- Money Market In India
- Money Market Concepts
- Negotiable Instruments
- India's Foreign Trade
- Balance of Trade (BoT)
- Balance of Payments (BoP)
- Current account transactions
- Capital account transactions
- Significance of Current Account Defecit
- Foreign Investment
- India's FDI Policy
- Foreign Institutional Investors
- Capital Market In India
- Mutual Fund
- Cross Selling
- Joint Venture
- Amalgamation and Public Finance
- National Income
Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every rupee you own buys a smaller percentage of a good or service.
The value of a rupee does not stay constant when there is inflation. The value of a rupee is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is 2% annually, then theoretically a Re 1 pack of gum will cost Rs 1.02 in a year. After inflation, your money can"t buy the same amount of goods it could beforehand.
Difference between WPI and CPI
WPI and CPIs differ in terms of their weighting pattern. First, food has a larger weight in CPI ranging from 46 per cent in CPI-IW to 69 per cent in CPI-AL whereas it has a weight of only 27 per cent in WPI. The CPIs are, therefore, more sensitive to changes in prices of food items. Second, the fuel group has a much higher weight in the WPI (14.2 percent) than the CPIs (5.5 to 8.4 per cent). As a result, movement in international crude prices has a greater bearing on WPI than on the CPIs. Third, services are not covered under WPI while they are, to different degrees, covered under CPIs. Consequently, service price inflation has a greater influence on CPIs. In general, revision of base in every 5 years is an accepted principle in major developed and emerging countries.
NEW WPI SERIES
Following the recommendation of the Working Group for Revision of Wholesale Price Index under the Chairmanship of Prof. Abhijit Sen, the base year has been revised to 2004-05 from September 2010. The proposed basket of manufactured products in the new series covers significantly a higher number of commodities and integrates items from both organised and un-organised manufacturing sectors. The revised WPI basket, however, does not include services prices. An Expert Group (Chairman: Prof. C. P. Chandrasekhar) is looking into process of developing a service price index. In order to enhance the representativeness of WPI index, it is important to expand the coverage to include services. The new WPI series aimes at capturing the price movement in a more realistic way in keeping with the times. The basic difference between the two series is that the new WPI index with 2004-05 as the base year has a total of 676 items instead of 435 items under the old series which had 1993-94 as the base year. Among the 241 items added to the basket for better reflection of the inflationary spiral are consumer items - essentially used by the middle-class - such as icecream, mineral water, readymade food, refrigerators, VCDs, dish antennas, microwave ovens, washing machines, computers and computer stationery and gold as well as silver. Under the primary article group, there are 102 items in the new series against 98 in the old index although the number of items in the fuel and power category remains unchanged at 19. A substantial increase is in the number of manufactured products that have been included in the index - 555 items as compared to 318 items in the basket under the old series.
PRODUCER PRICE INDEX
India revised the WPI, but still don"t have a Producer Price Index (PPI). The PPI covers price changes faced by the producers on primary, intermediate and finished goods and services ready for the market. The primary difference between the WPI and the PPI is, in addition to the coverage, that the WPI reflects changes in the average cost of production including mark-ups and taxes, while the PPI measures price changes of transacted goods at the gate excluding taxes. The purpose of the PPI is to provide a measure of prices received by producers of commodities. The PPI usually covers the industrial (manufacturing) sector as well as public utilities (electricity, gas and communications).
NEW CONSUMER PRICE INDEX
At the retail level, CPI is meant to reflect the cost of living conditions and is computed on the basis of the changes in the level of retail prices of selected goods and services on which consumers spend the major part of their income. Therefore, a broad based CPI for the country as a whole, including both services and manufacturing products, has greater relevance for monetary policy formulation.In India, however, data on CPI relates to different segments of the population rather than the entire population. With a view to addressing this issue, the Reserve Bank had taken the initiative and prepared an approach paper on CPI (Urban) and CPI (Rural). Subsequently, the Central Statistical Organisation (CSO) has taken up the work for generating data on CPI (Urban) and CPI (Rural). The new CPIs once complied will go a long way in filling a major data gap in price statistics
MONEY MARKET IN INDIA
The money market is the market in which short term funds are borrowed and lent. The lending money market institutions are -
- Government of India and other sovereign bodies
- Banks and Development Financial Institutions
- PSUs [Public Sector Undertakings]
- Private sector organizations
- The Government /Quasi government owned non-corporate entities.
Large numbers of instruments that are traded in the money market are issued by Government of India, State governments and other statutory bodies. Instruments that are issued by the Development Financial Institutions [DFI] and banks carry the highest credit ratings amongst nongovernment issuers mainly due to their connection with the Indian Government.
INSTRUMENTS OF MONEY MARKET
- Call Money - Call or notice money is an amount borrowed or lent on demand for a very short period. If the period is greater than one day and up to 14 days it is called Notice money; otherwise the amount is known as Call money. No collateral security is needed to cover these transactions. The call market enables the banks and institutions to even out their day-to-day deficits and surpluses of money. Co-operative banks, commercial banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirements. This is a completely inter-bank market. Interest rates are market determined. In view of the short tenure of these transactions, both borrowers and lenders are required to have current accounts with Reserve Bank of India.
- Treasury Bills - These are the lowest risk category instruments for the short term. RBI issues treasury bills [T-bills] at a prefixed day and for a fixed amount. There are 3 types of treasury bills. -91-day T-bill: maturity is in 91 days, it is auctioned on every Friday of every week and the notified amount for auction is Rs. 100 crores. -182-day T-bill: maturity is in 182 days, it is auctioned on every alternate Wednesday, which is not a reporting week and the notified amount for auction is Rs. 100 crores. -364-day T-bill: maturity is 64 days, it is auctioned on every alternate Wednesday which is a reporting week and the notified amount for the auction is Rs. 500 crores.
- Certificates of Deposits - After treasury bills, the next lowest risk category investment option is Certificate of Deposit (CD) issued by banks and Financial Institutions (FI). Allowed in 1989, CDs were one of RBI"s measures to deregulate the cost of funds for banks and FIs. A CD is a negotiable promissory note, secure and short term, of up to a year, in nature. A CD is issued at a discount to the face value, the discount rate being negotiated between the issuer and the investor. Although RBI allows CDs up to one-year maturity, the maturity most quoted in the market is for 90 days.
- Commercial Papers - Commercial papers [CPs] are negotiable short-term unsecured promissory notes with fixed maturities, issued by well-rated organizations. These are generally sold on discount basis. Organizations can issue CPs either directly or through banks or merchant banks [called as dealers]. These instruments are normally issued in the multiples of five crores for 30/45/60/90/120/180/270/364 days.
- Inter-Corporate Deposits - An Inter-Corporate Deposit or ICD is an unsecured loan extended by one corporate to another. Existing mainly as a refuge for low rated corporate, this market allows funds surplus corporate to lend to other corporate. A better rated corporate can borrow from the banking system and lend in this market. As the cost of funds for a corporate is much higher than a bank, the rates in this market are higher than those in other markets. ICDs are unsecured, and therefore the risk inherent is high. The ICD market is not well organized with very little information available about transaction details.
- Ready Forward Contracts - These are transactions in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a predetermined price. Such a transaction is called Repo when viewed from the prospective of the buyer of securities that is the party acquiring fund. It is called reverse repo when viewed from the prospective of supplier of funds.
- Commercial Bills - Bills of exchange are negotiable instruments drawn by the seller or drawer of the goods on the buyer or drawee of the good for the value of the goods delivered. These bills are called trade bills. These trade bills are called commercial bills when they are accepted by commercial banks. If the bill is payable at a future date and the seller needs money during the currency of the bill then the seller may approach the bank for discounting the bill.
- Pass through Certificates - This is an instrument with cash flows derived from the cash flow of another underlying instrument or loan. The issuer is a Special Purpose Vehicle (SPV), which only receives money, from a multitude of, may be several hundreds or thousands, underlying loans and passes the money to the holders of the PTCs. This process is called securitization. Legally speaking PTCs are promissory notes and hence tradable freely with no stamp duty payable on transfer. Most PTCs have 2-3 year maturity because the issuance stamp duty rate makes shorter duration PTCs unviable.
- Dated Government Securities - These are securities issued by the Government of India and State Governments. The date of maturity is specified in the securities therefore they are known as dated securities. The Government borrows funds through the issue of long term dated securities, the lowest risk category instruments in the economy. They are issued through auctions conducted by RBI, where RBI decides the coupon or discount rate based on the response received. Most of these securities are issued as fixed interest bearing securities, although the government sometimes issues zero coupon instruments and floating rate securities.
MONEY MARKET CONCEPTS
SEBI has conducted raids on large scale on dabba trading and investigations are on. These trading have intensified the speculative nature of the market. Therefore, despite the fact that market has a cash market with T + 1 rolling settlement and derivatives market with four types of options and futures products, a huge amount of illegal mode is also adopted in the transactions of stock market.
Definition of Negotiable Instrument According to section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means "promissory note, bill of exchange, or cheque, payable either to order or to bearer".
Types of Negotiable Instruments
According to the Negotiable Instruments Act, 1881 there are just three types of negotiable instruments i.e., promissory note, bill of exchange and cheque. However many other documents are also recognized as negotiable instruments on the basis of custom and usage, like hundis, treasury bills, share warrants, etc., provided they possess the features of negotiability. In the following sections, we shall study about Promissory Notes (popularly called pronotes), Bills of Exchange (popularly called bills), Cheques and Hundis (a popular indigenous document prevalent in India), in detail.
Suppose you take a loan of Rupees Five Thousand from your friend Ramesh. You can make a document stating that you will pay the money to Ramesh or the bearer on demand. Or you can mention in the document that you would like to pay the amount after three months. This document, once signed by you, duly stamped and handed over to Ramesh, becomes a negotiable instrument. Now Ramesh can personally present it before you for payment or give this document to some other person to collect money on his behalf. He can endorse it in somebody else"s name who in turn can endorse it further till the final payment is made by you to whosoever presents it before you. This type of a document is called a Promissory Note.
Bill of Exchange
Suppose Rajiv has given a loan of Rupees Ten Thousand to Sameer, which Sameer has to return. Now, Rajiv also has to give some money to Tarun. In this case, Rajiv can make a document directing Sameer to make payment up to Rupees Ten Thousand to Tarun on demand or after expiry of a specified period. This document is called a Bill of Exchange, which can be transferred to some other person"s name by Tarun. Section 5 of the Negotiable Instruments Act, 1881 defines a bill of exchange as "an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument".
Cheque is a very common form of negotiable instrument. If you have a savings bank account or current account in a bank, you can issue a cheque in your own name or in favour of others, thereby directing the bank to pay the specified amount to the person named in the cheque. Therefore, a cheque may be regarded as a bill of exchange; the only difference is that the bank is always the drawee in case of a cheque. The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. Actually, a cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.Types of Cheque
- Open cheque: A cheque is called "Open" when it is possible to get cash over the counter at the
bank. The holder of an open cheque can do the following:
- Receive its payment over the counter at the bank,
- Deposit the cheque in his own account
- Pass it to some one else by signing on the back of a cheque.
- Crossed cheque: Since open cheque is subject to risk of theft, it is dangerous to issue such cheques. This risk can be avoided by issuing another types of cheque called "Crossed cheque". The payment of such cheque is not made over the counter at the bank. It is only credited to the bank account of the payee. A cheque can be crossed by drawing two transverse parallel lines across the cheque, with or without the writing "Account payee" or "Not Negotiable".
- Bearer cheque: A cheque which is payable to any person who presents it for payment at the bank counter is called "Bearer cheque". A bearer cheque can be transferred by mere delivery and requires no endorsement.
- Order cheque: An order cheque is one which is payable to a particular person. In such a cheque the word "bearer" may be cut out or cancelled and the word "order" may be written. The payee can transfer an order cheque to someone else by signing his or her name on the back of it. Hundis
A Hundi is a negotiable instrument by usage. It is often in the form of a bill of exchange drawn in any local language in accordance with the custom of the place. Some times it can also be in the form of a promissory note. A hundi is the oldest known instrument used for the purpose of transfer of money without its actual physical movement. The provisions of the Negotiable Instruments Act shall apply to hundis only when there is no customary rule known to the people.
INDIA'S FOREIGN TRADE
Each country has to keep economic transaction with other countries of the world and India also has a healthy trade relationship with several countries. Foreign trade brings into play the commercial transaction of payment and receipt for goods and services sent (export) or received (import). The difference between these two creates the concept of Balance of Payment and Balance of Trade. According to Benham,"Balance of Payments of a country is a record of the monetary transactions over a period with rest of the world."
Ordinarily, a country has to deal with other countries in respect of three items, namely;
(i) Visible items, which include all types of physical goods exported and imported.
(ii) Invisible items, which include all those services, whose export and import are not visible.
(iii) Capital transfer, which are concerned with capital receipts and capital payments.
Each country has to workout a balance in respect of its dealings, in all the above three items with other countries of the world in a given period. Such a balance may assume any one of the three positions:(i) balanced (ii) negative (unfavourable) (iii) positive (favourable)
Balance of Trade (BoT)
When the difference in the value of imports and exports of only physical goods or visible items, is taken into account, it is called Balance of Trade or Net Exports. Balance of trade may be
(i) Surplus or Favourable In this situation, exports are greater than imports,
(ii) Deficit or Unfavourable In this situation, imports are greater than exports,
(iii) Equilibrium in Balance of Trade In this situation, total value of goods exported is equal to the total value of goods imported by a country.
Balance of Payments (BoP)
When the difference in the value of imports and exports of all the three items i.e., visible, invisible
and capital transfers, is taken into account, it is called Balance of Payments (BoP). Balance of
Payments (BoP) is thus an overall record of all economic transactions of a country in a given period,
with rest of the world.
Balance of Payments (BoP) account broadly comprises of the following components (i) Current account transaction and (ii) Capital account transaction.
Current account transactions:
These are the transactions relating to inflows and outflows of forex
of a routine transactions such as exports of goods and services, remittances received from nonresident
Indians, foreign tourists visiting India and bringing forex into India and outflows in the form
of imports of goods and services, remittances by expatriates to their home countries, expenses of
resident Indians travelling abroad. These inflows and outflows never match. When the outflows
exceed the inflows, a country has current account deficit.
Components of Current Account
Current account records the following transactions
(i) Export and import of goods (or of visible items).
(ii) Export and import of services (or of invisible items),
(iii) Uniliteral transfers from one country to the other.
7n the context of current account BoP, following are some important observations
- All exports (of goods and services), are recorded ;as positive (+) items as these result in the flow of foreign exchange into the country.
- All imports (of goods and services), are recorded as negative (-) items as these cause the v flow ofjforeign exchange out of the country.
- Balance occuring o/fcaccount of export and import of goods is regarded as balance"of visible trade.
- Balance occuring on account of export and import of services is recorded as balance of invisible trade.
- Receipts of uniliteral transfers are recorded as positive items.
- Payments of uniliteral transfers are recorded as negative items.
- Net value of the three balances (a) balance of visible trade, (b) balance of invisible trade, (c) balance of uniliteral transfers is recorded as balance on current account.
- Current Account Balance = Balance of Visible Trade + Balance of Invisible Trade + Balance of Uniliteral Transfers
Capital account transactions
These are the transactions that lead to change in asset or liability position of residents of a country, outside their own country. These are longer-term flows in the form of borrowings (ECB), investments (FDI), assistance by India to other countries or to India by other countries etc. The difference between outflows & inflows is either the capital account surplus or capital account deficit. If there is current account deficit, it will be covered by the capital account surplus. But if the capital account surplus is not enough to cover the current account deficit, the country will have to use the forex reserves leading to reduction in forex reserves. Components of Capital Account
Following are the principal forms of capital account transactions
1.Foreign Investment : It has two sub-components
(i) Foreign Direct Investment (FDI) referring to the purchase of assets in the rest of the world, which allows control over that assets. Example Purchase of a firm by TATA in the rest of the world.
(ii) Portfolio Investment referring to purchase of an asset in the rest of the world, without any control over that asset. Portfolio investment into India also consists of Foreign Institutional Investment (FIl). Example Purchase of some shares of a company by TATA in the rest of the world.
2. Loans : It has two sub-components
(i) Commercial Borrowings referring to borring by a country (including government and the private sector), from the international money market. This involves market rate of interest without considerations of any concession,
(ii) Borrowings as External Assistance referring to borrowing by a country with considerations of assistance. It involves lower rate of interest compared to that prevailing in the open market.
3. Banking Capital Transactions : referring to transactions of external financial assets and liabilities of Commercial Banks and Cooperative Banks operating as authorised dealers in foreign exchange. These transactions include NRI deposits.
4. Reserve Account : The official reserve account records the change in stock of reserve assets (also known as foreign exchange reserves) at the country"s monetary authority.
5. Net Errors and Omissions : This is the last component of the Balance of Payments and principally exists to correct any possible errors made in accounting for the three other accounts. They are often referred to as "balancing items".
All capital transactions causing flow of foreign exchange into the country are recorded as positive items in the capital account of BoP. Example Loans from rest of the world, foreign direct investment or portfolio investment by the nonresidents in our country.
All capital transactions causing flow of foreign exchange out of the country are recorded as negative items in the capital account of BoP.
While FDI and portfolio investments are non-debt creating capital transactions, borrowings are debtcreating capital transactions.
SIGNIFICANCE OF CURRENT ACCOUNT DEFICIT
CAD measures the dependence of an economy on the capital inflows from abroad, to cover its current requirements. If dependence high, it can create problem, because the inflow of long term capital is uncertain and there is obligation to service the long term capital in the form of interest payments, dividend payments and return of principal amount, in case it is borrowing and not the investment. ;
The dependency level is judged on the basis of CAD as percentage to gross domestic product of a country (and not by amount of CAD). In case of India, it is around 4.8% currently which is significantly higher than about 1.3% in 2007-08. There area no. of causes for higher demand foreign currency including import of oil and gold while the supply could not keep pack due to declining exports.
In normal circumstances, the increasing CAD would have been funded by inflow of foreign capital in the form of FDI and/or FII, but due to various reasons including policy paralysis, political uncertainty, sliding industrial output and a weakening economy, that did not happen. This demand-supply mismatch of foreign currencies particularly of US dollars, is the basic reason of US currency becoming more expensive.
Foreign Direct Investment (FDI) - It refers to direct investment in the productive capacities of a country by someone from outside the country. Such an investment can be in the form of setting up a new plant or through purchase of shares of a company, where the shareholding gives the foreign entity control over the business of the company. IMF defines control in such a case as, holding 10 % or more of ordinary shares or voting power in an incorporated firm. A foreign company can set up its business in India in two ways, by setting up a company under the Companies Act or by setting up an unincorporated entity like liaison office, project office or branch office.
Two concepts associated with FDI are Greenfield and Brownfield investment
Greenfield Investment It"s a form of foreign direct investment, where a parent company starts a
new venture in a foreign country by constructing new operational facilities from the ground up.
Brownfield Investment It happens, when a company or government entity purchases or leases
existing production facilities to launch a new production activity.
Foreign Institutional Investment (Fll) These are investments by entities from outside the country
into the financial assets like debts and shares of companies from a different country, in which they
are incorporated. FIIs are required to register with SEBI (Securities and Exchange Board of India)
and any foreign individual wanting to invest into India has to co^pie through one of these FIIs.
Participatory Notes (P-Notes) These are financial instruments used by investors or hedge funds
that are not registered with the Securities and Exchange Board of India to invest in Indian securities.
Indian-based brokerages buy India-based securities and then issue participatory notes to foreign
investors. Any dividends or capital gains collected from the underlying securities go back to the
Global Depository Receipts (GDRs) These are equity instruments issued in international markets like London, Luxembourg etc. Indian companies use GDRs to raise capital from abroad. GDRs are designated in dollars, euros etc.
American Depository Receipts (ADRs) These are the equity instruments issued to American retail and institutional investors. They are listed in New York, either on Nasdaq or New York Stock Exchange.
Indian Depository Receipts (IDRs) These are similar to ADR/GDR. They are used by non-Indian companies in the Indian stock markets for issuing equity to Indian investors.
INDIA'S FDI POLICY
To encourage FDI inflows, India has continued to be fine-tuned and progressively liberalised, allowing FDI in more and more industries under the automatic route. In the year 2000, government allowed FDI up to 100% on the automatic route for most activities; a small negative list was notified, where either the automatic route was not available or there were limits on FDI. Since then, the policy has been gradually simplified and rationalised and more sectors have been opened up for foreign investment. FDI is prohibited under the government route as well as the automatic route in the following sectors, where FDI is not allowed
1. Atomic Energy
2. Lottery Business
3. Gambling and Betting
4. Business of Chit Fund
5. Nidhi Companies
6. Agricultural (excluding floriculture, horticulture, development 01 seeds, animal husbandry, pisciculture and cultivation of vegetables, mushrooms, etc under controlled conditions and services related to Agro and Allied Sectors) and plantatioi activities (other than tea plantations).
7. Housing and Real Estate business (except development > townships, construction of residential/commercial premises. roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).
8. Trading in Transferable Development Rights (TDRs).
9. Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.
Approval Mechanism Under FDI Policy There are two routes for FDI to enter into India
In most sectors, FDI is permitted on the automatic route. FDI in such sectors does not require any
prior approval and only requires notification of RBI.
Government Approval Route
Limited activities are required to prior government approval. Proposals of FDI are considered by FIPB. (Foreign Investment Promotion Board), now functioning under the Department of Economic Affairs and decisions are conveyed in most cases within 6 to 8 weeks of receipt of complete application
Sector Specific Limits of FDI into India
|Single Brand Retail||100%||Automatic|
|Multi Brand Retail||51%||FIPB|
FOREIGN INSTITUTIONAL INVESTORS [FII]
[FII] that invest in the Indian capital markets. These flows are large in magnitude and have a great impact on capital market and the exchange rate. However, there is also the danger that if FIIs pull out, the stock markets could crash which in turn can adversely impact the economy. This danger is not only on account of the impact of share prices but also because of the impact on exchange rate, which can adversely affect foreign trade and consequently the price level in the country.
DIFFERENCE BETWEEN FDI AND FII
In order to remove the ambiguity that prevails on what is Foreign Direct Investment (FDI) and what is Foreign Institutional Investment (FII) the Finance Minister in his budget speech of 2013 clarified as under-
"I propose to follow the international practice and lay down a broad principle that where an investor has a stake of 10% or less in a company, it will be treated as FII and, where an investor has a stake of more than 10%, it will be treated as FDI. A committee will be constituted to examine the application of the principle and to work out the details expeditiously.
- FIIs will be allowed to participate in the exchange traded currency derivative segment to the extent of their rupee exposure in India.
- FIIs will also be permitted to use there investment in corporate bonds and Government securities as collateral to meet their margin requirements.
QUANTITATIVE EASING & ITS TAPERING
Following the 2008 crisis, the US Fed resorted to bond-buying as a means of boosting the economy. When the Fed buys up bonds, it amounts to releasing more money into the markets that leads to reducing interest rates. This is called "quantitative easing" measure or QE. This made borrowing in the US cheaper and hence incentivized borrowers to invest (in housing or in their businesses). In June 2013, Fed chief signalled that the QE process might be tapered off which would imply that interest rates in the US will climb again. That could lead to investors investing in US and pulling out their investment from emerging markets, including India.
CAPITAL MARKET IN INDIA
A capital market is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year,as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt).
The capital market has 3 components - the equity market, the debt market, and the derivative market. It consists of all those connected with issuing and trading in equity shares and also medium and long term debt instruments, namely, bonds and debentures. It is well accepted that tenures less than one year are considered as short term; while tenures more than one year and up to three years may be taken as medium term while more than three years can be considered as long term. Both equity and debt market have 2 segments - the primary market dealing with new issues of equity and debt instruments and the secondary market which facilitates trading in equity and debt instruments thereby imparting liquidity to the instruments and making it possible for people with different liquidity preferences to participate in the market. The capital market operations are regulated by the Securities and Exchange Board of India
SEBI [SECURITIES AND EXCHANGE BOARD OF INDIA]
ESTABLISHMENT OF SEBI
The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as "…..to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto"
The primary market is that part of the capital market that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers.
The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options and futures are bought and sold.The term "secondary market" is also used to refer to the market for any used goods or assets, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock but a "second" or "third" market has developed for use in ethanol production).
Sensex is an index based on shares traded on the BSE. The Sensex and Nifty are the barometers of the Indian markets. The indices are composite in nature in that they cover a large segment of industries.
Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts.
A bull market is associated with increasing investor confidence, and increased investing in anticipation of future price increases (capital gains). A bullish trend in the stock market often begins before the general economy shows clear signs of recovery.
A bear market is a general decline in the stock market over a period of time. It is a transition from high investor optimism to widespread investor fear and pessimism.
Blue Chip (Stock Market)
According to the New York Stock Exchange, a blue chip is stock in a corporation with a national reputation for quality, reliability and the ability to operate profitably in good times and bad. The most popular index which follows US blue chips is the Dow Jones Industrial Average. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
A rights issue is basically when a company offers existing shareholders a right to purchase additional shares of the company at a given price, which is at a discount to the prevailing market price of the stock, to make the offer enticing for the shareholder and to ensure that the rights offer is fully subscribed to.
Preference shares are those shares which are given preference as regards to payment of dividend and repayment of capital. Preference shareholders are given preference over equity shareholders as in the case of winding up of the company, their capital is paid back first and then the equity shareholders are paid. Preference shareholders cannot exercise their voting rights on all the matters. They can vote only on the matters affecting their own interest.
A debenture is a document which either creates a debt or acknowledges it. Debenture issued by a company is in the form of a certificate acknowledging indebtedness. The debentures are issued under the Company's Common Seal. Debentures are one of a series issued to a number of lenders. The date of repayment is specified in the debentures. Debentures are issued against a charge on the assets of the Company. Debentures holders have no right to vote at the meetings of the companies.
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.
Cross-selling stands for being able to offer to the existing bank customers, some additional banking products, with a view to expand banking business, reduce the per customer cost of operations and provide more satisfaction and value to the customer. For instance, when a bank is in a position to sell to a deposit customer (say saving bank or term deposit), a loan product such as housing loan, credit card, personal loan or vice-versa, this would result into additional business and lead to low per customer cost and higher per customer earning.
Mergers and Acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.
A Joint Venture (JV) is a cooperative enterprises entered into by two or more business entities. Sometimes the joint venture creates a separate corporation, limited liability company, or partnership. In other cases, the individual entities retain their individuality and they operate under a joint venture agreement. In any case, the parties in the JV share in the management, profits, and losses, according to a joint venture agreement (contract).
Amalgamation is a restructuring phenomenon in which two or more companies are liquidated and a new company is formed to acquire business. In simpler terms, it means that a new company is formed that buys the business of minimum two companies.
"Budget System" was introduced in India on 7th April, 1860. James Wilson the first Indian Finance Member delivered the budget speech expounding the Indian financial policy as an integral whole for the first time. The financial year for the Union and the State Governments in India is from April to March. Each financial year is, therefore, spread over two calendar years. The period of financial year as from April to March was introduced in India from 1867. Prior to that, the financial year in India used to commence on 1st May and ended on 30th April (L.K. Jha Committee"s Report of the Committee On Change in Financial Year). Although the Indian Constitution does not mention the term "Budget", it provides that the President shall in respect of every financial year cause to be laid before both the Houses of Parliament, the House of People (Lok Sabha) and the Council of States (Rajya Sabha), a statement of the estimated receipts and expenditure of the Government for that year. This statement known as the "Annual Financial Statement" is the main fiscal or budgetary document of the Government. Budget has been described in Article-112 of the Indian Constitution as Annual Financial Statement. Article-110 describes Money Bill
CONCEPTS OF BUDGET
On the budget day, the finance minister tables 14 documents. Of these, the main and most important document is the Annual Financial Statement.
ANNUAL FINANCIAL STATEMENT:
Article 112 of the constitution requires the government to present to the Parliament a statement of estimated receipts and expenditure in respect of every financial year, April 1 to March 31. This statement is the annual financial statement. The annual financial statement is usually a white 10- page document. It is divided into three parts, Consolidated Fund, Contingency Fund and Public Account. For each of these funds, the government has to present a statement of receipts and expenditure.
This is the most important of all the government funds. All revenues raised by the government, money borrowed and receipts from loans given by the government flow into the consolidated fund of India. All government expenditure is made from this fund, except for exceptional items met from the Contingency Fund or the Public Account. Importantly, no money can be withdrawn from this fund without Parliament‟s approval.
As the name suggests, any urgent or unforeseen expenditure is met from this fund. The Rs 500- crore fund is at the disposal of the President. Any expenditure incurred from this fund requires a subsequent approval from Parliament and the amount withdrawn is returned to the fund from the consolidated fund.
This fund is to account for flows for those transactions where the government is merely acting as a banker, for instance, provident funds, small savings and so on. These funds do not belong to the government. They have to be paid back at some time to their rightful owners. Because of this nature of the fund, expenditures from it are not required to be approved by Parliament.
The excess of disbursements over receipts on revenue account is called revenue deficit. This is an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account; the revenue deficit should be zero. When revenue disbursement exceeds receipts, the government would have to borrow. Such borrowing is considered regressive as it is for consumption and not for creating assets. It results in a greater proportion of revenue receipts going towards interest payment and eventually, a debt trap. The FRBM Act, which we will take up later, requires the government to reduce fiscal deficit to zero by 2008-09. RECEIPTS in the capital account of the consolidated fund are grouped under three broad heads - public debt, recoveries of loans and advances, and miscellaneous receipts.
When the government‟s non-borrowed receipts (revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily disinvestment proceeds) fall short of its entire expenditure, it has to borrow money from the public to meet the shortfall. The excess of total expenditure over total non-borrowed receipts is called the fiscal deficit.
The revenue expenditure includes interest payments on government‟s earlier borrowings. The primary deficit is the fiscal deficit less interest payments. A shrinking primary deficit would indicate progress towards fiscal health. The Budget document also mentions the deficit as a percentage of the GDP.
Annual income of a family is the sum total of income it receives from various sources during a
year. It is on this basis that the economic position of a family is determined. Factors of
production like land, labour and capital are owned by Households and they generate income in
the form of rent, wages, interest and profit respectively. An economy is divided mainly into three
sectors - Agricultural sector, Industrial sector and Service sector. Therefore, when we calculate
the annual income of a nation, naturally we have to take into account the income from various
sectors. These sectors produce innumerable items of goods and services ranging from ball pins to space shuttles during a year. The sum total of these goods and services is the gross
production of the country. When we express the value of these goods and services in terms of
money, we get national income. Gross National Product and Net National Product help us to
understand economic progress.
J.M.Keynes, a famous economist defined national income as follows. "National Income is the money value of all goods and services produced in a country during a year" While family income reflects the economic position of households, national income shows the economic position of a nation. The basic objective of an economy is to achieve economic progress. This is achieved by coordinating natural resources, human resources, capital, technology etc. National income will help to assess and compare the progress achieved by a country over a period of time
GDP = Money value of total goods and services + Income from abroad
Factors of production together produce output and income. The income received by the factors of production during a year can be obtained by adding rent to land, wages to labour, interest to capital and profit to organisations. This will be equal to the income of the nation. In other words, total income is equal to the reward given to various factors of production. By adding the money sent by the Indian citizens from abroad to the income of the various factors of production, we get the gross national income.
GDP = Rent + Wage + Interest +Profit + Income from abroad
This method will help us to know the contributions made by different agents like landlords, labourers, capitalists and organizers to national income.
National income can also be calculated by adding up the expenditure incurred for goods and services. Government as well as private individuals spend money for consumption and production purposes. The sum total of expenditure incurred in a country during a year will be equal to national income.
GDP = Individual Expenditure + Government Expenditure
This method will help us to identify the expenditure incurred by different agents.
Any one of the above methods can be used for calculating national income.
Production method = Income method = Expenditure method
Gross Domestic Product (GDP)
Gross Domestic Product measures the aggregate production of final goods and services taking place within the domestic economy during a year. GDP Value of all services produced within the country + value of all goods produced within the country.
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