for balance of tradecalculation :

Export & Imports.

# Corporate Governance


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# Corporate Governance.

Refers to ethical code of conduct prescribed for

corporate bodies.# Non performing assets ( NPA )

Assets on banks books which have principaland/or interest overdue..

# Upset price in an auction :

Also called reserve price or judgment amount.

Amount the bank is owed on the property plusany interest or fees that have accrued after thestart of the foreclosure process

# Market capitalization :


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# Market capitalization :

Number of equity shares issued by a listed

Company multiplied by the quoted price inthe SE for each share calculated on freefloat market capitalization basis ( FFMC ).

FFMC calculates MC only on those sharesthat are freely available for trading in thestock market.

According to BSE , following are not freelyavailable :

# Promoters/Govt/FDI/Locked in shares etc.

# FFMC An Example :


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# FFMC An Example :.

A has 1000 shares out of which 200 held by

promoters.

Market price is Rs. 150/-

Total market capitalization is Rs. 1,50,000/-

(i.e 1000 X Rs.150/- )

FFMC is Rs 1,20,000 ( i.e 800 X Rs.150/- )

Working Capital:


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Working Capital:

# Money required for day to day running of a

Company.# 1st charge on floating assets & 2nd chargeon fixed assets

Long Term Capital or Term Loan:# Money required for purchasing lasting fixedassets.

# 1st charge on fixed assets & 2nd

charge onfloating assets.

# An Example: A manufactures laptops.


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# An Example: A manufactures laptops.

Borrowings- Rs.10 cr. for WC(SBT) & Rs.20 cr.long term loan for fixed assets( SBI ).

After 1 year of operation it goes bust withfloating assets of Rs.8 crores & fixed assets ofRs. 25 crores.

SBT recovers Rs. 8crores from sale of floatingassets(1st charge).

SBI recovers Rs. 20 crores from sale of fixed

assets (1st

charge) SBT recovers Rs.2 cr. from sale of balance FA

( 2nd charge)

# Fund based working capital( WC ) limits :


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# Fund based working capital( WC ) limits :

Cash Credit Limit ( CC limit) :

-- A W/C facility allowing cash withdrawals uptothe sanctioned limit.

# Bill Discounting Limit( BD limit ):

-- A W/C facility for getting the proceeds againstsales bills immediately when your terms ofsales are on credit basis.

# Non-Fund based WC limits : Bank guarantee / LC limits.

# WC Drawing power:


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# WC Drawing power:

Amount of WC facility a company can draw

after providing for margin money & deletingaging receivables/stocks etc.

# Margin Money :

Funds to be invested by a Company / Person

borrowing money from a Bank for Capital/Day

to Day expenditure as his part contribution tothe total funds required .Generally 10 to 25%)

# Financial ratios :


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# Financial ratios :

Indicates the financial performance of aCompany on various parameters. Ex: debt-Equity Ratio.

# IRR( Internal Rate of return) :

Assess the financial viability of an investment .

Indicates internal rate of return of the project.

# NPV( Net present value) :

Helps to determine the present day value of an

investment whose returns are spread over anumber of years in the future.

Indicates value or magnitude.

# Initial Public Offering ( IPO ) :


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# Initial Public Offering ( IPO ) :

Offer by a new/existing Company for purchase of

equity shares in an expansion/new project for

listing in a stock exchange for the first time.

Investors allotted shares become part owners.# Book Building methodology of IPO :

Process by which bids are collected from

investors at various prices , within a price band

specified by the issuer. Issue price decided after

bid closure, based on price & demand .


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# Open Market Operations ( OMO ) of RBI :


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# Open Market Operations ( OMO ) of RBI :

Refers to sale of Treasury Bills & Bonds by RBI

to primary dealers.# Earnings per share ( EPS )

Earnings/Loss for a Company divided by the

number of shares.# Price to Earnings ratio ( P/ER )

P/E = Stock price divided by EPS.

An indication of what the market thinks of thestock.

# Preferential shares :


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# Preferential shares :

Shares issued by a Company to an

investor with a fixed dividend .

No voting rights.

Will be paid first in case of winding up.# Debentures :

Debt instrument issued by a Companyto an investor with a fixed rate of

return .

# Net worth :


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# Net worth :

Owners equity + Retained earnings

# Fixed cost:

Costs that dont change over short time

spans or production.

Ex : Expenditure on machinery, salary

# Variable cost ( Operating Cost ):

Costs that vary with production.

Ex : Raw material cost, energy cost.

# Break Even Point :


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The amount of sales income required to cover allexpenses.

Ex -- Selling price (SP) = Rs.10/kg-- Fixed cost (FC) = Rs.1000/--- Variable cost ( VC) = Rs. 5/kg

Break even point ( BEP ) = Fixed Cost

SP VC BEP in the above example is : 200 kgs.# Operating Profit :

The difference between total revenues on currentactivities and variable costs and before fixed costand depreciation

# Marginal costing :


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Analyses variable or direct costs. Pricing ?

In the previous example the 201st kg canbe priced at Rs.5/kg. Will be no loss/no

profit situation.

# Opportunity Cost :

The cost of what must be given up to

acquire/achieve something else.

Primary Market :


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Primary Market :

# A market where prospectiveinvestors buy shares directly fromCompanies when they have IPOs.

Secondary Market :# A market where shares of listed

Firms can be bought & sold. Inother words the Stock Market.

Bear Market :


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Bear Market :

# A stock market where prices are falling.

Bull Market :

# A stock market where prices are going up.

Commodities market :# An organized/statutorily recognized mkt

for sale & purchase of Commodities.

# For Ex : Kochi Pepper Exchange.

# Derivatives trading :


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Trading in financial instruments whose valueis derived from other assets.

Reduces risk of uncertainty of price andavailability.

Example :

-- A wheat miller contracts to buy 100 kgswheat from a farmer at Rs.10/- per kg on 31stJuly 31st 2011.

-- Both seller & buyer are guaranteed quantity& price on a future date.


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# Options :


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p

Gives the holder the right ( not an obligation ) to

buy or sell a particular asset. In return for the option the seller/buyer or the

exchange collects a premium.

There are 2 different kinds of options :# Put option :

Gives the holder the right to sell.

# Call option : Gives the holder the right to buy.

# Options Continued.


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p

# Swaps or Credit Default Swaps :

Transfer the risk of a repayment default to a3rd party for a premium

# Selling short :

Obligation to sell a security exceeds holding ofthat security.

Holding only 10 units but agree to sell 20 units

# Buying long :

Holding of a security exceeds obligations tosell that security.

Holding 20 units but agree to sell 10.


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# Top line growth :


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p g

Increase in sales revenue.

# Bottom line growth : Increase in profits.

# EBITD :

Earnings before Interest ,Tax & Depreciation.

# Due Diligence:

A legally binding process during which a

potential buyer evaluates the assets & liabilitiesof the company being acquired.

# Underwriting (Used in 2 different contexts):


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Is the process a large financial service provideruses to assess the eligibility of a customer toreceive its products. Another term for creditassessment

A process by which an underwriter guarantees

to subscribe to any short fall in an IPO.# Qualified Institutional Investors :

These are investors having expertise in the

market and are given some privileges in IPOsas per the SEBI rules.

For Ex : Commercial/Investment banks.

# Actuary :


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y

A business discipline that evaluates the

financial impact of risk & uncertainty.# Open - Ended Mutual fund Schemes :

Do not have a fixed maturity.

You deal directly with the Mutual Fund for yourinvestments and redemption's.

Key feature is liquidity. Can buy/sell at NAV .

# Close-Ended Mutual Fund Schemes Have a stipulated maturity period(2 to 15 yrs).

Can buy/sell in the stock exchange at NAV

# Open ended equity funds :


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p q y

Will mostly be in stock markets.

# Are of 3 types ; Diversified Equity funds.

-- Investing across sectors.

Sectoral funds :

-- Invest in selected sectors.

Index funds :

-- Invest depending on the index.

-- Will replicate Sensex ( For Ex ) movements

# Net Asset Value :


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Total market value of all the securities in

the mutual fund less expenses divided bythe number of units in the mutual fund.

For Example : In mutual fund A

-- Number of units = 1000.-- Total Market Value = Rs.1,00,000.

-- Expenses = Rs. 10,000.

-- NAV is = Rs. 90/- per unit.

# Sensex :


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Is the BSE Sensitive index.

Started on 1st Jan 1986.

A value weighted index composed of 30 stocks.

Actively traded stocks representative of varioussectors.

Accounts for 1/5th of BSE market capitalization.

Base value of index is 100 as on 1st April 1979.

Base year is 1978-79.

If on the base figure of 100 , mkt capitalizationwas Rs. 1000/- then if MC is Rs 2000/- todaySensex will be 200.

# Small-cap, Mid-cap, Large-cap stocks :

Th t k di id d i t th t i


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The stocks are divided into these categoriesdepending on value of market capitalization.

# Small cap/ Mid cap :

Market capitalization between Rs.10 crores toRs.125 crores

Mid cap market capitalization between Rs.150to Rs.500 crores.

BSE small/mid cap index launched in April2005. Base year 02-03 & value 1000.

# Large cap :

Over Rs.500 crores.

# NIFTY :

I d f NSE l t d t M b i


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Index of NSE located at Mumbai.

Largest in India in terms of trade volumes.

Index real name is S & P CNX Nifty.

Owned by financial institutions & floated in1992 .

3rd largest in the world for trade in equities.

Base year 1995.

Base value 1000. Calculated on 50 stocks.

# External Commercial Borrowings( ECB ) :


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Borrowings from lenders and investors outsideIndia.

Permitted by the GOI as a source of finance forIndian corporates for :

Expansion of existing capacity as well as forfresh investment.

ECBs are defined to include

-- Commercial bank loans, buyers credit,suppliers credit.

-- Credit from official export credit agencies.

# Indian Depository Receipts (IDRs)


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# Indian Depository Receipts (IDRs)

Companies incorporated outside thecountry can now raise resources from

the Indian capital market .

This will be a foreign company who

issues their shares in Indian rupees to

Indian investors which will be traded

in Indian stock exchanges.

# American Depositary Receipt (ADR) :


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Is an investment in shares of a non-US

corporation for a US citizen. While the shares of the non-US corporation trade

on a non-US exchange,

-- The ADRs by the same Non-US Corporationtrade on a US exchange.

This mechanism makes it straightforward for a US

investor to invest in a foreign issue.

ADRs were first introduced in 1927.

# Global Depositary receipts ( GDR ) :


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p y p

A certificate issued by a depository bank for

purchase of shares in a foreign company. It facilitates trade of shares and is frequently

used to invest in companies in developing or

emerging markets. Price of GDRs are very close the value of the

purchased shares.

They are traded & settled separately. Normally 1 GDR = 10 shares

# Participatory Notes -- or P-Notes or PNs :

I t t i d b i t d FII i t t


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Instruments issued by registered FII investors tooverseas investors, who wish to invest in the

Indian stock markets :-- Without registering with SEBI. Ownersunknown.

# Why do this ?

International access to the Indian capital marketis limited to FIIs. SO

-- The market circumvents this by issuing PNs.

-- They account for half the amount that standsto the credit of FIIs in India today.

-- Investing through P-Notes is very simple and

hence very popular.

# Promissory note :

A contract where one party makes an


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A contract where one party makes anunconditional promise to pay a sum of money

to another at a fixed date or a determinabletime in the future or on demand by the payee.

# IOU :

It is an acknowledgement of debt and not aspecific promise to pay.

# In a cheque , the courtesy amount is :

Amount in figures

# In a cheque the legal amount is :

Amount in words .

# In a cheque , the parties involved


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# In a cheque , the parties involvedare :

Drawer is the person or entity who

makes the cheque.

Payee is the recipient of the money. Drawee is the bank or a financial

institution where the cheque can bepresented for payment.

Cheque is a negotiable instrument.

# London Inter bank Offered Rate(LIBOR)


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(LIBOR)

The daily interest rate at which banksborrow unsecured funds from otherbanks in the London wholesale

money market .

Are short-term borrowings.

It is influenced by the U.S.Federalfunds rate and other factors.

# Letter of credit ( LC ) :

I d i d b B k b fi i


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Is a document issued by a Bank to a beneficiaryguaranteeing payment for facilitating trade.

-- An Example :

Company A in India imports garments fromCompany B in England.

A approaches his bankers SBI to open an LCin favor of B in England.

SBI opens the LC and advises the LC to B

through SBI , London. Ais the opener,SBI India is the issuing bank

SBI London is the advising bank and B is thebeneficiary.

# Letter of Credit Cont.


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Negotiation is the process by which B submits the documents stipulated in the LCto SBI London for getting payment.

Confirmation is the process by which abank in the sellers host country also adds its

payment guarantee to seller. LC can be a sight LC or on credit

-- In a sight LC payment to the beneficiary

is immediately on submission of stipulateddocuments.


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# CAR


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@@ Banks liability = Rs.95/-

@@ Assets = Rs.100/- composed ofcash Rs 10/-,Bonds Rs.30/- ,

housing loans Rs 60/-

@@ Risk weighting : Cash 0 % = 0

Bonds 50 % = 15

Loans 80 % = 48

Total = 63

# CAR = 5/63= 7.9 %

# Classification of Bank capital :

Cl ifi d f th i t f i f th li bilit f


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Classified from the point of view of the reliability ofthe capital from a regulatory point of view.

-- Tier 1 capital :

Retained earnings, Retained share premium Intangible assets (Goodwill, patents, patent rights )

-- Tier 2 capital : Unrealized earnings, General bad debt provisioning,

Revaluation reserve +subordinate debt

-- Tier 3 capital : Subordinate debt with maturity of at least 2 years.

# Invisible trade :

N h di t d lik t t b ki


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Non merchandise trade like transport, banking,insurance etc.

# Inflation rate or cost escalation coverage :

An agreed formulae to protect a vendor againstmanufacturing cost escalations particularly in respect

of long delivery items.# Bank Mortgage Clause :

A clause in the insurance policy taken by a borrowerof either working capital or long term loan.

By this clause , a lending Bank gets the first rights tothe proceeds of an insurance claim settlement.

# Arbitrage :

Is the process of trading by taking advantage of a


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Is the process of trading by taking advantage of aprice differential between two or more markets.

Commonly applied to trading in financialinstruments, such as bonds, stocks, derivatives,commodities and currencies.

# Real Time Gross Settlement( RTGS ):

For electronic transfer of amounts above Rs.1 lacthrough banking channels.

No upper ceiling.

Real time means payment not subject to a waiting

period. Gross Settlement means transactions are settled

on a one to one basis and not bunched with anyother transaction

# National Electronic Fund Transfer( NEFT) orElectronic Fund Transfer (EFT)


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Electronic Fund Transfer (EFT)

Electronic fund transfers through bankingchannels on a deferred net settlement (DNS)basis

DNS settles transactions in batches.

There are 6 settlement timings on a week dayand 3 times on Saturdays.

Transactions will have to wait for settlementtimings.

No maximum or minimum ceiling.

# Society for world wide inter bank financialtelecommunication (SWIFT)


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telecommunication (SWIFT)

Operates a worldwide financial messaging

network for secure exchange of msgs betweenbanks.

# Indian Financial System Code ( IFSC )

Payment system applications operated by RBIdepend on IFSC codes to process electronictransfer of funds between bank branches.

It is a 11 digit code. This is a single identifiable unique code foreach branch.

# Electronic Clearing Service ( ECS )

A i i i hi h h k l b f


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An institution which has to make large number ofpayments to different beneficiaries ( such as interest

or dividend ) can credit the amount electronically toindividual beneficiary accounts.

No cumbersome & time consuming paper work.

Convenient for the beneficiary.-- Does not have to visit the bank to deposit paperinstruments.

# Inflation rate or cost escalation coverage : An agreed formulae to protect a vendor against

manufacturing cost escalations particularly in respectof long delivery items


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REGULATORY

INSTITUTIONS

IN INDIA

# Securities &Exchange Board of India (SEBI )

P i f I


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Protects interest of Investors.

Promotes development of securities market byappropriate regulations.

# Company Law Board

Ensures compliance of Indian Companys act &Regulates relationship between Public/Private

Limited companys , share holders, SEBI , stock

exchange and Company Law Board.

# BIFR: (Board of Industrial & financial


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Reconstruction )

A Govt. agency that helps Companies that have

become sick to become viable and operate

again successfully.

# AIFR: ( Appellate tribunal of industrial &

financial Reconstruction)

Same purpose as above but at a higher level.

# Scheduled Bank.


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Bank meeting all stipulated normsas per RBI Act .

Included in the 2nd schedule of theRBI Act 1934.

Could be a public, private or

cooperative bank.


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# Private Sector Bank.


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A Bank which is not government

owned.

27 Banks in all

Some well known private sectorbanks :

-- ICICI Bank ltd , HDFC ,FederalBank etc , South Indian Bank Ltd

# Cooperative Bank.


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A Bank owned on a cooperative basis

by owners .

Operates under the cooperative society

laws

Is also regulated by RBI.

Ex:Peoples Urban Cooperative Bank

# Regional Rural Banks ( RRB)

Set up by GOI in 1975


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Set up by GOI in 1975.

Aim to provide credit to weaker sections ofRural Areas like small/marginal farmers, agri -laborers , artisans and small entrepreneurs.

Ex : Malabar Grameen Bank.

# Banking Codes & Standards Board of India

Autonomous Agency to monitor implementationof code of banks commitment to customers.

The code is voluntary. The objective to evolve codes for fair treatment

of customers.


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# Non-Banking Financial Companies ( NBFC) :

P id i t b ki i / ti


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Provide private banking services w/o meetingthe legal definitions of a conventional bank.

Raise funds from public & lend to borrowers.

Activities include :

-- Accepting deposits ,giving loans & advances,leasing ,hire purchase. No SB account.

Examples :

-- Chit funds, Money changers and investment

companies etc. Is regulated by RBI Act 1934 , Chapter 3 B.

# Export Credit Guarantee Corporation


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( ECGC) :

Established in 1957. Covers the risk of non-payment on exports on

credit.

# Insurance Regulatory & DevelopmentAuthority of India ( IRDA ) :

Set up after insurance sector thrown open toprivate players and foreign investors.

Protects the insured.

Remember AIG.

# Telecom Regulatory Authority of India

(TRAI)


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(TRAI)

Set up in 90s to promote telecommunications after thesector was opened up.

Ensures transparency & a level playing field.

# Central Electricity Regulatory Commission(CERC)

Set up in 2003.

Regulates tariff of power generating Companies

owned or controlled by the GOI.

Regulates inter-state transmission of electricity.

# Debt Recovery Tribunal :


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Constituted in 1993.

The objective was to receive claim

applications from Banks/FIs against

defaulting borrowers.

Initially worked well but later borrowers

started stalling proceedings. Lot of pending cases now.

# Reserve Bank of India ( RBI )

S t i 1935


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Set up in 1935.

Originally privately owned but nationalized in1949.

Responsibilities are :

-- Issues currency notes.-- Operate currency & Credit systems in India.

-- Regulate banking sector activities.

-- Control & regulate monetary policies.

# Planning Commission of India :

Set up in 1950


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Set up in 1950 .

Headquartered in Delhi.

PM is ex-officio Chairman because of hisposition as Prime Minister.

Finalizes the 5 year plans.

Main functions :

-- Estimate resources of the country.

-- Formulation of 5 year plans.

-- Determination of priorities and allocationof plans.

# Foreign Investment Promotion Board (FIPB)

Agency for the approval of all cases of foreign


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Agency for the approval of all cases of foreigninvestment not covered in the automatic

approval list.

Processing time 4 to 6 weeks.

# Dept of Industrial Policy & Promotion (DIPP)

Responsible for promotional and developmentmeasures for growth of industries

It also facilitates FDI.

Administers Industrial Development &Regulation Act

# Serious Fraud Investigation Office (SIFO)

A multi-disciplinary organization under Ministry


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p y g yof Corporate Affairs for detecting & prosecuting

/recommending prosecution of white collarcrimes/frauds

Normally the crime/fraud should have interdepartmental/multi-disciplinary ramifications and

should be of a complex nature. Investigation should result in or contribute

towards a clear improvement in systems, laws orprocedures.

The SFIO shall also investigate serious cases offraud received from Department of CompanyAffairs.


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# The Negotiable Instruments Act:

P l d i 1881 h h b l


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Promulgated in 1881. there has been several

amendments subsequently. It governs the rules & regulations regarding transfer

of money to a beneficiary against the submission in a

bank of negotiable instruments. Negotiable instruments are cheques, drafts,

promissory notes, bills of exchange commercial

paper etc

A holiday declared under the Negotiable Instruments

Act will be a bank holiday.

# The Fiscal Responsibility & Budget Mgmt Act 2003

( FRBM )


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( FRBM )

Places responsibility for achieving long-term macro-

economic stability by achieving sufficient revenue surplus

on the Central Government.

# SARFAESI Act (Securitization & Reconstruction of financial

assets & Enforcement of Security Interest Act 2002)

Applicable to NPA worth more than Rs.1 lac.

Take possession of the property within 60 days.

Aggrieved party can appeal to DRT but not to a civil court.


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Documents

Glossary of Terms Used in the Budget & Economics for Bank PO