3. 4.ORIGIN OF THE TERM BUDGET
• Origin from the French word“ Bougette”. Means a
leather Briefcase / Wallet.
• First use of the term” Budget” dates back to 1733.
# A cartoon appeared in The Times :
# Showing the British PM and Chancellor of
Exchequer opening a leather medicine seller’s bag .
# With the caption “The Budget opened “.
• The term “ Budget “ does not find a mention in our
Constitution . Instead referred to as “ Annual
Financial Statement for every financial year ”.
4. 5.FIRST BUDGET OF GOVT OF INDIA.
• Presented by RK Shanmukham , the FM on
26th November 1947 & not on last day in Feb.
• Interim Budget was required since :
# The earlier assembly that passed the Budget
for the Year 1947-48 ceased to exist.
# Because country divided in August 47.
• No fresh taxes proposed.
• Revenue 171 crores , Expenditure 197 crores.
• 2010-11 : Revenue
8.45 lac crores.
: Expenditure 12.57 lac crores.
5. 6.WHAT IS A GOVT BUDGET ?
• A statement of revenue and expenditure
for a year
• It is called the Annual Financial
Statement.
• Families / Individuals also budget. In such
cases, the details remain with him.
• A Govt’s Budget is not.
6. 7.OBJECTIVES OF GOVT. OF INDIA’S
BUDGET
• Economic
growth.
•
Social justice.
•
Price stability.
7. 8. Why Budget ?
• To enable a Govt to function effectively.
• Discharge all it’s duties and obligations
to the citizens & the Country.
• To do this Govt needs funds.
• Through the process of budgeting , the
Parliament authorizes the Govt to
collect funds.
8. 9.TERMS USED IN THE BUDGET
FISCAL YEAR.
• The year for which the budget
pertains to.
• In India 1st April to 31st March.
9. 10,COMPONENTS OF A BUDGET
# Revenue Account:
• Does not create liability for repayment or
reduction in assets.
• Can be both receipts & expenditure.
# Receipts :
-- Are taxes , interest recd etc
# Expenditure :
-- is of a recurrent/consumption nature for
purchase of goods, salaries etc
10. 11.COMPONENTS OF A BUDGET Cont…..
# Capital account:
• Either creates a liability for repayment or will
involve selling of government assets.
• Can be both receipts & expenditure.
# Receipts are grouped under 3 heads
1) Public debt :
-- External Debt (external borrowing)
-- Internal debt ( internal borrowing) comprising:
a) Treasury bills of less than 1 year tenure.
b) Ways & Means Advance given by RBI to meet
temporary mismatches in inflow/outflow
11. 12.COMPONENTS OF A BUDGET Cont…..
# Public debt contd…
c) Market Stabilization Scheme which are
securities issued by RBI & the proceeds
kept as reserve by them.
d) Securities against small savings fund
appropriated.
2.Return of loans & advances .
3. Misc receipts comprising disinvestment.
# Expenditure :
-- Money spent on development projects /
buying of machinery/lasting assets etc.
12. 13. TYPES OF BUDGET DEFICITS
# Fiscal deficit:
• Excess of expenditure on Revenue/ Capital account
minus revenue receipts + Non debt capital receipts
# Revenue Deficit :
• Excess of expenditure on Revenue account over
Revenue receipts.
# Primary deficit :
• Deficit of expenditure over revenue without interest
payments.
# All terms are expressed as a % of GDP
# Government debt/Budget deficit.
• Accumulation of fiscal deficit . Stands at 82 % of GDP.
13. # An example for a country :
• Gross Domestic Product (GDP)
=Rs.1,00,000/• Rev. Receipts
=Rs.10,000/1) Rev. Expenditure w/o interest
=Rs.15,000/-- Interest payments ( Cap+Rev)
=Rs.3000/2) Capital expenditure
=Rs.2000/ Total Expenditure 1 + 2
= Rs.20,000/# Fiscal deficit ( Rs.20000 – Rs.10000 ) = Rs.10,000/( 10 % of GDP )
# Revenue deficit ( Rs.18000-Rs.10000)
= Rs.8000/( 8 % of GDP)
# Primary deficit ( Rs .17000-Rs.10000 ) =Rs.7000/( 7 % of GDP )
14. DEFICITS IN GOI 2011-12 BUDGET
• Fiscal deficit
: Rs.4.13lac
crores.(4.6 % of GDP)
• Revenue deficit : Rs. 3.07 lac
crore.( 3.4 % of GDP )
• Primary deficit : Rs. 1.44 lac
crores.( 1.6 % of GDP )
16. # Literacy rates (%)
• 1950 = 17
• 1980 = 52
• 2000 = 65
• 2010 = 80 ( projected )
# Poverty (%)
• 1980 = 46
• 2000 = 26
• 2010 = 16
# Per Capita income ( PPP )
• 1980 = Rs.53,000 per year
• 2010 =Rs.1,38,000 per year
17. # BUDGET IS AN ANNUAL FINACIAL STATEMENT
• It is usually a white colored 10 page
document.
• It is divided into 3 parts :
# Consolidated Fund :
@ Represents all revenues raised by Govt
money borrowed & receipts from loans.
@ Most important fund.
@ All Govt expenditure both revenue &
capital
except exceptional items, met
from this fund.
18. # Contingency fund :
• Urgent/Unforeseen expenditure met from
this fund.
• Currently corpus is Rs.500 crores.
• It is at the disposal of the President.
• Amount withdrawn is replaced from the
Consolidated Fund.
• Expenditure incurred requires subsequent
parliamentary approval.
19. # Public account:
• An account where the Govt merely acts as
a custodian .
• Example : PF, Small savings etc.
• Funds do not belong to the Govt .
• Have to be paid back to the rightful
owners at previously agreed dates.
• Hence does not require parliamentary
approval prior to disbursement.
20. # Direct taxes :
• Income tax , Corporate tax ,Wealth tax
•
•
•
•
•
•
-- Advantages :
Equitable distribution of wealth.
And hence progressive
Prevents distortions in resource allocation
Slows inflationary tendencies in boom times.
-- Disadvantages :
Collection difficult.
Disincentive for investment if rates high
21. # Other examples of direct tax :
• Profession Tax
-- Tax on those in a profession .Decided by
State Govts and collected by Municipal
Corporations
• Securities Transaction Tax ( STT )
--Tax on what one pays or receives in a share
deal.
# Minimum Alternate tax :
• If a company’s tax liability is less than 10 % of
its profits , then it has to pay a minimum
alternate tax of 18 % of its book profits.
22. # Indirect Taxes:
• Excise/Customs duty, Sales/ Service tax.
-- Advantages :
• Easy to collect.
• -- Disadvantages :
• Equitable distribution impossible.
-- Hence regressive.
• Can create inflationary trends.
23. # Methods of levying excise duty :
• Ad Valorem
-- By value. If Selling Price is Rs.1000 per unit &
ED is 10 % , the duty collected will be Rs.100.
• Specific rate :
-- Rs. 100/- per unit without considering selling
price
# Customs duty/Sales tax ;
• Normally by value
24. # Value Added Tax (VAT) and Central
Value Added Tax (CENVAT):
• Prevents cascading effects of taxation
or tax on tax. # An example :
• “ A " manufactures cotton cloth from
raw cotton bought at Rs.100/ kg .
• Excise duty( ED ) on raw cotton- 10 % .
• A' s input landed cost is Rs.110/( Basic price of Rs.100/- + ED of
Rs.10/- )
25. # VAT & CENVAT Cont….
• His cost of production including profit
margin is 90/- kg.
• His basic selling price is ,therefore, Rs.200/
kg ( Rs.110/-+ Rs.90/- ).Let us assume that
ED on cotton cloth is 10%
• In case there is no CENVAT , A's final price
for the customer will Rs.220/- kg ( Rs.200 +
ED of 10% )
26. # VAT & CCENVAT Cont….
• In a CENVAT situation
-- A is allowed to take credit for the excise
duty he has paid on his input of Raw
cotton .In this case it is Rs.10/• The selling price can be reduced to Rs.190
( Rs.200 minus credit of Rs.10/- paid as ED
on raw cotton )
• His final price will be Rs.209/-( Basic Price
of Rs.190/- + ED of 10 % )
27. # Due to CENVAT,customer does not
pay:
• The ED paid by A on his input of raw
cotton, i.e., Rs.10/kg
• Nor the cascading effect of paying ED
on ED.i.e10 %( ED on A's final product )
on ED of Rs.10/- paid by A on his input
of raw cotton.
• However no legal binding on the seller
to pass on this benefit to the customer.
28. # Non-Tax revenue:
• Interest/Dividends/profits received etc.
# Transfer payments:
• Payments by the Government without
receiving any service or goods in return
# Plan Expenditure:
• Those incurred on 5 year plan projects
• Like Agriculture, Rural development,
Energy, Social Services, infrastructure etc
29. # Non plan expenditure:
• Those incurred on items not included in
the 5 year plan / schemes. Examples :
-- Defense revenue expenditure.
-- Pensions.
-- Defense capital expenditure.
# Interest Subvention :
• Interest subsidy given by GOI to private
borrowers .For example:
• Housing Loans
30. # Inclusive Growth :
• Ensuring that all strata of society receive the
benefits of economic progress.
• No longer a political slogan.
• GOI Schemes aimed at in Inclusive Growth :
-- Bharat Nirman – Build Infrastructure.
-- Mahatma Gandhi Rural Employment
Guarantee scheme ( NREGS )
-- Jawaharlal Nehru Urban Renewal Mission
(JNURM)
31. # Financial Inclusion :
• The business of providing financial services
(savings investment, credit & insurance) to
those not served by the formal financial
system.
• To ensure a Bank A/C for every Indian citizen.
• To ensure cheap & timely credit to “Aam
Admi”.
• Cover all villages with a population of 2000
and above by March 2012.73,000 such
villages
32. # Financial Inclusion…..(BS dt 17/3/11)
• Only 40 % of the population have bank
accounts.
• If MFI included , 47 %.
• Only 38 % of 87,051 branches of
scheduled banks are in rural areas.
• I.E only 32919 branches for 6,00,000
villages.
• Implications for the Job market.
33. # Take Out Financing :
• A method of financing for long term gestation
projects , say , 15 yrs and above.
• Commercial Banks initially grant the loan in
the medium term , say ,5 to 7 years.
• Another financial institution takes it over
afterwards for the rest of the loan tenure .
Like IDFC.
• Liability taken off the original lender’s books.
34. # Resources transferred to States :
• Proportion of GOI tax receipts transferred to
States.
• GOI transfers to States to support their Plans.
• Maybe in the form of Grants transferred , in
particular , for implementing GOI sponsored
schemes.
36. FAMOUS ECONOMISTS.
• Adam Smith – Wealth Of Nations.
• Thomas Maltheus – Theory of
population.
• Keynes-- Keynesian economics.
• Paul Samulson .
• Amrtaya Sen .
37. A. GROSS DOMESTIC PRODUCT ( GDP )
•Total market value of all final goods and services
currently produced in the country with no
duplication.
• POINTS TO BE NOTED about GDP:
# A monetary measure
# Only final goods and services to be included.
# Only currently produced goods & services to be
included.
# Only domestically produced goods to be included.
# No duplication.
38. # What is meant by ‘ no duplication’ ?
• ‘A’ makes cotton cloth out of raw cotton.
• Raw cotton is Rs.1/-kg and cotton cloth is
Rs.2/kg
• In fiscal 2008-09, A buys Rs.1000/- worth of
raw cotton & sells Rs.2000/- of cotton cloth.
• GDP will be :
-- Rs. 2000/• If on the other hand, he converts only ½ the
raw cotton to Rs.1000/- of cotton cloth , GDP
is :
-- Rs. 1500 ( Rs.1000/- cotton cloth + Rs.500/of raw cotton that went to stock )
39. COMPONENTS OF GDP.
@ Consumption by domestic households. Called private
final consumption expenditure.
@ Value of new capital goods produced and
increase in Inventories of raw material/Work in
process/unsold finish goods. Called Gross private
investment.
@ Purchases by Government .
@ Net Exports
40. # COMPONENTS NOT CONSIDERED IN GDP
• Buying and selling of securities.
• Government transfer payments.
• Private transfer payments.
• Sale of used goods.
• Non-market goods and services.
Implication for a country like India
which is agricultural.
• Illegal activities.
41. METHODS OF COMPUTING GDP.
• Value added method ( Output ) :
# Net value addition of each segment of
industry.
• Income method :
# In simple terms it means salaries,
profits, interest, rent etc.
• Expenditure method:
# Expenditure by individuals/households ,
Government,purchase of capital goods
42. • Gross National Product ( GNP ):
# GDP + Net factor income from abroad (NFI).
-- NFI is excess of interest, rent, salary,
profits originating abroad & remitted to India
over similar payments to foreign nationals in
India
• Nominal GNP :
# Calculated at market prices for the year.
• Real GNP :
# GNP adjusted for a base year. Currently
1999-2000.
• Net National product(NNP)at market prices:
# GNP – Depreciation on assets.
43. • Net National product at factor cost or National
Income :
# NNP minus Government taxes.
• Per Capita income :
# National Income divided by the population.
• Personal disposable income :
# Personal Income minus income tax.
# Does not include miscellaneous receipts by Govt by
its administrative actions.
• National disposable income :
# Sum of all incomes recd by residents available for
consumption and saving.
# Includes net current transfer payments from abroad
# These transfers are not non factor income.
44. # Revenue or Current account convertibility :
• Allows free inflows/outflows for all purposes other than
for capital purposes such as investments ,loans, sale of
fixed assets.
• In other words, it allows residents to make and receive
trade-related payments, travel, medical, education etc.
# Capital account convertibility:
•The freedom to convert local financial assets into
foreign financial assets and vice versa at market
determined rates of exchange whatever be its nature
45. # FDI :
• Foreign Direct Investment. In lasting assets.
# FII :
• Foreign Institutional Investment. In the securities
market.
# Nominal exchange rate:
• The rate at which the currency of One country can
be traded for that of another.
# Real exchange rate or purchasing power parity
( PPP ) :
• The rate at which goods/services of one country can
be traded for that of another.
# Deficit financing or monetization of deficit :
• In simple words , it means the GOI will print notes to
bridge the deficit. The dangers ?
46. # Tax-GDP ratio :
• Proportion of taxes collected by a
Government with respect to GDP
expressed in % terms.
# Inflation :
• Sustained increase in prices because
of increase in purchasing power
without equivalent increase in
production.
47. # Stagflation.
• A situation where economic stagnation and
inflation occur simultaneously.
# Deflation :
• A situation completely opposite of “ Inflation “.
# Recession :
• 2 continuous qtrs of negative GDP growth.
• Economists categorize recession into V,U,L
and W depending on the way it appears in a
graph.
48. # Recession……..
• W shaped is also called double dip recession.
• In W shaped recession, an economy gets out of
recession , recovers but then slides back into
recession and then recovers in cyclical upward/
downward movements.
• There are concerns that that the Greek crisis
can lead to double dip recession.
# Unchecked recession leads to :
• Depression. Historical example of depression.
• US depression of 1930’s.
49. # Gross Capital Formation :
• Additions to fixed assets by Govt ,
Businesses & Individuals/Households
less value of assets disposed of or
scrapped.
• Called gross because depreciation
not taken into consideration while
calculating value of assets not
disposed off.
51. # Cash reserve ratio ( CRR ) :
• Money to be parked with RBI by
Banks compulsorily. Used to control
liquidity available in the system.
# Statutory liquidity ratio ( SLR ) :
• % to be held compulsorily by banks in
Govt. Securities. Used to (1) control
liquidity in the banking system &
create market for public sector debt.
52. # REPO :
• Is the rate at which RBI lends money to banks on
short term basis Max 1 month.
# Reverse REPO :
• Is the rate at which RBI accepts funds from banks
on short term basis.
# CRR/SLR/REPO/ REVERSE REPO are called:
• Monetary policies of the Govt announced once in
three months by RBi.
# Taxes , both direct and indirect are :
• Fiscal policies of the Govt announced once in a
year through the annual budget.
53. • Call money market :
# Inter-bank market where banks lend each
other money to meet their immediate liquidity
requirements.
# Will be short term.
# Interest rates are demand dependent. No
ceiling. Can be even be 100 % per annum in an
extreme liquidity crisis situation. .
• Stock Market ;
# A market where shares of listed companies
are bought & sold .
54. # Double entry system.
• A system of accounting where each
transaction in a company is
represented by 2 entries in the
account books.
• One is a debit entry & the other is a
credit entry.
• Evolved by FLB Pacioli , an Italian in
15th Century
55. # Trial balance :
• An accounting statement of the debits &
credits in the various accounting heads in a
Company. Total of debits have to match with
total of credits.
# Profit & Loss Account :
• An accounting statement of expenditure &
income of a Company over a period of time ,
say , a financial year.
# Balance Sheet :
• An accounting statement of the assets &
liabilities of a Company as on a particular date.
56. # Sundry Creditors :
• Those to whom a Company owes money
# Sundry Debtors :
• Those from whom a Company has to receive
money.
# Work-In-Process or Progress :
• Represents the monetary value of inventories
fed into the production process but not
converted to finished goods
57. # Wholesale price index ( WPI ) :
• General index capturing price
movements.
• Base year currently 2004-05
• Tracks 676 items.
• Weightage assigned: Primary
articles 22%, fuel & power 14 %,
manufactured products 64 %.
• Inflation calculated on WPI.
58. # Consumer price index ( CPI ) :
• An index measuring retail price
movements of selected goods
• Highest weight age for food items –
57 %
• Base year 1982.
• WPI tracks wholesale transactions
while CPI tracks retail transactions.
59. # Dearness allowance ( DA ) :
• Monetary compensation given to employees both in
Govt & Private sector to adjust for price increases &
decreases. Included for the purpose of PF/ Gratuity/
and Retirement benefits.
# Public limited company :
• A separate legal entity.
• Liability limited to extent of share holding.
• Must have min 7 share holders. No cap on Max.
• May or may not be listed in the stock exchange.
• Regulated by Registrar of Companies and SEBI if
listed.
60. # Private limited company :
• Separate legal entity.
• Max 50 members. Min 2.
• No invitation to public to invest. Hence cannot be trade in Stock
Exchanges
• Liability limited to extent of share holding.
• Regulated by Registrar of Companies.
# Partnerships :
• Unlimited liability.
• Personal assets can be attached.
• Not a separate legal entity.
• Not regulated by Registrar of Companies
61. # LTD Liability Partnerships.
• Introduced on 1st April 09.
• Separate legal entity.
• Liability limited to extent of
share holding.
62. # Authorized capital :
• Capital authorized by Registrar of
Companies
# Subscribed capital :
• Capital agreed to be given by prospective
share holders.
# Paid up capital :
• Capital actually paid by the subscribers .
# Memorandum of Association :
• States main/subsidiary/ ancillary objects.
• A statutory document under Company’s
Act
63. # Articles of association :
• Contains rules/regulations for routine conduct of
business:
• Typically cover the issuing of shares, voting and
dividend rights attached to different classes of
share, restrictions on the transfer of shares, the
rules of board meetings and shareholder
meetings, and other similar issues.
• A statutory document under Company’s Act.
64. # Components of Foreign exchange reserves :
• FDI.
• FII.
• FEI.
• NRI Remittances.
• Excess of exports of goods & services over imports.
# Where does GOI hold its FE reserves :
• Overseas assets like Govt bonds, Treasury bills:
• Bonds long term while treasury bills short term.
# Components included for balance of trade
calculation :
• Export & Imports.
65. # Corporate Governance.
• Refers to ethical code of conduct prescribed for
corporate bodies.
# Non performing assets ( NPA )
• Assets on bank’s book’s which have principal
and/or interest overdue..
# Upset price in an auction :
• Also called reserve price or judgment amount.
• Amount the bank is owed on the property plus
any interest or fees that have accrued after the
start of the foreclosure process
66. # Market capitalization :
• Number of equity shares issued by a listed
Company multiplied by the quoted price in
the SE for each share calculated on free
float market capitalization basis ( FFMC ).
• FFMC calculates MC only on those shares
that are freely available for trading in the
stock market.
• According to BSE , following are not freely
available :
# Promoters/Govt/FDI/Locked in shares etc.
67. # FFMC – An Example :.
• A has 1000 shares out of which 200 held by
promoters.
• Market price is Rs. 150/• Total market capitalization is Rs. 1,50,000/(i.e 1000 X Rs.150/- )
• FFMC is Rs 1,20,000 ( i.e 800 X Rs.150/- )
68. • Working Capital:
# Money required for day to day running of a
Company.
# 1st charge on floating assets & 2 nd charge on
fixed assets
• Long Term Capital or Term Loan:
# Money required for purchasing lasting fixed
assets.
# 1st charge on fixed assets & 2 nd charge on
floating assets.
69. # An Example:” A “ manufactures laptops.
• Borrowings- Rs.10 cr. for WC(SBT) & Rs.20 cr.
long term loan for fixed assets( SBI ).
• After 1 year of operation it goes bust with
floating assets of Rs.8 crores & fixed assets of
Rs. 25 crores.
• SBT recovers Rs. 8crores from sale of floating
assets(1st charge).
• SBI recovers Rs. 20 crores from sale of fixed
assets (1st charge)
• SBT recovers Rs.2 cr. from sale of balance FA
( 2nd charge)
70. # Fund based working capital( WC ) limits :
• Cash Credit Limit ( CC limit) :
-- A W/C facility allowing cash withdrawals upto
the sanctioned limit.
# Bill Discounting Limit( BD limit ):
-- A W/C facility for getting the proceeds
against sales bills immediately when your terms
of sales are on credit basis.
# Non-Fund based WC limits :
• Bank guarantee / LC limits.
71. # WC Drawing power:
• Amount of WC facility a company can draw
after providing for margin money & deleting
aging receivables/stocks etc.
# Margin Money :
• Funds to be invested by a Company / Person
borrowing money from a Bank for Capital/Day
to Day expenditure as his part contribution to
the total funds required .Generally 10 to 25%)
72. # Financial ratios :
• Indicates the financial performance of a
Company on various parameters. Ex: debtEquity Ratio.
# IRR( Internal Rate of return) :
• Assess the financial viability of an investment .
• Indicates internal rate of return of the project.
# NPV( Net present value) :
• Helps to determine the present day value of an
investment whose returns are spread over a
number of years in the future.
• Indicates value or magnitude.
73. # Initial Public Offering ( IPO ) :
• Offer by a new/existing Company for purchase of
equity shares in an expansion/new project for
listing in a stock exchange for the first time.
• Investors allotted shares become part owners.
# Book Building methodology of IPO :
• Process by which bids are collected from
investors at various prices , within a price band
specified by the issuer. Issue price decided after
bid closure, based on price & demand .
74. # Follow on Public Offer :
•
Offer for purchase of equity shares to prospective investors by already
listed companies.
•
Can be done by promoters either diluting their share holding or a fresh
issue or a combination of both.
# Red Herring prospectus :
•
A document issued by a company prior to a public issue.
•
The document will not contain details of price and number of shares offered
or quantum of issue.
•
Has to be filed with SEBI and terms/conditions approved by them.
•
The origin of the term red herring is from the British tradition whereby
young hunting dogs in were trained to follow a scent with the use of a "red"
(salted and smoked) herring . This pungent fish would be dragged across a
trail until the puppy learned to follow the scent.
•
It is called a red herring because of a disclosure statement in the document
which explicitly states that the issuing company will not go ahead with the
public issue if the prospectus is not approved by SEBI
75. # Equity Capital :
• Shares issued to those making monetary
investments in a Company to become part
owners.
# Sweat Equity :
• Shares issued to those who bring in share
capital into a Company by their intellectual
abilities. No money brought in by them
76. # Open Market Operations ( OMO ) of RBI :
• Refers to sale of Treasury Bills & Bonds by RBI
to primary dealers.
# Earnings per share ( EPS )
• Earnings/Loss for a Company divided by the
number of shares.
# Price to Earnings ratio ( P/ER )
• P/E = Stock price divided by EPS.
• An indication of what the market thinks of the
stock.
77. # Preferential shares :
• Shares issued by a Company to an
investor with a fixed dividend .
• No voting rights.
• Will be paid first in case of winding up.
# Debentures :
• Debt instrument issued by a Company
to an investor with a fixed rate of
return .
78. # Net worth :
• Owners equity + Retained earnings
# Fixed cost:
• Costs that don’t change over short time
spans or production.
• Ex : Expenditure on machinery, salary
# Variable cost ( Operating Cost ):
• Costs that vary with production.
• Ex : Raw material cost, energy cost.
79. # Break Even Point :
• The amount of sales income required to cover all
expenses.
• Ex -- Selling price (SP)
= Rs.10/kg
-- Fixed cost (FC)
= Rs.1000/-- Variable cost ( VC)
= Rs. 5/kg
• Break even point ( BEP )
= Fixed Cost
SP – VC
• BEP in the above example is :
• 200 kgs.
# Operating Profit :
• The difference between total revenues on current
activities and variable costs and before fixed cost
and depreciation
80. # Marginal costing :
• Analyses variable or direct costs. Pricing ?
• In the previous example the 201st kg can
be priced at Rs.5/kg. Will be no loss/no
profit situation.
# Opportunity Cost :
• The cost of what must be given up to
acquire/achieve something else.
81. • Primary Market :
# A market where prospective
investors buy shares directly from
Companies when they have IPO’s.
• Secondary Market :
# A market where shares of listed
Firms can be bought & sold. In
other words the Stock Market.
82. • Bear Market :
# A stock market where prices are falling.
• Bull Market :
# A stock market where prices are going up.
• Commodities market :
# An organized/statutorily recognized mkt
for sale & purchase of Commodities.
# For Ex : Kochi Pepper Exchange.
83. # Derivatives trading :
• Trading in financial instruments whose value
is derived from other assets.
• Reduces risk of uncertainty of price and
availability.
• Example :
-- A wheat miller contracts to buy 100 kgs
wheat from a farmer at Rs.10/- per kg on 31 st
July 31st 2011.
-- Both seller & buyer are guaranteed quantity
& price on a future date.
84. # Types of Derivatives :
-- Futures:
• Contract to buy an agreed qty of a commodity
or financial asset at an agreed price / time.
• Can trade in the futures market in the
derivatives market
-- Forwards :
• Customized futures contract
85. # Options :
• Gives the holder the right ( not an obligation ) to
buy or sell a particular asset.
• In return for the option the seller/buyer or the
exchange collects a premium.
• There are 2 different kinds of options :
# Put option :
• Gives the holder the right to sell.
# Call option :
• Gives the holder the right to buy.
86. # Options Continued….
# Swaps or Credit Default Swaps :
• Transfer the risk of a repayment default to a 3 rd
party for a premium
# Selling short :
• Obligation to sell a security exceeds holding of
that security.
• Holding only 10 units but agree to sell 20 units
# Buying long :
• Holding of a security exceeds obligations to
sell that security.
• Holding 20 units but agree to sell 10.
87. # Mergers :
• 2 companies merging into a new legal entity.
# Acquisitions :
• One Company acquiring a controlling interest in
another.
# Leveraged buy-out :
• The buyer invests very little of his own funds.
# Highly Leveraged Company :
• A Company with a high debt-equity ration.
# Hostile takeover :
• Taking mgmt control w/o approval of existing
mgmt
88. # Top line growth :
• Increase in sales revenue.
# Bottom line growth :
• Increase in profits.
# EBITD :
• Earnings before Interest ,Tax & Depreciation.
# Due Diligence:
• A legally binding process during which a
potential buyer evaluates the assets & liabilities
of the company being acquired.
89. # Underwriting (Used in 2 different contexts):
• Is the process a large financial service provider
uses to assess the eligibility of a customer to
receive its products. Another term for credit
assessment
• A process by which an underwriter guarantees
to subscribe to any short fall in an IPO.
# Qualified Institutional Investors :
• These are investors having expertise in the
market and are given some privileges in IPO’s
as per the SEBI rules.
• For Ex : Commercial/Investment banks.
90. # Actuary :
• A business discipline that evaluates the
financial impact of risk & uncertainty.
# Open - Ended Mutual fund Schemes :
• Do not have a fixed maturity.
• You deal directly with the Mutual Fund for your
investments and redemption's.
• Key feature is liquidity. Can buy/sell at NAV .
# Close-Ended Mutual Fund Schemes
• Have a stipulated maturity period(2 to 15 yrs).
Can buy/sell in the stock exchange at NAV
91. # Open ended equity funds :
• Will mostly be in stock markets.
# Are of 3 types ;
• Diversified Equity funds.
-- Investing across sectors.
• Sectoral funds :
-- Invest in selected sectors.
• Index funds :
-- Invest depending on the index.
-- Will replicate Sensex ( For Ex )
movements
92. # Net Asset Value :
• Total market value of all the securities in
the mutual fund less expenses divided by
the number of units in the mutual fund.
• For Example : In mutual fund ‘ A ‘
-- Number of units
= 1000.
-- Total Market Value = Rs.1,00,000.
-- Expenses
= Rs. 10,000.
-- NAV is
= Rs. 90/- per unit.
93. # Sensex :
• Is the BSE Sensitive index.
• Started on 1st Jan 1986.
• A value weighted index composed of 30 stocks.
• Actively traded stocks representative of various
sectors.
• Accounts for 1/5th of BSE market capitalization.
• Base value of index is 100 as on 1 st April 1979.
• Base year is 1978-79.
• If on the base figure of 100 , mkt capitalization
was Rs. 1000/- then if MC is Rs 2000/- today
Sensex will be 200.
94. # Small-cap, Mid-cap, Large-cap stocks :
• The stocks are divided into these categories
depending on value of market capitalization.
# Small cap/ Mid cap :
• Market capitalization between Rs.10 crores to
Rs.125 crores
• Mid cap market capitalization between Rs.150
to Rs.500 crores.
• BSE small/mid cap index launched in April
2005. Base year 02-03 & value 1000.
# Large cap :
• Over Rs.500 crores.
95. # NIFTY :
• Index of NSE located at Mumbai.
• Largest in India in terms of trade volumes.
• Index real name is S & P CNX Nifty.
• Owned by financial institutions & floated in
1992 .
• 3rd largest in the world for trade in equities.
• Base year 1995.
• Base value 1000.
• Calculated on 50 stocks.
96. # External Commercial Borrowings( ECB ) :
• Borrowings from lenders and investors outside
India.
• Permitted by the GOI as a source of finance for
Indian corporates for :
• Expansion of existing capacity as well as for
fresh investment.
• ECBs are defined to include
-- Commercial bank loans, buyers’ credit,
suppliers’ credit.
-- Credit from official export credit agencies.
97. # Indian Depository Receipts (IDRs)
• Companies incorporated outside the
country can now raise resources from
the Indian capital market .
• This will be a foreign company who
issues their shares in Indian rupees to
Indian investors which will be traded
in Indian stock exchanges.
98. # American Depositary Receipt (ADR) :
• Is an investment in shares of a non-US corporation
for a US citizen.
• While the shares of the non-US corporation trade
on a non-US exchange,
-- The ADRs by the same Non-US Corporation
trade on a US exchange.
• This mechanism makes it straightforward for a US
investor to invest in a foreign issue.
• ADRs were first introduced in 1927.
99. # Global Depositary receipts ( GDR ) :
• A certificate issued by a depository bank for
purchase of shares in a foreign company.
• It facilitates trade of shares and is frequently
used to invest in companies in developing or
emerging markets.
• Price of GDR’s are very close the value of the
purchased shares.
• They are traded & settled separately.
• Normally 1 GDR = 10 shares
100. # Participatory Notes -- or P-Notes or PNs :
• Instruments issued by registered FII investors to
overseas investors, who wish to invest in the
Indian stock markets :
-- Without registering with SEBI. Owners
unknown.
# Why do this ?
• International access to the Indian capital market
is limited to FIIs. SO …
-- The market circumvents this by issuing PNs.
-- They account for half the amount that stands
to the credit of FIIs in India today.
-- Investing through P-Notes is very simple and
hence very popular.
101. # Promissory note :
• A contract where one party makes an
unconditional promise to pay a sum of money
to another at a fixed date or a determinable
time in the future or on demand by the payee.
# IOU :
• It is an acknowledgement of debt and not a
specific promise to pay.
# In a cheque , the courtesy amount is :
• Amount in figures
# In a cheque the legal amount is :
• Amount in words .
102. # In a cheque , the parties involved
are :
• Drawer is the person or entity who
makes the cheque.
• Payee is the recipient of the money.
• Drawee is the bank or a financial
institution where the cheque can be
presented for payment.
• Cheque is a negotiable instrument.
103. # London Inter bank Offered Rate
(LIBOR)
• The daily interest rate at which banks
borrow unsecured funds from other
banks in the London wholesale
money market .
• Are short-term borrowings.
• It is influenced by the U.S.Federal
funds rate and other factors.
104. # Letter of credit ( LC ) :
• Is a document issued by a Bank to a
beneficiary guaranteeing payment for
facilitating trade.
-- An Example :
• Company “ A “ in India imports garments from
Company “ B “ in England.
• “ A “ approaches his bankers SBI to open an
LC in favor of “ B” in England.
• SBI opens the LC and advises the LC to “ B “
through SBI , London.
• ”A”is the “opener“,SBI India is the ‘issuing bank
SBI London is the ‘advising bank’ and “ B” is
105. # Letter of Credit Cont….
• ‘ Negotiation ‘ is the process by which “ B “
submits the documents stipulated in the LC
to SBI London for getting payment.
• “ Confirmation” is the process by which a
bank in the sellers host country also adds its
payment guarantee to seller.
• LC can be a ‘ sight’ LC or ‘ on credit ‘
-- In a ‘sight LC ‘ payment to the beneficiary
is immediately on submission of stipulated
documents.
106. # Force Majure clause :
• A clause in a contract which absolves parties to a
commercial transaction for delays in performance on
account of factors beyond ones control
# Capital adequacy ratio ( CAR ) or capital risk
(weighted) adequacy ratio( CRAR) :
• A ratio that indicates a bank’s ability to meet its time
liabilities & other operational/credit risks.
• It is fixed by RBI . It is currently :
-- 9 % for existing banks.
-- 10 % for new private sector banks.
-- 10 % for banks doing insurance business
108. # Classification of Bank capital :
• Classified from the point of view of the reliability of
the capital from a regulatory point of view.
-- Tier 1 capital :
• Retained earnings, Retained share premium −
Intangible assets (Goodwill, patents, patent rights )
-- Tier 2 capital :
• Unrealized earnings, General bad debt provisioning,
Revaluation reserve +subordinate debt
-- Tier 3 capital :
• Subordinate debt with maturity of at least 2 years.
109. # Invisible trade :
• Non merchandise trade like transport, banking,
insurance etc.
# Inflation rate or cost escalation coverage :
• An agreed formulae to protect a vendor against
manufacturing cost escalations particularly in respect
of long delivery items.
# Bank Mortgage Clause :
• A clause in the insurance policy taken by a borrower
of either working capital or long term loan.
• By this clause , a lending Bank gets the first rights to
the proceeds of an insurance claim settlement.
110. # Arbitrage :
• Is the process of trading by taking advantage of a
price differential between two or more markets.
• Commonly applied to trading in financial
instruments, such as bonds, stocks, derivatives,
commodities and currencies.
# Real Time Gross Settlement( RTGS ):
• For electronic transfer of amounts above Rs.1 lac
through banking channels.
• No upper ceiling.
• Real time means payment not subject to a waiting
period.
• Gross Settlement means transactions are settled
on a one to one basis and not bunched with any
other transaction
111. # National Electronic Fund Transfer( NEFT) or
Electronic Fund Transfer (EFT)
• Electronic fund transfers through banking
channels on a deferred net settlement (DNS)
basis
• DNS settles transactions in batches.
• There are 6 settlement timings on a week day
and 3 times on Saturdays.
• Transactions will have to wait for settlement
timings.
• No maximum or minimum ceiling.
112. # Society for world wide inter bank financial
telecommunication (SWIFT)
• Operates a worldwide financial messaging
network for secure exchange of msgs between
banks.
# Indian Financial System Code ( IFSC )
• Payment system applications operated by RBI
depend on IFSC codes to process electronic
transfer of funds between bank branches.
• It is a 11 digit code.
• This is a single identifiable unique code for
each branch.
113. # Electronic Clearing Service ( ECS )
• An institution which has to make large number of
payments to different beneficiaries ( such as interest
or dividend ) can credit the amount electronically to
individual beneficiary accounts.
• No cumbersome & time consuming paper work.
• Convenient for the beneficiary.
-- Does not have to visit the bank to deposit paper
instruments.
# Inflation rate or cost escalation coverage :
• An agreed formulae to protect a vendor against
manufacturing cost escalations particularly in respect
of long delivery items
115. # Securities &Exchange Board of India (SEBI )
• Protects interest of Investors.
• Promotes development of securities market by
appropriate regulations.
# Company Law Board
• Ensures compliance of Indian Companys act &
Regulates relationship between Public/Private
Limited company’s , share holders, SEBI ,
stock exchange and Company Law Board.
116. # BIFR: (Board of Industrial & financial
Reconstruction )
• A Govt. agency that helps Companies that
have become sick to become viable and
operate again successfully.
# AIFR: ( Appellate tribunal of industrial &
financial Reconstruction)
• Same purpose as above but at a higher level.
117. # Scheduled Bank.
• Bank meeting all stipulated norms
as per RBI Act .
• Included in the 2nd schedule of the
RBI Act 1934.
• Could be a public, private or
cooperative bank.
118. # Public Sector Banks :
• SBI Group ( SBI,State Bank of Bikaner &
Jaipur Hyderabad, Indore, Mysore, Patiala,
Saurashtra ,& Travancore ) – Total 8 Banks
# Nationalized Public sector Banks
• Allahabad Bank,OBC,IOB etc– Total 19
Banks
# Other Public Sector Banks :
• IDBI Bank Ltd . Total 1 bank
119. # Private Sector Bank.
• A Bank which is not government
owned.
• 27 Banks in all
• Some well known private sector
banks :
-- ICICI Bank ltd , HDFC ,Federal
Bank etc , South Indian Bank Ltd
120. # Cooperative Bank.
• A Bank owned on a cooperative basis
by owners .
• Operates under the cooperative society
laws
• Is also regulated by RBI.
• Ex:Peoples Urban Cooperative Bank
121. # Regional Rural Banks ( RRB)
• Set up by GOI in 1975.
• Aim to provide credit to weaker sections of
Rural Areas like small/marginal farmers, agri
-laborers , artisans and small entrepreneurs.
• Ex : Malabar Grameen Bank.
# Banking Codes & Standards Board of India
• Autonomous Agency to monitor implementation
of code of banks commitment to customers.
• The code is voluntary.
• The objective to evolve codes for fair treatment
of customers.
122. # Banking Ombudsman :
• Set up in 1995 & objectives revised in 2006.
• Staffed and funded by RBI.
• An agency to which a customer can complain
on issues of deficient service by Banks.
# Consumer Courts in India :
• Set up under the Consumer Protection Act
1986
• District Consumer Disputes Redressal Forum
(DCDRF)for less than Rs.20 lacs
• State CDRF 20 lacs to 1 crore
• National CDRF for above 1 crore.
123. # Non-Banking Financial Companies ( NBFC) :
• Provide private banking services w/o meeting
the legal definitions of a conventional bank.
• Raise funds from public & lend to borrowers.
• Activities include :
-- Accepting deposits ,giving loans & advances,
leasing ,hire purchase. No SB account.
• Examples :
-- Chit funds, Money changers and investment
companies etc.
• Is regulated by RBI Act 1934 , Chapter 3 B.
124. # Export Credit Guarantee Corporation
( ECGC) :
• Established in 1957.
• Covers the risk of non-payment on exports on
credit.
# Insurance Regulatory & Development
Authority of India ( IRDA ) :
• Set up after insurance sector thrown open to
private players and foreign investors.
• Protects the insured.
• Remember AIG.
125. # Telecom Regulatory Authority of India
(TRAI)
• Set up in 90’s to promote telecommunications after
the sector was opened up.
• Ensures transparency & a level playing field.
# Central Electricity Regulatory Commission(CERC)
• Set up in 2003.
• Regulates tariff of power generating Companies
owned or controlled by the GOI.
• Regulates inter-state transmission of electricity.
126. # Debt Recovery Tribunal :
• Constituted in 1993.
• The objective was to receive claim
applications from Banks/FI’s against
defaulting borrowers.
• Initially worked well but later borrowers
started stalling proceedings.
• Lot of pending cases now.
127. # Reserve Bank of India ( RBI )
• Set up in 1935.
• Originally privately owned but nationalized in
1949.
• Responsibilities are :
-- Issues currency notes.
-- Operate currency & Credit systems in India.
-- Regulate banking sector activities.
-- Control & regulate monetary policies.
128. # Planning Commission of India :
• Set up in 1950 .
• Headquartered in Delhi.
• PM is ex-officio Chairman because of his
position as Prime Minister.
• Finalizes the 5 year plans.
• Main functions :
-- Estimate resources of the country.
-- Formulation of 5 year plans.
-- Determination of priorities and allocation
of plans.
129. # Foreign Investment Promotion Board (FIPB)
• Agency for the approval of all cases of foreign
investment not covered in the automatic
approval list.
• Processing time 4 to 6 weeks.
# Dept of Industrial Policy & Promotion (DIPP)
• Responsible for promotional and development
measures for growth of industries
• It also facilitates FDI.
• Administers Industrial Development &
Regulation Act
130. # Serious Fraud Investigation Office (SIFO)
• A multi-disciplinary organization under Ministry
of Corporate Affairs for detecting &
prosecuting /recommending prosecution of white
collar crimes/frauds
• Normally the crime/fraud should have inter
departmental/multi-disciplinary ramifications and
should be of a complex nature.
• Investigation should result in or contribute
towards a clear improvement in systems, laws or
procedures.
• The SFIO shall also investigate serious cases of
fraud received from Department of Company
Affairs.
132. # The Negotiable Instruments Act:
• Promulgated in 1881. there has been several
amendments subsequently.
• It governs the rules & regulations regarding transfer
of money to a beneficiary against the submission in a
bank of negotiable instruments.
• Negotiable instruments are cheques, drafts,
promissory notes, bills of exchange commercial
paper etc
• A holiday declared under the Negotiable Instruments
Act will be a bank holiday.
133. # The Fiscal Responsibility & Budget Mgmt Act 2003
( FRBM )
• Places responsibility for achieving long-term macroeconomic stability by achieving sufficient revenue surplus
on the Central Government.
# SARFAESI Act (Securitization & Reconstruction of financial
assets & Enforcement of Security Interest Act 2002)
• Applicable to NPA worth more than Rs.1 lac.
• Take possession of the property within 60 days.
• Aggrieved party can appeal to DRT but not to a civil court.