Welcome To Finance With Saurabh.

2018-12-25T13:01:00.000+05:30

Hi everyone.

Hope every one of you is doing great. It has been a long time since I published any article. I did keep a few articles but sadly all of those were lost because my computer crashed.

😞

I will start with a fresh series now, so today I will explain something about LIBOR, its relevance and its eventual phasing.

I will try my best to post new and relevant articles and I invite suggestions from each one of you.

Quantitative Easing

2015-11-23T15:55:00.003+05:30

It is a tool which is used by the central bank of any country uses so that the banks start to lend each other thereby increasing the liquidity in the market. The definition is a very easy to understand but the working is a bit complex.

As we know that banks by their lending activities help the economy grow. Say if the bank lends money to any organization (which needs it for capacity expansion), it would lead to creation of more jobs. More jobs would mean greater consumption and this would lead to increase in the Gross Domestic Product. But if the bank stops its lending, it could be detrimental to the whole economy.

In Quantitative Easing, the central bank buys the securities (of the banks) which could be debt, collateralized loan obligations, bad loans etc. (Toxic assets). Once the central bank buys the assets, the central bank directly pumps money into the bank. The central bank prints the money and gives it to the bank.

The toxic assets go off from the banks financial statements and with the money that they have got from the central bank can be used for various purposes.

Now further to this, the banks invest in government securities (treasury securities) which are risk-less. By Risk-less, it means that there is virtually no chance of a default. The banks invest some of the money with them into these government securities because the return is guaranteed. The central bank goes and buys the government securities because the more demand that the central bank creates for these government securities, the lower the yield. And if the yield goes down, so there would be less incentive for the banks to invest in the government securities. It forces the banks to look for places to invest (lend) the money.

The problem with Quantitative Easing is that if this pumping of money does not work, it would devalue the home currency. On a positive side, the goods of the country become cheaper and the demand for the goods would help the economy grow. But on the other side, if the currency is devalued too much, then the home currency might crash.

Happy reading :)

Greece Debt Crisis

2015-10-11T19:07:00.002+05:30

Hi Guys

I am back with another article of interest - The Greek Debt Crisis. In this article, I will try to explain what exactly happened with Greece, how it got into this crisis situation and how this affect would the global economies.

How it happened?

Throughout the 1990’s, Greece consistently ran into budget deficits. Its currency at that time was the Drachma. It had to join the Euro in 2001 rather than in 1999 like many other nations. Good time prevailed for the country shortly and it enjoyed growth for 7 years (2001- 2007). This growth as many economists have referred was because of the cheaper loans that were being sold.

The sub-prime crisis of 2008 had hit the globe very hard and Greece was also one of them. It was unable to come out of recession because it had been printing more money as the Euro was controlled by the European Central Bank (ECB), the unemployment went to 28%.

In 2010 – the International Monetary Fund, the European Commission and the ECB bailed out Greece with a covenant that Greece would undertake austerity measures and increase taxes. This did not work and the economy did not go up. Another round of bailout package was provided and the total figure was now close to £ 170 Billion.

The current prime minister – Mr Alex Tsipras rose to power because of the rising discontent amongst the Greeks and the stringent covenants put up by the lenders. The current situation is that the unemployment is at 28% and debt is 18% of the GDP.

The talks have been going on a number of issues like - pensions, labour market reforms, the civil service and the budget surplus. Many international corporations have pulled out their money from Greece and a majority of the debt is held by rich EU nations.

Where is the money going?

Much of the loans that went into Greece have been used to pay up its International Loans and not on the Economy. The taxations system is in a mess in which they have 6 bands of taxes and a lot of pension funds (130+ funds).

The other problem is that when Greece did cut some of its spending, the EU and ECB asked for a reduction in wages rather than a cut in spending. So, while the military budget remains intact, soldiers have seen their wages fall by 40 per cent. Their experience is replicated across other public sector fields – notably by healthcare professionals.

Unfortunately, investors have lost confidence in the Greek government's ability to walk this tightrope – so they have been demanding ever higher rates of interest to compensate for the risk that they might not get their money back. The higher its borrowing costs, the harder it is for the Greek economy to grow itself out of trouble.

Events began to spiral out of control when credit rating agencies downgraded Greek government debt to "junk" status, pushing the cost of borrowing so high that the country effectively had its international overdraft facility cancelled overnight.

What many investors fear is that the only way out of this vicious circle is for Greece to walk away from its existing debts and try to go it alone – potentially triggering a wave of similar defaults in other indebted European countries, and jeopardizing the euro itself. In the meantime, what many Greeks fear is that the IMF option is just going to prolong the agony – and drive the country to the brink of political as well as economic collapse.

According to calculations by Reuters, it owes its official lenders €242.8b, with Germany its biggest creditor. The lenders include the IMF (International Monetary Fund), the ECB (European Central Bank) and the Euro zone governments. Many of the loans don't mature for years, even decades.

How will all this affect other countries?

The euro is already tumbling on international markets. If Greece defaults it leaves many of its neighbors short. Germany is owed €57b, France €43b, Italy €38b and Spain €25b – on top of those countries' contributions to the IMF loans. The loans don't mature for almost 30 years, there is almost no interest on them and some of the loans came with a 10-year moratorium on interest payments, so it's not like the countries need the money back immediately. However it's still a lot to have to take off the bottom line.

Confidence in Europe, and the euro, has been profoundly shaken. Eyes will turn to the continent's other weak economies such as Portugal, Spain and Italy. They may start to lose capital and investment.

Chinese Devaluation

2015-09-29T11:53:00.001+05:30

Hello everyone.

On 11th August, 2015, the secondary markets across the globe tumbled because the People's Bank of China (PBOC) depreciated their currency the renminbi by approximately 2%.

Here in this post, we would try to find out about the implications of the same but first we would have a look at the reasons for the same.

China, which is majorly an export driven economy has been under-performing for sometime because falling exports. Devaluation would mean that their goods would be more competitive in the world markets as compared to other goods which could help them in increasing the demand.

Some other reasons are:

1) China wishes to turn their currency into an International Reserve Currency (like the US Dollar) which is a strategic move. Since the Chinese currency was managed by the PBOC within a range, now they are moving free float wherein the market forces determine the exchange rates.

2) China wants to get its currency added into the basket of currencies in IMF's Special Drawing Rights basket which is kind of a synthetic reserve asset. The current composition of the basket is US Dollar, the British Pound, the Euro and the Japanese Yen. It is a matter of prestige if any country's currency is added to this basket.

The criteria for being included in the basket are

a) The country must be a among the leading exporters of the world
b) The currency is freely usable

The Implications for the World are

1) This could be a signal of Recession in the Chinese Economy. The country is trying its best to move to a Consumption driven economy from an export driven one. They are also faced with a property bubble.

2) Availability of Cheaper Commodities

3) The proposed rate rise by US Fed could be delayed.

4) Currency wars by other countries

5) The move puts pressure on other central banks around the world to push down their own currencies to help their own exporters and to prevent destabilizing capital flows. The move could hurt commodities markets because it signals potential weak demand from China. It could also accelerate capital outflows out of China, especially if investors expect further devaluations.

Hope I have covered the major points in this post.
Would appreciate your comments

2015-09-15T18:17:00.000+05:30

Hi all,

I am back after a very long break. I would now try my best to post articles on the blog regularly.

The topic for today is Derivatives

What are Derivatives?

Derivatives are financial contracts that derive their value from the value of the underlying. The underlying could be an Asset, a stock, index, interest rates etc.

Transaction Types

A) Long – The long is the transaction wherein one party agrees to buy the contract.

B) Short- The short is the transaction wherein the other party agrees to sell the contract.

Structure of Derivative Markets

1) Exchange Traded – Salient Features are:

a. The terms of the contract are standardized except for Price

b. They are more liquid (a market is available to buy and sell easily)

c. Transparent

d. There is a clearing and a settlement process

e. The participants have to furnish some deposit (margin)

2) Over the Counter – Salient Features are:

a. It is a market where the terms are customized

b. It has an informal network of market participants

c. It is less liquid

Types of Derivatives – There are many types of derivatives but for simplicity I would discuss only 2 of the important types:

1) Forward Commitments

2) Contingent Claims

Forward Commitments – In this type of contract, the two parties come together at a point in time and mutually agree to engage in a transaction at some later point in time.

Types: Forward Contracts, Swaps and Futures

Contingent Claims – It is also same as a forward commitment, but with an additional feature, the holder has the option of executing the contract.

Types: Options and Credit Backed Securities

Will be back with more stuff. Keep visiting this page.

Bitcoins - New Money

2014-02-03T15:46:00.002+05:30

Hello Friends, after a long hiatus I am back. This time I am posting about Bitcoins. Hope you like it

Bitcoins

Bitcoin is a peer-to-peer payment system and digital currency introduced as open source software in 2009 by Satoshi Nakamoto. It is a cryptocurrency, as it uses cryptography to control the creation and transfer of money. Conventionally "Bitcoin" refers to the technology and network whereas lowercase "bitcoins" refers to the currency itself.
Bitcoins are created by a process called mining, in which participants verify and record payments in exchange for transaction fees and newly minted bitcoins. Users send and receive bitcoins using wallet software on a personal computer, mobile device, or a web application. Bitcoins can be obtained by mining or in exchange for products, services, or other currencies.

Controversy
Bitcoin has been a subject of scrutiny due to ties with illicit activity. In 2013, the US FBI shut down the Silk Road online black market and seized 144,000 bitcoins worth US$28.5 million at the time.The US is considered Bitcoin-friendly compared to other governments. However. in China, new rules restrict bitcoin exchange for local currency,and the European Banking Authority has warned that Bitcoin lacks consumer protections. Bitcoins can be stolen, and chargebacks are impossible.
Commercial use of Bitcoin, illicit or otherwise, is currently small compared to its use by speculators, which has fueled price volatility. Bitcoin as a form of payment for products and services has seen growth, however, and merchants have an incentive to accept the currency because transaction fees are lower than the 2–3% typically imposed by credit card processors.

The basics for a new user
Once you have installed a Bitcoin wallet on your computer or mobile phone, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose your addresses to your friends so that they can pay you or vice versa. In fact, this is pretty similar to how email works, except that Bitcoin addresses should only be used once.

Balances - block chain

The block chain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.

Transactions - private keys

A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing a mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and usually begin to be confirmed by the network in the following 10 minutes, through a process called mining.

Processing - mining

Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the block chain. It enforces a chronological order in the block chain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all following blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively in the block chain. This way, no individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.

Some things you need to know

If you are about to explore Bitcoin, there are a few things you should know. Bitcoin lets you exchange money in a different way than with usual banks. As such, you should take time to inform yourself before using Bitcoin for any serious transaction. Bitcoin should be treated with the same care as your regular wallet, or even more in some cases!

Securing your wallet

Like in real life, your wallet must be secured. Bitcoin makes it possible to transfer value anywhere in a very easy way and it allows you to be in control of your money. Such great features also come with great security concerns. At the same time, Bitcoin can provide very high levels of security if used correctly. Always remember that it is your responsibility to adopt good practices in order to protect your money.

Bitcoin price is volatile

The price of a bitcoin can unpredictably increase or decrease over a short period of time due to its young economy, novel nature, and sometimes illiquid markets. Consequently, keeping your savings with Bitcoin is not recommended at this point. Bitcoin should be seen like a high risk asset, and you should never store money that you cannot afford to lose with Bitcoin. If you receive payments with Bitcoin, many service providers can convert them to your local currency.

Bitcoin payments are irreversible

Any transaction issued with Bitcoin cannot be reversed, they can only be refunded by the person receiving the funds. That means you should take care to do business with people and organizations you know and trust, or who have an established reputation. For their part, businesses need to keep control of the payment requests they are displaying to their customers. Bitcoin can detect typos and usually won't let you send money to an invalid address by mistake. Additional services might exist in the future to provide more choice and protection for the consumer.

Bitcoin is not anonymous

Some effort is required to protect your privacy with Bitcoin. All Bitcoin transactions are stored publicly and permanently on the network, which means anyone can see the balance and transactions of any Bitcoin address. However, the identity of the user behind an address remains unknown until information is revealed during a purchase or in other circumstances. This is one reason why Bitcoin addresses should only be used once. Always remember that it is your responsibility to adopt good practices in order to protect your privacy.

Instant transactions are less secure

A Bitcoin transaction is usually deployed within a few seconds and begins to be confirmed in the following 10 minutes. During that time, a transaction can be considered authentic but still reversible. Dishonest users could try to cheat. If you can't wait for a confirmation, asking for a small transaction fee or using a detection system for unsafe transactions can increase security. For larger amounts like 1000 US$, it makes sense to wait for 6 confirmations or more. Each confirmation exponentially decreases the risk of a reversed transaction.

Bitcoin is still experimental

Bitcoin is an experimental new currency that is in active development. Although it becomes less experimental as usage grows, you should keep in mind that Bitcoin is a new invention that is exploring ideas that have never been attempted before. As such, its future cannot be predicted by anyone.

Don't forget government taxes

Bitcoin is not an official currency. That said, most jurisdictions still require you to pay income, sales, payroll, and capital gains taxes on anything that has value, including bitcoins.

Source - Wiki, Bitcoin Community

Credit Rating

2013-06-15T14:10:00.002+05:30

Hello Everyone. This topic is in the news more often and which is why I thought to publish another article today itself.

Credit
It is a loan, allowing you to receive goods and services now and pay for them later
It is an agreement that the money borrowed will be paid back
It is a debt, it is not income
It comes with fees; interest and other charges

Credit Rating - Credit Rating is an opinion on the relative degree of safety regarding debt obligations being met on time.
It estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower’s overall credit history.

A credit rating is also known as an evaluation of a potential borrower's ability to repay debt, prepared by a credit bureau at the request of the lender Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the subject being able to pay back a loan.

However, in recent years, credit ratings have also been used to adjust insurance premiums, and determine employment eligibility

A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest rates, or the refusal of a loan by the creditor.

It is an opinion, not a recommendation
Assigned by a committee of experts in finance, management & economics, after a detailed and in-depth discussion

Credit Score
A credit score is a numerical expression based on a statistical, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus.
Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt.
Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits.
Its not limited to banks. Other organizations, such as mobile phone companies, insurance companies and government departments employ the same techniques.

Credit Rating Agency
A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations themselves.

In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-profit organizations, or national governments issuing debt-like securities (i.e., bonds) that can be traded on a secondary market.

A credit rating for an issuer takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rate applied to the particular security being issued.

company that issues credit scores for individual credit-worthiness is generally called a credit bureau or consumer credit reporting agency.

The value of such ratings has been widely questioned after the 2008 financial crisis.

Some Agencies
Agencies that assign credit ratings for corporations include:
A. M. Best (U.S.)
Baycorp Advantage (Australia)
Dominion Bond Rating Service (Canada)
China Credit Information Service (China)
Fitch Ratings (U.S.)
Japan Credit Rating Agency (Japan)
Moody's Investors Service (U.S.)
Standard & Poor's (U.S.)
Rating Agency Malaysia (Malaysia)
Egan-Jones Rating Company (U.S.)

Uses of ratingsCredit ratings are used by investors, issuers, investment banks, broker-dealers, and governments.
For investors, credit rating agencies increase the range of investment alternatives and easy-to-use measurements of relative credit risk; thus g increasing the efficiency of the market, lowering costs for both borrowers and lenders and in turn increases the total supply of risk capital in the economy, leading to stronger growth.

Credit Rating Types:
1) Personal Credit Ratings
2) Corporate Credit Ratings
3) Sovereign Credit Ratings

Personal Credit Rating
An individual's credit score, along with his or her credit report, affects his or her ability to borrow money through financial institutions such as banks.
The factors which may influence a person's credit rating are:-
-ability to pay a loan
-interest
-amount of credit used
-saving patterns
-spending patterns
-debt

In different parts of the world different personal credit rating systems exist.
In the United States, an individual's credit history is compiled and maintained by companies called credit bureaus. Credit worthiness is usually determined through a statistical analysis of the available credit data.

A common form of this analysis is a 3-digit credit score provided by independent financial service companies such as the FICO credit score.

The term FICO is a registered trademark, comes from Fair Isaac Corporation, which pioneered the credit rating concept in the late 1950s.

In Canada, the most common ratings are the North American Standard Account Ratings, also known as the "R" ratings, which have a range between R0 and R9.

R0 refers to a new account; R1 refers to on-time payments; R9 refers to bad debt. Very few people maintain the R0 status for long, as there are similar mechanisms in place in Canada that would allow for monthly updates of one's credit rating.

Corporate Credit Rating
The credit rating of a corporation is a financial indicator to potential investors of debt securities such as bonds.
These are assigned by credit rating agencies such as A.M.Best, Standar & Poor’s, Moody’s or Fitch Ratings and have letter designations such as AAA, B, CC.
The Standard & Poor's rating scale is as follows, from excellent to poor: AAA, AA, A, BBB, BB, B, CCC, CC, C, D.

Anything lower than a BBB rating is considered a speculative or junk bond.
The Moody's rating system is similar in concept but the naming is a little different. It is as follows, from excellent to poor: AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C.
A.M. Best rates from excellent to poor in the following manner: A++, A+, A, A-, B++, B+, B, B-, C++, C+, C, C-, D, E, F, and S.

Criticism:
Until the early 1970s, bond credit ratings agencies were paid for their work by investors who wanted impartial information on the credit worthiness of securities issuers and their particular offerings.
Starting in the early 1970s, the "Big Three" ratings agencies (S&P, Moody's, and Fitch) began to receive payment for their work by the securities issuers for whom they issue those ratings, which has led to charges that these ratings agencies can no longer always be impartial when issuing ratings for those securities issuers.
Securities issuers have been accused of "shopping" for the best ratings from these three ratings agencies, in order to attract investors, until at least one of the agencies delivers favorable ratings.
This arrangement has been cited as one of the primary causes of the subprime crisis (which began in 2007), when some securities, particularly mortgage backed securities (MBSs) and collateralized debt obligations (CDOs) rated highly by the credit ratings agencies, and thus heavily invested in by many organizations and individuals, were rapidly and vastly devalued due to defaults, and fear of defaults, on some of the individual components of those securities, such as home loans and credit card accounts.

Sovereign Credit Rating
A sovereign credit rating is the credit rating of a sovereign entity, i.e. a country.
The sovereign credit rating indicates the risk level of the investing environment of a country and is used by investors looking to invest abroad.
It takes political risk into account.
Ratings are further broken down into components including political risk, economic risk.
Results focus foremost on economics, specifically sovereign default risk and/or payment default risk for exporters (a.k.a. "trade credit" risk).
Euro-money's bi-annual country risk index Country risk survey monitors the political and economic stability of 185 sovereign countries.

Credit Rating Agencies in India
Credit Rating Information Services of India Limited (CRISIL)
Investment Information and Credit Rating Agency of India (ICRA)
Credit Analysis & Research Limited (CARE)
Duff & Phelps Credit Rating India Private Ltd. (DCR India)
ONICRA Credit Rating Agency of India Ltd.

Credit Rating information Services of India ltd. (CRISIL)
First and the largest credit rating agency in India
4th Largest Rating Agency in the World
Affiliation with Standard & Poor’s (USA)
The first to rate a state government in India – Gujarat
The first municipal bond rating in Asia – Ahmedabad
Credit assessment of all the major state governments and more than 100 urban local bodies in the country. This also includes:
-5 municipal corporations
-2 Water and Sewerage Service providers

India's transformation into a market-led economy greatly increased its need for capital, and required extensive reforms and institution building. Accordingly, we diversified into the infrastructure advisory and business research domains.

CRISIL offers domestic and international customers a unique combination of local insights and global perspectives, delivering independent information, opinions and solutions that help them make better informed business and investment decisions, improve the efficiency of markets and market participants, and help shape infrastructure policy and projects. Its integrated range of capabilities includes credit ratings; research on India's economy ,industries and companies, risk management and infrastructure advisory services more .

CRISIL's majority shareholder is Standard & Poor's, the world's foremost provider of independent credit ratings, indices, risk evaluation.

Rating Process
Multi-member rating teams
Multi-tier rating process
All rating decisions taken by a rating committee comprising experienced, competent and reputed professionals
Organisation-wide internal transparency, with each stage of the rating process for all ratings - including the rating committee's discussions - being open to all analytical staff in CRISIL's rating division
Rating methodologies and criteria that are clearly spelt out and published, and are consistently applied

CRISIL keeps information obtained for the rating exercise confidential, by enforcing appropriate process safeguards; for instance, all CRISIL employees are required to sign a confidentiality agreement. CRISIL does not disclose confidential information that it has obtained for the purpose of credit rating to anyone (other than to market regulators or law enforcement authorities, if required).

Credit Analysis & Research Ltd. (CARE)
Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company that offers a wide range of rating and grading services across sectors. CARE has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices.

CARE Ratings has completed over 5307 rating assignments having aggregate value of about Rs.14801 billion (as at December 2008), since its inception in April 1993.

CARE is recognised by Securities and Exchange Board of India (Sebi), Government of India (GoI) and Reserve Bank of India (RBI) etc

Methodology

CARE undertakes rating exercise based on:-
information provided by the company
In-house database and data from other sources that CARE considers reliable. CARE does not undertake unsolicited ratings.
The primary focus of the rating exercise is to assess future cash generation capability and their adequacy to meet debt obligations in adverse conditions.
The analytical framework of CARE's rating methodology is divided into two interdependent segments. The first deals with the operational characteristics and the second with the financial characteristics.
Rating determination is a matter of experienced and holistic judgement, based on the relevant quantitative and qualitative factors affecting the credit quality of the issuer.

The rating process takes about three to four weeks, depending on the complexity of the assignment and the flow of information from the client. Rating decisions are made by the Rating Committee.

Regulation

Who regulates a rating agency?
The capital market regulator regulates rating agencies in most regions. In India, the capital markets regulator, the Securities and Exchange Board of India (SEBI), regulates the rating agencies in the country.

Who pays for a credit rating?
Most credit rating agencies across the world use a revenue model where the issuer pays for the credit rating.
Once a rating is assigned and published, CRISIL keeps the rating under surveillance until the instrument is fully repaid. The surveillance process may result in rating changes from time to time.

Inflation Calculation

2013-06-15T13:29:00.001+05:30

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services.Consequently, inflation is the destruction of the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.
Fixed constant real value non-monetary items never maintained are treated like monetary items under historical cost accounting. Consequently their real values are destroyed at a rate equal to the rate of inflation because inflation destroys the real value of money which is the monetary unit of account.
A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.

Inflation can have positive and negative effects on an economy.
Negative effects of inflation include loss in stability in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include a mitigation of economic recessions, and debt relief by reducing the real level of debt.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Today, most mainstream economists favor a low steady rate of inflation.Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy.The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

There are two ways in which we can measure Inflation Rate-
1)CPI
2)WPI

CPI is Consumer Price Index.Many countries like the U.S.,U.K.,France etc follow this.It is available on a monthly basis.
WPI is Wholesale Price Index. India Follows this as it is available on a weekly basis.

Calculation is Easy
I= ∑ (Ii x Wi) / ∑ Wi
Where,

I = Index numbers of wholesale prices of a sub- group/group/ major group/ all commodities
Ii = Index of the ith item / sub- group/ group/ major group.
Wi = Weight assigned to the ith item of sub- group/group/ major group.

Current Account and Capital Account

2013-06-15T13:27:00.002+05:30

Hello everyone.

I am posting this article after a very long break.

Hope this will enrich you.

The topic for today is

Current Account and Capital Account. This is in continuation of my earlier post on Balance of Payments

Current Account - It is defined as the sum of net revenue on exports minus payments for imports, factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers.

It shows us the picture of the nature of foreign trade.

A surplus increases a country's net foreign assets by the corresponding amount, and a current account deficit does the reverse.

As exports generate positive net sales, and the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports.

If an economy is running current account deficit, it is absorbing (absorption = domestic consumption + investment + government spending) more than that it is producing. This can only happen if some other economies are lending their savings to it (in the form of debt to or direct/ portfolio investment in the economy) or the economy is running down its foreign assets such as official foreign currency reserve.

On the other hand, if an economy is running a current account surplus it is absorbing less than that it is producing. This means it is saving. As the economy is open, this saving is being invested abroad and thus foreign assets are being created.

Capital Account - It reflects net change in national ownership of assets.

It is calculated as:
Capital Account - FDI + portfolio investment + other investment + reserve account

Foreign direct investment (FDI), refers to long term capital investment such as the purchase or construction of machinery, buildings or even whole manufacturing plants. If foreigners are investing in a country, that is an inbound flow and counts as a surplus item on the capital account. If a nation's citizens are investing in foreign countries, that's an outbound flow that will count as a deficit. After the initial investment, any yearly profits not re-invested will flow in the opposite direction, but will be recorded in the current account rather than as capital.

Portfolio investment refers to the purchase of shares and bonds. It's sometimes grouped together with "other" as short term investment. As with FDI, the income derived from these assets is recorded in the current account; the capital account entry will just be for any international buying or selling of the portfolio assets.

Other investment includes capital flows into bank accounts or provided as loans. Large short term flows between accounts in different nations are commonly seen when the market is able to take advantage of fluctuations in interest rates and / or the exchange rate between currencies. Sometimes this category can include the reserve account.

Reserve account is operated by a nation's central bank to buy and sell foreign currencies; it can be a source of large capital flows to counteract those originating from the market. Inbound capital flows (from sales of the account's foreign currency), especially when combined with a current account surplus, can cause a rise in value (appreciation) of a nation's currency, while outbound flows can cause a fall in value (depreciation). If a government (or, if authorized to operate independently in this area, the central bank itself) doesn't consider the market-driven change to its currency value to be in the nation's best interests, it can intervene.

A surplus in the capital account means money is flowing into the country, but unlike a surplus in the current account, the inbound flows will effectively be borrowings or sales of assets rather than earnings. A deficit in the capital account means money is flowing out the country, but it also suggests the nation is increasing its claims on foreign assets.

I will be posting more such informative articles. If you wish information on specific topics, then do let me know ( in the comments section )

Issue Mechanism of Shares

2012-03-03T12:49:00.000+05:30

Sorry for the delay in post.. was busy in something else... Well this article is in succession to the previous one (below this post)

New issue can be made in any of the following ways:
1) Public Issue through Prospectus
2) Through offer for sale
3) Private placement
4) Right Issue
5) Issue of bonus shares
6) IPOs through secondary market
7) Book-building
8) Stock option

1. Public Issue Through Prospectus: company issue a prospectus which is an invitation for subscription by the investing public. It is a direct offer by the company to the public.Normally the shares of new company are issued at par and shares of existing company can be issued at premium. prospectus contains all the details of the company and its promoters, prospects and risk associated.
Key Features - simple way of issuing shares.
- wide distribution of share is possible.
- floatation costs, administrative costs, publicity costs and
legal costs are high.
2. Offer for Sale: The company does not offer shares directly to the public, but through intermediaries, such as, issuing houses or stock broker firms. Sale of securities done in two stages. In the first stage, the issuing company makes an en bloc sale of securities to the issue house at an agreed fixed price. The second stage involves re-issue of securities by issue houses to the ultimate investor at higher price. The difference between the sale and purchase price of issue house is called as turn. All the costs related with the issue like underwriting, advertisement etc. have to meet by issuing houses, out of the turn.
Major benefit of the method is issuing company is free of hassles involved in issuing shares.
3. Private Placement: Under this method, the securities are acquired by the issuing company at an agreed price and then these are placed only with their investor-clients, both individual and institutional investors, at a higher price and hence earning turn. In this case no underwriting is required. The advantage of this method is no advertisement costs or no underwriting fee is to be paid.
Advantages SEs requirement regarding prospectus is also less stringent.
On the other hand, the major limitation of this method is – fear of issue getting concentrated in few hands. This method is more common for Government Owned Institutions.
4. Right Issue: A fresh issue of shares by an existing company to its existing shareholders in proportion to the number of shares already held by them is called as right issue. Only a company whose shares are already listed can make right issue. It is offered on pro-rata basis.
Major advantage of this method is – it is economical and do not disturb the existing shareholding pattern. Limitations are – only existing company can issue it, shares may get concentrated in few hands and there may be conflict between the rights of existing shareholders and overall societal considerations of diffusion of share ownership for promoting dispersal of wealth and economic power.
5. Bonus Shares: It does not result in raising fresh capital. It is merely a conversion of existing reserves and surpluses into share capital. It represents just a book entry subject to certain rules and regulation. Total resource base of the company does not change nor it results into entry of new shareholders
6. IPOs through Secondary Market: In October 1999, SEBI accepted the proposal for marketing IPOs through the secondary market, i.e. using existing infrastructure. Here the brokers place orders on behalf of clients through a special window on trading terminal. After finalisation of allocation, brokers are advised to inform the allottees. Successful allottees submit the application form and the amount payable through the broker to the clearing house. Subsequently the share certificates would be delivered to the investors by crediting the depositories account in the name of investor.
The major advantage of the method is investors need not to park their funds until allotment.
7. Book Building: Most commonly used method now-a-days. In this case the issuer company does not directly issue shares to the public but invites bids from public. Therefore this method is also called as “Price Discovery Through book Building Process”. In this method the bids are collected from investors at various prices which are above or equal to the floor price. The offer price is determined after the bid closing date. In this case the issuer company advertise about the issue in the national newspaper. The advertisement will have the information about floor price, price band and cap price. Floor price is the minimum price of the issue and cap price is the maximum price, and the spread between these two prices are called as price band. Here the cap price must not be more than 120 percent of the floor price. The book shall remain open minimum for three days. The price band can be revised also and in that case the bidding process can be extended to three more days subject to total bidding period not exceeding ten days. The actual discovered issue price can be any price between the price band.
The issue price is called as “Cut-Off Price”, which is decided by issuer and lead managers looking at the demand of issue in the market. As per SEBI guidelines, the basis of allotment should be completed within 15 days from the issue close date. As soon as the basis of allotment is completed, within 2 working days the details of credit to demat account /allotment advice and dispatch of refund order needs to be completed.
So an investor should know in about 15 days time from the closure of issue, whether shares are allotted to him or not. It should take around three weeks, after the closure of book, to get listed the shares on SEs. The role of Registrar to an Issue is to finalize the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent.
The Lead Manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed. Specially for book building process the lead managers are also called as “Book Running Lead Managers (BRLMs)”.
According to the disclosure guidelines of SEBI, the issuer company have to give all details about the issue like - the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc. This information is in the form of ‘Prospectus’ which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. The prospectus is called as “Red Herring Prospectus (RHP)”, which also contains lot of mandatory information regarding underwriting and statutory compliances. This helps investors to evaluate short term and long term prospects of the company. the RHP also contains about the information regarding listing of shares on the SEs. The regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers.
If shares are issued first time in the market then it is called as “Initial Public Offer (IPO)”, otherwise for an existing company whose shares are already listed with SE, the further issue is called as “Follow-on Public Offer (FPO)”.
Eligibility Norms: Any company issuing security through the offer document has to satisfy the following conditions:
A company making a public issue of securities has to file a draft prospectus with SEBI, through eligible merchant banker, at least 21 days prior to the filing of prospectus with Registrar of the Companies (RoCs). Filing of application is mandatory for listed company even in case of right issue, if the issue amount is more than Rs 50 lakhs (including premium).
Moreover listing of securities to the SEs is mandatory.
Prior agreement with depositories regarding dematerialisation of share certificates is also important.
A company can not make public issue if it has been prohibited by SEBI.
An unlisted company can also make a public issue at a fixed price or by book building method provided –
(i) it has pre-issue net worth of not less than Rs1 crore in 3 out of the preceding 5 years and has minimum net worth in immediately preceding two years.
(ii) it has a track record of distributable profits for at least 3 out of immediately preceding 5 years
(iii) the issue size should not exceed five times its pre-issue net worth. If the company, listed or unlisted, does not meet the above criteria then the issue have to be compulsorily made through book building route and in such case, 60% of the issue size will have to be allotted to Qualified Institutional Buyers (QIBs)
Failing which the full subscription monies shall be refunded. Infrastructure companies are exempt from the eligibility norms if their project has been appraised by PFIs or Infrastructure Development Finance Corporation. Banks and right issues of listed companies are also exempt from the eligibility norms. The companies eligible to make public issues can freely price their securities subject to disclosure norms of SEBI. Contribution of Promoters and Lock-In: The promoters’ contribution in case of public issue of unlisted companies should not be less than 20% of the post-issue capital. In case of public issues of listed companies, promoter should contribute to the extent of 20% of the proposed issue or should ensure post-issue holding to the extent of 20 % of the post-issue capital.
The requirement of promoters’ contribution is not required in case of –
(i) public issue of securities which has been listed in the SE for at least 3 years and has track record of dividend payment for at least 3 immediate preceding years.
(ii) companies where no identifiable promoter or promoter group exists.
(iii) right issues.
Listing of Securities: Listing means admission of securities of an issuer to trading privileges (dealings) on a stock exchange through a formal agreement. The prime objective of admission to dealings on the exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective control and supervision of trading.
Listing Agreement: The listing agreement specifies the terms and conditions of listing and the disclosures that shall be made by a company on a continuous basis to the exchange.
Delisting of Securities: The term ‘Delisting of securities’ means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.

Well this wraps up the whole subject of share markets. Enjoy!!

Do come again for more information.

Capital Markets

2012-01-31T20:47:00.001+05:30

Money Market deals with claims, assets and securities which have a maturity period of upto one year
on the other hand
Capital Market deals in long term securities with maturity period more than one years.
It is broadly divided into two segments –
1)Primary (or New Issue) Market
2)Secondary Market.

Primary/New Issue Market and Secondary/Stock Market
Primary market deals in new securities, i.e., fresh issue by the company to the ultimate investors, while, secondary markets deals in existing securities which have already been issued and are already outstanding.

Major differences between primary and secondary markets are

Now,
Relationship Between Primary and Secondary Market

Securities first pass through primary market and thereafter enter the secondary market.
In the issuing prospectus (CALLED AS The Red Herring Prospectus) the issuing company made it clear that the scrip will be listed in the stock exchange.
Stock exchange exercise significant control over NIM also.

SEs (Stock Exchanges) provide liquidity to the securities which have passed through NIM, thus help in expanding NIM.

A period of rising activity in SEs is accompanied with higher activities in NIM resulting in large number of successful issues and vice versa.

SEs will not exist in absence of NIM and NIM will remain narrow and inefficient in the absence of SEs.
Therefore these two complement each other.

Functions of NIM

Three functions (also called as triple-service function) –
Origination
Underwriting and
Distribution

We will see them one by one

1. Origination: Refers to the work of investigation, analysis and review, rendering relevant consultative services, authenticating and processing of new issue proposals.
Broadly these services can be categorized into two:

- Preliminary investigation into technical, economic, financial, legal and environmental aspects of the present and /or proposed activities of the issuing company regarding quality of issue, intent of the company, market prospects and listing on SEs.

- Sponsoring institutions also provide different types of services like security mix to be issued, issue price of the security, size and timing of the issue, methods of floatation and so on.

2. Underwriting: Although sound origination is essential but it do not guarantee the issue will be successful.
Unsuccessful issue not only hurt the future plans of the company but also money invested for origination services will get wasted.
Therefore to ensure success of the issue the company/promoters get the issue underwritten.

Underwriter guarantees that he would buy the portion of the issue not subscribed by the public.
But to avail the service, minimum 90 percent of the issue have to be subscribed.
The service is rendered for a commission.

3. Distribution: Sale of securities to ultimate investors is called as distribution.
It is a specialized activity rendered by brokers, sub-brokers and dealers because they maintain close and continuous touch with the capital market and maintain regular and direct contact with the present and prospective ultimate investors.

Next Post will be a continuation of this on Issue Mechanism.

Till then keep visiting...

Outsourcing

2011-07-16T01:30:00.000+05:30

Hi everyone posting this new and fresh article on Outsourcing.

What is Outsourcing?

Outsourcing - A company purchases a product or process from an outside supplier rather than producing it in house.
Outsourcing is subcontracting a service, such as product design or manufacturing, to a third-party company.
Outsourcing became part of the business lexicon during the 1980s.

Note - Subcontracting - A company contracts an outside supplier to produce a product or process to the company specifications.The manufacturing process is controlled and owned by the company
In clear text...

Outsourcing = Subcontracting

Generally outsourcing can be defined as - An organization entering into a contract with another organization to operate and manage one or more of its business processes.

The decision whether to outsource or to do inhouse is often based upon achieving a lower production cost, making better use of available resources, focusing energy on the core competencies of a particular business, or just making more efficient use of labor, capital, information technology or land resources. It is essentially a division of labor.

Reasons for Outsourcing
1. Cost savings
2. Focus on Core Business
3. Improve quality
4. Knowledge
5. Contract
6. Operational expertise
7. Access to talent
8. Capacity management
9. Catalyst for change
10.Enhance capacity for innovation
11.Reduce time to market
12.Risk management
13.Tax Benefit

Outsourcing to India…Beyond Information Technology

Clinical Trials
Medical Transcription
Legal Services
Laboratory Services
Contract Research
Lab outsourcing
Conducting quality control
Testing or other analytical services associated for an industrial site, such as a chemical plant, refinery, consumer product, corporate research & technical center, medical, food processor or other business.

Why India
India is the most preferred outsourcing destination

Cheap Labour
Skilled Workers
Workers are paid peanuts
India has gained confidence of global corporations by exporting high quality brainpower.
More than 80% U.S. companies chose India as their most favored destination for outsourcing. It is now an IT superpower.

Outsourcing to India
ITES : Information Technology Enabled Services
Software development, Data entry, Programming,
Web development services

BPO : Business Process Outsourcing
Medical Transcription, Call Centers

KPO : Knowledge Process Outsourcing
Financial Analysis

LPO : Legal Process Outsourcing
Legal Services

India tops global outsourcing nations list
-Liau Yun Qing, ZDNet Asia Thursday, October 22, 2009
India continues to top the list of outsourcing nations, with six Indian cities in the top 8 outsourcing destinations, according to a global study.

BPO
BPO – Business Process Outsourcing
Business Process Outsourcing (BPO) is the delegation of one or more IT-intensive business processes to an external provider that in turn owns, administers and manages the selected process based on defined and measurable performance criteria.
Business Process Outsourcing (BPO) is one of the fastest growing segments of the Information Technology Enabled Services (ITES) industry.

Business process outsourcing in India
The business process outsourcing industry in India refers to the services outsourcing industry in India, catering mainly to Western operations of Multinational Corporations (MNCs).

As of 2008, around 0.7 million people work in outsourcing sector (less than 0.1% of Indians). Annual revenues are around $11 billion, around 1% of GDP. Around 2.5 million people graduate in India every year. Wages are rising by 10-15 percent as a result of skill shortage.

Note : As of 20 May 2008 all Indian on-shore workers in the UK and EU are now entitled to the full wage and benefits packages enjoyed by their European counterparts.

Different Types of Services Being Offered By BPOs
Customer Support Services
Technical Support Services
Telemarketing Services
Employee IT Help-desk Services
Insurance Processing

There is always a ‘first mover’ advantage.
Countries like Vietnam, Philippines, Malaysia, China and Central and Eastern European countries offer IT-BPO services at competitive rates; and it is probable that India may lose its low cost advantage.
Such countries are progressively promoting IT-BPO business by offering various incentives and tax benefits.
So developing the Knowledge Process Outsourcing (KPO) becomes imperative.

KPO
Knowledge Process Outsourcing (KPO) is the outsourcing of high-end business functions in an organization. These functions include both core and non-core activities.
India is expected to corner a lion’s share of the overall KPO market. By 2010, India is expected to account for almost 70 percent of global market.

Examples of KPO functions are

intellectual property or patent research
R&D in pharmaceuticals and biotechnology
data mining, database creation
high-end customer/technical support
and a range of analytical services such as equity research, competitive intelligence, industry reports and financial modeling.

LPO

Legal Process Outsourcing (LPO) is one of the value added BPO services which involves legal work that companies outsource to more economical offshore destinations.
Legal outsourcing consists of various processes which can be classified into low skilled quantitative tasks or high end qualitative tasks.

How big is the sector globally?
In the past three years, the legal outsourcing industry here has grown about 60% annually.

According to a report by research firm ValueNotes, the industry will employ about 24,000 people and earn revenue of $640 million by 2010.
Currently many tasks like legal research, pre-litigation documentation, document analysis, preparing software licensing agreements are outsourced to India.

The India Advantage
Law firms across the globe can greatly benefit from offshoring legal services to India.

In India, Professionals are providing patent related services with a resulting fee as little as $2000 as against $8000-$12000 charged by US firms.

The Indian legal system is similar to the legal systems of the UK, US, Canada, and parts of Europe.

Stance of Obama on Outsourcing

Old tax system- "a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, N.Y.,“.

The newly proposed tax laws, which still must be approved by Congress, would affect IT entities that operate operations abroad by disallowing deductions for various offshore business expenses, including payroll

"By denying the payroll deduction, the hope is that it will be more costly to operate offshore and it will give incentives to create jobs in the U.S.,”

So what can happen?

Some of his policies are framed to specifically struck out at the epicenter of Indian outsourcing.
However, the most significant motivation to transfer work abroad is the large difference among salaries in the U.S. and many other countries.
After all, IBM didn’t hire nearly 75,000 employees in India to save tax dollars – it hired them because they cost as little as 1/5th or 1/6th of their American counterparts and often produce the same quality work.

Though US defended its revised tax policies by saying:
“The jobs aren’t coming back to the U.S. as a result of this proposal, The tax proposal is about revenues and that’s it.”
''Bangalored,'' a term that has galloped into dictionaries to describe loss of jobs due to offshoring.

Contribution to India’s GDP

Export IT and Outsourcing account for less than 7% of India’s GDP and USA accounts for 60% of that.

In 2009, seven Indian firms were listedamong the top 15 technology outsourcing companies in the world.
In March 2009, annual revenues from outsourcing operations in India amounted to US$60 billion and this is expected to increase to US$225 billion by 2020.

Impact of Recession

Conventional wisdom says that companies tend to outsource more as growth contracts. While that's often the case at the end of a recession, experts say the opposite may be true early on, as companies scramble to respond to rapid changes in economic conditions.

Outsourcing's Boom Quickly Fades
First the global credit crisis escalated in September. Then the November Mumbai terror attacks made U.S. companies briefly worry about India's long-term security as an outsourcing destination.

Less than two months later, a financial scandal rocked Satyam (SAY), India's fourth-largest outsourcing provider, leaving the future of that company uncertain and raising questions about whether there is enough regulatory oversight of India-based outsourcing providers.

IN A NUTSHELL
BPO sector is a significant contributor of Indian IT industry.

What China has given the world in manufacturing,India has given in service industry.

Balance Of Payments

2011-04-13T20:59:00.000+05:30

Today’s topic of interest is Balance of Payments or BoP..
It must be a new term for many people but I am sure after reading this small article, you’ll definately be aware of the term.
The BoP of a country is a systematic record of all its economic transactions with the outside world in a given year.
It shows the country’s trading position, changes in its net position as foreign lender or borrower, and changes in its official reserve holdings. It is constructed on the principle of the double entry book-keeping. BoP accounting differs from business accounting in one respect.
In business accounting debits (-) are shown on the left side and credits (+) on the right side of balance sheet, while here it is just revered, credit on left side and debit on the right side of the BoP.
When a payment is received from foreign country, it is credit transaction and shown on left side, while in case of payment it is debit transaction and shown on right side.

Export, receipts of payments and investment in the country is a credit transactions while import, payments and investments outside is a credit transactions.
The BoP is divided into three sections: the current account, the capital account, and the official settlement account or the official reserve assets account.
It is shown in the figure below-

The difference between exports and imports is called as balance of trade. If visible exports exceeds the visible imports, the balance of trade is said to be favorable, otherwise unfavorable.
Transfer payments are considered as invisible items. Saying BoP as favorable or unfavorable is same as the case of balance of trade.
In capital accounts, there are two types of transactions – private and government. Private transactions include all types of investments: direct, portfolio, or short term. Government
investments consist of loans to and from foreign official agencies. The official settlement account shows the country’s net official reserve assets.
Errors and omissions is a balancing item so that the total credit and debit side must equal in accordance with the principle of double entry accounting system. Thus balance of payments of a country always balances in accounting sense.
Now the question is If the balance of payments always balances,then why does a deficit or surplus arises?
It is only when all items of BoP are included then there is no deficit or surplus but is some items are excluded then only there will be deficit or surplus.

Causes of Disequilibrium:
- Temporary Disequilibrium
- Chronic or Fundamental Disequilibrium
- Technological Changes
- National Income
- Inflation
- Economic Development
- Borrowings and Lending
The Adjustment Mechanism:
-Adjustment through Exchange Depreciation
-Devaluation
-Direct Controls
-Adjustments through Capital Movements
-Stimulation of Exports

That's it for today's article. Stay Tuned for more articles.

Why Currencies Keep Fluctuating?

2011-04-06T21:06:00.001+05:30

This article is in the view of the Indian Economy

The rupee movement against major world currencies is in the limelight again since the last few weeks. The rupee appreciated sharply against the US dollar this month, by almost four percent, from Rs 48 per dollar to Rs 46 per dollar, in a span of four weeks.

One of the main reasons for the appreciation of the rupee against the dollar, and other major currencies, is the funds coming in from large global players. Foreign investors have invested around 13 billion dollars this year.

These funds coming in since the middle of September have triggered an appreciation in the rupee against major world currencies. Here are some of the major reasons behind large foreign players pumping funds into the markets:

Liquidity

There is surplus liquidity in most of the large economies of the world. One of the main reasons for this liquidity is the large economic stimulus packages given by governments and the liberal monetary policy adopted by central banks.

In the recent G-20 nations' meet, it was decided to continue the liberal monetary measures. This has increased the money flow from large financial players into emerging markets which have better potential for growth in the medium term.

Some expect the Reserve Bank of India (RBI) to hike policy rates in this quarter to control inflation. This is another reason why funds are flowing into the domestic markets. The softer interest rate regimes in developed countries are attracting foreign funds to the domestic debt market.

Another reason for currency fluctuations is speculation. Some large funds and major traders are pumping money into emerging markets to make arbitration profits due to currency fluctuations.

Impact of currency fluctuations

As more businesses are expanding their operations around the globe there is a widespread impact of sharp currency fluctuations.

In simple terms, it shrinks the receivables of exporters and makes life easier for importers as the prices of imports get cheaper.

A sharp fluctuation in the currency hits the small and mid-cap companies harder than their larger peers, as the larger players can manage the situation through actively managing (hedging) the currency and working with the scale.

The rupee appreciation would also have an impact on investors in international commodities funds (for example, gold exchange traded funds).

Although gold prices are rising in international markets in terms of dollar, it translates to lower gains due to rupee appreciation against the dollar.

RBI action

Theoretically, currency movements should be driven by the economic fundamentals and progress of the economy. But modern communication systems and globalisation have made active management of large funds easy which in turn has increased the shortterm currency volatility.

This short-term currency volatility (upward or downward) is not good for business and hence the central banks in many countries allow controlled/managed currency movements by actively intervening from time to time. Here, the RBI smoothens the short-term currency fluctuations by buying/selling dollars in the market.

Outlook

Analysts expect capital inflows to continue and even increase in the short to medium terms due to the huge increase in global liquidity conditions. There are large financial institutions and funds that are accessing offshore markets for debt and equity. Analysts believe there is a huge amount of money waiting to come into the domestic markets. This will ensure a steady stream of dollars and hence keep the rupee moving in an upward direction.

Hawala

2009-12-01T12:28:00.000+05:30

Suppose Abdul (in India) wants to send 20 Lakh Rs. to his brother Mohammed in U.S.
The Normal preocedure for Abdul is to go to a Bank. Deposit the money and then tell Mohammmed to collect the money from the bank. The Bank will charge a Service Tax of say 10%.

Now in Hawala what happens is that
Yasmeen and Ghulam both are Hawala Traders in India (say Mumbai) and U.S.(say Los Angeles). Abdul goes to Yasmeen,tells her that he has to send money to his brother in US, Yasmeen takes the Money from Abdul and gives him a code.

Then Abdul calls up Mohammed and tells him the code plus the address of the Hawala Trader Ghulam. Mohammed goes to the address and after telling the code gets his money.
Normally Hawala traders charge a Service charge less than the Banks.
So people go for it.

Now how does Ghulam get back his money????

Either
1) Ghulam had to give 20 Lakh Rs to Yasmeen. So his debt is cleared
Or
2) Ghulam gets his money via Reverse Hawala Trading.
In this money is transferred from bank to bank and institution to institution, so the source is not actually known.

Is Hawala legal…?
Hawala is illegal in India and Pakistan.

India and Pakistan have laws that :

Prohibit speculation in the local currency,
Prohibit foreign exchange transactions at anything other than the official rate of exchange, and
Impose strict licensing requirements on money remitters and foreign exchange dealers.

In addition, there are regulations governing inbound and outbound remittances.

What are some indicators of Hawala?
A ‘Hawala' bank account almost always shows significant deposit activity.
These accounts will also almost always show outgoing transfers (usually by wire) to a major financial center known to be involved in Hawala. Three of the most common locations are Great Britain, Switzerland and Dubai.

Certain businesses are also more likely than others to be involved in Hawala :
Import/Export,
Travel and Related Services,
Jewelry (gold, precious stones),
Foreign Exchange,
Rugs/Carpets, and
Used Cars or Car Rentals.

Money Laundering

2009-12-01T12:20:00.000+05:30

These days we get to hear about Money Laundering. So lets see what exactly what it is.

Let us see some of the Important Terms:-

Fraud :
A false representation of a matter of fact - whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed - that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

Scam :
A scheme designed with an intent to defraud a group of individuals or an enterprise(s) or a government(s) or a mix thereof, for getting some personal benefit - financial or fame, which requires violation of some law or flouting of certain established controls and involves a team work.

White Collar Offence :
An offence which does not result in any physical injury but results in a financial loss.

Money Laundering
Money laundering is the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.

It is a crime in many jurisdictions with varying definitions.

It is a key operation of the underground economy.

Various Definitions:
Money laundering is the practice of disguising illegally obtained funds so that they seem legal.

The conversion or transfer of property derived from a criminal offense for the purpose of concealing, or disguising, the illicit origin of the funds.

Finance Definition : Making money that is generated through criminal activities appear as if it was earned through legitimate business activities.

The act of engaging in transactions designed to obscure the origin of money that has been obtained illegally.
In the past, the term money laundering was applied only to financial transactions related to organised crime.

Today, its definition is often expanded by government and international regulators to mean any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting.

Courts involve money laundering committed by private individuals, drug dealers, businesses, corrupt officials, members of criminal organizations and even states.

Do You Know
$1 trillion is currently being laundered worldwide.

It has been estimated that between 5% to 10% of global GDP comprises of criminal proceeds.

In the UK alone, £20 billion is generated annually by organised crime.

More money is stolen from the African continent every year than is donated in aid.

Techniques in Money Laundering

Placement
Getting Currency into the financial system so as to convert illicit funds from cash straight into a financial instrument or bank account.

Layering
The movement of funds from institution to institution to hide the source and ownership of the funds, obscure the audit trail and sever the link with the original crime.

Integration
The reinvestment of those funds in an ostensibly legitimate business so that no suspicion of its origins remains and to give the appearance of legitimizing the proceeds.

Emerging Money Laundering Trends
1.use of companies for money laundering,
2.use of real estate for money laundering,
3.trade based money laundering, and
4.New Payment Methods (NPM’s).

Use of Companies for Money Laundering

Companies have always been a valuable way to “layer” the criminal funds, to further obscure their origin.

They are used in two ways:

companies specifically formed for that purpose; and

existing companies “hijacked” for money laundering purposes.

Use of Real Estate for Money Laundering\
The money laundering method of choice for criminals.

High value of investment.

Single transaction in; single transaction out.

Historically, an appreciating asset while held.

Trade Based Money Laundering

At its simplest, falsifying the value of a transaction, usually by means of inflated/ deflated invoices.

Low-tech.

Highly effective.

Very commonly seen.

New Payment Methods (NPM’s)

Sometimes called “e-money” or “digital cash”.

Examples include: internet payment services, pre-paid calling cards, credit cards, digital precious metals, electronic purses, mobile payments (“m-payments”), etc.

M - Payments
Worldwide, there are fewer than 1 billion bank accounts.
Worldwide, there are in excess of 3 billion mobile phones.
In Africa, only 20% of the population has a bank account.
M-payments facilitate wider access to financial services.
Workers can be paid by phone.
They can then pay bills, transfer money, receive credits, open accounts and check balances on the mobile phone itself.
No requirement for a bank or ATM, the phone is a “virtual” ATM.

Globalization

2009-12-01T12:16:00.000+05:30

I have seen many people are curious to know more about Globalization In India. So i decided to psot some more facts about Globalization.

The human society,over a period of time, has established greater contact, but the pace has increased rapidly since the mid 1980’s.The term globalization means international integration. It includes an array of social, political and economic changes. Unimaginable progress in modes of communications, transportation and computer technology have given the process a new lease of life.

The world is more interdependent now than ever before.
Multinational companies manufacture products across many countries and sell to consumers across the globe. Money, technology and raw materials have broken the International barriers. Not only products and finances, but also ideas and cultures have breached the national boundaries.

Laws, economies and social movements have become international in nature and not only the Globalization of the Economy but also the Globalization of Politics, Culture and Law is the order of the day. The formation of General Agreement on Tariffs and Trade (GATT), International Monetary Fund and the concept of free trade has boosted globalization.

Globalization in India
In early 1990s the Indian economy had witnessed dramatic policy changes. The idea behind the new economic model known as Liberalization, Privatization and Globalization in India (LPG), was to make the Indian economy one of the fastest growing economies in the world. An array of reforms was initiated with regard to industrial, trade and social sector to make the economy more competitive. The economic changes initiated have had a dramatic effect on the overall growth of the economy. It also heralded the integration of the Indian economy into the global economy. The Indian economy was in major crisis in 1991 when foreign currency reserves went down to $1 billion and inflation was as high as 17%. Fiscal deficit was also high and NRI's were not interested in investing in India. Then the following measures were taken to liberalize and globalize the economy.

Steps Taken to Globalize Indian Economy

Some of the steps taken to liberalize and globalize our economy were:

1. Devaluation: To solve the balance of payment problem Indian currency were devaluated by 18 to 19%.

2. Disinvestment: To make the LPG model smooth many of the public sectors were sold to the private sector.

3. Allowing Foreign Direct Investment (FDI): FDI was allowed in a wide range of sectors such as Insurance (26%), defense industries (26%) etc.

4. NRI Scheme: The facilities which were available to foreign investors were also given to NRI's.

The Merits of Globalization are as follows:
There is an International market for companies and for consumers there is a wider range of products to choose from.
Increase in flow of investments from developed countries to developing countries, which can be used for economic reconstruction.
Greater and faster flow of information between countries and greater cultural interaction has helped to overcome cultural barriers.
Technological development has resulted in reverse brain drain in developing countries.

The Demerits of Globalization are as follows:
The outsourcing of jobs to developing countries has resulted in loss of jobs in developed countries.
There is a greater threat of spread of communicable diseases.
There is an underlying threat of multinational corporations with immense power ruling the globe.
For smaller developing nations at the receiving end, it could indirectly lead to a subtle form of colonization.

Summary
India gained highly from the LPG model as its GDP increased to 9.7% in 2007-2008. In respect of market capitalization, India ranks fourth in the world. But even after globalization, condition of agriculture has not improved. The share of agriculture in the GDP is only 17%. The number of landless families has increased and farmers are still committing suicide. But seeing the positive effects of globalization, it can be said that very soon India will overcome these hurdles too and march strongly on its path of development.

Banking Solutions

2009-11-04T11:19:00.000+05:30

What is Bank rate?
Bank Rate is the rate at which central bank of the country (in India it is RBI) allows finance to commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Prime Lending Rate. This any revision in the Bank rate indicates could mean more or less interest on your deposits and also an increase or decrease in your EMI.

What is Bank Rate ? (For Non Bankers)
This is the rate at which central bank (RBI) lends money to other banks or financial institutions. If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Thus, it can said that in case bank rate is hiked, in all likelihood banks will hikes their own lending rates to ensure and they continue to make a profit.

What is CRR?
The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and has come into force with its gazette notification. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate. [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between 3 per cent and 20 per cent of total of their demand and time liabilities].

RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation. Thus we can say that this serves dual purposes i.e. it not only ensures that a portion of bank deposits is totally risk-free, but also enables RBI to control liquidity in the system, and thereby, inflation by tying the hands of the banks in lending money.

What is CRR? (For Non Bankers)
CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks don’t hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivalent to holding cash with themselves.. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio.

Thus, When a bank’s deposits increase by Rs 100, and if the cash reserve ratio is 9%, the banks will have to hold additional Rs 9 with RBI and Bank will be able to use only Rs 91 for investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investment. This power of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.

What is SLR?
Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR).
Present SLR is 24%. (reduced w.e.f. 8/11/2008, from earlier 25%) RBI is empowered to increase this ratio up to 40%. An increase in SLR also restrict the bank’s leverage position to pump more money into the economy.

What is SLR ? (For Non Bankers)
SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved to liabilities (deposits) It regulates the credit growth in India.

What are Repo rate and Reverse Repo rate?

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI

Debt

2009-11-01T20:02:00.000+05:30

Debt is that which is owed; usually referencing assets owed, but the term can also cover moral obligations and other interactions not requiring money. In the case of assets, debt is a means of using future purchasing power in the present before a summation has been earned. Some companies and corporations use debt as a part of their overall corporate finance strategy.

A debt is created when a creditor agrees to lend a sum of assets to a debtor. In modern society, debt is usually granted with expected repayment; in many cases, plus interest. Historically, debt was responsible for the creation of indentured servants.

Payment

Before a debt can be made, both the debtor and the creditor must agree on the manner in which the debt will be repaid, known as the standard of deferred payment. This payment is usually denominated as a sum of money in units of currency, but can sometimes be denominated in terms of goods. Payment can be made in increments over a period of time, or all at once at the end of the loan agreement.

A company uses various kinds of debt to finance its operations. The various types of debt can generally be categorized into: 1) secured and unsecured debt, 2) private and public debt, 3) syndicated and bilateral debt, and 4) other types of debt that display one or more of the characteristics noted above.

A debt obligation is considered secured if creditors have recourse to the assets of the company on a proprietary basis or otherwise ahead of general claims against the company. Unsecured debt comprises financial obligations, where creditors do not have recourse to the assets of the borrower to satisfy their claims.

Private debt comprises bank-loan type obligations, whether senior or mezzanine. Public debt is a general definition covering all financial instruments that are freely tradeable on a public exchange or over the counter, with few if any restrictions.

Loan syndication is a risk management tool that allows the lead banks underwriting the debt to reduce their risk and free up lending capacity.

A basic loan is the simplest form of debt. It consists of an agreement to lend a principal sum for a fixed period of time, to be repaid by a certain date. In commercial loans interest, calculated as a percentage of the principal sum per year, will also have to be paid by that date.

In some loans, the amount actually loaned to the debtor is less than the principal sum to be repaid; the additional principal has the same economic effect as a higher interest rate.

A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan, usually many millions of dollars. In such a case, a syndicate of banks can each agree to put forward a portion of the principal sum.

A bond is a debt security issued by certain institutions such as companies and governments. A bond entitles the holder to repayment of the principal sum, plus interest. Bonds are issued to investors in a marketplace when an institution wishes to borrow money. Bonds have a fixed lifetime, usually a number of years; with long-term bonds, lasting over 30 years, being less common. At the end of the bond's life the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments (known as coupons) during the life of the bond. Bonds may be traded in the bond markets, and are widely used as relatively safe investments in comparison to equity.

Fund Base

Cash Credit

This is the primary method in which Banks lend money against the security of commodities and debt. It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called "limit", "credit facility" in excess of the amount deposited in the account. Cash Credits are, in theory, payable on demand. These are, therefore, counter part of demand deposits of the Bank.

Working capital:

Firms need cash to pay for all their day-to-day activities. They have to pay wages, pay for raw materials, pay bills and so on. The money available to them to do this is known as the firm's working capital. The main sources of working capital are the current assets as these are the short-term assets that the firm can use to generate cash. However, the firm also has current liabilities and so these have to be taken account of when working out how much working capital a firm has at its disposal.

Working capital is therefore:-

WORKING CAPITAL = Current Assets || stock + debtors + cash - Current liabilities

Thus working capital is the same as net current assets, and is an important part of the top half of the firm's balance sheet. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital. Working Capital Cycle

Bank Overdraft:

The word overdraft means the act of overdrawing from a Bank account. In other words, the account holder withdraws more money from a Bank Account than has been deposited in it. An overdraft occurs when withdrawals from a bank account exceed the available balance which gives the account a negative balance - a person can be said to be "overdrawn".

If there is a prior agreement with the account provider for an overdraft protection plan, and the amount overdrawn is within this authorised overdraft, then interest is normally charged at the agreed rate. If the balance exceeds the agreed terms, then fees may be charged and higher interest rate might apply

Term loan:

Term Loan are the counter parts of Fixed Deposits in the Bank. Banks lend money in this mode when the repayment is sought to be made in fixed, pre-determined installments. This type of loan is normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the borrower over a long period (exceeding at least one year). Purchases of plant and machinery, constructing building for factory, setting up new projects fall in this category. Financing for purchase of automobiles, consumer durables, real estate and creation of infra structure also falls in this category.

Bill discounting:

Bill discounting is a major activity with some of the smaller Banks. Under this type of lending, Bank takes the bill drawn by borrower on his(borrower's) customer and pay him or her immediately deducting some amount as discount/commission. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collect the total amount. If the bill is delayed, the borrower or his customer pay the Bank a pre-determined interest depending upon the terms of transaction.

Project Financing:

Project finance is the financing of long-term infrastructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the project, rather than the balance sheets of project sponsors. Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks that provide loans to the operation.

Non Fund Base

Letter of Credit:

The LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to giros and Traveler's cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and a document proving the shipment was insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin.

Effects of debt

Debt allows people and organizations to do things that they would otherwise not be able, or allowed, to do. Commonly, people in industrialised nations use it to purchase houses, cars and many other things too expensive to buy with cash on hand. Companies also use debt in many ways to leverage the investment made in their assets, "leveraging" the return on their equity. This leverage, the proportion of debt to equity, is considered important in determining the riskiness of an investment; the more debt per equity, the riskier. For both companies and individuals, this increased risk can lead to poor results, as the cost of servicing the debt can grow beyond the ability to pay due to either external events (income loss) or internal difficulties (poor management of resources).

Excesses in debt accumulation have been blamed for exacerbating economic problems. For example, prior to the beginning of the Great Depression debt/GDP ratio was very high. Economic agents were heavily indebted. This excess of debt, equivalent to excessive expectations on future returns, accompanied asset bubbles on the stock markets. When expectations corrected, deflation and a credit crunch followed. Deflation effectively made debt more expensive and, as Fisher explained, this reinforced deflation again, because, in order to reduce their debt level, economic agents reduced their consumption and investment. The reduction in demand reduced business activity and caused further unemployment. In a more direct sense, more bankruptcies also occurred due both to increased debt cost caused by deflation and the reduced demand.

It is possible for some organizations to enter into alternative types of borrowing and repayment arrangements which will not result in bankruptcy. For example, companies can sometimes convert debt that they owe into equity in themselves. In this case, the creditor hopes to regain something equivalent to the debt and interest in the form of dividends and capital gains of the borrower. The "repayments" are therefore proportional to what the borrower earns and so can not in themselves cause bankruptcy. Once debt is converted in this way, it is no longer known as debt.

What is EQUITY?

2009-11-01T19:57:00.000+05:30

Equity, in finance and accounting, is the residual claim or interest of the most junior class of investors in an asset, after all liabilities are paid. If valuations placed on assets do not exceed liabilities, negative equity exists.

At the start of a business, owners put some funding into the business to finance assets. Businesses can be considered to be, for accounting purposes, sums of liabilities and assets; this is the accounting equation. After liabilities have been accounted for, the positive remainder is deemed the owner's interest in the business.

This definition is helpful put into receivership or bankruptcy.
Then, a series of creditors, ranked in priority sequence, have the first claim on the proceeds (e.g. asset sales), and ownership equity is the last or residual claim against assets, paid only after all other creditors are paid.
In such a case, creditors may not get enough money to pay their bills, and nothing is left over to reimburse owners' equity. Thus owners' equity is reduced to zero. Ownership equity is also known as risk capital, liable capital and equity.
Equity investments generally refers to the buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises. It also sometimes refers to the acquisition of equity (ownership) participation in a private (unlisted) company or a startup (a company being created or newly created). When the investment is in infant companies, it is referred to as venture capital investing and is generally understood to be higher risk than investment in listed going-concern situations.

The equities held by private individuals are often held via mutual funds or other forms of pooled investment vehicle, many of which have quoted prices that are listed in financial newspapers or magazines; the mutual funds are typically managed by prominent fund management firms (e.g. Schroders, Fidelity Investments or the Vanguard Group). Such holdings allow individual investors to obtain the diversification of the fund(s) and to obtain the skill of the professional fund managers in charge of the fund(s). An alternative, usually employed by large private investors and pension funds, is to hold shares directly; in the institutional environment many clients who own portfolios have what are called segregated funds as opposed to, or in addition to, the pooled e.g. mutual fund alternative.

In financial accounting, it is the owners' interest on the assets of the enterprise after deducting all its liabilities.It appears on the balance sheet, one of four financial statements.

Ownership equity includes both tangible and intangible items (such as brand names and reputation). In contrast, book value includes only the tangible assets.

Accounts listed under ownership equity include:

* Preferred stock
* Share capital, common stock
* Capital surplus
* Stock options
* Retained earnings
* Treasury stock
* Reserve (accounting)

Book value

The book value of equity will change in the case of the following events:

* Changes in the firm's assets relative to its liabilities. For example, a profitable firm receives more cash for its products than the cost at which it produced these goods, and so in the act of making a profit it is increasing its assets.
* Depreciation. Equity will decrease, for example, when machinery depreciates, which is registered as a decline in the value of the asset, and on the liabilities side of the firm's balance sheet as a decrease in shareholders' equity.
* Issue of new equity in which the firm obtains new capital increases the total shareholders' equity.
* Share repurchases, in which a firm gives back money to its investors, reducing on the asset side its financial assets, and on the liability side the shareholders' equity. For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment, as both consist of the firm giving money back to investors. Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares (increases the size of each share) in future income and distributions.
* Dividends paid out to preferred stock owners are considered an expense to be subtracted from net income[citation needed](from the point of view of the common share owners).
* Other reasons. Assets and liabilities can change without any effect being measured in the Income Statement under certain circumstances; for example, changes in accounting rules may be applied retroactively. Sometimes assets bought and held in other countries get translated back into the reporting currency at different exchange rates, resulting in a changed value.

Shareholders' equity

When the owners are shareholders, the interest can be called shareholders' equity;[2] the accounting remains the same, and it is ownership equity spread out among shareholders. If all shareholders are in one and the same class, they share equally in ownership equity from all perspectives. However, shareholders may allow different priority ranking among themselves by the use of share classes, and options. This complicates both analysis for stock valuation, and accounting.

The individual investor is interested not only in the total changes to equity, but also in the increase / decrease in the value of his own personal share of the equity. This reconciliation of equity should be done both in total and on a per share basis.

* Equity (beg. of year)
* + net income inter net money you gained
* − dividends how much money you gained or lost so far
* +/− gain/loss from changes to the number of shares outstanding.more or less
* = Equity (end of year) if you get more money during the year or less or not anything

Market value of shares

In the stock market, market price per share does not correspond to the equity per share calculated in the accounting statements. Stock valuations, often much higher, are based on other considerations related to the business' operating cashflow, profits and future prospects; some factors are derived from the accounting statements. Thus, there is little or no correlation between the equity seen in financial statements and the stock valuation of the business.

Real estate equity

Individuals can also use market valuations to calculate equity in real estate. An owner refers to his or her equity in a property as the difference between the market price of a property and the liability attached to the property (mortgage or home equity loan).

Lehman Brothers

2009-10-16T22:56:00.000+05:30

Well It has been One Year since the Demise of the 158 yr. old Investment Banking Firm Lehman Brothers(U.S.).The Bank had filed for BANKRUPTCY on September 15, 2008. The bankruptcy of Lehman Brothers is the largest bankruptcy filing in U.S. history It went under holding assets of $639 billion against debts of $613 billion

Primary Reason for its shutdown was "The SUB PRIME CRISIS".

Now I have some facts and figures that will explain the Collapse of Lehman from Financial Management Point of View like the Balance Sheet.

Lehman's Two Biggest Mistakes
1)Too much leverage
2)Risky debt-to-equity ratios

Too much leverage

The basic concept of financial leverage is taking the proceeds of a loan and investing that money to receive a higher rate of return. The difference in the rates (the interest rate of the loan and interest rate earned on the investment) is called the spread.
Lehman Brothers was overleveraged.
They borrowed money in order to invest in mortgage-backed securities (MBS) .

In the case of the MBSs, when it was revealed that the assets used as collateral for those mortgage-backed securities were worth a lot less than they thought, the MBSs became worthless and Lehman Brothers' spread went from positive to negative.

In balance sheet terms, they started with a balance sheet in which they owned more than they owed. They ended up with a balance sheet in which they owed more than they owned

Risky debt-to-equity ratios
Debt-to-equity ratios tells us how much debt a company has for every dollar of equity. Divide total liabilities by total equity.

In the case of commercial banks, debt-to-equity ratio of about 10 to 1, meaning for every dollar of equity, the bank has $10 of debt.

Lehman Brothers at various times had debt-to-equity ratios of >30 to 1. If a firm is running at $30 of debt for every $1 of equity, their cushion is dangerously small.
Any drop in the value of the assets underlying their investments, or in their spread, pushes the firm to bankruptcy.

Why AIG and not Lehman?????

Size – Same as the Lehman.
Fear -- Whereas Lehman’s collapse was long expected, AIG have the same affect to the Fed and market participants alike. The business is so complex and mysterious, and its reach so broad, that no one was sure what its failure would mean.
AIG’s troubles arose because it sold too many credit default swaps, essentially insurance against loan failures.
It’s the largest insurance company in the world, AIG insures millions not just of individuals but of institutions as well.
It was thought that collapse of Lehman won’t bring much chaos to the markets as opposed to the collapse of AIG or Bear Stearns or Fannie Mae or Freddie Mac(prob. Calc by Fed).

Lehman’s financial troubles have been plaguing the company for more than a year prior to bankruptcy filing.
In August 2007, it closed one of its subprime lenders and recorded a one-time after-tax charge of $25 million.
The company reported a $2.8 billion loss during the second quarter. From January to June 2008 alone, the company’s stock lost more than 75% in value. In short, investors had an idea what was going on in the company.
The Fed decided not to help these investors, probably because it thought Lehman’s investors could have saved themselves by managing investment risks in a company already suffering from poor financial health.
Barclays and Bank of America had been in talks to rescue the bank, but negotiations faltered when it became clear that the US Treasury was opposed to using government money to help seal a deal.

What was the Actual Reason we all do not Know some say that The CEO of Lehman had bad relations with the US Govt,Some say that Lehman's CEO was Over ambitious,Some say that US TREASURY SECY. called Richard Fuld(CEO Lehman Brothers) on 10th Sept and offered him some amount to sell of his bank but Richard Fuld refused to do so as the amount cited was too low for Lehman Brothers because its value was 3 times more.

Whatever the reason was Folks,I cannot say but what was Bad was that the US Govt. didn't help Lehman Brothers and thats why we landed up in the so called CRISIS

A light on the Indian Economy

2009-09-07T11:04:00.000+05:30

India economy, the third largest economy in the world, in terms of purchasing power, is going to touch new heights in coming years. As predicted by Goldman Sachs, the Global Investment Bank, by 2035 India would be the third largest economy of the world just after US and China. It will grow to 60% of size of the US economy. This booming economy of today has to pass through many phases before it can achieve the current milestone of 9% GDP.

The history of Indian economy can be broadly divided into three phases: Pre- Colonial, Colonial and Post Colonial.
Pre Colonial: The economic history of India since Indus Valley Civilization to 1700 AD can be categorized under this phase. During Indus Valley Civilization Indian economy was very well developed. It had very good trade relations with other parts of world, which is evident from the coins of various civilizations found at the site of Indus valley. Before the advent of East India Company, each village in India was a self sufficient entity. Each village was economically independent as all the economic needs were fulfilled with in the village. Then came the phase of Colonization. The arrival of East India Company in India ruined the Indian economy. There was a two-way depletion of resources. British used to buy raw materials from India at cheaper rates and finished goods were sold at higher than normal price in Indian markets. During this phase India's share of world income declined from 22.3% in 1700 AD to 3.8% in 1952. After India got independence from this colonial rule in 1947, the process of rebuilding the economy started. For this various policies and schemes were formulated. First five year plan for the development of Indian economy came into implementation in 1952. These Five Year Plans, started by Indian government, focused on the needs of Indian economy.

If on one hand agriculture received the immediate attention on the other side industrial sector was developed at a fast pace to provide employment opportunities to the growing population and to keep pace with the developments in the world. Since then Indian economy has come a long way. The Gross Domestic Product (GDP) at factor cost, which was 2.3 % in 1951-52 reached 9% in financial year 2005-06 Trade liberalization, financial liberalization, tax reforms and opening up to foreign investments were some of the important steps, which helped Indian economy to gain momentum. The Economic Liberalization introduced by Man Mohan Singh in 1991, then Finance Minister in the government of P V Narsimha Rao, proved to be the stepping-stone for Indian economic reform movements. To maintain its current status and to achieve the target GDP of 10% for financial year 2006-07, Indian economy has to overcome many challenges. Challenges before Indian economy:
Population explosion: This monster is eating up into the success of India. According to 2001 census of India, population of India in 2001 was 1,028,610,328, growing at a rate of 2.11% approx. Such a vast population puts lots of stress on economic infrastructure of the nation. Thus India has to control its burgeoning population.
Poverty: As per records of National Planning Commission, 36% of the Indian population was living Below Poverty Line in 1993-94. Though this figure has decreased in recent times but some major steps are needed to be taken to eliminate poverty from India.
Unemployment: The increasing population is pressing hard on economic resources as well as job opportunities. Indian government has started various schemes such as Jawahar Rozgar Yojna, and Self Employment Scheme for Educated Unemployed Youth (SEEUY). But these are proving to be a drop in an ocean.
Rural urban divide: It is said that India lies in villages, even today when there is lots of talk going about migration to cities, 70% of the Indian population still lives in villages. There is a very stark difference in pace of rural and urban growth. Unless there isn't a balanced development Indian economy cannot grow. These challenges can be overcome by the sustained and planned economic reforms.
These include:
1)Maintaining fiscal discipline
2)Orientation of public expenditure towards sectors in which India is faring badly such as health and education.
3)Introduction of reforms in labour laws to generate more employment opportunities for the growing population of India.
4)Reorganization of agricultural sector, introduction of new technology, reducing agriculture's dependence on monsoon by developing means of irrigation.
5)Introduction of financial reforms including privatization of some public sector banks.

Source - Indian Economy

Google AdSense

2009-09-07T10:38:00.001+05:30

Hello All..
Every now and then I hear of someone or the other posting questions on various websiites on how to earn money online.
So here's the solution,you can create a BLOG of your own and paste some useful information.
Then start submitting your blog links on various Social Networking Websites like ORKUT,FACEBOOK,DIGG,TECHNORATI etc.
Make Sure you have a Visitor counter script installed on your BLOG.After a few days you'll notice that the number of vistors visting the website is increasing.

Then apply for a Google AdSense Account.
There you go,after the appporval of your AdSense Account,paste ad's and earn money.

Cheers

Inflation

2009-09-04T11:22:00.000+05:30

Inflation is caused due to several economic factors:
1)When the government of a country print money in excess, prices increase to keep up with the increase in currency, leading to inflation.
2)Increase in production and labor costs, have a direct impact on the price of the final product, resulting in inflation.
3)When countries borrow money, they have to cope with the interest burden. This interest burden results in inflation.
4)High taxes on consumer products, can also lead to inflation.
5)Demands pull inflation, wherein the economy demands more goods and services than what is produced.
6)Cost push inflation or supply shock inflation, wherein non availability of a commodity would lead to increase in prices.

Problems

The problems due to inflation would be:
1)When the balance between supply and demand goes out of control, consumers could change their buying habits, forcing manufacturers to cut down production.
2)The mortgage crisis of 2007 in USA could best illustrate the ill effects of inflation. Housing prices increases substantially from 2002 onwards, resulting in a dramatic decrease in demand.
3)Inflation can create major problems in the economy. Price increase can worsen the poverty affecting low income household,
4)Inflation creates economic uncertainty and is a dampener to the investment climate slowing growth and finally it reduce savings and thereby consumption.
5)The producers would not be able to control the cost of raw material and labor and hence the price of the final product. This could result in less profit or in some extreme case no profit, forcing them out of business.
6)Manufacturers would not have an incentive to invest in new equipment and new technology.
7)Uncertainty would force people to withdraw money from the bank and convert it into product with long lasting value like gold, artifacts.

Inflation in India Economy

India after independence has had a more stable record with respect to inflation than most other developing countries. Since 1950, the inflation in Indian economy has been in single digits for most of the years
Between 1950-1960
The inflation on an average was at 2.00%
Between 1960-1970
The inflation on an average was at 7.2%
Between 1970-1980
The inflation on an average was at 8.5%.
Inflation At Present
Inflation in India a menace a few years ago is at a 30 year low. The inflation ended at a low of 0.61% in the week ended May 9, 2009 this after reaching a 16 year high of 12.91 % in August 2008, bringing in a sigh of relief to policymakers.

History of Indian Banking

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1786-1969
In the year 1786, the General Bank of India was set up, followed by Bank of Hindustan and Bengal Bank. The East India Company formed Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent banks and called them as Presidency Banks. These three banks were unified in 1920 and Imperial Bank of India was formed. In 1865 Allahabad Bank was established, In 1894 Punjab National Bank ltd was formed in 1894.From the year 1906 to 1913 Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank and Bank of Mysore were established. The RBI was founded in 1935.During this period the development of banks was sluggish and banks suffered regular failures. To bring about greater stability in the bank’s the Government of India passed The Banking Companies Act 1949, which was later modified as Banking Regulation Act 1949.The act of 1965 entrusted the Reserve Bank Of India with authority to control the functioning of other nationalized banks heralding a new beginning in Indian banking. In 1955 the Imperial Bank of India was nationalized. The State Bank of India was established to act as the controlling authority for RBI and to take care of banking transactions of the Union and State governments across the country. In 1960 seven banks were nationalized and assigned as subsidiary of SBI.
After Nationalization
In 1969 under directions from the then Prime Minister Mrs. Indira Gandhi 14 major commercial banks in the country was nationalized. In 1980 seven more banks were nationalized, resulting in 80% of the banking sector coming under the control of the government. The national banks played a vital role in both rural and urban economies and in making banking services accessible to the masses.
Post Liberalization
Reforms were introduced in the banking sector to strengthen Indian banks and make them internationally competitive and for banks to play a vital role in the economic development of the country. The Banking Industry was opened up for private participation and the entry of new private banks and foreign banks increased competition. The efficiency of the banking sector improved as suggested by indicators such as gradual reduction in cost of intermediation and decline in nonperforming loans. Efficiency in the banking sector was driven by improved technology and competition.
Financial Sector
The financial industry has undergone rapid transformation post liberalization. Reforms have overall led to greater accountability and transparency in the financial markets, resulting in greater inflow of investments from FII's into the capital market. Today the Indian capital market is considered as a mature market and among the fastest growing markets in the world.
Capital Market
The efficiency of the transaction cycle has improved with the introduction of the depository and share dematerialization system.
The forward trading mechanism has been replaced with rolling settlement for greater transparency.
Stock Exchanges were Corporatized.
Securities and Exchange Board Of India (SEBI) has been bestowed the statutory powers to monitor and control the stock markets.
The Indian capital markets are increasingly being favored by the Foreign Institutional Investors.
Instruments like derivatives and options have been introduced in the capital markets.
Venture Capital

In the last few decades, technology and knowledge have driven economic growth across the world and will continue to do so in the future. India has certain advantages over the rest of the world in terms of technical skills, diligent workforce, cost competitiveness and a huge middle class proficient in English. To tap the potential there is an urgent requirement for risk finance and venture capital funding to promote entrepreneurship, innovation, technological advancement and further enhance knowledge based sectors.Future Roadblocks And Recommendations

Roadblocks
Competition.
Customer Retention.
Globalization.
Shrinking Margin.
Recommendations
Strong In house research and market intelligence.
Focused marketing.