INTRODUCTION #
Financial system is about money and related matters. It consists of financial markets and Finan- cial Intermediaries (FIs) financial institutions that intermediate between lenders (savers) and borrowers (spenders/investors). Fls can be commercial banks, cooperative societies and banks, mutual funds, investment institutions etc. Finance is provided to ultimate borrowers directly or indirectly. If the finance is provided through FIs, it is indirect financ- ing and if financing is through financial markets, it is direct financing.
DEBT MARKET #
Financial market is classified as debt and equity market. One of the ways to raise funds is through debts. This is called as debt market. The holder of a debt security, typically a bond, is the debt owed by the issuer and is entitled to payment of principal and interest together with other personal rights under the terms of the issue such as the right to, receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. If the debt is of short term the market will be recognized as Money Market while Capital Market is the market for long term credit instruments. If the maturity of credit/debt instruments is equal to or less than one year they are short term debt instruments. They are also known as Money Market Instruments. For eg: commercial paper and certain bills of exchange. They are highly liquid and referred to as “near cash”. And if the maturity is above one year they are regarded as long term debt instruments. Money market operates through different institutions like Central Bank of
the country, Commercial Banks, Non-bank financial intermediaries, Discount houses (where discounting of bills is done on behalf of others), etc. Most of these institutions also deal in capital markets.
EQUITY MARKET #
Another market for raising funds is equity mar- ket or securities market. Eg: Shares representing ownership in companies. Equity markets are further classified as primary market and secondary market. Primary market is the market for issuance of new securities to first holders. The issue of new equity securities is known as ‘Initial Public Offering’ (IPO). Alternatively, they may be offered privately to a limited number of qualified persons in a private placement. Often a combination of the two is used. The distinction between the two is important for securities regulation and company law.
Secondary markets are the markets which facil- itate transferability of securities. It is also called as after trading. It often consists of what is called an exchange to facilitate the meeting of buyers and sell- ers. They are referred to as stock exchanges. Stock exchange is an organized, officially recognized market on which securities can be bought and sold. The stock are listed and traded on stock exchanges, which are entities (a corporation or mutual organiza- tion) specialized in the business of bringing buyers and sellers of stocks and securities together. Eg: The stock market in U.S.A includes the trading of all securities listed on New York Stock Exchange (NYSE), National Association of Securities Dealers Automated Quotation (NASDAQ), Toronto Stock Exchange (TSE) the Amex, as well as many regional exchanges. Stock Market is a market that enables the trading of company stocks, other securities and
derivatives. Stock is the capital raised by a corpora- tion through the issuance and distribution of shares. Aggregate value of a corporation’s issued shares is its market capitalization. A person or organization which holds share of stocks is called a share holder, The word ‘stock’ also refers to as bond and widely refers to all kinds of marketable securities. Security is the legal right given to a creditor by a borrower. Securities have been categorized into debt and equity securities. The major purpose of issuing securities has been to raise capital.
Securities are often represented by a certificate. They include shares of corporate stock or mutual funds, bonds issued .by corporations or government agencies, stock options or other options, limited part- nership units and various other formal “investment instruments”. The different kinds of securities are:
Bills of exchanges or Trade Bills
It is a written order by one person to pay another a specific sum on a specific date sometime in the future, usually 91 days. If the order is written by the government, they are called as treasury bills. Treasury Bills in India are usually of period 91 days, 182 and 364 days.
Call and notice money
In call money market funds are borrowed and lent for one day. In the notice market, they are bor- rowed and lent up to 14 days without any collateral security. But deposit receipt is issued to the lender by the borrower who repays the borrowed amount with interest on call.
Commercial Paper
It is a money market security issued by large banks and corporations. It is generally not used to finance long – term investments but rather for purchases of inventory or to manage working capi- tal. Commercial paper maturities don’t exceed nine months.
Government Bonds
These are medium or long term debt securities issued by sovereign governments or their agencies. They carry a lower rate of interest than corporate bonds. They provide a source of finance for gov- ernments.
Sub sovereign government bonds
They are also known as municipal bonds. They represent the debt of state, provincial, territorial, municipal or other government units other than sovereign governments.
General obligation bonds
Principal and interest are secured by the full faith and credit of the issuer and usually supported by either the issuers’ unlimited or limited taxing power.
Revenue Bonds
Principal and interest are secured by revenues derived from tolls, charges, or rents paid by the facility built with the proceed of the bond issue. Public project financed by revenue bonds include toll roads, bridges, airports, water & sewage treat- ment facilities, hospitals and housing for poor etc.
Supranational Bonds
They are the debts of international organizations such as the World Bank, the International Monetary Fund, regional development banks like Asia Devel- opment Bank., African Development Bank etc.
Corporate Bonds
They represent the debt of commercial and industrial entities. Shares: A share is one of a finite number of equal portions in the capital of a company, entitling the owner to a proportion of distributed, non-reinvested profits known as dividends and to a portion of the value of the company in case of liquidation.
Shares can be voting or non-voting, i.e., they either carry or do not carry the right to vote on the board of directors and corporate policy. Whether this right exists often affects the value of the share.
Preference Shares
It is an intermediate class of security between equities and debt if the issuer is liquidated (i.e., Bankrupt or run), they carry the right to receive interest and/or a return of capital in priority to ordinary share holders.
Debenture
In finance, a debenture is a long-term debt investment used by government and large companies
to obtain funds, It is a measured loan, A debenture is unsecured in the sense that there are no pledges on specific assets. It is however, secured by all properties not otherwise pledged. In case of bank- ruptcy debenture holders are considered creditors. (Creditors are people to whom you owe money). A debenture is similar to a bond except the securitiza- tion conditions are different.
Equity is an ordinary share in a company. The holder of equity is a share holder, owning a share,
0.1 fractional part of the issuer.
Hybrid: Hybrid securities combine some of the. characteristics of both debt and equity securities.
Convertibles: These are bonds which can be converted at the selection of the bond holder into another sort of security such as equities.
Equity warrants: They are contractual entitle- ments to purchase shares on pre- determined terms. They are often issued together with bonds or existing equities but are detachable from them and separately tradable.
DERIVATIVES #
Financial markets also offer opportunity to manage and trade financial assets through condi- tional instruments. Such conditional instruments are called as Derivatives. The derivatives market is the financial markets for derivatives. The market can be divided into two – exchange traded derivatives and over the counter (OTC) derivatives. O.T.C. deriva- tives are contracts that are traded directly between free parties without going through an exchange or intermediary. Exchange Traded derivatives are those traded through exchange. Here exchange acts as an intermediary to all transactions and takes initial mar- gin from both sides of the trade to act as a guarantee.
There, are essentially two derivatives, namely: Options or futures and swaps Options or futures are different kind of contracts where, one party agrees to pay a fee to another or the right to buy or sell something to the other. For eg: A person worried that the price for his stock (of a company) may go down soon just before he plans to sell it, may pay a fee to another person who agrees to buy the stock from him at today’s price. The person is using an option to manage the risk of lowered stock price,
whereas the person to whom he has paid fees might be using the option speculating increase in stock price. Futures Contract is a standardized contract traded on futures exchange, to buy or sell a cer- tain underlying instrument at a certain date in the future, at a pre-set price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. The futures price normally con- verges towards the settlement price on the delivery date. A futures contract gives the holder the right and the obligation to buy or sell, which differs from an options contract, which gives the buyer the right, but not the obligation and the options holder (seller) the obligation, but not the right. In other words, the owner of an options contract can exercise (to buy or sell) on or prior to the pre-determined settlement/ expiration date. Both parties of a “futures contract” must exercise the contract on the settlement date. To exit the commitment, the holder of a futures position has to sell his long position or buy back his short position, effectively closing out the futures position and its contract obligations. A put is the option to sell a futures contract, and a call is the option to buy a futures contract. A long position in an asset is a position that benefits from price increase in that security. A short position benefits from price decreases in the security. An option holder is very flexible whereas option seller has to fulfill option holder’s requests. For this, options buyer has to pay a premium to option seller. Examples of options are European (options exercised only at expiration date), American (any time before expiry), and Bermudan (certain predetermined date before expiry) options.
Swaps are instruments which allow a swap holder to receive a floating interest rate from and pay a fixed interest rate to a swap seller for a certain period of time. The interest rates are paid on the same fixed notional principal. A swap can be priced as combination of bonds; can be between different currencies; and are extremely liquid instruments.
International bond market and World stock mar- ket indicate internationalization of financial markets. International bond market consists of foreign bonds and Euro Bonds. Foreign bonds are sold in a foreign country and denominated in that country’s currency.
Euro bonds are denominated in a currency different from where it is sold. Eg: Bonds sold in London denominated in US dollars.
SEBI #
Financial markets are known to be volatile and hence lot of risk is associated with it. This calls for regulation which can provide information to inves- tors for investing on sound assets and ensuring the soundness of FIs. Securities Exchange Board of India (SEBI) is the regulatory body in India. The securities contract (regulation) Act, 1956 empowers the central government to regulate stock exchanges- in India. SEBI is •the apex board to regulate stock exchanges and to promote an orderly growth of securities mar- ket. It was set up on April 12, 1988 through an extraordinary notification of the government of India in the gazette of India. In April -1992, it was made a statutory body by an Act of Parliament.
CREDIT RATING MECHANISMS #
Apart from regulatory bodies, Credit Rating mechanisms allow investors to know the credibility of various securities in the financial market and invest on sound assets. Credit rating is recognized as a significant measure towards investor’s protec- tion and self check for the corporate enterprises for their financial and operational strength. It is useful to investors, issuers, intermediaries, banks and finan- cial institutions. Credit Rating is an indicator which indicates the relative capability of the issuer (of a security) to service its debt obligation in a timely fashion. A rating is an opinion on the future ability and legal obligation of an issuer to make timely payments of principal and interest on a specific fixed income security. The agencies which perform such a job are called credit rating agencies. Funda- mental analysis helps the process of credit rating. Fundamental Analysis is a method of evaluating a stock by attempting to measure its ‘intrinsic value.’ Fundamental analysts study everything from the overall economy and industry conditions, to the financial condition and management of companies. It is about using real data to evaluate a stock’s value. The method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company’s underlying value and potential for future growth.
Credit Rating Agencies in India
In India, the practice of credit rating began in 1987 with the setting up of Credit Rating Informa- tion Services of India Ltd (CRISIL).
CRISIL was promoted jointly by Industrial Credit and Investment Corporation of India Ltd (ICICI) and UTI as a public limited company with its headquarters at Mumbai; Investment information and credit rating agency of India Ltd (ICRA Ltd);
The Credit Analysis and Research Ltd (CARE Ltd) undertakes credit rating of all types of debt instruments, both long and short term; Fitch India Limited concentrates 011rating of debentures fixed deposits and other short term instruments.
Rating symbols: The credit rating symbols differ from agency to agency. Some examples are:
AAA, AA +: Best rating which indicate sound assets;
BBB, BB: Better assets and
C, D: Least preferred assets
STOCK MARKET AND STOCK EXCHANGE #
Joint stock companies (or corporations) raise money through selling of their shares in the mar- ket. The people who buy shares or investors have a degree of ownership in the company. More the shares one owns, more control he/she has over the company’s operations. And also, more shares a company issues, more dilution of its ownership and control over the company. If the company makes profit, it may decide to put back money into business for expansion or pay dividends on the shares.Because of the dividends and rising prices of shares people begin buying and selling of shares. The stock market or the stock exchange is the place, which facilitates such buying and selling of shares. Stock exchanges are an efficient medium for raising resources and channeling savings from the public by way of issue of equity/debt capital by joint stock companies listed on the stock exchanges.
In India we have two major stock exchanges, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) and other regional exchanges. They ease the process of selling shares in public markets.
The companies or corporations should go public before selling of shares to the large public. It means that it should be listed in the major stock exchange. In India a Corporation/ Company gets listed on BSE or NSE or both. By going public the company can infuse huge capital since large number of investors can easily purchase the shares. Each market has its own rules and regulations about the gratuities of a company to be listed on an exchange. Such rules and regulations are provided by SEBl. If a corporation violates these rules or loose the qualities stipulated by SEBI it can be delisted or removed from an exchange. The financial soundness of a company affects its share price. When the financial statements of a company are good, people become confident in its growth and hence the demand for company’s shares increases. This increases the price of the shares. If a company is not doing very well the price of its shares decreases due to excess supply.
Bombay Stock Exchange (BSE) Limited is the oldest stock exchange in Asia. It was established as “The Native Share & Stock Brokers Association” in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956. The Exchange is profes- sionally managed under the overall direction of the Board of Directors. The Board comprises eminent professionals, representatives of Trading Members and the Managing Director of the Exchange. The Exchange provides an efficient and transparent mar- ket for trading in equity, debt instruments and deriv- atives. The BSE’s on line trading system (BOLT) is a repertory system of the Exchange. The Exchange’s pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, Sensex, is tracked worldwide.
The National Stock Exchange (NSE), located in Bombay, is India’s first debt market. It was set up in 1993 to encourage stock exchange reform through system modernization and competition. It opened for trading in mid- 1994. It was recently accorded recognition as a stock exchange by the Department of Company Affairs. The instruments traded are: treasury bills, government security and bonds issued by public sector companies. NSE Group includes: I. India Index Services & Products Ltd. (IISL), 2. National Securities Clearing Corpo-
ration Ltd. (NSCCL), 3. NSE.IT Ltd., 4. National Securities Depository Ltd. (NSDL) and 5. Dot Ex International Limited.
Financial indexes are constructed to measure price movements of stocks, bonds, Trade-bills and other forms of investments. Stock market indexes are meant to capture the overall Behaviors of equity markets. A stock market index is created by select- ing a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value. The BSE Sensex is a value-weighted index composed of 30 companies with the base April 1979. The set of companies in the index is essentially fixed. These companies account for around one-fifth of the mar- ket capitalization of the BSE. NIFTY is the index of NSE.
Bulls indicate institutional investors/others who buy securities in the stock market, when stocks values are going up. A bull is hence an optimistic person. He is an investor who thinks the market, a specific security or an industry will rise. A bear is person who is pessimistic believing that stocks are going to drop or suffer a decline in price. Bull Market is when everything in the economy is great, people are finding jobs, GDP is growing and stocks are rising. Picking stocks during a bull market is easier because everything is going up. Bull Run Stock Market is when there is continuous buying of security by institutional investors and others in the stock markets. Bear Market is when the economy is bad, recession is looming and stock Prices are fall- ing. It is tough for investors pick profitable stocks.
Money Supply #
Money Supply means the total volume of mon- etary media of exchange available to the community for use in connection with the economic activity of the economy. Money supply consists of (a) Currency with the public and (b) deposit money with the public.
The measures of money supply are conceptual- ized as follows;
M1 = Currency held by the public + demand deposits held by the public with banks.
M2 = M1 + Saving Deposits held by the public with post offices
M3 = M1 + Time deposits held by the public with banks
M4 = M1 + Total deposits held by the public with post offices.
Though the estimates of MI, M2, M3 and M4 are prepared by R.B.I, only Ml denotes money supply in the economy. M3 represents the overall liquidity position of the economy or the aggregate monetary resources of the country. Money and related assets have in them certain aspects like liquidity and fun- gibility. Liquidity refers to how quickly and cheaply an asset can be converted into cash. It is the purchas- ing power of the money and related assets. Money (in the form of cash) is the most liquid asset. The term liquidity is used in various ways, all relating to availability of, access to, or convertibility into cash. An institution is said to have liquidity if it can easily
meet its needs for cash either because it has cash on hand or can otherwise raise or borrow cash; a market is said to be liquid if the instrument it trades can easily be bought or sold in quantity with little impact on market prices; and an asset is liquid if it can easily be converted into cash.
Fungibility is a measure of how easily one good may be exchanged or substituted for another. For eg: same good at equal value which are interchangeable. Fungibility is also an attribute of commodity money. Fungibility is different from liquidity. Many com- modities that are fungible also tend to be liquid. For eg: gold is fungible and highly liquid while diamonds are fungible and have lower liquidity. The fungibility of a good is dependent on the intrinsic properties of that good; the liquidity of a good is dependent instead on how frequently that good is traded.
Important Factopedia #
Foreign Direct Investments (FDI) and Foreign Institutional Investors (FIIs)
| FDI | When a foreign company invests in India directly by setting up a wholly owned subsidiary or getting into a joint venture and conduct business in India. |
| FII | When foreign investors invest in the shares/bonds of a company that is listed in India. |
| Nature | FDI invests in new production activities hence help in economic development. Whereas FIIs invest mainly in capital market for short term. |
| FDI inflow | Major portion of FDI in India is from Mauritius as it has double taxation avoidance agreement with India. Singapore is on second position. |
| Double Taxation | DTAA is a tax treaty signed between two countries to avoid dual taxation on |
| Avoidance | same income. It makes a country an attractive investment destination. But |
| Agreement. | even legitimate investors were routing investments through Mauritius and Singapore to sidestep taxation. Hence India has amended DTAA with Mauritius, Singapore and Cyprus to curb tax evasion.Amendment provides for source based taxation of capital gains arising from transfer of shares on or after 1st April, 2017 in a company resident in India instead of residence based taxation. |
| Strategic Sale of PSU. | In the strategic sale of a company, the transaction has two elements: Transfer of a block of shares to a Strategic Partner andTransfer of management control to the Strategic Partner |
| Salient features of the Policy. | Public Sector Undertakings are the wealth of the Nation and to ensure this wealth rests in the hands of the people, promote public ownership of CPSEs;-While pursuing disinvestment through minority stake sale in listed CPSEs, the Government will retain majority shareholding, i.e. at least 51% of the shareholding and management control of the Public Sector Undertakings;-Strategic disinvestment by way of sale of substantial portion of Government shareholding in identified CPSEs upto 50% or more, along with transfer of management control. |
| Main objectives of disinvestment | To reduce the financial burden on the Government To improve public finances.To introduce, competition and market discipline.To fund growth.To encourage wider share of ownership.To depoliticize non-essential services. |
| Committees | NITI Aayog had constituted a Committee under the Chairmanship of Dr. Arvind Panagariya, Vice Chairman, NITI Aayog on sick/lossmaking/ non-performing Central Public Sector Enterprises (CPSEs). The committee noted that financial performance of 74 CPSEs has been unsatisfac- tory and a number of these have requested for and received periodic support from budgetary resources. Over the years, this has become a significant drain on limited resources of the government. The committee has made the recommendations of closure/winding up of 26 such CPSEs. |
Foreign Investment Promotion Board
| Administrative Ministry. | Department of Economic Affairs, Ministry of Finance. | |
| About FIPB | The Foreign Investment Promotion Board (FIPB) offers a single window clearance for applications on Foreign Direct Investment(FDI) in India that are under the approval route.The sectors under automatic route do not require any prior approval from FIPB and are subject to only sectoral laws. | |
| Recommendations to Govt. Sanctioning power | FIPB is responsible for process- ing of FDI proposals and making recommendations for Government approval. | |
| Ministry of Finance | The Minister of Finance would con- sider the recommendations of FIPB on proposals with total foreign equity inflow of upto Rs. 5000 crore. | |
| Cabinet Committee on Economic Affairs (CCEA) | Recommendations of FIPB on propos- als with total foreign equity inflow of more than Rs. 5000 crore would be placed for consideration of CCEA. The CCEA would also consider the proposals which may be referred to it by the FIPB/Minister of Finance. |
| Budget 2017 | Foreign Investment Promotion Board to be abolished in 2017-18. |
Death Valley Curve
| Used in | Venture capital |
| About it | It refers to period from when a startup raises an initial capital till it starts generating revenues.Initial costs of almost all the start-ups are very high. This is called Death Valley curve as the startup is most vulnerable to death because of additional capital requirements as income has not yet been generated.Thus startup has to manage itself during the Death Valley phase. |
Chit Fund Company
| Registered by | State Governments under the Chit Funds Act, 1982 – an Act administered by the Ministry of Finance but with responsibilities of implementation resting with the States. |
| Power of investigation | Power to investigate and prosecute the Chit Fund Company lies with the State Governments. |
| Investigation under Companies act | Serious Fraud Investigation Office (SFIO) under the Ministry of Finance can investigate the Chit Fund companies on violations of provision of Companies act, 2013. |
Shell Companies
| Meaning | Companies which does not conduct any operations and indulge in money laundering. |
| Status in India | In India, There are about 15 lakh registered companies in India; and only 6 lakh companies file their Annual Return.This means that large number of these companies may be indulging in financial irregularities. |
| Characteristics of Shell companies | Shell Companies’ are characterized by nominal paid-up capital, high reserves & surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income, high cash in hand, private companies as majority shareholders, low turnover & operating income, nominal expenses, nominal statutory payments & stock in trade, minimum Fixed Asset. |
The Build Operate and Transfer BOT (Annuity) Model
| Cost & Maintenance | Developer meets the construction cost and the maintenance expenditure. |
| Recovery from Annuities | Developer recovers his cost and return on his investment out of the annuities payable by the Govt./NHAI every year. |
BOT (Toll) Model
| Cost & Maintenance | Developer meets the construction cost and the maintenance expenditure. |
| Recovery from Toll | Developer recovers his cost and return on his investment out of the future toll collection. |
Engineering, Procurement and Construction (EPC) Model
| Cost | Cost is borne by the government. |
| Developers’ scope | Construction of road and raise the running bill on Govt. for payment. |
The Hybrid Annuity Model (HAM)
| About HAM | The HAM is a mix of EPC and BOT model. |
| Govt Share | National Highways Authority of India (NHAI) will pay 40% of the project cost in the five equal installment linked to project completion milestone. |
| Developer share | Developer has to bear the remaining 60% cost through a combination of quity and debts and construct the highway. |
| On project completion | Authority shall pay 60% cost to developer through Semi- annual annuity payment. Project cost shall be inflation indexed.Interest shall be paid on reducing balance of cost.Interest rate shall be bank rate plus 3%. |
| Toll collection | Toll collection shall be the responsibility of the NHAI. |
| Maintenance | Developer shall be responsible for maintenance till the end of concession period for which payment will be made. |
| Concession period | Construction period plus operation period of 15 years. |
Swiss Challenge Method (SCM) a model to develop unsolicited proposals
| About SCM | It allows other parties to make better offers for a project and the project proponent then has the right to counter-match any superior offers. |
| Process | Project proponent shall submit unsolicited/innovative proposal.Authority will provide approval after examination of the proposal.An open bidding shall be done by the concerned authority inviting bids from various organizations.If the competing bidder provides the best financial offer, the project proponent shall be given an opportunity to match the counter proposal. |
Viability Gap funding scheme
| About VGF | Govt provides financial support in the form of capital grants, one time or deferred, to infrastructure projects undertaken through PPPs with a view to make them com- mercially viable. |
| Administered by | The Scheme for Financial Support to PPPs in Infrastructure (Viability Gap Funding scheme) of the Government of India is administered by the Ministry of Finance. |
| Funding % | The Government of India provides total Viability Gap Funding up to 20% of the total project cost; at the stage of project construction.The Government or statutory entity that owns the project may, provide additional grants out of its budget up to further 20% of the total project cost. |
P2P Lending
| Online platform | It is the use of an online platform that matches lenders with borrowers in order to provide unsecured loans. |
| Interest rate | interest rate may be set by the platform or by mutual agreement between the borrower and the lender. |
| Charges by platform | The platforms do the credit scoring and make a profit from arrangement fees and not from the spread between lending and deposit rates as is the case with normal financial intermediation. |
| Benefit of P2P lending. | For borrowers- lower interest rates than those offered by money lenders/ unorganized sector and for lenders- higher returns than what conventional investment opportunities offer. |
| Regulator | Bank |
Predatory Pricing-Reliance Jio
| Meaning | The predator sets its prices so low for a sufficient period of time that its competitors leave the market and others are deterred from entering. |
| Reliance Jio | Reliance Jio has offered free voice and data offer.Other telecom operators have moved to Commission of India (CCI) accusing the Mukesh Ambani-led Reliance Jio of predatory pricing, and anti-competitive behavior. |
Public Financial Management System (PFMS)
| About it | PFMS is a web-based online transaction system for payment, accounting and recon- ciliation of Government transactions. |
| Objective | The primary objective of PFMS is to establish an efficient fund flow system and expenditure network |
| Benefit | PFMS helps in ensuring ‘Just in Time’ releases and monitor the end uses of funds |
| Uses | Govt has decided to use the PFMS to cover all transactions in respect of Central Sector (CS) and Central Assistance to State Plan (CASP) schemes. |
| Administered by | Controller General of Accounts in the Department of Expenditure, Ministry of Finance. |
Money
| Function | It acts as a medium of exchange.Money is the most liquid of all assets in the sense that it is universally acceptable and hence can be exchanged for other commodities very easily. |
| Barter system | Economic exchanges without the money are referred to as barter exchanges. e.g. exchange of Milk with Rice. |
| Opportunity cost | It has an opportunity cost. If, instead of holding a certain cash balance, you put the money in a fixed deposits you can earn interest on that money. |
| Motive for hold- ingmoney | People desire to hold money balance broadly from two motives.The transaction motive i.e. to carry out transactions.The Speculative Motive i.e. to earn monetary returns in future. |
| Demand deposits is also considered money | Apart from currency notes and coins, the balance in savings or current account (i.e. Demand deposits) is also considered money since cheques drawn on these accounts are used to settle transactions. |
| Promise from the Governor of RBI | Every currency note bears on its face a promise from the Governor of RBI that if someone produces the note to RBI, or any other commercial bank, RBI will be responsible for giving the person purchasing power equal to the value printed on the note. The same is also true of coins. |
| Fiat money and Legal tenders | Currency notes and coins are called fiat money. They do not have intrinsic value like a gold or silver coin.They are also called legal tenders as they cannot be refused by any citizen of the country for settlement of any kind of transaction.Cheques drawn on savings or current accounts, however, can be refused by anyone as a mode of payment. Hence, demand deposits are not legal tenders. |
Time Value of Money
| Rupee today is more valuable | Money has time value as a Rupee today will have greaterpurchasing power than after a year. |
| Impact of Inflation | A rising price level may erode the purchasing power of money. |
Money in circulation
| Coins in circulation | 50 paise, 1, 2, 5 and 10 rupee |
| Notes in circulation | 5, 10, 20, 50, 100, 500 and 2000 |
| Issuingauthority | Upto Re. 1 note and coins are issued by Govt of India (Ministry of finance). Rest are issued by RBI |
| Indian coinageact | As per Indian coinage act,-Rupee coin 1 and above can be used to pay for any sum.-50 paisa coin can be used to pay for any sum not exceeding 10 rupees. |
| Plastic notes | Reserve Bank is considering issue of Rs. 10 banknotes in plastic. |
| Reasons forissue of plastic note | for ensuring availability of clean notesfor strengthening the security features of bank notes andsince the volumes involved and costs incurred in the printing, transport, storage and removal of unfit/soiled notes is very high, the Reserve Bank is evaluating ways to extend the life of bank notes – particularly in lower denominations. |
Demonetization (8th Nov, 2016)
| Reason | The incidence of fake Indian currency notes in higher denomination has increased. For ordinary persons, the fake notes look similar to genuine notes, even though no security feature has been copied.The fake notes are used for antinational and illegal activities.High denomination notes have been misused by terrorists and for hoarding black money.India remains a cash based economy hence the circulation of Fake Indian Currency Notes continues to be a menace.In order to contain the rising incidence of fake notes and black money, the scheme to withdraw legal tender character of the old Bank Notes in the denominations of 500 and 1000 (Specified Bank Notes) was introduced. |
| Exchange facility | Upto 30-12-2016 |
| Ordinance | The Specified Bank Notes (Cessation of Liabilities) Ordinance 2016 promulgated by the President of India dated December 30, 2016.In terms of this ordinance, with effect from December 31, 2016, the Specified Bank Notes shall cease to be the liabilities of the Reserve Bank of India and shall cease to have the guarantee of the Central Government. |
| Grace period | A grace period has been provided during which the Specified Bank Notes can be deposited at five RBI Offices (Mumbai, New Delhi, Chennai, Kolkata, and Nagpur). |
| Holding of SBN after the expiry of grace period | A person can hold maximum 10 notes or 25 notes for the purpose of study/ research/ numismatics.Otherwise, Fine upto Rs.10,000 or 5 times the face value of the SBNs, whichever is higher. |
Lucky Grahak Yojana and Digi-Dhan Vyapar Yojana
| Launched by | NITI Aayog |
| Implementing agency | National Payment Corporation of India (NPCI) |
| Purpose | The primary aim of these schemes is to incentivize digital transactions so that electronic payments are adopted by all sections of the society, especially the poor and the middle class.To give cash awards to consumers and merchants who utilize digital payment instruments for personal consumption expenditures |
| Period of scheme | The scheme will become operational with the first draw on 25th December, 2016 (as a Christmas gift to the nation) leading up to a Mega Draw on Babasaheb Ambedkar Jayanti on 14th April 2017. |
| Lucky Grahak Yojana for Consumers | Daily reward of Rs 1000 to be given to 15,000 lucky Consumers for a period of 100 days.Weekly prizes worth Rs 1 lakh, Rs 10,000 and Rs. 5000. |
| Eligible transactions | Transactions within the range of Rs 50 to Rs 3000 through UPI,USSD, AEPS and RuPay Cards. |
| Exclusion | Private Credit Cards and Digital Wallets. |
| Digi-Dhan Vyapar Yojana for Merchants | Prizes for Merchants for all digital transactions conducted at Merchant estab- lishments Weekly prizes worth Rs. 50,000, Rs 5,000 and Rs. 2,500. |
| Mega Draw on 14th of April–Ambedkar Jayanti | 3 Mega Prizes for consumers worth Rs 1 cr, 50 lakh, 25 lakh for digital transactions between 8thNovember, 2016 to 13th April, 2017 to be an- nounced on 14th April, 2017.3 Mega Prizes for merchants worth Rs 50 lakhs, 25 lakh,12 lakh for digital transactions between 8th November, 2016 to 13th April, 2017 to be an- nounced on 14th. |
| DigiDhan Mela | To make Digital payments and a less cash society a mass movement in India, the DigiDhan Mela will take place in 100 different cities across the country over the next 100 days until March.First ‘Digi Dhan’ mela (fair) organised in Gurugram, Haryana. |
| Estimated expenditure of Govt. | estimated expenditure on the first phase of the scheme (up to 14th April 2017) is likely to be 340 Crores. |
Bitcoin
| About bitcoin | Bitcoin is a web based crypto-currency. |
| Peer-to-peer payment network | It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. |
| Digital money | Bitcoin is pretty much like cash for the Internet i.e. a completely digital money. |
| Triple entrybook keep- ing system | Bitcoin can also be seen as the most prominent triple entry book keeping system in existence. |
| From a user perspective | Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them. |
| Digitalsignatures | The authenticity of each transaction is protected by digital signatures. |
| 24×7 use | It is possible to send and receive bitcoins anywhere in the world at any time. No bank holidays. No borders. No bureaucracy. |
Money market v/s Capital/Security market
| Money Market | Capital/Security Market |
| Controlled by RBI. | Controlled by SEBI. |
| Sources which meet short term requirements of money are the constituents of the money market. | Sources which meet medium and long term requirements of money are the constituents of the capital market. It has two type Primary market and secondary market. |
Primary market v/s Secondary market
| Primary market | Secondary market |
| It is a market of new issue. Since securities are new hence they create capital formation. | It provides market ability for the securities coming for sale in stock market. There is no profit for company. When price of securities is increased, capitalization of company increased. |
Bull and Bear Market
| Bull market | A bull market is one where prices are rising |
| Investor Optimistic | A bull investor has a very optimistic view of the market. Heaggressively buys and sells stocks quickly. |
| Bear market Investor | A bear market is one where prices are falling. |
| Investor Pessimistic | A bear investor is pessimistic about the market and may make more conservative stock choices. |
Underwriting
| Definition | The arrangement wherein underwriter undertakes the risk associated with the issue of new securities to public. |
| Who is underwriter | Underwriters may be individual, Banks or Financial institutions |
| Example | XYZ ltd issued a IPO of 2,00,000 shares.XYZ limited entered into underwriting agreement with SBI for underwriting of shares.Offer from public came for 1,50,000 shares, now SBI will have to purchase unsubscribed 50,000 shares. |
The Securities and Exchange Board of India (SEBI) or Market Watchdog
| Establishment | SEBI was enacted on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992. |
| Basic functions of the SEBI | to protect the interests of investors in securities marketto promote the development of securities market andto regulate the securities market |
| HQ | Mumbai. |
| Chairman | Ajay Tyagi |
Merger of Forward Markets Commission (FMC) with SEBI
| Regulating act | SEBI was enacted on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992 for regulating the securities markets.Forward Markets Commission, on the other hand, had been regulating commodities markets since 1953. It is overseen by the Department of Economic Affair (Ministry of Finance). |
| Reason for merger | The Government opted for merger of the two regulators since both commodity derivatives and security derivatives have similar economic purposes of hedging, efficient price discovery and risk management and have close resemblance in so far as trade practices and mechanisms are concerned.FMC’s merger with SEBI is aimed at streamlining the regulations and curb wild speculations in the commodities market, while facilitating further growth. |
Masala Bonds
| Nature | Masala bonds are rupee denominated bonds issued to overseas buyers. |
| First issue | IFC issued the first Masala bond listed on the London Stock Exchange. The bonds worth over Rs 1000 crore were issued to raise funds for infra- structure projects. |
| Minimum maturity period | Minimum maturity period for such bonds is 3 years. |
Major stock exchanges of world
| Country | Stock Exchange | Indices |
| India | Bombay Stock Exchange. | SENSEX (30 companies) |
| India | National Stock Exchange of India. | NIFTY (50 companies) |
| Japan | Tokyo stock exchange | NIKKEI |
| US | New York Stock Exchange (NYSE) | NYSE Composite, Dow Zones, S&P 500 |
| US | NASDAQ | NASDAQ Composite, Dow Zones, S&P 500 |
| Uk | London stock exchange | FTSE 100 |
| China | Shanghai stock exchange | SSE Composite/SHCOMP |
| China | Hong Kong stock market | Hang Seng |
| China | Shenzhen stock exchange | SZSE component |
| Singapore | Singapore stock market | Straits Times STI |
| Pakistan | Karachi Stock Exchange | KSE 100 |
| Brazil | Sao Paulo stock exchange | IBOVESPA |
| Korea | Korea Stock exchange | KOSPI |
| Germany | German stock exchange | KOSPI |
| French | French stock market | CAC 40 |
| Russia | Moscow Stock Exchange | RTS and MICEX |
| South Africa | Johannesburg Stock Exchange | FTSE/JSE |
