Economic and Financial Terminology Part 5 by Mr. Veeraragavan Ex. RBI officer
Economic and Financial Terminology Part 5
Some Reference Terms for Upcoming PO level Exams
1. Balanced Budget
The annual financial statement (i.e., the budget) of a government which has the total expenditures equal to the taxes and other receipts
2. Kyoto Protocol a voluntary treaty signed by 141 countries including the European Union, Japan and Canada for reducing GHG (Green House Gase) emission by 5.2 per cent below 1990 levels by 2012.
– Three mechanisms to acquire greenhouse gas reduction credits – Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET).
– Under JI, a developed country with a relatively higher costs of domestic greenhouse reduction sets up a project in another developed country which has a relatively low cost.
– The concept of carbon credit trading encourages countries to reduce their GHG emissions, as it rewards those countries which meet their targets and provides financial incentives to the others to do so as quickly as possible. Surplus credits (collected by overshooting the target reduction) can be traded in international markets.
– Carbon credits are certificates issued to countries that reduce their emission of GHG (greenhouse gases) which leads to global warming.
– It is estimated that 60-70 per cent of the GHG emission is through fuel combustion in industries like cement, steel, textiles and fertilisers.
– Some GHGs like hydro fluorocarbons, methane and nitrous oxide are released as by products of certain industrial process which adversely affect the ozone layer, leading to global warming.
– One unit of Carbon Credit is equivalent to one tonne of emission reduced. Carbon Credit (CC) is available for companies engaged in developing renewable energy projects that offset the use of fossil fuels.
- Assets Reconstruction Companies (ARCs) acquire non-performing assets (NPAs) from banks or financial institutions along with the underlying securities mortgaged and/or hypothecated by the borrowers to the lenders.
- The ARCs then try and manage or resolve these NPAs acquired from banks.
- It can even infuse more funds in order to reconstruct the asset.
- If reconstruction is not possible and the borrower is unwilling to repay the loan, the ARCs even sell the secured assets.
- ARCs acquire NPAs by way of ‘true sale’, i.e., once an NPA has been sold, the seller has no further interest in that asset.
- ARCs are a product of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The act provides full right to the lenders acting in majority (75 per cent of the total debt by value) to enforce the security interest without judicial intervention.
4. POVERTY TRAP
A situation where an unemployed getting unemployment allowance is not encouraged o seek work/employment because his/her after-tax earnings as employed is less than the benefits as unemployed, also known as the Unemployment Trap.
5. MEZZANINE FINANCING
Mezzanine Financing is a financial instrument which is a mix of debt and equity finance.
– It is a dept capital that gives the lender the rights to convert to an ownership or equity interest in the company.
– It is listed as an asset on company’s balance sheet.
– As it is treated as enquity in a companys balance sheet,it allows the company to access other traditional sources of finance.
– Mezzanine finance is subordinate to senior debt but ranks higher than equity.
– The return on Mezzanine finance is higher in relation to debt finance but lower than equity finance.
– It is also available quickly to the borrower with little or no collateral.
– ICICI Ventures Mezzanine Fund was the first fund in India to focus on mezzanine opportunities.
6. CAPITAL-OUTPUT RATIO
A measure of how much additional capital is needed to produce each extra unit of the output. Put the other way round, it is the amount of extra output produced by each unit of added capital. The ratio indicated how efficient ne
7. PPP (Purchasing Power Parity)
– a method of calculating the correct/real value of a currency which may be different from the market exchange rate of the currency.
Using this method economies may be studied comparatively in a common currency adopted by IMF and WB in studying the living standards of people in different economies.
– The PPP gives a different exchange rate for a currency which may be made the basis for measuring the national income of the economies. It is on this basis that the value of gross national product(GNP) of India became the Fourth largest in the world through on the basis of market exchange rate of rupee it stood at the thirteenth rank in 2013.
– The concept was developed by the European economist, Gustav Cassel (1866-1944) of Sweden. This concept works on the assumption that markets work on the law of one price. Identical goods and services must have the same price in different markets when measured in a common currency. If this is not the case it means that the purchasing power of the two currencies is different.
– In theory ,the value of the currencies in terms of of their market exchange rate should converge with their market value in terms of the PPP in the long run. But that might not happen due to many factors like the fluctuations in inflation, level of money supply, follow up to the exchange rate regimes and other economic conditions.
– For the calculation of the PPP, a comparable basket of good and services is selected of the identical qualities and quantities. The other difficulty in computing PPP arises out of the flaw in the one price theory i e,due to transportation cost, local taxes, level of production etc. The prices of goods and services cannot be the same in different markets (this is correct in theory only not possible in practice.)
Qualified Institutional Placement (QIP) is a policy associated with the Indian stock market for raising capital by issuing entity.
– The companies listed on the BSE and the NSE are allowed to raise capital by issuing equity shares, or any securities other than warrants, which are convertible into or exchangeable with equity shares.
– The attractive part of the new QIP is that the issuing company does not have to undergo elaborate procedural requirements to raise this capital. –
-These securities have to be issued to Qualified Institutional Buyers on a discretionary basis, with just a 10 per cent reservation for mutual funds.
9. REVERSE MORTGAGE
A scheme for senior citizens in India announced in the Union Budget
2007-08. Senior citizens can mortgage housed owned by them to a bank and the bank pays them the agreed money either in instalments or lumpsum and also continue to hold its possession and live.
– Guidlines for reverse mortgage announced by the National Housing Bank(NHB) in may 2007 has a provision of maximum period of 15 years for such mortgage.
– Once the period of mortgage is complete either the house should be vacated or the bank will sell the house at the market price and the loan of the bank will be settled .
– If the value of the house is more than the loan, the difference is paid to the senior citizens or their legal heirs.
– If the heir wants to possess the house, he/she needs to pay the loan.
10. BROAD BASED FUND
This is a fund established or incorporated outside India, which has at least 20 investors with no single individual investor holding more than 49 per cent of the shares or units of the fund.
– If the broad based fund has institutional investor(s), then it is not necessary for the fund to have 20 investors.
– Further, if the broad based fund has an institutional investor who holds more than 49 per cent of the shares or units in the fund, then the institutional investor must itself be a broad based fund.
– In India, the entities, proposing to invest on behalf of broad based funds, are eligible to be registered as FIIs are :
(i) Asset Management Companies, (ii) Investment Manager/Advisor, (iii) Institutional Portfolio Managers, (iv) Trustee of a Trust, and (v) Bank.
11. CAPITAL ADEQUACY RATIO
– A regulation on commercial banks, co-operative banks and the non-banking financial companies to maintain a certain amount of capital in relation to their assets (i.e., loans and investments) as a cushion (shock-absorber) against probable losses in their investments and loans.
– A concept devised by the Bank for International Settlements (BIS), Basel, the provision was implemented in India in 1992 by the RBI (for more detailed discussion see the chapter on ‘Banking’).
12. MUTUAL FUNDS
– Trusts which pool the resources of large number of small investors and help them earn return from capital markets.
– The key considerations are safety, liquidity and return.
– There are no assured returns from mutual funds and they vary with the scheme under each fund.
– The schemes are structured to suit the risk –bearing capacity of unit holders and the nature of deployment of funds by the various schemes.
– The structure of mutual funds is governed by the Securities and Exchanges Board of India (SEBI) Mutual Fund Regulations 1996.
– These regulations make it mandatory for mutual funds to have a three-tier structure a sponsor, a trustee, and an asset management company (AMC).
– The sponsor is the promoter of the mutual funds and appoints the trustee.
– The trustees are responsible to the investors in the mutual fund and appoint the AMC for managing the investment portfolio.
– The AMC manages all the affairs of the mutual fund.
– The mutual fund and the AMC have to be registered with the SEBI.
– SEBI regulations also provider for who can be a sponsor, trustee, and AMC and specify the format of agreements between these entities.
– These agreements provide for the rights, duties and regulations of these three entities.
– Mutual funds are the preferred route for investors, particularly small and retail investors, who do not have the knowledge or time to directly trade in the equity and debt markets.
-The funds are managed by qualified investment professionals and other service providers who are paid for their services.
Portfolio diversification, professional management and reduced risk are among the myriad advantage of mutual funds.
-Mutual funds invest in multiple asset classes,enable continuous evaluation and provide higher flexibility in investment plans.
– Investors in mutual funds have a wide choice from an assorted variety of funds and schemes with several products on offer.
– Competition in the industry has led to innovative changes in standard products by fund houses.
– The product choice enables investors to choose options that suit their return requirement and risk appetite. The value of the portfolio and investors holdings alter with change in the market value of investments.
– Mutual funds predominantly invest in equity shares and debt instruments. under equity funds.
– One can invest in diversified equity schemes, primary market schemes, index based funds, and sectoral funds.
– Debt funds invest predominantly in debt markets. Diversified debt funds, income funds, gilt funds, liquid and money market funds, fixed term plans and floating rate funds are among the categories of debt funds. while equity funds suit growth objectives, debt funds fit income objectives.
– Mutual fund houses also offer balanced funds and money market funds. –
– Balanced funds invest in enquity and debt in specified proportions while money market funds are preffered by institutional invenstors which churn their investments depending on the need and view.
13. NEW PENSION SCHEME
– All employees of the Central Government and Central autonomous bodies, with the exception of the armed forces, are now covered by this defined-contribution scheme with effect from January 1,2004.
– Subsequently,27 state Governments have notified and joined the NPS for their employees.
– The NPS to was opened to all citizens of India on MAY 1,2009, on voluntary basis-the challenge is to spread the message of the NPS and old age income security to people in the unorganized sector across the country.
-The pension fund managers manage three separate schemes, consisting of three asset classes. Namely (i)equity, (ii)Government securities and (iii)credit risk–bearing fixed income instruments, with the investment in enquity subject to a cap of 50 per cent.
The PFRDA is a regulator on the lines of the watchdogs for insurance and capital market, to regulate and supervise pension funds in the country.
-It regulates the new pension funds in the scheme which has been in vogue since jan 1 ,2004.
– It also regulates the new pension schemes announced by state governments besides all gratuity and superannuating funds.
– However, other social security schemes which are in operation like the one offered by employees provident fund, coal miners provident fund, seaman provident fund, Assam tea provident fund, tc., will be out the purview of PFRDA as they are governed by specific legislations.
– PFRDA will also have a promotional role like education, awareness creation etc
– It will also have to curb fraudulent and unfair practices in the sector by participants and protect the interests of subscribers.
-It also grants licences to pension fund managers. In short, all the operational guidelines for pension fund management will be laid down by the PFRDA .
– Besides ,the regulators will also prescribe the level of investment by the pension fund managers in various types of instruments, whether debt or enquity, both in the local and overseas markets.
15. PRIMARY DEALER
Primary Leader (PL) is an intermediary participating in the primary auctions of the government securities (i.e, G-See or the GILT-edge securities or the GILT) and the Treasury Bills (TBs) through a PD these instruments reach the secondary market.
– PDs are allowed participation in the call money market and notice money market.
– They get liquidity support from RBI via repos or refinance (against the G-Secs).
16. SHORT SELLING
Selling shares without possessing them.After the prices fell to a certain extent the short-seller covers his position by cheaper shares booking the difference in price as profits.It is also known as bear operation.Short –sellers, however, could get caught on the wrong foot if the market reverses the downtrend.
17. SKIMMING PRICE
A pricing method of charging high profits-adopted by a firm when consumers are not price sensitive and demand is price –inelastic.
18. ULIPS &MFS
Unit linked insurance policies (ULIPs) offer insurance plus investment objective to those who want a higher amount of insurance cover at a marginally higher cost.
– However, unlike mutual funds, which may be a short –term investment ULIPs meet long-term investment objectives.
– Returns are varied across the risk class.-three classes for both MF & ULIP schemes-high, medium, and low risks.
– High –risk policies have a higher exposure to equities and low risk policies might have low or no exposure to equities. For MFs, high risk comparable products are diversified equity funds, medium-risks are balanced funds, and low risks are debt instruments.
19. CASH COW
A profitable business or firm (may belong to either public or private sector) which gives regular cash flow to the owner.
20. BROWNFIELD LOCATION
A derelict industrial area that has been demolished to accommodate new industries. This is opposite to the Greenfield location where a new industry is set up in a new area.
21. MOST FAVOURED NATION
– As per the WTO agreements, a member country cannot normally discriminate between their trading partners. If any country grants one country a special favour such as a lower customs duty rate for one of their products the same would need to be extended to all other WTO members. This principle is known as Most Favoured Nation (MFN) treatment.
– MFN governs trade in goods. aMFN is also a priority in the general agreement on trade in services(GATS) and the Agreement on Trade Related Aspects of Intellectual Property Rights(TRIPS). However, there are some exceptions under WTO regime which allow member countries to
(i) Set up a ‘free trade agreement that applies only to goods traded within the group(discriminating against goods from outside).
(ii) Give developing countries special access to their markets.
(iii)Raise barriers against products that are considered to be traded unfairly from specific countries.
(iv) To discriminate,in limited circumstances,in services.
– But the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier opens up a market, it has to do so for the same goods or services for all its trading partners whether developed or developing.
22. MULTI-FIBRE ARRANGEMENT(MFA)
– Up to the end of the Uruguay Rounds 1986-94 textile and clothing trade were negotiated bilaterally and governed by the rule of MFA, introduced in 1974. This provided for the application of selective quantitative restrictions (quota) when surges in imports of particular products caused,or threatened to cause, serious damage to the industry of the importing country. The multi fibre Arrangement was a major departure from the basic GATT rules and particularly the principles of non–discrimination.
– On January 1,1995 MFA was replaced by the WTO Agreement on Textiles and Clothing (ATC) which sets out a transitional process for the ultimate removal of these quotas in stages. The MFA regime, however, continued till Dec 31,2004 until quota was completely phased out.
– In the MFA regime, higher quota was allocated to various countries irrespective of cost competitiveness. Apparel exports from countries like Nepal, Bangladesh, Sri Lanka, Taiwan, and other south East Asian Nations thrived due to quota protection in the lucrative EU and the US markets. But most of these nations lack competitive edge. Their market share was expected to be grabbed by countries like china and India as they offer cheaper and better products.
– The ATC was a transitional instrument meant for progressively integrating textile and clothing products into GATT 1994.It laid down the integration procedure and stipulated how members should integrate textile products into the rule of GATT 1994 over the 10-year period which ended on December31,2004. The process was to be carried out progressively in three stages (3,4 and 3 years) with all textile products being integrated at the end of the 10-year period.
– An instrument of raising long-term debt on which the bond-issuer pays a periodic interest (known as ‘coupon’). In theory, bonds could be issued by governments as well as private companies.
– Bonds generally have a maturity period, however, some bonds might not have any definite maturity period (which are known as ‘Perpetual Bonds’).
– Bonds are supported/secured by collateral in the form of immovable property (i.e., fixed assets) while debentures, also used to raise long-term debt, are not supported by any collateral.
24. BOOK BUILDING
This is public offer of equity shares of a company. In this process, bids are collected from the investors, in a certain price range fixed by the company. The issue price is fixed after the bid closing date depending on the number of bids received at various price levels. A company that is planning an initial public offer (IPO) appoints a merchant banker as a ‘book runner’.
– The company issues a prospectus which does not mention the price, but gives other details about the company with regard to issue size, the business the company is in, promoters and future plans among other disclosures.
– A particular period is fixed as the bid period. The book runner builds an order book, that is, collates the bids from various investors, which shows the demand for the shares.
– Prospective investors can revise their bid at any time during the bid period. On closure of the book, the quantum of shares ordered and the perspective prices offered are known. The price discovery is a function of demand at various prices, and involves negotiations between those involved in the issue. The book runner and the company conclude the pricing and decide the allocation to each member.
The term has got three different meanings in which it is used—
(i)The purchase of reinsurance by a reinsurance company. This limits the risk that the reinsurance company may face, since it has purchased insurance against an event that might affect a company that it had underwritten. If a reinsurance company continues to purchase insurance it might unknowingly buy back its own risk, which is known as spiralling.
(ii)The voluntary act of returning ceded property by one to another which may be a result of request to have property returned. But by definition, it is not the result of a forced transaction. aReturning of Hong Kong to China by the UK in 1997 is the best such example of the recent times.
(iii) The act of differentiating and diversifying assets by consolidating and then dividing them against a number of stakeholders-by doing by so the risk involved the retro-ceded. This is usually, done by the hedge funds in their day to day portfolio management.
The concept of corporate social responsibility (CSR) is fast gaining popularity among the corporate sector of the world. CSR is qualitatively different from the traditional philanthropy by the corporate houses.
– CSR acknowledges that corporate owe to the community within which they operate.
– It defines the corporate partnership with social action groups (i.e., the NGOs) in providing financial and other resources to support development plans, especially among disadvantages communities.
– Sec 135 of the New Companies Act 2013 deals with CSR
27. OPPORTUNITY COST
A measure of the economic cost of using scarce resources to produce one particular good or service in terms of the alternative thereby foregone,also known as the economic cost.
– In finance it is the rate of return on alternate investments which should be foregone if a particular choice of investment is made.
The price rise of an asset unexplained by the fundamentals and still people interested in holding the assets. After the bursting of the bubble, assets cool down to their real prices.
29. OVER THE COUNTER
The financial papers/securities which can be bought or sold through a private dealer or bank rather than on a financial exchange using electronic channels of communication.
30. CHINESE WALL
The segregation of the different activities of a financial institution (such as, jobbing, stock broking, fund management, etc.) in order to protect clients interest.
31. PENNY STOCKS
Very low-priced shares of small companies which have low market capitalisation.The term made news in mid-2006 when some of the penny stocks did show a high rise in their trading prices in India at the BSE as well as the NSE.
32. SOVEREIGN RISK
The risk of a government defaulting on its debt or a loan guaranteed by it(all international loans by the private companies are basically guaranteed by the government of an economy).
– Recent event of Greece declaring its inability to honour its commitments on the country’s external borrowings is an example.
33. DUTY DRAWBACK SCHEME
– The Duty Drawback Scheme (DDS) is an export incentive to exporters to make exports competitive.
– Exporters get refund of the central excise (censat) and custom duties on the inputs they use in manufacturing the exportable.
– Those who are covered by the Duty Entitlement Passbook Scheme (DEPS) are not covered by it. The rates are announced from time to time.
A bond on which there is no annual interest payment.
– zero coupon bonds are sold at a discount – price lower than its face value and investors getting the face value price at maturity
– The discount is equal to the Face Value and the sum of present values of the sum of the annual interest payments and the redemption value at maturity.
– The present value of the series of payments are arrived at by discounting at a rate equal to the cost of capital for the bond issuing company.
– This rate is called Yield to Maturity.
– TBs issued by Central Govt are examples of Zero Coupon Bonds
35. VENTURE CAPITAL
Generally a private equity capital which lends capital to the entrepreneurs who are innovative and cannot get the required fund from the conventional set-up of the lending mechanism.
– In India it was the Governments of India which did set up the first such fund in 1998-the IVCF
36. VEBLEN EFFECT
Named after the American economist Thorstein Bunde Veblen(1857-1929) –
-A theory of consumption which suggests that consumers may have an ‘upward-sloping demand curve as opposed to traditional theory of a ‘downward-sloping demand curve’ because they practice conspicuous consumption.
– The concept suggests that quality demanded of a particular good varies directly with a change in price.
37. FISCAL DRAG
The restraining effect of the progressive taxation economies feel on their expansion-fall in the total demand in the economy due to people moving from lower to higher tax brackets and the government tax receipts go on increasing. To neutralise this negative impact, government usually increase personal tax allowances.
38. BUSY & SLACK SEASONS
– 1 May to 30 September is the slack season and from October beginning to end-April is the busy season of the Indian economy.
– During the slack season, crops are generally sown. Agricultural activities at a low level and loans taken during the previous busy season tend to be returned.
– Consequently, the growth rate of money is low or negative.
– Government usually borrows heavily during the slack season, since the demand for credit from the commercial sector is not very strong.
– Since there are no fresh crop arrivals in the market and the demand for crops is steady, the prices are expected to be generally upward in the slack season.
– From October, both agricultural and related industrial activities pick up.
– Fresh crops arrive in the market, prices generally are on the downward trend.
– Seasonal variation in the arrival of crops in the market, while there is steady demand throughout the year causes prices to fluctuate during the year.
– In recent years there has been perceptible change in this trend. The government borrows both during the slack and the busy seasons. Industry too is active in both the seasons. Because of greater storage facilities, the fluctuations in market arrival of agricultural products have been reduced. Money supply expands continuously and prices are generally up throughout barring one or two months.
39. STATES’ MARKET BORROWING
– The state governments ,for years, had been raising money from the market without any restraint. With the onset of financial sector reforms, the situation started changing.
– from the 1990s, increasingly state as well as the centre have accessed funds at market-related rates. Now the onus will be on the states to manage their borrowing programmes.
– The market borrowings are arrived at by RBI in consultation with Planning Commission (now NITI Ayog) and the state government concerned
-A part of market borrowings is through the auctions where the rate is determined based on market response with the rest being through the fixed coupon basis.
– The Reserve Bank of India used to take into account the borrowing programme of the Central government, liquidity conditions,the cash flow needs of state, future repayments schedules while working out of the borrowing programme for states.
– A significant change was signalled when the Twelfth Finance Commission recommended the delinking of grants and loans in plan assistance to states as part of reforms on the borrowing programme front,
– Earlier there was a ratio of 70:30 between loans and grants for extending plan assistance to states- that states could access loans from the Central Government for their plan expenditure. These loans were for long tenures of over 20 years at a relatively higher interest spread.
-The government has accepted the financial commissions recommendations on doing away with such loans.This would mean greater recourses to the markets by states.
– Now like the Centre,staes will have to decide their annual borrowing programme within the framework of their fiscal responsibility programmes.
– This is expected to help in fiscal discipline. The commission and the RBI want to impose some sort of discipline on states on their debt management.
– If more market borrowings by states governments are carried out through the auction route, it could mean that well –managed states would stand to gain.
– They would be in a position to obtain better rates as the market would factor in the fiscal strengths of a particular state when pricing is determined.
– When states take a recourse to market borrowings through the auction route, there would be greater price discovery besides enhanced secondary market liquidity for such securities.
– A state whose credit rating is strong will get a better rate while borrowing while a weaker state may have to settle for a higher rate.
– This is expected to lead to greater attention and focus fiscal responsibility and debt management by states especially as they cannot look to the Central Government for loans as in the past.
-The Reserve Bank of India, which manages the debt for both the centre and states, want to progressively raise the share of market borrowings by states under the auction route so that the entire programme is covered through auction.
40. CRONY CAPITALISM
An approach of doing business when the firms look after themselves by looking after their own people (i.e., families and friends). Used in negative sense.
Private equity (PE) investors participate in two types of buyouts of firms (a PE- backed buyout simply means that the PE investor takes a controlling stake i.e. between 50-100 per cent in a company):
(i) Management Buyout (MBO): In such buyouts, the PE investor usually helps the existing management of the company to buy out the promoters of the company. In return, the PE investor takes a majority stake.
(ii) Leveraged Buyout (LBO): In such buyouts, a large portion of fund in acquiring the company is financed by debt-the normal ratio being 70 per cent debt and 30 per cent equity.
– Foreign Currency Convertible Bond, (FCCB) is an unsecured instrument to raise long-term loan in foreign currency by an Indian company which is converted into shares of the company on a predetermined rate.
– It is counted as the part of external debt. It is a safer route to raise foreign currency requirements of a company.
43. VULTURE FUNDS
Private financial firms which buy up sovereign debt issued by poor countries at a fraction of its value, then file lawsuits against the countries in courts usually in London, New York, or Paris, for their full face value plus interest
– A paper prepared for IMF/WB showed that there are now $1.8b lawsuits against poor countries where people typically live below $1 a day;
– 24 countries that have received debt cancellation under Heavily Indebted poor countries (HIPCs) initiative,11 have been targeted by such creditors and they have been awarded just under $1 b-money which have gone for schools and hospitals;
– they are neutralising the good deeds of WEB/ IMF.
– As per IMF ,the litigating creditors were concentrated in the US ,UK as well as the British Virgin Islands(BVI)-the UK protectorate tax haven.
44. Balance of Payment:
A balance sheet of an economy showing its total external transactions with the world-calculated on the principles of accounting-is an annual concept.
45. Tobin Tax
– it was put forward in 1972 by the Nobel-prize winning American economist James Tobin.
– Originally he suggested a tax on all payments from one currency to another. His aim was to curb massive and destabilising movements of funds between foreign currency exchanges.
– He proposed that the cash raised should be used as aid for developing countries. He said it had to to be an internationally agreed uniform tax to work effectively. He said each government would levy it with the proceeds paid into a global financial body such as the World Bank or the International Monetary Fund (IMF).
– The idea has since been extended to cover a tax on all share, bond and currency transactions.
– Critics said it would be impractical: a high rate would undermine financial markets, but if it were too low, it would not achieve its aim.
– It has also proved impossible to get global agreement to introduce it.
– Without worldwide agreement, the 11 European countries have decided to move ahead on their own, with the support of the European Union. And instead of paying the proceeds to a global body, they will use the funds to help bring down their respective national debts.
– Tobin suggested a rate of 0.5%, but other economists have put forward rates ranging from 0.1% to 1%. Even at a very low rate, supporters argue that if it were imposed on all financial transactions across the world, it could raise billions of pounds.
– advantages and disadvantages of the tax
– it could be a huge money-raiser for governments. Others add that it is only fair that banks and other financial firms pay an additional tax to help tackle government debt levels that they helped increase, as a result of the bailout schemes which many of them required during the financial crisis.
– Those in favour of the tax also argue that it helps to increase stability. They say that in the 1990s, it could have prevented countries such as Russia, Mexico and those in South East Asia having to raise their interest rates to very high levels, as their currencies came under threat from speculators.
– Critics argue that the tax will result in fewer financial transactions being made, resulting in job losses in financial centres. Others warn that the tax will mean pension funds and savers get less returns, as banks will simply pass the cost of the tax onto their customers.
– A version of it was tried in Sweden in 1984, where a 0.5% tax was introduced on the buying and selling of shares. The results were disappointing. It had been hoped that about 1.5bn Swedish kronor (£142m) per year would be raised. On average, 50 million was raised. Capital gains tax revenues also fell. But the impact on market trading was also more dramatic. During the first week of the tax, the volume of bond trading fell by 85%. In 1991, the tax was scrapped.
– Yet Tobin taxes are still in place in some of the world’s fastest-growing financial centres – Hong Kong, Mumbai, Seoul, Johannesburg and Tapei – where they are said to collectively raise £12bn a year.
– Recently China drafted rules for introduction of Tobin Tax
46. BUYER’S MARKET
A short period of market situations in which there is excess supply of goods/services forcing price fall to the advantage of the buyers.
47. Trasfer Payments
-The expenditure by the government for which it receives no goods or services. For example, the expenditure on tax collection, social sector, unemployment allowance ,etc.
– As such expenditures are not done against any products they are not counted in the national income of the economy.
The financial assets that ‘derive’ their value from other assets, such as shares, debentures, bonds, securities, etc.
Using computers and the Internet to link both the internal operations (i.e, transactions and communications between the various departments/divisions of the business firm) and its external operations (i.e, all its dealings with the suppliers, customers, etc).
50. FINANCIAL CLOSURE
Financial closure is defined as a stage when all the conditions of a financing agreement are fulfilled prior to the initial availability of funds. It is attained when all the tie ups with banks or financial institutions for funds are made and all the conditions precedent to initial drawing of debt is satisfied.
-In a Public Private Partnership (PPP) project, financial closure indicates the commencement of the Concession Period –the date on which financial closure is achieved is the appointed date which is deemed to be the date of commencement of concession period.
-RBI has provided a definition financial closure is “a legally binding commitment of equity holders and debt financiers to provide or mobilise funding for the project. Such funding must account for a significant part of the project cost which should not be less than 90 per cent of the total project cost securing the construction of the facility.
Method of buying and selling goods and services over the Internet – a kind of direct marketing i.e. without the help of any middle arrangement of sales.
52. FORWARD CONTRACT
A transaction contract of commodity on an agreed price which binds the seller and buyer both to pay and deliver the commodity on a future date. The price agreed upon is known as forward rate.
53. FORWARD TRADING
A trading system in certain shares (as allowed by the SEBI in India) in which buyers and sellers are allowed to postpone/defer payment and delivery respectively after paying some charges. If the buyer wants deferment, it is known as badla (an Indian term for contango) and if the seller goes for deferment of delivery of shares, it is known as undha badla (in India, elsewhere it is known as backwardation).
The process of acceptance by a financial institution of the financial risks of a transaction for a fee. For example, merchant banks underwrite new share issues, guaranteeing to buy up the shares not sold in a public offer (i.e., in the situations of under subscription).
55. VELOCITY OF CIRCULATION
A measure of the average number of times each unit of money is used to purchase the final goods and services produced in an economy in a year.
56. CAVEAT EMPTOR
A Latin phrase which means ‘let the buyer beware’. Simply put, it means that the supplier has no legal obligation to inform buyers about any defects in his goods or services; the onus is on the buyer to himself determine the level of satisfaction out of the products.
57. Special drawing rights (ISO 4217 currency code XDR, also abbreviated as SDR are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).
-The XDR is the unit of account for the IMF, and is not a currency but represent a claim to currency held by IMF member countries for which they may be exchanged.
– The XDR was created in 1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and the U.S. dollar.
– XDRs are allocated to countries by the IMF. The amount of XDRs in existence was around XDR 21.4 billion in August 2009. During the global financial crisis of 2009, an additional XDR 182.6 billion were allocated to “provide liquidity to the global economic system and supplement member countries’ official reserves”.
– By October 2014, the amount of XDRs in existence was XDR 204 billion.
– The value of the XDR is based on a basket of key international currencies reviewed by IMF every five years.The weights assigned to each currency in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves.
– In the review conducted in November 2015, the IMF decided that the Renminbi (Chinese Yuan) would be added to the basket effective October 1, 2016. From that date, the XDR basket will consist of the following five currencies: U.S. dollar 41.73%, Euro 30.93%, Chinese yuan 10.92%, Japanese yen 8.33%, British pound 8.09%.
Capital is one of the three main factors of production (labour and natural resources are the other two), classified into physical capital (i.e., factories, machines, offices, etc.) and human capital (i.e., training, skill, etc.). Share Capital of a business entity means the total amount invested by all the shareholders in the entity. It is classified into
(i) Authorised Capital : This is the amount of share capital fixed in the Memorandum of association of a company as required by the Companies Act. This is also known as the Nominal or Registered Capital.
(ii) Paid-up Capital: The part of the authorised capital of a company that has actually been paid up by the shareholders. A difference may arise because all shares authorised may not have been issues or the issued shares have been only partly paid-up by then.
(iii) Subscribed Capital: The capital that has actually been paid by the shareholders (as they might have committed more than this to contribute). It means, the subscribed capital is the actually realised paid-up capital (paid-up capital is subscribed capital plus credit/due on the shareholders).
(iv) Issued Capital: The amount of the capital which has been sought by a company to be raised by the issue of shares (it should be kept in mind that this cannot exceed the authorised capital).
(v) Called-up Capital: The amount of share capital the shareholders have been called to pay to date under the phased payments terms.
59. CETERIS PARIBUS
A Latin phrase which means ‘other things being equal’. The phrase is used by economists to cover their forecasting’s.
60. WITHHOLDING TAX
A tax imposed on the income on a foreign portfolio.This tax is imposed todiscourage foreign investments,to encourage domestic investment,and to raise money for the government.
61. BACK-TO-BACK LOAN
A term of international banking, is an arrangement under which two firms (i.e., companies) in different economies (i.e., countries) borrow each other’s currency and agree to repay (such loans) at a specified future date. Each company gets full amount of the loan on the repayment date in their domestic currency without any risk of losses due to exchange rate fluctuations. It has developed as a popular tool of minimising the exchange-rate exposure risk among the multi-national companies. This is also known as parallel loan.
62. Cross Subsidizing
The process of giving subsidy to one sub-area or product and recovering the loss incurred in it through the profits from another or other subareas/ products. As for example, in India kerosene oil is cross-subsidised against petrol and aviation fuel.
63. ESCROW ACCOUNT
An ‘escrow account’ is a third party account. It is a separate bank account to hold money parked will be released only under fulfilment of certain conditions of a contract.
– It is an arrangement for safeguarding the ‘seller’ against its ‘buyer’ from the payment risk for the goods or services sold by the former to the latter. – – This is done by removing the control over cash flows from the hands of the buyer to an independent agent. The independent agent, i.e, the holder of the escrow account would ensure that the appropriation of cash flows is as per the agreed terms and conditions between the transacting parties. –
– Escrow account has become the standard in various transactions and business deals.
– In India escrow account is widely used in public private partnership projects in infrastructure.
– RBI has also permitted Banks (Authorised Dealer Category I) to open escrow accounts on behalf of Non-Resident corporate for acquisition/transfer of shares/convertible shares of an Indian company.
64. Financial Stability Forum (FSF)
-Established by the G7 finance ministers and central bank governors in 1999 to promote international financial stability through enhanced information exchange and international cooperation in financial market supervision and surveillance.
– It decided at its plenary meeting in London on March 2009 to broaden its membership by inviting the new members from the G20 countries, namely, Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa and Turkey.
– The FSF was re-launched as the Financial Stability Board (FSB) on 2,April,2009, in order to mark a change and convey that the FSF in future would play a prominent role in this direction.
65. FINANCIAL STATBILITY BOARD (FSB)
– The Financial Stability Board(FSB) is an international body that monitors and makes recommendations about the global financial system. It was established after the 2009 G20 London summit in April 2009 as a successor to the Financial Stability Forum (FSF). The Board includes all G20 major economies, FSF members, and the European Commission. It is based in Basel, Switzerland
The FSB represents the G-20 leaders’ first major international institutional innovation. Secretary of the US Treasury Tim Geithner has described it as “in effect, a fourth pillar” of the architecture of global economic governance. -The FSB has been assigned a number of important tasks, working alongside the IMF, World Bank, and WTO. Chairman of the board is the Canadian Mark Carney, Governor of the Bank of England.
– its recommendations for enhancing the resilience of financial markets and financial institutions cover five areas of financial oversight:
- Strengthened prudential oversight of capital, liquidity and risk management;
- Enhancing transparency and valuation;
- Changes in the role and uses of credit ratings;
- Strengthening the authorities’ responsiveness to risks; and
- Robust arrangements for dealing with stress in the financial system.
– Recently cautioned India as it is among the nations who have witnessed a marked increase in the exposure of its banks to ‘shadow banking’ entities, whose asset base globally grew to $ 71 trillion in 2012-end, according to an international body of financial regulators. Shadow banking system refers to credit intermediation involving entities and activities outside the purview of the regular banking system.
66. Financial Stability and Development Council of India (FSDC)
It is an apex-level body constituted in 2010 by the Government of India mooted by the Raghuram Rajan Committee in 2008 to deal with macro prudential and financial regularities in the entire financial sector of India.
– The recent global economic meltdown has put pressure on governments and institutions across the globe to regulate their economic assets. This council is seen as India’s initiative to be better conditioned to prevent such incidents in future.
– The new body envisages to strengthen and institutionalise the mechanism of maintaining financial stability, financial sector development, inter-regulatory coordination along with monitoring macro-prudential regulation of economy.
– The Union Finance Minister is the Chairperson and includes heads of regulatory bodies (RBI, SEBI, PFRDA, IRDAI & FMC) Finance Secretary and/or Secretary, Department of Economic Affairs, Secretary, Department of Financial Services, and Chief Economic Adviser. The Council can invite experts to its meeting if required.
– Its major functions are
- Financial Stability
- Financial Sector Development
- Inter-Regulatory Coordination
- Financial Literacy
- Financial Inclusion
- Macro prudential supervision of the economy including the functioning of large financial conglomerates
- Coordinating India’s international interface with financial sector bodies like the Financial Action Task Force(FATF), Financial Stability Board(FSB)and any such body as may be decided by the Finance Minister from time to time.
It has subgroups like Macro Financial and Monitoring Group, Working Group on resolution regime for financial institutions Early Warning Group, Inter regulatory forum for monitoring financial conglomerates (IRF-FC) and Technical Group on financial inclusion and financial literacy
67. PHILLIPS CURVE
A graphic curve depicting an empirical observation of the relationship between the level of unemployment and the rate of change of money wages and, by inference, the rate of change of prices proposed by in 1958 by an economist from new Zealand ,A.W.H.Phillips (1914-75) that there was a trade –off between inflation and unemployment rate, the higher the inflation rate-governments simply need to choose the right balance between the two evils.
68. PIGGYBACK LOAN
A term associated with mortgage business got popular in the wake of the US subprime crisis mid-2007.piggyback loan is a second mortgage enabling a borrower to buy a house with little or no equity.
An Indian term for ‘contango’ associated with the trading system in the stock market which is a postponement of either payments by the share buyer, or the person who needs to deliver the shares against the payment.
70. BALLOON PAYMENT
When the final payment of a debt is more than the previous payments, it is balloon payment.
71. ZERO TILLING
A relatively new farm production process,is a one-time operation in which a small drill places the seed and the fertiliser in a small furrow,saving the farmer a lot of time and other resourses.
-First utilised in Hariyana in 1999-2000,by now it has spread to the other wheat growing state like, Punjab, Uttar Pradhesh, Uttarakhand and Bihar.
-The technique gives comparatively higher yield (by over 5 per cent) than the conventional wheat farming.
72. FRACTIONAL BANKING
A system of banking in which banks maintain a minimum reserve asset ratio in order to maintain adequate liquidity to meet the customer’s cash demands in its everyday business (the SLR in India is such a provision).
73. CROWDING-OUT EFFECT
A concept of public finance which means an increase in the government expenditure which has an effect of reducing the private sector expenditure.
74. ASSIGNED REVENUE
The term is used to refer to various tax/duty/cess/surcharge/levy etc., proceeds of which are (traditionally) collected by state government (on behalf of ) local bodies (the PRIs), and subsequently adjusted with/assigned to the PRIs. Collection of such revenue is governed by relevant Acts of the local bodies.
– Some examples of assigned revenue in India, include, entertainment tax, surcharge on stamp duty, local cess/surcharge on land revenue, lease amount of mines and minerals, sale proceeds of social forestry plantations, etc. State Finance Commissions recommend devolution of assigned revenue to local bodies on objective criteria, which may be specified by them in specific context.
75. BELLWETHER STOCK
A share which often reflects the state of the whole stock market. The technical analysts, associated with the stock market, usually keep a track-record of such shares and go on to forecast the future stock movements.
76. NARROW BANKING
Short term lending in risk-free asset is narrow banking. A suggestion for such banking was given by the committee on financial system(CFS) in 1991 for the weak banks of India.
77. BULLET REPAYMENT
Bullet repayment’ means a lump-sum payment for the entire loan amount paid at the time of maturity. Such arrangements may be put in place by the banking regulator (RBI in case of India) to fasten the process of recovery of the non-performing assets (NPAs) process of the banks. The distressed assets, in this way come back to bank, may be with a lower profit element to them.
Such an announcement was made by the RBI in 2014-2015 allowing bullet repayment of loans extended against pledge of gold ornaments and jewellery for other than agricultural purposes.
An acronym derived from the terms capital adequacy (C), asset quality (A), management (M), earnings (E), liquidity (L) and systems for control (S). The acronym is used as a technique for evaluating and rating the operations and performance of banks all over the world.
– Anything which has a ‘money value’ owned by an individual or a firm is an asset. It is of three types:
(i) Tangible Asset: All physical assets such as land, machinery, building, consumer durables (refrigerator, car, TV, Radio, etc.), etc. (the assets which are in the material form).
(ii) Intangible Assets: All non-physical/immaterial assets such as brand names, good-will, credit-worthiness, knowledge, know-how, etc.
(iii) Financial Assets: All financially valid valuables other than tangibles and intangibles such as currencies, bank deposits, bonds, securities, shares, etc.
80. BACKWARDATIONA term of future trading which means a commodity is valued higher today (i.e., spots market) than in the futures (i.e., future market). When the situation is opposite, it is known as contango.
– An instrument of raising long-term loan by companies, having a maturity period bearing an interest (coupon rate). Theoretically they may be secured or unsecured by assets such as land and buildings of the issuing company (known as collateral).
– Debenture holders are provided with a prior claim on the earnings (by interest) and assets of the company in the situation of liquidation of the company over the preference and equity shareholders of the company.
82. DEBT RECOVERY TRIBUNAL (DRT)
Set up on the recommendations of Mr.Narasimham Committee with special adjudicator powers.
– In 1993 the Recovery of Debts Due to Banks and Financial Institutions Act’ was passed. The Act, however, imposes a limitation and states that only those debts which are in excess of Rs. 10 lakhs (or up to Rs.1 lakh, where the Central government specified certain types of debts) would come under its purview.
– The tribunals are set by the Central government. The government also specifies the areas within which such tribunals will have jurisdiction. A DRT consists of the Presiding Officer to be appointed by notification by the Central government.
– The government may also specify that the presiding officer of one tribunal may take over the functions of the presiding officer of another tribunal. A person has to be at least a district judge to become a presiding officer of a Tribunal.
83. DEMAT ACCOUNT
It is a way of holding securities in electronic or dematerialised form. Demat form of shares can be traded online.
– the transactions are concluded much faster, which prevents theft, misuse, forging of original shares certificates or other documents, and allows an investor to buy or sell shares in any quantity.
– Demat account allows for faster refund of money in case application is not accepted.
– Demat accounts are offered by banks, and the dematerialised stock is held by the depository (National Securities Depository Ltd.-[NSDL] or Central Securities Depository Ltd.-[CSDL]).
Employee Stock Option Plans (ESOPs) is a provision under which a foreign company (i.e., MNC) offers shares to its employees overseas. Till February 2005 in the case of local firms, an MNC needed a permission from the RBI before allotting ESOPs, but since then, it does not need any permission provided the company has a minimum of 15 per cent holding in the Indian arm.
The London Interbank Offered Rate (LIBOR) is the intrest rate on dollar and other foreign currency deposits at which larger banks are prepared to borrow and lend these currencies in the Eurocurrency market. The rate reflects market conditions for international funds and are widely used by the banks as a basis for determining the interest rates charged on the US dollar and foreign currency loans to the business customers.
86. LIFE-CYCLE HYPOTHESIS
An idea which states that current consumption its not dependent solely on current disposable income of the consumers but is related to their anticipated lifetime income. This hypothesis has its high applied value in the real life economic management.
87. MARKET MAKER
An intermediary (may be an individual or a firm0 in the secondary market who buys and sells securities/shares simultaneously quoting two way rates. –
– Over The Counter Stoke Exchange Of India (OTCEI) is the only market marker are allowed to operate.
– The Discount and Finance House of India(SBI DFHI)is the chief market maker in the money market of India
The Multi- Appliction Smart Cards (MASCs) system to facilitate simplification of procedures and enhancing the efficiency of Government schemes has been suggested by a planning Commission Working Group in the context of the eleventh Five Year Plan.
– The smart card has been recognised to be useful in implementation of various central government schemes like, PDS, Indira Awas Yojana and National Rural Employment Guarantee Scheme (NREGS).
– Based on a web enabled information system the smart cards will be based on unique ID. sharing ID, multi application and access control. The whole system will consist of front, middle and back end.
-The electronic card will be the ‘FRONT ‘end of the system which will be the point of delivery where the smart cards will be responsible for changing and updating the card periodically (that is monthly, quarterly, annually)depending on the type of information and requirement and transfer information from the front end to the back end and vice versa.
– The office at ‘back end will contain the computerised records, guidelines, accounts and management information systems. The complete digitisation of records will be required by this system.
89. MERCHANT BANKING
A financial world business of providing various finantial services other then lending such as public issue management, mergers, and acquisition related services, etc.
The Mumbai Inter Bank Bid(MIBID)is the weighted average intrest rate at which certain banks in Mumbai are ready to borrow from the call money market.
91. MIBOR The Mumbai Inter Bank Offer Rate (MIBOR) is the weighted average interest rate at which certain banks/institutions in Mumbai are ready to lend in the call money market.
92. EQUITY LINKED SAVING SCHEME
Equity linked savings schemes (ELSS) are open-ended, diversified equity schemes offered by mutual funds. To avail tax benefits under section 80C of IT Act.
– Besides offering the tax benefits, the scheme invests in shares of frontline companies and offers long-term capital appreciation. This means unlike a guaranteed return by assured return schemes like Public Provident Fund or National Savings Certificate, the investor gets the benefit of the upside (if any) in the equity markets.
– Unlike other mutual fund schemes, there is a three-year lock in period for investments made in these schemes. Investors planning to build wealth over the long-term and save on tax can use these schemes.
– Returns in these schemes are linked to the fortunes of the stock market. It falls in the high risk and high return category.