Financial Concepts

Bulls Eye Learning Curve
1
www.hitbullseye.com Financial Concepts
Financial Concepts
The banks in India are free to decide interest rates on term deposits and loans. Yet the RBI needs to control
interest rates as it is an important tool to check inflation, one of its prime concerns. So the RBI continues to
referee and provide a direction to interest rates. The Bank Rate is one of the tools used by RBI for this purpose
as it refinances banks at this rate. In other words, the Bank Rate is the rate at which the banks borrow from
the RBI.
What are CRR and SLR?

CRR (Cash Reserve Ratio) is the part of deposits the banks have to maintain with RBI. This serves two
purposes - it ensures that a part of bank deposits is totally risk-free and also, it enables RBI control liquidity,
and thereby, inflation. Besides CRR, banks are required to invest a portion (25%) of their deposits in
government securities as a part of their statutory liquidity ratio (SLR) requirements. The government securities
(called gilt-edged securities/ gilts) are Central government bonds to meet its revenue requirements. Although
long-term, they are liquid as they have a ready secondary market.
What impact does a cut in CRR have on interest rates?

The RBI prescribes a CRR, or the minimum amount of cash that the banks have to maintain with it. It is fixed
as a percentage of total deposits. The deposits earn around 4 %, less than half of the average cost of funds for
banks. At present, the total bank deposits are Rs 6,90,000 crore. Therefore, a one percent cut in CRR means
the banking system will have nearly Rs 7, 000 crore more available for lending. As more money chases the
same number of borrowers, interest rates come down.
Does a change in SLR impact interest rates?

SLR reduction is not so relevant in the present context for two reasons: One, the government has begun
borrowing at market-related rates. Therefore, banks get relatively better interest for their statutory
investments in government securities.
Second, banks are still the main source of funds for the government, which means despite a lower SLR
requirement, banks’ investment in government securities will go up as government borrowing rises.
Consequently, bank investment in gilts continues to be higher than 30 % despite RBI bringing down the
minimum SLR to 25 % a couple of years ago.
Therefore, to determine the interest rates, what matters is not the SLR requirement but the size of the
government borrowing programme. As government borrowing increases, interest rates, too, look up.
What is PLR? What does a cut in PLR mean?

Prime Lending Rate (PLR) is the rate at which banks lend working capital to their best customers. However,
most of them receive funds at a mark-up to the PLR of up to 3.5 % (PLR+). A company not considered a good
risk will, therefore, get working capital loans at 15.5 %per cent even when the PLR is 12 %
However, there are some loans to which PLR do not apply - like some priority sectors, which are at directed
and sub-PLR rates. At the same time, banks can charge higher rates on consumer loans such as car loans
which are governed by their PLR.
Besides working capital loans, banks provide term loans to companies for new projects, for which they
announce a separate medium-term prime lending rate (MTPLR). A cut in PLR means money is available at
cheaper rates, thereby giving a fillip to new projects, encouraging new investments and stimulating demand.
2
What are CENVAT and VAT?

Under CENVAT (the Central Value Added Tax), the Centre levies a tax on the value added at each stage of
manufacture. In a VAT system, the tax paid on all inputs can be deducted from the excise paid on the output;
in effect, therefore, tax is paid only on the value addition that takes place at each stage.
Pioneered in France to eliminate the cascading effect of several levies from the stage of raw material to final
product, it is now levied in more than 40 countries. The advantage of VAT over any other indirect tax is that it
shifts the tax base towards the point of final consumption rather than first point sale thereby ensuring `tax
neutrality' of production decisions. Since each producer up the value chain would like to claim the benefit of
set-off, there is automatic pressure on the producers down the value chain to pay their tax. Moreover, since
tax collection takes place in stages, evasion at any one stage is automatically compensated at a later stage.
What was wrong with the existing system of excise tax?

Under the existing law, the central government is empowered to levy excise duty on goods manufactured in
the country. Over time, the excise system has become very complex. Rate differentiation was taken to absurd
lengths as it became very difficult to establish which item fell into which tax slab and disputes often lingered in
courts for years. Multiple rates and complicated tax regime increase the cost of compliance. Excise tax,
moreover, suffered from the problem of cascading, with tax levied on both inputs and output. MODVAT or
modified VAT scheme was devised as an alternative to do away with the cascading by introducing VAT
provisions like set-off and deduction. Under MODVAT, central excise on most manufactured goods was modified
to incorporate credit for the tax paid on various inputs. But with multiplicity of rates, problems of classification
and of disputes continued. Thereafter, the Tax Reforms Committee recommended a comprehensive VAT to
replace the existing system of Central excise, states sales tax and other indirect taxes. Unfortunately, we have
not been able to go this far.
How is CENVAT better?

CENVAT is a single rate of excise to eliminate complexity by having a single basic rate, i.e. the 16 % CENVAT
and making all inputs (with single basic rate) eligible for a set-off/deduction. Except HSD and petrol, tax paid
on all inputs can be set off. Therefore, CENVAT is a VAT up to the manufacturing stage. Tax paid on capital
goods is also eligible for set off with it being spread over a two-year period. Besides there are three special
excise rates — of 8, 16 and 24 % — which cannot be set-off. While the basic CENVAT rate of 16 % is applicable
to almost all goods subject to excise, special excise is levied only on certain finished goods. As most finished
goods are sold to consumers, the question of a set-off does not arise — here the special excise is akin to a
sales tax.
3
What are Mutual Funds?

A mutual fund is a collective investment vehicle with the specific goal of raising money from a large number of
individuals and investing it according to a specified mandate. The mutual fund signifies a vehicle wherein the
benefits of investment come proportionately to all the investors.
What are the plus points of a Mutual Fund?

It is ideal for today's complex world as the markets for equity shares, bonds and other instruments have
become mature and information-driven. Price changes in these assets are driven by global events occurring far
away and a typical individual will not have the knowledge, skills, inclination and time to track events,
understand implications and act speedily. He also finds it difficult to keep track of registrations, brokerage
account and bank account reconciliation etc. A mutual fund is the answer to all these situations as it appoints
professionals to manage these functions full time.
The money collected by the fund allows it to hire such staff at very low costs. In effect, the mutual fund vehicle
exploits economies of scale and all three areas – research, investing and transaction.
How does this work?

A mutual fund scheme is initiated by a sponsor, which markets the fund. It specifies the investment goals,
risks, costs involved and broad rules for entry and exit and other areas of operation. In India, the sponsors
need approval from SEBI (Securities Exchange Board of India), which looks at the sponsor’s track record and
its financial strengths.
A sponsor then hires an Asset Management Company (AMC) to invest the funds according to the investment
objective. It also hires a custodian and perhaps a third one to handle registry (unitholders’) work. In the Indian
context, the sponsor promotes the AMC also in which it holds a majority stake.
So is the mutual fund registered as a separate company?

The mutual fund scheme itself is a trust administered by a trustee company, which is promoted by the sponsor.
For all practical purposes, the trustee company is a shell vehicle. Typically, the trustees are experienced and
eminent people representing a cross section of the industry and society
The AMC has to hire an outside custodian responsible for the custody of the fund assets. The custodian is also
responsible for the receipt of all kinds of cash and non-cash benefits such as bonus, dividends, rights etc. The
custodian is usually a bank/ financially sound institution. The AMC receives a fee for its services. In addition
SEBI also permits AMCs to charge expenses for the management of the fund upto certain limits.
4
What are NPAs, so much in news?

NPAs (Non-Performing Assets) are the loans given by a bank/ financial institution where the borrower defaults
or delays interest or principal payments. Banks are now required to recognise such loans faster and classify
them as problem assets. Close to 16% of loans made by Indian banks are NPAs - very high compared to say 5
% in banks in advanced countries.
Banks are not allowed to book any income from NPAs. Also, they have to provision for the NPA i.e. keep money
aside in case they can't collect from the borrower.
How are NPAs classified?

In line with RBI, the bank loans are classified as performing and non-performing for income recognition and
provisioning. The criteria for classification are:
Performing / Standard Assets: Loans for which interest and principal are received regularly. It also includes
loans where arrears of interest and /or of principal do not exceed 180 days at the end of a financial year. No
provisioning is required for such loans.
Non-Performing Assets: As per RBI, any loan repayment which is delayed beyond 180 days has to be
identified as an NPA. They are further sub-classified into:
Sub-Standard Assets: Non-performing assets for not more than two years. Also, in cases where the loan
repayment is rescheduled, RBI has asked banks to recognize the loans as sub-standard at least for a year.
Doubtful Assets: Loans which have remained non-performing for a period exceeding two years and which are
not considered as loss assets. A major portion of assets under this category are `sick' companies referred to
the B.I.F.R. and awaiting finalization of rehabilitation packages.
Loss Assets: Are one where the loss has been identified but the amount has not been written off wholly or
partly. In other words, such an asset is considered uncollectible.
How do banks provide for NPAs?

The RBI has provisioning rules for NPAs i.e. banks have to set aside a portion of their funds to safeguard
against any losses due to impaired loans. The banks have to set aside 10 % of sub-standard assets as
provisions. The provisioning for doubtful assets is 20 % and for loss assets it is 100 %.
What is the magnitude of the problem?

As per RBI, gross NPAs are Rs 45,563 crore, about 16 % of the total loans. The net NPAs (gross NPAs minus
provisioning) are Rs 21,232 crore, about 7 % of advances. Though percent wise, the NPAs have come down
lately, in absolute terms they have grown, signifying that while new NPAs are being added, older dues are
being recovered too slowly. Eventually, increasing NPAs imply that the funds locked are not being used
properly or are not producing adequate returns. If a bank has high NPAs, it may be unable to earn enough to
pay depositors' interest or repay their principal.
What is evergreening or rescheduling of loans?

Sometimes, to avoid classifying problem assets as NPAs, banks give another loan to the co. to help it pay the
due interest on the original loan. While this allows the bank to project a healthy image, it actually worsens the
problems and creates more NPAs in the long run.
How to solve the NPA problem? What steps have been taken so far?
Banks need better credit appraisal systems so as to prevent NPAs from happening. However, once NPAs
happen, the problem can be solved only if there is enabling legal structure, since NPA recovery requires court
orders. With judicial delays, debt recovery takes a very long time.
Banks are now working on Debt Recovery Tribunals to solve this problem. An Asset Reconstruction Company,
has also been mooted for rehabilitating revivable NPAs and recovering funds out of unrevivable NPAs (gone
cases).
Experts have also suggested the concept of narrow banking, where only strong and efficient banks will be
allowed to give commercial loans, while the weak banks will take positions in less risky assets such as
government securities and inter-bank lending.
5
What is Venture Capital?
Venture Capital is the capital provided by firms of professionals who invest alongside management in young,
rapidly growing companies have the potential for high growth. Thus a Venture Capitalist (VC) may provide the
seed capital for unproven ideas, products or technology-oriented firms. The VC may also invest in a firm unable
to raise finance through conventional means.
How is it different from other forms of finance?

VCs finance innovative, unproven ideas with high growth potential, making it high risk-high return game.
Besides, VCs provide value-added services and managerial support to realize the venture’s net potential.
What are the types of VCs?

Generally there are three types of organised VC funds: VC funds set up by angel investors i.e. high net worth
individual investors; VC subsidiaries of corporations and private venture capital firms.
VC subsidiaries are established by major companies and financial institutions. The primary institutional source
of VC is a VC firm. VCs take higher risks by investing in an early-stage company with little history, and expect
a higher return for their high-risk investment.
Which areas do venture funds prefer to invest in?

Different VC groups prefer different types of investments. Some specialise in seed capital and early expansion
while others focus on exit financing. Biotechnology, communications, electronic components and software are
attracting great attention from VCs. In India, the software sector has been the darling of VCs.
How hard is it to raise institutional venture capital?

Getting investment from an institutional VC fund is extremely difficult. In the US only 5% business plans are
viable and only 3% result in successful financing. In fact, the odds could be as low as one in 100. More than
half of the proposals to VCs are usually rejected after a 20-30 minute scanning, and 25 % are discarded after a
lengthier review. The remaining 15 % get a detailed review, but at least 10 % of these are dismissed due to
irreconcilable flaws. Another consideration in institutional VC is the amount being sought. Entrepreneurs should
emphasize their managerial capability, market attractiveness and cashout potential.
What type of returns are expected by venture capitalists?

In a start-up, institutional VCs look for average returns of at least 40 - 50 % for start-up funding. Second and
later stage funding usually requires at least a 20- 40 % return compounded per annum. Most firms require
large equity in exchange for start-up financing.
In calculating returns, many VCs end up owning substantial company stock, which sometimes gives them
equity control. The professional investor will look at company value before investment and the investor's
financial contribution when determining how much equity is necessary for the fund to get adequate return on
investment. This issue is often the largest financing hurdle for VCs and owners to work through.
What are incubators?

Incubators are non-profit entities providing advisory and certain support infrastructure including finance and
complementary resources. Incubators are mostly promoted by government or professional organizations
seeking to develop small enterprises in a particular area. Sometimes VCs also have their own incubators and
companies also set up in-house incubators. Incubators support the entrepreneur in the pre-VC stage, i.e.,
when he wants to develop the idea to a viable proposition which could be financed by a VC.
What do venture capital firms look for?

A strong management team — with adequate skills and motivation that creates a balance between members in
marketing, finance, and operations, R& D, general and personnel management. A viable idea — establish and
know the market for the product/ service, why customers will buy it, the ultimate users, the competition, and
the projected industry growth. Business plan: the plan should describe the nature of business, the
qualifications of the management team, performance history and business projections.
6
What is an ESOP?
An Employee Stock Option Plan (ESOP) is an employee benefit plan, which makes the employees stock owners
in that company. Several features make ESOPs comparatively unique. Most companies worldwide are utilizing
this scheme to reward and retain their employees. Currently, this form of compensation most prevalent in IT
companies and other knowledge-based companies where manpower is the principal asset.
How do ESOPs work?

Abroad, ESOP is seen when employees buy over the stock of an owner relinquishing charge. In India, ESOP is
used largely to motivate the employees to put in their best and in turn help the company retain its talent pool.
What else can ESOP be used for?

Interestingly, internationally many companies use ESOPs as a technique of corporate finance for a variety of
purposes -- to finance expansion, make an acquisition, take a company private, and so on. This has yet to
catch on in India perhaps because the scale of ESOP so far is too small for many of these uses.
How does one allocate an ESOP?

Different formulae may be used for allocation. The most common is allocation as per compensation, but
formulae allocating stock in terms of years of service, combination of compensation and years of service have
all been used. Typically employees might join the plan and begin receiving allocations after completing one
year of service with the company.
Let's take Zee Telefilms (ZTL), which considered criteria like length of service, performance and the seniority.
ZTL issued 4.60 lakh ESOPs convertible into equity shares of Rs 10 each, to about 70 employees of ZTL and its
associate companies. Each employee was eligible to apply for between 3,000 shares and 10,000 shares at Rs
212 per share when the share traded at the time was at Rs 4,255 on the BSE. The shares consisted of three
equal parts, issuable to employees with a minimum of two years’ continuous service. One-third of the shares
allotted were freely transferable, another third were locked in for one year from the date of allotment and the
balance was locked in for two years after allotment. Many companies are now flashing ESOPs to attract the
best of talents from big B-school campuses offering ESOPs to graduates at the entry level. This includes
companies like Infosys, Wipro, Microsoft, HCL Technologies and HCL Infosystems.
What is the holding period for an employee under an ESOP?

The maturity for the ESOPs is typically 3-5 years. But some schemes have provisions for a certain percentage
of the stocks maturing from the first year on to allow an employee the facility to offload in case they wish to
move to another company. Of course, a major chunk of the stocks would mature in the final lap.
What is the future of ESOPs in India?

As more and more companies realize the need to retain their best talent in a world which is dominated by
companies with the best intellectual capital, this management technique would be the phenomenon of the new
century.
7
How does the Budget exercise proceed?
The Union Budget is the most eagerly awaited economic document of the government. The finance minister’s
Budget speech is only the beginning of the process of getting the Budget passed. After the speech, the
Parliament formally approves the Budget.
What timetable does the Budget exercise follow?

The rules require the Budget to be presented in Lok Sabha on a day as the President directs. To enable a
discussion on it, a time-table is drawn by the Business Advisory Committee (BAC).
Normally, the Budget is presented in Parliament in the last week of February, on the last working day.
Immediately after the Budget presentation, Parliament allots some time for a general discussion it. This is to
discuss the general thrust, policy issues and proposals made by the finance minister in his speech, to which he
replies at the end of the discussion. The reply is also general and no specifics are discussed. Also, no motion is
moved nor voting required at this stage.
What is demand for grants?

After the reply, the Lok Sabha discusses each ministry’s expenditure proposals, called demand for grants, a
process that takes several weeks and spills over to the next financial year.
What is a vote-on-account?
The demand for grants takes time, and the government cannot wait for Parliament to clear the expenditure
proposals before meeting its expenses from April 1. The Constitution, therefore, empowers the Lok Sabha to
grant a Vote-on-Account so that the government can continue with the necessary expenditure in the new fiscal,
before the Budget proposals actually get passed.
The vote-on-account normally covers the expenditure requirement of the government for two months, during
which the government is expected to continue spending proportionately on its ongoing expenditure items.
What happens if there is any unforeseen expenditure?

if an unforeseen expenditure is to be made immediately, the government can draw advances from the
Contingency Fund after making a statement in the House. Otherwise, as a rule, all new expenditure proposals
will have to be passed part of the new Appropriation Bill.
Let’s get back to the Budget timetable. What happens next?

The demands for grants presented by each ministry are taken up by the House. To examine them more
effectively, the standing committees of respective ministries study the proposals. The standing committees
hold several meetings to enable a closer scrutiny of the demands. Senior secretary-level bureaucrats make
presentations before the committee on behalf of their respective ministries. The reports of the committee are
published later.
What is the guillotine?

Parliament, unfortunately, has very limited time for scrutinising the expenditure demands. In the schedule,
there is a fixed discussion period for each ministry. Often the time allotted taken up by other pressing issues
that dominate the Budget session. So, once the prescribed period for the discussion is over, the Speaker
applies the `guillotine’, and all the outstanding demands for grants, whether discussed or not, are put to vote
at once.
What happens after the guillotine is applied?

The government formally introduces the Appropriation Bill to get authority to draw funds from the Consolidated
Fund of India. Once this Bill is passed, it becomes the Appropriation Act.
After the voting on the Appropriation Bill, the Finance Bill is taken up for consideration. Discussion on the
Finance Bill and the amendments thereto is confined to the tax proposals.
After the passing of this Bill, it enters the statute as the Finance Act. Thus the final Budget gets approved. If
voting on these bills goes against the government, it is treated as a vote of no confidence against the
government. Thus a government can even fall if a money bill gets voted out.
8
How are exchange rates determined?
The exchange rate is the value of one currency in terms of another. For example, if a dollar is worth Rs. 45.60
today, the rupee dollar exchange rate is said to be 45.6 to one.
Today, currencies aren’t weighed against each other and valued according to the amount of gold or silver
contained in them, though done long ago to price different currencies. Now, a subtler method values
currencies. Nations which attract more foreign exchange than they lose, see their currencies appreciate; those
that lose more forex than they earn, see their currencies drop in value. The valuation is done by the
marketplace — through the relentless buying and selling of different currencies.
Today, the volume of foreign exchange worldwide tops $1 trillion a day. Nations that run persistent trade
surpluses or have huge capital inflows by way of foreign direct investment or stock market investment see their
currencies appreciate since these inflows raise the stock of foreign currencies against the local one.
On the other hand, trade deficits and capital flight trigger depreciation. In currency markets, the relative
strengths of economies, policies and expectations determine exchange rates.
Why do fundamentals and policies matter in exchange rate determination?

Fundamentals like employee productivity, transportation costs, input prices like energy, communications costs,
taxation levels, quality of government and the fiscal state determine an economy’s efficiency.
These affect export performance and the ability of a country to absorb imports and investments. These
influence the supply of local vs. overseas currencies, and determine exchange rates.
Policy matters a lot. Greater openness exposes nations to overseas trade and investment flows. This can cut
both ways. Countries with good fundamentals do well; however, open economy policies also expose
fundamental weaknesses rapidly. Perhaps the most important job for policymakers in economies trying to open
up is to align domestic policies to global standards. Countries like India, having rickety economic foundations,
are cautious and retain controls on overseas trade and investment.
Why do expectations matter for exchange rates?

Many countries, including India, follow a policy of dirty floats, where the exchange rate fluctuates but is
controlled by the central bank. It often tries to hold currencies to targets or bands, which fundamentals can’t
support. Given these uncertainties, it is profitable to bet on future values of exchange rates, either for
speculative gains or to insure against sudden movements. It’s better for each player to act earlier than later:
hence forex markets move on expectations, and often fully discount the effects of changes in fundamentals
before they actually happen.
A phenomenon known as Sunspots syndromes — when expectations become self fulfilling and trigger actual
changes — is common in forex markets. Eventually fundamentals, which depend on polices, influence interest
rates, prices and eventually exchange rates. But forex markets move much faster than the government
policies. Often movements are caused by simple rumours about policy changes.
Are exchange rate movements bad for the economy?

No. Movements in exchange rates do two important things. One, they tend to correct trade or capital flow
imbalances which would cause tremendous damage if allowed to persist. For example, a sudden depreciation
makes imports more expensive and tends to bring trade deficits down. On the other hand, an appreciation
caused by capital inflows due to high interest rates will choke back exports and some forex earnings, and
eventually arrest the appreciation.
However, large sea-saws in relatively short time are not desirable. One, they make it tough for people to
reckon what a reasonable rate is.
9
What is poverty line?
Poverty line is a construct essential to measure how poor a country is, which is useful in making policies for
development. Behind statements like "40 % Indians are poor" there is an implicit poverty line.
A common way to define the poverty line is a broad income-based level, say, 60 per cent of a country’s
average income per head.
The average Indian earns about $ 440, or Re 19800 per year. Going by the 60 % of income rule, a poor Indian
has an annual income of Rs 11800 or Rs 990 a month. We draw a poverty line by calculating the `minimum’
cost of living that can sustain people. For very poor countries like ours, this boils down to a nutritional
requirement: the cost of minimum calories needed to keep people alive. This looks like a fairly foolproof
method, but has some built in glitches. For example, calorie needs vary across genders and age. A rough
average is 3,000 calories daily for working men; about 2,900 for working women.
Is a roll call enough to count the poor?

The simplest measure of poverty is the head count ratio: people below the poverty line, divided by the total
population. This is simply the proportion of the poor in total population. The HCR is easy to understand, but
making policy on its basis leads to trouble. That’s because the HCR makes no distinction between people just
below the poverty line, and those poorer by a longer margin.
Consequently, the government can show large poverty declines by spending just enough on the least-poor to
drag them above the poverty line, spending nothing on the poorer folk. Despite that, the HCR is India’s official
method to estimate poverty.
Can we go beyond the roll call?

Certainly. Another index, the Income Gap Ratio (IGR), gives a better idea of how deep poverty is entrenched.
IGR measures how far below the poverty line poor people actually are, divided by the total expenditure by
them. That shows how poor the average poor person is, with respect to all poor people. A government that
goes by this measure to make policy will target the `average poor’ person, not the `least poor’ one, as is the
danger with the HCR.
That’s why the IGR is a more useful measure than a simple roll call. Now, if you took something away from
someone who is acutely poor and gave it to someone less poor, it is obvious that the degree of poverty will
rise. But neither HCR nor IGR can account for this. Neither reflects changes in poverty brought about by
transfers between the poor.
10
What is securitisation?
Securitisation is a process by which the forecast future income of an entity is transformed and sold as debt
instruments such as bonds. This allows the company to get cash upfront, which can be productively used. It is
done by suitably “repackaging” the cash flows or the free cash generated by the firm issuing these bonds.
A finance company with car loans can raise funds by selling these loans to another entity. But this sale can also
be done by “securitising” its car loans portfolio into instruments with a fixed return based on the maturity
profile. If the company has Re. 100 crore worth of car loans and is due to earn 17% income on them, it can
securitise them into instruments with 16% return with safeguards against defaults. These could be sold by the
co. to another if it needs funds before these repayments are due. The principal and interest repayment on the
securitised instruments are met from the securitized assets.
Selling these securities will not only provide the co with cash before maturity, but also the assets (loans) will
go out of the books of the finance co once they are securitised, a good thing as all risk is gone.
What can be securitised?

Any asset that generates funds over time can be securitized, including repayments under car loans, money
credit card dues, airline ticket sales, road toll collections, and sales of petro products. In fact, artists have even
raised funds by securitising the royalty they will get out of future sales of their records.
It works well if the securitised asset is homogenous w.r.t credit risk and maturity. Ideally, there should be
historical data on the portfolio performance and the issuing company on credit quality and repayment speed.
How does it differ from financing through a straight bond or debenture issue?
Unlike a traditional bond issue, the repayment of funds raised through securitisation is not an obligation of the
originator, or the finance company issuing the securitised instrument. In a straight bond or debenture issue, if
the company goes bust, the investors would have a tough time getting their funds back. However, if one
invests in a securitised instrument, investors are assured of interest payments even if the finance company
goes bust, as the securitised loans are separated from the finance company’s books through a special purpose
vehicle which holds these assets. At the same time, as securitised instruments can be traded, the investor has
liquidity as the securitised bond can be sold in the market.
How does it benefit the issuer?

The issuer can raise longer maturity funds than he would be able to do, otherwise. For instance, in case of toll
roads, the costs can normally be recovered only over a very long period. A long-term repayment loan may not
be easily available. Here, securitisation can provide a solution. For instance, conventional loans are generally
backed by the borrower’s existing assets. In many cases, the borrower may be unable to offer the required
collateral. The process helps the borrower raise funds against future cash flows rather than existing assets.
What makes up a securitisation transaction?

The entities involved in the securitisation transaction are the seller , the issuer (special purpose vehicle which
issues the securities), the servicer (which manages the portfolio), the trustee and the credit rating agency.
Other entities involved are credit enhancement providers and the investors.
What kinds of roles are performed by each of these players?

The originator is the party which has a pool of assets, which it can offer for securitisation and is in need of
immediate cash. The Special Purpose Vehicle (SPV) is the entity that will own the assets once they are
securitised. Usually, this is in the form of a trust. It is necessary that the assets should be held by the SPV as
this would ensure that the investors’ interest is secure even if the originator goes bankrupt.
The servicer is an entity that will manage the asset portfolio and ensure that timely payments are made. The
credit enhancer can be any party, which provides a reassurance to the investors that it will pay in the event of
a default. This could take the form of a bank guarantee also.
11
What is credit rating?
A rating is an opinion of the credit rating agency (CRA), on the future ability of the company under question to
make timely payments of principal and interest on the obligation. Expressed as a symbol, it measures the
probability that the issuer will default on the security over the life of the instrument.
What are the different kinds of ratings in India?

Ratings can be of debt instruments whether fixed deposits, bonds, loans, future receivables, mutual funds,
insurance companies and real estate developers etc.
What are the ratings based on?

A rating is based on a quantitative study of the company financials and qualitative factors such as management
quality and integrity, the strength of its brands etc. The CRA attempts to measure the relative ability of the
issuer of the instrument to service the obligations due Industry risk often determines the cap for most ratings.
For instance, most non-banking financial services and agro-plantation cos are unable to get high ratings
because of the high sectoral risk attached to these sectors. Stable businesses with stable or increasing market-
shares usually get favourable long-term ratings and vice versa.
What does a rating not constitute?

A rating is neither a general evaluation of the issuer nor an assessment of the credit risk to be involved in all
the debts contracted by concerned entity. Thus ratings on different instruments for the same co may differ on
the tenure and the in-built protection for that instrument.
The rating is also not a recommendation to buy, hold or sell an instrument. This means that before deciding to
purchase an instrument, you have to ensure the suitability of the investment to your risk profile.
Besides, since ratings change, it is always better to ask for the latest rating outstanding on the instrument,
available on web-sites of CRISIL, CARE and ICRA.
What does the suffix ‘+’ or ‘ - ’ with the rating mean?

The financial flexibility of the co determines the relative strength of the instrument within a rating category
indicated by the suffixes ‘+’ and ‘-’. The ‘+’ suffix denotes a relatively higher standing within the category while
the ‘-’ rating indicates a relatively lower standing. Thus any instrument from the highest to the lowest grade
can have a ‘+’ or a ‘-’ suffix.
What is the procedure for obtaining a rating?

While in the US, where rating began, it is issued both on the request of the co intending to issue the
instrument and the CRA on its own initiative, in India ratings are only undertaken at the issuer’s request. Also,
in the USA all ratings whether accepted or not for use by the issuer are made public, while in India the rating is
first communicated to the issuer and on its acceptance, it is made public.
However, a rating once accepted can be downgraded or upgraded by the CRA with prior notice to the issuer. In
this case the issuer does not have the right to request that the downgrade or upgrade not be made public.
12
What is BPO all about?
BPO (Business Process Outsourcing) is the contractual service to completely manage, deliver and operate one
or more (typically IT-intensive) business processes or functions. This could include processing to contact
centre operations to payroll processing, among others. A simpler way to think of BPO is to compare it to the
functions most organisations include in the general and administrative category. Some key business processes
that are outsourced and form a large part of the BPO market are administration, finance and accounting,
human resource, payment services, manufacturing services, distribution, logistics, sales and marketing,
customer care among others.
What is the potential size of the BPO business?

Gartner Dataquest has forecast the global BPO market to grow to $ 64 billion in 2006, at a CAGR of 21%.
Distribution and logistics comprise the largest portion of the market today at 29 % followed by human
resources at 24 % and payment services at 16 %.
At present, the US comprises 50 % of the global BPO market. Of the various BPO areas, Customer Relationship
Management (CRM) is expected to undergo most rapid growth projected at over 20 p.a. Within CRM BPO, more
specifically, call centre outsourcing is expected to grow at 29 p. a. over the next five years.
Why would a company outsource such jobs rather than do it in-house?

Principally due to pricing and cost. If a business entity could outsource its mundane functions and achieve the
desired result at a significantly lower cost, that would be the primary initiative for BPO. Besides, a potentially
better service level and continuous improvement in processes are key objectives for outsourcing. More than
reducing costs and improving service levels, there exist several other growth drivers. As IT outsourcing has
become more accepted, organizations are more willing to outsource additional work, leaving themselves free to
focus on their core business. The early BPO successes are now attracting the attention of additional companies.
As globalisation moves forward, the pressure to cut costs also increases.
How can India gain from the BPO boom?

India stands at a great advantage owing to several factors like low cost manpower, English speaking people
and India’s advantageous time zone. Large MNCs, especially in US and Europe already understand and in many
cases are utilizing India’s advantage as a cost efficient base for software development and maintenance.
Companies like GE, American Express and British Airways, have successfully demonstrated the benefit of the
model, with total annual savings of a few hundred million dollars between them alone.
What kind of BPO business are Indian companies handling?

In India, BPO essentially implies IT-enabled services, as manufacturing services have still not picked up.
Amongst IT Enabled Services (ITES), contact content development and administration are key areas. Other
ITES areas are legal database outsourcing, HR outsourcing and geographic information system. The market
size of ITES in India currently is Rs. 4, 100 crore. While call centres are known in India, the trend for contact
centers is picking up as voice telephony. Back office processing is expected to pick up in India significantly.
Banks and aviation require large-scale data processing and decision-making capabilities. For instance, large
insurance cos need to process claims they receive regularly. With well laid out rules regarding processing, such
processing can be done anywhere, provided there are a large number of graduates available.
13
What’s procurement price?
In each farm marketing season, the government announces the prices at which it guarantees to procure wheat
and rice, if market prices fall below the announced price. The Commission for Agricultural Cost and Prices
(CACP) makes price recommendations on the basis of the long run average production costs that cover costs
and reward efficient farmers. These prices are meant to prevent distress sales in years of glut, and ensure
affordable prices for consumers. Over time, support prices have become a guaranteed income support rather
than a price risk hedge.
How is the price policy responsible for huge stocks of food grain?
The misuse of the price policy has created a huge food management problem. Procurement prices for wheat
and paddy have been rising every year, creating a distorted incentive for farmers to switch to rice and wheat
cultivation.
Price policy has an impact on the cost of procurement operations and ultimately on distribution costs, both on
the open market and on the PDS. Food Corporations India (FCI) is the central agency responsible for
procurement, transportation and storage operations and rising procurement prices raise economic costs of its
operations.
To cover part of the costs, PDS prices have been raised throughout the nineties, especially after 1997-98. This
turned away most PDS customers, since market prices were below PDS prices. So, while rising prices have led
to a huge supply response form farmers, PDS offtake has fallen. As result, grain stocks have ballooned over the
past few years.
Has anything been done to correct the problem?

Targeted PDS was introduced under which two sets of PDS prices were announced, one each for Above Poverty
Line (APL) and Below Poverty Line (BPL) users. Since their inception, APL prices had to be raised to cover the
rising costs of FCI. As consumers fled the PDS, issue prices had to be lowered to 70 per cent and 48 per cent of
costs to FCI for APL and BPL users, respectively. Another policy that is being tried is decentralized
procurement, whereby states are individually responsible for procurement storage operations. Some states like
West Bengal have been following this practice, but most states complain of inadequate finances and
infrastructure to under take this operation. Among the most vocal opponents, of decentralized procurement
and Punjab and Haryana, who will have to confront farmers lobbies on their own? Food for work programmes
have been implemented which make grain available to states at BPL prices, yet the programme has shown
some results only in Rajasthan.
What are the fiscal implications of higher prices?

Recently issue prices were cut even further to encourage PDS offtake. This will put more pressure on food
subsidy. As the bulk of the Rs. 18,000 core food subsidy bill is actually a producer subsidy; consumers hardly
derive any benefit from the PDS. In addition, FCI pays for procurement with food credit, and higher
procurement prices lead to unwarranted diversion of ingestible funds.
14
What is a cooperative bank?
Banks in India can be broadly classified under two heads - commercial banks and cooperative banks. While
commercial banks (nationalised banks, State Bank group, private sector banks, foreign banks and regional
rural banks) account for overwhelming share of banking business, co-operative banks also play an important
role. Initially set up to supplant money-lenders, today they mostly serve the needs of agriculture and allied
activities, rural-based industries and to a lesser extent, trade and industry in urban centres. Co-operative
banks have a three tier structure –
• primary (agriculture or urban) credit societies,

• district central cooperative banks and at the apex level,
• state co-operative banks.
What are urban co-operative banks? Who regulates them?

Primary (urban) credit societies that meet certain specified criteria can apply to RBI for a banking license to
operate UCBs. Primary UCBs are registered and governed by state governments under the respective co-
operative societies acts. Since they are also covered by the provisions of the Banking Regulation Act, 1949,
they come under RBI control as well. While the managerial aspects of these banks are controlled by the state
governments, matters regarding banking are governed by RBI. Traditionally, the area of operation of primary
UCBs is confined to metropolitan, urban or semi-urban centres to small borrowers including SSIs, retail traders,
small entrepreneurs, professionals and the salaried class. However, there is no formal restriction as such and
today UCBs can conduct business in the entire district in which they are registered, including rural areas. Well
managed primary UCBs with deposits of over Rs 50 crore are also allowed to operate in more than one state
subject to certain norms.
These, as the name suggests, are cooperative banks at the district level and at the state level. Each district will
have not more than one DCCB with a number of DCCBs reporting to the SCB. Earlier these two tiers were also
under RBI supervision. However, following the establishment of the National Bank of Agriculture and
Development (NABARD) in 1982, the supervisory function of these banks has been passed on to NABARD.
What ails co-operative banks?

The biggest problem facing co-operative banks is the they have more than one master - in the case of UCBs,
they have the RBI and the Registrar of Cooperative Societies (RCS) of the respective state and in the case of
the distinct and state cooperative banks, they have NABARD, the RBI and the RCS. Given the close links
between politicians and cooperatives and the fact that the RCS functions under the state government, in
practice this dual or triple control of co-operative banks has led to poor supervision and control. Also most co-
operative banks lack skill/expertise. Recruitments are politicised at most levels. Income recognition and
prudential norms introduced for commercial banks were also not extended to the co-operative sector.
15
What is inflation all about?
Inflation is the rate at which prices rise. Basically prices go up due to two factors: cost push and demand pull.
The former occurs due to an increase in production cost, which gets translated into higher price for that item.
The latter takes place when there is too much money with customers relative to the amount of goods available
in the market. In such a situation we have too much money chasing too few goods and prices rise because
people are willing to pay more for the same item. When the item being chased is in short supply, we have
demand pull inflation.
As against inflation, we have deflation, a situation when prices take a tumble. This is a theoretical concept and
something that rarely occurs in developing countries.
What’s the nature of inflation in India?

In India we have a combination of both cost push and demand pull. For instance, the high growth in onion
prices during the BJP regime was demand pull inflation, when the shortage of onions in the market took the
prices to new heights.
Also, prices go up whenever there is a hike in petro prices. Inflation here is due to cost push factors. This is
because petroleum is a vital input in many items and as an essential fuel for road transport, it adds to the
transportation costs and so prices in general tend to rise.
Why do we feel the pinch of rising prices despite low inflation?

While the inflation figures that are published every week refer to wholesale price index (WPI) representing rate
of increase in wholesale prices, what matters to us as individual buyers is the consumer price. Though prices in
the wholesale market have grown at a slow pace (at about 2-3 per cent), comparatively consumer prices
(measured in terms of consumer price index - CPI) have grown at a much faster pace (about 8-9 per cent).
Hence the pinch.
Why is there such a difference between wholesale prices and consumer

prices?
This is due to several factors. A substantial part of the differential is accounted for by the retailers’ margin,
which is built into the consumer’s price. Besides, the way the two indices are calculated differs both in terms of
weightage assigned to products and the kind of items included in the basket.
Why doesn’t the government publish the trend in consumer prices?

While wholesale prices are almost the same throughout the country, retail prices vary across regions (rural and
urban) and also across cities as per the consumer preferences for certain products, supplies and purchasing
power. Besides, taxes levied by states comprise an important component of the variation in prices of many
products.
Therefore, it is felt that it is important to give a more representative picture true for the entire nation.
Therefore, the government sticks to trends in wholesale prices when it talks of inflation.
16
What is the canalized list?
Several items like urea are canalized — they can be imported only by designated agencies like MMTC and STC,
the government's trading arms. Gold in bulk, for example, can be imported only by specified banks. Earlier,
items like sugar, edible oil, wheat and rice were imported by the government through canalizing agencies.
However, ongoing liberalization has led to many of them becoming freely importable.
What are the current export promotion schemes?

The government has devised many schemes to provide incentives to exporters and encourage them to compete
globally. Essentially, this was done by enabling them to import raw materials free of duty. Advance Licensing,
Export Promotion Capital Goods (EPCG) scheme, SIL and the Duty Exemption Pass Book (DEPB) are among
such incentive schemes. They schemes were attractive when the customs duty levels were high, but they are
losing their sheen in view of the falling import duties.
What is DEPB scheme?

The Duty Exemption Pass Book (DEPB) Scheme is a modified version of the advance license concept. Under
advance licences, exporters ship their goods and obtain a licence to import raw materials necessary for
manufacturing the shipped goods. The volume of imports is controlled through input-output norms that specify
the import entitlement on the basis of the quantum of exports. The DEPB Scheme permits accumulation of
entitlement points each time an export shipment is made. The difference with advanced licensing is that the
exporter can utilize the entitlement to pay customs duty not only on the inputs used but also for other items.
Also the entitlement can be sold.
What is EPCG?
The EPCG scheme allows exporters to import machinery duty free or at concessional duty if the importer
agrees to achieve a fixed export target within a specified time. The scheme was very popular when customs
duty on capital goods was high. Currently under the EPCG scheme, import of capital goods carry 10% customs
duty though duty free imports are also permitted, subject to a minimum import volume. Exemptions are
available for certain sectors like farming and garments even if the minimum threshold is not met.
What is Special Import Licence?

THE special import licence (SIL) is an incentive given to exporters to import goods that are otherwise
restricted, subject to payment of normal customs duties. This licence is freely transferable. The SIL benefit is
provided under two schemes.
First, the scheme of Export & Trading Houses. These are units recognized by the office of the DGFT (Director
General of Foreign Trade) on the basis of their export performance. The second scheme covers exporters who
have directly exported goods worth Rs 5 crore and above during the preceding licensing year or an average of
Rs 2 crore and above during each of the preceding three licensing years.
While Export & Trading Houses are entitled for a SIL ranging between 6 per cent and 12 per cent on FOB (free
on board, or cost of the goods at the point of shipment) basis and 7.5 per cent and 15 per cent on NFE (net
foreign exchange earning) basis, the other exporters are issued SIL at the rate of 4 per cent.
What is a Replenishment License?

The idea of a replenishment licence is to make available inputs, that have gone into goods which have been
exported. Earlier, Replenishment Licences were being given under the Advance Licensing Scheme, a practice
discontinued during the last couple of years with exporters now having to ship the goods out first. Now, only
exporters of gems and jewellery are eligible for grant of replenishment licences to import and replenish their
inputs at a specified rate.
17
What are the important points of the duty exemption scheme?
Under the Duty Exemption Scheme of the Export and Import Policy, there are two important schemes — Duty
Entitlement Pass Book Scheme (DEPB) and Advance Licensing Scheme (ALS). The rationale behind them is to
make available duty-free inputs, including packing materials both imported and locally made to exporters.
The objective of the DEPB is to neutralize the incidence of basic customs duty on the import content of export
products. This neutralization is provided by way of grant of duty credit against the export products at rates
announced by the DGFT from time to time. The DEPB licence is issued on both post and pre-export basis. The
DEPB licence is transferable, and all items except those appearing in the negative list of imports are allowed to
be imported. Credits earned under the DEPB can be utilized for payment of customs duty on any item imported
under SIL.
An Advance Licence is granted to a merchant or a manufacturer exporter for duty-free supply of domestic as
well as imported inputs required for the manufacture of export goods without payment of basic customs duty.
However, such inputs are subject to payment of additional customs duty equal to the excise duty at the time of
import.
Advance licences are issued on the basis of production programmes of regular exporters and also on specific
export order subject to fulfillment of a time-bound export obligation both in terms of quantity as well as value.
The licence is issued on the basis of a minimum value of 33 per cent, which may be reduced up to 25 per cent
in exceptional cases.
What does the EPCG cover?

The EPCG (Export Promotion Capital Goods) scheme is an export-promotion instrument under which capital
goods, new and second-hand, can be imported subject to fulfillment of specified export obligation. Under this
scheme, two windows are available — zero import duty and duty at a concessional 10 % rate. If a computer
system is imported under this scheme, supporting manufacturers and service providers are also eligible to
import capital goods.
What is an Open General License?

Under the Open General Licence (OGL) scheme, import of certain goods is permitted without any licence.
Earlier, EXIM policies necessitated elaborate procedures even for import of items under the OGL. Most items
have now been placed under OGL, and only a limited number of items come under other lists —negative list of
imports, restricted list and canalized list for both import and export.
What are the Other Lists?

The restricted list covers certain consumer goods, precious, semi-precious and other stones, items of safety
and security, seeds, plants and animals, insecticides and pesticides, drugs and pharmaceuticals, chemicals and
allied items and a few other products. These items are allowed to be imported and exported on restricted basis
as specified in the EXIM policy.
The negative list contains items not allowed to be imported or exported. However, some of these are allowed to
be imported and exported through canalizing agencies.
18
What is a Debit card? How does it work?
A Debit Card combines the functions of an ATM card and a cheque. When you pay with your Debit Card, the
shopkeeper swipes your card through an electronic point of sale (EOS) terminal, directly linked with the issuing
bank. When this is done, the cardholder’s account immediately gets debited. So, let’s say you spend Re. 520 at
a shop, your account instantly gets debited accordingly. Debit cards are issued by banks, but are used at
stores.
What are the types of Debit Cards?

One is the personal identification number (PIN) based card and the other, the signature-based card. In India,
MasterCard issues the PIN based card in association with Citibank, while Visa International issues the
signature-based card in association with HDFC Bank. While the PIN-based card is thought to be more secure,
the signature-based card is more widely accepted in India.
How much does the card cost?

A Debit Card is much cheaper to have than a credit card. A number of banks issue the debit card. The debit
card is still in its infancy in the country but more banks are issuing the card and the card usage is increasing.
What is the difference between credit and debit cards? If you have both, when
will you use the credit card and when the debit card?
A credit card offers you credit for a given period, usually about 45 days. With a debit card, there’s no interest
or bill to be settled separately, as your bank account is immediately debited. Also, when you apply for a debit
card, you do not need to go through a credit check.
All you need is a bank account. A debit cardholder cannot spend on his card if he lacks sufficient balance in his
account. Customers tend to use credit cards in high value transactions and debit cards for lower value goods or
services.
Does a debit card holder have to pay if there’s a mistake in his debit card
statement?
Although the chances of errors in a debit card statement are remote, mistakes can still occur. If you find an
error in your statement, notify your bank immediately. Normally, a bank has 10 business days from the date of
your notification to investigate the problem. If the bank needs more time, it can take up to 45 days, but only if
it deposits the amount in dispute into your account. If the bank later determines that there was no error, it can
take the money back, but it must first send you a written explanation.
19
What’s monetary policy?
Monetary and credit policy is the policy statement, traditionally bi-annual, through which the RBI targets a key
set of indicators to ensure price stability in the economy. These factors include:
a) Money supply, commonly referred to as M3 — which indicates the stock of legal currency in the economy
b) Interest rates
c) Inflation
Besides, the RBI gets a platform to announce norms for financial bodies such as banks, financial institutions,
NBFCs, nidhis, primary dealers in the money markets and foreign exchange market dealers. It also gets an an
opportunity to spell out its overview on the economy, and an occasion for it to indicate deposit and advance
targets for banks in the half-year.
How frequently is the monetary policy announced?

Historically, the monetary policy has been announced twice a year — one for the slack season (April-
September) and one for the busy season (October-March). However, with the share of credit to agriculture
coming down, the share of non-food credit in total credit has gone up. Since non-food credit is not seasonal,
the RBI, in 1998-99, experimented with one policy announcement in April followed by a review in October.
Now, the RBI has decided that the policy will be an annual affair.
How does the monetary policy impact me as an individual?

Till recently, the policy included an announcement on interest rates. The interest costs of banks would
immediately either increase or decrease. A reduction in interest rates would prompt banks to lower their
lending and borrowing rates. So if you want to have a deposit with a bank or take a loan, it would offer you a
lower interest rate. On the other hand, if there were to be an increase in interest rates, banks would
immediately increase their lending and borrowing rates.
How does the monetary policy affect the domestic industry and exporters in
particular?
Exporters keenly look forward to the monetary policy since the central bank always makes an announcement
on export refinance, or the rate at which the RBI will lend to banks, which have advanced pre-shipment credit
to exporters. A lowering of these rates would mean lower borrowing costs for the exporter. The most important
issue that the monetary policy has addressed till now has been that of interest rates. And since the interest
rates affect the borrowing costs of corporates and as a result, their bottomlines, the monetary policy is very
important to them.
20
What is the US GAAP?
GAAP or “Generally Accepted Accounting Principles” are the basis for preparation of accounts by US companies.
GAAP is considered to be among the toughest and most conservative accounting standards in the world. As a
result, accounts prepared under US GAAP are considered more trustworthy and transparent than many others.
Recent scandals involving Enron and WorldCom, have however, severely dented confidence on this score.
Who formulates GAAP?

The Financial Accounting Standards Board (FASB) in the US is the organization in the private sector for
establishing standards of financial accounting and reporting. These standards govern the preparation of
financial reports and are officially recognized as authoritative by the Securities and Exchange Commission
(SEC) and the American Institute of Certified Public Accountants. SEC has the statutory authority to establish
financial accounting and reporting standards for public companies. However, throughout history, the
commission’s policy has been to rely on the private sector demonstrating the ability to fulfill the responsibility
in public interest.
It has an open decision making process, which is open to public observation and participation. It receives many
requests for actions on various financial accounting and reporting topics.
What are GAAP’S goals?

Accounting standards are essential to the efficient functioning of the economy because investors, creditors,
auditors and others rely on credible and transparent information. Decisions on resource allocation rely heavily
on accounts. Financial information about the operations and financial information about the operations and
financial position of individual entitles also is used by the public in making various other zecision. FASB
endeavors to
1. improve the usefulness of financial reporting by focusing on primary characteristics of relevance and
reliability
2. keep standards current to reflect changes
3. consider promptly any significant areas of deficiency
4. promote international convergence of accounting standards
Why has it not been able to prevent accounting scams?

No accounting standard by itself can prevent such scams. If accounting and reporting is done under GAAP, the
reader of the financial statements and reports is assured that he is reading credible and transparent
information. But if the firm does not prepare its statements in accordance with GAAP and the auditor
incorrectly certifies it, that is no fault of the standards. This is what happened in the case of Enron and more
recently WorldCom. Enron is accused of hiding material information from the auditors, which could not be
captured in financial statements, making the entire report misleading.
21
What are TRP ratings?
A television programme or a commercial, on a cable system, or direct from a satellite is available for viewing to
millions. How does one know how many of them are actually viewing a particular programme? Unlike a
newspaper or magazine, where the publisher can count how many copies are sold, there is no direct way to
know exactly how many people are watching a programme. Hence, indirect measuring techniques based on the
statistical sampling theory, called Television Audience Measurement (TAM) are used. Technically, TAM is a
special branch of media research, dedicated to quantifying and qualifying detailed TV audience information. In
India, the TAM is commonly referred to as TRP or Television Ratings Points. Generally, when used for the
broadcast medium, one rating point equals 1% of the given population group.
Why do we need them?

With crores spent annually on TV programmes and commercials, reliable TV audience information is required to
evaluate and maximize the effectiveness of this investment. This has led to the increasing desire by
broadcasters, advertisers and agencies to have accurate and and detailed information about TV audiences.
These ratings, if reliable and valid, become the common currency for the market’s commercial airtime. Media
planners and buyers evaluate the alternative programmes offered to best achieve their advertising goals;
broadcasters evaluate programme popularity and how much to charge advertisers for commercials during a
programme/ on a given channel.
How is the viewership measured?

There are many ways to measure the audiences. One is through random telephone calls (if teledensity is
satisfactory). Another is by using TV diaries, booklets in which samples of viewers record their TV viewing
during a measurement week. However, with increasing channels, multiple broadcasting platforms and
increased numbers of TV sets, people meters are used to measure audiences. The people meter, about the size
of a paperback book, is placed on each TV set. The box has buttons and lights are assigned to each person who
lives there (with additional buttons for guests). Each meter is capable of accurately monitoring every second 24
hours a day, 365 days a year, what is being viewed on each TV set, by whom and of storing this data. The data
is then periodically transmitted by means of the family’s telephone line, or a dedicated cellular telephone line to
a central computer for analysis. In actual practice all the three methods are used in combination, to enhance
accuracy. The world’s first people meter was installed in 1976 in 500 homes in Italy by LCM Graman, and
Italina market research company. Today, AC Nielsen, AGB Group and Gallup are the three leading TAM
agencies. Most television markets in the world have a single TAM rating. However, India has two – one called
TAM done by AC Nielsen and other INTAM reported by ORG-MARG.
How reliable are TRP ratings?

TRP ratings could be inaccurate due to sampling errors like inadequate coverage of the TV owning population.
In India, for example, TAM ratings are based on people meters installed in only 16 top cities in 9 states. Also,
the panel households exclude lower middle and top income bracket households, who are keen watchers of
niche English channels. Then, the whole system is based on the list of metered households being confidential
so that their viewing habits are not unduly influenced. However, in the recent TRP scandal in India, the list of
households with people meter was found to be openly available in the market. However, none of these are the
errors that cannot be set right.
22
What is budget?
The core of the budget is called the Annual Financial Statement, the main budget document. Under the
Constitution, a statement of estimated receipts and expenditures of the government of India has to be laid
before the Parliament in respect of every financial year running from April 1 to March 31. This statement shows
the receipts and payments of government under the three parts in which Government accounts are kept:
(1) Consolidated Fund (2) Contingency Fund and (3) Public Account
What is consolidated funds?

All revenues received by the government, loans raised by it, and also its receipts from recoveries of loans
granted by it, form the Consolidated Fund. All expenditure of the government is incurred from the Consolidated
Fund and no amount can be withdrawn from the Fund without authorization from Parliament.
What is contingency fund?

This Fund is placed at the disposal of the President to enable the government to meet urgent, unforeseen
expenditure pending authorization from Parliament. The corpus of the Fund authorization by the Parliament is,
at present, Rs 50 crores.
What is public account?

Besides the normal receipts and expenditure of the government related to the Consolidated Fund, certain other
transactions enter government accounts for of which government acts more as a banker. For example,
transactions relating to provident funds, small saving collections, other deposits, etc. The money thus received
is kept in the Public Account. As the money does not belong to the government and has to be paid back
sometime to the person and authorities who deposited it, no parliamentary approval for the payment from the
Public Account is required.
What is revenue budget?

This consists of the revenue receipts of the government (tax revenues and other revenues) and the
expenditure met from these revenues. Tax revenues comprise proceeds of taxes and other duties levied by the
Union. Other revenues are government receipts, mainly interest and dividend on investments, fees and receipts
for other services rendered by the government. Revenue expenditure is expenditure for the normal running of
the government departments and various services, interest charges on debt incurred by the government,
subsidies and so on. Broadly speaking, expenditure which does not result in the creation of assets is treated as
revenue expenditure. All grants given to state governments and other parties are also treated as revenue
expenditure even though some grants may be for the creation of assets.
What is capital budget?

This consists of capital receipts and payments. It also incorporates transactions in the Public Account. Capital
receipts are loans raised by the government from the public which are called market loans, borrowings by
government from R.B.I. and other parties through sale of Treasury bills, loans received from foreign bodies and
government and recoveries of loans granted by Central government to State and union Territory governments
and parties.
Capital payments consists of capital expenditure on acquisition of assets like land, buildings, machinery,
equipment, as also investment in shares, loans and advances granted by Central government to State and
Union Territory governments, government companies, corporations and other parties.
What are demands for grants?

This is the form in which estimates of expenditure in the Annual Financial Statement are required to be voted
in the Lok Sabha are submitted. Generally, one demand for grant is presented in respect of each ministry or
department. However, for large industries and departments more than one demand is presented.
23
What Is Dabba Trading?
Dabba (empty box) trading refers to illegal or parallel stockmarket deals those that aren’t routed through the
official exchanges.
Is It A New Phenomenon?
No. It is no different from ‘kerb’ deals of the 1990s, which disappeared with the advent of screen-based
trading.
Why Has It Returned?

Regional exchanges have become defunct. Brokers from these exchanges have reinvented ‘kerb’ dealing under
a new name, dabba.
How Does Dabba Trading Work?

In three ways. One, it happens at a broker’s office where two clients transact directly without routing the trade
through the exchange. Two, brokers and investors assemble at a pre-ordained place. In the past, the
stockmarket watchdog, SEBI superseded the board of Ahmedabad Stock Exchange for allowing an unofficial
market to exist within its premises. Three (the most prevalent), the two parties entering into a dabba
transaction through the exchanges (in the ratio 1: 100; that is, if the unofficial deal is for 100 shares, the
official one is for 1 share) to keep track of the price at which the transaction is effected.
What Is The Lure of Dabba?

First, investors can take a forward position (settlement happens on a future date at a price agreed upon on the
day of the trade) without any margin requirements (stock exchanges mandate that anyone taking forward
position has pay a certain amount every day depending on the stock’s volatility). Second, they can take
forward positions on all counters and not just the ones allowed by SEBI.
So, What’s Bad About Dabba?

Problems in the dabba market can spread to the stock exchanges as most dabba brokers operate on the
exchanges. And unlike kerb deal which used to be reported to the exchange the next day, all dabba
transactions are in cash. Since no contract notes are issued, investors can’t claim any protection from
unscrupulous brokers. Three, dabba trading could result in tax evasion.
24
What is Biometrics?
Biometrics – an automated system to verify someone’s identity by looking at physiological or behavioral
characteristics – is becoming very popular. Linking physical characteristics to identity is nothing new; crime
investigators have been dusting for fingerprints for more than a century. Biometrics just sophisticated
technology to this idea in order to identify someone.
How does it work?

We will take the most popular kind of biometric technology - the finger scan - as an example. Employee X
works for an insurance company which has installed biometric technology to control network access. To
register with the system, Employee X submits his fingerprint by placing his finger on a special silicon surface.
The system then creates an enrollment template – a record of Employee X’s fingerprint. Each time Employee X
has to access the network, he places his finger on the same sort of surface, usually built right in to his mouse
or keyboard. The system creates a template of that submission, compares it with the enrollment template. If
the match is acceptable – bingo – Employee X is in. It takes just a few seconds. The finger scan isn’t the only
kind of biometrics, though. Other kinds include iris recognition, voice scan and hand scan.
Why do we need it?

If you’ve ever left your network password on a note stuck to your computer, you well understand the need for
biometrics. Apart from what’s known as “logical” use – using a finger scan or another technology to determine
if a user is allowed to access information – biometrics can also give appropriate people access to a secure
building or area. Biometrics isn’t just for inside company walls, either. Banks are looking at the technology to
replace cards and PINs at ATMs. There’s potential for using biometrics to verify payment in online purchases.
The use of biometrics technology is on the rise and it is receiving more and more acceptance.
25
What’s a Uniform Civil Code?
The term civil code is used to cover the entire body of laws regarding rights regarding property and personal
matters like marriage, divorce, maintenance, adoption and inheritance. Currently, there are different laws
governing these aspects of different communities in India. Thus, the laws governing inheritance or divorce
among Hindus would be different from those pertaining to Muslims or Christians. The demand for a uniform
civil code means unifying all “personal laws” to have one set of laws that will apply to Indian citizens
irrespective of their religious community. Though the exact contours of such a uniform code are not clear, it
should incorporate the most modern and progressive aspects of existing personal laws while discarding the
retrograde.
What does the Indian constitution say on the subject?

Article 44, a ‘‘directive principle” laid down in the Constitution says: “The State shall endeavor to secure for the
citizens a uniform civil code throughout the territory of India.” As Article 37 of the Constitution itself makes
clear, the “directive principles” shall not be enforceable by any court”. Nevertheless, they are “fundamental in
the governance of the country”.
What has the Supreme court said on the subject?

Very recently, while hearing a case pertaining to whether a Christian has the right to bequeath property to a
charity, the court regretted the fact that the state had not yet implemented a uniform civil code. This is not the
first time that the apex court has expressed itself in flavour of a uniform civil code or taken a dim view of the
government’s inability to bring it into being. There have been other occasions - like during the Shah Bano case
and later in the Sarla Mudgal case - where too the apex court came out strongly in favour of the uniform civil
code. However, none of these comments are binding on the legislature and do not amount to orders. At best,
they exert some moral pressure on the Indian state to move towards a uniform civil code.
Would a uniform code affect the personal laws of only one community?
Not at all. The perception that a uniform civil code would necessitate changes in only Muslim personal law is
incorrect. As women’s organizations and others have repeatedly pointed out, personal laws governing different
communities in India have a common feature – they are all gender-biased. For instance, the law pertaining to
succession among Hindus is unequal in the way it treats men and women. A truly modern and progressive code
would, therefore, mean changes in all personal laws. The concept of the “Hindu Undivided Family”, so far as it
pertains to succession, would also obviously have to undergo a change under a uniform civil code. Similarly,
Muslim, Christian and other personal laws too would have to change. This also explains why historically
changes in personal law have been resisted not just by one community, but by the ruling orthodoxy in all of
them.

Financial Concepts

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Financial Concepts

Hochgeladen von

Copyright:

Verfügbare Formate

Bulls Eye Learning Curve

What are CRR and SLR?

What impact does a cut in CRR have on interest rates?

Does a change in SLR impact interest rates?

What is PLR? What does a cut in PLR mean?

What are CENVAT and VAT?

What was wrong with the existing system of excise tax?

How is CENVAT better?

What are Mutual Funds?

What are the plus points of a Mutual Fund?

How does this work?

So is the mutual fund registered as a separate company?

What are NPAs, so much in news?

How are NPAs classified?

How do banks provide for NPAs?

What is the magnitude of the problem?

What is evergreening or rescheduling of loans?

How is it different from other forms of finance?

What are the types of VCs?

Which areas do venture funds prefer to invest in?

How hard is it to raise institutional venture capital?

What type of returns are expected by venture capitalists?

What are incubators?

What do venture capital firms look for?

How do ESOPs work?

What else can ESOP be used for?

How does one allocate an ESOP?

What is the holding period for an employee under an ESOP?

What is the future of ESOPs in India?

What timetable does the Budget exercise follow?

What is demand for grants?

What happens if there is any unforeseen expenditure?

Let’s get back to the Budget timetable. What happens next?

What is the guillotine?

What happens after the guillotine is applied?

Why do fundamentals and policies matter in exchange rate determination?

Why do expectations matter for exchange rates?

Are exchange rate movements bad for the economy?

Is a roll call enough to count the poor?

Can we go beyond the roll call?

What can be securitised?

How does it benefit the issuer?

What makes up a securitisation transaction?

What kinds of roles are performed by each of these players?

What are the different kinds of ratings in India?

What are the ratings based on?

What does a rating not constitute?

What does the suffix ‘+’ or ‘ - ’ with the rating mean?

What is the procedure for obtaining a rating?

What is the potential size of the BPO business?

Why would a company outsource such jobs rather than do it in-house?

How can India gain from the BPO boom?

What kind of BPO business are Indian companies handling?

Has anything been done to correct the problem?

What are the fiscal implications of higher prices?

• primary (agriculture or urban) credit societies,

What are urban co-operative banks? Who regulates them?

What ails co-operative banks?

What’s the nature of inflation in India?

Why do we feel the pinch of rising prices despite low inflation?

Why is there such a difference between wholesale prices and consumer

Why doesn’t the government publish the trend in consumer prices?

What are the current export promotion schemes?