TERMS USED IN

BUDGET

ECONOMICS

BANKING AND FINANCE

REGULATORY INSTITUTIONS IN INDIA

BANKING LEGISLATION

TERMS USED IN THE

BUDGET

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 of Exchequer opening a leather medicine seller’s 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 ”.

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.

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 Govt’s Budget is not.

7.OBJECTIVES OF GOVT. OF INDIA’S BUDGET

• Economic growth.

• Social justice.

• Price stability.

8. Why Budget ?

• To enable a Govt to function effectively.

• Discharge all it’s 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.

9.TERMS USED IN THE BUDGET

FISCAL YEAR.

• The year for which the budget pertains to.

• In India 1st April to 31st March.

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

11.COMPONENTS OF A BUDGET Cont…..

# Capital account: • Either creates a liability for repayment or will

involve selling of government assets.• Can be both receipts & expenditure.

# Receipts are grouped under 3 heads

1) 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 meet temporary mismatches in inflow/outflow

12.COMPONENTS OF A BUDGET Cont…..# Public debt contd…c) Market Stabilization Scheme which are

securities issued by RBI & the proceeds kept as reserve by them.

d) Securities against small savings fund appropriated.

2.Return of loans & advances . 3. Misc receipts comprising disinvestment.# Expenditure : -- Money spent on development projects / buying of machinery/lasting assets etc.

13. TYPES OF BUDGET DEFICITS# Fiscal deficit: • Excess of expenditure on Revenue/ Capital account

minus 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 interest

payments.# All terms are expressed as a % of GDP# Government debt/Budget deficit.• Accumulation of fiscal deficit . Stands at 82 % of GDP.

# 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 )

DEFICITS IN GOI 2011-12 BUDGET

• Fiscal deficit : Rs.4.13lac crores.(4.6 % of GDP)

• Revenue deficit : Rs. 3.07 lac crore.( 3.4 % of GDP )

• Primary deficit : Rs. 1.44 lac crores.( 1.6 % of GDP )

# 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

# 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

# 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 Govt

money borrowed & receipts from loans.

@ Most important fund.

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

@ Prior approval from Parliament required.

# 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 the Consolidated Fund.

• Expenditure incurred requires subsequent parliamentary approval.

# 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 owners at previously agreed dates.

• Hence does not require parliamentary approval prior to disbursement.

# 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

# Other examples of direct tax :• Profession Tax -- Tax on those in a profession .Decided by

State Govts and collected by Municipal Corporations

• Securities Transaction Tax ( STT ) --Tax on what one pays or receives in a share deal.# Minimum Alternate tax :• If a company’s tax liability is less than 10 % of its profits , then it has to pay a minimum alternate tax of 18 % of its book profits.

# Indirect Taxes:

• Excise/Customs duty, Sales/ Service tax.

-- Advantages :

• Easy to collect.

• -- Disadvantages :

• Equitable distribution impossible.

-- Hence regressive.

• Can create inflationary trends.

# 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 selling price

# Customs duty/Sales tax ;

• Normally by value

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

• Prevents cascading effects of taxation or 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/- )

# 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 price

for the customer will Rs.220/- kg ( Rs.200 +

ED of 10% )

# VAT & CCENVAT Cont….• In a CENVAT situation -- A is allowed to take credit for the excise

duty he has paid on his input of Raw cotton .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 ED on raw cotton )

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

# Due to CENVAT,customer does not pay:

• The ED paid by A on his input of raw cotton, 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 input of raw cotton.

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

# 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

# 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

# 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 Employment Guarantee scheme ( NREGS )

-- Jawaharlal Nehru Urban Renewal Mission

(JNURM)

# Financial Inclusion :

• The business of providing financial services (savings investment, credit & insurance) to those not served by the formal financial system.

• 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 2000 and above by March 2012.73,000 such villages

# 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.

# Take Out Financing :

• A method of financing for long term gestation

projects , 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 lender’s books.

# 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 sponsored schemes.

TERMS USED IN

ECONOMICS

FAMOUS ECONOMISTS.

• Adam Smith – Wealth Of Nations.

• Thomas Maltheus – Theory of population.

• Keynes-- Keynesian economics.

• Paul Samulson .

• Amrtaya Sen .

A. GROSS DOMESTIC PRODUCT ( GDP ) •Total market value of all final goods and services currently produced in the country with no duplication.

• 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.

# What is meant by ‘ no duplication’ ?• ‘A’ makes cotton cloth out of raw cotton.• Raw cotton is Rs.1/-kg and cotton cloth is

Rs.2/kg• In fiscal 2008-09, A buys Rs.1000/- worth of

raw cotton & sells Rs.2000/- of cotton cloth.• GDP will be : -- Rs. 2000/-• If on the other hand, he converts only ½ the raw

cotton to Rs.1000/- of cotton cloth , GDP is : -- Rs. 1500 ( Rs.1000/- cotton cloth + Rs.500/-

of raw cotton that went to stock )

COMPONENTS OF GDP.

@ Net Exports

@ Consumption by domestic households. Called private final consumption expenditure.

@ Value of new capital goods produced and increase in Inventories of raw material/Work in process/unsold finish goods. Called Gross private investment.

@ Purchases by Government .

# 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 India which is agricultural.

• Illegal activities.

METHODS OF COMPUTING GDP.

• Value added method ( Output ) : # Net value addition of each segment of

industry.• Income method : # In simple terms it means salaries,

profits, interest, rent etc.• Expenditure method: # Expenditure by individuals/households ,

Government,purchase of capital goods

• Gross National Product ( GNP ): # GDP + Net factor income from abroad (NFI). -- NFI is excess of interest, rent, salary, profits

originating abroad & remitted to India over similar 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 Income :

# 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 by

its administrative actions.• National disposable income : # Sum of all incomes recd by residents available for

consumption and saving. # Includes net current transfer payments from abroad

# These transfers are not non factor income.

# Revenue or Current account convertibility :

• Allows free inflows/outflows for all purposes other than

for capital purposes such as investments ,loans, sale of

fixed 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 : • Foreign Direct Investment. In lasting assets.# FII : • Foreign Institutional Investment. In the securities

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

be traded for that of another.# Real exchange rate or purchasing power parity

( PPP ) : • The rate at which goods/services of one country

can be 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 ?

# Tax-GDP ratio :

• Proportion of taxes collected by a Government with respect to GDP expressed in % terms.

# Inflation :

• Sustained increase in prices because of increase in purchasing power without equivalent increase in production.

# 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 a graph.

# Recession……..• W shaped is also called double dip recession.• In W shaped recession, an economy gets out of

recession , recovers but then slides back into recession and then recovers in cyclical upward/ downward movements.

• There are concerns that that the Greek crisis can lead to double dip recession.

# Unchecked recession leads to :• Depression. Historical example of depression.• US depression of 1930’s.

# 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 not disposed off.

FINANCIAL AND

BANKING TERMS

# 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 :

• 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.

• Call money market :

# Inter-bank market where banks lend each other money to meet their immediate liquidity requirements.

# Will be short term.

# Interest rates are demand dependent. No ceiling. Can be even be 100 % per annum in an extreme liquidity crisis situation. .

• Stock Market ;

# A market where shares of listed companies are bought & sold .

# 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

# Trial balance :• An accounting statement of the debits &

credits in the various accounting heads in a Company. Total of debits have to match with total 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 :

• 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 ) :• 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.

# Consumer price index ( CPI ) :

• An index measuring retail price movements of selected goods

• Highest weight age for food items – 57 %

• Base year 1982.

• WPI tracks wholesale transactions while CPI tracks retail transactions.

# Dearness allowance ( DA ) :• Monetary compensation given to employees both in

Govt & 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 :

• 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 Liability Partnerships.

• Introduced on 1st April 09.

• Separate legal entity.

• Liability limited to extent of share holding.

# Authorized capital :• Capital authorized by Registrar of

Companies# Subscribed capital :• Capital agreed to be given by prospective

share holders.# Paid up capital :• Capital actually paid by the subscribers .# Memorandum of Association :• States main/subsidiary/ ancillary objects.• A statutory document under Company’s

Act

# 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 Company’s Act.

# 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 trade calculation :

• Export & Imports.

# Corporate Governance.• Refers to ethical code of conduct prescribed for

corporate bodies.# Non performing assets ( NPA ) • Assets on bank’s book’s which have principal

and/or interest overdue..# Upset price in an auction :• Also called reserve price or judgment amount.• Amount the bank is owed on the property plus

any interest or fees that have accrued after the start of the foreclosure process

# Market capitalization :

• Number of equity shares issued by a listed Company multiplied by the quoted price in the SE for each share calculated on free float market capitalization basis ( FFMC ).

• FFMC calculates MC only on those shares that are freely available for trading in the stock market.

• According to BSE , following are not freely available :

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

# 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:

# Money required for day to day running of a Company.

# 1st charge on floating assets & 2nd charge on fixed assets

• Long Term Capital or Term Loan:

# Money required for purchasing lasting fixed assets.

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

# 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 with

floating assets of Rs.8 crores & fixed assets of Rs. 25 crores.

• SBT recovers Rs. 8crores from sale of floating assets(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 :

• Cash Credit Limit ( CC limit) :

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

# Bill Discounting Limit( BD limit ):

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

# Non-Fund based WC limits :

• Bank guarantee / LC limits.

# WC Drawing power:

• Amount of WC facility a company can draw

after providing for margin money & deleting

aging 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 to

the total funds required .Generally 10 to 25%)

# Financial ratios : • Indicates the financial performance of a

Company 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 a number of years in the future.

• Indicates value or magnitude.

# 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 .

# Follow on Public Offer :

• Offer for purchase of equity shares to prospective investors by already

listed companies.

• Can be done by promoters either diluting their share holding or a fresh

issue or a combination of both.

# Red Herring prospectus :

• A document issued by a company prior to a public issue.

• The document will not contain details of price and number of shares offered

or quantum of issue.

• Has to be filed with SEBI and terms/conditions approved by them.

• The origin of the term red herring is from the British tradition whereby

young hunting dogs in were trained to follow a scent with the use of a "red"

(salted and smoked) herring . This pungent fish would be dragged across a

trail until the puppy learned to follow the scent.

• It is called a red herring because of a disclosure statement in the document

which explicitly states that the issuing company will not go ahead with the

public issue if the prospectus is not approved by SEBI

# Equity Capital :

• Shares issued to those making monetary

investments in a Company to become part

owners.

# Sweat Equity :

• Shares issued to those who bring in share

capital into a Company by their intellectual

abilities. No money brought in by them

# 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 the stock.

# 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 Company to an investor with a fixed rate of return .

# Net worth :

• Owners equity + Retained earnings

# Fixed cost:

• Costs that don’t 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 :• The amount of sales income required to cover all expenses. • 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 current

activities and variable costs and before fixed cost and depreciation

# Marginal costing :

• Analyses variable or direct costs. Pricing ?

• In the previous example the 201st kg can

be 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 :

# A market where prospective investors buy shares directly from Companies when they have IPO’s.

• Secondary Market :

# A market where shares of listed Firms can be bought & sold. In other words the Stock Market.

• Bear Market :

# A stock market where prices are falling.

• Bull Market : 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 :

• Trading in financial instruments whose value is derived from other assets.

• Reduces risk of uncertainty of price and availability.

• Example :

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

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

# Types of Derivatives :

-- Futures:

• Contract to buy an agreed qty of a commodity

or financial asset at an agreed price / time.

• Can trade in the futures market in the

derivatives market

-- Forwards :

• Customized futures contract

# Options :

• 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 :# Call option :

• Gives the holder the right to buy.

# Options Continued….# Swaps or Credit Default Swaps :• Transfer the risk of a repayment default to a

3rd party for a premium# Selling short :• Obligation to sell a security exceeds holding of

that security.• Holding only 10 units but agree to sell 20 units# Buying long :• Holding of a security exceeds obligations to

sell that security.• Holding 20 units but agree to sell 10.

# Mergers : • 2 companies merging into a new legal entity.# Acquisitions : • One Company acquiring a controlling interest in

another.# Leveraged buy-out :• The buyer invests very little of his own funds.# Highly Leveraged Company :• A Company with a high debt-equity ration.# Hostile takeover :• Taking mgmt control w/o approval of existing

mgmt

# Top line growth :

• 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 & liabilities of the company being acquired.

# Underwriting (Used in 2 different contexts): • Is the process a large financial service provider

uses to assess the eligibility of a customer to receive its products. Another term for credit assessment

• 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 IPO’s as per the SEBI rules.

• For Ex : Commercial/Investment banks.

# Actuary :

• 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 your investments 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 :

• 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 :

• Total market value of all the securities in the mutual fund less expenses divided by the 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 :• Is the BSE Sensitive index.• Started on 1st Jan 1986.• A value weighted index composed of 30 stocks.• Actively traded stocks representative of various

sectors.• 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 capitalization

was Rs. 1000/- then if MC is Rs 2000/- today Sensex will be 200.

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

• The stocks are divided into these categories depending on value of market capitalization.

# Small cap/ Mid cap :

• Market capitalization between Rs.10 crores to Rs.125 crores

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

• BSE small/mid cap index launched in April 2005. Base year 02-03 & value 1000.

# Large cap :

• Over Rs.500 crores.

# NIFTY :

• 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 in 1992 .

• 3rd largest in the world for trade in equities.

• Base year 1995.

• Base value 1000.

• Calculated on 50 stocks.

# External Commercial Borrowings( ECB ) :

• Borrowings from lenders and investors outside India.

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

• Expansion of existing capacity as well as for fresh investment.

• ECBs are defined to include

-- Commercial bank loans, buyers’ credit,

suppliers’ credit.

-- Credit from official export credit agencies.

# Indian Depository Receipts (IDRs)

• Companies incorporated outside the country 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) :

• 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 Corporation

trade 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 ) :

• 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 GDR’s 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 :• Instruments issued by registered FII investors to

overseas investors, who wish to invest in the Indian stock markets :

-- Without registering with SEBI. Owners unknown.

# Why do this ?• International access to the Indian capital market

is limited to FIIs. SO … -- The market circumvents this by issuing PNs. -- They account for half the amount that stands

to 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 unconditional promise to pay a sum of money to another at a fixed date or a determinable time in the future or on demand by the payee.

# IOU :

• It is an acknowledgement of debt and not a specific 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 are :

• 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 be presented for payment.

• Cheque is a negotiable instrument.

# London Inter bank Offered Rate (LIBOR)

• The daily interest rate at which banks borrow unsecured funds from other banks in the London wholesale money market .

• Are short-term borrowings.

• It is influenced by the U.S.Federal funds rate and other factors.

# Letter of credit ( LC ) :• Is a document issued by a Bank to a

beneficiary guaranteeing payment for facilitating trade.

-- An Example :• Company “ A “ in India imports garments from

Company “ B “ in England.• “ A “ approaches his bankers SBI to open an

LC in favor of “ B” in England.• SBI opens the LC and advises the LC to “ B “

through SBI , London.• ”A”is the “opener“,SBI India is the ‘issuing bank

SBI London is the ‘advising bank’ and “ B” is the ‘beneficiary’.

# Letter of Credit Cont….• ‘ Negotiation ‘ is the process by which “ B “

submits the documents stipulated in the LC to SBI London for getting payment.

• “ Confirmation” is the process by which a bank 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 stipulated documents.

# Force Majure clause :• A clause in a contract which absolves parties to a

commercial transaction for delays in performance on account of factors beyond ones control

# Capital adequacy ratio ( CAR ) or capital risk (weighted) adequacy ratio( CRAR) :

• A ratio that indicates a bank’s ability to meet its time liabilities & other operational/credit risks.

• It is fixed by RBI . It is currently : -- 9 % for existing banks. -- 10 % for new private sector banks. -- 10 % for banks doing insurance business

# CAR …

@@ Bank’s liability = Rs.95/-

@@ Assets = Rs.100/- composed of

cash 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 :• Classified from the point of view of the reliability of

the 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 :• Non merchandise trade like transport, banking,

insurance etc.

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

manufacturing cost escalations particularly in respect of long delivery items.

# Bank Mortgage Clause :• A clause in the insurance policy taken by a borrower

of either working capital or long term loan.• By this clause , a lending Bank gets the first rights to

the proceeds of an insurance claim settlement.

# Arbitrage :• Is the process of trading by taking advantage of a

price differential between two or more markets. • Commonly applied to trading in financial

instruments, such as bonds, stocks, derivatives, commodities and currencies.

# Real Time Gross Settlement( RTGS ):• For electronic transfer of amounts above Rs.1 lac

through 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 any other transaction

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

• Electronic fund transfers through banking channels on a deferred net settlement (DNS) basis

• DNS settles transactions in batches.

• There are 6 settlement timings on a week day and 3 times on Saturdays.

• Transactions will have to wait for settlement timings.

• No maximum or minimum ceiling.

# Society for world wide inter bank financial telecommunication (SWIFT)

• Operates a worldwide financial messaging network for secure exchange of msgs between banks.

# Indian Financial System Code ( IFSC )• Payment system applications operated by RBI

depend on IFSC codes to process electronic transfer of funds between bank branches.

• It is a 11 digit code.• This is a single identifiable unique code for

each branch.

# Electronic Clearing Service ( ECS )• An institution which has to make large number of

payments to different beneficiaries ( such as interest or dividend ) can credit the amount electronically to individual beneficiary accounts.

• No cumbersome & time consuming paper work.• Convenient for the beneficiary.

-- Does not have to visit the bank to deposit paper instruments.

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

manufacturing cost escalations particularly in respect of long delivery items

REGULATORY INSTITUTIONS

IN INDIA

# Securities &Exchange Board of India (SEBI )

• Protects interest of Investors.

• Promotes development of securities market by appropriate regulations.

# Company Law Board

• Ensures compliance of Indian Companys act &

Regulates relationship between Public/Private

Limited company’s , share holders, SEBI , stock

exchange and Company Law Board.

# BIFR: (Board of Industrial & financial

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.

• Bank meeting all stipulated norms

as per RBI Act .

• Included in the 2nd schedule of the

RBI Act 1934.

• Could be a public, private or

cooperative bank.

# Public Sector Banks :

• SBI Group ( SBI,State Bank of Bikaner &

Jaipur Hyderabad, Indore, Mysore, Patiala,

Saurashtra ,& Travancore ) – Total 8 Banks

# Nationalized Public sector Banks

• Allahabad Bank,OBC,IOB etc– Total 19

Banks

# Other Public Sector Banks :

• IDBI Bank Ltd . Total 1 bank

# Private Sector Bank.

• A Bank which is not government owned.

• 27 Banks in all

• Some well known private sector banks :

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

# Cooperative Bank.

• 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.• Aim to provide credit to weaker sections of

Rural 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 implementation

of code of banks commitment to customers.• The code is voluntary.• The objective to evolve codes for fair treatment

of customers.

# Banking Ombudsman :• Set up in 1995 & objectives revised in 2006.• Staffed and funded by RBI.• An agency to which a customer can complain

on issues of deficient service by Banks.# Consumer Courts in India :• Set up under the Consumer Protection Act

1986• District Consumer Disputes Redressal Forum

(DCDRF)for less than Rs.20 lacs• State CDRF 20 lacs to 1 crore• National CDRF for above 1 crore.

# Non-Banking Financial Companies ( NBFC) :• Provide private banking services w/o meeting

the 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 ( ECGC) :• Established in 1957.• Covers the risk of non-payment on exports on

credit.# Insurance Regulatory & Development

Authority of India ( IRDA ) :• Set up after insurance sector thrown open to

private players and foreign investors.• Protects the insured.• Remember AIG.

# Telecom Regulatory Authority of India

(TRAI)

• Set up in 90’s to promote telecommunications after the

sector 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 :

• Constituted in 1993.

• The objective was to receive claim

applications from Banks/FI’s against

defaulting borrowers.

• Initially worked well but later borrowers

started stalling proceedings.

• Lot of pending cases now.

# Reserve Bank of India ( RBI )

• Set up in 1935.

• Originally privately owned but nationalized in 1949.

• 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 .• Headquartered in Delhi.• PM is ex-officio Chairman because of his

position as Prime Minister.• Finalizes the 5 year plans.• Main functions : -- Estimate resources of the country. -- Formulation of 5 year plans. -- Determination of priorities and allocation

of plans.

# Foreign Investment Promotion Board (FIPB)• Agency for the approval of all cases of foreign

investment not covered in the automatic approval list.

• Processing time 4 to 6 weeks.

# Dept of Industrial Policy & Promotion (DIPP)• Responsible for promotional and development

measures for growth of industries• It also facilitates FDI.• Administers Industrial Development &

Regulation Act

# Serious Fraud Investigation Office (SIFO)• A multi-disciplinary organization under Ministry

of Corporate Affairs for detecting & prosecuting /recommending prosecution of white collar crimes/frauds

• Normally the crime/fraud should have inter departmental/multi-disciplinary ramifications and should be of a complex nature.

• Investigation should result in or contribute towards a clear improvement in systems, laws or procedures.

• The SFIO shall also investigate serious cases of fraud received from Department of Company Affairs.

BUSINESS AND LABOUR LEGISLATION

# The Negotiable Instruments Act:

• 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 )

• 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.

THANK YOU