Book of Financial Terms

Fourth Edition
Book of Financial Terms
Fourth Edition

Surendra Sundararajan
M.S. Patel Institute of Management Studies
Faculty of Management Studies
The M.S. University of Baroda
Baroda

Tata McGraw Hill Education Private Limited

NEW DELHI
McGraw-Hill Offices
New Delhi New York St Louis San Francisco Auckland Bogotá Caracas
Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal
San Juan Santiago Singapore Sydney Tokyo Toronto
Published by Tata McGraw Hill Education Private Limited,
7 West Patel Nagar, New Delhi 110 008.

Copyright © 2010, 2004, 2000, 1997 by Tata McGraw Hill Education Private Limited.

No part of this publication may be reproduced or distributed in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise or stored in a database or
retrieval system without the prior written permission of the publishers. The program
listings (if any) may be entered, stored and executed in a computer system, but they may
not be reproduced for publication.

This edition can be exported from India only by the publishers,

Tata McGraw Hill Education Private Limited.

ISBN (13): 978-0-07-070708-5

ISBN (10): 0-07-070708-1

Vice President and Managing Director—Asia-Pacific Region: Ajay Shukla

Executive Publisher—Professional: R Chandra Sekhar
Manager—Production: Sohan Gaur
Manager—Sales and Marketing: S Girish
Asst. Product Manager—BGR: Priyanka Goel
General Manager—Production: Rajender P Ghansela
Assistant General Manager—Production: B L Dogra

Information contained in this work has been obtained by Tata McGraw Hill, from
sources believed to be reliable. However, neither Tata McGraw Hill nor its authors
guarantee the accuracy or completeness of any information published herein, and
neither Tata McGraw Hill nor its authors shall be responsible for any errors, omissions,
or damages arising out of use of this information. This work is published with the
understanding that Tata McGraw Hill and its authors are supplying information but are
not attempting to render engineering or other professional services. If such services
are required, the assistance of an appropriate professional should be sought.

Typeset at Tej Composers, WZ-391, Madipur, New Delhi 110063, and printed at Adarsh
Printers, C-50-51, Mohan Park, Naveen Shahdara, Delhi-110032
Cover Printer: Rashtriya Printers
Cover Designer: Kapil Gupta
RAXLCRQZRZBLC
 PREFACE TO THE FOURTH EDITION

The world of finance crossed uncharted territory in the last decade.

By the year 2000, stock markets had scaled new peaks in the US,
Germany, France and other countries. Markets in India, Japan and
elsewhere were also on the rise during that time. Though some of
the markets underwent corrections after their dizzying ascent, the
developments gave rise to new concerns. Central bankers began to
worry about asset bubbles and debated on ways to quell them. Then
it was the turn of housing prices which soared across Europe, the
US, Russia, India, China and Canada. Not to be left out, commodity
prices also took off on a steep trajectory, perhaps fuelled by the
surging economic growth and massive infrastructure spending in
India and China. Capital flows to the emerging economic stars
surged, posing a dilemma, rather “trilemma”, for monetary policy.
Meanwhile, some countries which had benefitted from soaring
commodity prices and export surpluses created Sovereign Wealth
Funds to pick up underpriced stocks, especially in western countries.
Then, quite suddenly, the western financial market was hit by a
massive meteor, in the form of the subprime crisis, which brutally
wrecked reputed financial institutions. There were immediate and
serious repercussions—economic growth across the world was
suddenly choked and bank credit dried up. Rattled governments
reacted by casting aside the free market philosophy and embracing
Keynesian economics, which translated into bailout packages and
stimulus programmes. Though severe in its impact, the meteor did
turn out to be a rich lode of financial terms: Collateralized Debt
Obligations, Credit Default Swaps, Toxic Assets, Carry-trade ... which
began to feature prominently in media reports.
Even as India coped with the economic crisis, new initiatives,
such as, a council for maintaining financial stability, a thrust to
financial inclusion and the Goods and Services Tax emerged. These
developments across the globe signaled the need to offer an updated
edition of this book. New terms have been included which capture
vi � Preface to the Fourth Edition

the events surveyed in the preceding paragraphs; existing terms have

also been updated.

SURENDRA SUNDARARAJAN
 PREFACE TO THE FIRST EDITION

The financial scene in India has changed dramatically with the

advent of economic liberalization and financial sector reforms. The
impact on the various constituents of the financial system is
conspicuous—be it the financial markets, the financial instruments,
the financial intermediaries or the participants, which include the
government, the corporate sector, and the individuals.
New instruments and financing techniques such as SDO,
RUF/NIF, Bought-out deals, and Securitization, have come to the
fore. New institutions, such as the National Stock Exchange and
the Securities Trading Corporation of India, have been estab-
lished. Banks and finance companies are coming to terms with
unfamiliar rules relating to capital adequacy, income recognition,
and provisioning. The government has started borrowing at mar-
ket rates and is emulating the private sector by issuing zero-coupon
securities. Special purpose mutual funds have been floated. Mean-
while, for the corporate sector, there’s something new and bewitch-
ing—Euro Issues!
These developments have heightened people’s interest in economic
and financial matters. The urge to improve personal financial planning
in an era of persistent inflation, motivates many individuals to seek
and assimilate new information. Their interest now extends to
issues such as the size and significance of the budget deficit and the
gross fiscal deficit. This voracious appetite for knowledge is even
more evident among university students. In today’s competitive
world, many want to know all about derivatives even as they are
learning the rudiments of finance. And so, there is intense curiosity
about options, futures, caps, floors, collars, swaptions, and all!
This book is a modest effort at bridging the information gap,
alluded to the above. It brings together terminology from corporate
finance, investments, public finance, and financial economics. The
terms are alphabetically arranged to facilitate quick access. Further,
several related terms have been clubbed together under the subject
viii � Preface to the First Edition

index that appears at the end of the book. For the more interested
reader, there are six important appendices covering topics such as
calculating yields, hedging strategies, and financial ratios. Although
I embarked on this project about three years ago, I have strived to
keep the contents as current as possible. For this, I have depended
considerably on newspapers, particularly The Economic Times, besides
books and periodicals mentioned in the bibliography.
I feel a deep sense of gratitude towards all those people who have
taken an interest in this project. My faculty Dean, Prof M M Dadi
and my colleagues, Prof Kiran Joshi and Ms Meenakshi Chauhan,
encouraged me to persevere with this exacting task. Prof Joshi also
offered useful suggestions from time to time. I am also immensely
thankful to Mr Varadarajan R Iyengar of Merit Services, Baroda, for
the word processing facilities, and to my nephew Rajesh Rangaswamy
for typing the manuscript. I also acknowledge the typing assistance
rendered in the earlier stages by Nilkanth Jugdan, Atique Khan,
and Jacob Mathew.
The guiding principle in writing this book has been that it should
be useful to students, professionals, bankers and investors. I hope
their need is well served.

SURENDRA SUNDARARAJAN
 CONTENTS

Preface to the Fourth Edition v

Preface to the First Edition vii

Book of Financial Terms 1-254

Appendix I 255
Appendix II 259
Appendix III 265
Appendix IV 267
Appendix V 271
Appendix VI 273
Bibliography 275
Subject-wise Listing 281
 e

Accelerator Principle A proposition that relates increasing

investment in real eƒƒi„ƒ, such as equipment and inventory, to
increase in sales.

Acceptance The drawee’s acknowledgment of the vsefsvs„‰ on

a fsvv yp iˆgrexqi, in writing on the instrument itself. A bill
may also bear the co-acceptance by a bank, which is a guarantee
to honour the instrument in the event of default by the drawee.

Accommodation Bill A fsvv yp iˆgrexqi without any

conside-ration, or quid pro quo. In this case, a person signs a bill
and makes himself liable, without receiving any value in return,
such as, an advantage or a benefit. The purpose of accepting
such a bill is to accommodate the drawer who is temporarily in
need of funds. The acceptance enhances the vs…shs„‰ of the
instrument, which can be discounted by the drawer with a
bank.

Accounts Receivable The amounts due from customers who

have been sold goods or services on credit. This item appears
under g…‚‚ix„ eƒƒi„ƒ in a fevexgi ƒrii„.

Accrual Basis A method of accounting that recognizes

revenues and expenses as they accrue, even though cash would
not have been received or paid during the accrual period.
P q2Accumulation

Accumulation The eg…sƒs„syx of a large number of shares of

a stock in a gradual and unobtrusive manner, so as not to invite
the investors’ attention, which could push up prices. Technical
analysts thus look for ‘Accumulation Areas’, within which a
stock hovers due to steady buying support. This is particularly
relevant in the case of sxƒ„s„…„syxev sx†iƒ„y‚ƒ having regular
cash inflows that are used in an accumulation plan.

Accumulation Area See egg…w…ve„syx .

Acid-Test Ratio See Appendix IV

Acquisition The purchase of a controlling shareholding in a

company by another company or an individual. (See also
‚eshi‚.)

Ad Valorem A term which specifies that the basis of levying

a charge, e.g. taxes or excise duty, is on the value of the item,
which may be a commodity, a manufactured product or some
property.

ADR An acronym for American Depository Receipt. It is an

instrument traded at U.S. exchanges representing a fixed
number of shares of a foreign company that is traded in the
foreign country. By trading in ADRs, U.S. investors manage
to avoid some of the problems of dealing in foreign securities
markets. The ADR route enables companies to raise funds in
the U.S. financial markets, provided they meet the stringent
regulatory norms for disclosure and accounting. (See also qh‚.)

Advance Refunding The ‚ipsxexgsxq of securities undertaken

prior to their we„…‚s„‰.

Advance-Decline Line See f‚ieh„r yp we‚ui„.

 Annual Report q Q

Adverse Selection The chance that financial contracts may be

entered into with high-risk or unworthy counterparties. Banks
and insurance companies are susceptible to this problem created
by eƒ‰wwi„‚sg sxpy‚we„syx. For instance, an unscrupulous
borrower may inveigle a bank into giving him a loan.

Aggressive Stock A share that displays considerable volatility,

recording substantial increases or decreases in price with changes
in market conditions. Such stocks are useful to have in one’s
€y‚„pyvsy when the stock market is poised for a ‚evv‰ .

Aging Schedule See Appendix IV.

Allotment The acceptance of an application subscribing to the

shares or other securities of a company. Such allotment establishes
the contractual relationship that underlies an investment
through public subscription.

Amortization The reduction of an amount at regular intervals

over a certain time period. This term is used to refer to the
reduction of debt by regular payment of loan instalments during
the life of a loan. It is also used to describe the accounting process
of writing off an intangible eƒƒi„.

Annual Report A yearly publication that contains particulars

relating to the operating data of a company and which is published
and distributed by the company to its shareholders, as per the
requirement of the Companies Act. The important contents are
the profit and loss statement and the fevexgi ƒrii„. These
statements show a company’s performance in terms of sales and
earnings during a financial year, and also its year-end financial
position in terms of eƒƒi„ƒ and vsefsvs„siƒ. It also contains the
directors’ report, a notice to the shareholders about the proposed
business agenda of the annual general meeting and the auditor’s
report.
R q2Annuity

Annuity A series of payments of a fixed sum at regular

intervals over a period of time.

Approved Security A security which constitutes an

acceptable investment, either for the purpose of meeting the
ƒ„e„…„y‚‰ vs…shs„‰ ‚e„sy (SLR) requirement or in attaining
a prescribed investment pattern. For example, a financial
eƒƒi„ could be deemed as Approved Security under the
Banking Regulation Act, 1949, or under the Insurance Act,
1938, for investment by banks or insurance companies
respectively. Typically, these are securities that are issued by
the government or by other bodies, but bearing a government
guarantee with respect to the payment of all obligations.

Arbitrage The simultaneous purchase and sale transactions in

a security or a commodity, undertaken in different markets to
profit from price differences. For example, an arbitrageur may
find that the share of Tata Steel (TS) is trading at a lower
price, at the Vadodara Stock Exchange compared to the
exchange at Mumbai. Hence, she may simultaneously buy TS
stock in Vadodara at, say, Rs 517 and sell in Mumbai at a
higher price, say, Rs 521, making a profit of Rs 4 per share,
less expenses and taxes.

Arbitrage Pricing Theory A theory developed by Stephen

Ross, according to which the elimination of profitable
e‚fs„‚eqi opportunities by investors, as they go about
forming arbitrage €y‚„pyvsyƒ, culminates in the establishment
of equilibrium prices of ƒig…‚s„siƒ. An arbitrage portfolio is a
portfolio with distinct features, e.g., it does not require any
additional funds from the investor.

Asking Price The price demanded by an intermediary, e.g. a

we‚ui„ weui‚ or dealer, for selling a security or foreign
exchange.
 Asset Bubble q S

Asset Any item, whether physical property or right, which is

owned and has a tangible value. Thus, a business entity may own
psˆih eƒƒi„s such as land and buildings, and g…‚‚ix„ eƒƒi„ƒ such
as raw materials. Individuals may also own assets in the form of
vehicles, real estate or financial assets such as shares and fyxhƒ.

Asset Allocation The determination of the optimum mix of

different eƒƒi„ classes for a €y‚„pyvsy , in order to earn the
highest return for an acceptable level of risk. Examples of asset
classes are i…s„‰ ƒre‚iƒ, fyxhƒ, wyxi‰ we‚ui„ ƒig…‚s„siƒ and
gold.
Asset allocation is critical to managing a portfolio successfully.
To elaborate, a portfolio that is heavily weighted with stocks
may not do well if the medium, or long-term outlook for equity
shares in general is dismal. In such a situation, the investor would
be better off by loading the portfolio with bonds and other assets;
the switch to shares can take place later, when the outlook for
stocks improves.

Asset Bubble A ballooning of prices of ASSETS such as equity

shares, commodities or houses, to irrationally high levels due to
SPECULATION. Such a situation becomes a matter of deep
concern to regulators, as a sudden bursting of the balloon can
unleash devastating consequences on the financial system as
well on economic activity. The ensuing fall in prices could
inflict colossal losses on investors and cause widespread loss of
confidence; consequently, it may become exceedingly difficult
for firms to raise funds, especially for CAPITAL FORMATION,
for an indefinite length of time. Therefore, an important policy
question that has been debated in recent years among
policymakers and regulators is about the approach to pricking
asset bubbles, e.g., by tightening MONETARY POLICY,
before they assume monstrous proportions.
In recent years, a practice that may have spurred asset bubbles is
'Carry-Trade'. It is widespread speculative investment activity
spawned by the availability of funds at nominal rates of interest;
T q2Asset Management Company (AMC)

the low rates are symptomatic of a liberal monetary policy

adopted by CENTRAL BANKS in order to revive economic
activity. To illustrate, a speculator borrows US Dollars at a low
rate of interest and converts the currency to invest in, say, higher-
yielding Yen-denominated securities. Assuming no adverse
movements in interest rates or foreign exchange rates, the
transaction will yield a profit. However, the danger is that if the
interest rates are hiked in the US, which could probably cause the
Dollar to rise vis-à-vis the Yen, then the speculators may
scramble to unwind their positions. In such a scenario, the
panicky sell-off of securities could trigger a collapse of asset prices
and spark off SYSTEMIC RISK.

Asset Management Company (AMC) A company set up

for floating and managing schemes of a w…„…ev p…xh. An AMC
earns fees by acting as the €y‚„pyvso manager of a fund. The
AMC is appointed by the Board of Trustees, which oversees its
activities. Thus, a mutual fund is generally established as a trust
by a ƒ€yxƒy‚, which could be a registered company, bank or
psxexgsev sxƒ„s„…„syx . Also, a custodian and a registrar are
appointed to ensure safe keeping of the fund’s securities and to
deal with investors’ applications, correspondence and other
matters.

Asset Play A stock which, at a certain price, is considered to be

an attractive investment opportunity on the basis of the company’s
psˆih eƒƒi„ƒ, particularly real estate, rather than future earnings
capacity. The stock market may overlook these valuable fixed
assets of the company, resulting in underpricing of its stock. Such
underpriced stocks present an attractive opportunity for anyone
wanting to enter the business quickly and with lower
investment. (See also G‚erew and Dyhh A€€‚yegr.)

Asset Reconstruction Company (ARC) A specialized entity

that will buy the loan assets of banks and Fsxegsev Ixƒ„s„…„syxƒ,
 At-the-Money q U

especially those harder to recover and then directly follow up on

the recovery. Given the problematic nature of the assets, their
sale would be mostly at a considerable discount.
In India, institutions such as IFCI, and IDBI have promoted
ARCs jointly with others. The idea has its genesis in the
recommen-dation for an eƒƒi„ƒ ‚igyxƒ„‚…g„syx p…xh by the
xe‚eƒswrew gywws„„ii (1991).

Asset Transformation Effect The impact of psxexgsev

sx„i‚wihse„syx by w…„…ev p…xhƒ whereby individually risky
financial eƒƒi„ƒ are transformed into less risky fund shares
without a corresponding sacrifice in expected returns.

Assets Reconstruction Fund An arrangement proposed by

the xe‚eƒswrew gywws„„ii (1991), according to which, such a
fund would take over from the banks and psxexgsev sxƒ„s„…„syxƒ,
a part of their bad and doubtful debts, which are under recovery,
at a hsƒgy…x„. The objective of establishing this fund is to enable
the financial intermediaries to have some funds released through
the mechanism of transferring sticky debts, which could then be
profitably recycled. The Assets Reconstruction Fund would sub-
sequently pursue the recovery of dues on debts purchased by it.

Assignment of Accounts Receivable An arrangement under

which finance is obtained against receivables, and the lender has
recourse to the borrower (company) in the event that dues are not
paid by the company’s customers. ‘Pledging’ is another term for
this arrangement.

Asymmetric Information See wy‚ev ree‚h.

At-the-Money The term relates to trading in listed y€„syxƒ. An

option is said to be trading “at-the-money” when the ƒ„‚susxq
€‚sgi and the market price of the underlying share are equal.
(See y€„syxƒ as well as Appendix II.)
V q2Authorized Share Capital

Authorized Share Capital See ƒre‚i ge€s„ev.

Average Tax Rate The proportion of income paid as taxes,

determined by dividing taxes paid by total income.
n
 f

Backwardation Rate See fehve ƒ‰ƒ„iw.

Bad Debt Amount due from a hif„y‚ that is deemed irrecov-

erable.

Badla System An Indian term for a trading system with a

mechanism for deferring either payment for shares purchased or
delivery of shares sold. The system, discontinued by the Securities
and Exchange Board of India (SEBI), from March 1994, was
applicable to A group or ‘Specified’ shares. For carrying forward
a purchase transaction from one settlement period to the next,
the buyer normally paid the seller a charge termed badla or
‘Contango’. This consideration would be fixed in the badla session.
When buyers could not take delivery, badla financiers would step
in and help out the buyers. In the reverse but abnormal situation,
when the market was in an oversold position and a buyer
demanded delivery but the seller could not respond even by
borrowing shares, the buyer would be paid a ‘Backwardation
charge’, also known as undha badla. However the buyer could
insist on delivery, instead of accepting deferment charges, leading
to an auction of the shares in question. The contango or
backwardation charge depended on various factors including the
extent of outstanding position, short sales, floating stocks, and the
prevailing interest rate. The criticism against the badla system has
essentially been on two counts: equity and transparency. The
system was slanted in favour of short sellers who could, in a
IH q 2Balance of Payments

normal market situation, earn interest even without owning

the shares sold (it has been argued though, that such short
selling helps to check speculative and frenzied buying). Also,
it was suspected that the contango and backwardation
charges reportedly decided at the badla sessions were often
untrue. Besides, it appears that the limit of 90 days within
which the carryovers were to be settled, was often exceeded.

Balance of Payments A statement that contains details of all

the economic transactions of a country with the rest of the
world, for a given time period, usually one year. The statement
has two parts: the Current Account and the Capital Account.
The ‘Current Account’ gives a record of a country’s:
(a) Trade Balance which shows the difference of exports and
imports of physical goods such as machinery, textiles, chemicals
and tea, (b) ‘Invisibles’ that comprise services (rendered and
received) such as transportation and insurance and certain other
flows, notably private transfers by individuals. When imports of
goods exceed exports, it is referred to as a ‘Trade Deficit.’
However, the overall current account position depends on both
the trade balance and the performance of ‘Invisibles.’
The ‘Capital Account’ contains details of the inward and
outward flows of capital and international grants and loans.
Examples of such flows are external assistance, foreign (direct
a n d €y‚„pyvsy) investments, subscription to Global Depository
Receipts or i…‚ygyx†i‚„sfvi fyxhƒ and deposits of non-residents.
Inflows on the capital account are helpful in financing a current
account hipsgs„. Any gap that remains is covered by drawing on
exchange or gold reserves, or by credit from the International
Monetary Fund. Depending on the nature of imports, a deficit on
the current account indicates an excess of investment over
domestic saving in an economy. So long as this deficit is kept in
check (evaluated as a percentage of the q‚yƒƒ hywiƒ„sg €‚yh…g„),
the hif„ ƒi‚†sgi ‚e„sy would remain within manageable limits.
A challenge posed to India some years ago was the upward
pressure on the Rupee’s exchange rate in the wake of large
 Bank Rate q II

capital account inflows. So, to maintain the competitiveness

of India’s exports, the Reserve Bank of India (RBI) resorted to
purchases of foreign exchange. However, this has also caused
money supply to increase, and the RBI has had to ‘sterilize’
such monetization by raising the geƒr ‚iƒi‚†i ‚e„sy or by
engaging in y€ix we‚ui„ y€i‚e„syxƒ.

Balance Sheet A statement of the financial position of an

enterprise, as on a certain date, and in a certain format showing
the type and amounts of the various eƒƒi„ƒ owned, vsefsvs„siƒ
owed, and shareholders’ funds.

Balanced Fund A w…„…ev p…xh whose objective is to earn a

mix of periodic income and capital appreciation for its investors.
The LICMF Balanced Fund and the Sundaram BNP Paribas
Balanced Fund are examples of this type of fund.

Balloon Payment The final payment on a debt which is larger

than the previous sums paid.

Bank Guarantees The financial guarantees and performance

guarantees issued by banks on behalf of their clients. A financial
guarantee assures repayment of money, (e.g. an advance received
on an electrification contract), in the event of non-completion of
the contract by the client. A performance guarantee provides an
assurance of compensation in the event of inadequate or delayed
performance on a contract. A deferred payment guarantee
promises payment of instalments due to a supplier of machinery
or equipment.

Bank Rate The rate of interest charged by the Reserve Bank of

India (RBI) on financial accommodation extended to banks and
psxexgsev sxƒ„s„…„syxƒ. The support is provided in the form of
a bills rediscounting facility and advances or ‚ipsxexgi against
IP q 2Bank Receipt (BR)

specified eƒƒi„ƒ (e.g. „‚ieƒ…‚‰ fsvvƒ and he„ih ƒig…‚s„siƒ) or

€‚ywsƒƒy‚‰ xy„iƒ.
The intent behind changing the Bank Rate at certain
junctures is to raise or lower the cost of funds that banks
obtain from the RBI. This, in turn, would alter the structure
of banks’ interest rates and thereby serve to curb or encourage
the use of credit. However, the Bank Rate is a relatively
passive instrument of credit control. In the wake of the East
Asian currency crisis, the ‚fs used the Bank Rate in
conjunction with the geƒr €‚iƒi‚†i ‚e„sy and other measures
to stabilize the exchange rate of the Rupee.
In recent times, it has been ‚fs’ƒ endeavour to make the Bank
Rate an effective signalling device as well as a reference rate.
However, since frequent changes in the Bank Rate may be
undesirable, the short-term ‚i€yƒ interest rate seems to be a
useful supplement in influencing the flow and cost of funds in the
short term.

Bank Receipt (BR) A non-transferable document in a certain

format, used by banks in securities transactions. It acknowledges
a transaction and confirms that the issuer has undertaken to
deliver the specified securities such as units or fyxhƒ of public
sector organizations to the purchaser. A BR must be exchanged
with the actual scrips within a specified period.

Banker’s Acceptance This is the term used in the U.S. for a

fsvv of iˆgrexqi which carries a guarantee of the hif„y‚’ƒ bank
for the payment of the sum stated in the instrument.

Bar Chart A type of chart employed by technical analysts that

uses vertical bars to record each day’s price movement of
individual securities or market indices. As shown in the graph
below, the length of each bar bridges the distance between a day’s
highest and lowest prices; the closing price is indicated by a
small horizontal line.
 Behavioural Finance q IQ

Price

Bar Chart Trading Days

Basis Point A term commonly used in international psxexgsev

we‚ui„ƒ. A basis point is 1/100th of 1 per cent, i.e. 0.0001.

Bazaar Bill Rate The rate of interest charged on r…xhsƒ

discounted by private moneylenders, known as Shroffs in some
regions of India. Since the banking services run by the numerous
moneylenders are unregulated and spread across different parts
of India, the bazaar bill rate is not a uniform rate.

Bear A person who expects share prices in general to decline and

who is likely to indulge in ƒry‚„ ƒeviƒ.

Bear Market A long period of declining security prices. Wides-

pread expectations of a fall in corporate profits or a slowdown in
general economic activity can bring about a bear market.

Behavioural Finance A school of thought in the area of

finance which asserts that the investment actions of many
investors are primarily influenced by behavioural traits such as
overweening pride, over-reaction and attraction to fashions and
fads, which set off predictable movement in stock prices. Such
forecasts can, it is argued, be used to design profitable investment
strategies. Interestingly, this contention goes against the
Eppsgsix„ Me‚ui„ƒ H‰€y„riƒsƒ.
IR q 2Bellwether Stock

Bellwether Stock A share that often reflects the state of the

stock market and is, therefore, monitored by technical analysts,
who even attempt to forecast shifts in market movements by
tracking the bellwether stock.

Best Efforts Basis The assurance by an sx†iƒ„wix„ fexui‚ to

a firm to market the latter’s securities as an agent making the best
possible effort. This is in contrast to the alternative of purchasing
the issue from the firm and then attempting to resell it. In the
latter case, the sx†iƒ„wix„ fexui‚ is exposed to the risk of a
substantial capital loss.
The expression is also used in the context of vyex ƒ‰xhsge„syxƒ.
Syndication on a best-efforts-basis implies that the mediating bank
is making no commitment to provide the loan, in case syndication
does not materialize.

Beta ( ) A measure of the volatility of a stock in relation to the

market. More specifically, it is the index of ƒ‰ƒ„iwe„sg ‚sƒu,
indicating the sensitivity of return on a security or a €y‚„pyvsy
to return from the market. It is the slope of the regression line,
known as the gre‚eg„i‚sƒ„sg vsxi which shows the relationship
of an eƒƒi„ with the market. For measuring market returns, a
proxy such as a broad-based index is used. Thus, if exceeds 1,
the security is more volatile than the market, and is termed an
‘Aggressive Security’. For example, a beta of 1.3 implies that a
security’s return will increase by 13 per cent when the return from
the market goes up by 10 per cent. An asset whose beta is less
than 1 is termed a ‘defensive security’. Based on this, an aggressive
growth strategy would be to invest in high beta stocks when the
market is poised for an upswing; similarly, a switchover to low
beta stocks is recommended when a downswing is imminent.

Bid The price offered by an intermediary, e.g., a we‚ui„ weui‚

or a dealer, for buying a security or foreign exchange. The
term is also used in business to refer to the price quoted for
 BIS q IS

goods or services, usually in response to an invitation from a

potential purchaser. The request may be publicly announced
or addressed to a number of known suppliers. Hence, in this
context it is also called ‘Quotation’.

Bill of Exchange A credit instrument that originates from the

creditor (drawer) on which the hif„y‚ (drawee) acknowledges
his vsefsvs„‰; after such acceptance, the drawer may get the bill
discounted, so as to realize the proceeds immediately. As an
illustration, consider the following:
Hindustan Rasayan, a supplier of chemicals, draws a 90-day
bill of Rs 6,20,000 on Indian Pharma Corporation (drawee)
directing the drawee to make payment at the end of 90 days to
or to the order of Pyramid Finance Limited (payee).
After the drawee accepts the bill, it is discounted with
Pyramid Finance at a hsƒgy…x„ ‚e„i of 20 per cent per annum.
Hindustan Rasayan thus receives
6,20,000 ¥ (1 – (90/365 ¥ 20/100)) = Rs 5,89,425
The effective interest rate works out to 21 per cent:
FG 6,20 ,000 - 5,89,425 ¥ 365 IJ
H 5,89,425 90 K

Bills Rediscounting Scheme (of IDBI) A scheme started in

1965 by shfs, to enable machinery manufacturers to receive
timely payment on the sale of machinery even though the user
may make deferred payments spread over five to seven years.
The mechanism involves banks who discount the bills first and
then get it ‚ihsƒgy…x„ih with IDBI.

BIS An acronym for the Bank for International Settlements based

in Switzerland. The bank performs two key roles:
1. Stabilizing the international financial system by streng
thening financial regulation, especially vis-a-vis the banking
system.
IT q 2Blue Chip

2. Managing the foreign exchange reserves of various gix„‚ev

fexuƒ.

Blue Chip The i…s„‰ ƒre‚i of a company that is financially

very sound, with an impressive track record of earnings and
DIVIDENDS, and which is highly regarded for its competent
management, quality products and/or services. Examples in India
are Hindustan Unilever and Ambuja Cements.

Board for Financial Supervision (BFS) A body set up by the

Reserve Bank of India (RBI) in November 1994 for the purpose
of supervision and surveillance of the financial system.
Specifically, the board’s ambit includes commercial banks, psxex-
gsev sxƒ„s„…„syxƒ , xyx-fexusxq psxexgsev gyw€exsiƒ, €‚swe‚‰
hievi‚ƒ and the Clearing Corporation of India. It is headed by
the Governor of RBI and will have a term of two years. The
Board ensures compliance with the guidelines and regulations
relating to capital adequacy, credit management, income recogni-
tion, treasury operations, etc. It receives operational support from
RBI’s Department of Supervision. The Board has an Advisory
Council consisting of persons who are proficient in economic,
banking, legal and financial matters. The functioning of the Board
will also help in improving supervisory policy and skills.

Bond A long-term debt instrument on which the issuer pays

interest periodically, known as ‘Coupon’. Bonds are secured by
gyvve„i‚ev in the form of immovable property. While generally,
bonds have a definite we„…‚s„‰, ‘Perpetual Bonds’ are securities
without any maturity. In the U.S., the term hifix„…‚iƒ refers to
long-term debt instruments which are not secured by specific
collateral, so as to distinguish them from bonds.

Bond Index A regularly computed statistic involving debt

securities, which may be a weighted average of the prices of
a group of specific bonds or an average of the yields of selected
 Bond Rating q IU

securities. The weights used may relate to the volume of

transac-tions in different securities. As an example, ICICI
Securities has constructed the i-fiˆ family of bond indices.
i-fiˆ has separate indices for short, medium and long maturity
securities, as well as a composite index which is an average of
the three.

Bond Insurance A form of credit enhancement which provides

a financial guarantee on the obligations of a debt instrument. The
purpose of credit enhancement is to increase the safety of debt
securities. Besides financial guarantees, other forms of credit
enhancement include vi„„i‚ yp g‚ihs„ and overcollateralization.
The latter involves provision of additional eƒƒi„ƒ as security.
Companies offering financial guarantees for a fee are also
referred to as ‘Monoline Insurers’, since they operate exclusively
in one field of insurance. A company that furnishes such a
guarantee, in effect, lends or rents its own high g‚ihs„ ‚e„sxq to
the security being issued. This rating reflects its claims-paying
capacity. Therefore, such credit enhancement imparts greater
assurance about timely payments of the interest and €‚sxgs€ev
sums and hence reduces the interest cost to the issuer, besides
making investors more receptive. (See also, ƒig…‚s„se„syx and
ƒ„‚…g„…‚ih hif„ yfvsqe„syx.)

Bond Rating A letter rating assigned by a rating agency that

conveys the agency’s opinion at that time, regarding the future
risks to an investor of investing in a long-term debt obligation
such as a hifix„…‚i or fyxh. A rating is specific to the security
issued. Neither is it a general evaluation of a company nor does
it connote a recommendation to invest in the security rated. It
is a summary indicator of the default risk, i.e., the credit quality
of the debt obligation and its purpose is to classify different
instruments in relation to each other on the basis of the assessed
degree of relative safety or risk. Therefore, a rating may be
changed during the life of an instrument depending upon the
IV q2Bond Theorems

changes or developments that may affect the issuer. Such changes

or developments may pertain to industrial, business or financial
factors or may even be the consequence of a subjective revision of
the assessment. (See also Appendix V.)

Bond Theorems These are statements that describe the

relation-ship between bond prices and bond ‰sivhƒ. For
example, three such theorems are:
1. Bond prices move in the opposite direction to bond yields.
2. When the ‰sivh „y we„…‚s„‰ diverges from the coupon rate,
the consequential price change will be greater, the longer the
term to maturity.
3. Bond price changes resulting from equal increases and
decreases in yields are not symmetrical. Such asymmetry in
price behaviour is termed ‘convexity’.

Bond-yield Equivalent See Appendix I.

Bonus Shares The issue of shares to the shareholders of a

company, by capitalizing a part of the company’s reserves. The
decision to issue bonus shares, or stock hs†shixh as in the U.S.,
may be in response to the need to signal an affirmation to the
expectations of shareholders that the prospects of the company
are bright; or it may be with the motive of bringing down the
share price in absolute terms, in order to ensure continuing
investor interest. Following a bonus issue, though the number
of total shares increases, the proportional ownership of shareholders
does not change. The magnitude of a bonus issue is determined
by taking into account certain rules, laid down for the purpose.
For example, the issue can be made out of free reserves created
by genuine profits or by share €‚iws…w collected in cash only.
Also, the residual reserves, after the proposed capitalization,
must be at least 40 per cent of the increased €esh-…€ ge€s„ev.
These and other guidelines must be satisfied by a company that
is considering a bonus issue. (See also we‚ui„ ge€s„evse„syx.)
 Book Runner q IW

Book Building A process used to ascertain and record the

indicative subscription bids of interested investors to a
planned issue of securities. The advantages of this technique of
obtaining advance feedback, are that it results in improved
pricing and removes uncertainty regarding mobilization of
funds.
The concept of book building is alien to India’s €‚swe‚‰
we‚ui„; so, towards the end of 1995, efforts were under way, to
introduce this mechanism as an option in the case of large issues
(minimum size: Rs 100 crore). An issue was divided into a
‘Placement Portion’ and another termed ‘Net Offer to the Public’.
For the Placement Portion, the exercise of book building enables
the issuing company to interact with institutional and individual
investors, and collect particulars of the number of shares they
would buy at various prices. The procedure is carried out
by a lead manager to the issue, called the ‘Book Runner’. It
commences with the circulation of a preliminary €‚yƒ€ig„…ƒ and
an indicative price band, for the purpose of forming a syndicate
of underwriters, comprising psxexgsev sxƒ„s„…„syxƒ, w…„…ev
p…xhƒ and others. This syndicate, in turn, contacts prospective
investors in order to elicit their quotes. These quotes are
forwarded to the book runner, who prepares a schedule of the
size of orders at different prices. After receiving a sufficient
number of orders, the company and the merchant bankers decide
the issue price and underwriting particulars. There are some other
aspects of book building arising from the guidelines issued by the
Securities and Exchange Board of India. A change brought
about in 1997 was that the book building process could be
applied to the extent of 100 per cent of the issue size, for large
issues as defined above. Interestingly, the process has been
used in India to place debt securities as well.
One peculiarity of the prevailing system is that if price
bands are used then €‚sgi hsƒgy†i‚‰ may suffer.

Book Runner See fyyu f…svhsxq and ‚yeh ƒry‡ƒ.

PH q 2Book Value

Book Value It is the amount of xi„ eƒƒi„ƒ that would be

available per i…s„‰ ƒre‚i, after a company pays off all vsefsvs-
„siƒ including €‚ipi‚ixgi ƒre‚iƒ from the sale proceeds of all
its eƒƒi„ƒ liquidated at fevexgi ƒrii„ values.

BOT An acronym for Build-Operate-Transfer, which is a

popular model of Public-Private Partnership (PPP), particularly
for infrastructure projects. Such projects are characterized by a
variety of risks such as adverse political and regulatory decisions,
cost overruns and overestimation of demand. Therefore, two
techniques of risk mitigation that could be used are the operating
arrangements, viz., PPP and structured financing, e.g., ƒ„‚…g„…‚ih
hif„ yfvsqe„syxƒ and fyxh sxƒ…‚exgi.
Under the BOT model, a private investor builds a project and
operates it for an agreed length of time before transferring it to the
government. The period during which the promoter builds and
operates the project is known as the 'Concession Period'.
Projects suitable for using the BOT arrangement usually have
characteristics such as regular and reliable cash flows, a long
economic life and strong government support. Another model of
PPP is Build-Operate-Lease-Transfer, or BOLT, in short. (See
also „eui-y…„ psxexgsxq and †sefsvs„‰ qe€ p…xhsxq.)

Bought-out Deal The sale of securities under a negotiated

agreement between an issuer and the investing institution, as an
alternative to a €…fvsg sƒƒ…i. The intent on the part of the
buyer is to offload the securities later in the market at a profit.
Bought-out deals pertain to the OTC Exchange of India
(OTCEI). The advantage to the issuing company is the saving
in time and costs that a public issue would entail. It is a big
help to unlisted companies and projects which must see
through a gestation period before tapping the €‚swe‚‰ we‚ui„.
For institutions and w…„…ev p…xhƒ, this route is another
avenue for investing funds. However, there could be some
disadvantages to the issuer such as interference by the
sxƒ„s„…„syxev sx†iƒ„y‚ or restrictive gy†ixex„ƒ in the initial
 Breadth of Market q PI

subscription agreement. On the other hand, the institutional

investor or the sponsor in y„gis deals, bears the risk of capital
loss due to a fall in the price of the securities.

Bracket Creep The phenomenon of rising incomes particularly

due to increasing dearness allowances, pushing individuals into
higher tax brackets and leaving them worse off on account of
lower real disposable incomes.

Breadth of Market A measure used by technical analysts to

gauge the intensity of stock market movements. This is determined
by comparing the number of stocks that have advanced in price
on a day with the number of stocks that have declined on that
day. The breadth is the cumulative total of the net differences,
which can be plotted on a graph and compared with a market
index. A brief example follows:

Number of Number of Net Breadth

stocks that stocks that difference (cumulative)
advanced declined
Monday 1000 400 + 600 + 600
Tuesday 800 500 + 300 + 900
Wednesday 850 600 + 250 + 1150
Thursday 750 650 + 100 + 1250
Friday 600 800 – 200 + 1050

The breadth which gives rise to an advance-decline line on

a graph is compared with the movement of a market index.
The technical analyst tries to spot key signals, such as, a
divergence between the two, which may indicate a turn in
market direction.
PP q2Break-even Point

Breadth and Index Levels

Market Index

Advance-Decline Line

Trading Days

Break-even Point The point where the revenues from a

business operation equal the total costs (psˆih gyƒ„ƒ + †e‚sefvi
gyƒ„ƒ). Thus, a profit accrues when revenues exceed the break-
even point. The break-even volume is computed by dividing the
fixed costs (FC) by the difference between the selling price per
unit (SP) and variable cost per unit (VC). For instance, if FC is
Rs 4,000, VC is Rs 60 and SP is Rs 85, the break-even volume
is 4,000[(85–60) = 160 units of output.
The break-even point in terms of revenues can be determined
by dividing the fixed costs by the contribution margin ((SP–VC)/
SP). Thus.
4 ,000
= Rs 13,600
((85 - 60 )/85)
which equals the revenues at 160 units.

Breakout A rise or fall in the price of a stock that pierces a

band (of prices) within which it was fluctuating. Technical
analysts believe that a breakout signals an onward movement
in the same direction.
 Buy Back q PQ

Bridge Loan A short-term loan granted to a borrower to tide

over a temporary funds shortage. Such an accommodation is
usually arranged at the time of a €…fvsg sƒƒ…i, when expenditures
on a project lead to a hipsgs„, thereby necessitating a bridge loan.

Budget A financial plan that projects receipts and payments of

an entity covering a specific period of time, usually one year. Its
primary purpose is to achieve financial control. Budgets could be
distinguished on the basis of time span, function and flexibility.
For instance, budgets may be short-term or long-term; similarly,
there are Sales Budgets, Cash Budgets, Capital Expenditure
Budgets and others to cover different functions.

Budget Deficit See hipsgs„.

Bull A person who expects share prices in general to move up and

who is likely to take a long position in the stock market.

Business Risk The risk of business failure which stems from

factors such as the cost structure of a venture (i.e. psˆih gyƒ„
versus †e‚sefvi gyƒ„), intra-industry competition, and government
policies. It is reflected in the variability of profits before interest
and taxes.

Busy Season The period from November to April, so called,

because of the impact of heightened agricultural activity in India,
particularly the harvest of kharif crops, on banking operations
and the industrial sector. (See also ƒvegu ƒieƒyx.)

Buy Back See „‚ieƒ…‚‰ ƒ„ygu .

n
 g

Call Money A term used for funds borrowed and lent mainly
by banks for overnight use. This is a market which banks access
in order to meet their reserve requirements or to cover a sudden
shortfall in funds and the interest rate is determined by supply
and demand conditions. The situation arises when banks face
an unforeseen shortfall in funds, perhaps because they have
invested a large amount in other eƒƒi„ƒ, e.g., qy†i‚xwix„
ƒig…‚s„siƒ and loans or due to heavy withdrawals by depositors
for different reasons. High call money rates are an indication of
such a mismatch or of a deliberate policy to substantially
borrow short-term and lend long-term. The more stringent
requirements relating to the Cash Reserve Ratio from January
1995, particularly the severe penalty for default, has also forced
banks to borrow short-term; this explains the sudden but short-
lived jumps in the call money rate.
In line with the decision to make the call money/xy„sgi
wyxi‰ market an exclusive inter-bank market, corporate firms
were phased out by July 2001. Further, lending by other non-
bank participants in the call money/notice money market is
being gradually reduced.

Call Option See y€„syx.

Call Provision A feature sometimes included in the indenture

that allows an issuer of hifix„…‚iƒ or fyxhƒ to prematurely
PT q 2Call Risk

retire the securities at a specified price above €e‚ †ev…i. The

specified price is termed ‘Call Price’ and the excess of the call
price over the par value is termed ‘Call Premium’. The
provision enables the borrower to redeem the bonds and issue
new ones at a lower ‰sivh, thus economizing on interest cost.
Since this would be disadvantageous to investors, as explained
below, they seek a higher yield at the outset on callable
securities. As an example, the pvye„sxq ‚e„i fyxhƒ of the
State Bank of India issued in December 1993 carried a call
feature which entitled the bank to redeem the bonds from
the sixth year onwards (except in the ninth year) at varying
premia of 5, 3 and 1 per cent over the face value.

Call Risk The probability of an issuer calling back fyxhƒ when

‰sivhƒ have fallen so as to be able to ‚ipsxexgi at a lower
interest cost. This is disadvantageous to investors because
callability at the call price (see gevv €‚y†sƒsyx) discourages
price appreciation; moreover, the funds received on ‚ihiw€„syx
would be reinvested only at lower yields.

CAMELS An acronym for a technique of evaluating and rating

the operations and performance of a bank in terms of ge€s„ev
ehi…eg‰, eƒƒi„ quality, Management, Earnings, vs…shs„‰
and Systems for control.

Capital Adequacy Ratio A requirement imposed on

commer-cial and co-operative banks to have a certain amount
of capital in relation to their eƒƒi„ƒ, i.e., loans and
investments as a cushion against probable losses in
investments and loans. In simple terms, this means that for
every Rs 100 of risk-weighted assets, a bank must have Rs X
in the form of capital. Capital is classified into Tier I or Tier
II. Tier I comprises share capital and disclosed reserves,
whereas Tier II includes revaluation reserves, hybrid capital
and subordinated debt. Further, Tier II capital should not
 Capital Adequacy Ratio q PU

exceed Tier I capital. The risk weighting depends upon the

type of assets. For example, it is 20 per cent on short-term
bank claims and 100 per cent on private sector loans. Risk
weights on qy†i‚xwix„ ƒig…‚s„siƒ were also introduced. The
capital adequacy ratio is the percentage of total capital funds
to the total risk-weighted assets.
The capital risk-weighted assets ratio system, popularly
known as Basel I, was introduced by the Reserve Bank of
India (RBI) in 1992, in accordance with the standards of the
Bank for International Settlements (BIS). It had set the
deadlines indicated below. Subsequently, RBI had to extend
the deadline in some cases up to March 1997.

Institutions Norm Date

(i) Foreign banks 8% March 31, 1993
operating in India
(ii) Indian banks with 8% March 31, 1995
branches abroad
(iii) All other banks 8% March 31, 1996

The ratio was raised to 9 per cent, with effect from March
31, 2000. Later, it was decided to progressively implement
Basel II norms with effect from March 31, 2008.
The impact of this system on Indian banks was reflected in
the increased demand for capital and changes in the
composition of assets. The trend of fund-raising by banks
through equity and other issues, as well as the accumulation of
qy†i‚xwix„ ƒig…ƒ‚s„siƒ should be seen in this perspective.
To shore up the capital position of public sector banks, the
Government of India injected over Rs 21,000 crore in the last
few years. This infusion is reflected in the banks’ investment
in Government fyxhƒ known as ‘Recapitalization Bonds’. In-
cidentally, capital adequacy norms have also been extended to
term-lending institutions, €‚swe‚‰ hievi‚ƒ and xyx-fexusxq
psxexgsev gyw€exsiƒ. See also xe‚eƒswrew gywws„„ii (1998).
PV q 2Capital Asset

Capital Asset This refers to eƒƒi„ƒ of various kinds including

land, building and shares. Under the Income-Tax Act, certain
items such as raw material relating to business, and jewellery
stock-in-trade are specifically excluded from the ambit of this
term.

Capital Asset Pricing Model (CAPM) A theoretical

construct, developed by William Sharpe and John Lintner,
according to which, a security’s return is directly related to its
ƒ‰ƒ„iwe„sg ‚sƒu, that is, the component of risk which
cannot be neutralized through hs†i‚ƒspsge„syx. This can be
expressed as:
Expected rate of return = Risk-free rate of return
+ Risk premium
Further, the model suggests that the prices of eƒƒƒi„ƒ are
determined in such a way that the ‚sƒu €‚iws…wƒ or excess
returns are proportional to systematic risk, which is indicated
by the fi„e coefficient. Accordingly, the relationship
Risk LM
Return on Risk-free OP FG Beta of IJ
premium = market portfolio - return
N Q H SecurityK
determines the risk premium. Thus, according to the model,
the expected rate of return is related to the beta coefficient.
This relation is portrayed by the ƒig…‚s„‰ we‚ui„ vsxi.
The model is often used to compute the cost of equity for
a firm. By plugging in the riskless rate of interest, the
expected return on the market and the firm’s beta into the
formula, the cost of equity can be estimated.

Capital Formation The process of net accumulation of the

physical factors of production, such as buildings, machinery
and inventories. The activity is also referred to as ‘Real
Investment.’
 Capital Market Line q PW

Capital Gain The profit on a capital asset, being the excess of

selling price over the purchase cost. Capital gain is deemed
short-term or long-term depending on the period for which an
asset has been held. In the following cases, for example, the
gain is long-term if the holding period exceeds 12 months: (a)
shares held in a company, (b) any other security listed at a
recognized stock exchange in India, (c) a unit of the Unit
Trust of India, (d) a unit of a w…„…ev p…xh specified under the
relevant section of the Income-tax Act.

Capital Indexed Bond A debt security of the Government

of India whose principal amount is periodically adjusted
for sxpve„syx. The gy…€yx ‚e„i is based on the principal
amount that is indexed semiannually, the benchmark being
the Wholesale Price Index.

Capital Market See psxexgsev we‚ui„ƒ.

Capital Market Line This is a graphical line which represents

a linear relationship between the expected return and the total risk
(standard deviation) for efficient €y‚„pyvsyƒ of risky and riskless
securities. When lending and borrowing possibilities are considered,
the capital market line becomes the ippsgsix„ p‚yx„si‚ starting
from the riskless rate to the point of tangency on the efficient
frontier of portfolios.
Expected Return

Risk (Standard Deviation of Return)

QH q 2Capital Reserves

Capital Reserves The reserves created in certain ways, that

include the sale of psˆih eƒƒi„ƒ at a profit. These amounts are
regarded as not available for distribution as hs†shixhƒ.

Capital Structure The mix of long-term sources of funds of

a company consisting of term loans, fyxhƒ, €‚ipi‚ixgi
ƒre‚iƒ, equity shares and reserves. (See also psxexgsev
ƒ„‚…g„…‚i.)

Capitalization of Reserves See fyx…ƒ ƒre‚is.

Capitalization Rate T h e hsƒgy…x„ ‚e„i used for calculating

the €‚iƒix„ †ev…i of a stream of cash flows.

Carry Forward See fehve ƒ‰ƒ„iw.

Carry-Trade See eƒƒi„ f…ffvi.

Cash Conversion Cycle S ee g…‚‚ix„ eƒƒi„ƒ.

Cash Cow A profitable business with regular cash flows

because of the sustained demand or popularity of its product.
Examples of such products are Colgate-Palmolive's Colgate
toothpaste and Reckitt Benckiser's Dettol.

Cash Credit System The arrangement under which banks

make funds available to companies for ‡y‚usxq ge€s„ev, up to
a certain limit, on the security of the latter's g…‚‚ix„ eƒƒi„ƒ.
The borrowers draw on their cash credit accounts to make
payments for raw materials, utilities, taxes and other purposes.
Upon receipt of money from customers, the same is deposited
in the account, thereby reducing the sum owed to the bank.
Since the cash credit system placed the burden of cash
management on banks, the Reserve Bank of India introduced
 Cash Reserve Ratio (CRR) q QI

an important modification in April 1995. Bank credit was

bifurcated into a cash credit component of 75 per cent of a
borrower's credit limit and a demand loan component for the
balance. It was applicable to borrowers whose working capital
limit (p…xh-feƒih) was Rs 10 crore or higher.
In subsequent credit policy announcements, the loan
component was enhanced to 80 per cent. Further, from
October 2001, banks were given the freedom to change the
composition of working capital, by raising the cash credit
component beyond 20 per cent or the loan component beyond
80 per cent, for working capital limits of Rs 10 crore and
above.

Cash Market The term refers to transactions in which

commodities, currencies and other assets are traded on a cash
basis; that is, the exchange of the commodity for payment is
immediate. See also ƒ€y„ we‚ui„.

Cash Reserve Ratio (CRR) A legal obligation on all

ƒgrih…vih gywwi‚gsev banks excluding ‚iqsyxev ‚…‚ev
fexuƒ to maintain certain reserves in the form cash with the
Reserve Bank of India (RBI). The reserves, to be maintained
over a fortnight, are com-puted as a percentage of a bank’s net
demand and time vsefsvs„siƒ. Banks earn interest on eligible
cash balances thus maintained and it contributes to their
profitability. However, such interest payment tends to
attenuate monetary control, and hence these outflows need to
be moderated if the situation so demands. An alternative that
has been suggested is to fix a lower level of reserves and pay
a modest interest.
From January 1995, banks had to maintain a minimum
level of 85 per cent of the CRR required on each of the first
13 days of the reporting fortnight. Failure to do so resulted in
a loss of interest from RBI, the amount depending on the
number of days of default. This step was taken to reduce sharp
variations in the level of cash balances maintained by banks
QP q 2Castle-in-the-Air Theory

and to gradually impart moderation to the gevv wyxi‰

market.
The RBI maintained the momentum of gradual cuts in the
CRR, to bring it to its statutory minimum level of 3 per cent.
Between August 1998 and May 2001, the CRR was reduced
from 11 per cent to 7.50 per cent. At this writing, it stands
at 4.50 per cent.
Further, with effect from December 2002, banks were to
maintain a minimum of 70 per cent of the required CRR
amount on a daily basis, for all the days in a reporting
fortnight.

Castle-in-the-Air Theory See q‚ie„i‚ pyyv „riy‚‰ .

Cat Bonds An abbreviation for Catastrophe fyxhƒ, which are

typically floating-rate securities issued by insurance companies
to investors with the motive of transferring a part of the risk
borne by the insurers. In the event of a specified trigger, e.g.,
a natural calamity, the bondholders will forfeit the €‚sxgs€ev,
which will be utilized by the issuer to pay insurance claims of
those affected by the natural disaster. However, if the tenure
of the bonds is unscathed by any such mishap, then the
bondholders would stand to gain substantially, from the high-
risk high-yield bonds. The security is, therefore, a capital
market solution to transfer risk, that is, an alternative to
seeking ‚isxƒ…‚exgi.

CCI Formula A formula which was used by the Controller of

Capital Issues to determine the fair value of equity shares,
proposed to be issued, by existing companies. The formula
makes use of three values in arriving at the fair value:
1. (NAV), based on the net worth of equity
xi„ eƒƒi„ †ev…i
shareholders.
2. Profit-earning Capacity Value (PECV), by capitalizing the
average of after-tax profits at prescribed capitalization rates.
 Chakravarty Committee q QQ

3. Market Value (MV).

Since the repeal of the Capital Issues (Control) Act 1947 and
the dismantling of the CCI apparatus, the formula is not applied.

Central Bank The premier bank in a country that discharges

the responsibilities of issuing currency, managing wyxi‰ ƒ…€€v‰
by appropriate measures in order to maintain price stability and
economic growth, maintaining the exchange value of the
domestic currency, superintendence and regulation of the
commercial banks, and so on. In India, the Reserve Bank of
India (RBI) is the Central Bank. RBI, therefore, carries out the
duties mentioned above, and also acts as a banker to the Central
and State governments. Besides this, it also manages the public
debt, i.e., fund-raising programmes of the government.

Certificate of Deposit (CD) A negotiable interest-bearing debt

instrument of specific we„…‚s„‰ issued by banks. A CD
represents the title to a „swi deposit with a bank, but is a liquid
instrument since it can be traded in the ƒigyxhe‚‰ we‚ui„. It is
a wyxi‰ we‚ui„ instrument having a maturity of less than one
year and is issued at a hsƒgy…x„ from the pegi †ev…i. The interest
is the difference between the issue price and the face value which
the holder receives at maturity. The Reserve Bank of India
stipulated the norms for issuing CDs; a relaxation announced in
October 1993 was the removal of limits on borrowings by banks
through CDs. By June 2002, the minimum size (pegi †ev…i) of
a CD to a single investor was reduced to Rs 1 lakh, in order to
widen the investor base. Further, banks were also granted the
flexibility to issue CDs on a floating-rate basis and also as coupon-
bearing securities.
Incidentally, certain psxexgsev sxƒ„s„…„syxƒ such as IFCI and
Small Industries Development Bank of India were permitted to
issue CDs, having a maturity from 367 days to 3 years.

Chakravarty Committee A committee set up by the Reserve

Bank of India (RBI), under the chairmanship of S Chakravarty
QR q 2Characteristic Line

to appraise the working of the monetary system and suggest

measures for improving the effectiveness of monetary policy
in promoting economic development. In its report submitted in
April 1985, the committee made several recommendations to
reform the financial system including:
1. wyxi„e‚‰ „e‚qi„sxq as a policy tool, that is, controlled
increase in money supply to maintain price stability while
facilitating increase in real output.
2. Removal of ceilings on interest rates on bank loans to the
non-priority sectors and on call loans.
3. Upward revision of interest rates on „‚ieƒ…‚‰ fsvvƒ and
qy†i‚xwix„ ƒig…‚s„siƒ. Selling marketable securities to the
public (instead of the RBI) at attractive ‰sivhƒ would avoid
the excessive creation of money.

Characteristic Line A graphical representation of the

relation-ship between the return on a stock (ri, the dependent
variable) and the return on the market (rm, the independent
variable). The characteristic line is obtained statistically by
the method of regression, and it helps to measure the
ƒ‰ƒ„iwe„sg and …xƒ‰ƒ„iwe„sg components of risk of an eƒƒi„.
(See also fi„e.)
ri

rm
Characteristic Line
 Charting q QS

Chart Patterns These are certain patterns of stock price

movement identified by gre‚„sƒ„ƒ as containing valuable
informa-tion for predicting the future direction of stock prices.
Various names have been assigned to these patterns such as
rieh and ƒry…vhi‚ƒ, inverted saucer, pennant, flag, triple top,
etc. (See also hy‡ „riy‚‰.)
Price

Time
Flag and Pennant
Price

Trading Days
Inverted Saucer

Charting The use of different types of charts to plot the move-

ment of share prices, stock market averages or indices, in
order to discern valuable information. Chart formations
appearing in bar charts or point-and-figure charts are carefully
QT q 2Chartist

studied to draw clues for trading, buy or sell signals. (See

gre‚„ €e„„i‚xƒ .)

Chartist A technical analyst who tracks the price movements

of stocks using different charts. (See gre‚„ €e„„i‚xƒ.)

Chelliah Committee A committee on tax reforms constituted

by the Government of India in 1991, under the chairmanship
of Raja Chelliah. Its recommendations encompass the areas of
corporate taxes, customs and excise duties, and personal income
taxes. Among its numerous suggestions aimed at improving
revenue buoyancy and simplicity are the following:
1. Reduction of the corporate tax rate on domestic companies
progressively to 40 per cent.
2. Introduction of the system of ‘Presumptive Taxation’ for
groups such as small traders, contractors, transport
operators and others.
3. Simplification of the excise duty structure and a move
towards a †ev…i ehhih „eˆ (VAT) system covering
commodities and services.
4. Substantial reductions in import tariffs and excise duties in
a phased manner.
5. Levying taxes on the service sector to cover stock-brokers,
telephone services and insurance contracts among others.

Cherry Picking See ƒig…‚s„se„syx.

Chit Fund This is a non-banking financial intermediary. A chit

fund scheme typically involves the collection of periodic
subscriptions from enrolled members, which is then disbursed
as a loan to a member. The member is selected either by lot
or through an auction. The promoter is also called the
‘Foreman’ and the capital given out is called ‘Prize Money’.
 Closed-end Fund q QU

Chore Committee A working group appointed by the

Reserve Bank of India (RBI), in 1979, to review the operation
of the geƒr g‚ihs„ ƒ‰ƒ„iw, to suggest improvements in the
same, as well as to propose alternative types of credit facilities
in order to ensure greater discipline and a more productive use
of credit. The group headed by KB Chore of the RBI made
several recommendations including:
1. To administer lending under method II of the „exhyx
gywws-„„ii norms.
2. In assessing credit requirements, banks should appraise and
fix separate limits for the normal level and for peak level
needs.
3. Simplification of the Quarterly Information System (QIS)
and penalty for delay in submitting the reports.
4. Establishment of a discount house in India.

Churning The frequent transactions generated by a broker on

a client’s account, with the ulterior motive of earning more
brokerage.

Clean Price The price at which a bond is quoted in the

market, that is, not including accrued interest that the buyer
will have to pay. See also hs‚„‰ €‚sgi.

Closed-end Fund A scheme of an investment company in

which a fixed number of shares are issued. The funds so
mobilized are invested in a variety of vehicles including shares
and hifix„…‚iƒ, to achieve the stated objective, e.g., capital
appreciation for a q‚y‡„r p…xh or current income for an
sxgywi p…xh. After the issue, investors may buy shares of the
fund from the ƒigyxhe‚‰ we‚ui„. The value of these shares
depends on the xi„ eƒƒi„ †ev…i of the fund, as well as supply
and demand for fund's shares. Examples are HDFC Long-term
Equity Fund, Sundaram BNP Paribas Energy Opportunities
Fund and Tata Capital Builder Fund.
QV q 2Coincident Indicators

Coincident Indicators These are economic variables whose

changes are concurrent with economic activity. For example,
an increase or decline in the general economic activity would
be immediately revealed by data on industrial production or
sales of manufacturing and trading firms.

Collateral An asset which serves as security for a loan.

Collateralised Borrowing and Lending Obligation

(CBLO) A secured, discounted wyxi‰ we‚ui„ instrument
issued in electronic book-entry form that enables entities,
whose access to the gevv wyxi‰ market is restricted, to raise
or invest funds for periods ranging from one day to 90 days,
and even extending up to one year. The product was
developed by the Clearing Corporation of India Limited
(CCIL). qy†i‚xwix„ ƒig…‚s„siƒ including „‚ieƒ…‚‰ fsvvƒ may
be used as gyvve„i‚ev in gfvy transactions and these are held
in custody with the CCIL.

Commercial Paper (CP) A short-term, unsecured €‚ywsƒƒy‚‰

xy„i issued by fv…i grs€ companies. Like other wyxi‰ we‚ui„
instruments, it is issued at a hsƒgy…x„ on the pegi †ev…i and
is freely marketable. Commercial Paper may be issued to any
person including individuals, banks and companies. The
Reserve Bank of India (RBI) has laid down certain conditions
regarding issue of CPs. The issuing company must have a
certain minimum tangible xi„ ‡y‚„r, ‡y‚usxq ge€s„ev limit,
eƒƒi„ classification, etc. and the paper must have a g‚ihs„
‚e„sxq of P2, A2 or PR-2. Moreover, the rating must not be
over two months old at the time of issue. From November
1996, the extent of CP that can be issued by all eligible
corporates was raised to 100 per cent of the working capital
credit limit. As for restoration of the limit consequent on
redemption of CP, banks have been given freedom to decide
on the manner of doing so.
 Commodity Futures q QW

Interestingly, non-bank entities including corporates have

been allowed to provide unconditional and irrevocable
guarantee for credit enhancement to CP issuers.

Commission Broker An intermediary who executes

transactions in shares and other securities for a fee.

Commitment Fee The charges levied by a lending institution

for making available a loan or a vsxi yp g‚ihs„. Typically, it is
0.5 per cent per annum and is charged on the amount of loan
not utilized.

Commodity Futures A standardized contract guaranteeing

delivery of a certain quantity of a commodity (such as wheat,
soybeans, sugar or copper) on a specified future date, at a price
agreed to, at the time of the transaction. These contracts are
standardized in terms of quantity, quality and delivery months
for different commodities. Contracts on certain commodities
such as pepper and coffee are already traded in India.
Moreover, the Kabra Committee in 1994 recommended that
futures trading be permitted in several other commodities
including rice, cotton, soyabean and castor oil. Further, in an
interesting development, a committee appointed by the
Reserve Bank of India under the chairmanship of RV Gupta
recommended that Indian corporates be allowed to hedge in
offshore futures and y€„syxƒ markets in a phased manner. The
committee submitted its report in November 1997.
The responsibility of regulating the commodity futures
markets rests with the Forward Markets Commission.
Commodity futures trading is poised for a huge leap, in view
of the emerging new institutions, e.g., the Multi-Commodity
Exchange of India (wgˆ) and the National Commodities and
Derivatives Exchange (xghiˆ). (See also Appendix II.)
RH q 2Compensatory Balance

Compensatory Balance A certain amount maintained by a

borrower in an account with a lending bank, under the terms
of the loan agreement.

Confidence Index An index devised by technical analysts to

monitor the movement of ‘Smart Money’, i.e., funds available
with large sxƒ„s„…„syxev sx†iƒ„y‚ƒ in the U.S. These funds
are managed by professionals who are credited with
clairvoyance and hence the expression ‘Smart Money’. The
index measures the ratio of the average ‰sivh of high-grade
corporate fyxhƒ to the average yield of low-grade corporate
bonds and has an upper limit of one. Technical analysts try to
presage stock market movements from the behaviour of the
confidence index.

Consortium A term generally used in banking; it refers to a

group of banks associating for the purpose of meeting the
financial requirements of a borrower such as ‡y‚usxq ge€s„ev
or a term loan. In business, the term applies to a group of
companies, national or international, working together as a
joint venture, sharing resources and having interlocking
financial agreements.

Contango See fehve ƒ‰ƒ„iw.

Contingent Liabilities The liabilities that may arise as a

result of some future event which, though possible, is deemed
unlikely; for example, a court judgment on a pending lawsuit
may impose a financial payment on a company.

Contrarian A person who follows a strategy in investing,

parti-cularly in shares, that advocates doing the opposite of
what investors in general would be doing during a certain
period. Thus, using this approach an investor ought to buy
shares when most others are selling, the logic being that the
 Convertibility (Full) q RI

selling pressure would have hammered share prices to levels

below their intrinsic worth.

Contribution Margin The difference between the selling

price per unit and the †e‚sefvi gyƒ„ per unit of a product or
service. (See also f‚ieu-i†ix €ysx„.)

Conversion See p…xhsxq.

Conversion Price The price per share at which conversion

takes place. For example, when a hifix„…‚i having a face
value of Rs 100 is to be fully converted into four shares, the
conversion price is Rs 25 per share.

Conversion Ratio This indicates the number of equity shares

that will be received on a gyx†i‚„sfvi security. For example,
since a debenture having a face value of Rs 100 gets fully
converted into four shares if the conversion price is Rs 25, the
conversion ratio is 4.

Conversion Value This refers to the value of a convertible

security derived from the market price of the underlying
shares into which it can be converted. For example, if each
share of a convertible security having a conversion ratio of 4
is trading at Rs 40, the conversion value is 4 ¥ Rs 40, i.e. Rs
160.

Convertibility (Full) The feature of unrestricted exchange-

ability of a currency for another currency. Alternatively
referred to as Capital Account Convertibility (CAC), it would
mean the abolition of all exchange controls and it would
integrate India’s, financial system with the international
markets. Already, foreign investors and non-residents are free
to withdraw the funds brought into the country. With CAC,
RP q 2Convertible

residents too will be able to exchange rupees for foreign

currency without restrictions, be it for investment in foreign
securities or for other purposes. The main benefit will be the
freedom to seek portfolio diversification, since the universe of
securities will expand manifold. However, this momentous
decision depends on the assessment concerning volatility in
exchange rates and destabilising capital flight out of India, that
such a move may trigger off.
As things stand, Current Account Convertibility has been
substantially effected. The vital pre-conditions for taking the
plunge to CAC include:
1. Control over inflation.
2. A moderate fiscal deficit.
3. A satisfactory external account position.
4. A comfortable external reserves position.
(See also „e‚e€y‚i gywws„„ii.)

Convertible It refers to the feature of convertibility.

Specifically, the term applies to a financial security which
may be a hifix„…‚i or a €‚ipi‚ixgi ƒre‚i that gets converted
into i…s„‰ ƒre‚iƒ according to a specified ratio. The security
may be structured as a Fully Convertible Debenture (FCD) or
a Partly Convertible Debenture (PCD). When used with
reference to a currency, the term signifies exchangeability for
another currency or for gold.

Convexity See fyxh „riy‚iwƒ.

Corner The eg…sƒs„syx of a very substantial or total holding

in a stock through purchases in the market. This stratagem
enables an unscrupulous investor to subsequently influence the
price and even impose onerous terms on short sellers in that
stock. (See also ƒ…iisxq „ri ƒry‚„ƒ.)
 Countercyclical q RQ

Corporate Governance The manner in which a company

is managed. The term, Corporate Governance connotes the
importance of responsibility and accountability of a company’s
management to its shareholders and other stakeholders, viz.,
employees, suppliers, customers and the local community.
Hence it calls for ethics, morals and good practices in running a
company. Good corporate governance would be reflected in
generally good performance, clean business practices, improved
disclosure and sound policies relating to capital expenditure,
financing and dividend payment, which will enhance
shareholders’ wealth.

Correction A reaction in stock prices that reverses an excessive

rise or decline posted earlier.

Cost of Capital The weighted average cost of long-term funds

raised by a company from different sources such as term loans,
hifix„…‚iƒ /fyxhƒ, €‚ipi‚ixgi ƒre‚iƒ, i…s„‰ ƒre‚iƒ and
‚i„esxih ie‚xsxqƒ.

Cost of Goods Sold Alternatively called the Cost of Sales, it is

the sum of total input costs associated with a certain quantity of
goods sold. The total input costs include materials used, direct
and indirect labour, utilities, and other manufacturing expenses
including hi€‚igse„syx.

Counter Receipt See y†i‚- „ri- gy…x„i‚ iˆgrexqi yp sxhse

(y„gis).

Countercyclical A tendency to move against economic cycles.

For instance, in stock markets in the West, shares of gold mining
companies have displayed this characteristic at times, since
capital usually flows into gold during economic downturns.
RR q 2Country Risk

Country Risk See ƒy†i‚isqx fyxh .

Coupon Rate It is the rate of annual interest on the €e‚

†ev…i of hifix„…‚iƒ or fyxhƒ that an issuer promises to pay.
In India, till a few years ago, coupon rates were subject to a
ceiling stipu-lated by the Controller of Capital Issues. With
the removal of the ceiling, issuers have fixed their coupon
rates by taking into consideration, market perceptions and
expectations. The rate may be fixed or it may be floating in
relation to some benchmark.

Covenants The restrictive clauses, terms and conditions that

appear in a loan agreement or in a „‚…ƒ„ hiih relating to
hifix„…‚iƒ .

Cover One’s Position To buy a security to offset a prior

ƒry‚„ ƒevi.

Covered Interest Arbitrage Arbitrage transactions simultan-

eously effected in the spot and forward segments of the foreign
exchange market in order to earn risk-free profits. Such an
opportunity would arise when the forward exchange rate
diverges from the theoretical rate as per the sx„i‚iƒ„ ‚e„i
€e‚s„‰ „riy‚iw.

Credit Authorization Scheme (CAS) A system to regulate

the level of bank credit to big borrowers. The objective was
to infuse financial discipline among big borrowers and thereby
ensure efficient use of bank credit. Under this scheme, prior
authorization of the Reserve Bank of India was required in
cases where the level of ‡y‚usxq ge€s„ev or terms loans to be
sanctioned to a borrower exceeded a certain limit. In 1986,
the limit for working capital was raised to Rs 6 crore for the
general category of borrowers. The scheme was withdrawn and
replaced by the g‚ihs„ wyxs„y‚sxq e‚‚exqiwix„ with effect
from October 1988.
 Credit Monitoring Arrangement (CMA) q RS

Credit Default Swap See g‚ihs„ hi‚s†e„s†i.

Credit-Deposit Ratio The relationship between the credit

ex-tended by a bank and its deposit liabilities, expressed in
percentage terms.

Credit Derivative A contract by which the hipe…v„ ‚sƒu on

a loan is transferred to a protection seller on payment of a
€‚iws…w. Thus the protection seller guarantees payment of the
€‚sxgs€ev and interest. Apart from banks and psxexgsev
sxƒ„s„…„syxƒ, companies too may find credit derivatives useful
for their receivables.
Credit Default Swaps account for the largest share of the
market for Credit Derivatives. With a Credit Default Swap
(CDS), a protection buyer who has invested in bonds arranges
contingent payment from a protection seller, on payment of
premium, which could be periodic or a lumpsum. To
illustrate, suppose Bank B enters into a one-year CDS on a
notional value of £100 million worth of 7-year bonds, issued
by Company XYZ. Since the annual premium is fixed at 40
feƒsƒ €ysx„ƒ, B pays £400,000 to the protection seller, S, at the
beginning of the year. At the end of the year, XYZ defaults
on its bonds which are now trading at 35 per cent of €e‚
†ev…i. Therefore, counterparty S is contractually obligated to
pay £65 million to B.
'Naked CDS' are a variant form of CDS in which the
protection buyer arranges for contingent payment as described
above, without having an underlying investment in bonds.

Credit Monitoring Arrangement (CMA) The system of

post-sanction scrutiny, by the Reserve Bank of India, of loans
and ‡y‚usxq ge€s„ev advanced by banks which exceed
specified limits, as for example Rs 5 crore in the case of working
capital when the scheme was introduced in place of the Credit
Authorization Scheme. These limits were subsequently revised
RT q 2Credit Rating

upwards. In 1992–93, the working capital limit for post-

sanction scrutiny was raised to Rs 10 crore. The system was
discontinued in December 1997.

Credit Rating The exercise of assessing the credit record,

integrity and capability of a prospective borrower to meet debt
obligations. Credit rating relates to companies, individuals and
even countries. In the case of a company’s debt instrument,
such formal evaluation with the aid of quantitative and quali-
tative criteria, culminates in the assignment of a letter rating
to the security. The instrument could be a hifix„…‚i, psˆih
hi€yƒs„ y‚ gywwi‚gsev €e€i‚. The rating represents the
ratingagency’s opinion at that time on the relative safety of
timely payment of interest and principal associated with the
particular debt obligation. This opinion rests on the agency’s
assessment of the willingness and capability of the issuer to
meet the debt obligations. The methodology is to examine
key factors like the business, the management, regulatory
environment, competition and fundamental aspects including
the financial position. A high credit rating can help in reduc-
ing the interest cost and also facilitate placement of the debt
security. The major rating agencies in India are Credit Rating
and Information Services of India Limited (CRISIL), ICRA,
and Credit Analysis and Research (CARE).
A development in India is the rating of fixed deposits of
banks, ƒ„‚…g„…‚ih hif„ yfvsqe„syxƒ and securitized debts.
Moreover, performance ratings can be obtained by real estate
developers and LPG bottlers. Besides, a general credit rating
service not linked to any debt issue may be availed of by a
company. This service is already offered by India rating firms.
CRISIL, for example, calls it Credit Assessment. This rating
can be used in negotiations with new bankers, for
performance guarantees, etc. International rating agencies also
undertake sovereign rating, i.e., of countries.
Credit appraisal also covers individuals. This type of
information is useful to consumer credit firms. Accordingly, at
 Cross Currency Option q RU

the initiative of the Central Government and the Reserve

Bank of India, the Credit Information Bureau (India) Limited
(CIBIL) was incorporated in 2000. CIBIL seeks to cater to the
needs of credit offering institutions for comprehensive credit
information by collecting, collating and disseminating relevant
information on individual and commercial borrowers, to
certain user members. Banks, psxexgsev sxƒ„s„…„syxƒ, xyx-
fexusxq psxexgsev gyw€exsiƒ, Housing Finance companies
and Credit Card companies utilize CIBIL's services. (See
Appendix V and also BOND RATING).

Credit Risk The chance that a borrower will not meet his
financial obligations. It is alternatively referred to as hipe…v„
‚sƒu.

Creditor A term for a business entity or an individual to

whom money is owed. Generally, a creditor is a supplier to
whom payment is due for goods or services provided.

Cross Currency Option An instrument that confers a

contractual right on the purchaser of the y€„syx to buy (call)
or sell (put) a currency against another currency, e.g., Yen for
U.S. dollar. For this privilege, the purchaser pays a cost
termed €‚iws…w. Incidentally, the terminology applicable to
cross currency options is similar to the one for stock options.
For instance, the ƒ„‚sui €‚sgi is the contracted exchange rate
at which the option buyer buys or sells a currency. The
advantages with a cross currency option (introduced in India
in January 1994), as compared to forward and futures deals are
that the option buyer is under no obligation to exercise the
right; moreover, the maximum possible loss, if at all, becomes
known to the option buyer at the outset. Thus, when the
direction of a currency’s movement is uncertain, a cross
currency option may be preferable to a py‚‡e‚h gyx„‚eg„.
RV q 2Cross Rate

Cross Rate The exchange rate between two currencies

derived from the rates relating to a common currency. For
instance, the DM/Yen cross rate can be calculated from the
DM/U.S. dollar and Yen/U.S. dollar rates.

Cum A prefix that means ‘with’. It is applied to the words

hs†shixh , ‚sqr„ƒ or fyx…ƒ to signify that the buyer of a share,
so described, is entitled to the dividend or rights or bonus as the
case may be.

Currency Swap See SWAP.

Current Assets The assets which are expected to be converted

into cash or consumed during the ‘Operating Cycle’ of a
business. The operating cycle is the time taken for the sequence
of events from the purchase of raw materials to the collection
of cash from customers for goods sold. Hence, it is also known
as the ‘Cash Conversion Cycle’. However, if raw materials are
bought on credit, then the cash conversion cycle is shorter than
the operating cycle by the period of credit available. Examples
of current assets are cash, short-term investments particularly
wyxi‰ we‚ui„ securities, raw materials, work-in-process,
finished goods, and eggy…x„ƒ ‚igis†efvi.
Purchase of
Raw Materials

Collection of Conversion into Finished

Cash Products (work-in-process)

Despatch to Customers Storage

and Billings (finished goods)

Operating Cycle
 Cyclical Stock q RW

Current Liabilities The claims against a company that will

become due within a year. These are mainly vsefsvs„siƒ on account
of purchase of materials or services rendered to the firm.
Examples include accounts and €‚ywsƒƒy‚‰ xy„iƒ payable, as well
as taxes and loan repayments falling due within the year.

Current Ratio This ratio is a measure of a company’s ability to

pay its short-term debts as they become due. It is computed from
a fevexgi ƒrii„ by dividing g…‚‚ix„ eƒƒi„ƒ by g…‚‚ix„
vsefsvs„siƒ. In India, the general norm for this liquidity ratio is
1.33. (See Appendix IV.)

Current Yield The ‰sivh on a hifix„…‚i or fyxh calculated by

dividing the amount of coupon interest per year by its prevailing
market price.

Cushion Theory See ƒry‚„ ƒeviƒ gyx„‚e‚‰ y€sxsyx „riy‚‰ .

Custodial Services The various services rendered to

sxƒ„s„…„syxev sx†iƒ„y‚ƒ and w…„…ev p…xhƒ such as
safekeeping of securities, collecting dividend and interest
income and monitoring corporate actions, as for instance,
‚sqr„ƒ and fyx…ƒ issues. These services are offered by
specialized agencies (e.g., Stock Holding Corporation of India
Limited) and by some banks and psxexgsev sxƒ„s„…„syxƒ.

Cyclical Stock The i…s„‰ ƒre‚i of a company whose per-

formance is directly related to economic activity in general.
For example, the share of a company dealing in steel, rubber
or chemicals is generally regarded as a cyclical stock. Such
securities usually move up during a period of vigorous
economic activity, and decline as the economy slackens.
n
 h

Dated Securities These are long-term debt instruments of a

definite we„…‚s„‰ issued by the government. Long-dated securities
have a maturity exceeding 10 years, medium-dated ones have a life
of 5 to 10 years, and short-dated securities mature within 5 years.
In recent years, the maximum maturity has been reduced to 10
years. (See qy†i‚xwix„ ƒig…‚s„siƒ.)

Debenture A debt security issued by companies, having a

certain we„…‚s„‰ and bearing a stated gy…€yx ‚e„i. Debentures
may be unsecured or secured by eƒƒi„ƒ such as land and buildings
of the issuing company. Debenture holders have a prior claim on
the earnings (coupon) and eƒƒi„ƒ in the event of liquidation, as
compared to €‚ipi‚ixgi and equity shareholders. (See also fyxh,
hifix„…‚i ‚ihiw€„syx ‚iƒi‚†i and hifix„…‚i „‚…ƒ„ii.)

Debenture Redemption Reserve (DRR) The term is given

to the reserves that are to be compulsorily created by companies
for the express purpose of retiring hifix„…‚iƒ issued by them
whose we„…‚s„‰ exceeds 18 months. Before redemption comm-
ences, the reserves (DRR) must cumulate to 50 per cent of the
amount of debentures issued.

Debenture Trustee The third party to a hifix„…‚i sƒƒ…i,

with whom the „‚…ƒ„ hiih is executed and who must ensure that
the issuer abides by the promises, pledges and restrictions relating
SP q 2Debtor

to the hifix„…‚i sƒƒ…i. The role of the trustee is that of a

watchdog who acts on behalf of the debenture holders. (See also
„‚…ƒ„ hiih.)

Debtor One who owes money, either as a buyer of merchandise

or services, or as a borrower of funds. The term (in plural) is also
used to refer to the eggy…x„ƒ ‚igis†efvi by a firm.

Debt Service Coverage Ratio (DSCR) A ratio used to

assess the financial ability of a borrower to meet debt obligations.
While appraising loan requests, lending institutions ascertain the
debt servicing capacity from financial projections submitted, by
computing the ratio of cash accruals plus interest payments (on
term loans) to the sum of interest and loan repayments:
Profits after taxes + DEPRECIATION + Interest charges
DSCR =
Interest charges + Loan repay ments
The figures in the numerator and denominator are typically
aggregated for 10 years in working out the DSCR.

Debt Service Ratio The proportion of annual export revenues

(from goods and invisibles) of a country, which constitutes its
repayment obligations of the principal and interest on external
debt for the year. (See also fevexgi yp €e‰wix„ƒ.)

Debt-Equity Ratio This ratio is used to analyze psxexgsev

vi†i‚eqi. It is a structural ratio that gauges the level of debt
financing, and is worked out by dividing total debt, short-term
and long-term, by xi„ ‡y‚„r. The denominator would comprise
total equity of common stockholders and €‚ipi‚ixgi capital.

Debt Value The value at which a xyx-gyx†i‚„sfvi fyxh or

hifix„…‚i would trade. It is calculated by discounting its future
inflows (coupon receipts and ‚ihiw€„syx price) at the prevailing
 Revenue Deficit q SQ

‰sivh on comparable securities. An alternative term is

sx†iƒ„wix„ †ev…i.

Deep Discount Bond See ysh fyxhƒ.

Default Risk The chance that the issuer of a debt security may
not pay the promised amount of interest and €‚sxgs€ev at the
promised time.

Defensive Stock An i…s„‰ ƒre‚i whose price remains

relatively stable during periods of declining stock prices. Such
shares have a fi„e of less than one and are likely to be of
companies in the business of pharmaceuticals, food items or
utilities. Switching to defensive stocks from, say, q‚y‡„r
ƒ„yguƒ is a worthwhile option when a broad stock market
decline is anticipated.

Deficit In general, it connotes a shortfall. In the context of a

f…hqi„ , it refers to the excess of expenditure over revenues
during a certain period. However, there are specific measures of
deficit used in India for a financial year, as described below:

Revenue Deficit The excess of expenditure over receipts in

the revenue account of the Government of India. Receipts
include taxes and non-tax revenues such as interest and
hs†shixhƒ and also grants. Some of the expenditure items are
interest, ƒ…fƒshsiƒ, certain defence outflows, salaries and
pensions. Thus, the revenue deficit is a good indicator of
whether the government is living within its means. The recent
phenome-non of high levels of revenue deficit financed by
borrowings to meet consumption expenditure has ominous
implications. Whereas outflows on account of interest charges
and loan repayments will go up, the creation of productive
eƒƒi„ƒ decelerates, as funds are diverted to current expenditure.
SR q 2Budget Deficit

An important development was the Fiscal Responsibility and

Budget Management Bill legislated by the Parliament in July
2003, which aimed at eliminating Revenue Deficits by March
2008.

Budget Deficit The figure that results by subtracting the total

expenditures (on revenue and capital accounts) from the total
receipts (on revenue and capital accounts) of the Government of
India. The budget deficit was financed through the issue of Ad
hoc „‚ieƒ…‚‰ fsvvƒ and/or by drawing down cash balances with
the Reserve Bank of India. As mentioned above, revenue
receipts include tax and non-tax revenues. Capital receipts
comprise recovery of loans, proceeds from the sale of
government assets and borrowings other than through Treasury
Bills. Capital expenditure includes loans and advances to states
and public sector units, and capital outlay.

Gross Fiscal Deficit (or Fiscal Deficit) The total

borrowing by the Government of India by various means. It
is a broader measure than the budget deficit, and is calculated
by subtracting total expenditure from the sum of revenue
receipts and those capital receipts which are not borrowings.
In other words, it is the gap that is not bridged even when
total expenditure including net lending is offset by total
revenue receipts, and non-debt capital receipts. This gap,
therefore, represents total government borrowing which
includes funds raised through he„ih ƒig…‚s„siƒ and „‚ieƒ…‚‰
fsvvƒ. Apart from causing the interest burden to mount, large-
scale government borrowing may “crowd out” private
borrowing and investment activity. Therefore, to attenuate
the pressure on interest rates, the Reserve Bank of India (RBI)
from June 1998, resorted to accepting P‚s†e„i Pvegiwix„ of
Gy†i‚xwix„ Sig…‚s„siƒ from time to time and then releasing
them through O€ix Me‚ui„ O€i‚e„syxƒ as conditions
improved.
 Primary Deficit q SS

To deal with the mounting debt burden, the RBI had

suggested the creation of a ƒsxusxq p…xh, on a priority basis, to
redeem outstanding debt. As per the recommendation, a part
of the revenue receipts should go towards the fund.

Primary Deficit The gross fiscal deficit less the interest

payments (or, alternatively, net interest payments). This
measure is to ascertain the extent of the discretionary policy
of the Government budget.
Given below are the Union Budget (1996–97) estimates in
which the above mentioned measures of deficit are clearly
illustrated.

Union Budget 1996–97

1. Revenue Receipts .......................................................................
1,30,345
2. Tax revenue (net to Centre) .....................................................
97,310
3. Non-tax revenue ........................................................................ 33,035
4. Capital Receipts .......................................................................... 67,737
.........................................
5. Recoveries of loans ................................................................... 7,048
6. Other receipts 5,001
7. Borrowings and other liabilities 55,688
8. Total Receipts (1 + 4) .............................................................. 1,98,082
........................................
9. Non-plan expenditure .............................................................. 1,49,975
10. ______ On revenue account 1,28,353
11. ______ Of which, Interest Payments 60,000
12. ______ On capital account 21,622
13. Plan expenditure ........................................................................ 54,685
14. ______ On revenue account 33,467
15. ______ On capital account 21,218
16. Total expenditure (9 + 13) ..................................................... 2,04,660
........................................
17. Revenue expenditure (10 + 14) 1,61,820
18. Capital expenditure (12 + 15) 42,840
.....................................................................................................................
ST q 2Deficit Spending

19. REVENUE DEFICIT (1 – 17) ........................................... 31,475

20. BUDGET DEFICIT (8 – 16) ............................................... 6,578
21. FISCAL DEFICIT ((1 + 5 + 6) – 16) or (7 + 20) .......... 62,266
22. PRIMARY DEFICIT (21 – 11) ............................................. 2,266

Deficit Spending The expenditure by a government in excess

of its revenue. Deficit spending entails 'deficit financing', i.e.,
borrowing to meet the excess expenditure. The funds could be
raised from the gix„‚ev fexu of a country or from the
psxexgsev we‚ui„ƒ . Some economists advocate deficit
spending to stimulate or revive economic growth. However,
others express concern that such spending will lead to
sxpve„syx and higher taxes in future.

Deflation A phenomenon of falling prices in an economy,

which may be due to a contraction in wyxi‰ ƒ…€€v‰.

Delist The withdrawal of permission to trade in a particular

share, hifix„…‚i or other security at a securities exchange. This
is usually due to a violation of the rules and regulations laid down
by the exchange. However, in recent years, there have also been
instances of voluntary delisting of i…s„‰ ƒre‚iƒ by certain
companies. The companies seeking such delisting are required to
adhere to specific guidelines framed by SEBI, including the
manner of determining the exit price for the security.
(See also, vsƒ„sxq eq‚iiwix„.)

Demand Loan A loan repayable when demanded by the

creditor.

Demutualisation The process of separation of ownership,

trading rights and management of stock exchanges, previously
operating as a mutual set-up. The objective of separating the right
to trade from ownership and management is to lessen conflict
of interest among trading members and thereby enhance
investor protection.
 Depository q SU

Demutualisation would be effected by issuing shares of an

exchange, converted into a corporate body, to the public at
large. Additional safeguards, as for example, barring a trading
member from becoming a director by virtue of voting control,
may also be instituted.

Deposit Insurance Financial protection to small depositors

in banks and other financial intermediaries against the loss of
their deposits. Such an insurance serves to protect depositors
and also enhances their confidence in the intermediary. The
confidence, therefore, provides the insured institutions,
security against the risk of a “run” or large-scale withdrawals
by panic-stricken depositors. However, the pitfalls of deposit
insurance are that it may cause the borrowing intermediary to
become reckless in its lending practices or it may even be
tempted to exploit the protection, to the detriment of the
insurer and the public exchequer.

Deposit Multiplier The factor by which banks are able to

cause multiple creation of credit since, under the p‚eg„syxev
‚iƒi‚†i ƒ‰ƒ„iw, only a fraction of their deposit vsefsvs„siƒ are
required to be maintained as reserves. Thus, for instance, if the
required reserve ratio is 10 per cent, a fresh increment of Rs 100
crore with the banking system will, through successive rounds of
l e n d i n g , add 100 ¥ 1/0.1 = Rs 1000 crore to the financial
system. The deposit multiplier is, therefore, the reciprocal of the
required reserve ratio. This simplified illustration assumes that
there is no withdrawal of currency from the banks at any stage
of credit creation. In reality, however, since such withdrawals
occur routinely, the extent of credit creation is restricted.

Depository A system of computerized book-entry of securities.

This arrangement enables a transfer of shares through a mere
book-entry rather than the physical movement of certificates.
This is because the scrips are ‘dematerialized’ or alternatively,
‘immobilized’ under the system.
SV q 2Depreciation

A depository performs the functions of holding, transferring

and allowing withdrawal of securities through its agents viz.,
depository participants. For settlement of trades done at an
exchange, the depository interacts with a clearing corporation
which oversees the payment of funds and delivery of
securities.
Under dematerialization, securities in physical form are
destroyed, whereas under immobilization, the securities are stored
away in vaults. Further, rematerialization is possible, so as to
restore securities to physical form.
The system of maintaining ownership records in the form of
electronic holdings will help to eliminate problems that are
associated with physical certificates such as fake/torn certificates
and loss in transit.

Depreciation An accounting process by which the cost of a

psˆih eƒƒi„, such as a building or machinery, is allocated as a
periodic expense, spread over the depreciable life of the eƒƒi„.
The term also means the amount of expense determined by
such a process. Sometimes, it is called ewy‚„se„syx when the
eƒƒi„ is intangible or ‘depletion’ when the asset is a natural
resource, such as minerals. There are different methods of
depreciation such as the Straight Line Method and the Written
Down Value (WDV) method.
In the context of international finance, depreciation refers to
the decline in the market value of a currency in relation to
another currency. For example, if one U.S. dollar could be bought
in the market for Rs 40 as against Rs 41.50 earlier, it means that
the dollar has depreciated vis-a-vis the Indian rupee. This would
result in American goods and services becoming cheaper to
Indians and Indian goods and services becoming more expensive
to Americans.

Depression An economic condition that is characterized by

a severe contraction in economic activity, which is manifested
in numerous business shut-downs, widespread unemployment,
 Derivative q SW

and declining investment in plant and equipment on account

of falling sales.

Derivative A financial contract that derives its value from

another eƒƒi„ or an index of asset values. These underlying assets
may be foreign exchange, fyxhƒ, equities or commodities. For
example, py‚‡e‚h gyx„‚eg„ƒ relate to foreign exchange; futures
to commodities, debt instruments, currencies or stock indices;
and y€„syxƒ to equities. Derivatives are traded at organized
exchanges and in the over-the-counter (OTC) market.
Derivatives Trading Forums

Organized Exchanges Over-the-counter (OTC)

Commodity Futures Forward Contracts

Financial Futures Swaps
Options (stock and index)
Stock Index Futures

Derivatives traded at exchanges are standardized contracts

having standard delivery dates and trading units. OTC
derivatives are customized contracts that enable the parties to
select the trading units and delivery dates to suit their
requirements. Moreover, there are fewer regulatory
restrictions and this facilitates innovation. A major difference
between the two is that of counterparty risk—the risk of default
by either party. With exchange-traded derivatives, the risk is
controlled by exchanges through clearing-houses which act as a
contractual intermediary and impose margin requirements. In
contrast, OTC derivatives signify greater vulnerability. y€„syxƒ
derive their values from shares or stock market indices; an
option confers the right without any obligation to buy or sell an
asset at a predetermined price on or before a stipulated
iˆ€s‚e„syx he„i . Interest-rate futures are tied to debt
instruments. This contract binds the parties to exchange a debt
TH q 2Derivative Usance Promissory Note

security against payment, e.g. „‚ieƒ…‚‰ fsvv, on a future date at

a predetermined price. The value of the futures contract is
governed by the value of the underlying Treasury Bill. If yields
decline, the value of the futures contract will rise because the
buyer has locked in a higher interest rate. ƒ‡e€ƒ are agreements
between two parties to exchange cash flows in the future
according to a predetermined formula.
With their universal recognition as risk-management tools,
trading in derivatives has registered a phenomenal growth in the
Western financial markets. The relationship with other assets and
certain other features makes derivatives useful for ƒ€ig…ve„syx,
rihqsxq , e‚fs„‚eqi a n d €y‚„pyvsy adjustments.
Trading in stock derivatives at Indian exchanges, viz., Bombay
Stock Exchange and National Stock Exchange, commenced in
June 2000. It began with index futures contracts; a year later,
index options followed by stock options began trading. Futures
contracts on individual stocks were introduced in November 2001
and interest-rate derivatives from June 2003. Contracts for 1
month, 2 months and 3 months are traded. The index options are
European type (exercised only on the iˆ€s‚e„syx he„i) whereas
the stock options are American type.

Derivative Usance Promissory Note An instrument that

represents commercial bills hsƒgy…x„ih by a bank, which is used
for the purpose of ‚ihsƒgy…x„sxq, as, for example, in availing of
rediscounting facilities with the Discount and Finance House of
India (DFHI). This innovation has considerably simplified proced-
ures and documentation to facilitate successive rounds of discount-
ing. It obviates the need to endorse and deliver the underlying bills
to the rediscounter, every time ‚ihsƒgy…x„sxq is done.

Devaluation The lowering of a country’s official exchange rate

in relation to a foreign currency (or to gold), so that exports
compete more favourably in the overseas markets, Devaluation
is the opposite of ‚i†ev…e„syx. (See also hi€‚igse„syx.)
 Dilution q TI

Devolvement The contractual requirement thrust upon

under-writers to subscribe to shares or other securities on
account of inadequate public subscription. (See €…fvsg sƒƒ…i and
…xhi‚‡‚s„i.)

Dhanuka Committee A committee headed by Justice D.R.

Dhanuka to review securities-related Acts, regulations and rules,
set up by the Securities and Exchange Board of India (ƒifs) in
March 1997. Some of its recommendations as gleaned from press
reports were:
1. The w…„…ev p…xh and collective schemes of the Unit Trust of
India (UTI) must come under the purview of SEBI.
2. In case of differences, the SEBI Act must prevail over the UTI
Act.
3. Self-regulatory organizations in the financial sector such as
AMBI and AMFI must register with SEBI.
4. The exemption from payment of stamp duty that is available
to beneficial owners of dematerialized shares should also be
extended to transfer of shares in physical form.
5. Companies making a public issue of over Rs 10 crore should use
the hi€yƒs„y‚‰ option.

DICGC An acronym for Deposit Insurance and Credit Guarantee

Corporation, which provides insurance coverage to depositors. It
also guarantees loans by banks and some lending institutions to
borrowers such as retail traders, professionals, self-employed
persons and others. Such protection to lending institutions
stimulates a greater flow of credit, particularly to small
borrowers.

Dilution A reduction in voting control or in the ie‚xsxqƒ €i‚

ƒre‚i as a consequence of an increase in the number of i…s„‰
ƒre‚iƒ . An issue of gyx†i‚„sfviƒ too could result in such dilution
when conversion takes place.
TP q 2Direct Costs

Direct Costs The costs that can be directly traced to the cost
objective. For example, the wood and labour expended in making
a table in a furniture shop are direct costs. (See also €‚swi gyƒ„ and
sxhs‚ig„ gyƒ„ƒ.)

Direct Taxes Taxes whose impact and incidence are on the

same person. The taxes levied on income, and wealth tax are
instances of direct taxes.

Dirty Price The price inclusive of interest accrued, since the

last coupon up to the date of purchase, that a bond buyer
would need to pay the seller.

Discount This refers to:

1. The margin by which a security’s market price is lower
than its face value.
2. In security analysis, it means the adjustment in security prices
consequent to the assimilation of new information about a
company, or news in general. An illustration is the increase in
the price of a stock following the news of the company
bagging big sale orders.
3. Reduction in the sale price of goods.

Discount and Finance House of India Limited (DFHI)

An institution promoted by the Reserve Bank of India (RBI),
public sector banks and psxexgsev sxƒ„s„…„syxƒ to meet the
long-felt need of activating the ƒigyxhe‚‰ we‚ui„ as well as
developing the €‚swe‚‰ we‚ui„ f o r wyxi‰ we‚ui„ instruments.
This step was in pursuance of one of the recommendations of
t h e Working Group on the Money Market (†eqr…v
gywws„„ii) appointed by the RBI in 1986. DFHI commenced
operations in April 1988.
During 2001–02, the RBI divested its entire holdings in
DFHI a n d ƒig…‚s„siƒ „‚ehsxq gy‚€y‚e„syx yp sxhse, so as
 Dividend q TQ

to free itself from the burden of conflict of interests; the latter

arose from RBI’s involvement as owner and supervisor.

Discount Rate The interest rate used in calculating the

€‚iƒix„ †ev…i of future cash flows.

Discounting It is a procedure for calculating the €‚iƒix„

†ev…i of future cash flows by applying the appropriate interest
factor or ge€s„evse„syx ‚e„i (see Appendix VI). This is
based on the concept of the time value of money which
differentiates between a rupee offered today and one expected
at some point in the future.

Disintermediation The flow of funds out of financial inter-

mediaries and usually into the open market where more interest
can be earned. This phenomenon is sometimes experienced by
banks and other intermediaries which cannot raise the interest
rates offered to depositors, to match the rising open market
interest rates.

Disinvestment The sale of shareholding by an individual or

institution in order to raise cash.

Diversification The process of spreading out investment so as

to limit exposure and reduce risk. Individuals do this by in-
vesting in shares of different companies or by combining
stocks with hifix„…‚iƒ, w…„…ev p…xh shares, psˆih hi€yƒs„ƒ
and other investment vehicles. Companies achieve diversifica-
tion by venturing into new and unrelated business areas.

Dividend The payment made by a company to its

shareholders. Legal and financial considerations have a bearing
on the level of dividend to be paid. For instance, dividends
may be paid out of profits alone; so also, a growing company
TR q 2Dividend Payout Ratio

needs funds to finance its expansion and hence may pay only
a modest dividend, in order to conserve resources.

Dividend Payout Ratio The fraction of ie‚xsxqƒ €i‚ ƒre‚i

paid out as hs†shixhƒ.

Dividend Stripping The purchase of g…w hs†shixh w…„…ev

p…xh units and their subsequent sale iˆ hs†shixh , that is, at a
lower price. The motive behind this short-term transaction is to
earn tax-free dividends and yet register a short-term loss on the
sale of units, which could be used to offset other taxable gains.
However, lately, the Government and the tax authorities have
begun frowning upon such transactions.

Dividend Yield The amount of annual hs†shixh on a share

divided by the current market price of the share.

Dollar Cost Averaging A method of reducing the average

cost of securities bought, by investing a fixed sum in a particular
security at regular intervals, spread over a long period of time.
This method automatically ensures that more shares are acquired
when the price falls and fewer shares are acquired when the price
rises. When the stock gradually rises, a profit accrues on the
greater number of shares bought cheaply. Although the
method is simple, the selection of the security is crucial and
is left to the investor.

Double Ready Forward The simultaneous sale and purchase

of different securities with agreements to buy back and sell
back the securities respectively at specific prices and on a
future date. It is, therefore, a combination of a repurchase
agreement (‚i€yƒ) with a reverse repurchase agreement. Such
transactions are undertaken in order to temporarily alter the
we„…‚s„‰ profile of the debt securities €y‚„pyvsy . Anticipating
 Double Ready Forward q TS

a change in ‰sivh or gy…€yx ‚e„iƒ, psxexgsev sxƒ„s„…„syxƒ,

banks and other intermediaries may effect such alterations to
either try to earn substantial profits or avoid capital losses
from security price changes. This ƒ‡e€ involves the
application of a bond theorem according to which interest-
bearing securities with longer „i‚wƒ „y we„…‚s„‰ will undergo
bigger price changes in response to yield changes, as compared
to short-term securities. A brief illustration of how the
stratagem was put to work during the 1992 scam is given
below.
The shrewd broker (SB), anticipates or has prior
information about a hike in the coupon rate on new
qy†i‚xwix„ ƒig…‚s„siƒ. Therefore, SB goes through a four-
step sequence.
1. In simultaneous repurchase agreements (‚i€yƒ), SB obtains
long-term securities (LS) from the OSB in exchange for short-
term securities.

Original
Selling Bank
1
SB
4
OSB

3
Shrewd
Broker
2

Market
UCB

Unsuspecting or
Colluding Bank
TT q 2Dow Theory

2. SB sells LS to UCB, at say, Rs 98 per security.

New government securities are issued at a higher coupon,
causing a decline in the prices of previously issued securities.
UCB suffers a capital loss.
3. SB buys back LS at a lower price, of say, Rs 95 and thereby
earns a profit.
4. The positions created in Step 1 above are reversed.

Dow Theory A theory to ascertain the emergence of a

primary trend (a trend which indicates either a bullish or
bearish phase) in the stock market. It seeks confirmation of
whether a long-term market advance or decline is under way,
by examining the movement of the Dow Jones Industrial
Average in conjuction with the Dow Jones Transportation
Average. These averages are summary measures of stock prices
in the U.S.

Drawee Bill System The system of financing purchases of

raw materials by manufacturers/producers by the eggi€„exgi
and hsƒgy…x„sxq of fsvvƒ yp iˆgrexqi drawn by the supplier of
raw materials. This is different from the discounting of bills
representing the manufacturer’s receivables.

Du Pont System See Appendix IV.

Dual Currency Bond A fyxh whose interest and €‚sxgs€ev

payments are made in different currencies.

Dual Purpose Fund A gvyƒi-ixh p…xh that issues two types

of shares: income shares to which is allocated the entire hs†shixh
and interest income earned by the fund; and capital shares to
which accrues a l l ge€s„ev qesxƒ and losses.

Dumping The sale of goods in a foreign market at a price that

is below the price realized in the home country, after allowing
 Duration q TU

for all costs of transfer including transportation charges and

duties. The motive may be to enhance revenues, offload surplus
stocks or a predatory intent of killing foreign competition.

Duration The weighted average we„…‚s„‰ of a fyxh or hifix-

„…‚i where the weights are the relative €‚iƒix„ †ev…iƒ of each
payment. In simple terms, it is the average time within which a
bond’s cash inflows are received. It takes into account the amount
and timing of every cash inflow, rather than the time span till the
final inflow. This measure, a contribution of F. Macaulay in 1938,
is computed from the formula given below.

Duration =
n
R
 ST t ¥ Present value of cash flow in time t
VW U
t =1
Present value of the security

Here, n is the term to maturity and t stands for different

periods. Let’s look at a hypothetical bond/debenture with the
following terms:
pegi †ev…i = Rs 100
Yield to maturity = 12%
gy…€yx ‚e„i = 8%
Annual coupon receipt = Rs 8
Term to maturity = 3 years
Market price (present value of coupons and €‚sxgs€ev value)
= Rs 90.39

(1) (2) (3) (4)

Year Present value Present value
of cash flows as a proportion
of VH (1) ¥ (3)
1 8 ¥ (1/1.12) = 7.14 0.079 0.079
2 8 ¥ (1/1.12)P = 6.38 0.071 0.142
3 108 ¥ (1/1.12)Q = 76.87 0.850 2.550
VH = 90.39 1.000 2.771
TV q 2Duration

The bond’s duration in the above case is 2.771 years. For

a security with interim coupon payments, its duration will be
shorter than its term to maturity. Duration is directly related
to the term to maturity of a security and inversely to its
coupon and to the market yield. More significantly, it is useful
as a measure of interest sensitivity; hence, in order to enhance
portfolio performance, interest sensitivity can be increased or
decreased by a bond portfolio manager, depending on antici-
pated changes in interest rate. (See also sww…xse„syx.)
n
 i

Earnings Per Share (EPS) The net profits of a company

expressed on a per (i…s„‰) share basis. It is arrived at by
dividing the figure of profits after taxes and hs†shixhƒ paid on
€‚ipi‚ixgi ƒre‚iƒ, if any, by the number of equity shares
outstanding. Therefore, it does not reveal the potential impact
of dilution in earnings on account of securities such as
convertibles or warrants that may be outstanding. Moreover, an
improvement in EPS does not necessarily indicate a more
productive use of the total amount of funds available with a
firm.

Economic Indicators These are certain statistics and

measures of economic activity which either foretell economic
changes or serve to confirm these. There are three categories
of such indicators: (a) viehsxq (b) gysxgshix„ and (c) veqqsxq.

Economic Value Added (EVA) A tool for evaluating and

selecting stocks for investment, and also used as a measure of
managerial performance. An American consultancy firm,
Stern Stewart is credited with the development of this tool in
the late eighties. It is calculated by subtracting the total cost
of capital from the after-tax operating profits of a company.
EVA = After-tax Operating Profits–Total cost of capital
Operating profits simply mean earnings before interest and
taxes. The cost of capital is the composite cost of total equity
UH q 2EEFC Account

and debt, which together are deployed in various eƒƒi„ƒ such as

land, buildings, machines, sx†ix„y‚siƒ, receivables and cash.
Total equity includes reserves and share €‚iws…w, for which an
appropriate y€€y‚„…xs„‰ gyƒ„ must be considered. A positive
EVA is deemed to be a good sign and the higher it is, the better.
EVA expressed on a per share basis facilitates comparison be-
tween companies.

EEFC Account This refers to the Exchange Earners’ Foreign

Currency Account, a scheme introduced in 1992 for exporters
and residents receiving foreign exchange. A certain percentage
of the earnings may be maintained in this account in order to
limit exchange rate risk in case of future imports or for other
specified purposes.

Efficient Frontier The locus of efficient €y‚„pyvsyƒ resulting

from the we‚uy‡s„ wyhiv of diversification.

Efficient Markets Hypothesis A theory which holds that

share prices react immediately to any new information that
becomes available. There are three forms of the hypothesis,
viz:
1. Securities markets are weakly efficient. According to this
assertion, share prices follow a random walk—i.e., share
prices are a series of random (uncorrelated) numbers
occurring in response to the random arrival of information.
2. The efficiency of markets is semi-strong. This statement
implies that all relevant information that is publicly
available, is already reflected in share prices. It suggests,
therefore, that dispersal of new information is prompt and
complete.
3. Securities markets are strongly efficient. This hypothesis
credits markets with a very high degree of efficiency by
postulating that all information, not just publicly available,
 Equity Share q UI

is fully reflected in share prices. In reality, some inefficiency

remains in the system on account of privileged
information and insider trading.

Efficient Portfolio A diversified selection of stocks resulting

in a least risk €y‚„pyvsy for a given rate of return. At that
level of ‚sƒu, no other portfolio provides superior returns.
Combining shares from different unrelated industries helps to
neutralize the …xƒ‰ƒ„iwe„sg ‚sƒu inherent in each security.
(See also we‚uy‡s„ wyhiv.)

Endowment Assurance Policy An insurance policy that

offers life coverage for a certain time period, and provides for
payment of the sum assured, in the event of early death of the
insured or at the termination of the policy period.

EOQ The acronym for Economic Order Quantity, a term that

relates to sx†ix„y‚‰ management. It is the optimum size of
order which minimizes the cost of purchasing and holding
inventories.

Equity Share A security that represents ownership interest in

a company. It is issued to those who have contributed capital
in setting up an enterprise. Apart from a €…fvsg sƒƒ…i, equity
shares may originate through an issue of fyx…ƒ ƒre‚iƒ,
gyx†i‚„sfvi securities, ‡e‚‚ex„ƒ, qh‚ƒ, etc. An alterative term
that is sometimes used is ‘gywwyx ƒ„ygu’ or simply, ‘ ƒ„ygu’.
The share of a public limited company can be subsequently
sold through stock exchanges or other forums. The claim of
equity shareholders on earnings and on eƒƒi„ƒ in the event of
liquidation, follows all others. For example, hs†shixh on equity
shares is paid after meeting interest obligations and dividends to
€‚ipi‚ixgi shareholders. Hence, they are also known as
‘residual owners’. For bearing such risk, equity shareholders
UP q2Escrow

expect handsome returns by way of dividends and price

appreciation of the share, when their enterprise performs well.

Escrow Cash, securities or other valuable instruments that are

held by a third party to ensure that the obligations under a
contract are discharged. The escrow mechanism is a technique
of mitigating the risk to lenders and it is used typically in
infra-structure projects such as power, roads or telecom. For
example, an escrow account can be set up at a bank for
depositing the payments of electricity bills.

ESOP An acronym for Employee Stock O€„syx Plan. Under

the plan, a company grants its employees, usually key
executives, the privilege to buy a certain number of its shares
at a fixed price, irrespective of the actual price of the stock. At
the time the option is granted, the iˆi‚gsƒi €‚sgi is usually set
at the then prevailing stock price. The option may be
exercisable only after a specified period, e.g., one year, but not
beyond the iˆ€s‚e„syx he„i.
The option becomes valuable when the market price of the
stock surges past the exercise price. The incentive scheme is
meant to spur the top managers to work towards the goal of
stockholder wealth maximization. However, the emphasis on
maximizing the stock price may cause the managers to restrict
dividend payments. Additionally, the managers will not incur
a loss on the options on the downside, unlike the owners, and
so may be more inclined to undertaking riskier ventures.

Ethical Fund A w…„…ev p…xh that expressly avoids making

investments in certain sectors or areas which are disapproved
by many investors. For instance, such funds have been floated
overseas for investors having reservations about the liquor and
defence industries on ethical grounds. In India too, e.g., there are
individual investors who refrain from investing in the
hatchery and aquaculture sectors.
 Eurocurrency Deposit q UQ

Euro The common European currency that has come into cir-
culation with the formation of the European Union. This
economic union has given birth to the European Monetary
Union that is characterized by a common gix„‚ev fexu and
wyxi„e‚‰ €yvsg‰, besides the common currency. Elimination
of exchange rate risk and reduction of transaction costs be-
tween members are seen as major benefits of the common
currency.

Euro lssue An issue of securities to raise funds outside the

domestic market. Euro issues by Indian companies have been
by way of qh‚ƒ or i…‚ygyx†i‚„sfvi fyxhƒ. The advantages
associated with Euro issues are:
1. Reduced cost of capital owing to lower interest rates and
floatation costs.
2. Efficient pricing that maximizes mobilization.
3. No immediate dilution of voting control.
4. Greater visibility due to international exposure.
5. Inflow of foreign currency funds.
Euro issues must conform to the guidelines issued by the
Central Government. Among other things, prior permission
for an issue must be obtained from the Ministry of Finance.
(See qh‚ and py‚isqx g…‚‚ixg‰ gyx†i‚„sfvi fyxh.)

Eurobond A bond denominated in a currency different from

that of the country in which it is sold.

Euroconvertible Bond See py‚isqx g…‚‚ixg‰ gyx†i‚„sfvi

fyxh.

Eurocurrency Deposit A deposit made at a bank in foreign

currency.
UR q 2Eurodollar Deposit

Eurodollar Deposit This refers to a U.S. dollar deposit in a

bank outside the United States of America. Eurodollar
deposits belong to individuals, companies and governments
across the globe. The term, Eurodollar does not narrowly refer
to deposits at banks in Europe; dollar deposits held anywhere,
e.g. in Panama, Hong Kong and Singapore, are also included.

Ex A term that relates to stock exchange transactions, used as

a prefix to the words, hs†shixh or fyx…ƒ or ‚sqr„ƒ to indicate
exclusion. When a share begins to trade ex-dividend, it means
that the buyers will not be entitled to its declared dividend.
(See also g…w.)

Excess Reserves The cash held by a bank exceeding the

requirement of the geƒr ‚iƒi‚†i ‚e„sy. This excess cash is taken
into consideration with other eligible eƒƒi„ƒ in computing the
ƒ„e„…„y‚‰ vs…shs„‰ ‚e„sy of a bank.

Exchange-traded Funds (ETFs) An investment vehicle for

investing in securities, typically, those comprising a stock
market index, but with the distinct feature of intraday trading
and monitoring of prices. Thus, ETFs are usually similar to
sxhiˆ p…xhƒ ; but, there are instances of ETFs created for
investment in eƒƒi„ƒ such as gold. An investment in w…„…ev
p…xhƒ, including index funds, is done after trading hours at the
day's closing xi„ eƒƒi„ †ev…i of the chosen fund, provided
certain conditions are met. In contrast, an investment in units
of an exchange-traded fund can be effected at any chosen time
during trading hours.

Excise Duty A levy by the government on the manufacture or

production of goods. (See also ƒi‚†sgi „eˆ.)
 Extraordinary Item q US

Exercise Price The contractual price at which an eƒƒi„ can

be bought or sold, by exercising the related y€„syx. An
alternative term is ƒ„‚susxq €‚sgi.

Exim Bank (of India) A bank set up by the Government of

India in 1982 whose thrust area is international trade.
Accordingly, it grants loans for exports and imports, ‚ihsƒgy…x„ƒ
export bills for banks and also provides them with ‚ipsxexgi
assistance for international trade, and participates in financing
foreign trade activities in other ways.

Expectations Theory A theory that offers an explanation for

the shape of a ‰sivh g…‚†i in terms of investors’ expectations.
For instance, during a period of abnormally high interest rates,
investors expect future rates to come down. This explains a
downward sloping yield curve, which suggests that the long-
term rate will be lower than rates in the near term. (See also
‰sivh g…‚†i.)

Expiration Date The last date by which an y€„syx to buy or

sell a security must be exercised.

Export Credit See €‚i - ƒrs€wix„ g‚ihs„ and €yƒ„ - ƒrs€wix„

g‚ihs„.

Extraordinary Item An accounting term in the U.S. for a

profit or loss to a company resulting from an unusual and rare
occurrence or event. Examples include expropriation of prop-
erties by a foreign government or gains from refunding a fyxh
issue.
n
 p

Face Value The nominal value of a security. The face value

helps to know the share of ownership in a company. For
example, a person holding one equity share with a face value
of Rs 100 in a company having a total equity capital of Rs
20,000 has an ownership stake of 100/20,000, i.e., 0.50 per
cent in the company.

Factoring An arrangement for obtaining funds by selling

receivables to a specialized financing agency (the factor),
generally without recourse. When factoring is contemplated, a
firm’s sales to different customers must have prior approval of
the factor. Typically, a factor pays up to 80 per cent of the
invoice value to its client (firm) upon receipt of the copy of
the invoice relating to goods delivered. The balance is paid
after receiving the amount due from the firm’s customer. In
order to ensure timely collec-tion, the factor may follow up
with the customer after furnishing the details of receivables.
The agency, i.e., the factor, bears the responsibility and
attendant ‚sƒu of collecting the dues from the company’s
customers.
There are two basic components to the charges levied by a
factor: interest or hsƒgy…x„ charge and service fee. Whereas the
interest rate depends on the cost of money and competition
among factors, the service commission is for bearing risk,
processing and collecting the receivables and handling the book-
UV q 2Factory Overhead

keeping. Factoring is thus a financial package of credit, debt

collection and sales ledger administration resulting in regular
cash flows to companies whose credit sales comprise a
significant portion of the total sales. The main drawback with
factoring is that it is usually very expensive.
Among the reasons why factoring has not caught on in India
are competition from alternative sources of financing
particularly b i l l hsƒgy…x„sxq as well as funds constraint and
lack of credit information. The task of debt collection is also
considered to be a major impediment.

Factory Overhead This refers to the costs of manufacturing

other than hs‚ig„ gyƒ„ƒ of materials and labour. It includes
indirect materials and indirect labour, as well as other sxhs‚ig„
gyƒ„ƒ such as rent, hi€‚igse„syx, insurance, power and repairs.
Examples of indirect materials are lubricating oils and brushes,
while indirect labour would include costs of supervisors,
workers and cleaners, and maintenance.

FEDAI The acronym for Foreign Exchange Dealers’ Association

of India.

Filter Rule This is a maxim advocated by technical analysts,

according to which buying and selling decisions are implemented
when a share moves up or down by a predetermined percentage
from a low or high point. These rules are based on the assumption
that stock prices move in trends, but the patterns are indistinct
owing to intervening fluctuations. Therefore, a certain filter,
that is a minimum price change is used as a screen in timing
buying and selling decisions. A typical filter rule would suggest:
if the price of a share goes up by 5 per cent, buy and hold the stock
until it falls 5 per cent from a subsequent high. At this point sell
and simultaneously go short. Maintain the short position until
the stock again advances 5 per cent from its low price. Any x per
cent filter rule can be constructed analogously.
 Finance Commission q UW

Finance Commission A body of persons appointed every five

years, by the President of India, pursuant to Article 280 of the
Indian Constitution, to recommend the bases of distribution of
certain tax receipts between the Union and the States and also
between the States. For example, the Thirteenth Finance
Commission (13th FC) was directed to make recommendations
covering a period of five years commencing on April 1, 2010
with regard to the following matters, among others:
1. The distribution between the Union and the States of the
net proceeds of taxes which are to be, or may be, divided
between them under the Constitution and the allocation
between the States of the respective shares of such proceeds;
2. The principles which should govern the grants-in-aid of the
revenues of the States.
3. The measures needed to augment the Consolidated Fund of
a State to supplement the resources of the Panchayats and
Municipalities in the State on the basis of the recommendations
made by the Finance Commission of the State.
4. Measures for maintaining a stable and sustainable fiscal
environment consistent with equitable growth based on the
Commission's review of the state of the finances of the
Union and the States.
5. Keeping in mind the need to bring the hitherto off-budget
liabilities of the Central Government on account of oil, food
and fertilizer fyxhƒ into the fiscal accounting, and the
impact of various other obligations of the Central
Government on the deficit targets, the Commission was
advised to review the roadmap for fiscal adjustments and
suggest a suitably revised roadmap with a view to maintain
the gains of fiscal consolidation through 2010 to 2015.

Among the recommendations of the 13th FC are the following:

1. Action needs to be initiated to reduce the number of
Centrally-sponsored schemes.
VH q 2Financial Engineering

2. The main agenda of the Central Government should be a

calibrated exit from the expansionary fiscal stance of 2008-09
and 2009-10.
3. The combined debt of the Centre and States should be down
to 68 per cent of q‚yƒƒ hywiƒ„sg €‚yh…g„ by 2014-15.
4. The Centre and the States should co-operate to introduce the
Model qyyhƒ exh ƒi‚†sgiƒ „eˆ.
5. The share of States in the net proceeds of shareable Central
taxes to be 32 per cent in each of the financial years from
2010-11 to 2014-15.

Financial Engineering This refers to the creation of new

financial instruments or development of new financing
techniques. Financial engineering is an unceasing activity that
periodically throws up new products to suit the emerging needs
of investors and borrowers. Hence, the last couple of decades have
witnessed the birth of i‚y - gy…€yx fyxhƒ , adjustable-rate
€‚ipi‚ixgi ƒre‚iƒ, psxexgsev p…„…‚iƒ and so on.

Financial Futures These are contracts guaranteeing delivery of

specified financial instruments on a future date, at a predeter-
mined price. The financial instruments traded in the U.S. futures
markets consist of foreign currencies and debt securities e.g.,
„‚ieƒ…‚‰ fsvvƒ, long-term U.S. Treasury fyxhƒ and gywwi‚gsev
€e€i‚. The futures contracts on debt securities are commonly
known as interest-rate futures. They offer companies, banks and
institutions a means to insulate themselves from adverse interest
rate movement through rihqsxq. The objective behind hedging
is to establish in advance, a certain rate of interest for a given time
period. That apart, financial futures offer considerable profit
potential which attracts speculators and individual investors too.
In June 2003, trading commenced in futures relating to
notional 10-year Government of India bonds, notional 91-day
Treasury Bills and 10-year i‚y-gy…€yx fyxhƒ at the xe„syxev
ƒ„ygu iˆgrexqi. (See Appendix II.)
 Financial Institution q VI

Financial Inclusion The provision of banking and other

financial services such as acceptance of deposits, extending
credit, remittance facilities and insurance at affordable costs to
individuals in very low income groups. The objective is to
provide the poor, e.g., agricultural and unskilled wage earners,
micro-entrepreneurs and low-salaried employees access to a
wide array of financial services, hitherto beyond their pale.

Financial Institution A non-banking financial intermediary

(company, corporation or co-operative society) carrying on any of
the activities specified in the relevant section of the Reserve Bank
of India (RBI) Act. These activities include lending, investing in
shares and other securities, rs‚i-€…‚greƒi, insurance and grs„
p…xhƒ .
In general, this term refers to the Development Finance
Institutions such as IFCI as well as the Unit Trust of India (UTI)
and the Life Insurance Corporation (LIC). However, a more
specific though not all-inclusive classification could be as shown
below. For the purposes of regulation and supervision,
NABARD, NHB and SIDBI are considered as ‚ipsxexgi
institutions. Besides the trio, five term-lending institutions
figure in the regulatory and supervisory ambit of the RBI. They
are IFCI, IIBI, TFCI, IDFC and EXIM Bank.
Financial Institutions

Development Specialized/Sectoral Investment State Level

banks (National) Financial Institutions Institution Institutions
SIDBI TFCI UTI SFCs
IFCI NHB LIC SIDCs
IIBI EXIM BANK GIC (with
NABARD subsidiaries)
IDFC
and others

SIDBI: Small Industries Development Bank of India

SFCs: State Financial Corporations
TFCI: Tourism Finance Corporation of India Ltd.
IIBI: Industrial Investment Bank of India
NHB: National Housing Bank
VP q 2Financial Intermediation

IDFC: Infrastructure Development Finance Company Ltd.

Financial Intermediation The activity of mobilization of

funds from savers, for investment or lending to deficit units at
terms acceptable to both sides. Financial intermediation is the
role of banks, term-lending institutions and w…„…ev p…xhƒ
among others. A bank, for instance, mobilizes savings and „swi
hi€yƒs„ƒ at interest rates of around 4 and 7 per cent and lends to
various borrowers at rates ranging from 11 to 15 per cent or even
higher, depending on liquidity conditions. (See also
hsƒsx„i‚wihse„syx a n d vsefsvs„‰ „‚exƒpy‚we„syx ippig„.)

Financial Lease See vieƒi.

Financial Leverage The ability to magnify earnings available

to equity shareholders, by the use of debt or fixed-charge
securities. Generally, the higher the amount of debt in relation
to total financing, the greater will be the impact on profits
available to equity shareholders, other things being equal. A
simple illustration is shown below.
The Sparkling Water Company has total assets of Rs 3,00,000.
The impact of the use of debt becomes evident by comparing the
ie‚xsxqƒ €i‚ ƒre‚i (EPS) under different financing alternatives
as shown below.
The effect of financial leverage is that an increase in the firm’s
PBIT results in a greater than proportionate increase in its EPS.
For instance, in Plan B, a 50 per cent increase in PBIT (from
Rs 1,20,000 to 1,80,000) results in a 56 per cent increase in EPS.
Hence DFL, the degree of financial leverage, at a given PBIT can
be measured by the formula.
Percentage change in EPS
DFL =
Percentage change in PBIT
At PBIT Rs 1,20,000, DFL = 56/50 = 1.12.
Though debt finance is tax-deductible, and hence an
attractive source of funds, leverage is a double-edged sword,
 Financial Markets q VQ

since the firm using leverage attracts not only higher returns
but a risk as well. This is because an increase in debt raises
fixed interest expenses and, thereby, the chances of financial
failure.

Plan A: 0% debt; equity Rs 3,00,000 (3,000 equity shares of Rs 100 par)

Profits before Profits
Interest and taxes Interest before taxes Taxes EPS
(PBIT) (PBT) (50%)
1,20,000 0 1,20,000 60,000 20
1,80,000 0 1,80,000 90,000 30
2,40,000 0 2,40,000 1,20,000 40
Plan B: 30% debt at 15% interest per annum (2,100 shares at Rs 100 par)
PBIT Interest PBT Taxes EPS
(50%)
1,20,000 13,500 1,06,500 53,250 25.36
1,80,000 13,500 1,66,500 83,250 39.64
2,40,000 13,500 2,26,500 1,13,250 53.93

Financial Markets The transactions which result in the cre-

ation or transfer of financial eƒƒi„ƒ and vsefsvs„siƒ, mostly in the
form of tradeable securities. The term connotes a vast forum
rather than a specific physical location for trading activity. The
constituents of financial markets are shown below:

Financial Markets

Money Market Capital Market

Primary Secondary Primary Secondary

Market Market Market Market

Public and Euro Private STCI Security Over-the-

Rights Issues Issues Placements Exchanges counter
(Domestic and Tran-
including Overseas sactions
OTCEI Offerings
issues)
VR q 2The Money Market

The Money Market is that segment of the financial

markets wherein financial instruments having maturities of
less than one year are traded. These different instruments
are listed as follows:

Instrument Typical we„…‚s„‰ (in days)

gevv wyxi‰ and xy„sgi wyxi‰ 1 and up to 14
‚i€yƒ 14
sx„i‚- fexu „i‚w wyxi‰ 15 to 90
fsvv yp iˆgrexqi 90
„‚ieƒ…‚‰ fsvv 91 and 364
sx„i‚- fexu €e‚„sgs€e„syx
gi‚„spsge„i 91 to 180
gi‚„spsge„i yp hi€yƒs„ 90 to 364
gywwi‚gsev €e€i‚ 30 to 364
sx„i‚gy‚€y‚e„i hi€yƒs„ 90

The money market is useful to any entity, whether a

government, bank, business or wealthy individuals having a
temporary surplus or hipsgs„. Hence, it may be viewed as a
forum for adjusting their short-term vs…shs„‰ positions. The
open money market does not have any physical trading
locations. It is essentially a network of the major players and
intermediaries linked by telephones and other media.
However, the Reserve Bank of India plans to introduce
screen-based trading system for this segment.

The Capital Market is that segment of the financial

markets in which securities having maturities exceeding one
year are traded. Examples include hifix„…‚iƒ, €‚ipi‚ixgi
shares and i…s„‰ ƒre‚iƒ.
Over-the-Counter Exchange of India (yg„is) offerings may
originate as a public issue or a fy…qr„-y…„ hiev. i…‚y sƒƒ…iƒ
 Financial Structure q VS

and overseas offerings include qh‚ s, py‚isqx g…‚‚ixg‰

gyx†i‚„sfvi fyxhƒ , eh‚ s, py‚isqx fyxhƒ and private
placement with Foreign Institutional Investors (FIIs), all of
which bring inflow of foreign exchange.
Over-the-counter transactions refer to the trading in
securities including shares, that goes on at places other than
exchanges, e.g., ui‚f hievƒ or transactions at investors’
clubs.

Financial Risk The chance that a firm may not be able to

meet its financial obligations. Firms that have a high level of
debt are subject to greater financial risk.

Financial Stability and Development Council (FSDC) A

body proposed to be set up to strengthen and institutionalize
the mechanism for maintaining financial stability in India's
financial system, in the wake of the ƒ…f€‚swi g‚sƒsƒ. The
council will monitor macro-prudential supervision of the
economy, including the functioning of large financial
conglomerates and address inter-regulatory issues. It will also
focus on financial literacy and financial inclusion. The
establishment of the FSDC was announced in the Union
Budget proposals for 2010-11 and is on the lines of a Financial
Sector Oversight Agency, recommended by the ‚eqr…‚ew
‚etex gywws„„ii.
An example of inter-regulatory conflict is the tussle over
Unit-linked Insurance Plans (ULIPs) which bear features of
w…„…ev p…xhƒ and insurance plans. Consequently, both the
respective regulators, viz., SEBI and the Insurance Regulatory
Development Authority have thought it legitimate to regulate
the product.

Financial Structure The composition of short-term and long-

term sources of funds of a company; in other words, it refers to
t h e vsefsvs„siƒ side of a fevexgi ƒrii„.
VT q 2Financial Supermarket

Financial Supermarket A one-stop shop which offers a

complete range of financial products and services encompass-
ing w…„…ev p…xh units, savings account deposits, housing
loans, stock broking and insurance, among others. Also
known as 'Universal Banking', this one-stop concept is in
sharp contrast to financial segmentation in which specialist
firms or 'boutique shops' offer selective products or services, as
for example, foreign exchange advisory or wi‚qi‚ƒ and eg…s-
ƒs„syxƒ. In India some banks and institutions such as the
Housing Development Finance Corporation Limited and the
erstwhile ICICI have fanned out into various areas of financial
services.

Fiscal Deficit See hipsgs„ .

Fiscal Policy The use of tax and expenditure powers by a

government to influence total spending in an economy.
Governments all over the world undertake the task of creating
infrastructure (e.g., roads, ports and power plants) and are also
vested with the responsibility of ensuring internal and
external security. These responsibilities entail government
expenditures on various fronts---capital outlays, the defence
forces, police, the administrative services and others. Taxes
are a major source of revenue to meet these outflows. Thus,
the Union Government collects income tax, iˆgsƒi h…„‰,
customs duties and others through its different arms.
An increase in government spending without a matching
increase in inflows may cause or exacerbate a hipsgs„. But,
government spending also bolsters aggregate demand for goods
and services—directly, and indirectly by increasing private
incomes, which stimulates private demand.

Fisher Equilibrium The increase effected in the nominal rate

of interest corresponding to the rate of expected sxpve„syx, by
lenders wanting to protect themselves from the erosion of
 Fixed Income Investment q VU

purchasing power of the principal and interest income. This

phenomenon is named after an American economist, Irving
Fisher, who believed that the nominal interest rate will be the
sum of the ‚iev sx„i‚iƒ„ ‚e„i and a premium for inflation.
To illustrate, if the real or natural interest rate, r, is 4 per
cent, and the expected rate of inflation over one year, f, is 9
per cent, then the nominal rate of interest, i , will be:
i = r + f + r f (product of r and f ),
i.e., i = 13.36 per cent. Thus, a lender who seeks to protect
the purchasing power of the €‚sxgs€ev and interest due a year
later, will ask for an interest rate of at least 13.00 per cent.

Fixed Asset Any tangible property acquired and put to use in

a business operation for producing goods or services. Examples
are machines and computers.

Fixed Cost An item of cost that does not automatically vary

with changes in the volume of production of an enterprise,
within a reasonable time span. Rent and property taxes are
examples of fixed costs. Hence, as production rises, these costs
are spread over a larger volume causing fixed costs per unit to
decline.

Fixed Deposit A deposit made at a bank, company or

psxexgsev sxƒ„s„…„syx for a specific period.

Fixed Exchange Rate The exchange rate of a currency

which is pegged to a predetermined value of another currency
or to gold.

Fixed Income Investment An investment vehicle that

yields a constant sum at regular intervals. Examples include
hifix„…‚iƒ, psˆih hi€yƒs„ƒ and qy†i‚xwix„ ƒig…‚s„siƒ.
VV q 2Fixed Payment Mortgage

Fixed Payment Mortgage See wy‚„qeqi.

Float The interval between the issuance of a cheque and its

payment by the drawer’s bank, through the clearing system.
The time involved in clearing cheques through the banking
system allows greater flexibility in cash management: funds
need not be deposited in an account as soon as a cheque is
issued.

Floating Exchange Rate The exchange rate of a currency

that is allowed to float, either within a narrow specified band
around a reference rate, or totally freely according to market
forces. These forces of demand and supply are influenced by
factors such as, a nation’s economic health, trade performance
and fevexgi yp €e‰wix„ƒ position, interest rates and sxpve„syx.

Floating Rate Bond A debt security whose gy…€yx ‚e„i is

periodically adjusted upwards or downwards, usually within a
specified band, on the basis of a benchmark interest rate or an
index. These securities, also termed 'Indexed Bonds', were
introduced to offer investors protection from sxpve„syx and
sx„i‚iƒ„ ‚e„i ‚sƒu that are inherent in a hifix„…‚i or fyxh
bearing a fixed coupon. When interest rates and bond ‰sivhƒ
go up, the coupon rate is raised as indicated by the issuer. The
disadvantage is when rates fall, because the bondholder's
coupon receipts will fall. Moreover, the downward revision of
the coupon receipts would also preclude any ge€s„ev qesxƒ by
way of price appreciation, accruing to the holder. In India,
e.g., the first such instrument was introduced by the State
Bank of India in December 1993. The bonds carried a floating
rate of interest at 3 per cent over the bank's maximum term
deposit rate, with a minimum coupon rate of 12 per cent per
annum; the coupon rate would be adjusted at regular intervals
of six months on January 1 and July 1 throughout the tenure
of the instrument.
 Foreign Currency Convertible Bond (FCCB) q VW

In December 1997, Capital Indexed Bonds of the

Government of India were introduced. These bonds sought to
provide investors a complete hedge against inflation for the
principal amount of the investment, on the basis of the
Wholesale Price Index. (See also qy†i‚xwix„ ƒig…‚s„siƒ.)

Flow of Funds Accounting A compilation of data on the

flow of funds in an economy. This information, commonly
presented in a matrix, would indicate the sectors in an
economy which have produced savings and how these
surpluses have been chanelled to hipsgs„ units as investment or
lending, either directly or via the financial intermediaries.
Typically, the household sector produces surpluses which flow
to the corporate and government sectors.

Flow of Funds Statement See ƒy…‚giƒ exh …ƒiƒ ƒ„e„iwix„.

FOB An acronym for Free on Board. This commercial term

used as a prefix to the name of a certain place or location,
indicates the delivery point up to which the seller of goods
will bear expenses and charges relating to transportation.

Foreign Bonds These are fyxhƒ denominated in the

currency of the foreign country where funds are sought to be
raised. The issuer is a borrower (i.e., foreign government,
company or bank) who desires to raise funds outside the
domestic capital market. Accordingly, ‘Yankee Bonds’ are
dollar-denominated debt instru-ments sold in the U.S. by any
overseas entity. Similarly, ‘Bulldog Bonds’ are foreign bonds
issued in the U.K. and ‘Samurai Bonds’ are those issued in
Japan.

Foreign Currency Convertible Bond (FCCB) An unsecured

debt instrument denominated in a foreign-currency and issued
by an Indian company which is convertible into shares, or in
WH q 2Forfaiting

some cases into qh‚ s,at a predetermined rate. That is, the
gyx†i‚ƒsyx €‚sgi and the exchange rate are fixed. The fyxh
which bears a certain coupon enables the issuing company to
economize on interest cost by tapping foreign markets and
also to postpone a hsv…„syx in the ie‚xsxqƒ €i‚ ƒre‚i. The
advantage to the investor is the option of retaining the
security as a bond till ‚ihiw€„syx, if the stock does not rise
to the desired level. Moreover, the interest rate on the
security is higher as compared to bonds of foreign companies.
Subject to the rules prevailing, put and call y€„syxƒ may be
attached to the instrument. The put enables investors to sell
their bonds back to the issuer. The call allows the issuer to
undertake ‚ipsxexgsxq or to force conversion. Incidentally, one
dimension of FCCBs is that they add to India’s external debt.
Moreover, until conversion, the interest is paid in foreign
currency. If the option to convert is not exercised, redemption
too will entail an outflow of foreign currency. Therefore, the
exchange risk, i.e., the depreciation cost, must be taken into
consideration. In some respects, an ‘Alpine Convertible’ bond
(issued to Swiss investors) scores over others; the issue costs
are lower and the placement process is shorter. (See also i…‚y
sƒƒ…iƒ a n d qh‚.)

Forfaiting This refers to the sale of export receivables. It

amounts to hsƒgy…x„sxq receivables by a forfaiting company,
but without recourse to the exporter. Therefore, it serves to
convert a sale of goods on credit into a cash sale. Under this
arrangement, the exporter receives the proceeds on surrendering
to the forfaiter, the endorsed debt instrument duly accepted by
the importer and co-accepted by his bank. Unless otherwise
specified, the forfaiter bears the risk of default in payment by
the importer. So, the forfaiter’s fee depends on the country of
the importer apart from the due date of payment. For
instance, the fee for forfaiting bills accepted by an importer in
Uganda could be higher than for an importer in U.K. In India,
 Formula Value of a Warrant q WI

the iˆsw fexu introduced forfaiting in 1992. Authorized

Dealers in foreign exchange may also enter this business.

Forfeiture It means the deprivation of shares held by an

investor, usually as a consequence of default in paying money,
called upon allotment, to the company. As a result of a
forfeiture, the investor ceases to be a shareholder insofar as the
forfeited shares are concerned; however, he remains liable for
the sum due.

Formula Planƒ These are mechanistic methods of timing

decisions relating to the buying and selling of securities. There
are different formula plans that include the Constant Dollar
Plan and the Constant and Variable Ratio Plans. These
methods are for the patient, conservative investor who seeks
protection from large losses and is not confident of timing his
decisions correctly. (See hyvve‚ gyƒ„ e†i‚eqsxq.)

Formula Value of a Warrant Alternatively termed as

‘„riy‚i„sgev †ev…i’, it is the intrinsic value of a ‡e‚‚ex„,
calculated by the formula
FV = (MP – EP) ¥ N
where FV = formula value
MP = market price of the underlying stock
EP = exercise price, that is the stated price at which
the share will be issued.
N = number of shares entitled per warrant.
This formula is meaningless when MP is less than EP.
However, what is important is that the price at which a
warrant is trading is likely to be higher than the formula value
because of its attractiveness in terms of vi†i‚eqi and lower
downside risk, as compared to the alternative of buying the
underlying stock.
WP q 2Forward Contract

Forward Contract A transaction which binds a seller to

deliver at a future date and the buyer to correspondingly
accept a certain quantity of a specified commodity at the price
agreed upon, which is known as the ‘Forward Rate’. A
forward contract is distinct from a futures contract because the
terms of the former can be tailored to one’s needs whereas,
the latter is standardized in terms of quantity, quality and
delivery month for different commodities. In other words,
forward contracts are customized contracts that enable the
parties to choose delivery dates and trading units to suit their
requirements. (See also gywwyhs„‰ p…„…‚iƒ.)

Forward Discount The differential by which a currency is

less expensive in the forward market as compared to the ƒ€y„
we‚ui„ .

Forward Premium The amount by which a currency’s

forward rate exceeds the spot market rate. (See sx„i‚iƒ„ ‚e„i
€e‚s„‰ „riy‚iw .)

Forward Rate Agreement (FRA) This is a py‚‡e‚h

gyx„‚eg„ by which a borrower locks in a certain rate of
interest for an agreed time period in the future. The
counterparty is, typically, a bank which sells the FRA.
As an illustration, consider that a company is planning to
raise a six-month loan after 90 days. The company expects
short-term interest rates to go up shortly. So, it buys a three-
month FRA on six-month vsfy‚ at 6.50 per cent (assume
vsfy‚ as the reference rate in this transaction). If, after three
months, the six-month vsfy‚ is more than 6.50 per cent, the
bank which has sold the FRA will pay the excess amount to
the company. However, if the vsfy‚ is less than 6.50 per cent,
the company pays the bank the difference. (See also sx„i‚iƒ„
‚e„i ge€ and sx„i‚iƒ„ ‚e„i pvyy‚.)
 Fundamental Analysis q WQ

Forward Trading A system of trading in certain shares that

has a mechanism which allows buyers and sellers to defer
payment and delivery of shares respectively, by paying the
necessary charges. (See fehve ƒ‰ƒ„iw.)

Fractional Reserve System The system of modern com-

mercial banking which requires banks to maintain only a
fraction of their deposit vsefsvs„siƒ as reserves. This is based
on the experience that deposits in the aggregate constitute a
stable source of funds; all depositors do not simultaneously
make withdrawals. Moreover, outflows of deposits are
generally offset by inflows of new deposits. This facilitates
banking operations including lending, even though only a fraction
of the deposit liabilities is held as reserves.

Fund-based This term is used to describe financial assistance

that involves disbursement of funds. Examples include the
geƒr g‚ihs„ facility, bill hsƒgy…x„sxq, equipment leasing,
rs‚i -€…‚greƒi a n d peg„y‚sxq . In contrast, non-fund based
services involve the issuance of vi„„i‚ƒ yp g‚ihs„, fexu
q…e‚ex„iiƒ, eggi€„exgiƒ and fee-based services such as
security issues management, vyex ƒ‰xhsge„syx and advisory
assistance.

Fundamental Analysis A technique of evaluating and

identi-fying stocks for investment. It involves appraisals of the
economy and the particular industry, followed by a close
scrutiny of the company in terms of its management, financial
position, future plans and expected performance over the
desired holding period, particularly, in terms of ie‚xsxqƒ and
hs†shixhƒ €i‚ ƒre‚i. This exercise is essentially forward-
looking. Based on such an indepth analysis, the sx„‚sxƒsg
†ev…i of a share is determined for a comparison with its
market price, in order to yield buy/sell decisions.
WR q2Funding

Funding The technique of extending the we„…‚s„‰ of debt by

substituting long-term debt instruments for short-term securi-
ties through ‚ipsxexgsxq operations. Sometimes, this is also
referred to as ‘debt roll-over’ or ‘conversion’. In India, funding
has been applied to Ad hoc „‚iƒeƒ…‚‰ fsvvƒ held by the Re-
serve Bank of India. Subsequently, it has been extended to
364-day and 91-day auctioned bills. The consequence of such
substitution of ‘floating debt’ („‚ieƒ…‚‰ fsvvƒ o r ‡e‰ƒ a n d
wiexƒ eh†exgiƒ) by ‘funded debt’ (vyxq -he„ih or undated
qy†i‚xwix„ ƒig…‚s„siƒ) is an increase in the interest burden
as a result of the longer maturity of government debt, even
though the quantum has not changed. Funding operations also
result in replenishment of the floating stock of Government
Securities, which facilitates y€ix we‚ui„ y€i‚e„syxƒ and
statutory investment by banks.
This practice of debt roll-over may be employed during
tight vs…shs„‰ conditions in the financial markets or
alternatively with the objective of matching outflows to
receipts. However, such a change in the we„…‚s„‰ profile of
debt that causes the interest obligations to become more
onerous, as stated above, may aggravate the repayment
situation. The latter contingency can, however, be overcome
if the Government’s coffers get filled due to a growing
economy. (See also ƒ„e„…„y‚‰ vs…shs„‰ ‚e„sy.)

Fungible An instrument is termed fungible when it can be

replaced by another of a similar description, as for instance, a
Global Depository Receipt (GDR), vis-à-vis its underlying
share. In India, fungibility was initially one-way, in that the
GDR could be cancelled and changed to shares. Two-way
fungibility allows companies to reconvert the shares so
released, into GDRs for placement with foreign investors.

Futures Market A market in which contracts for future

delivery of certain commodities or securities are traded.
(See also gywwyhs„‰ p…„…‚iƒ and psxexgsev p…„…‚iƒ.)
n
 q

GDR An acronym for Global Depository Receipt. It is an instru-

ment denominated in foreign currency that enables foreign
investors to trade in securities of alien companies not listed at
their exchanges. So, e.g., a dollar-denominated GDR issued on
behalf of an Indian company represents a certain number of
rupee-denominated equity shares, which are issued by the
company to an intermediary termed the ‘Overseas Depository
Bank’ (ODB), in whose name the shares are registered. The
shares, however, rest with the local custodian bank. The GDR
which is issued by the ODB may trade freely in the security
markets overseas; e.g., GDRs of Indian companies are listed on
the Luxembourg Stock Exchange and some on the London
Stock Exchange. Also, a GDR holder, not wanting to continue
holding the instrument, may opt for cancellation of the same
after the specified period by approaching the ODB and having
the underlying shares released by the custodian in India for sale.
The proceeds, adjusted for taxes, and converted into foreign
currency will be remitted to the foreign investor subsequently.
As an example, the GDR of G.E. Shipping issued in February
1994 at a price of U.S.$ 15.94 has five underlying shares. GDRs
are generally issued at a modest hsƒgy…x„ to the prevailing
market price. A bigger discount may trigger off widespread
e‚fs„‚eqi trading.
The advantage to any issuing company is the inflow of
foreign currency funds. Further, hs†shixh payments are in
rupees and, therefore, there is no exchange risk. Moreover, the
WT q 2GIC

increase in equity is clearly known unlike with py‚isqx g…‚-

‚ixg‰ gyx†i‚„sfvi fyxhƒ. Administratively too, in matters
regarding dividends, company meetings, etc., it becomes easier
for the company to interact with the single ODB that ac-
counts for a large shareholding. The management may enter
into a suitable understanding with the ODB as regards the
exercise of voting rights. Besides holding the shares, the ODB
also performs the functions of distribution of dividends and
issue of GDR certificates to replace those lost, mutilated, and
so on.
There are no stipulated norms regarding turnover and we‚ui„
ge€s„evse„syx. However, prospective issuers are expected to have
a minimum turnover of Rs 500 crore and market capitalization
in the range of Rs 1,200 to 1,500 crore. Two-way fungibility of
GDRs and ADRs has been facilitated, with the issuance of
guidelines by the Reserve Bank of India in February 2002. (See
also p…xqsfvi.)

GIC An acronym for General Insurance Corporation, a govern-

ment-owned organization which, together with its four
subsidiaries, is in the business of ‚isxƒ…‚exgi, crop insurance
and general insurance such as marine, fire, automobile and
professional indemnity. The four subsidiaries are National
Insurance Company Ltd., Oriental Insurance Company Ltd.,
New India Assurance Company Ltd. and United India
Insurance Company Ltd. (See also wevry„‚e gywws„„ii.)

Gilt-edged Securities A term often used to refer to qy†i‚x-

wix„ securities signifying that the securities have the highest
degree of reliability. They are, however, vulnerable to sx„i‚iƒ„
‚e„i ‚sƒu a n d sxpve„syx ‚sƒu.

Go-Go Funds These are highly speculative w…„…ev p…xhƒ

operating in the U.S., whose objective is to earn large profits from
capital appreciation. Also known as €i‚py‚wexgi p…xhƒ, they
 Goods and Services Tax (GST) q WU

adopt unconventional and risky approaches, e.g. investing in

shares of small, unproven companies and volatile shares. (See
also rihqi p…xhƒ.)

Going Concern Value The value of a firm as an operating

business.

Good-Till-Cancelled Order A buy or sell order for

securities usually at a specified price, which is to remain in
effect indefinitely, that is, till it is expressly cancelled.

Goods and Services Tax (GST) A unified levy that will

replace consumption taxes presently imposed by the central and
state governments in India, which will be an important step
towards reforming the structure of sxhs‚ig„ „eˆiƒ. The GST
may subsume the following duties and taxes of the Centre:
Central Excise, additional iˆgsƒi h…„siƒ, ƒi‚†sgi „eˆ, additional
and special additional Customs Duties, surcharges and cesses.
The State taxes and levies expected to be subsumed under the
GST are: VAT/Sales Tax, Entertainment Taxes other than
those levied by local bodies, Luxury Tax, taxes on lottery,
betting and gambling, State cesses and charges relating to the
supply of goods and services and entry tax, not in lieu of octroi.
The anticipated benefits of such a change are an increase in
revenues owing to widened voluntary compliance as well as
increases in output and productivity resulting from
simplification. The attraction of a single levy is that it will
purge the problem of cascading cost of production which is an
outcome of multiple taxes. It is expected that India will have a
regime of Dual GST, whereby the tax will be levied
concurrently by the Central Government on goods and services
and by the State Governments on goods alone. The GST will
also be levied on imports.
WV q 2Goodwill

Goodwill The value of intangible facets of a business such as

its name, reputation and location, which is reflected in the
excess of its acquisition price over the fair value of its tangible
assets.

Government Securities These are long-term debt securities

of varying maturities extending up to 30 years issued by the
central and state governments as well as municipal
corporations, electricity boards, certain psxexgsev sxƒ„s„…„syxƒ
l i k e xefe‚h, and other bodies. Because these securities are
issued by governments or bear their guarantee which signifies
zero hipe…v„ ‚sƒu, the adjective ‘qsv„-ihqih’ or simply’ ‘Gilts’ is
often used while referring to these instruments. The securities
may be issued in the form of a €‚ywsƒƒy‚‰ xy„i, stock
certificate or bear er fyxh. In June 1992, the Reserve Bank of
India (RBI) commenced the issue of Government Securities
through auction. This was an important step in the process of
financial reforms, prompted by the shady deals in the regime of
fixed gy…€yx ‚e„iƒ (see hy…fvi ‚ieh‰ py‚‡e‚h). In January
1994, the RBI for the first time auctioned government issued
zero-coupon fyxhƒ of five years we„…‚s„‰. Further, in March
1995, the RBI decided to conduct auctions in Government
Securities in ƒigyxhe‚‰ we‚ui„ sales as well. In an interesting
development, the Union Government in September 1995,
issued pvye„sxq ‚e„i fyxhƒ, at a face value of Rs 10,000 each.
These fyxhƒ had a we„…‚s„‰ of four years and an interest rate
for any half-year period at 1.25 per cent over the average rate of
the government’s 364-day „‚ieƒ…‚‰ fsvvƒ, auctioned during the
previous six calendar months. Also, the securities carried a floor
rate of 13 per cent. During July 2002, a long-term bond with
call and put options was floated. Shorter maturities of gilts give
rise to redemption pressures owing to bunched repayments.
Consequently, the RBI has reverted to longer maturities of upto
30 years. A relevant development is the replacement of the
Public Debt Act, 1944, by a new Government Securities Act
 Grooming q WW

2006. (See also ƒig…‚s„siƒ „‚ehsxq gy‚€y‚e„syx yp sxhse, ƒqv

„‚exƒpi‚ py‚w and ‰sivh g…‚†i.)

Graduated Payment Mortgage See wy‚„qeqi.

Graham and Dodd Approach A method of selecting

stocks based on eƒƒi„ values, advocated by Benjamin Graham
and David Dodd. In their classic book. ‘Security Analysis’,
they suggested using xi„ g…‚‚ix„ eƒƒi„ Value as the standard
for comparison with market price or the investment value
based on expected cash flows. This method is simple and more
objective as compared to the intricate valuation approach that
requires dividends and multiplier forecasts.
Net Current Asset Value is determined by the ratio:
- All liabilities and preference capital
C URRENT ASSETS
Number of equity shares outstanding
The availability of an i…s„‰ ƒre‚i at less than its net
current asset value presents a bargain; in effect, an investor can
buy a company at less than its ‡y‚usxq ge€s„ev with the fixed
assets coming free. Such opportunities are more likely when
stock prices are generally depressed.

Greater Fool Theory A theory according to which some

investors buy stocks even if they are overvalued, on the
conviction that they will find a greater fool who will buy the
stocks from them at higher prices. Also called ‘Castle-in-the-
Air Theory’, this approach has formally evolved into „igrxsgev
exev‰ƒsƒ.

Greenshoe Option An option to retain y†i‚ƒ…fƒg‚s€„syx.

The term is usually used in the context of qh‚ issues.

Grooming A term referring to operations undertaken by the

Reserve Bank of India in the qy†i‚xwix„ ƒig…‚s„siƒ market,
IHH q 2Gross Capital Formation

whereby securities nearing we„…‚s„‰ are acquired. With the

receipt of funds, investors are in a position to reinvest even prior
to the ‚ihiw€„syx date; also, they become more receptive to
new loan offerings.

Gross Capital Formation A term in economics, that refers

to additions to productive eƒƒi„ƒ in an economy, such as
buildings, machines and equipment.

Gross Fiscal Deficit See hipsgs„.

Gross Domestic Product (GDP) This is a comprehensive

measure of the economic activity that takes place in a country
during a certain period. It is the total value of final goods and
services produced in an economy in a year. The computation is
on the basis of value added—the contribution of a producing
enterprise is the difference between the value of its finished pro-
duct and the cost of materials used. Hence, national output is
the total value added by all producing enterprises. More
specifically, gross domestic product is expressed as
C + I + G + (X – M)
where C stands for consumption, which is the expenditure
by consumers on consumption goods and services.
I is ‘Gross Private Domestic Investment’ represent-
ing the acquisition of new capital goods (e.g.,
plant and machinery) and inventory additions by
business enterprises, as well as construction of
factories and houses.
G denotes government expenditure on goods and
services.
(X – M) represents the difference between exports (X) and
imports ( M ) of goods and services.
 Growth Stock q IHI

Growth Fund This is a w…„…ev p…xh that seeks capital

apprecia-tion for its investors, by acquiring shares which are
likely to post significant price increases.

Growth Stock A share of a company that is registering a rapid

growth in earnings. This could be because of a burgeoning
market for its goods (or services) or due to an expanding market
share owing to product quality, innovative management or
other distinctive features.
n
 r

Havala Rate See weusxq-…€ €‚sgi.

Havala Transaction An Indian term which refers to a mode

of transferring funds out of India or into the country,
bypassing official and legal channels. As an example, an
individual may transfer his ill-gotten cash to a discreet bank
in a foreign country. Using the havala route, he gives the
rupees to an intermediary in India, who then arranges a
reciprocal deposit of an equivalent amount to his account in
the chosen bank. At a later date, the funds could be brought
into India through another havala transaction. Since such
deals circumvent official channels, there is a loss to the nation
in terms of the net inflow of foreign exchange.

Head and Shoulders The name given to one of the better

known patterns of stock price movements identified by
technical analysts as containing valuable information for
trading decisions. This pattern resembles the upper half of a
human body in that it has a prominent peak in the middle
flanked by two smaller ones, all formed by tracing the
movement of a security’s market price. (See also gre‚„
€e„„i‚xƒ.)

Health Code System This is a comprehensive and uniform

grading system to monitor the quality of bank loans,
IHR q 2Health Code System
Closing Prices

Head and Shoulders Pattern Time

introduced by the Reserve Bank of India in 1985. The system

created eight categories of loans; based on the credit grading,
the accounts were designated as shown in the following table:

Account Designation Code Number

Satisfactory 1
Irregular 2
Sick but viable 3
Sick, unviable/sticky 4
Advances recalled 5
Suit-filed accounts 6
Decreed debts 7
Bad debts 8

From April 1994, the health code system has been

superceded by the new norms for eƒƒi„ƒ classification. This
classification forms the basis for determining provisions for
losses by banks. Accordingly, advances under the different codes
will be compressed into the four categories given as follows:
1. Standard assets.
2. Sub-standard assets.
 Holder of Record Date q IHS

3. Doubtful assets.
4. Loss assets.
The health code system will, however, continue to serve as a
management information tool. (See also xyx-€i‚py‚wsxq eƒƒi„.)

Hedge Funds These are w…„…ev p…xhƒ that invest in various

securities and may even sell short, in order to contain or
hedge risks. These highly speculative funds operate mainly in
the U.S. Besides buying shares of small and unknown
companies, they indulge i n we‚qsx trading, short selling and
hi‚s†e„s†iƒ. The objective is to maximize returns by playing
in any market that looks exciting. For example, t h r o u g h
y€„syxƒ and futures they look for the benefit of vi†i‚eqi; so
also, with margin trading, using loans to buy securities.

Hedging The action of combining two or more transactions

so as to achieve a risk-reducing position. The objective, generally,
is to protect a profit or minimize a loss that may result on a
transaction. For instance, a ƒry‚„ ƒevi could be employed to
lock in a price gain on a vyxq „‚exƒeg„syx. As demonstrated
in Appendix II, hedging is useful with futures contracts too.
A disadvantage with hedging, however, is that it results in
less than the maximum profit that could have accrued.

Hire-Purchase Arrangement A transaction by which an

eƒƒi„ is acquired on payment of regular instalments
comprising the €‚sxgs€ev and interest spread over a specified
period. Although the asset gets transferred on payment of the
last instalment, the hirer can avail of hi€‚igse„syx and deduction
of interest cost for computing taxable income.

Holder of Record Date The person whose name appears as a

shareholder in the ‘Register of Members’ on the date fixed by the
board of directors of a company for the purpose of determining
entitlement to ‚sqr„ƒ, bonus or hs†shixhƒ, as the case may be.
IHT q2Holding Company

Holding Company The company which controls a majority

shareholding of another company, or controls the composition of
the board of directors or exercises control through a subsidiary.

Holding Period Yield (HPY) This is a measure of return to

calculate the ‰sivh from interest-bearing securities as well as
shares. For a holding period of one year, it is expressed as:
D1 + ( P1 - P0 )
HPY =
P0
where hI is the periodic income meaning interest or hs†shixh
received at the end of the year, €I is the price at the year-end
and €H2 is the purchase price. (See Appendix I.)

Hot Money This refers to large amounts of short-term funds

held internationally by banks, institutions and wealthy
individuals which quickly move out of or into a country,
usually, in anticipation of exchange rate movements or interest
rate changes. Hot Money is, therefore, an unstable source of
funds.

Housing Development Finance Corporation Limited

(HDFC) This is the premier private sector housing finance
company in the country, promoted by institutions and various
banks.

Hundi An Indian term for a negotiable instrument that is

similar to a fsvv yp iˆgrexqi.

Hurdle Rate The minimum return that an investment proposal

must yield to a firm. This hurdle rate is the weighted average cost
of capital, raised by the firm from different sources, e.g., equity,
fyxhƒ and loans, for making the investment.
 Hypothecation q IHU

Hypothecation This refers to the pledging of assets as

security for funds borrowed. Bank lending for working capital
involves a hypothecation of sx†ix„y‚siƒ and book debts.
Under this arrangement, the g…‚‚ix„ eƒƒi„ƒ remain with the
borrower, but in case of default, the bank may seek recovery
of the loan by instituting a lawsuit to seize the hypothecated
assets, which can later be sold.
n
 s

ICICI An acronym for Industrial Credit and Investment

Corporation of India Limited, which was a private sector term
lending institution set up in 1955. Its sponsors included foreign
institutions, notably the World Bank. Besides granting term
loans, particularly foreign currency loans, it assisted businesses
by hsƒgy…x„sxq bills, providing vieƒi finance, managing €…fvsg
sƒƒ…iƒ and providing †ix„…‚i ge€s„ev . The corporation was also
instrumental in setting up other important institutions such as
Credit Rating and Information Services of India Limited
(CRISIL) for credit rating, Technology Development and
Information Company of India (TDICI) for the promotion of
indigenous technology and ƒgsgs for financing the shipping
industry. ICICI ceased to exist after its amalgamation with the
ICICI Bank.

ICRA An acronym for the credit rating institution, Investment

Information and Credit Rating Agency of India Limited,
which has subsequently been rechristened as ICRA Limited.
The agency has been promoted by various financial institutions
including Industrial Finance Corporation of India, State Bank
of India and Unit Trust of India. The role of this agency like
Credit Rating and Information Services of India Limited
(CRISIL), is to assist investors in assessing the credit risk of
various securities such as fyxhƒ and gywwi‚gsev €e€i‚, by
assigning letter ratings.
IIH q 2IDBI

IDBI An acronym for the Industrial Development Bank of

India, which was the apex term-lending institution in the
field of industrial finance. From 1976, IDBI functioned as a
separate entity, wholly owned by the Government of India.
In 1995, IDBI issued equity shares through public subscrip-
tion. It was active in providing finance through term loans,
hsƒgy…x„sxq and ‚ihsƒgy…x„sxq of bills, and in ‚ipsxexgsxq
loans granted by State Financial Corporations and banks. It
also subscribed to securities of psxexgsev sxƒ„s„…„syxƒ. Besides
these activities, IDBI also performed the important task of co-
ordinating the functions and operations of other term-lending
institutions in the country. Further, IDBI played a key role in
setting up ƒwevv sxh…ƒ„‚siƒ hi†ivy€wix„ fexu yp sxhse
(SIDBI) and later, the xe„syxev ƒ„ygu iˆgrexqi and Credit
Analysis and Research (popularly known as CARE). Emulat-
ing other financial institutions that ventured into newer areas,
IDBI turned to leasing, eƒƒi„ credit and merchant banking. In
December 2003, Parliament approved legislation to convert
IDBI into a banking entity. It paved the way for IDBI's
amalgamation with its own creation, the IDBI Bank.

IDR An acronym for Indian hi€yƒs„y‚‰ Receipt. It is a security

denominated in Indian Rupees that would allow investors in
India to indirectly invest in the i…s„‰ ƒre‚iƒ of foreign
companies, which are not listed at Indian stock exchanges.
However, the IDR would be listed for trading at recognized
stock exchanges in India. The issuing company would deliver
the underlying equity shares to an overseas custodian bank
following which the bank will authorize a designated
domestic depository to issue IDRs.
According to the rules initially laid down, the issuing
company needed to satisfy certain conditions for issuing IDRs.
For instance, its pre-issue €esh-…€ ge€s„ev and free reserves
had to be at least US$ 100 million with an average turnover
of US$ 500 million over the three financial years preceding
the issue. There are other conditions as for example, the IDRs
 IL&FS q III

shall not be redeemable into the underlying equity shares

within a year of issuance. An Indian resident holder of the
IDR may choose to transfer the security or ask the domestic
depository to redeem the IDRs. In the latter case, the
depository shall request the Overseas Custodian Bank to
arrange for release of the underlying equity shares in favour of
the Indian investor, who may opt to hold the shares or sell
them. The responsibility of distributing dividends or other
corporate benefits would be discharged by the domestic
depository.
Press reports suggest that Standard Chartered Bank is set to
make the first-ever IDR issue. While the security will be
traded on Indian stock exchanges, the underlying equity share
is listed and traded on the London Stock Exchange. (See also
GDR.)

IFCI The oldest of the term lending institutions, Industrial

Finance Corporation of India was set up by the Government of
India in 1948 to provide medium and long-term finance to
businesses in the private sector. Over the years, IFCI has
diversified its activities to leasing and merchant banking. IFCI
is also responsible for establishing among others, the Tourism
Finance Corporation of India Limited, the Management
Development Institute in Gurgaon, and Technical Consultancy
Organizations in different states. In late 1993, it floated a €…fvsg
sƒƒ…i of equity shares after its conversion into a company.
Earlier, IFCI was forbidden from raising funds through debt or
equity.

IIBI See IRBI.

IL&FS An abbreviation for the finance company, Infrastructure

Leasing and Financial Services Limited. As the name suggests,
its area of focus is financing major infrastructure projects such
as highways, bridges and power plants. IL&FS is also active in
leasing, advisory services for infrastructure projects and
IIP q2Immunization

stockbroking. Its promoters include Central Bank of India and

Unit Trust of India. (See also „yvv fyxh.)

Immunization The term refers to the designing of a fyxh

€y‚„pyvsy so as to realize a specific level of return even in a
situation of changing market interest rates. An investor in
bonds in vulnerable to sx„i‚iƒ„ ‚e„i ‚sƒu—i.e., the chance of
capital loss (decline in bond prices) due to an increase in
interest rates. There is also an uncertainty regarding
‚isx†iƒ„wix„ ‚e„iƒ . However, price risk and reinvestment
risk work in opposite directions; nevertheless, the objective
would be to neutralize the two or in other words, to
‘immunize’ the portfolio. To achieve this, it has been
suggested by Lawrence Fisher and Roman Weil that the
h…‚e„syx of a bond portfolio should equal the desired holding
period.

Impact Cost The term refers to the difference between the

actual price of a financial eƒƒi„ at which a transaction has
gone through and the expected price, based on quotes for
buying and selling the asset. It is a reflection of the level of
activity or trading interest in the asset at any time. For
example, stocks which are regularly traded in substantial
volumes would have a low impact cost. Hence, the impact
cost is also an indicator of the degree of liquidity of an asset.

Implied Repo Rate The rate of interest that equates the spot
price of a commodity to its forward or futures price.
Therefore, it represents the implicit carrying cost as opposed
to the actual carrying cost and a difference between the two
suggests an e‚fs„‚eqi opportunity.

Implied Volatility The volatility that equates the fair value

of an y€„syx, as determined by the Black-Scholes model, to its
observed market price.
 Index Fund q IIQ

In-the-Money An expression used to indicate that an y€„syx

has an immediate tangible value because of the difference bet-
ween the current market price of the share and its exercise
price. For example, if a company’s share is trading at Rs 110
while its call has an exercise price of Rs 100, the option is said
to be in-the-money. (See also y€„syx).

Income Bond A hybrid debt security which promises interest

only if a certain level of net income is earned. This type of
security is generally associated with rehabilitation schemes
under which no immediate burden is placed upon companies
as they gradually return to good financial health. After a few
years, the interest vsefsvs„‰ may be made cumulative.

Income Fund A w…„…ev p…xh whose primary objective is to

earn current income. Accordingly, its €y‚„pyvsy will comprise
mainly high ‰sivh hifix„…‚iƒ and i…s„‰ ƒre‚iƒ.

Incremental Cash Flow The net differential cash flow

accruing as a result of an investment decision. For instance,
when a new machine replaces an old one, the incremental
cash flow would be computed by working out the net
addition, taking into account the profit and hi€‚igse„syx
foregone by discarding the old machine.

Indenture See „‚…ƒ„ hiih.

Index Arbitrage See €‚yq‚ew „‚ehsxq.

Index Fund This is a w…„…ev p…xh whose €y‚„pyvsy mirrors

a market index. The investments of such a fund are in the
same stocks as those comprising the selected market index and
in the same proportion as their weightings in the index.
Setting up the portfolio is called 'Indexing'. This innovation
IIR q 2Index Options

in the U.S. emerged as a result of research findings that the

Standard & Poor's 500-stock index (a proxy for a market
portfolio) had outperformed many sxƒ„s„…„syxev sx†iƒ„y‚ƒ
during the 1960s and 1970s. Since the portfolio of an index
fund replicates a certain index, the fund saves substantially on
research and administrative expenses. As an example, the
Index Equity Fund launched by the Unit Trust of India in
May 1997 was based on stocks figuring in the ƒixƒs„s†i sxhiˆ
and the NSE-50 of the xe„syxev ƒ„ygu iˆgrexqi.
Index funds are, however, prone to 'tracking error,' that is,
the risk of a fund's returns varying from that of the index.
Factors that contribute to tracking error include flows into or
out of a fund and the level of cash maintained by a fund for
vs…shs„‰.

Index Options These are listed €…„ and gevv y€„syxƒ on

stock indices traded at options exchanges in India, the U.S.,
and some other countries. The instrument allows an investor
who can anticipate broad market movements, to attempt to
profit from such forecasts. An investor expecting a rise in the
market may consider buying a call option on a broad index.
For an individual with an opinion on a particular industry, it
may be possible to buy or sell options on the industry-based
index. Index options are similar to equity options in contract
terms and trading, but the important difference is that index
options are settled by cash when exercised, unlike equity
options, which may entail delivery of the underlying security
upon exercise.
As an example, trading in index options on the xe„syxev
ƒ„ygu iˆgrexqi includes contracts based on the S&P CNX
Nifty in 3 near months' expirations. The option contracts are
European-type and settled by cash.

Indexed Bond See pvye„sxq ‚e„i fyxh.

 Insider q IIS

Indirect Costs These are costs that cannot be directly traced

to a cost objective. Instances are costs of lubricants used on
equip-ment, power and maintenance.

Indirect Taxes These are taxes levied on goods and services

which enter into the basket of consumption or use by
individuals or organizations, such as sales tax and iˆgsƒi h…„‰.
Consequently the incidence and impact of these taxes would
be on different persons.

Inflation The phenomenon of rising prices of goods and

services in general. It can come about due to a scarcity of
supplies in rela-tion to demand; this is known as ‘demand-pull
inflation’. It may also result from an increase in the cost of
some critical input, such as steel or petroleum, which then
triggers off a gradual rise in prices in general; this is know as
‘cost-push inflation’.

Inflation Hedge The term is used with reference to an

invest-ment in stocks, art, gold, real estate or any other
vehicle whose return keeps abreast of sxpve„syx, thereby
insulating the investor from a decline in ‚iev sxgywi.

Inflation Risk The threat of erosion in the purchasing power

of income, as a result of rising prices. Investors having fyxhƒ,
psˆih hi€yƒs„ƒ or other securities which yield only a fixed
income are vulnerable to this inflation-induced risk.

Insider A term used for one who has access to information

concerning a company, that is not publicly available and is of
such a nature that it enables him or her to make substantial
profits in share transactions.
IIT q2Institutional Broker

Institutional Broker A broker who buys and sells securities

for sxƒ„s„…„syxev sx†iƒ„y‚ƒ such as w…„…ev p…xhƒ and
insurance companies.

Institutional Investor A financial intermediary such as a

w…„…ev p…xh or an insurance company. Securities transactions
of such investors are mostly in large blocks.

Insurance Reforms Committee See wevry„‚e gywws„„ii.

Intangible Asset This is a long-term eƒƒi„ that is useful to a

firm, but lacks a physical characteristic. Examples are qyyh‡svv,
patents and copyrights.

Inter-Bank Term Money These are wyxi‰ we‚ui„ transac-

tions exclusively involving banks in which funds are borrowed
and lent for periods ranging from 15 days to less than one
year, at market interest rates. Generally, the transactions are
for periods ranging between 15 and 90 days and no
gyvve„i‚ev is involved. From 1993, select all-India psxexgsev
sxƒ„s„…„syxƒ have been allowed to participate as borrowers in
the term money market for periods ranging from three to six
months.
The term money market has not shown the growth
generally expected, mainly due to the strong preference among
banks for gevv wyxi‰ transactions over term money lending
and borrowing. However, measures such as the exemption of
inter-bank term liabilities of original maturity between 15
days and 1 year from geƒr ‚iƒi‚†i ‚e„sy requirements and the
gradual departure of non-bank participants from the call
money market are expected to improve the volumes in the
term money market.
 Intercorporate Deposit q IIU

Inter-Bank Participation Certificate (IBPC) It is an

instru-ment representing an interest in a part of a loan made
by the bank selling the instrument. The participation
certificate is strictly an inter-bank instrument. IBPCs can be
of two types, ‘With risk-sharing’ and ‘Without risk-sharing’,
and can have a maximum we„…‚s„‰ of 180 days. The bank
that issues an IBPC, benefits from the infusion of funds. For
the investing bank, it can be an attractive parking place for
surplus money, especially when the gevv wyxi‰ interest rate
is low.

Inter-connected Stock Exchange (ISE) A stock market in

the form of a network comprising India's regional stock
exchanges, created with the objective of promoting trading
volumes at the member exchanges thereby serving small
companies and retail investors. Thus, ISE is a national-level
stock exchange which provides the facility of trading, clearing,
settlement, risk management and surveillance to its trading
members who are spread across twenty-five states of India.
Further, since a subsidiary of ISE has acquired membership of
the ge€s„ev we‚ui„ segments of the xe„syxev ƒ„ygu
iˆgrexqi and Bombay Stock Exchange and also of the
hi‚s†e„s†iƒ segment in the former, ISE's members can access
the two other exchanges mentioned above. Trading on the
ISE commenced in February 1999.

Intercorporate Deposit A short-term deposit made by one

company with another. The period usually does not exceed six
months, and it could be as short as one or a few days. These
deposits are essentially ‘Brokered Deposits’, given the
extensive involvement of brokers. The interest rate is
influenced by market forces and is, generally, significantly
higher than the banks’ lending rate for ‡y‚usxq ge€s„ev.
IIV q 2Interest Rate Cap

Interest Rate Cap This is a hi‚s†e„s†i that enables a firm

with a floating rate loan to limit its exposure to a rise in
interest rates. By buying this derivative, the firm receives the
difference between the floating rate of interest and the
predetermined ceiling called the ‘Cap Rate’, whenever the
floating rate exceeds the cap.

Interest Rate Collar A combination of an sx„i‚iƒ„ ‚e„i

ge€ and an sx„i‚iƒ„ ‚e„i pvyy‚. For example, a borrower
with a floating rate vsefsvs„‰ may seek protection from an
anticipated sharp rise in the interest rate. This could be
achieved by buying a cap and selling a floor. Selling a floor
would deprive the bor-rower of savings that would result if the
interest rate fell below the floor rate. However, the idea is
that the payment received for the floor would offset the cost
of buying the cap.

Interest Rate Floor A hi‚s†e„s†i that protects a lender from

a sharp fall in interest rates. By buying a floor, the lender will
receive the difference between the predetermined floor rate
and the floating rate, whenever the latter falls below the floor.

Interest Rate Parity Theorem A theorem that explains

how the forward and spot currency exchange rates between
two countries are related through their respective nominal
interest rates. For example, assume that the spot rate between
the Euro and the U.S. Dollar is €1 = $1.25 and that the
prevailing annual rates of interest on the Euro and the Dollar
are 6 and 4 per cent respectively. Therefore, over a period of
30 days, the interest accruing will be 1 x (6/100) x (30/360)
= €0.005 and 1.25 x (4/100) x (30/360) = $0.0042. Thirty
days hence, €1.005 is equivalent to $1.2542. Thus, the
forward rate today on one-month contracts ought to be €1 =
1.2542/1.005 = $1.2479.
 Intrinsic Value q IIW

Interest Rate Risk The chance of capital loss due to interest

rate changes. This characteristic is associated more with fixed
interest-bearing securities whose market prices move down or
up as ‰sivhƒ on comparable securities rise or fall.

Intermediation See psxexgsev sx„i‚wihse„syx.

Internal Financing The utilization of funds generated from

operations, i.e., manufacturing and selling, to acquire new
eƒƒi„ƒ. Internal financing may be supplemented by ‘External
Financing’ in the form of loans or issue of shares, fyxhƒ or
other securities.

Internal Rate of Return (IRR) T h e hsƒgy…x„ ‚e„i that

equates the total €‚iƒix„ †ev…i of expected cash flows on a
project to its initial outlay so that the xi„ €‚iƒix„ †ev…i of
the project is zero.

Intrinsic Value The worth of a share that is determined by

an investor on the basis of the expected inflows by way of
hs†shixhƒ and price realized at the end of the holding period.
Decisions to buy or sell shares are often based on differences
between the current market price and intrinsic value i.e.,
assume that a share which is currently trading at Rs 36 will
pay dividends of Rs 2 and Rs 2.50 in the coming two years,
and will be sold at Rs 45 at the end of two years. At a
discount rate of 20 per cent, its intrinsic value, or the €‚iƒix„
†ev…i of its flows, is calculated as follows:

2 2.50 + 45
V0 = + = Rs 34.65
(1.20 ) (1.20 ¥ 1.20 )
The analysis reveals that the share is slightly overpriced,
and its purchase at Rs 36 would not yield the required rate of
return, i.e., 20 per cent.
IPH q2Inventory

Inventory A term that refers to the stock of raw materials,

semi-finished and finished goods lying with a company.

Inventory Turnover Ratio See Appendix IV.

Investment Account The €y‚„pyvsy of long-term securities

held by a bank that usually consists of qy†i‚xwix„ ƒig…‚s„siƒ,
high-grade hifix„…‚iƒ and shares.

Investment Banker An intermediary who is engaged in the

origination, …xhi‚‡‚s„sxq and issue of securities to investors.
Thus, an investment banker creates a link between an issuer
of securities and investors at large. This nomenclature is
preferred in the U.S., while in India, the term wi‚grex„
fexui‚ is widely used. The securities may be i…s„‰ ƒre‚iƒ,
fyxhƒ, gyx†i‚„sfviƒ and others.

Investment Grade An expression that indicates the quality

of debt securities. fyxhƒ described as investment grade are
con-sidered to be relatively safer with a greater assurance of
interest and €‚sxgs€ev payments, and therefore appeal to
conservative investors. For instance, going by the ratings of
the Credit Rating and Information Services of India Limited
(CRISIL), debentures up to Triple B are considered
investment grade since the rating signifies sufficient safety of
timely payments of interest and principal. (See Appendix V.)

Investment Income The income from various investments

of an individual such as stocks, hifix„…‚iƒ and psˆih
hi€yƒs„ƒ. This income is in the form of hs†shixhƒ, interest and
ge€s„ev qesxƒ .

Investment Value See hif„ †ev…i .

 IRBI q IPI

IPO An acronym for Initial Public Offering which is the first

issue of a company’s securities.

IPO Grading A rating agency's opinion on the fundamentals

of i…s„‰ ƒre‚iƒ being issued by an Initial Public Offering
(IPO). It is expressed as a relative assessment in comparison to
other listed equity shares. For instance, the rating agency,
ICRA uses a five-point scale, in which IPO Grade 5 at the
higher end conveys strong fundamentals whereas IPO Grade
1 at the lower end represents poor fundamentals. The opinion
is not to be construed as a verdict on the desirability of
investing in the graded security nor as a comment on the price
of the security being issued. From April 2007, SEBI has made
it mandatory for all IPOs to be graded by rating agencies.

IRBI An acronym for the Industrial Reconstruction Bank of

India. As the name indicates, the institution's primary
objective was to foster the rehabilitation of sick and closed
industrial enterprises. Some years ago, IRBI transformed itself
into a full-fledged psxexgsev sxƒ„s„…„syx and was renamed as
Industrial Investment Bank of India (IIBI). As a consequence,
its activities in term-lending and non-fund based services
increased.
n
 t

Jilani Committee A group headed by Rashid Jilani, Chairman,

Punjab National Bank which was constituted to review and
suggest changes in the system of bank lending for ‡y‚usxq
ge€s„ev. Some of the recommendation of the committee, which
submitted its report in October 1993, are:
1. Bifurcation of the geƒr g‚ihs„ limit into a ‘Loan Component’
(also termed the ‘Core Component’) and a ‘Fluctuating Limit’.
2. The core component credit needs are to be determined by the
g…‚‚ix„ ‚e„sy.
3. For existing companies with p…xh-feƒih ‡y‚usxq ge€s„ev limits
of Rs 10 crore and above, the current ratio be raised to 1.50
from 1.33.
4. Bank finance, in excess of the revised permissible limit, to be
transferred to a loan account, repayable after three to five years.
5. Divergence in the curr`ent ratio may be allowed at the discretion
of banks, for genuine reasons.

Jobber An individual who specializes in one or a few stocks. A

jobber buys and sells on his own account and profits from the
price differential which is known as the ‘Jobber’s Spread’. His
function of quoting fsh and eƒusxq €‚sgiƒ, i.e., making a market,
imparts vs…shs„‰ to the stocks that he specializes in. On the
Bombay Stock Exchange the jobber is also known as ‘Taravniwalla’.

Junk Bonds The debt securities of companies bearing a

considerable degree of risk that is reflected in their mediocre or
IPR q2Junk Bonds

poor g‚ihs„ ‚e„sxqƒ. Alternatively referred to as ‘Low-grade’ or

‘High-risk’ fyxhƒ, Junk Bonds include a wide spectrum of fixed-
income securities, such as, those of (a) relatively new companies
of below sx†iƒ„wix„ q‚ehi quality, but likely to be upgraded
and (b) companies whose ratings have fallen owing to financial
woes. Since sxƒ„s„…„syxev sx†iƒ„y‚ƒ would steer clear of Junk
Bonds, the market for these securities is thought to be inefficient,
thereby offering opportunities for a higher return compared to
higher-grade bonds. Perhaps, the perceived risk is greater than the
actual risk. Moreover, low-grade bonds are less sensitive to
interest rate changes. An interesting strategy is to buy Junk Bonds
in anticipation of an improvement in rating which would result
in price appreciation. Incidentally, some w…„…ev p…xhƒ in the U.S.
have found it worthwhile to specialize in Junk Bond investing.
n
 u

Kabra Committee See gywwyhs„‰ p…„…‚iƒ .

Kannan Committee A committee constituted by the Indian

Banks’ Association to examine the relevance of the concept of
Maximum Permissible Bank Finance (w€fp) as a method of
assessing the requirements of bank credit for ‡y‚usxq ge€s„ev,
and to suggest alternative methods. The committee was headed
by K. Kannan, Chairman, Bank of Baroda and its report
submitted in 1997, includes the following recommendations:
1. The MPBF prescription is not to be enforced and banks may
use their discretion to determine the credit limits of
corporates.
2. The g‚ihs„ wyxs„y‚sxq arrangement and sƒ may cease to be
regulatory requirements.
3. The financing bank may use its discretion to determine the
level of stocks and receivables as security for working capital
assistance.
4. The mechanism for verifying the end-use of bank credit
should be strengthened.
5. A Credit Information Bureau may be floated independently
by banks.
Since April 1997, banks have been given the freedom to
assess working capital requirement within prudential guidelines
and exposure norms. Banks may evolve their methods to assess
the working capital needs of borrowers—the Turnover Method
IPT q 2Kerb Dealings

or the Cash Budget Method or the MPBF System with

necessary modifications or any other system.

Kerb Dealings The transactions that take place outside

stock exchanges.

Keynesian An attribute which means subscribing to the

economic prescriptions enunciated by John M Keynes.
Keynes, a pre-eminent British economist during the first half
of the twentieth century, authored the famous treatise, ‘The
General Theory of Employment, Interest and Money’. Increasing
government spending to generate employment is a prominent
Keynesian idea which different countries have resorted to at
different times. An example is the expenditure undertaken on
public works during a period of ‚igiƒƒsyx. (See also psƒgev
€yvsg‰.)

Khan Committee A working group that was appointed by

the Reserve Bank of India (RBI) in December 1997 to
harmonize the role and operations of development finance
institutions (DFIs) and banks. Headed by SH Khan, then
Chairman of the Industrial Development bank of India, the
terms of reference of the committee included the following:
1. To review the role, structure and operations of hpsƒ and
commercial banks in the emerging environment and to
suggest changes.
2. To suggest measures for achieving harmonization in the
activities of hpsƒ and banks.
The developments that prompted the decision to appoint
the Committee were the gradual entry by DFIs and banks
into each other’s territory, viz., term finance and ‡y‚usxq
ge€s„ev, the dwindling supply of funds to DFIs owing to a
reduction in the ƒ„e„…„y‚‰ vs…shs„‰ ‚e„sy, and the absence
of reserve require-ments of DFIs, an advantage vis-a-vis banks.
Some of the recommendations of the committee are:
 Khusro Committee q IPU

1. A gradual move towards …xs†i‚ƒev fexusxq with an

approp-riate enabling regulatory framework for that
purpose.
2. Exploring the possibility of gainful mergers between banks,
and among banks and financial institutions.
3. Speedy implementation of legal reforms to hasten debt
recovery.
4. Reducing geƒr ‚iƒi‚†i ‚e„sy to international standards and
phasing out the ƒ„e„…„y‚‰ vs…shs„‰ ‚e„sy.

Kharif Season The main agricultural season in India

occurring between October and April, when the rice crop is
harvested and sugarcane is crushed. (See also f…ƒ‰ ƒieƒyx.)

Khokha A popular Indian term for the non-convertible

portion of a security that yields a fixed income. The word
khokha, drawn from the Gujarati Language, connotes a box or
chest emptied of its contents and hence is used to refer to a
‘straight’ debt security that has been stripped of its
attraction—the convertible portion.

Khusro Committee A committee headed by an economist,

A.M. Khusro, that conducted an appraisal of the agricultural
credit system in India. Several observations and recommendations
were made in its report in 1989, including the following:
1. Setting up of an apex institution for the co-operative banks.
2. Merger of Regional Rural banks (RRBs) with the respective
sponsoring banks.
3. Establishment of Agricultural and Rural Development
Corpo-rations for some eastern and north-eastern states of
India, in order to increase the tempo of agricultural lending.
(See also, xe„syxev gy- y€i‚e„s†i fexu yp sxhse.)

n
 v

Laddered Portfolio See ƒ€egih we„…‚s„‰.

Lagging Indicators The economic variables that follow the

changes, i.e., peaks or troughs in economic activity after a time
lag. Instances of lagged relationships are reflected in the unem-
ployment rate, business expenditures on new plant and equipment
and loans outstanding. For example, the unemployment rate would
gradually go up following the onset of a recession.

Laissez Faire The economic doctrine of freedom to individuals

in business and commerce, advocated by Adam Smith through
his famous work, ‘The Wealth of Nations’, in 1776. Adam Smith
argued that governments should refrain from interfering in
economic activities or in the conditions of people’s working lives
so that the “invisible hand” would motivate people to maximize
profits and bring about prosperity. The term laissez faire is of
French origin.

L.C. Gupta Committee A committee which was appointed by

the Securities and Exchange Board of India with LC Gupta as
Chairman, to develop the regulatory framework for hi‚s†e„s†iƒ
trading in India. The committee submitted its report in December
1997, and its recommendations include the following:
IQH q 2Leading Indicators

1. There is a need for derivatives in India and a beginning may

be made with ƒ„ygu sxhiˆ p…„…‚iƒ.
2. The introduction of equity derivatives, viz., equity y€„syxƒ and
sxhiˆ y€„syxƒ should be in a phased manner.
3. The cash market needs to be strengthened by bringing about
a uniform settlement cycle among all stock exchanges, pro-
gressing towards rolling settlement cycles and accelerating the
dematerialization of securities.
4. An independent clearing corporation to be responsible for
clearing in the derviatives market.
5. The use of derivatives by w…„…ev p…xhƒ should be only for
rihqsxq and €y‚„pyvsy balancing, but not for ƒ€ig…ve„syx .
6. Brokers (members), dealers and sales persons in the field of
derivatives must pass a certification programme insuring their
competency.

Leading Indicators These are certain economic and

financial variables or measures which precede peaks and troughs
in economic activity. Examples of such barometers are the
order booking of the capital goods sector, the number of
housing starts and share prices in general (e.g., as captured by
an index).

Lease A contractual arrangement by which a firm or person

acquires the right to use an eƒƒi„ for a definite period, in return
for rent payable at regular intervals. Leasing is an alternative
source of funds with certain advantages as listed below:
1. Availability of 100 per cent financing.
2. Tax deduction on lease payment.
3. Possibility of a faster tax write-off, depending on the
payments schedule.
4. Flexible terms of payment.
5. Borrowing capacity is not affected since it is an off-fevexgi
ƒrii„ form of financing.
6. Less time consuming and excludes costs such as compensating
balances and sxhix„…‚i gy†ixex„ƒ.
 Financial Lease q IQI

The disadvantages associated with leasing are that it can be an

expensive source of funds and also, there is the risk of financial
failure of the lessor, which may jeopardize the continued use of
leased assets by the lessee.
There are different types of leasing arrangements such as the
following:
Operating or Service Lease

Direct
Financial Lease

Types of Sale and Leaseback

Leases

Leveraged Lease

Operating or Service Lease A lease under which the les-

sor maintains and services the leased equipment; the term of
the lease contract may be less than the economic life of the
asset. Therefore, the cost of the equipment would not be fully
ewy‚„sih, and the lessor would subsequently lend the eƒƒi„
to other users. Also, the lessee may opt to cancel the lease
prematurely and return the eƒƒi„. Thus, operating leases allow
lessees to combat technological obsolescence that may affect
computers and other equipments.

Financial Lease A lease with no cancellation clause and no

provision for maintenance; here, the lease covers the useful
life of an eƒƒi„ and its cost is fully ewy‚„sih. The rentals
may be so structured as to enable the lessor to recoup the
investment with a return in the early part of the term,
known as the ‘Primary Lease Period’. Thus, only a nominal
rent is payable during the ‘Secondary Lease Period’, which
comprises the remainder of the asset’s life.
IQP q 2Sale and Leaseback

Sale and Leaseback A lease under which an eƒƒi„ is sold

by its owner to the leasing company, but is immediately taken
on a lease contract. The erstwhile owner thus receives the
value of the asset and also has its use for a specific period.

Leveraged Lease A lease under which the eƒƒi„ is

purchased by the lessor with the help of a loan. This brings
in the involve-ment of one more party to the transaction.
Besides the above, there are arrangements such as the ‘Sales-
aid Lease’ involving a tie-up between a manufacturer and a lessor
for mutual benefit. The lessor gains by way of commission
and/or credit from the manufacturer. A ‘Cross-border Lease’
transcends national boundaries, and a ‘Big-ticket Lease’ is one
with a very large transaction value.

LERMS An acronym for Liberalized Exchange Rate Management

System, a dual exchange rate system that was introduced from
March 1992 under which the Rupee was made partially gyx†i‚„s-
fvi. The objective was to encourage exporters and induce a greater
inflow of remittances through proper channels, as well as to bring
about greater efficiency in import substitution. Under the system,
60 per cent of eligible foreign exchange receipts such as export
earnings or remittances was to be converted at the market rate and
the balance 40 per cent at the official rate of exchange. Importers
could obtain their requirements of foreign exchange from autho-
rized dealers at the market rate. Because of certain weaknesses,
this system was replaced by a unified exchange rate in March 1993.
This unification was recommended as an important step towards
f u l l gyx†i‚„sfsvs„‰, by the Committee on Balance of Payments
under the chairmanship of C Rangarajan. Under the unified rate
system, all foreign exchange transactions through authorized dealers
are carried out at market-determined rates of exchange.

Letter of Credit A financial instrument issued by a bank on

behalf of a purchaser of goods, undertaking responsibility to pay
a certain amount during a specified period, for goods delivered.
 LIBOR q IQQ

Leverage The ability to magnify gains to shareholders by the

use of debt; in slang, the expression is ‘more bang for the
buck’. (See psxexgsev vi†i‚eqi and y€i‚e„sxq vi†i‚eqi.)

Leveraged Buyout A technique of acquiring companies by

using substantial debt. Leveraged buyouts became popular in
the U.S. in the early 1980s. The buyers, often company managers
backed by investors, would put up 10 to 25 per cent of the
purchase price and borrow the remainder. The company’s eƒƒi„ƒ
would be pledged as security, while sometimes the lender would
get a stake in the shareholding. In such takeovers, the buyers bank
on profits to repay the huge debts incurred and look forward to
selling their shareholding at a handsome profit. But, this leveraged
technique can be devastating if the investment declines in
value or if the debt burden becomes onerous—as when stock
prices fall and interest rates rise on floating-rate debt used in an
acquisition.

Liability A claim against a company or an individual acknow-

ledged as due. Examples of liabilities are bills payable, accrued
wages, bank loans and hifix„…‚iƒ. ‘Short-term’ liabilities need to
be paid within a year, e.g., salaries and taxes due, whereas ‘Long-
term’ liabilities such as wy‚„qeqiƒ a n d fyxhƒ run for periods
exceeding one year.

Liability Transformation Effect The impact of psxexgsev

sx„i‚wihse„syx, especially by banks, whereby short-term funds,
particularly savings deposits, serve as permanent sources of
funds, which the banks are able to lend long-term. This happens
because savings deposits in the aggregate, constitute a stable source
of funds.

LIBOR An abbreviation for London Inter Bank Offer Rate,

which is an average of the interest rates at which leading
international banks are prepared to offer term i…‚yhyvve‚
IQR q2LIC

hi€yƒs„ƒ to each other. The interest rate differs according to

the deposit we„…‚s„‰ and the soundness of borrowing banks.
Libor is also used as a reference rate in quoting interest rates
on various other loans.

LIC An abbreviation of Life Insurance Corporation of India, a

government-owned organization that offers a variety of insurance
plans for individuals. These schemes include basic life insurance
plans (e.g. ‡ryvi vspi a n d ixhy‡wix„ plans), term assurance
plans, plans for children, pension plans, group insurance plans and
others.

Lien A lender’s claim on eƒƒi„ƒ forming security for the loan.

Limit Order A direction to a broker to buy or sell certain shares

or securities at, or better than, a specified price.

Limited Liability A term which conveys that the responsibility

of shareholders, for debts and other vsefsvs„siƒ of their company,
is limited to the extent of the amount remaining unpaid towards
their shares in the company. In other words, each shareholder is
liable to pay the full nominal value of shares held by him or her.

Line of Credit This is an arrangement under which a lending

institution agrees to provide to a borrower any amount of funds
up to a specified limit, during a specified period. The arrangement
may include a gywws„wix„ pii on credit that remains available
but unused.

Liquidation Value The net value of a firm if its eƒƒi„ƒ were

sold separately and not as part of a going concern. This amount
is what would be left from the sale proceeds of the assets after
paying all liabilities and preference shares.
 Loan Syndication q IQS

Liquidity The ease and swiftness with which an eƒƒi„ can be

converted into cash without suffering a significant loss.

Liquidity Adjustment Facility See ‚i€yƒ.

Liquidity Ratios See Appendix IV.

Listing The grant of approval for dealings in a certain security

(e.g., share or hifix„…‚i) at a stock exchange. Consequently,
companies must pay their respective exchanges, an annual listing
fee which is linked to the €esh-…€ ge€s„ev. (See also vsƒ„sxq
eq‚iiwix„.)

Listing Agreement A detailed undertaking to be submitted to

a stock exchange by a company whose security is to be admitted
for trading on the exchange. The provisions contained in a pre-
scribed format relate to, among other things, time-bound registra-
tion of shares, issue of new certificates in lieu of torn or defaced
ones and timely intimation to the exchange authorities regarding
the board of directors’ meetings on important matters.

Loan Syndication The participation by a group of lending

institutions as financiers to a single borrower, so that no institution
individually has a high exposure.
The borrower may select a bank to arrange for syndication,
after reviewing fshƒ from different banks. The syndicating bank
then invites the participation of other banks, for which a detailed
write-up (Information Memorandum) may be circulated. Although
the borrowing company signs a common document (containing
clauses relating to term, interest, repayment and security), drawn
up by the syndicate manager, it has a distinct contractual relation-
ship with each of the syndicate members. In syndication, the
interest charged by member banks may differ, unlike in a gyxƒy‚-
„s…w arrangement.
IQT q 2Local Area Bank (LAB)

Loan syndications can be arranged to finance term require-

ments or ‡y‚usxq ge€s„ev. The interest rate, which may be
fixed or floating, mainly depends on the credit standing of a
borrower. Thus, creditworthy borrowers may find syndication
more advantageous. (See also fiƒ„ ippy‚„ƒ feƒsƒ and ƒri„„‰
gywws„„ii.)

Local Area Bank (LAB) A bank whose operations will be

confined to a narrow geographical domain of three contiguous
districts. The idea behind this concept, proposed in the Union
Budget in 1996, is to ensure a focussed approach to mobiliza-
tion of savings and provision of credit by clearly defining the
boundary of operations. It is expected that LABs, whose own-
ership will be in private hands, will spur growth in rural sav-
ings and improve credit delivery to economic activities in local
areas covering agriculture, small-scale industry, trading and
others. Critics, however, apprehend that the emergence of
LABs which require a modest capital base, will intensify the
competition with the rural branches of commercial banks and
with ‚iqsyxev ‚…‚ev fexuƒ (RRBs), which will further aggra-
vate the dismal condition of RRBs. By December 2002, four
LABs were functioning in India. As an example, the South
Gujarat Local Area Bank Ltd., based at Navsari, Gujarat,
covers the districts of Navsari, Surat and Bharuch, in Gujarat.

Lock-box A facility used in the U.S. and elsewhere for speeding

up collections. A bank collects and arranges for clearance of
cheques that are sent by customers to a designated post office
box. The advantage of this cash management system is that it
eliminates the clerical functions prior to the deposit of the
cheques. The company is thereby able to reduce pvye„ and
realize sale proceeds faster.
 Long-term Capital Gains q IQU

Long Transaction The acquisition of shares or other

securities with the objective of selling them at a later date for
a profit; the idea is, “f…‰ v y ‡ , ƒivv rsqr.”

Long-dated See he„ih ƒig…‚s„siƒ.

Long-term Capital Gains The profit as a result of a price

appreciation on an eƒƒi„ held for a specified time period. For
example, in the case of i…s„‰ ƒre‚iƒ, the specified holding period
is one year. Long-term ge€s„ev qesxƒ qualify for favourable tax
treatment.
n
 w

M1 A measure of the stock of money in India, which is also

referred to as ‘Narrow Money’. M1 is calculated by adding the
net demand deposits of banks and ‘Other’ deposits with the
Reserve Bank of India (RBI) to the sum of currency notes and
coins held by the public. ‘Net demand deposits’ comprise current
account deposits and a portion of the savings deposits considered
as a demand vsefsvs„‰, all held by the public; ‘Other’ deposits with
RBI refers to funds held by certain institutions like the Industrial
Development Bank of India and International Monetary Fund,
foreign governments and gix„‚ev fexuƒ . (See also ‚ihh‰
gywws„„ii .)

M2 The sum of M1 and post office savings bank deposits.

M3 A measure of the stock of money in the nation with reference

to which monetary growth projections are indicated by the
Reserve Bank of India. It the sum of M1 and the net „swi
hi€yƒs„ƒ (together with the portion of savings deposits not
included in M1) with banks. It is also called 'Broad Money'. M3
is a function of ‚iƒi‚†i wyxi‰. (See also greu‚e†e‚„‰
gywws„„ii and ‚ihh‰ gywws„„ii.)

M4 The sum of M3 and total post office deposits.

IRH q 2Making-up Price

Making-up Price The price fixed by the stock exchange

authorities on the basis of the average or closing rates of a
settlement at which an outstanding sale or purchase transaction is
offset and carried forward to the next settlement. The making-
up price or re†eve ‚e„i, as it is alternatively termed, figures in
transactions carried forward under the fehve ƒ‰ƒ„iw.

Malegam Committee A committee set up by the Securities

and Exchange Board of India (ƒifs) to suggest reforms in the
primary market. The committee, headed by YH Malegam, gave
its recommendations in the second half of 1995, and these
include:
1. Stricter norms of disclosure of financial information in the
prospectuses of companies raising capital.
2. Draft prospectus filed with ƒifs to be treated as a public
document.
3. Permitting companies to undertake fyyu f…svhsxq, depending
on the issue size.
Several recommendations of the committee have been accepted
by SEBI and implemented through its guidelines.

Malhotra Committee A committee set up to recommend

reforms in the insurance sector; headed by the former Reserve
Bank of India Governor, late RN Malhotra, the sxƒ…‚exgi
‚ipy‚wƒ gywws„„ii made several suggestions in its report
submitted in January 1994, that includes the following:
1. To permit the entry of private as well as foreign firms in the
insurance business.
2. To reduce government stake in Life Insurance Corporation
(vsg) and General Insurance Corporation (qsg) to 50 per cent
and restructure the two.
3. To delink qsg and its four subsidiaries namely:
(a) Oriental Fire and Insurance Co. Ltd.
(b) National Insurance Co. Ltd.
 Margin q IRI

(c) New India Assurance Co. Ltd.

(d) United India Insurance Co. Ltd.
4. To discard the system of licensing of surveyors by the
Controller of Insurance.
5. To restructure the Tariff Advisory Committee.
6. To set up a regulatory authority for the insurance industry.

Mandi An Indian term to describe a period of depressed share

prices and reduced stock market activity.

Mandi Option An indigenous type of €…„ y€„syx traded in

clandestine deals mainly in Bombay and Calcutta.

Marathe Committee (on Urban Co-operative Banks) A

committee set up to review the licensing policy for new urban co-
operative banks. Headed by SS Marathe of the Reserve Bank of
India (RBI) Board, the committee’s prescriptions submitted in
May 1992, favour a liberal entry policy and include:
1. Establishment of new urban co-operative banks on the basis of
need and potential, and achievement of revised viability norms.
The one-bank-per-district approach is to be discarded.
2. Achieving prescribed viability norms in terms of share capital,
initial membership and other parameters within a specified
time.
3. Introduction of a monitoring system to generate early warning
signals and for the timely detection of sickness.
The committee’s recommendations have been accepted by the
RBI with certain modifications.

Margin The amount of money that a borrower must invest when

acquiring an eƒƒi„ with the use of credit. The term is also used
to denote ‘Profit Margin’.
IRP q 2Margin Trading

Margin Trading The purchase of shares with the help of a

loan. Under we‚qsx trading, an investor puts up a specified
minimum amount of the transaction value and the broking firm
lends the balance. vi†i‚eqi is the key attraction of margin
trading. Importantly, though, if the share price declines to a pre-
specified level, then the broker will send out a 'Margin Call',
requiring the investor to deposit additional funds.

Marginal Cost The cost of producing an additional unit of a

product. (See †e‚sefvi gyƒ„.)

Marginal Revenue The additional revenue generated by selling

one more unit of output.

Marginal Tax Rate The rate of tax applicable on additional

income. In a progressive tax regime, the marginal tax rate rises as
income increases. It is the ratio of the change in total tax to the
change in the base on which it is imposed, expressed as a
percentage.

Market Capitalization The value of equity shares outstanding

at prevailing market prices.
Market capitalization = Number of shares ¥ Market price of
each share.
Market capitalization may be determined for a company or for
the stock market as a whole. Some stock market players attempt
to gauge the price appreciation potential of a stock by relating
market capitalization to the company’s sales. (See €‚sgi-ƒeviƒ
‚e„sy.)

Market Maker An important intermediary in the ƒigyxhe‚‰

we‚ui„, who stands ready to buy and sell securities by simultan-
eously quoting two-way rates. The activity of the market maker
contributes substantially to vs…shs„‰ in the secondary market.
 Market Stabilization Scheme (MSS) q IRQ

For instance, in the wyxi‰ we‚ui„, the hsƒgy…x„ and ps x e x g i

is the chief market maker. Thus, banks,
ry … ƒ i y p sx h s e
institutions and other participants have a ready facility to liquidate
or to buy money market instruments. (See also tyffi‚ and
ƒig…‚s„siƒ „‚ehsxq gy‚€y‚e„syx yp sxhse.)

Market Order A direction to a broker to execute a transaction

as soon as possible, at the best going market price. If an investor
is anxious to get a transaction done, a market order should be
placed rather than a vsws„ y‚hi‚.

Market Portfolio A €y‚„pyvsy whose composition in terms of

securities and their proportions is identical to the composition of
all the risky securities in the market. The market portfolio is a
theoretical construct and it does not exist in reality. Therefore, the
practice is to use a €‚yˆ‰ for the market, which is usually a
broad-based index.

Market Risk The chance of loss due to sharp fluctuations in the

market prices of securities, triggered off by, among other things,
some major political or social events. An illustration would be a
stock market crash following the resignation or sudden demise of
an important political figure. It is also t e r m e d ƒ‰ƒ„iwe„sg ‚sƒu.

Market Stabilization Scheme (MSS) An arrangement that

allowed the Reserve Bank of India (RBI) to issue „‚ieƒ…‚‰ fsvvƒ
and qy†i‚xwix„ ƒig…‚s„siƒ in order to absorb excess vs…shs„‰
resulting from its intervention in the foreign exchange market. At
certain points in time, the RBI has bought US Dollars against
Rupees to stave off a rise in the domestic currency. The
consequential torrent of Rupees would ordinarily have been
sterilized by the sale of government securities. However,
dwindling stocks of the securities caused the RBI to seek the
MSS arrangement, which, incidentally, is subject to annual ceilings
on the amount of issuance.
IRR q 2Market Timing

Market Timing A term for executing purchase and sale trans-

actions at carefully chosen points in time, keeping in mind the
future course of stock prices and the general economic condition.

Marketability Risk The probability of not being able to sell a

security quickly and at a reasonable price. This risk is more when
transactions in particular securities are infrequent. In India, holders
of xyx-gyx†i‚„sfvi hifix„…‚iƒ (xghs) were susceptible to this
risk. But, the proliferation of w…„…ev p…xhƒ with their appetite
for xghs and the improvement in the trading of debentures
gradually alleviated the situation. (See also sw€eg„ gyƒ„ and „rsx
we‚ui„.)

Marking-to-Market A process of monitoring and updating

the account positions of different parties to a transaction, as for
example in a ƒry‚„ ƒevi. By debiting and crediting the different
accounts in tandem with security price changes, a broker is able
to quickly determine the vsefsvs„‰ resulting or the profit accruing
to either side. For instance, if the price of a share sold short were
to rise, the broker would reduce the short seller’s account and
increase the account of the lender of securities. This provides
protection to the latter and helps in determining the actual margin
in the former’s account.

Markowitz Model An investment model credited to Harry

Markowitz, which suggests the combining of eƒƒi„ƒ that are less
than perfectly positively correlated, so as to reduce €y‚„pyvsy risk
without any sacrifice in portfolio returns. The lower the
correlation, the greater will be the risk reduction. To construct an
efficient portfolio, the model requires the following estimates:
1. Expected return for each security.
2. Standard deviation of the expected return of each security.
3. Covariance between each pair of securities.
To implement the idea in practice is virtually impossible,
considering the umpteen number of calculations entailed for a
 MIBID q IRS

large number of securities. For instance, a set of fifty shares will

necessitate the calculation of 1325 estimates mentioned above, in
order to identify the efficient portfolios.

Maturity The time span between the issue of a security and the
terminal date on which it becomes due for ‚ihiw€„syx. (See also
„i‚w „y we„…‚s„‰.)

Medium-dated See he„ih ƒig…‚s„siƒ.

Merchant Banker An intermediary who provides various

financial services, other than lending money, such as managing
€…fvsg sƒƒ…iƒ, …xhi‚‡‚s„sxq new issues, arranging vyex ƒ‰xhsge-
„syxƒ and giving advice on €y‚„pyvsy management, financial
restructuring, wi‚qi‚ƒ and eg…sƒs„syxƒ.

Merger The combination of two (or more) companies into one

entity, usually through the exchange of shares. Three common
forms of mergers are:
1. Horizontal, uniting similar plants and products;
2. Vertical, combining plants in different stages of production;
3. Conglomerate, uniting dissimilar plants and products.

Method of 72 A simple rule of thumb to approximate the rate

of interest, when it is known that a deposit in an interest bearing
account doubles in a certain time. To illustrate, if Rs 100 grows
to Rs 200 in six years, the rate of interest compounded every
year is 72/6 = 12 per cent.

MIBID An acronym for the Mumbai Inter Bank Bid Rate, which
is the weighted average interest rate at which certain banks in
Mumbai are prepared to borrow gevv wyxi‰. (See also wsfy‚.)
IRT q2MIBOR

MIBOR An acronym for the Mumbai Inter Bank Offer Rate,

which is the weighted average interest rate of the rates at which
certain banks/institutions in Mumbai belonging to a representa-
tive panel are prepared to lend gevv wyxi‰.

Microcredit Credit extended to small and needy borrowers who

are outside the domain of commercial banks. The scope of micro-
credit is immense, considering the number of such individuals
who may undertake productive activities. Hence it can contribute
significantly to the economic growth of developing countries.

Monetarist An economist who holds the view that changes in

wyxi‰ ƒ…€€v‰ exert significant influences on aggregate demand.
Also, increases in money supply are believed to engender expec-
tations of sxpve„syx and thereby cause interest rates to go up.
(See also psƒri‚ i…svsf‚s…w.)

Monetary Policy The use of instruments of monetary control

to manage the supply of money in an economy. It is by effecting
adjustments to money supply that the gix„‚ev fexu of any
nation (in India, the Reserve Bank of India), influences the total
spending or aggregate demand for goods and services in the
economy. The principal instruments are y€ix we‚ui„ y€i‚e„syxƒ,
geƒr ‚iƒi‚†i ‚e„sy, ƒ„e„…„y‚‰ vs…shs„‰ ‚e„sy, the fexu ‚e„i
and selective credit controls.

Monetary Targeting The technique of fixing, in advance

(ex ante), the desired growth rate of wyxi‰ ƒ…€€v‰ in a year. The
idea of monetary targeting is an outcome of the greu‚e†e‚„‰
gywws„„ii recommendations; accordingly, the focus of monetary
targeting is the measure of money supply, M3. The inputs for
setting the target, which is meant to be flexible, are the anticipated
growth in real output, the income-elasticity of demand for money
and the acceptable increase in prices. (See also ‚ihh‰ gywws„„ii.)
 Money Market Fund q IRU

Money Back Policy An insurance policy that provides life cover

over the desired term and also pays lumpsum amounts at certain
intervals during the policy period.

Money Market The segment of psxexgsev we‚ui„ƒ wherein

financial instruments having maturities of less than one year are
traded. Examples of such instruments are „‚ieƒ…‚‰ fsvvƒ, ‚i€yƒ
and gywwi‚gsev €e€i‚. (See also psxexgsev we‚ui„ƒ.)

Money Market Fund A w…„…ev p…xh which invests in wyxi‰

we‚ui„ securities such as „‚ieƒ…‚‰ fsvvƒ and gywwi‚gsev €e€i‚.
In India, although the guidelines for setting up Money Market
Mutual Funds (MMMFs) were spelt out by the Reserve Bank of
India (RBI) in April 1992, the response was lukewarm owing to
certain rigidities in the scheme. Consequently, in November 1995,
the RBI introduced certain relaxations, which include the following:
1. The private sector has been permitted to set up MMMFs.
Earlier, this privilege was restricted to scheduled gywwi‚gsev
fexuƒ and public psxexgsev sxƒ„s„…„syxƒ.

2. There will be no ceiling or floor as regards the size of MMMFs.

3. Removal of limits on investments in individual instruments
by the funds, except in the case of Commercial Paper. (The
eligible instruments are Treasury Bills, dated qy†i‚xwix„
ƒig…‚s„siƒ having an unexpired we„…‚s„‰ of up to one year,
gevv and xy„sgi wyxi‰ , Commercial Paper, commercial
bills accepted/co-accepted by banks and gi‚„spsge„i yp
hi€yƒs„. Further, in October 1997, the RBI decided to permit
MMMFs to invest in rated corporate bonds and debentures
with a residual maturity of up to one year.)
In April 1996, the RBI had announced that MMMFs may issue
units to corporates too. Also, RBI would provide liquidity support
to those funds which are dedicated to Government Securities.
Eventually, the year 1997 saw the birth of MMMFs in India.
IRV q 2Money Supply

Incidentally, in a period of rising short-term interest rates,

money market funds may become an attractive investment
alternative and could even trigger off hsƒsx„i‚wihse„syx from
low-yield savings deposits with banks.

Money Supply The stock of money which is in circulation in

an economy at any point of time. In general terms, it comprises
currency in circulation and deposits in current and savings
accounts. (See M1 and M3.)

Monoline Insurer See fyxh sxƒ…‚exgi.

Moral Hazard A problem associated with asymmetric

informa-tion, that is, the inequality of information among the
parties to a contract. Moral hazard refers to the risk of a borrower
engaging in activities that jeopardizes the repayment of the debt
obligation. A simple example is when the borrower diverts a
loan to purposes other than what was expressly approved by the
lender.

Moral Suasion This refers to the persuasion employed by a

gix„‚ev fexu in its communications with various banks, in
order to ensure control over the expansion of credit.

Moratorium The time interval between the disbursement of a

loan and the scheduled commencement of its repayment. The
period of deferment is formally agreed to or legally invoked.

Mortgage A long-term loan secured by real property (land and

structures). Mortgage credit in the U.S. covers homes and apart-
ments, commercial and business establishments and farms. The
lenders are mainly savings and loans associations, commercial
banks and other psxexgsev sxƒ„s„…„syxƒ. Mortgage lenders place
greater reliance on the sale value of the property financed than
on the income potential of the borrower. Mortgage loans have
 Municipal Bond q IRW

been structured in different ways to suit various buyers. Some

illustrations are:

Fixed Payment Mortgage (FPM) The interest rate and

monthly instalment are constant throughout the term.

Graduated Payment Mortgage (GPM) Interest rate is

fixed but monthly payments are tailored to the income levels
of the borrower over the term. Thus, in the early years,
payments are lower but go up with the passage of time as per
a predetermined schedule.

Variable Rate Mortgage (VRM) It provides for a periodic

adjustment of the interest rate with changes in market
interest rates. VRM rates are generally linked to some specific
index that represents the market rate. (See also ƒ…f€‚swi g‚sƒsƒ.)

Moving Average Analysis A method used by technical

analysts that considers the moving average of the prices of an
individual security or a market index, as a reference point for
evaluating daily price changes. What is computed is the
average of a fixed number of observations over a constantly
advancing period of time. Buy and sell decisions are taken
after studying daily prices vis-a-vis the moving average.

Municipal Bond A debt security that is issued by a civic

body. These bonds have been a very useful source of funds in
the U.S., for financing various forms of capital expenditures
like the establishment of utilities and sewer systems.
Such securities are yet to be widely used in India. An
example, however, was the issue by Bangalore city corporation
in 1997 to fund the development of major arterial roads in the
city along with other works. Debt securities of local
governments are assigned a g‚ihs„ ‚e„sxq, based upon a study
of their expected revenues from property taxes, service charges
ISH q 2Mutual Fund

and other sources which will fund the debt obligations.

Therefore, the financial standing of a municipal authority is
critical in obtaining a satisfactory rating, which bears upon
the interest cost. (See also ‚i†ix…i fyxh.)

Mutual Fund An organization that mobilizes the surpluses

of savers and invests the same in different securities. Thus, an
individual who owns a share in a mutual fund has a
proportionate claim on the €y‚„pyvsy of investment vehicles
held by the fund. In financial nomenclature, the term mutual
fund refers to the ‘Open-end’ type of investment company
which has no limit on the number of shares that it can issue.
The Unit Trust of India’s, Units 1964 scheme is a prime
example. However, in common parlance, the term mutual
fund refers to both the y€ix-ixh and gvyƒih-ixh types of
investment companies.
Managing an open-end fund however, involves some distinct
challenges. The portfolio manager must estimate the maximum
possible demand for ‚ihiw€„syx and accordingly retain some
liquid eƒƒi„ƒ. Moreover, daily calculation of the xe† requires a
sophisticated information system.
The ƒ…ftig„-‡sƒi vsƒ„sxq mentions the different types of
mutual funds that are explained elsewhere in this book.
n
 x

NABARD An acronym for the National Bank for Agricultural and

Rural Development. Set up in 1982, it is the apex institution for
agricultural and rural credit, though primarily a ‚ipsxexgsxq
institution. Accordingly, xefe‚h interacts with commercial banks,
state co-operative banks, ‚iqsyxev ‚…‚ev fexuƒ and others, for
the development of agriculture, small-scale industries, village
industries, handicrafts and other sectors in rural areas, all over
India. Besides refinance assistance, xefe‚h gives loans to banks
and state governments which are channeled to the rural sector. In
the mid-1990s, xefe‚h's share capital was significantly scaled up
to increase the flow of credit to agriculture and agro-industries.

Naked Option A gevv (€…„) y€„syx written without owning

(selling short) the underlying share. For example, by selling a naked
call, also termed an ‘Uncovered Call’, the writer is perilously
exposed to the risk of an upside movement in the price of the
share; in this situation, his losses could be infinite. (See also y€„syx.)

Narasimham Committee (1991) A committee appointed by

the Government of India in August 1991, to examine all aspects
of the financial system, in terms of its structure, organization
functions and procedures. The committee was headed by M.
Narasimham, former Governor, Reserve Bank of India (RBI).
Some of the recommendations offered by the committee, in its
report submitted in November 1991, are:
ISP q2Narasimham Committee (1998)

1. A reduction, phased over five years in the ƒ„e„…„y‚‰ vs…shs„‰

‚e„sy (SLR) to 25 per cent, synchronized with the planned
contraction in psƒgev hipsgs„.
2. A progressive reduction in the geƒr ‚iƒi‚†i ‚e„sy (CRR).
3. Gradual deregulation of interest rates.
4. All banks to attain ge€s„ev ehi…eg‰ of 8 per cent in a phased
manner.
5. Banks to make substantial provisions for bad and doubtful
debts.
6. Profitable and reputed banks be permitted to raise capital from
the public.
7. Instituting an eƒƒi„ƒ ‚igyxƒ„‚…g„syx p…xh to which the bad
and doubtful debts of banks and psxexgsev sxƒ„s„…„syxƒ
could be transferred at a hsƒgy…x„.
8. Facilitating the establishment of new private banks, subject to
RBI norms.
9. Banks and financial institutions to classify their eƒƒi„ƒ into four
broad groups, viz., Standard, Sub-standard, Doubtful and Loss.
10. RBI to be primarily responsible for the regulation of the
banking system.
11. Larger role for SEBI, particularly as a market regulator rather
than as a controlling authority.
As a sequel to the report, the government acted upon many of
the suggestions. These actions include reductions in CRR and
SLR, stipulation of capital adequacy norms for banks and
announcement of guidelines for new private banks. (See riev„r
gyhi ƒ‰ƒ„iw.)

Narasimham Committee (1998) A committee that was a

sequel to the earlier one of 1991. It was set up to appraise the
progress of financial sector reforms and to suggest further
measures to streamline the financial system. Some of the
recommendations of the committee are:
1. The ge€s„ev ehi…eg‰ norm for banks ought to be raised to
10 per cent by the year 2002.
 Narrow Banks q ISQ

2. Within a period of three years, the entire €y‚„pyvsy of qy†-

i‚xwix„ ƒig…‚s„siƒ should be marked to market. Also, there
should be a 5 per cent weighting for we‚ui„ ‚sƒu for govern-
ment a n d e€€‚y†ih ƒig…‚s„siƒ.
3. Banks should be encouraged to introduce risk management
techniques like †ev…i e„ ‚sƒu.
4. Recapitalization of banks should be discontinued.
5. wi‚qi‚ƒ with a view to bailing out weak banks should not be
effected.
6. The shareholdings of the Government and the Reserve Bank
of India (RBI) in public sector banks and the State Bank of
India respectively should be reduced to 33 per cent.
7. The minimum net worth requirement for xyx-fexusxq
psxexgsev gyw€exsiƒ, (xfpgs) should be progressively raised to
Rs 2 crore.
8. Urban Co-operative Banks should be brought within the
purview of t h e fye‚h py‚ psxexgsev ƒ…€i‚†sƒsyx.
9. The inter-bank gevv and xy„sgi wyxi‰ market and the sx„i‚-
fexu „i‚w wyxi‰ market should be strictly restricted to banks,
with the exception of €‚swe‚‰ hievi‚ƒ.
10. The prevailing duality of control over co-operative credit
institutions by State Governments and RBI/NABARD should
be eliminated.
11. There should an integrated system of regulation and supervision
of banks, psxexgsev sxƒ„s„…„syxƒ and xfpgs. Accordingly, the
body vested with this responsibility should be renamed the
Board for Financial Regulation and Supervision.

Narrow Banks Banks that invest demand deposits only in highly

liquid financial eƒƒi„ƒ such as „‚ieƒ…‚‰ fsvvƒ. The idea of such
an intermediary was born as a solution to asset-liability mismatches
that traditional banks experienced. Highly liquid financial assets
can be readily sold in order to meet unexpected deposit withdrawals.
Besides, the absence of lending activities will preclude regulatory
requirements, especially ge€s„ev ehi…eg‰ norms. Consequently,
a narrow bank may perform well even with smaller spreads. The
concerns voiced against the concept relate to the probable scarcity
ISR q 2Nasdaq

of Treasury Bills or their low ‰sivhƒ, if acquired at high prices.

Another argument is that because of narrow banking, credit
needs would not be adequately met.
In India, narrow banking has been advocated by the „e‚e€y‚i
gywws„„ii as a means of reducing the systemic danger. Conversion
of weak banks into narrow banks has been suggested, so as to
strengthen the financial sector.

Nasdaq An acronym for National Association of Security Dealers

Automated Quotations System, which is a nationwide network of
computers and other electronic equipment that connects dealers
in the over-the-counter market across the U.S. The system
provides the latest fsh and eƒusxq €‚sgiƒ quoted for any security
by different dealers. This enables an investor to have his or her
transaction done at the best price. Due to NASDAQ, the over-
the-counter market in the U.S. is like a vast but convenient trading
floor on which several thousand stocks are traded.

National Co-operative Bank of India (NCBI) A new

national level bank of co-operative credit organizations, which
was registered in 1993. This apex bank will help to fill a void that
exists in the co-operative credit structure at the national level.
Besides functioning as a banking institution, NCBI may participate
in foreign exchange and wyxi‰ we‚ui„ operations.

National Index An index of 100 stocks quoted nationwide

on different exchanges such as those in Mumbai, Delhi and
Kolkata, which is computed by the Statistics Department of
the Bombay Stock Exchange (BSE); hence, it is called the BSE
National Index (BSENI). The index was developed as a more
representative €‚yˆ‰ of the stock market since the ƒixƒs„s†i
sxhiˆ consists of only 30 stocks quoted on the BSE; these 30
figure among the 100 comprising the National Index. For
calculating the market value of any component share, the
price of the share is assigned a weighting corresponding to the
 National Stock Exchange (NSE) q ISS

number of shares outstanding and hence, the index expressed

as a percentage is:
Aggregate market value of all the stocks in the sample
Average market value during the base period
The base period is 1983-84. Adjustments are made to the
weighting and the base year average if a company included in the
index issues fyx…ƒ ƒre‚iƒ or ‚sqr„ƒ. With effect from April 2004,
the free-float index construction methodology was adopted.
Another development was the contribution of a 500-stock
index by g‚sƒsv. Its base value is 1000 and its composition
captures a high degree of we‚ui„ ge€s„evse„syx and industry
representation.
In mid-1999, the BSE added a 500-stock index to its family of
indices. It represents several major industries and numerous sub-
sectors of the economy, with Information Technology getting a
significant weighting. Stocks were selected on the basis of we‚ui„
ge€s„evse„syx, industry representation, trading frequency and
other criteria.

National Stock Exchange (NSE) It is a nationwide screen-

based trading network using computers, satellite link and electronic
media that facilitate transactions in securities by investors across
India. The idea of this model exchange (traced to the Pherwani
Committee recommendations) was an answer to the deficiencies
of the older stock exchanges as reflected in settlement delays, price
rigging and a lack of transparency.
Efforts to get the exchange going began with its
incorporation in November 1992. The sponsors, mainly
psxexgsev sxƒ„s„…„syxƒ , included shfs , qsg and vsg with IDBI
playing the lead role. In the earlier stages, it was contemplated
that the NSE would function primarily as a wholesale debt
market (WDM) and that for i…s„‰ ƒre‚iƒ, it would play a
complementary role to the Bombay Stock Exchange (BSE).
However, NSE’s active operations in stocks have unleashed
competitive pressures on the BSE and the latter has consequently
IST q 2National Stock Market System (NSMS)

streamlined its outmoded trading system. BSE members seek to

extend their new on-line system (BOLT) to other towns and
cities. NSE’s WDM segment involves transactions in „‚ieƒ…‚‰
fsvvƒ, qy†i‚xwix„ ƒig…‚s„siƒ, €ƒ… fyxhƒ, gywwi‚gsev €e€i‚ ,
gi‚„spsge„i yp hi€yƒs„ a n d hifix„…‚iƒ. Other distinct features
of the NSE include:
1. Separation of the ownership (and management) of the
exchange from the right to trade on the exchange.
2. Membership of the exchange is based on professional merit
and financial soundness.
3. A fully automated screen-based trading system that connects
members across the length and breadth of India. The system
is ‘order driven’ and provides flexibility to users as to the kinds
of orders that may be placed. Additionally, it furnishes volumi-
nous market information on-line, upon request.

National Stock Market System (NSMS) A proposed

integrated market of about twenty Indian stock exchanges to be
linked electronically. The plan was to hook up all the member
exchanges to the nodal bourse, Bombay Stock Exchange by
Very Small Aperture Terminal (VSAT) connections for instant
dissemination of data such as stock prices and other market
related information. It was believed that such a system would
promote keen competition among stock exchanges, resulting in
speedier execution of orders and better prices for investors. It
would also facilitate investors’ access to distant exchanges. A
prerequisite for the NSMS, however, would be uniformity in bye-
laws and settlement systems. (See also sx„i‚-gyxxig„ih ƒ„ygu
iˆgrexqi.)

Near Money This refers to highly liquid financial assets; as e.g.,

„‚ieƒ…‚‰ fsvvƒ a n d qy†i‚xwix„ ƒig…‚s„siƒ.

Negative Grant See †sefsvs„‰ ge€ p…xhsxq.

 Net Asset Value (NAV) q ISU

Negotiable Instrument A document that entitles a person

to a sum of money and which is transferable from one person
to another. Examples of negotiable instruments are cheques,
fsvvƒ yp iˆgrexqi a n d €‚ywsƒƒy‚‰ xy„iƒ. The law governing
negotiable instruments are contained in the Negotiable
Instruments Act, 1881. As per an amendment to the act in
1988, a drawer of a cheque dishonoured due to insufficiency of
funds, is deemed to have committed an offence punishable
with imprisonment.

Net Asset Value (NAV) The net value of a w…„…ev p…xh’ƒ

€y‚„pyvsy, expressed on a per share basis. Thus NAV per share
is:
Total Net Assets
Total number of shares outstanding
To calculate the ‘Total Net Assets’, investments are periodically
valued at market prices (although hifix„…‚iƒ may be valued at
cost or at prevailing yields) and added to other assets; from this
figure, vsefsvs„siƒ including fund expenses, are deducted, in order
to arrive at the total net assets.
A vexatious matter that the Securities and Exchange Board of
India (ƒifs) has grappled with is the need for uniformity in
calculation of the NAV. Differences in valuation and accounting
policies with respect to quoted and unquoted or unlisted shares,
gyx†i‚„sfviƒ, debentures, interest, hs†shixh, expenses, etc., make
a comparison of net asset values of different funds difficult. An
expert committee, set up by SEBI to examine this matter,
suggested specific valuation norms for debt and equity securities.
In its report released in January 1996, the committee has made
some other suggestions, that include the following:
1. Fees payable to an eƒƒi„ wexeqiwix„ gyw€ex‰ to comprise
a ‘Basic Annual Fee’ and a performance-linked component.
2. Reporting of NAV on a weekly basis.
y€ix-ixh p…xhƒ set their sale and repurchase prices on the
basis of their net asset values. However the prices of gvyƒih-ixh
ISV q 2Net Assets

p…xh shares, as for instance, Tata Capital Builder Fund, are

determined by the forces of supply and demand operating in
securities transactions, besides the NAV.

Net Assets An alternative term for xi„ ‡y‚„r. This figure

shows the difference between eƒƒi„ƒ and vsefsvs„siƒ excluding
shareholders’ funds, of a company. This measure gains currency
in a situation involving a takeover or a wi‚qi‚, as an important
input in the valuation of the company being acquired.

Net Current Assets The excess of g…‚‚ix„ eƒƒi„ƒ over

g…‚‚ix„ vsefsvs„siƒ, commonly referred to as net working capital
or simply ‡y‚usxq ge€s„ev. This excess indicates the amount of
long-term funds deployed in current assets.

Net Present Value (NPV) A hsƒgy…x„ih cash flow measure

to evaluate the viability of an investment proposal. It serves to
determine whether the €‚iƒix„ †ev…i of estimated future cash
flows exceeds the investment on a project. The net present value
is the difference of the sum of discounted cash flows and the
outlay, i.e.
n
CF
NPV = Â (1 + kt )t -I
t =1

where CFt represents cash flow in year t, k is the hsƒgy…x„ ‚e„i,

and I is the outlay.

Net Profit Margin See Appendix IV.

Net RBI Credit to the Government The amount of funds

borrowed by the government from the Reserve Bank of India
(RBI) and outstanding in terms of the following, less
government deposits with the RBI:
 Non-Banking Financial Company (NBFC) q ISW

1. Ad hoc „‚ieƒ…‚‰ fsvvƒ.

2. Ad hoc Treasury Bills funded into long-term securities.
3. Treasury Bills of 91 days and 364 days subscribed to by RBI.
4. Treasury Bills acquired by RBI through open-market purchases.
5. he„ih ƒig…‚s„siƒ directly subscribed to by RBI.
6. Dated securities acquired by RBI from the market.
7. RBI’s ‡e‰ƒ and wiexƒ eh†exgiƒ.
8. Net drawal of cash balances by governments from RBI.
The increase in net RBI credit is a measure of the level of
deficit financing. The government has attempted to control this
borrowing by changing over to auction of dated securities and
Treasury Bills, especially of 364 days we„…‚s„‰. (See also „‚ieƒ…‚‰
fsvv.)

Net Worth The funds belonging to the shareholders of a

company. Ordinarily, the term ‘Net Worth’ is synonymous with
the funds belonging to the equity shareholders. However, a wider
meaning of the term is as follows:
Net Worth = ƒre‚iryvhi‚ƒ ’ i…s„‰ + €‚ipi‚ixgi ƒre‚i
ge€s„ev Shareholders’ equity is the sum of paid-up equity capital
and reserves.

Nidhi An Indian term for an organization that sets up a common

fund from the specified contributions of its members, which is
then used to extend financial assistance to needy members.
Such assistance may be given even for meeting unanticipated
family and social obligations. Therefore, it is also known as
‘Mutual Benefit Fund’. Deposits from members also constitute an
important source of funds. These may be savings, recurring or
fixed deposits.

Non-Banking Financial Company (NBFC) A financial

intermediary that is engaged in certain financing activities
other than banking. These activities are specified in the Non-Banking
Financial Companies (Reserve Bank) Directions, 1977 and
ITH q 2Non-convertible Debenture (NCD)

amendments thereto. They include equipment leasing, rs‚i-

€…‚greƒi, housing finance, xshrsƒ , grs„ p…xhƒ, €‚swe‚‰
hievi‚ƒ and investments in financial securities; however,
insurance companies and stockbroking enterprises are
excluded. Many of these intermediaries offer other p…xh-feƒih
products too, as for instance bill hsƒgy…x„sxq and peg„y‚sxq;
also offered are fee-based services such as security issues
management and advice on wi‚qi‚ƒ and eg…sƒs„syxƒ and
capital restructuring. The activities of NBFCs are both
complementary and competitive to banks. Incidentally, in
view of the new areas of financial services that NBFCs have
charted, the ƒrer gywws„„ii suggested redefining NBFCs by
amending the relevant law.
Unless exempt, an NBFC is required to seek registration with
the Reserve Bank of India. Further, NBFCs are required to
comply with regulatory norms relating to maintenance of liquid
assets and creation of a reserve fund.

Non-convertible Debenture (NCD) A debenture without

any convertibility feature; hence it is alternatively termed, ‘Straight
Debenture’.

Non-performing Asset (NPA) A credit facility which ceases

to generate income for a bank. In April 2001, it was decided that
a loan should be classified as non-performing if the interest and/
or instalment of principal remain overdue for a period of over
90 days, from the year ending March 31, 2004.

Non-voting share (NVS) This refers to an equity share not

carrying the right to vote at general meetings, but bearing the
benefit of a higher hs†shixh as compared to a share with voting
rights. The introduction of the NVS was under consideration of
SEBI and the Union Finance Ministry. The proposed
guidelines had envisaged that such equity should not exceed 25
per cent of the issued ƒre‚i ge€s„ev of a company, and
 NSC q ITI

dividend thereon would have to be 20 per cent higher than on

voting shares. ‚sqr„ƒ and fyx…ƒ ƒre‚iƒ on non-voting equity
should also be non-voting.

Note Issuance Facility (NIF) A method of financing that

involves repeat issues of a short-term debt instrument to the
most competitive bidder through auctions. When combined with
a Revolving Underwriting Facility (RUF, i.e., an underwriting facility
which is extended in every round of fund-raising), the issue will
devolve on the underwriter, if the fshƒ from investors are above
the cut-off rate. Hence, this financing mechanism is also referred
to as RUF/NIF. The advantage is that the borrowing company
can access funds long-term, at short-term rates. For example, a
three-year underwriting facility for 90-day paper means that the
borrowing company may tap the market up to twelve times in
three years.

Notice Money This refers to funds borrowed or lent for periods

from 2 to 14 days without any gyvve„i‚ev. The participants in
these transactions are commercial banks, co-operative banks,
w…„…ev p…xhƒ and certain psxexgsev sxƒ„s„…„syxƒ. The interest
rate is market-determined and the funds can be recalled at short
notice. See also gevv wyxi‰.

NSC An acronym for National Savings Certificate, an investment

vehicle of six years we„…‚s„‰ issued by the National Savings
Organization. The certificate carries certain tax benefits for the
investment and interest accruing annually.
n
 y

Odd-lot A lot of shares that is different from a round (marketa-

ble) lot. At stock exchanges, transactions were done in lots mostly
of 100 or 50 shares and multiples thereof. These conventional
trading units are called ‘Round Lots’. Any lot that is different from
the prescribed trading unit is deemed an odd-lot.

Odd-lot Theory A theory promoted by technical analysts,

that advocates doing the opposite of what small investors
would be doing at any time. This theory rests on the premise
that small investors are very late in reacting to market trends
and hence, incorrectly time their buying and selling decisions.
The activities of small investors are monitored by measuring
trading activity in yhh-vy„ƒ. Thus, going by this approach, if
‘Net Odd-lot Sales’ (Odd-lot sales – Odd-lot purchases) were
positive, then investors ought to be buying stocks.

Offshore Financial Centre (OFC) A place that encourages

financial activities by having a pragmatic regulatory environment
with few exchange controls. Thus, it acts as a conduit for invest-
ment activities of international sxƒ„s„…„syxev sx†iƒ„y‚ƒ and other
intermediaries. While an OFC can boost the flow of investments
and give a fillip to related industries such as tourism, it can also
be misused for money laundering and other undesirable activities.

OID Bonds An abbreviation for a group of bonds that are

called Original Issue Discount Bonds or alternatively, Deep
ITR q 2Open-end Fund

Discount Bonds (DDB). These are securities bearing gy…€yx

‚e„iƒ that are considerably less than the market ‰sivh
prevailing when issued and hence are sold at prices
substantially below the pegi †ev…i. For instance, in a situation
where the going yield on interest-bearing securities of a certain
quality is (say) 17 per cent, a comparable fyxh bearing a
coupon of 5 per cent will be issued at a price substantially
below its €e‚ †ev…i, so that it yields 17 per cent. (See a l s o
i‚y -gy…€yx fyxh .)

Open-end Fund A mutual fund which continuously issues

new shares or units to meet investors’ demand. Simultaneously,
it redeems shares for those who want to sell. Hence, there is no
limit on the number of shares that can be issued, and in fact,
the number of shares outstanding keeps changing because of the
continuous influx and exit of investors. Due to the constant
changes in the aggregate portfolio value and the number of shares,
the xi„ eƒƒi„ †ev…i keeps changing. The purchase and sale
prices for redeeming or selling shares are set at or around the net
asset value. (See also w…„…ev p…xh.)

Open Market Operations (OMO) The purchase or sale of

securities, by the gix„‚ev fexu of a country to expand or
contract the reserves with the banking system. OMO serve as
an instrument of €…fvsg hif„ management and also of monetary
control, alongside the geƒr ‚iƒi‚†i ‚e„sy and ƒ„e„…„y‚‰
vs…shs„‰ ‚e„sy. In recent years, OMO have been undertaken
to sterilize foreign capital inflows.
Through OMO, the Reserve Bank of India (RBI) is able to
absorb liquidity from, or inject the same into, the banking
system. Since it was envisaged that OMO would become the
dominant tool of monetary control in India, the Central
Government and RBI initiated a series of measures to deepen
and widen the market for qy†i‚xwix„ ƒig…‚s„siƒ. The actions,
aimed at enhancing the effectiveness of OMO, were as follows:
1. A shift to market rates of interest on Government Securities.
 Operating Leverage q ITS

2. The establishment of new institutions, viz., hsƒgy…x„ exh

psxexgi ry…ƒi yp sxhse and ƒig…‚s„siƒ „‚ehsxq gy‚€y‚e„syx
yp sxhse.

3. The appointment of '€‚swe‚‰ hievi‚ƒ' to intensify the

participation of intermediaries.
4. The introduction of 'Delivery versus Payment' system.
5. Implementation of the we‚usxq-„y-we‚ui„ system for the
valuation of e€€‚y†ih ƒig…‚s„siƒ held by banks.
6. Permitting banks to trade in Government Securities, in order to
promote the retail market segment.
(See also ƒqv „‚exƒpi‚ py‚w.)

Operating Cycle See g…‚‚ix„ eƒƒi„ƒ .

Operating Income The amount by which the sales income

exceeds the cost of goods sold and the related operating expenses,
but not including financial income and expenses such as interest,
hs†shixh , taxes, as w e l l as iˆ„‚ey‚hsxe‚‰ s„iwƒ.

Operating Leverage The ability to magnify profits from

increases in sales due to a firm’s operating costs being largely
fixed than variable. When the proportion of †e‚sefvi gyƒ„ƒ is
small, any increase in sales results in a significant impact on
profitability beyond the f‚ieu-i†ix €ysx„, at which revenues
equal total costs. The degree of operating leverage which
gauges the impact on profitability of a change in volume, is
measured by the ratio:
Percentage change in OPERATING INC OME
Percentage change in units sold or in sales
To illustrate, if the operating income of a company rises to
Rs 2,40,000 from Rs 1,60,000 as a result of an increase in the
number of units sold from 90,000 to 1,20,000, its degree of
ope-rating leverage suggests that is will benefit by increasing
volume:
ITT q 2Opportunity Cost

FG 80 ,000 IJ ¥ 100
H 1,60 ,000 K =
50%
= 1.50
FG 30 ,000 IJ ¥ 100 33.33%
H 90 ,000 K
Therefore, in order to increase volume, the company could adopt
a competitive pricing strategy.

Opportunity Cost The value or benefit from an alternative

proposal, e.g., investment decision, that is foregone in favour of
another.

Option A contract that gives the holder the right to buy (‘Call
Option’) or sell (‘Put Option’) a certain number of shares of a
company at a specified price known as the ‘Striking Price’ or
‘Exercise Price’. American options may be exercised during a
certain time period, which extends up to what is known as the
‘Expiration Date’. Exchange-traded options in the U.S. are in
denominations of 100 shares. In India, the minimun contract
size for all derivatives was set at Rs 2 lakh. The attraction of
buying options is a potentially large profit on a relatively small
investment. The maximum possible loss is the price paid for the
option, known as the ‘Premium’. The premium is paid by the
option buyer to the option writer (seller) who keeps the money,
whether the option is exercised or not. The buyer is under no
obligation to exercise his right and may simply let the option
expire. However, by selling a call or a put, the writer obligates
himself to deliver or buy shares if the option is exercised.
Importantly though, the buyer or the writer may independently
terminate their outstanding positions before the expiration
date, by executing offsetting transactions. The value of an
option comprises a time value and an sx„‚sxƒsg †ev…i, the latter
resulting from the price of the underlying stock. As the
expiration date approaches, the time value converges to zero.
Buying a call option is an alternative to buying the underlying
shares. Buying a put is an alternative to a short sale of the
underlying shares. Thus, a call buyer’s outlook is essentially
bullish whereas a put buyer is bearish about the underlying
 Option q ITU

share. The value of a call option rises with the price of the
underlying share whereas, the value of a put option increases as
the price of the share falls. This is illustrated in the examples
(Appendix II contains an illustration of rihqsxq involving
options) given as follows:
1. Mr. Joy buys a six-month call on Yummy Ice Cream Ltd. at
a striking price of Rs 60, paying a premium of Rs 6 per share.
The share is currently trading at Rs 50. Incidentally, since
the market price is below the striking price, this call is said
to be ‘out-of-the-money’. The profit or loss picture at different
market prices six months hence, is shown below (brokerage
and taxes excluded):

Rupees
Share price at 45 55 65 66 75 85
expiration date
Call value 0 0 500 600 1500 2500
(on 100 shares)
Premium (600) (600) (600) (600) (600) (600)
(on 100 shares) _____ _____ _____ _____ _____ _____
Net profit/loss (600) (600) (100) 0 900 1900

2. Expecting the share of Lite Umbrella Ltd. to fall, Mr.

Peppy buys a six-month put at a striking price of Rs 30,
paying a premium of Rs 4.50 per share. The share is
currently trading at Rs 28, which means that the put is ‘in-
the-money’. How well does Mr Peppy perform ? This
performance depends on the share price movement during
the life of the option.

Rupees
Share price at 15 20 25 28 30 35 40
expiration date
Put Value (on 1500 1000 500 200 nil nil nil
100 shares)
Premium (on (450) (450) (450) (450) (450) (450) (450)
100 shares) _____ _____ _____ _____ _____ _____ _____
Net Profit/Loss 1050 550 50 (250) (450) (450) (450)
ITV q 2Options Writer

Profit/Loss
Call Buyer
(Mr. Joy)

0
66 Stock Price

(600)
Call Writer

Profit/Loss Graph of a Call Buyer

Options Writer A person who originates a €…„ or gevv

y€„syx, Any interested person may engage in writing
exchange-traded options with the assistance of a broker.
Options writing can be a source of income and also a rihqsxq
technique.
Profit/Loss

0
25.50 Stock Price

(450)

Profit/Loss Graph of a Put Buyer

 OTC Exchange of India (OTCEI) q ITW

OTC Exchange of India (OTCEI) A floorless national

securities exchange with a screen-based system of trading.
Modelled on the lines of NASDAQ, OTCEI was the first to
introduce screen-based scripless trading in India. This modern
market characterized by fully computerized operations, was
promoted by the Unit Trust of India, ICICI and SBI Capital
Markets Ltd. among others, in order to overcome problems such
as the lack of transparency and delays in settlements that have
plagued the older exchanges. Additionally, the prohibitive cost of
a €…fvsg sƒƒ…i through the conventional route also spurred the
development of this alternative forum. OTCEI’s operations began
in 1992 and its network consists of counters located all over the
country, linked by computers and other electronic media. Com-
panies with a small equity capital and certain permitted securities
are traded on it. Each counter is the location of a member or
dealer and serves as a trading floor. Members of the OTC
Exchange include psxexgsev sxƒ„s„…„syxƒ, subsidiaries of banks
and certain wi‚grex„ fexui‚ƒ. They help in originating issues,
i.e., sponsoring companies and also in ensuring vs…shs„‰ by
making a market; the latter function entails offering two-way
quotes for a stipulated period from the date of vsƒ„sxq. The
dealers are intermediaries between buyers and sellers They may
deal in securities or act as brokers.
The Initial Counter Receipt (ICR) is the document an investor
gets upon allotment in an OTCEI issue. The existence of an
electronic depository eliminates the cumbersome method of
physical movement of securities and so, facilitates quick transfers
at the registrar’s end. Thus the share certificates remain in the
custody of the registrar.
Subject to certain conditions, any company with a €esh-…€
ge€s„ev from Rs. 30 lakh upwards could be listed on the y„gis .
The shares may be originated by a direct public issue or
through a fy…qr„-y…„ hiev. For this purpose, it is necessary
to appoint a sponsor from among the OTCEI affiliates.
Besides trading in listed securities and certain permitted
securities, OTCEI has a retail debt trading segment too for
qy†i‚xwix„ ƒig…‚s„siƒ.
IUH q2Overbought

A major advantage of the system is the transparency and

speed with which transactions are completed, including
payment and delivery of securities. An investor is able to see
the price quotes on the OTC scan when placing a buy/sell
order. The gy…x„i‚ ‚igis€„ is the document in OTCEI
transactions that evidences the purchase of a share. The ‘Sales
Confirmation Slip’ (SCS) confirms the sale of the shares.
Payment is made to an investor against the SCS.

Bank
OTC
Central Computer

Registrar Communication PTI

System Computer

OTC OTC
Scan
Counter Counter
A B
The OTCEI Network

Overbought A market condition characterized by excessively

heavy purchases in a stock or stocks in general, driving prices up
to an unsustainable level. Since further purchases are not expected,
a downturn in the market may be considered imminent.

Overdraft A facility with a bank enabling a depositor to overdraw

on his or her current account up to a specified limit.

Oversold A market condition reflecting excessively heavy

sales in a particular stock or stocks in general. It indicates that
further sales will not take place and that the market may
spring back to a higher level.
 Overvalued q IUI

Oversubscribed Subscription to an issue of securities in

excess of the amount sought to be raised.

Overvalued An expression to describe a share that is trading

at a price higher than, what is deemed to be, its intrinsic
worth based on future cash flows. It, therefore, implies that
the price will fall shortly.
This term is also used in relation to a currency, that is main-
tained either at an exchange rate that is higher than its equilibrium
rate, or at a rate higher than would prevail in the free market.
n
 €

Paid-up Capital See ƒre‚i ge€s„ev .

Par Value The nominal value of a security, also termed pegi

†ev…i.

Pari Passu A term indicating equality of claim. It is used with

reference to hs†shixhƒ, ‚sqr„ƒ and other benefits on newly
issued shares vis-à-vis older shares or in the context of a charge
on psˆih eƒƒi„ƒ securing a loan.

Participation Certificates These are securities whose income

is from periodic cash flows, viz., €‚sxgs€ev and interest generated
by loan eƒƒi„ƒ. These cash flows are passed through via an
intermediary to the holder of the securities. (See ƒig…‚s„se„syx.)

Participatory Note (PN) An instrument that facilitates invest-

ment in listed Indian stocks by clients of Foreign Institutional
Investors (FIIs).
For example, an FII may issue a PN representing stocks of
Indian companies to a client, whose identity is usually kept a
secret by the FII. Speculation in the print media suggests that
such clients may be overseas corporate bodies or non-resident
Indians or foreign investors or even Indian companies. Consider-
ing the secrecy surrounding the ultimate investors and the
amounts involved, concerns have arisen about the desirability and
IUR q 2Payback Period

possibly volatile repercussions of this source of investments,

on the Indian stock market.

Payback Period The time taken to recover the investment

on a project. This is ascertained in the following manner:

Outlay (Rs) Inflows (Rs)

Time (years) 0 1 2 3 4
|— — — —|— — — —|— — — —|— — — — –|
2,00,000 70,000 80,000 1,00,000 1,10,000

In the above example, the payback period is estimated at two

years and six months, assuming that the cash flow during the first
half of the third year will be Rs 50,000. This method has some
obvious drawbacks; it does not consider the time value of money
nor the cash flows beyond the payback period.

Payout Ratio The proportion of earnings available to equity

shareholders, which is paid out as hs†shixhƒ. Hence, if a
company whose ie‚xsxqƒ €i‚ ƒre‚i, are Rs 10 pays a dividend
of Rs 2 per share, the payout ratio is 20 per cent. The ratio can
be a basis for setting the long-term dividend policy. For instance,
a company may fix its payout ratio at 40 per cent of earnings.

Permanent Investments The investments made by banks in

e€€‚y†ih ƒig…‚s„siƒ which they intend to hold till maturity. In
contrast, ‘Current Investments’ are for very short holding periods.
The distinction entails differences in the basis of valuation.
Permanent investments are valued at cost, in contrast to current
investments which are marked to market. (See also y€ix we‚ui„
y€i‚e„syxƒ.)

Pledging An arrangement for obtaining finance on the strength of

a firm’s receivables. (See eƒƒsqxwix„ yp eggy…x„ƒ ‚igis†efvi.)
 Point-and-Figure Chart q IUS

Point-and-Figure Chart An unconventional graphic technique

devised by technical analysts for plotting the movement of the
price of a share (or the market in general). Typically, a point-and-
figure chart will be used to record only such price changes as are
deemed ‘significant’ by the technician. Thus, for instance, a one-
point chart will record changes of not less than one rupee.
Therefore, there is no consideration of the time dimension.
Significant price increases and decreases are recorded by
writing an ‘X’ and an ‘O’ respectively. The column changes only
on a price reversal (a decline after previous increases or a rise after
previous declines).
A technician will attempt price forecasts by identifying ‘conges-
tion areas’. The congestion areas is a price range (a horizontal
band of Xs and Os) within which several reversals occur. A price
trend reflected by a column of Xs that penetrates the top of a
congestion area is interpreted as a bullish signal—a f‚ieuy…„.
Similarly, a series of falling prices below the region is considered
a bearish signal, known as ‘Penetration’.

48

46 X

X X X
Price

44 X X O X O

X X O O

42 X O

40

Price Reversals
IUT q2Pool

Pool A group of persons getting together to surreptitiously

influence the market price of a certain security or securities with
the objective of doing profitable trades.
In insurance, the term refers to an association of insurers
organized to share the premiums and losses of one or more
specific contracts, subject to whatever conditions are determined
by the group.

Portfolio A term that collectively refers to the different securities

belonging to an individual or a group of persons or a w…„…ev
p…xh . The investments may include shares, hifix„…‚iƒ ,
gyx†i‚„sfviƒ and other securities.

Portfolio Insurance See €‚yq‚ew „‚ehsxq.

Post-shipment Credit Funds lent by banks in rupees or dollar-

denominated credit (PSCFC) to exporters after the shipment of
goods. This is useful to exporters who may otherwise suffer a
long collection period. Post-shipment finance can be in the
form of purchase or hsƒgy…x„sxq of export bills, advance against
foreign bills presented for collection, advance against cash
incentives, etc. Post-shipment and €‚i-ƒrs€wix„ finance entail
disbursement or credit and hence are p…xh-feƒih. In addition,
banks assist exporters through non fund-based facilities such as
issuance of letters of guarantee and vi„„i‚ƒ yp g‚ihs„.
In February 1996, the Reserve Bank of India scrapped the
PSCFC scheme. This decision was based on the assessment that
the credit provided under the scheme, being concessional, induced
exporters to postpone repatriation of export earnings, especially
when the rupee was expected to depreciate vis-a-vis the US dollar.
The post-shipment rupee credit continues to be available.

Pre-shipment Credit Funds lent by banks in rupees or foreign

currency (PCFC) to exporters, prior to the shipment of goods.
Pre-shipment finance can be in the form of packing credit,
 Premium q IUU

advance against cash incentives and others. Packing credit is

offered to an exporter for purposes of packing and shipment
and also manufacture of goods. Such credit may be in the form
of a loan, geƒr g‚ihs„ or y†i‚h‚ep„ facility.

Preference Share A share that bears a stated hs†shixh and

has priority of claim over i…s„‰ ƒre‚iƒ in the matter of
dividend, and eƒƒi„ƒ in the event of liquidation of the company.
Preference shares have been called ‘Hybrid Securities’ since they
have features of fyxhƒ as well as equity shares. The dividend is
stated at the time of issue, just as with hifix„…‚iƒ; however, the
dividend may not always be paid. Preference shares do not
ordinarily bear voting rights; but such rights may be conferred if
dividends are not paid for a certain number of years.
There are different types of preference shares. If they are
‘Cumulative’, then dividends not paid accumulate and must be
paid before dividends on equity shares. However, dividends
passed on ‘Noncumulative’ preference shares do not add up for
future payment. ‘Participating’ preference shares provide for a
specified minimum dividend and a share in the profits available
to equity shareholders. Several years ago, ‘Adjustable-rate’
preference shares became popular with sx†iƒ„wix„ fexui‚ƒ in
the U.S., and there were several issues of the same. This financial
innovation of periodic adjustments to the dividend rate lessens
the sx„i‚iƒ„ ‚e„i ‚sƒu and sxpve„syx ‚sƒu that are inherent in
fixed-income preference shares.
In India, the Companies Act was amended in 1988, and it has
been stipulated that preference shares cannot have a life exceeding
ten years. Guidelines were also issued for ‘Cumulative Convertible
Preference’ (CCP) shares.
The decision in 1997 to make dividend income in the hands
of investors free of tax applies to preference shares as well, thus
renewing investor interest in the security.

Premium The term usually refers to the increment of price over

the pegi †ev…i of a security or over the market price generally
IUV q 2Present Value

quoted. This term has specific meanings too. In insurance

contracts, it refers to the charges paid regularly to the insurer for
maintaining insurance cover. In the case of y€„syxƒ, the premium
is the price paid by the option buyer to the y€„syx ‡‚s„i‚ for
acquiring the right to buy2or sell securities.

Present Value The hsƒgy…x„ih value of future cash flows. For

example the present value of Rs 1000 expected two years from
today is Rs 756.14, if the discount rate is 15 per cent, i.e., 1000/
(1/1.15)P.

Price Discovery The economic function performed by p…„…‚iƒ

we‚ui„ƒ of disseminating price information to the world at large.
The futures price serves as a benchmark to buyers and sellers who
use the futures market to obtain price insurance.
Price discovery, also sometimes referred to as “price formation,”
facilitates allocation decisions with regard to production and
consumption. For instance, a steadily rising trend in the futures
price of a certain commodity suggests that the underlying expect-
ation among speculators and hedgers is one of a higher spot price
in future. Accordingly, while producers might decide to produce
more of the commodity, users may begin to look for a cheaper
substitute.

Price-earnings Ratio The market price of a share divided by

ie‚xsxqƒ €i‚ ƒre‚i. This number, also known as the ‘Multiple’,
or ‘Multiplier,’ is often used by investors and analysts to
determine the upward potential of a share by comparing its
multiplier to that of the particular industry as a whole. The
multiplicand can be the expected earnings per share. One simple
rule of thumb suggests that the P/E ratio can be as high as the
anticipated growth rate of a company.

Price-sales Ratio A ratio to screen for good investments, which

is calculated by dividing the market value of shares outstanding
 Primary Reserve q IUW

of a company, by its annual sales. An investor may set limits for

different shares, as e.g., a ratio of up to 0.75 for small growth-
oriented companies but no more than 0.40 for a big company in
a declining industry.

Primary Dealer (PD) An intermediary that participates in

the primary auctions for qy†i‚xwix„ ƒig…‚s„siƒ and „‚ieƒ…‚‰
fsvvƒ and subsequently liquidates them in the ƒigyxh-e‚‰ we‚ui„.
The system of Primary Dealers has served at least two important
purposes:
1. The emergence of a ready and receptive set of intermediaries
that aid in the issuance of new securities by functioning as
transient holders. The importance of the future role of PDs
can be grasped from the fact that the ultimate aim of the
Reserve Bank of India (RBI) is to completely withdraw its own
support to the primary issues of the Government.
2. Making a market by offering two-way quotes which imparts
liquidity to secondary market transactions.
PDs are subject to minimum obligations with respect to bidding,
success ratio and turnover commitments. RBI extends vs…shs„‰
support to PDs through ‚i€yƒ o r ‚ipsxexgi against Central
Government Securities.

Primary Deficit See hipsgs„.

Primary Market The segment of psxexgsev we‚ui„ƒ in which

securities are originated. Thus, the transactions for fresh offerings
of i…s„‰ ƒre‚iƒ, hifix„…‚iƒ, €‚ipi‚ixgi ƒre‚iƒ, and other
securities are collectively referred to as the primary market.
(See psxexgsev we‚ui„ƒ.)

Primary Reserve The sum of (a) cash reserves, legally required

to be held by a bank and (b) working reserves maintained to
facilitate operations such as payments to depositors and credit
IVH q 2Prime Cost

disbursement. The level of working reserves depends on several

factors that include the scale of operations, profile of depositors,
business conditions, and size of the ƒigyxhe‚‰ ‚iƒi‚†i.

Prime Cost The sum of direct material cost, direct labour cost
and direct expenses. Direct material cost consists of materials that
become a part of the finished product. Direct labour cost com-
prises costs that can be specifically identified with the product,
as for instance the wages of a machine operator. An example
of a direct expense is the hire charges for a special purpose
machine.

Prime Lending Rate (PLR) The rate of interest charged by

banks on ‡y‚usxq ge€s„ev and short-terms loans to their most
credit-worthy borrowers. The prime rate serves as a benchmark
for deciding on the interest rate to be charged to other borrowers.
Accordingly, major banks and also psxexgsev sxƒ„s„…„syxƒ in
India periodically announce their PLRs depending on their cost of
funds and competitive lending rates. Banks have the freedom to
lend at sub-PLR rates. A likely development is that a ‘Base Rate’
will replace the PLR and thereafter, banks will lend at the base
rate plus an appropriate ‚sƒu €‚iws…w.

Principal The amount due, exclusive of interest, under a loan

agreement or on a debt instrument. The term is also used in
securities trading for an individual/firm, represented in a business
transaction by an agent authorized to do so.

Priority Sectors Certain sectors of India’s economy which

have been identified for directed bank assistance (from scheduled
commercial banks including foreign banks operating in India) at
very favorable terms, especially concessional lending rates. These
sectors include:
1. Agriculture.
 Private Equity Fund (PEF) q IVI

2. Small-scale industry.
3. Traders and small entrepreneurs.
4. Self-employed persons and professionals.
5. Transport operators (directly and indirectly).
6. Students.
There are numerous schemes covering the sectors men-
tioned above. Examples include loans for farm inputs and for
acquiring tractors, assistance to small-scale ventures for purchas-
ing machinery financing village and cottage industries and
loans to doctors for setting up clinics/hospital. In addition,
there are other schemes, such as the Differential Interest Rate
Scheme, to aid the economically and socially weaker sections
of the population and credit guarantee schemes for small bor-
rowers and enterprises.
The stipulated priority sector target for public and private
sector banks stands at 40 per cent of net bank credit.

Private Equity Fund (PEF) A fund belonging to private

investors that typically invests in the equity of upcoming companies
by a negotiated deal. The investment is medium-term, the period
ranging between three and five years, and is usually in unlisted
companies.
The success of a PEF depends on both the quality of the
portfolio as well as the profit upon exit. Thus, a fund has to be
very selective about its investments and must also plan its exit
properly. The investments may be liquidated in future either
through a public issue, a direct placement or under a prior
agreement with the promoter for buying back the shares. Since
the commitment of PEFs is for an appreciable length of time,
promoters of many companies welcome their participation.
Others, however, are uneasy with the idea since PEFs take a close
interest in the activities and performance of the companies
funded by them which may include setting financial targets
jointly and then tightly monitoring the progress.
IVP q 2Private Placement

Private Placement The issuance of debt or equity securities to

a select set of investors, such as banks, psxexgsev sxƒ„s„…„syxƒ,
w…„…ev p…xhƒ and high xi„ ‡y‚„r individuals, by negotiations,
which may involve a wi‚grex„ fexui‚. In contrast, the
conventional method of €…fvsg sƒƒ…i seeks subscription from
investors in general. The advantage in private placement is the
substantial saving in marketing expenses that a public issue
entails. Consequently, the amount of funds raised annually
through this route has tripled over ten years up to 2007-08, to
cross Rs. 1,100 billion.

Profit Taking The act of converting unrealized gains into

profits by selling securities whose prices have risen appreciably
in a short period.

Profitability Index (PI) A hsƒgy…x„ih cash flow method

used in capital budgeting to evaluate the financial viability of
investment proposals. The index (PI) is calculated by the
formula:
S PV
PI =
I
where the numerator is the sum of the discounted cash flows
(present value) over the life of the project and the denominator
is the initial outlay on the project. An investment proposal is
viable if the index is greater than unity.

Program Trading Trading orders generated by a computer,

based on mechanical trading rules. Two forms of Progr a m
Trading are Index e‚fs„‚eqi an d €y‚„pyvsy Insurance. Index
arbitrage may be triggered when the futures price of an under-
lying, i.e., an index futures contract, moves sufficiently away
from its theoretical value. Portfolio insurance is sought through
actions such as the purchase of €…„ y€„syxƒ, to hedge against the
downside risk of a stock portfolio or a specific stock.
 PSU Bonds q IVQ

Promissory Note An instrument in writing that serves as an

evidence of indebtedness of a person. The promissory note
contains a definite undertaking by the maker to pay a certain sum
of money to, or to the order of, a certain person.

Prospectus A document required to be filed with the

Registrar of Companies and also, widely distributed by a
public company that seeks to mobilize funds from the public at
large. A prospectus contains several details about the company
including the following:
1. Particulars about the issue—number of shares or other
securities for which subscription is invited.
2. Dates of opening and closing of the issue.
3. Names and addresses of the directors of the company.
4. Names of the underwriters and brokers to the issue.
5. The purpose for which funds are being raised, i.e., the infor-
mation about the project, prospects, risk factors and other
relevant information.
6. Auditors’ report.
7. Excerpts from the company’s Memorandum and Articles of
Association such as its main objects, rules regarding py‚pis„…‚i
of shares and so on.
The format and contents of the prospectus must conform to
the relevant provisions of the Companies Act, 1956 and rules laid
down by ƒifs. (See also weviqew gywws„„ii.)

Proxy A document that facilities the transfer of a shareholder’s

right to vote in favour of another person who may represent and
vote on his/her behalf at a general meeting of the company. The
term proxy also refers to the person authorized to act on behalf
of another.

PSU Bonds The fyxhƒ issued by Public Sector Undertakings

in India. These bonds generally have a we„…‚s„‰ of seven years.
IVR q 2Public Debt

Two types of securities are issued: a tax-exempt bond and a

taxable one, the former bearing a lowe r gy…€yx ‚e„i. The
main investors are w…„…ev p…xhƒ, banks and companies.

Public Debt The debt obligation of the Government of India

comprising external debt, i.e., loans from foreign countries,
international psxexgsev sxƒ„s„…„syxƒ and other foreign investors
and internal debt that includes market loans, „‚ieƒ…‚‰ fsvvƒ,
special bearer fyxhƒ and special loans and securities outstanding.
A very large portion of the internal debt obligations is held by the
Reserve Bank of India.
In a broader sense, public debt includes the debt of Central,
State and Local governments and also Government-owned
entities. (See also „‚ieƒ…‚‰ fsvv and qy†i‚xwix„ ƒig…‚s„siƒ.)

Public Debt Office (PDO) A central hi€yƒs„y‚‰ within the

Reserve Bank of India for all types of qy†i‚xwix„ ƒig…‚s„siƒ
except „‚ieƒ…‚‰ fsvvƒ. The Subsidiary General Ledger (SGL)
Section of the PDO discharges functions such as the maintenance
of the SGL accounts of banks, psxexgsev sxƒ„s„…„syxƒ and
others, examination of securities tendered, issue of scrips, and
payment of interest and €‚sxgs€ev to account holders.

Public Issue An invitation to the public at large to subscribe to

shares or other securities of a company. A public issue entails
numerous tasks such as organizing the syndicate of …xhi‚‡‚s„i‚ƒ,
brokers and others, preparation of the €‚yƒ€ig„…ƒ and fulfillment
of several formalities including, notably, prior approval from
ƒifs and the Registrar of Companies.
Canvassing for the issue is done mainly by the brokers who
approach prospective investors directly or via subbrokers and
supply application forms and informative brochures. (See also
€‚yƒ€ig„…ƒ.)
 PUT q IVS

Company

Registrars Issue Manager

Advt.
Agency Printer

Underwriting
Underwriters Broker
Broker

Sub-broker Sub-broker

Investors Investors Investors Investors

Public Provident Fund (PPF) A tax saving scheme offered

by the National Savings Organization. A PPF account can be
opened at certain banks and post offices. Deposits qualify for
tax deduction and the interest earned is exempt from taxes.

Public Securities The securities which are eligible for investment

by public trusts. An issuer of a financial security may seek this
designation for its asset by approaching the central and state
governments. The objective is to enhance the acceptability of
the instrument, so as to facilitate the placement of the issue.

PUT See y€„syxƒ.

n
 

QIB An acronym for Qualified Institutional Buyer. The list of

QIBs is wide and includes public psxexgsev sxƒ„s„…„syxƒ as
defined in section 4A of the Companies Act, 1956, scheduled
commercial banks, w…„…ev p…xhƒ, foreign institutional investors
registered with SEBI, multilateral and bilateral financial
institutions, †ix„…‚i ge€s„ev funds registered with SEBI, certain
provident funds and so on. SEBI has spelt out guidelines on
issue of securities such as i…s„‰ ƒre‚iƒ and fully gyx†i‚„sfvi
hifix„…‚iƒ to QIBs under the scheme of Qualified Institutional
Placements.

QIS An abbreviation for Quarterly Information System, imposed

by banks on borrowers, following the recommendations of the
Chore Committee (1979) on bank finance for ‡y‚usxq ge€s„ev.
The system prescribes three statements:
1. Estimates of g…‚‚ix„ eƒƒi„ƒ and g…‚‚ix„ vsefsvs„siƒ for the
ensuing quarter, to be submitted in advance.
2. Actual performance in terms of production and sales, and vis-
a-vis estimates in terms of current assets and liabilities.
3. Half-yearly operating statement and flow of funds statement.

Quasi-sovereign Yield Curve A benchmark for ‰sivhƒ,

established by the issues of state-owned companies of a country,
in international debt markets. In the absence of sovereign issues,
this ‰sivh g…‚†i serves as the basis for pricing debt issues of
IVV q 2Quick Ratio

creditworthy corporate borrowers of that country. Thus, for

instance, debt issues by Indian Oil Corporation, Oil and
Natural Gas Commission (ONGC) and other similar organi-
zations would help to establish a quasi-sovereign yield curve.
(See ‰sivh g…‚†i.)

Quick Ratio See egsh-„iƒ„ ‚e„sy.

n
 ‚

Rabi Season The agricultural season in India from May to

September when wheat and other crops are harvested. (See also
ƒvegu ƒieƒyx.)

Raghuram Rajan Committee A committee on financial

sector reforms, appointed by the Planning Commission,
Government of India, in 2007 and headed by Professor
Raghuram Rajan, with terms of reference that included the
following:
1. To identify the emerging challenges in meeting the financing
needs of the Indian economy in the coming decade and to
identify real sector reforms that would allow those needs to be
met more easily by the financial sector.
2. To examine the performance of various segments of the
financial sector and identify changes that will allow it to meet
the needs of the real sector.
3. To identify changes in the regulatory and the supervisory
infrastructure that can better allow the financial sector to play
its role, while ensuring that risks are contained.
Among the Committee's various recommendations, submitted in
2008, are the following:
1. The Reserve Bank of India should formally have a single
objective, to stay close to a low inflation number or within a
range in the medium term, and progress towards using a single
instrument, viz., ‚i€yƒ and ‚i†i‚ƒi ‚i€yƒ to achieve it.
IWH q 2Raider

2. To steadily open up investment in the Rupee corporate

fyxhƒ and qy†i‚xwix„ ƒig…‚s„siƒ markets to foreign
investors, after a clear wyxi„e‚‰ €yvsg‰ framework is in
place.
3. Allow wider entry to private well-governed deposit-taking small
finance banks.
4. Offer 'Priority Sector Loan Certificates' to all registered entities
that lend to eligible categories in the €‚sy‚s„‰ ƒig„y‚.
These certificates would be bought by deficient banks to
compensate for their shortfall in lending to the sector.
5. To set up a working group on financial sector reforms
chaired by the Union Finance Minister whose main focus
would be to shepherd such reforms.

Raider An individual or a company attempting to take control

of a company by acquiring a controlling interest in the
shareholding.

Rally A brisk rise in stock prices after a decline. The term

connotes a short surge in prices, rather than a sustained rise in
the market.

Random Walk Theory A proposition that describes the

movement of share prices as being random, i.e., devoid of any
definite pattern. This assertion, therefore, challenges the very
basis of „igrxsgev exev‰ƒsƒ, especially gre‚„sxq which rests
on the idea of trends in share prices. (See also ippsgsix„ we‚ui„ƒ
r‰€y„riƒsƒ.)

Ratio Analysis The use of financial ratios for assessing the

financial performance and financial condition of a company.
The technique makes use of various ratios that assess the
vs…shs„‰, turnover performance, profitability and other
dimensions of a company. (See Appendix IV.)

Ratio Plans See py‚w…ve €vexƒ.

 Real Bills Doctrine q IWI

RBl’ Draft Strategic Plan A long-term plan drawn up for

the Reserve Bank of India (RBI) covering the period 1993–
2002. The plan, which was to be executed in three phases,
reportedly recommended several responsibilities for the gix-
„‚ev fexu , including the following:

1. Long-term wyxi„e‚‰ €yvsg‰ formulation and vs…shs„‰

forecasting as well as public policy pronouncements on the
target sxpve„syx rate.
2. Assigning complete responsibility of monetary policy formula-
tion to the Credit Planning Cell which will be appropriately
renamed.
3. Deregulation of interest rates on lending and borrowing.
4. To develop strong market intelligence.
5. Progressive removal of all end-use controls on foreign
exchange.
6. Reducing the number of departments in the central bank.
As a result of the several measures including those mentioned
above, the scenario that has emerged bears the following features:
1. Primary responsibility of RBI for monetary stability.
2. A policy having the fexu ‚e„i and y€ix we‚ui„ y€i‚e„syxƒ
as the dominant tools of monetary control.
3. Market interest rates on deposits and advances.
4. Reduced ƒ„e„…„y‚‰ vs…shs„‰ ratio and geƒr ‚iƒi‚†i ‚e„sy
and limits on lending to the Government.
5. Effective market intelligence systems.
6. Free gyx†i‚„sfsvs„‰ of the rupee on current account and
controlled convertibility on capital account.

Real Bills Doctrine A doctrine relating to bank lending

which advocates conservatism in making loans. More
specifically, the doctrine favours self-liquidating short-term
loans through the medium of bills: the assistance is for goods
in the stages from production to sales, rather than loans for
psˆih eƒƒi„ƒ and other long-term needs.
IWP q 2Real Effective Exchange Rate (REER)

Real Effective Exchange Rate (REER) The exchange rate

arrived at after adjusting the nominal exchange rate by the relative
price changes within a country and in the foreign country in
question. For instance, sxpve„syx in a country has the same
impact as an appreciation of its currency, since exports become
costlier to foreigners. This adverse development would not be
reflected in the nominal exchange rate. The REER, therefore, is
a better indicator of the competitive position of a country.

Real Income The income of an individual or a nation which is

adjusted for sxpve„syx prevailing in the country, so as to reflect
the actual purchasing power. A price index is used to effect this
adjustment.

Real Interest Rate The difference between the nominal rate

of interest quoted or prevailing in the market and the expected
rate of sxpve„syx. (See also psƒri‚ i…svsf‚s…w.)

Real Options y€„syxƒ that are embedded in an investment

proposal. For example, an investment proposal to make an action
film, say a spy thriller, bears an embedded option to produce a
sequel if the main character becomes a hit with moviegoers.

Recapitalization Bonds See ge€s„ev ehi…eg‰ ‚e„sy.

Recession A phase in an economy characterized by declining

sales, increasing layoffs and sometimes, falling prices and interest
rates.

Record Date The date on which an investor’s name must

appear in the Register of Members in order to be entitled to
receive hs†shixhƒ, ‚sqr„ƒ or fyx…ƒ ƒre‚iƒ as the case may be.
(See also Eˆ.)
 Reddy Committee q IWQ

Reddy Committee A working group on matters relating to

money supply which was appointed in December 1997 under
the Chairmanship of YV Reddy of the Reserve Bank of India
(RBI). Its terms of reference sought, among other things, an
assessment of the adequacy of existing money stock measures
and suggestions to improve the existing reporting system.
The committee submitted its report in June 1998, which
includes the following recommendations:
1. The introduction of a new set of monetary and liquidity
aggregates as detailed below.
2. A comprehensive commercial bank survey to be carried out,
which would reflect the changing scope of their activities.
3. Compilation of a comprehensive financial sector survey in
order “to capture the dynamic interlinkages” between deposi-
tory corporations (banking sector) and psxexgsev sxƒ„s„…„syxƒ.

Reddy Committee’s recommended measures of financial

aggregates
A. Monetary Aggregates
Weekly Compilation
MH (i.e., ‚iƒi‚†i wyxi‰) = Currency in Circulation + Bankers’
deposits with the RBI + ‘Other’ deposits with the RBI.
Fortnightly compilation
MI = Currency with the public + Demand Deposits with banks
+ ‘Other’ deposits with the RBI = Currency with the public
+ Current Deposits with banks + demand liability portion of
Savings Deposits with banks + ‘Other’ deposits with the RBI.
MP = MI + Time liability portion of Savings Deposits with
banks + gi‚„spsge„iƒ yp hi€yƒs„ issued by banks (CDs) + „i‚w
hi€yƒs„ƒ (excluding FCNR* (B) Deposits) with a contractual
maturity of up to and including one year with banks = Currency
with the public + Current Deposits with banks + Savings
Deposits with banks + CDs + Term Deposits (excluding FCNR
IWR q2Redemption

(B) Deposits) with a contractual maturity of up to and including

one year with banks + ‘Other’ deposits with the RBI.
MQ = MP + Term Deposits (excluding FCNR (B) Deposits)
with a contractual maturity of over one year with banks +
gevv wyxi‰ loans from ‘Non-depository’ Financial
Corporations by banks.
B. Liquidity Aggregates
Monthly compilation
LI = MQ + all deposits with the Post Office Saving Banks
(excluding NSCs).
LP = LI + Term Deposits with term-lending institutions and
refinancing institutions (FIs) + Term Borrowing by FIs + Certifi-
cates of Deposit issued by FIs.
Quarterly compilation
LQ = LP + Public deposits of xyx-fexusxq psxexgsev gyw€exsiƒ
(NBFCƒ).
* Foreign Currency Non-resident.
During 1999, the RBI introduced new monetary and liquidity
aggregates on the basis of the Committee’s recommendations.
Importantly, the new broad monetary aggregate NMQ excludes
non-resident foreign currency deposits. Thus, the aggregates are
defined as:
NMQ = MQ – Non-resident repatriable foreign currency fixed
deposits + Non-bank call/term borrowings.
LI = NMQ + Post Office deposits.
LP = LI + Term deposits with term-lending institutions and
refinancing institutions (FIs) + Term borrowing by FIs +
Certificates of deposit issued by FIs.
LQ = LP + Public deposits of NBFCs.

Redemption The repayment of an obligation such as a hifix-

„…‚i or a redeemable €‚ipi‚ixgi ƒre‚i. The redemption usually
takes place at we„…‚s„‰; however in some cases it could be
earlier. The repayment may be at €e‚ or at a €‚iws…w.
 Regional Rural Banks (RRBs) q IWS

Rediscount The hsƒgy…x„sxq of a debt instrument such as a

fsvv yp iˆgrexqi by a bank or psxexgsev sxƒ„s„…„syx which had
earlier invested in the financial instrument through the mode of
discounting. Rediscounting facilities are available with the hsƒgy…x„
exh psxexgi ry…ƒi yp sxhse and several other banks and
institutions which have been allowed to participate in the fsvvƒ
‚ihsƒgy…x„sxq market.

Refinance The system of borrowing by a bank or other financial

intermediary from an apex institution or the gix„‚ev fexu of a
country, on the strength of its loans or financial eƒƒi„ƒ. Thus, for
instance, shfs and xefe‚h provide refinance to a host of banks
and institutions vis-a-vis the loans made by the latter to ultimate
borrowers. Refinance may also be increased by the Reserve Bank
of India as a short-term measure to douse a sudden flare-up in
wyxi‰ we‚ui„ rates, e.g., the gevv wyxi‰ rate.

Refinancing The mobilization of funds through an issue of

securities, usually to retire a prior issue whose interest burden is
higher.

Refunding The technique of retiring old debt with the help of

a new issue, often in order to effect a reduction in interest costs.
This can be done by utilizing the proceeds of the new issue or
by offering existing holders new securities for the ones maturing.

Regional Rural Banks (RRBs) The banks sponsored by

public sector banks to cater exclusively to rural areas. The target
segments of RRB’s loans are small and marginal farmers,
agricultural labourers, agricultural co-operative societies, artisans
and small entrepreneurs among others. The sponsoring bank,
besides subscribing to the ƒre‚i ge€s„ev, provides managerial and
financial assistance to its RRB. There are 196 RRBs in India,
which have been established form 1975 onwards, with well
over 14,000 branches spread across the rural regions. However,
for various reasons, many of them are faring very badly and it
IWT q 2Reinsurance

is a problem that is now being tackled, as per the advice of

certain committees constituted to study the matter and make
suggestions for restructuring the banks.

Reinsurance An arrangement under which an insurer shares

the risk of large losses with another insurer. Through
reinsurance, an insurance company spreads the risk of
excessive loss on big contracts. The arrangement helps to
dilute exposure and retain financial flexibility.

Reinvestment Rate The rate of interest at which the cash

flows from an investment (e.g., coupon from a hifix„…‚i or in-
flows from a project) are periodically reinvested. This depends on
the investment choices available during the term of a security or
project. However in the case of a i‚y-gy…€yx fyxh, the problem
of having to reinvest does not arise since there is no periodic cash
flow. The reinvestment rate is unvarying and is the same as its
‰sivh „y we„…‚s„‰. (See also ‰sivh „y we„…‚s„‰.)

Rekhi Committee A committee on sxhs‚ig„ „eˆiƒ , that

submitted its report in 1992, containing recommendations for
simplification and streamlining of customs and central excise laws
and procedures.

Relative Strength The tendency occasionally demonstrated

by some stocks to rise faster and outperform others in a f…vv
market. On this basis, technical analysts recommend
investing in shares that have relative strength.

Repos An abbreviation for a Sale and Repurchase Agreement,

which is also termed ‘Buy back’, ‘RP’ or ‘Ready Forward’ (RF).
It is a sale of securities with an agreement to repurchase the same
on a future date and at a specific price. By doing so, funds become
temporarily available. The difference between the sale and
purchase prices, the latter being slightly higher, is the interest
 Reserve Money q IWU

earned by the investor or lender. Alternatively, the sale and

repurchase prices may be identical, with the borrower agreeing
to pay a specific interest charge.
It is, in effect, a short-term loan secured by the eƒƒi„ƒ sold
to the lender. So, the interest rate decided may be lower,
considering that gyvve„i‚ev is involved. sxƒ„s„…„syxev
sx†iƒ„y‚ƒ having surplus funds find repos a convenient vehicle;
they are able to invest such funds up to a specific date for which
a security with matching we„…‚s„‰ is not available. The term,
‘‚i†i‚ƒi ‚i€…‚greƒi eq‚iiwix„’ refers to a repos deal viewed
from the perspective of the supplier of funds. It is also a
technique of borrowing securities. The assets are bought with
an agreement to resell them at a fixed price on a future date.
Prior to the scam in 1992, some banks actively engaged in
repos transactions to keep their €y‚„pyvsyƒ liquid and avoid
capital losses from interest rate changes. A significant portion
of the securities comprising the ƒ„e„…„y‚‰ vs…shs„‰ ‚e„sy
(SLR) figured in fortnightly repos, with the financial assets
appearing in bank books every alternate Friday for SLR
purposes, only to be sold again the very next day.
Incidentally, the Reserve Bank of India (RBI) also conducts
repos auctions of qy†i‚xwix„ ƒig…‚s„siƒ from time to time.
The objective is to mop up the temporary excess vs…shs„‰ in
the financial system and to moderate fluctuations in the gevv
wyxi‰ interest rate.
From 1999, the RBI has been employing the Liquidity
Adjust-ment Facility (LAF) comprising daily repos and reverse
repos transactions, as a technique of correcting liquidity
mismatches in the financial system. The vep is also used to
smoothen volatility in the short-term wyxi‰ we‚ui„ rates.
Importantly, the repos rate has served as a floor for money
market rates and also as a signaling device about RBI’s stance on
interest rates. (See also gevv wyxi‰ and hy…fvi ‚ieh‰ py‚‡e‚h.)

Reserve Money The money created by the Reserve Bank of

India (RBI). It primarily consists of currency with the public
and cash balances of banks with the RBI. More specifically, it
IWV q2Resistance Level

comprises currency including Rupee and smaller denomination

coinage with the public, reserves of banks in the form of cash
in hand and deposits with RBI, and ‘other deposits’ with the
RBI which are its vsefsvs„siƒ to the non-bank sector. RBI’s
purchases of foreign exchange and RBI credit to the
Government, banks and psxexgsev sxƒ„s„…„syxƒ, particularly
the monetization of the f…hqi„ hipsgs„ , cause reserve
money creation. Increase in reserve money causes a multiple
expansion in wyxi‰ ƒ…€€v‰, MQ. Therefore, reserve money is
also called ‘High-powered money’ or ‘Base money’.
The impact of money produced by the Government by way
of small coins and one rupee notes is comparatively insignificant.
(See also M1 and xi„ ‚fs g‚ihs„ „y „ri qy†i‚xwix„.)

Resistance Level A term from „igrxsgev exev‰ƒsƒ that refers

to a price level at which investors sell a security causing the price
to rebound downwards from that level.

Retained Earnings The amount of profits after taxes not

paid out as hs†shixhƒ, which is, therefore, available to a
company to finance additional eƒƒi„ƒ. Thus, retained earnings
form a part of xi„ ‡y‚„r which represents the total funds
belonging to share-holders.

Return on Equity See Appendix IV.

Return on Investment (ROI) See Appendix IV.

Revaluation The meaning of this term depends on the

context in which it appears.
With reference to foreign exchange it denotes an upward
revision of a currency’s official exchange rate vis-a-vis other
currencies or in relation to gold. It may be noted that sxpve„syx
in a country has a similar consequence as revaluation, since
exportable goods become more expensive to foreign buyers.
 Riding the Yield Curve q IWW

In finance, the term refers to a fresh valuation of psˆih eƒƒi„ƒ

of a company such as land and machinery by an approved
valuer. Revaluation helps to establish realistic values of assets in
place of historical costs since market prices and realizable values
are taken into consideration by the valuer. (See also ‚iev
ippig„s†i iˆgrexqi ‚e„i.)

Revenue Bond A type of w…xsgs€ev fyxh whose obligations of

interest and €‚sxgs€ev are paid out of specific kinds of revenues.
For instance, sufficient revenues may be anticipated from
charges levied on the users of a proposed bridge or highway.
That being the case, revenue bonds could be issued for the
project. In the U.S., revenue bonds have financed the
construction of bridges, tunnels and docks. (See „yvv fyxh.)

Revenue Deficit See hipsgs„.

Reverse Repurchase Agreement See ‚i€yƒ.

Reverse Split See ƒ„ygu ƒ€vs„.

Revolving Credit An intermediate-term vsxi yp g‚ihs„ that is

a legally binding commitment by the bank. At times, it may
bear a proviso that permits the borrower to convert the facility
into a term loan, at the end of the period for which revolving
credit was extended. (See also xy„i sƒƒ…exgi pegsvs„‰.)

Riding the Yield Curve A strategy to improve the ‰sivh on a

fyxh €y‚„pyvsy. It entails the purchase of a long-term bond
when the ‰sivh g…‚†i is ascending and is expected to retain its
shape and level. With the passage of time the yield on the
security declines, corresponding to its shorter remaining life.
Hence, as the security moves towards we„…‚s„‰, the price rises
as yield falls. The price gain coupled with the coupon received
at regular intervals helps to enhance the return. But, the risk
PHH q 2Riding the Yield Curve

inherent in the strategy is the chance of capital loss if interest

rates were to significantly go up or if the yield curve were to get
inverted.
Yields

Riding the Yield Curve Term to Maturity

Here is an example of the strategy. Assume that an investor

has funds available to invest for 3 months. A 91-day „‚ieƒ…‚‰
fsvv is trading at a discount of 9.63 and a 364-day Treasury Bill
which has 182 days remaining is trading at 10.40. The
alternatives available to the investor are: (1) to buy the 91-day
Bill and hold it to maturity or (2) to buy the other security
and sell it after 3 months.
Assuming that the yield curve will not undergo a
significant change in its slope or level, the calculations support
the second option, as shown in the following table:

Calculation of return (in Rupees)

Option 1
Buy Rs 1 lakh of 91-day Bills at 9.63 and hold to maturity.
Discount at purchase (interest earned) Rs 2,408
Purchase price Rs 97,592
Annualized yield 9.89 per cent
Option 2
Buy Rs 1 lakh of Bills having 182 days to maturity at 10.40 per
cent discount and sell at 9.63
Purchase price (discount: Rs 5,200) Rs 94,800
 Right q PHI

Sale price Rs 97,592

Profit Rs 2,792
Annualized yield 11.81 per cent

What is of great interest is the fact that, even if the yield

curve were to move up after the investor has embarked on the
strategy, he will come out better unless the discount rises by
over 77 feƒsƒ €ysx„ƒ and breaches 11.17. At this f‚ieu-i†ix
€ysx„, the sale price would be Rs 97,208, which will result in
a ge€s„ev qesx of Rs 2,408, yielding the same amount of profit
as that of the 91-day Bill. Even so, the yield per cent would
still be better, since this gain is realized on a smaller outlay,
i.e., Rs 94,800.

Right The entitlement of a company’s shareholder to i…s„‰

ƒre‚iƒ in a proposed issue of the company in proportion to his/
her existing holding. Since rights shares are offered mostly at a
lower rate than the market price, rights have tangible value. This
value can be ascertained by the formula:

MPc - SP
N +1
Where MPc = the market price of the share g…w-right.
SP = the subscription price at which shares are offered to
shareholders.
N = the number of rights needed to obtain one new share.
The following example will help to clarify the above
formula. A company, Glow Bulbs Limited has 1,20,000 shares
outstanding and decides to issue 80,000 shares on rights basis at
a subscription price of Rs 30 per share. If the market price of the
share is Rs 60, the value of a right will be calculated as under:

1,20 ,000
N= = 1.5
80 ,000
PHP q2Risk Premium

Hence, value of a right is:

60 - 30
= Rs 12
15
. +1
The same answer can be ascertained in a different way.
Assum-ing that the increase in the number of shares will cause
its price to decline, the share price, after increase in capital,
is estimated by the formula:
( N ¥ MPc ) + SP
N +1
Thus, the price following the rights issue may be:
(15
. ¥ 60 ) + 30 120
= = Rs 48
2.5 2.5
Therefore, value of a right is:
MPc – Price following the rights issue = 60 – 48 = Rs 12

Risk Premium The extra return over the ‚sƒu-p‚ii rate that
investors earn or expect on a risky security.

Risk-free Rate of Return The return on securities issued by

the government which are deemed default-fee. However, qy†i‚x-
wix„ ƒig…‚s„siƒ are subject to sxpve„syx and sx„i‚iƒ„ ‚e„i
‚sƒuƒ.

Road Shows The presentations to fund managers and ƒig…-

‚s„‰ exev‰ƒ„ƒ as part of a marketing effort for a i…‚y sƒƒ…i by
a company. These road shows enable the company and the
lead manager to gauge the likely response to an issue. The lead
manager acts as a ‘Book Runner’ noting down quotes from
prospective investors for different prices and lots. This infor-
mation is helpful in determining the timing and price of the
issue.

RUF/NIF See xy„i sƒƒ…exgi pegsvs„‰ .

n
 ƒ

Sale and Leaseback See vieƒi.

Salvage Value The expected price or disposal value of an

eƒƒi„, usually machinery, at the time of its replacement or at a
future date approximating the end of the asset’s economic life. In
insurance, it is the value of a property after it has been partly
destroyed or damaged by fire, storm or some other hazard.

Satellite Dealers See €‚swe‚‰ hievi‚.

Scheduled Bank A bank that is registered in the Second

Schedule to the Reserve bank of India (RBI) Act, 1934. To be
included in the schedule, a bank must fulfill certain conditions
that include:
1. The €esh-…€ ge€s„ev and reserves must be at least Rs 5 lakh.
2. Its conduct must not be to the detriment of its depositors.
Scheduled banks are required to maintain cash reserves with
the RBI as prescribed. In return, they enjoy certain privileges
from RBI such as borrowing facilities and remittances at
concessional rates.

SDR An acronym for Special Drawing Rights, an international

reserve eƒƒi„ created in 1970, to enable member countries of
the International Monetary Fund (IMF) to deal with payment
PHR q 2SEBI

problems. Each member is assigned a quota which specifies the

subscription required from the member in full, in the form of
reserve assets and the member nation’s currency. This quota thus
determines the maximum amount of fevexgi yp €e‰wix„ƒ
assistance a member can get from the IMF. The quotas are also
crucial in determining the voting power of each member.

SEBI An abbreviation for Securities and Exchange Board of India,

which is a regulatory body established under the Securities and
Exchange Board of India Act, 1992. Its role is to protect the
interests of investors in securities, to promote the development
of securities markets and to regulate the same. Towards the
achievement of theses goals, SEBI is empowered to adopt various
measures which include:
1. Regulating the business at stock exchanges and other markets.
2. Registration of stock brokers, sub-brokers, transfer agents,
registrars to issues, wi‚grex„ fexui‚ƒ, …xhi‚‡‚s„i‚ƒ and
others.
3. Regulating w…„…ev p…xhƒ.
4. Promoting investor education.
5. Undertaking inspection and audit of stock exchanges and
various intermediaries.

Secondary Market The segment of psxexgsev we‚ui„ƒ in

which securities that have already been issued are traded. Thus
the secondary market comprises security exchanges and also
transactions taking place elsewhere, as e.g., ui‚f hievƒ. (See also
psxexgsev we‚ui„ƒ.)

Secondary Reserve The funds maintained by a bank in highly

liquid earning eƒƒi„ƒ to enable it to meet sudden requirements of
cash. Secondary reserve assets bolster a bank’s vs…shs„‰ while
earning some income, unlike €‚swe‚‰ ‚iƒi‚†i which comprises
cash, an idle asset. ( See ƒ„e„…„y‚‰ vs…shs„‰ ‚e„sy.)
 Securitization q PHS

Secured Premium Note (SPN) An interest-bearing security

(of Rs 300 each) issued by The Tata Iron and Steel Company
along with detachable ‡e‚‚ex„ƒ. The SPN had a lock-in period
(of three years after evvy„wix„) during which no interest was
payable. The return accrued upon ‚ihiw€„syx. So, the warrants
with their equity appeal (of one equity share for Rs 80) served
as the sweetener.

Securities Trading Corporation of India (STCI) An

institution originally promoted by the Reserve Bank of India
(RBI), along with banks, psxexgsev sxƒ„s„…„syxƒ, w…„…ev p…xhƒ,
and others, as a we‚ui„ weui‚ in designated qy†i‚xwix„ ƒig…‚s-
„siƒ and €ƒ… fyxhƒ, quoting two-way prices. The objective was to
promote an active market for the securities mentioned.
From June 1995, STCI began quoting two-way prices in
Government Securities and „‚ieƒ…‚‰ fsvvƒ. Since 1996, STCI has
been a leading €‚swe‚‰ hievi‚ in government securities. Besides
dealing in PSU bonds, STCI is also active in the market for bonds
of companies and financial institutions. Incidentally, by March
2002, the RBI had fully divested its stake in STCI. (See also y€ix
we‚ui„ y€i‚e„syxƒ .)

Securitization The transfer of loan (eƒƒi„ƒ) of a homogeneous

nature, from a lending institution to investors through an
intermediary, by packaging them in the form of securities which
are usually termed ‘€eƒƒ-„r‚y…qr ƒig…‚s„siƒ’. The cash flow by
way of €‚sxgs€ev and interest on the underlying loans is “passed
through” to the security holders. The assignment of loans is
mostly without recourse to the original lender. Various assets that
generate cash flows can be securitized—as e.g., housing loans and
car loans. The lending institution benefits by this arrangement
since it frees a large amount of funds for reinvestment, long
before they become due. The assets are selected form a pool that
is carefully sifted—this is known as ‘Cherry Picking’. They are
subsequently monitored over a period of time to confirm their
PHT q 2Security Analyst

financial soundness—this part is termed ‘Seasoning’. Considering

that there is such a careful appraisal coupled with the backing of
the underlying assets, the financial instruments that are created
present an attractive investment opportunity. Moreover, their
investment quality can be determined from the g‚ihs„ ‚e„sxq, if
available. A trust or an intermediary termed ‘Special Purpose
Vehicle’ (SPV) is involved in the arrangement of securitization.
The SPV holds the loans and issues paper against the security
of the loans, say wy‚„qeqiƒ. The proceeds from the issue of
securities are given to the housing finance company. The periodic
interest and principal are collected by the SPV and passed on
after retaining service costs and insurance fees.

Security Analyst An individual who evaluates and identifies

stocks and other securities for investment. The technique that is
commonly employed to identify mispriced securities, involves an
examination of the fundamental aspects—economic outlook,
industry prospects and a company’s plans, projections, strengths
and weaknesses—that will have a bearing on the intrinsic worth
of an eƒƒi„. On this basis, a security analyst makes recommenda-
tions to buy, sell or hold securities. Alternatively, an analyst may
use tools of „igrxsgev exev‰ƒsƒ in order to generate short-term
forecasts of stock prices.
Analysts in the U.S. are employed by brokerage firms and banks,
among others. They tend to specialize in a particular industry or
a few industries. For instance, an analyst may specialize in airline
stocks while another in pharmaceuticals. (See also p…xhewix„ev
exev‰ƒsƒ and „igrxsgev exev‰ƒsƒ.)

Security Market Line A linear relationship between the

expected rate of return on a security and its ƒ‰ƒ„iwe„sg ‚sƒu
indicated by fi„e.

Seed Capital The financial assistance towards a promoter’s

equity contribution. Seed Capital, alternatively called ‘Equity
 Sensitive Index q PHU

Support’, is to enable promising entrepreneurs with inadequate

capital to set up their enterprises. The assistance is usually in the
form of a loan at very generous terms, as e.g., a long wy‚e„y‚s…w
period, nominal service charge and a lengthy repayment period.

Segmented Markets Theory A theory that offers an

explanation for a situation in which short-term interest rates are
higher than long-term rates, which manifests in a descending
‰sivh g…‚†i . This theory holds that the psxexgsev we‚ui„ƒ
consist of two separate segments, short-term and long-term.
Hence, when the demand for short-term funds significantly
outstrips supply, whereas the long-term segment experiences
market equilibrium, the yield curve will be descending.

Selling Climax A flurry of sales causing a steep fall in stock

prices as investors unload their security holdings. Technical
analysts expect an upswing in prices after a selling climax has
taken place.

Semi-variable Costs The costs that vary with output though

not proportionately. Examples are repairs and maintenance
expenses.

Senior When prefixed to the word “security” or “debt”, the term

indicates a priority of claim of the security holders over earnings
and eƒƒi„ƒ in the event of liquidation, as compared to other
securities issued by a company.

Sensitive Index A statistical measure of the prices of 30

selected stocks of large, established and financially strong
companies traded on the Bombay Stock Exchange. For several
years, it was constructed on the basis of the we‚ui„
ge€s„evse„syx weighting method. The base-weighted aggregative
method assigns to the price of each component share, a weighting
PHV q 2Service Tax

corresponding to the number of shares outstanding. Therefore,

the index on a particular day would be the ratio of the aggregate
market capitalization of 30 stocks on that day to the average
market capitalization of the same stocks during the base period.
The base year is the financial year 1978-79. In the event of an
increase in the number of shares outstanding due to, say, a ‚sqr„ƒ
issue or conversion, proportional adjustments will be made to the
weightings and base year average market capitalization.
From September 2003, the index construction methodology
was changed to the free-float method under which the market
capitalization taken into consideration relates only to the
number of shares that are readily available for trading.
Accordingly, those stakes which are unlikely to feature in
trading, as for example, promoters' holding, government
holding and shares confined under a lock-in period will be
excluded from consideration. Consequently, the method
results in a more realistic representation of market trends.
Moreover, it improves the credibility of an index as a
benchmark for comparing €y‚„pyvsy performance. The free-
float factor is determined on the basis of data received
periodically by the exchange from the selected companies.
Although the index is popular, it is a narrower barometer of
market movements since it comprises only 30 stocks.

Service Tax A levy on the value of taxable services provided

to any person.
Based on the recommendations of the grivvser gywws„„ii on
tax reforms, a beginning was made with the Union Budget for
1994-95 to impose a 5 per cent service tax on stock brokerage,
general insurance and telephone connection. Its administration
is the responsibility of the Central Excise Department.
Subsequently, the tax has been extended to several other services,
as for example, advertising and courier service.

SGL Transfer Form An abbreviation for Subsidiary General

Ledger transfer form. It is a document that instructs the
 Shah Committee q PHW

€…fvsg hif„ yppsgi (PDO) to transfer qy†i‚xwix„ ƒig…‚s„siƒ

from the seller’s account to the buyer’s account.
The RBI has ushered in the Delivery versus Payment (DVP)
system in transactions in Government Securities and „‚ieƒ…‚‰
fsvvƒ. This will require the buyer’s authorization in the SGL form
for making payment to the seller. The system of simultaneous
transfer of funds and securities eliminates the risk of non-
payment by the buyer, besides increasing transparency.

Shah Committee A working group constituted by the Reserve

Bank of India (RBI) in May 1992, under the chairmanship of
AC Shah to suggest reforms relating to xyx-fexusxq
psxexgsev gyw€exsiƒ (NBFCs). The task of the group was to
carry out an indepth study of these companies and suggest
regulatory and control measures to promote their healthy
growth and operations. Its report was submitted in September
1992 and subsequently, the RBI acted upon some important
recommendations which are mentioned below:
1. There should be uniform regulatory norms for all categories
of NBFCs.
2. Regulation should be made applicable to incorporated deposit-
accepting entities having ‘Net Owned Funds’ (NOF) of at least
Rs 50 lakh (NOF is the sum of €esh-…€ ge€s„ev and free reserves
less accumulated loss, deferred revenue expenditure and
sx„exqsfvi eƒƒi„ƒ. In 1998, the RBI modified the definition
to include convertible preference shares, for certain purposes.
A further reduction would be made for investments in shares
and loans to subsidiaries, companies in the same group and
other NBFCs, in excess of 10 per cent of owned funds.).
3. New NBFCs should have a minimum NOF level of Rs 50
lakh.
4. Regulation should focus on eƒƒi„ƒ rather than vsefsvs„siƒ;
this view has resulted in a prescription of norms for ge€s„ev
ehi…eg‰, vs…shs„‰ , psxexgsev vi†i‚eqi, etc. For instance,
the group suggested capital requirement at 8 per cent of risk-
weighted assets which is comparable to that for banks.
PIH q 2Share Capital

Similarly, the minimum vs…shs„‰ ‚e„sy suggested was

10 per cent of total deposit liabilities. Examples of liquid
assets are bank deposits and investments in qy†i‚xwix„
ƒig…‚s„siƒ and e€€‚y†ih ƒig…‚s„siƒ.
5. Mandatory g‚ihs„ ‚e„sxq for all NBFCs by 1998.
The RBI implemented these recommendations in a phased
manner. For instance, the minimum period of deposits at NBFCs
was reduced to 12 months. A l so rs‚i-€…‚greƒi, finance and
equipment leasing companies are required to maintain liquid
assets as per a specified composition at 10 per cent of deposits.
The minimum Net Owned Funds for NBFCs seeking registration
was raised to Rs 2 crore with effect f r om April 1999.

Share Capital The amount raised by a company by issuing

€‚ipi‚ixgi or i…s„‰ ƒre‚iƒ. There are more specific terms
relating to share capital as mentioned below:

Authorized (Nominal) Capital The limit up to which

shares can be issued.

Issued Capital The amount sought to be raised by the issue

of shares; this cannot exceed the authorized capital.

Subscribed Capital The amount up to which investors have

committed to contribute.

Paid-up Capital The amounts actually paid by shareholders and

also credited as paid-up.

Shareholders’ Equity The xi„ ‡y‚„r of the equity

shareholders of a company. It comprises the pegi †ev…i of all
the i…s„‰ ƒre‚iƒ, ‚i„esxih ie‚xsxqƒ, and the surplus
received on issuing equity shares at a €‚iws…w.
 Short Interest q PII

Sharpe Ratio A summary, risk-adjusted measure of €y‚„pyvsy

performance devised by William Sharpe, which can be used to
evaluate the performance of w…„…ev p…xhƒ. It is the ratio of
the ‚sƒu €‚iws…w to the ‘Total Risk’ (standard deviation of
returns) of a portfolio and hence, is also referred to as the
‘reward-to-variability ratio’. The risk premium is the excess of
the average rate of return on a portfolio over the ‚sƒu-p‚ii
‚e„i of interest. Thus, the Sharpe Ratio (or the Sharpe Index),
S, is given by:
Average return - Risk-free
Risk premium on portfolio i rate r -R
S= = = i
Total risk Standard deviation of si
returns on portfolio i
The ratio (index), therefore, measures the excess return earned
on a portfolio per unit of its total risk. (See also „‚i‰xy‚ ‚e„sy.)

Shetty Committee A committee appointed by the Reserve

Bank of India (RBI) to review gyxƒy‚„s…w-based lending. The
committee which was headed by J.V. Shetty, Chairman, Canara
Bank, submitted its report in 1993. As a sequel to the report, the
RBI effected certain changes in the system of bank finance for
‡y‚usxq ge€s„ev, thereby imparting greater flexibility to the
system. For example, the limit for obligatory consortium
arrangement was raised to Rs 50 crore. Thus companies whose
requirements are below Rs 50 crore need not have a consortium;
they may deal with just one bank. Also, as an alternative to the
obligatory consortium arrangement, banks may arrange vyex
ƒ‰xhsge„syx. This could result in a more competitive pricing and
infuse greater discipline owing to a fixed repayment period.
In April 1997, it was decided that it would no longer be
obligatory for banks to form a consortium, even if the credit
limit of the borrower exceeded Rs 50 crore.

Short Interest The shares sold short and not covered as on a

particular date. Also termed ‘short position’.
PIP q 2Short Interest Theory

Short Interest Theory A proposition advanced by technical

analysts to forecast stock market movements. According to
this theory, ƒry‚„ ƒeviƒ are undertaken by discerning
investors. Hence, if the level of ƒry‚„ sx„i‚iƒ„ is high, it
presages a downturn in the market. (See also ƒry‚„ ƒeviƒ
gyx„‚e‚‰ y€sxsyx „riy‚‰ .)

Short Sale The sale of a security not owned. The intention is

to cover the sale subsequently, by repurchase at a lower price
and thereby earn a profit. Thus, a short sale is undertaken in
anticipation of a decline in the price of a share or another
security. However, it is a very perilous proposition; for, if the
share price zooms up after the sale, and the short seller cannot
borrow the shares for delivery, then he is forced to cover. The
loss so incurred could be colossal. In fact, when short sales take
place on a large scale, f…vvƒ may try to lay a trap for short sellers
by buying heavily. (See ƒ…iisxq „ri ƒry‚„ƒ and ƒ„ygu
vixhsxq ƒgriwi.)

Short Sales Contrary Opinion Theory A variation of the

ƒry‚„ sx„i‚iƒ„ „riy‚‰ which interprets a high level of ƒry‚„
sx„i‚iƒ„ in a contrary manner. According to this theory, heavy
ƒry‚„ ƒeviƒ signal future demand and hence, an uptrend in stock
prices can be expected. Hence, it is also named ‘Cushion Theory’.

Short-dated See he„ih.

Shorting-against-the-box A rihqsxq strategy that

involves the ƒry‚„ ƒevi of shares in order to lock in an
unrealized profit on a prior vyxq „‚exƒeg„syx in the same
stock. An illustration is provided in Appendix II.

SIDC/SIIC These are acronyms for State Industrial Development

Corporation and State Industrial Investment Corporation. These
 SIDBI q PIQ

institutions were established in various states in India in the

sixties and seventies, to accelerate the pace of industrialization.
Their scope of activities includes:
1. Identifying project ideas, preparing feasibility reports and
training entrepreneurs.
2. Providing industrial plots and sheds.
3. Grant of financial assistance by way of term loans and
participation in equity.

Single-Index Model A €y‚„pyvsy selection approach developed

by William Sharpe. It suggests using estimates of the relationship
between each security’s rate of return and the return on a market
index as an alternative to calculating the covariances of each pair
of securities as required by the we‚uy‡s„ wyhiv. The idea is to
drastically reduce the number of calculations needed in construct-
ing an efficient portfolio.

Sinking Fund The money accumulated by setting aside a certain

sum periodically, to facilitate the orderly retirement of an issue
of fyxhƒ or €‚ipi‚ixgi ƒre‚iƒ. In India, the requirement of
hifix„…‚i ‚ihiw€„syx ‚iƒi‚†i for hifix„…‚iƒ serves this
purpose.

Slack Season The period between May and October when

agricultural activity is comparatively lean, leading to easy conditions
in the psxexgsev we‚ui„ƒ. The lean season credit policy of the
Reserve Bank of India is announced at the start of this period.

Small Industries Development Bank of India (SIDBI) The

principal psxexgsev sxƒ„s„…„syx for the promotion, financing
and development of industries in the small-scale sector in India.
SIDBI was established by an Act of Parliament in October
1989. As the apex institution for the small-scale sector, it is
vested with the responsibility of co-ordinating the functions of
PIR q 2Sources and Uses Statement

all the institutions engaged in similar activities. SIDBI’s

activities include the following:
1. Dsƒgy…x„sxq and ‚ihsƒgy…x„sxq of bills arising from the
sale of machinery to, or manufactured by, businesses in the
small-scale sector.
2. Providing direct assistance as well as ‚ipsxexgsxq loans
extended to facilitate export of products.
3. Refinancing loans extended by primary lending institutions to
small-scale industrial enterprises.
SIDBI’s assistance is channelled through ƒ„e„i psxexgsev
gy‚€y‚e„syxƒ, SIDCs, commercial banks and others. ƒshfs has
also extended its financing activity into infrastructure development
and †ix„…‚i ge€s„ev.

Sources and Uses Statement The classification of fund

flows of a firm occurring during a specific period, into sources
and uses in a certain format. An increase in vsefsvs„siƒ or a
decrease in eƒƒi„ƒ is a “source” of funds, whereas a decrease in
liabilities or an increase in assets is a “use” of funds. Moreover,
funds from operations, namely after-tax profits and hi€‚igse„syx
are sources, while payment of hs†shixhƒ and repurchase of
shares issued, are uses.
This tool gives an insight into how the funds become available
and the manner in which they are deployed or expended. It shows
the share of internal and external sources in the flows, and their
utilization in creating assets, retiring labilities and paying dividends.
It could alert the management of a company to a possible we„…‚s„‰
mismatch of assets and liabilities. Besides, the statement is a
useful tool for planning and visualizing future fund flows.
The analysis may cover all assets and liabilities or it may
be limited to studying the change in long-term assets and long-
term liabilities with the residual figure showing the impact on
net ‡y‚usxq ge€s„ev, i.e., g…‚‚ix„ eƒƒi„ƒ minus g…‚‚ix„
vsefsvs„siƒ.
 Sovereign Wealth Fund (SWF) q PIS

Sovereign Bond A debt security that is issued by a country

raising funds from foreign investors. The purpose is to augment
the domestic sources of funds in order to finance various govern-
ment expenditures, including infrastructure projects. The inflow
of foreign exchange can also be useful in dealing with fevexgi
yp €e‰wix„ƒ problems.
Since it is the State that is borrowing in its own name, instead
of a state-owned or private organization, the security will sell at
a finer price as compared to issues of the other entities, How-
ever, the cost of such debt to the state depends on its ‘Sovereign
Risk’ or ‘Country Risk’ as assessed by the overseas g‚ihs„ ‚e„sxq
agencies.
The factors that are taken into consideration by prospective
issuers include the saving in interest cost as mentioned above,
the burden of servicing such debt and the probability of adverse
exchange rate movement. (See also …eƒs- ƒy†i‚isqx ‰sivh
g…‚†i.)

Sovereign Wealth Fund (SWF) An investment fund owned

by the government of a country and which has been created out
of fevexgi yp €e‰wix„ƒ surpluses, largely arising from oil
royalties and high commodity prices. In recent years, oil exporting
nations and emerging economies have accumulated huge foreign
exchange reserves, far in excess of what might be considered as
adequate to meet import requirements or to dampen capital flight.
Given the size of the reserves heaps, governments have
considered it desirable to go beyond the traditional low-risk low-
yield …ƒ „‚ieƒ…‚‰ fsvvƒ and actively invest the reserves. Thus,
SWFs seek to acquire long-term stakes in firms of economically
advanced countries, as a form of diversification coupled with
economic security from downturns in their countries, due to
commodity and oil cycles.
A Sovereign Fund may also be floated to assist state-owned
companies in acquiring oil, gas, coal and other raw material
ASSETS, which can help feed rapid economic growth. The
PIT q 2Spaced Maturity

creation of such a fund from India's foreign exchange reserves

is reportedly under the consideration of the Union Government.

Spaced Maturity A method of scheduling we„…‚s„siƒ in an

investment €y‚„pyvsy such that equal sums are invested in „swi
hi€yƒs„ƒ or securities of progressively increasing maturities. So,
for instance, if a portfolio is spread across maturities of one to
five years equally, a constant 20 per cent of the portfolio will
mature every year, which would be reinvested for the longest
maturity. Such a portfolio is termed 'Laddered Portfolio.'

Special Purpose Vehicle See ƒig…‚s„se„syx.

Specialist An important intermediary in stock exchanges in

the U.S. Specialists are appointed for the various stocks traded
at an exchange. They quote fsh and eƒusxq €‚sgiƒ with narrow
spreads, and this vital function of making a market imparts
vs…shs„‰ and continuity to stock exchange trading. (See
tyffi‚).

Specialty Fund A w…„…ev p…xh which focuses on a particular

industry or on companies in a specified geographical region.
For instance, a mutual fund may be promoted to cater to
investors in a ƒ…x‚sƒi sxh…ƒ„‚‰ or in companies based in a
high-growth economy. Some funds may concentrate on a
particular type of security, e.g., gyx†i‚„sfviƒ. In February
1994, Canbank Mutual Fund floated a unique fund, Canexpo
for investing mainly in export-oriented businesses. Similarly,
ICICI Power, another mutual fund, decided to focus on the
infrastructure sector including power and telecom.

Specified Shares These are certain stocks in which

transactions could be carried forward. (See fehve ƒ‰ƒ„iw.)
 State Financial Corporations (SFC) q PIU

Speculation An approach to investing that relies more on

chance and therefore, entails a greater risk. Speculation is
driven by an expectation of a high rate of return over a very
short holding period.

Sponsor A member of the y„g iˆgrexqi yp sxhse (OTCEI)

who is appointed by a company seeking a vsƒ„sxq on the
exchange, to assist it in raising funds through a direct €…fvsg
sƒƒ…i or a fy…qr„-y…„ hiev. The member who accepts the
sponsorship appraises the project and satisfies himself about its
viability and the promoters’ integrity, before proceeding with
the fund-raising programme. (See also eƒƒi„ wexeqiwix„
gyw€ex‰.)

Spot Market The transactions in which securities and foreign

exchange get traded for immediate delivery. Since the exchange
of securities and cash is virtually immediate (to be precise, the
settlement would take place within two working days), the term,
cash market, has also been used to refer to spot dealings.

Spread The difference between the rate of interest charged to

borrowers and the rate paid to lenders by a bank or psxexgsev
sxƒ„s„…„syx.

Squeezing the Shorts The tactic of hurrying short sellers in

a stock to cover their positions as the share price rises. On
occasions, this can cause the price of a share to zoom, thus
benefitting the buyers and hurting the short sellers.

State Financial Corporations (SFC) The term-lending

institutions set up in different states in India under the State
Financial Corporations Act, 1951. The main aim of SFCs is to
meet the medium-term and long-term financial requirements of
small and medium enterprises in their respective states so as to
promote regionally balanced economic development.
PIV q 2Statutory Liquidity Ratio (SLR)

Statutory Liquidity Ratio (SLR) The portion of net demand

and time vsefsvs„siƒ that ƒgrih…vih commercial banks must
invest in specified financial eƒƒi„ƒ such as „‚ieƒ…‚‰ fsvvƒ and
qy†i‚xwix„ ƒig…‚s„siƒ. The SLR indirectly serves as an instru-
ment of credit control, by reducing the monetization of the
hipsgs„ that would have taken place if funds from the banking
system were not statutorily pre-empted by the government sector.

Stock Index Futures Futures contracts based on broad stock

market indices. This vehicle is meant for investors and active
traders who have a forecast on the stock market’s direction, but
are unsure or unwilling to select specific stocks. So, investors who
are bullish could buy stock index futures, whereas those expecting
a market downturn may sell the contract. In essence, stock index
futures enable investors and speculators to take a position based
on their opinion about the market without actually selecting
individual stocks. The instrument may also be used to offset
unrealized or probable losses on a long or short position. In
general, a futures contract is an obligation to accept or effect
delivery as per the transaction. However, this obligation may be
discharged with an offsetting transaction by the last trading day.
With stock index futures, since each contract represents a
hypothetical €y‚„pyvsy of stocks, there is no physical delivery of
securities, and the difference in market value is settled in cash.
(See also Appendix II)

Stock Lending Scheme An arrangement under which

brokers, jobbers and we‚ui„ weui‚ƒ may borrow shares from
persons holding them but not intending to sell these in the
near future, so that delivery commitments can be met at the
stipulated time. The lender of the shares would ordinarily be
protected by gyvve„i‚ev such as a cash deposit. The shares
would be returned to the lender at the end of the agreed
period. Meanwhile, the borrower is bound to compensate the
lender for benefits such as hs†shixhƒ, bonuses or ‚sqr„ƒ that
 Straddle q PIW

may accrue when stock has been lent. When the scheme
operates smoothly it is likely to give a fillip to ƒry‚„ ƒeviƒ.
SEBI has stipulated that only approved intermediaries with a
specified xi„ ‡y‚„r may undertake securities lending, on
their own or on behalf of others. The framework has been
furnished by SEBI vide the ‘Securities Lending Scheme, 1997’.

Stock Split Adjustments effected in the pegi †ev…i of shares

and the number of shares outstanding, such that no change
occurs in the total €esh-…€ ge€s„ev. Stock splits are generally
associated with shares having a high face value and which corres-
pondingly trade at a higher price. By reducing the face value and
increasing the number of shares (for instance, 10 shares of €e‚
†ev…i Rs 10 each in place of each share of Rs 100), a company
hopes to bring down the market price to ensure continued
investor interest. In a ‘Reverse split’, a company increases the face
value and accordingly reduces the number of shares. This has
been the case with some companies in the U.S. where a very low
face value with a low market price had created a negative
impression on investors.

Stop Order An order to buy or sell a security with the objective

of minimizing a loss or protecting profit on a prior transaction.
The peculiarity is that a stop order becomes a we‚ui„ y‚hi‚
when the specified price is touched. Hence, the actual loss or
profit depends on the price at which the transaction gets executed.

Straddle A combination of a gevv and a €…„ y€„syx involving

the same security, at the same iˆi‚gsƒi €‚sgi and for the same
time period. The buyer of a straddle is speculating that the
underlying security’s price will deviate up or down significantly
before the options expire. Other combinations are a ‘Strip’
(two €…„ƒ and one gevv), ‘Strap’ (two calls and one put), and
a ‘Spread’ that involves the purchase of one option and the
sale of another, both on the same security. In a spread, the
PPH q 2Straight Line Depreciation

exercise prices or the iˆ€s‚e„syx he„iƒ may differ. ( See also

y€„syx).

Straight Line Depreciation See hi€‚igse„syx.

Striking Price See y€„syx.

STRIPS An acronym for Separate Trading of Registered Interest

and Principal of Securities. This technique enables an interme-
diary such as a brokerage firm or a bank to strip the gy…€yxƒ
from the €‚sxgs€ev of the fyxh so that the two can be traded
separately. For example, a three-year hifix„…‚i with coupons
payable semi-annually will have seven distinct cash flows viz.,
coupon payments at the end of every six months till we„…‚s„‰
and the principal payment at maturity. Accordingly, the cou-
pons can be sold to investors as psˆih hi€yƒs„ƒ falling due at the
end of 6, 12, 18, 24, 30 and 36 months, and the principal is sold
on a discounted basis, similar to a i‚y-gy…€yx fyxh. The
advant-ages to investors arise from the flexibility it offers to suit
cash flow needs and maturity requirements. For instance, banks
with short-term liabilities could invest in the stripped coupon-
security, while insurance companies and pension funds would
prefer the stripped principal-security. In India, GE Capital and
ABN Amro teamed up to use the technique for the first time,
for the former’s debenture issue.

Structured Debt Obligation (SDO) The technique of raising

loans through debt securities that carry special features which
enhance the investment quality of the instruments. Some
examples of such innovative features are:
1. The establishment of an escrow account into which regular
deposits are to be made by the borrower and which will be
supervised by the trustee.
 Subprime Crisis q PPI

2. Obtaining a repayment guarantee from the state government on

whose behalf an entity (e.g., state corporation) is raising funds.
3. Stipulating budgetary provisions by the state government to
cover each year’s debt obligations of the borrowing state
agency.
In India, some SDOs were arranged to enable cash-strapped
state governments to raise funds through their corporate entities.

Subordinate Debentures The hifix„…‚iƒ that explicitly

rank lower in terms of the priority of claim on earnings and
eƒƒi„ƒ compared to other loans taken by a company. For example,
the floating interest rate fyxhƒ issued by State Bank of India in
December 1993, are described in the prospectus as “subordinated
obligations of the Bank, subordinated to the claims of all other
creditors and also depositors of the Bank, as regards repayment
of principal and payment of interest”. Hence, the issue of
subordinate debentures by a company reinforces the position of
it s ƒixsy‚ debt holders.

Subprime Crisis The financial debacle of many lending

institutions in the U.S., and elsewhere, from 2006-07, as a
consequence of huge €y‚„pyvsy losses, especially on wy‚„qeqi
securities held and its perilous economic ramifications,
worldwide. The genesis of the crisis, according to Nobel
Laureate economist Joseph Stiglitz, lay in the easy money
policy of the Federal Reserve Board of the U.S., which was
intended to stimulate economic activity. A regime of low
interest rates coupled with exhortations to people to take on
variable-rate housing loans which were being pushed by slick
marketing, resulted in a significant growth in mortgage lending.
Due to relaxations in credit standards, the horde of borrowers
included many of doubtful creditworthiness, that is, below
prime. The mortgage loans were subsequently ƒig…‚s„sih and
sold to many banks and institutions, including rihqi p…xhƒ.
Flawed g‚ihs„ ‚e„sxqƒ also facilitated the sale of the securities.
PPP q 2Subsidy

The instruments were called Collateralized Debt Obligations

(CDOs) and some hedge funds had even borrowed to invest in
them.
With the passage of time, when interest rates began to rise,
causing the variable-rate loans to be re-priced upwards,
borrowers began to default in droves on seeing their repayment
burden escalate and their house prices plummet, as the housing
bubble burst. This behaviour wrecked the quality of the
securitized eƒƒi„ƒ held as investments, which, therefore, have
consequently come to be known as Toxic, or Troubled, Assets.
Media reports have placed the estimate of Toxic Assets held by
banks at over $1 trillion! India too experienced early tremors
caused by the crisis. International banks which had lent to
Hedge Funds with CDOs as gyvve„i‚ev began demanding
more we‚qsx money. To comply with the demand, Hedge
Funds sold off i…s„‰ ƒre‚iƒ of Indian companies to raise the
money. The big sell-off injected volatility in the Indian stock
market in the second half of 2007.
An interesting sequel to the crisis has been the recourse to
ui‰xiƒsex economics by governments across the world. It
manifested in interventions to bail out sinking psxexgsev
sxƒ„s„…„syxƒ and banks or effecting tax cuts, e.g., iˆgsƒi h…„‰
cuts in India, to help business revival. The rescue efforts have
caused government deficits and borrowings to bloat rapidly.
Therefore, policymakers are anxiously awaiting signs of
economic revival in order to begin unwinding the burdensome
'Fiscal Stimulus'. (See also, eƒƒi„ f…ffvi.)

Subsidy The money paid by the State or a public body to

producers to keep down the prices of commodities or services
at artificially lower levels.

Sunk Costs The costs that have already been incurred because
of decisions in the past. Consequently, decisions taken today
cannot vary nor reverse what has already happened.
 Swap q PPQ

Sunrise Industries The newly emerging industries holding a

promise of a bright future. These are businesses betting on
growth areas that have just appeared on the industrial horizon
and whose best years are ahead. Examples are solar devices and
biotechnology products.

Supplier’s Credit A short-term loan provided by a supplier

of goods to finance the purchase of his merchandise. Indian
companies utilize this facility to finance imports. Typically,
the importer opens a vi„„i‚ yp g‚ihs„ bearing a period of 180
days. The fsvvƒ yp iˆgrexqi drawn by the supplier covering
€‚sxgs€ev and interest are duly accepted and returned. These
accepted bills can be sold in the market if required. The
importer pays on the 180th day.
A bolder approach is to advance funds without a bank
q…e‚ex„ii. In this case, the international supplier takes on a
customer risk besides a gy…x„‚‰ ‚sƒu. As far as the importer
is concerned, he is exposed to currency risk and sx„i‚iƒ„ ‚e„i
‚sƒu, if interest rate is a floating rate. This may entail a need
to rihqi which adds to the cost. Despite this, however, a
supplier’s credit is likely to be a less expensive option.
Moreover, the protracted process of obtaining a term loan
from a bank or psxexgsev sxƒ„s„…„syx is a factor which favours
the choice of a supplier’s credit over a term loan.

Support Level A term from „igrxsgev exev‰ƒsƒ; it is the price

level at which a security stops declining because demand
outweighs supply. (See also ‚iƒsƒ„exgi vi†iv.)

Swap The exchange of financial vsefsvs„siƒ which may be in the

same currency or in different currencies. Swaps may relate to
ge€s„ev we‚ui„ƒ or to the foreign exchange market. They are
used to alter the stream of interest payment flows mostly from
fixed to floating or vice versa, with no €‚sxgs€ev obligations
changing hands in the case of an interest-rate swap. For
PPR q 2Swaption

instance, a company with a variable-rate liability may opt for a

swap with another borrower who has raised a fixed-rate loan.
Thus, the difference in the two interest payments would be
exchanged. A currency swap involves conversion of principal
and interest into another currency for the duration of the flows,
after which the principal sums are reconverted to the original
currencies.
An example of an interest rate swap is shown below.
Assuming that there are two companies, A and B, with the
former enjoying a superior g‚ihs„ ‚e„sxq which translates into
an interest cost advantage, a mutually beneficial swap could be
arranged as illustrated in the following table.

Company A Company B
1. Cost of fixed-rate loan 10.60% 11.70%
2. Cost of variable-rate Six-month Six-month
loan LIBOR + 0.20% LIBOR + 0.70%
3. Funds raised from the Fixed-rate Variable-rate
market loan @ 10.60% loan @ vsfy‚
+ 0.70%
4. Payments swapped A pays six-month B pays 10.70%
month LIBOR to
B to A.
5. Post-swap cost Six-month 11.40%
LIBOR — 0.10% (Fixed)
(Variable)
6. Saving in interest cost 0.30% 0.30%

Swaption An y€„syx to ƒ‡e€ vsefsvs„siƒ or receivables so as to

limit the interest burden or to maintain a certain level of
interest income respectively. The holder of the swaption has
the right (but no obligation) to enter into a swap by the
exercise date. A swaption facilitates rihqsxq in a situation of
uncertain interest rates. For instance, a borrower with
floating-rate debt who anticipates an increase in interest rates
may buy a ‘Payer Swaption’ thereby obtaining the right to
 Systematic Risk q PPS

convert the liability to a fixed one when rates rise above the
strike rate. Similarly, if an investor holding floating-rate
securities expects a decline in rates, then he may buy a
‘Receiver Swaption’. The terms payer and receiver indicate
the right with regard to the fixed interest. The cost of the
swaption is the €‚iws…w; as is the case with other options,
this up-front cost is the maximum that the swaption holder
can lose.

Sweat Equity Equity shares allotted to certain employees of a

company either at a discount or for consideration other than
cash, as a reward for providing know-how or sharing intellectual
rights or some other value addition to the company.

Switch Operation A type of transaction carried out in the

past by the Reserve Bank of India in the ƒigyxhe‚‰ we‚ui„
from time to time. It involved the purchase of one
qy†i‚xwix„ ƒig…‚s„‰ against the sale of another in order to
maintain a proper pattern of ‰sivhƒ. Such switching also
helped to maintain the varying needs of diffe-rent investors
insofar as scheduling we„…‚s„siƒ was concerned. However,
these operations had no impact on monetary aggregates and
hence were discontinued.

Synergy A notion of disproportionately higher financial

benefits expected by combining complementary businesses,
which would exceed the performance of the entities achieved
separately. For example, the wi‚qi‚ some years ago of the two
electrical equipment giants in Europe, namely eƒie and Brown
Boveri with individual strengths in marketing and R&D
respectively, was effected to reap the benefit of synergy.

Systematic Risk The portion of risk or variability that is

caused by factors which affect the returns on all securities.
PPT q 2Systemic Risk

Major political, economic and social phenomena, for instance,

would affect all stocks, which implies that systematic risk
cannot be eliminated by hs†i‚ƒspsge„syx. Therefore, it is also
termed ‘Undiversifiable ‚sƒu’. However, by diversifying
internationally, an investor can reduce the level of systematic
risk of a €y‚„pyvsy; the lack of coincidence between economic
cycles of different countries helps to achieve this. Systematic
risk of a financial eƒƒi„ is indicated by the fi„e coefficient. It
shows the sensitivity of return on a security or a portfolio to
return from the market. (See fi„e.)

Systemic Risk A hazard that has the potential to destabilize an

entire financial system, often originating in unbridled and
indiscriminate lending by banks or reckless ƒ€ig…ve„syx in, say,
hi‚s†e„s†iƒ. A collapse of one or a few borrowers or investors
could snuff out several creditor psxexgsev sxƒ„s„…„syxƒ, like a
row of falling dominoes, then trigger off a general loss of
confidence and eventually result in a financial meltdown.
n
 „

Take-out Financing A guarantee to a lending institution, say,

a bank, from another institution whereby the latter will,
subject to certain conditions, take over the loan or a part of it
after a certain period. The technique was pioneered in India by
the Infrastructure Development Finance Company for
infrastructure projects which are typically characterized by long
gestation periods. That gives rise to a mismatch between a
project's cash flow pattern and the usual terms of a bank loan,
especially with regard to the interest and repayment schedule.
Therefore, take-out financing aims at effectively stretching loan
maturities and resolving the timing mismatch described above.
The guaranteed takeover of a loan encourages banks to consider
lending more to the infrastructure sector.

Tandon Committee A study group set up by the Reserve Bank

of India (RBI) in 1974, to examine the system of ‡y‚usxq ge€s„ev
financing by banks prevalent at that time and to make suitable
recommendations on the same. The contribution of the committee,
headed by late Prakash Tandon, that stands out relates to:
1. The framing of norms for sx†ix„y‚‰ and receivables for 15
major industries.
2. Determining the amount of permissible bank finance.
The committee suggested norms, i.e., ceilings for inventory
and receivables which could be considered for bank finance.
The 15 industries included cotton and synthetic textiles, paper,
PPV q 2Tarapore Committee

cement, pharmaceuticals and engineering. Thus, for instance,

the norms proposed for the pharmaceutical industry were:
Raw materials : 2.75 months’ consumption
Stocks in process : 1/2 month’s cost of production
Finished goods : 2 months’ cost of sales
Receivables : 1.25 months’ sales
For determining the maximum permissible bank finance
(MPBF), the methods suggested were:
Method I : 0.75 (CA – CL)
Method II : 0.75CA – CL
Method III : 0.75 (CA – CCA) – CL
Here CA stands for g…‚‚ix„ eƒƒi„ƒ corresponding to the
suggested norms or past levels if lower, CL represents g…‚‚ix„
vsefsvs„siƒ excluding bank lending and CCA stands for the ‘Core
Current Assets’, i.e., permanent current assets. Method I and,
following the gry‚i gywws„„ii recommendations, Method II
have been used by banks in assessing working capital needs of
businesses, for the last several years. In October 1993, the RBI
infused operational autonomy by permitting banks to determine
appropriate levels of inventory and receivables, based on
production, processing cycle, etc. These lending norms were made
applicable to all borrowers enjoying an aggregate (p…xh-feƒih)
working capital limit of Rs 1 crore and above from the banking
system. However, the requirement of the g…‚‚ix„ ‚e„sy at 1.33
was retained.
Other recommendations of the Tandon Committee related
to the mode of lending and an information and reporting system
concerning the operation of the lending system. (See also
uexxex gywws„„ii.)

Tarapore Committee A committee on Capital Account

gyx†i‚„sfsvs„‰ (CAC) which was headed by SS Tarapore of the
Reserve Bank of India. Among other things, the committee was
 Taxable Equivalent Yield q PPW

asked to recommend measures for achieving CAC and to specify

the sequence and time-table for such measures.
Some of the recommendations in the report submitted in 1997
are:
1. A phased implementation of CAC over a three-year period, i.e.,
1997–2000.
2. The implementation of measures in each phase to be based on
certain preconditions or signposts.
3. The preconditions include a specified reduction in the q‚yƒƒ
psƒgev hipsgs„ of the Union Government, a nominal sxpve„syx
rate, full deregulation in the interest rates, reductions in the
geƒr ‚iƒi‚†i ‚e„sy and the level of xyx- €i‚py‚wsxq eƒƒi„ƒ
and monitoring of various macroeconomic indicators such as
the exchange rate and adequacy of reserves.
4. Progressively allowing individual residents, corporates and others
to invest overseas in financial eƒƒi„ƒ and industrial ventures.
5. Measures to develop and integrate the forex, wyxi‰ and ge€s„ev
we‚ui„ƒ, such as permitting all participants in the ƒ€y„ we‚ui„
to operate in the forward market.
A second committee on CAC headed by Mr. Tarapore gave
its recommendations in 2006. They included liberalization of
the limits for foreign institutional investment in qy†i‚xwix„
ƒig…‚s„siƒ and corporate fyxhƒ . (See also gyx†i‚„sfsvs„‰
(Full)).

Taxable Equivalent Yield The taxable return which, after tax,

equals a certain tax-free return. The taxable equivalent ‰sivh is
determined by the formula:
Tax-free rate of return
1 - Income tax rate applicable
For instance, a person who is in the 40 per cent tax bracket
would have to find a security yielding a taxable return of over
16.67 per cent in order to prefer it over one that pays a 10 per
cent tax-free return.
PQH q 2Technical Analysis

Technical Analysis A technique of stock analysis for timing

buy/sell decisions, so called because it is based on studies of the
market activity, particularly price and volume data. It has its
origins in the geƒ„vi-sx-„ri-es‚ approach. The basic premise of
technical analysis is that stock prices tend to move in trends that
persist for sometime and so, an analysis of recent market data
can be used to detect emerging trends and predict future price
behaviour. Therefore, the endeavour is to forecast the direction
of the market price of a share or the market as a whole, in the
short run. The underlying logic of focussing on the future market
price is—an object is worth only what someone else will pay for
it. Technical analysts employ a dazzling array of tools and theories
including, notably, gre‚„sxq, the hy‡ „riy‚‰, gyxpshixgi sxhiˆ,
wy†sxq e†i‚eqi, and psv„i‚ ‚…vi, to name a few.

Technical Indicators These are certain measures of stock

market activity that are used to appraise the technical condition
of the market. The objective is to discern the likelihood and
direction of a change in market prices. Examples of technical
indicators are market volume and ƒry‚„ sx„i‚iƒ„.

Teji A popular Indian expression for a bullish phase in stock

prices, or for a f…vv market.

Teji Option An indigenous type of gevv y€„syx traded in

clandestine deals mainly in Mumbai and Kolkata.

Term Deposit See psˆih hi€yƒs„.

Term to Maturity The period remaining till a security

becomes due for ‚ihiw€„syx.

Terminal Value The value at a future date of cash inflows

that are invested. This future date signifies the end of the
holding period for a financial eƒƒi„.
 Toll Bond q PQI

Thin Market The term refers to infrequent trading and hence

poor vs…shs„‰ associated with certain securities.

Tight Money Policy The use of instruments of monetary

control for the express purpose of curbing the expansion of
credit, by making it dearer. The measures employed could involve
one, or a combination, of the following:
1. Raising the fexu ‚e„i.
2. Raising the geƒr ‚iƒi‚†i ‚e„sy or the ƒ„e„…„y‚‰ vs…shs„‰
‚e„sy.
3. y€ix we‚ui„ y€i‚e„syxƒ to effect a contraction in the level
of reserves with the banks.
4. Increasing interest rates.
5. Quantitative and selective credit controls.
6. wy‚ev ƒ…eƒsyx.

Time Deposit A deposit made at a bank for a specific period;

also called a ‘Fixed Deposit’.

Tobin Tax A small tax advocated on all foreign exchange transac-

tions, with the idea of discouraging speculative short-term trades
that are intrinsically volatile in nature.
The tax owes its name to Nobel Laureate James Tobin who
proposed it years ago. The prime argument for the tax is that it
will discourage speculative transactions which account for around
four-fifths of the total trading volume. Additionally, it will yield
very large revenues to governments. Critics, however, have
countered the idea by saying that a tax of 0.2 per cent or even
0.5 per cent is not sufficiently potent and that transactions
will migrate elsewhere, when the tax is levied.

Toll Bond An indigenous version of the ‚i†ix…i fyxh which

provides for payment of interest and principal from the inflows
on a specific project such as a port, bridge or other infrastructure
schemes. The toll bond was engineered in India by Infrastructure
PQP q 2Total Income

Leasing and Financial Services Limited; it was issued to

mobilize funds for the Rao-Pithampur Road in Madhya
Pradesh. It was estimated that the toll charges from vehicles
using the road would be sufficient to pay the coupon and
redeem the bonds.

Total Income The amount of income that is subject to tax

after taking into consideration permissible deductions.

Tracking Error See sxhiˆ p…xh.

Trade Credit The facility of deferred payment on the purchase

of materials or services, which appears in the buyer's fevexgi
ƒrii„ as accounts payable. It constitutes an important source of
short-term funds for the purchaser of goods or services.

Treasury Bill (T-Bill) A short-term debt instrument of the

Government of India. This security bears no hipe…v„ ‚sƒu and
has a high degree of vs…shs„‰ and low sx„i‚iƒ„ ‚e„i ‚sƒu in view
of its short term. The instrument is negotiable and is issued at a
discount from the pegi †ev…i. At we„…‚s„‰, the investor
receives the face value and hence the increment constitutes the
interest earned. Two types of T-Bills were issued in India, by the
Reserve Bank of India (RBI), on behalf of the government:
1. Ad hoc T-Bills (or Ad hocs) of 91 days maturity (which were
non-marketable) to the RBI to replenish the Central Govern-
ment’s cash balance.
2. Ordinary T-Bills “on tap” that are taken up mainly by banks,
for short-term investment or to comply with statutory
requirements.
For several years, T-Bills were issued on tap at a fixed hsƒgy…x„
of 4.60 per cent per annum. The purpose behind the low rate was
to control the burden of interest charges. However, the system
caused large-scale monetization of government debt. Financing
 Treasury Bill (T-Bill) q PQQ

government expenditure by issuing Ad-hoc Bills to the RBI

caused an increase in the outstanding ‚iƒi‚†i wyxi‰, i.e., money
created by the RBI. This situation was compounded by the
‚ihsƒgy…x„sxq of tap T-Bills by banks with the RBI. To control
such monetization, the government resorted to auctions of 182-
day T-Bills from November 1986, 364-day T-Bills from April
1992, and 91-day T-Bills from January 1993 (in addition to the
tap bill). The idea was to improve the ‰sivh, so as to attract
investment from sources other than the RBI.
There have been major changes with regard to T-Bills:
(a) An agreement was signed between the Finance Ministry
and the RBI in September 1994 to limit the net issue of
Ad hoc T-Bills, with the express objective of phasing them
out within three years.
(b) Discontinuation of the issuance of Ad hocs and tap T-Bills
from April 1997. The former has been substituted by a
system of ‡e‰ƒ and wiexƒ eh†exgiƒ to the Union Govern-
ment, with specific limits.
(c) Conversion of outstanding Ad hocs and tap Bills as on March
31, 1997 into special securities, bearing an interest rate of
4.60 per cent per annum and having an indefinite life.
(d) Issue of 14-day Intermediate T-Bills from April 1997 to serve
as investment vehicles exclusively for State Governments,
foreign gix„‚ev fexuƒ and other specified bodies.
(e) Proposed introduction of 28-day and 182-day (not issued
since April 1992) Bills, so as to promote the emergence of a
‰sivh g…‚†i for short-term ‚sƒu- p‚ii securities.
(f ) Introduction of the practice of notifying amounts in the
case of all T-Bill auctions.
(g) The proposed use of uniform price auction method in the
case of 91-day T-Bills, to eliminate the problem of “‡sxxi‚’ƒ
g…‚ƒi”.

It was also decided that 14-day and 91-day Bills would be

auctioned weekly, whereas 182-day and 364-day Bills would be
auctioned fortnightly. Further, the notified amounts were to be
PQR q 2Treasury Stock

pre-announced for the whole year, although the discretion to

change the amounts would rest with the RBI.
The auction of 14-day and 182-day T-Bills which had com-
menced, was discontinued from May 2001. (See also Appendix I.)

Treasury Stock The equity shares repurchased by the issuing

company. Companies in the U.S., undertake treasury stock opera-
tions as an alternative to paying cash dividends and for other
reasons—the shares could be used for eg…sƒs„syxƒ, stock option
plans or other purposes. In India, however, the Companies Act
1956, vide Section 77, forbade treasury stock operations.
In 1998, SEBI granted permission to companies to undertake
treasury stock operations, also known as “Buy back” and subseq-
uently several companies proceeded to do so.

Treasury Management The management of cash inflows

and outflows by an organization. These flows originate from a
variety of sources, viz., an organization’s operations, its inward or
outward remittances involving foreign currency, flows relating to
investments undertaken or liquidated and flows as a consequence
of funds mobilized or pertaining to a redemption programme.

Treynor Ratio A summary measure of €y‚„pyvsy performance

suggested by Jack Treynor which relates the ‚sƒu €‚iws…w to
the portfolio’s ƒ‰ƒ„iwe„sg ‚sƒu. It is calculated by dividing the
risk premium by the systematic risk of a portfolio and is also
termed the ‘reward-to-volatility ratio’. The risk premium is
the excess of a portfolio’s average rate of return over the ‚sƒu-
p‚ii ‚e„i of interest. A portfolio whose index is higher than
another’s has performed better, relative to the systematic risk.
Hence for the Treynor Index, T, is given by:
Risk premium
T =
Sy stematic risk
 Trust Deed q PQS

Average rate of - Risk-free

return on portfolio p rate r p- - R
= =
Beta of protfolio p bp

Trilemma The constraint on a country of being able to choose

only two out of the following three policy choices:
1. A fixed exchange rate.
2. Free flow of international capital.
3. An independent wyxi„e‚‰ €yvsg‰.
As an example, if a country decides to have a fixed exchange
rate policy along with an independent monetary policy, then,
clearly, it will need to curb capital flows as the latter can play
mischief with the exchange rate and also affect the growth of
money supply. To elaborate, a substantial inflow of foreign funds
within a short period could cause the domestic currency to
appreciate and the money supply to expand, as the foreign funds
get converted into the domestic currency and flow into the
financial system. The above constraint in policy options is also
termed 'Incompatible Trinity'.

Trust Deed A legal document containing covenants that establish

the duties, obligations and rights of the various parties to an issue
of hifix„…‚iƒ . Also known as the ‘Indenture’, the deed is
executed between the issuing company and a hifix„…‚i „‚…ƒ„ii
who is vested with the responsibility of safeguarding the interests
of the debenture holders. Among other things, the covenants
relate to creation of security and its inalienation during the term
of the debentures, timely payment of the debt obligations and
creation of the hifix„…‚i ‚ihiw€„syx ‚iƒi‚†i, if applicable. In
India, banks and psxexgsev sxƒ„s„…„syxƒ act as trustees for which
they receive fees.
n
 …

Underwrite It means to contractually guarantee subscription

to shares or other securities. An underwriting arrangement
serves as a back-up in the event of inadequate subscription to a
€…fvsg sƒƒ…i. In India, wi‚grex„ fexui‚ƒ, stockbrokers, banks
and psxexgsev sxƒ„s„…„syxƒ offer underwriting commitments
and receive commission on the amount underwritten. In some
Western countries, underwriting may alternatively mean the
purchase of securities from a company by sx†iƒ„wix„ fexui‚ƒ,
who subsequently sell it to investors. The price risk is thus
assumed by the intermediaries. In the context of insurance, the
term, underwriting refers to the function of assuming the risk
of financial loss due to death or a mishap, in return for €‚iws…w.
(See also fiƒ„ ippy‚„ƒ feƒsƒ.)

Unencumbered Securities The securities against which no

loan is outstanding.

Universal Banking See psxexgsev ƒ…€i‚we‚ui„.

Unsecured Debenture A long-term debt instrument which is

not secured by specific gyvve„i‚ev. The status of the holders is
comparable to that of general creditors; in case of default, their
claims will be settled by the sale of property not specifically
pledged, or from any balance remaining after settling the claims
of secured debt holders.
PQV q2Unsystematic Risk

Unsystematic Risk A risk that is unique to a firm or industry.

The returns on an eƒƒi„ can be affected by occurrences such as
a labour strike, changes in consumer preferences, or even wrong
management decisions. The adverse impact of any such occur-
rence would be confined to one or a few firms. Therefore, these
unsystematic variations occur independently of broad price
movements in the market. By having a diversified €y‚„pyvsy,
it is possible to neutralize unsystematic risk, which is also there-
fore termed, ‘Diversifiable Risk’. Generally, firms which are
less vulnerable to macroeconomic changes, as e.g., those manu-
facturing consumer non-durables (e.g., Hindustan Unilever and
Colgate) would have less ƒ‰ƒ„iwe„sg ‚sƒu and a higher degree of
unsystematic risk.

Usance Bill A fsvv yp iˆgrexqi with a fixed we„…‚s„‰. For

example, if the time stipulated is 120 days, it means that it is
payable on presentation at the end of the period specified.

Uses of Funds The appropriation of funds toward the creation

of eƒƒi„ƒ or payment of vsefsvs„siƒ and hs†shixhƒ. (See also
ƒy…‚giƒ and …ƒiƒ ƒ„e„iwix„.)

n
 †

Vaghul Committee A working group on the wyxi‰ we‚ui„ in

India, appointed by the Reserve Bank of India (RBI) in 1986. It
was headed by N Vaghul, Chairman, ICICI. Some of its recom-
mendations for developing the money market were:
1. Deregulation of administered interest rates.
2. Introduction of gywwi‚gsev €e€i‚ (CP) and later, gi‚„spsge„i
yp hi€yƒs„ (CD).
3. Activating the ƒigyxhe‚‰ we‚ui„ by establishing an institutional
intermediary to deal in money market instruments.
As a sequel to the report, some very significant changes were
ushered in by the RBI. These include the introduction of money
market instruments such as CDs and CPs at market-determined
rates and establishment of the hsƒgy…x„ exh psxexgi ry…ƒi yp
sxhse vsws„ih (DFHI).

Value at Risk (VaR) A measure of risk that indicates the maxi-

mum amount at stake, that is, the maximum loss that an entity
such as a bank could incur on its exposures at a point in time,
determined at a certain confidence level. For example a VaR of
Rs 25 lakh at a confidence level of 95 per cent for a certain bank
means that the amount is the maximum loss that the bank is
expected to incur and that there is only a small chance (5 per
cent) that the loss may exceed Rs 25 lakh. Apart from banks, VaR
can be used by corporates for their portfolios, especially in
„‚ieƒ…‚‰ wexeqiwix„, and also by intermediaries in hi‚s†e„s†iƒ
trading.
PRH q 2Variable Cost

Variable Cost The expenses that vary proportionately with the

level of production activities or volume of output of any business.
Examples include materials, electricity, and lubricants. Hence,
ordinarily, the we‚qsxev gyƒ„ of a unit of output is the increase
in total variable cost entailed by the additional unit, i.e., direct
material, direct labour, direct expenses and certain overheads.

Variable Rate Mortgage See wy‚„qeqi.

VAT An acronym for Value Added Tax. As the name suggests,

the tax is collected at various stages of production as each
processing unit or business pays on the additions it makes to
the value of a product or service.

Venture Capital The long-term financial assistance to projects

being set up to introduce new products/inventions/innovations
or to employ or commercialize new technologies. Thus, venture
capital entails high risk but has the promise of attractive re-
turns. It is, therefore, also known as ‘Risk Capital’. The role of
venture capital institutions is very important to the economic
growth of a nation. Because of their assistance, new entrepre-
neurs and busi-nesses spring up and contribute significantly to
the total wealth of a nation. In India, such institutions have
been set up at the national and state levels. Examples include
Technology Development and Information Company of India
Limited (TDICI), Risk Capital and Technology Finance Corpo-
ration Limited (RCTFC) and Gujarat Venture Finance Limited
(GVFL). The first two have been renamed as ICICI Venture
Funds Management Company Limited and IFCI Venture Capi-
tal Funds Limited.

Viability Gap Funding (VGF) An incentive scheme for infra-

structure projects whereby the Central Government offers a
grant, or a waiver of duties or taxes, up to a certain percentage
of the capital cost of a project, to promoters of those projects
 Viability Gap Funding (VGF) q PRI

that are unviable under a certain user charge regime. In the case
of certain projects, there may be either a restraint on charging
economic user fees, say, tolls or electricity tariffs, or an unwill-
ingness of users to pay the same. Under such circumstances, an
incentive would be needed to attract private capital so as to offer
the prospect of an adequate rate of return. In contrast, though,
in projects where private promoters are confident of earning
sufficient profits even with prescribed user fees, a 'Negative
Grant' (or, a 'Negative Bid') could be offered by them, which
is actually a payment to the government or public authority to
secure the right to build and operate a project. As an example
Larsen & Toubro paid the National Highways Authority of
India, a sum of Rs. 4710 million as negative grant to bag the
Vadodara-Bharuch highway project.
It is expected that the VGF scheme may be extended to
facilitate creation of physical infrastructure in the health and
education sectors.
n
 ‡

Warehousing Transactions The execution of an order

involving a large block of financial securities, in parts as opposed
to a single trade. It is considered advantageous to brokers on the
grounds that it reduces both the risk of price variation and
volume of paperwork, especially issuance of contract notes.

Warrant An instrument issued by a company that carries a

right to buy a specified number of shares at a stated price from
the company, within a stipulated period. For instance a warrant
of Gujarat Narmada Valley Fertilizers Company, issued on
October 15, 1992 entitled its holder to acquire one share of the
company at Rs 35 after 12 months, but by November 13, 1993.
Warrants usually originate as “sweeteners” to an issue of debt
instruments or other securities. The idea is to induce a good
subscription by the investors. A warrant can trade separately in
the ƒigyxhe‚‰ we‚ui„ and the prospects of a high return on a
modest investment is what makes it an attractive y€„syx. (See
also py‚w…ve †ev…i yp e ‡e‚‚ex„.)

Wash Sale A sham sale, transacted to register a capital loss for tax
benefits, since the security is bought back almost immediately.

Ways and Means Advances (WMA) The short-term loans

granted by the Reserve Bank of India (RBI) to state governments,
to enable the latter to overcome a temporary mismatch in cash
PRR q 2Weather Derivatives

flows. Such assistance is intended to help them to tide over

temporary difficulties caused by an unexpected shortfall in
receipts. The RBI is empowered to grant ways and means
advances to the central and state governments for a term of
three months. The amount of advance varies from state to state,
and is a multiple of the balance maintained by a state with the
RBI. Besides this clean advance or “Normal” WMA (i.e., not
requiring gyvve„i‚ev), a state government may seek financial
accommodation on the strength of the central qy†i‚xwix„
ƒig…‚s„siƒ it holds. This is termed “Special” WMA. Over the
years, the total limits for ways and means advances under clean
and secured basis have been progressively increased, keeping in
view the higher volume of cash flows and transactions, versus
the imperatives of wyxi„e‚‰ €yvsg‰; the latter aspect impels
the RBI to closely monitor the utilization of this credit facility
and also charge penal interest on y†i‚h‚ep„ƒ. Further, in
extraordinary circumstances, e.g., a natural calamity, the RBI
may allow an additional special ways and means advance. The
scheme of WMA to state governments has been revised from
March 1999. The salient features of the changes include an
increase in WMA limits, liberalization of Special WMA and a
stricter y†i‚h‚ep„ regime. Pursuant to an agreement between
the RBI and the Government of India in 1997, the RBI extends
WMA to the Central Government, subject to limits set by the
RBI. (See also „‚ieƒ…‚‰ fsvv.)

Weather Derivatives A hi‚s†e„s†i, as for example, an

y€„syx or a p…„…‚iƒ contract in which the underlying is an
index of the weather, e.g., temperature. Such contracts could
be used to hedge against the risk of a lower output or volume
of sales. For instance, a hotel owner may be concerned about
low occupancy during the forthcoming winter owing to very
severe weather. Accordingly, the hotelier may decide to hedge
with weather derivatives.
 Working Capital q PRS

Whole Life Insurance A type of life insurance that provides

protection throughout the entire life of the person insured.
€‚iws…wƒ are spread over the life of the insured and hence this
policy is least expensive.

Winner’s Curse The event of being a successful bidder in an

auction (e.g., for „‚ieƒ…‚‰ fsvvƒ) as a consequence of having bid
a very high price, which turns out to be a drawback. This is because
securities so acquired fetch a lower price when sold, thus resulting
in a loss to the bidder. Therefore, fear of the Winner’s Curse
prompts bidders to quote somewhat lower prices at auctions.
Thus, this type of behaviour is detrimental to the fund-raising
operations of a Government.

Working Capital The funds deployed by a company in the form

of cash, sx†ix„y‚siƒ, eggy…x„ƒ ‚igis†efvi and other g…‚‚ix„
eƒƒi„ƒ. The sum total of the funds so employed is termed ‘Gross
Working Capital’. The term ‘working capital’ generally means ‘Net
Working Capital’, i.e., the excess of g…‚‚ix„ eƒƒi„ƒ over g…‚‚ix„
vsefsvs„siƒ.

Net Working Capital = Current Assets – Current Liabilities

Current assets are built up with the help of short-term and
long-term funds. Short-term sources include „‚ehi g‚ihs„,
bank finance and bills payable. These are current liabilities,
repayable within a year. Hence, working capital or better still,
net working capital can be understood as the portion of current
assets financed by long-term funds such as loans, ƒre‚i ge€s„ev
and ‚i„esxih ie‚xsxqƒ.
n
 ˆ

XB or XD or XR The symbols that sometimes appear in stock

market quotations to indicate that a stock is trading ex-fyx…ƒ (XB)
or ex-hs†shixh (XD) or ex-‚sqr„ (XR) respectively. (See also iˆ.)
n
 ‰

Yield The return earned on an investment, usually expressed as

a percentage. There are specific measures of yield to deal with
different securities and situations as explained in Appendix I.

Yield Curve A graphic representation of the pattern of ‰sivhƒ

on a specific date for fyxhƒ differing only in terms of current
maturity. Hence, the yield curve is a graphic representation of
the term structure of interest rates. For instance, a yield curve
could be plotted on a particular day for central qy†i‚xwix„
ƒig…‚s„siƒ of varying maturities. The following data appeared in
the “Money Manager” (Business Standard ) on August 3, 1995.

Term (years) to maturity on ‰sivh „y we„…‚s„‰ (%)

Government Securities as on
March 31, 1995
1 11.23
2 11.73
3 12.23
4 12.47
5 12.71
6 12.77
7 12.83
8 12.88
9 12.94
10 13.00
PSH q 2Yield Curve

The above term structure of interest rates assumed as pre-

vailing on March 31, 1995, can be displayed in the form of a
yield curve, as shown below:
Yield

Year

Yield curves can take different shapes depending upon the

conditions prevailing and the outlook for the psxexgsev
we‚ui„ƒ at any point of time.
Yield

Yield

Term to Maturity Term to Maturity

Upward-sloping yield curve Downward-sloping yield curve

The yield curve reflects the expectations generally prevailing

about interest rates. According to the iˆ€ig„e„syxƒ „riy‚‰,
long-term interest rates are averages of short-term rates, both
actual and observed today, and expected future short-term rates.
This theory can be of help in deriving expected future short-term
rates.
 Yield to Maturity q PSI

The data given below indicate various interest rates

(hypotheti-cal), from which the short-term one-year rate
expected in the fifth year, is to be derived.

Year Observed long-term rate (%) Actual & expected

on 5-year note short-term rates (%)
1 14 11
2 12
3 13
4 14
5 ?

The relationship can be expressed as

1 + pR5 = [(1 + pR1) (1 + er2) (1 + er3) (1 + er4)
(1 + er5)]IGS
pR5 indicates the prevailing five-year rate, pR1 stands for the
current 1-year rate and eri (i = 2, …, 5) represents the expected
future one-year rates. So,
1.14 = [(1.11) (1.12) (1.13) (1.14) (1 + er5)]IGS
er5 = 20.23%
That is, the (implicit forecast) one-year rate expected to
prevail in the fifth year, that begins four years hence, is 20.23
per cent.

Yield to Maturity The return earned by an investor on a

hifix„…‚i or fyxh held till we„…‚s„‰ . It is, therefore, the
hsƒgy…x„ ‚e„i which equates the €‚iƒix„ †ev…i of a security’s
inflows to its purchase price. The peculiarity with this measure
is that it contains an implicit assumption that the periodic
inflows are reinvested at a rate equal to the yield to maturity.
(See also Appendix I and ‚shsxq „ri ‰sivh g…‚†i.)
n
 

Zero-base Budgeting A rigorous method of drawing up

f…hqi„ƒ in which the premise is that expenditures will be zero,
and so allocations are made thereafter, only upon a justification
of the true requirements. Thus, this method does not consider the
previous year’s allocation, but instead, imposes an onerous burden
of justifying any expenditure whose approval is sought. In the
process, it forces administrators or managers to critically appraise
ongoing programmes and activities; this review could lead to
considerable economy in inessential expenditure.

Zero-coupon Bond A fyxh that bears a zero gy…€yx ‚e„i

and hence is issued at a price substantially below its pegi †ev…i.
At we„…‚s„‰, an investor receives the face value. So, the return
consists of the hsƒgy…x„, i.e., the excess of face value over the
issue price. Thus, zero-coupon bonds are a sub-set of the group
of hii€ hsƒgy…x„ fyxhƒ. The advantage with this security to an
investor is that, he does not have to worry about reinvestment,
since there are no periodic inflows. Similarly, a company need
not bother about meeting interest obligations at regular
intervals, and yet would obtain tax deduction.
A few companies in India have issued such securities especially
zero-coupon gyx†i‚„sfviƒ. IDBI and SIDBI too have issued the
zero-coupon variety of deep discount bonds. An interesting
development was the issue of five-year zero-coupon bonds by
the Government of India by auction, in January 1994.
PSR q 2Zero-coupon Yield Curve

Zero-coupon Yield Curve The pattern of yields on a given

day for i‚y-gy…€yx fyxhƒ of different maturities. Such a ‰sivh
g…‚†i reflects the true time value of money, since with coupon-
bearing bonds, a portion of the return is realized by way of
coupons received at periodic intervals prior to maturity. In the
absence of zero-coupon bonds, an alternative basis for
constructing the zero-coupon yield curve would be data on
yields on ƒ„‚s€ƒ.
n
 APPENDIX I

Calculating the Yield

The return on a security is computed according to the type of instru-

ment and other relevant aspects. In what follows, illustrations are
given for ascertaining the yield in the following cases:
1. MONEY MARKET instruments
2. BONDS /DEBENTURES
3. EQUITY SHARES /MUTUAL FUNDS

1. Money Market Instruments

Bond-Yield Equivalent
Securities such as TREASURY BILLS and COMMERCIAL PAPER are sold
at a DISCOUNT from the FACE VALUE. The amount by which the
face value exceeds the issue price constitutes the return and it is
received at MATURITY. Therefore, although the discount
percentage is known, it is essential to determine the true yield
according to the formula given below:
Yield per annum (%)
Face value - Issue price 365
= ¥
Issue price Term to maturity
As an illustration, at the 364-day T-Bill auction held by the
Reserve Bank of India on May 10, 1995, 2 0 BIDS for Rs 140 crore
were received. Out of these, it was reported that 16 bids for Rs
101 crore were accepted up to a cut-off price of Rs 88.89. This
means that the amount was raised at interest rates of 12.5 per
cent and less, as shown below:
Yield per annum = 100 - 88.89 ¥ 365 = 12.53%
88.89 364
The yield calculated above is the ‘Bond-Yield Equivalent’, which
facilitates a comparison with the yield on coupon type issues.
256 q Appendix I

2. Bonds/Debentures

(a) Yield to Maturity

Ignoring brokerage, the YIELD TO MATURITY, k, to an investor
who has acquired a BOND at the market price (MP) and holds it
till maturity, n, is calculated thus:
MP = CR ¥ PVAF (k%, n) + FV ¥ PVIF (k%, n)
Where FV is face value, CR is coupon receipt,
PVAF is present value of annuity factor and
PVIF is present value of interest factor.
( S ee Appendix VI.)
Solving for k accurately through a trial-and-error method will
give the yield. For semi-annual rates, the replacements k = k/2
and n = 2n have to be made in the above equation.
Suppose a bond having a face value of Rs 100, a life of seven
years and bearing a coupon of 16 per cent paid semi-annually, is
trading in the market at Rs 88. Then, the present value of flows
at a trial rate of 20 per cent is:
8 ¥ PVAF (10%, 14 yrs.) = 8 ¥ 7.3667 = 58.93
100 ¥ PVIF (10%, 14 yrs.) = 100 ¥ 0.2633 = 26.33
85.26
Similarly, the present value of flows at a rate of 18 per cent
is Rs 92.21. Thus the range within which the yield lies has been
identified as between 18 and 20 per cent.
92.21 88 85.26
18% YIELD 20%
So, by linear interpolation, the answer is computed thus:
Yield to maturity

= 18% +
FG (92.21 - 88) ¥ (20% - 18%)IJ = 19.21%
H (92.21 - 85.26) K
(b) Holding Period Yield
The above answer implicitly assumes that the coupons received
semi-annually are reinvested at a rate equal to the YIELD TO
 Appendix I q 257

MATURITY. How does one deal with a situation where the

REINVESTMENT RATE may be different? For instance, modifying the
above problem, let’s say that the investor holds the security for
only three years (and not till maturity) and sells it at Rs 95.
During the three years, the coupons are reinvested in an account
bearing interest at 14 per cent compounded semi-annually. Here,
the HOLDING PERIOD YIELD can be calculated by the formula:
TV
HPY = n -1
IO
where HPY = Holding period yield,
TV = Terminal value of the investment,
IO = Initial outlay, and,
n = Duration of the holding period.
The terminal value is determined by the relation
Cumulative value of Price at which the
TV = +
coupons reinvested security is sold
Now, since six coupon receipts accrue starting six months
hence, their cumulative value is
8(1.07)5 + 8(1.07)4 + 8(1.07)3 + 8(1.07)2 + 8(1.07)1 + 8(1.07)0
Therefore, TV = 8(7.1533) + 95 = 152.23
152.23
Thus HPY = 3 - 1 = 20.04% per annum
88

3. Equity Shares/Mutual Funds

Holding Period Yield

A holding period yield could be computed for shares, taking into
account, both DIVIDENDS a n d CAPITAL GAINS. For a period of one
year, it is derived by the formula:
D1 + (P1 - P0 )
HPY =
P0
where D1 = Dividends earned at the end of the year
P1 = Price at which share is sold at the end of the year
258 q Appendix I

P0 = Purchase price
Thus, if a share of (say) Synergy Motors is bought at Rs 30 and
sold at Rs 37 at the end of one year, after receiving a dividend
of Rs 2, the holding period yield is
2 + (37 - 30)
= 0.3 or 30%
30
The Holding Period Return (HPR) is
HPR = 1 + HPY,
which is 1.30 in our example. It indicates return as a ratio of the
original investment and is useful for expressing negative yields.
Where the holding period exceeds one year, a series of calcula-
tions are entailed. Extending the above illustration, let’s suppose
that the share is held for two years. At the end of the second
year, a dividend of (say) Rs 2.50 is received and the share is then
sold at Rs 42. The answer would be determined through the
following steps:
D1 + (P1 - P0 )
HPY 1 = = 0.3
P1
D 2 + (P2 - P1 ) 2.50 + (42 - 37)
HPY 2 = = = 0.203
P1 37
From the above intermediate numbers,
HPR1 = 1 + HPY1 = 1.30, and HPR2 = 1 + HPY2 = 1.203
Therefore, the holding period yield per year for the two-year
period is:
HPY = HPR1 ¥ HPR 2 - 1 = 1.30 ¥ 1.203 - 1 = 25.05%
As is the case with YIELD TO MATURITY, this measure implicitly
assumes reinvestment of the interim receipts. In our example, it is
assumed that the dividend of Rs 2 (D1), is reinvested in the share at
the price of Rs 37 per share; which means that the shareholding
goes up by a fraction, i.e., 2/37. Although the measure ignores tax
considerations and the time value of money, it is useful for
evaluating the performance of MUTUAL FUNDS, especially where
reinvestment of dividends is involved.
n
 e€€ixhsˆ2ss

Hedging Strategies

A rihqsxq strategy involves a combination of transactions in the

same or different securities, in order to achieve a position of
reduced risk. In what follows, illustrations of three different hedges
involving shares, y€„syxƒ and futures are presented.

1. Short-sale-against-the-box

A ƒry‚„ ƒevi is executed to secure a profit already generated on a

long transaction. The example below demonstrates the use of this
strategy.
Mr Greenhorn buys 100 shares of Fast Track Ltd., at Rs 25 per
share. Some months later, Greenhorn is delighted that the stock has
steadily gone up to Rs 85; since he intends to continue holding the
share indefinitely, his friend, Mr Savvy advises him to hedge with a
short sale. This involves selling short an equal number of the same
stock. Greenhorn does so and is pleasantly surprised to discover that
he has thereby locked in a profit of Rs 6,000, irrespective of any
price the stock touches thereafter:

Rupees
Market price of 15 25 45 65 85 105
Fast Track Ltd.
Profit/Loss (1,000) Nil 2,000 4,000 6,000 8,000
(on long transaction)
Profit/Loss 7,000 6,000 4,000 2,000 Nil (2,000)
(on short sale)
Net Profit/Loss 6,000 6,000 6,000 6,000 6,000 6,000
(ignoring brokerage
and taxes)
PTH q 2Appendix II

2. The Put Hedge

Using the above situation, let’s see what would happen if

Greenhorn is advised to buy a six-month €…„ option on Fast
Track Ltd., instead of shorting-against-the-box. The ƒ„‚susxq
€‚sgi on the put is Rs 85 and it is available for Rs 850.

Rupees
Market price of 15 25 45 65 85 105
Fast Track Ltd.
Profit/Loss (on (1,000) Nil 2,000 4,000 6,000 8,000
(long transaction)
Put value 7,000 6,000 4,000 2,000 Nil Nil
(at iˆ€s‚e„syx)
Less: €‚iws…w paid (850) (850) (850) (850) (850) (850)
Net Profit/Loss 5,150 5,150 5,150 5,150 5,150 7,150
(ignoring brokerage
and taxes)

The put hedge enables Greenhorn to lock in a profit of Rs

5,150. Although it is lower due to the premium, the hedge
allows him to retain his upside potential, unlike the previous
hedge! For example, when the market price of the share is Rs
105, Greenhorn’s profit would be Rs 7,150.
Caution: This simplified example assumes that the ‘hedge ratio’
(simultaneous price changes in the option and the underlying share)
remains unchanged. In reality however, the hedge ratio will keep
changing with the share price, thereby entailing adjustments in the
number of options utilized. A failure to do so may undermine the
effectiveness of the hedge.

3. Hedging with Interest-rate Futures

The example below shows how a short hedge can be created by a

corporate treasurer who is committed to making available short-term
funds, but expects the cost of funds to go up by the time he
 Appendix II q PTI

accesses the wyxi‰ we‚ui„. The short hedge involves the ƒry‚„
ƒevi of futures to offset the expected erosion in the market value
of fixed-income securities, due to a rise in interest rates. The erosion
is offset to the extent of the profit on the futures contract.

Short Hedge Against Liability Issue

Cash Basis Futures market

Oct. 1, 201X Oct. 1, 201X
Plans to issue $ 50 million Sells $ 50 million 90-day
90-day gywwi‚gsev €e€i‚ „‚ieƒ…‚‰ fsvv futures for
(CP) December 1996
13.00 1.60 11.40
Interest rates rise
Nov. 1, 201X Nov. 1, 201X
Issues $ 50 million Buys $ 50 million „‚ieƒ…‚‰ fsvv
CPs futures for December 1996
14.00 180
. 12.20
- 100 - 20 80

To calculate receipts and payments, the following formula is used.

FACE VALUE ¥
RS1 - FG DISCOUNT
¥
Maturity IJ UV
T H 100 360 KW
Accordingly, the following result emerges: (In million)
1. Expected proceeds from CP issue
(discount 13.00) : $ 48.375
2. Actual proceeds from CP issue
(discount 14.00) : $ 48.250
Increased interest burden 0.125
3. Sale value of T-Bill futures: $ 48.575
4. Purchase price of T-Bill futures : 48.475
Profit on futures transaction 0.10
PTP q 2Appendix II

Therefore, the increase in interest burden is contained at $ 25,000

(–0.125 million + 0.10 million), which means that the effective cost
of funds raised is 13.84 per cent per annum. In terms of feƒsƒ €ysx„
movements, the increased burden of $ 1,25,000 is partially offset by
the gain of 80 basis points in the futures transactions, which
translates into a profit of

80 ¥ 25 ¥ 50 = $ 1,00,000

Dollar value of one basis point Number of contracts

per 90-day T-Bill contract of
$ 1 million

The ‘basis’, i.e., the difference between prices (or ‰sivhƒ) of cash
and futures, changes and has an adverse impact as the hedge
protects the company for only 80 of the 100-point rise in the cost
of funds. In the above illustration, as the cash market instrument CP
is different from the futures instrument, this is an example of a
‘Cross Hedge’. In any such hedge, it is vital to ensure the dollar
(or rupee) equivalent of a one basis point move in rates between
cash and futures by trading in an appropriate number of contracts.

4. Hedging with Commodities Contracts

A potato chips maker wants to buy 50,000 kgs., of edible oil in

a couple of months to cover its production needs till the year
end.
The current (September) price is Rs 55 per kg., but the company
fears a price rise soon. Assuming that the contract size is 10,000 kgs.,
a long hedge can be employed as follows:

Cash Market Basis Futures market

Sept. 15, 201X Sept. 15, 201X
Price Rs 55 per kg (1.00) Buys five December
delivery edible oil
contracts @ Rs 56 per kg
 Appendix II q PTQ

Edible oil prices rise

Nov. 1, 201X Nov. 1, 201X
Buys 50,000 kg Sells five December
of edible oil spot (0.50) delivery edible oil
@ Rs 58 per kg — — – contracts @ Rs 58.50 per kg
– 0.50
Results of the hedge: Rs per kg
Purchase price 58.00
Less: Futures gain 2.50
Net Purchase price 55.50

Had the company not hedged its position, the oil would have cost
it Rs 58 per kg.

5. Hedging with Stock Index Futures (SIF)

A w…„…ev p…xh that expects a broad market decline may use a short
hedge to offset fully or partially the loss on its portfolio. This is
shown in the example below, which assumes the portfolio value to
be Rs 10 crore and the multiplier for the stock index futures
contracts to be 100. (Therefore, the value of one contract today in
the example below will be 100 ¥ 920 = Rs 92,000. However, in SIF
trading at the xe„syxev ƒ„ygu iˆgrexqi, the substitute for the
multiplier will be a lot of 100 contracts, thereby yielding the same
transaction value of Rs 92,000.)

Value Value Change

today after a 10% fall in value
(Rs) (Rs) (Rs)
Long position portfolio 10 crore 9 crore (1 crore)
value
Sell 1086 SIF contracts 9.991 crore 8.992 crore 0.999 crore
at 920
Net hedge result … (8800)
By hedging, the fund has contained losses on its portfolio at Rs 8800.
n
 e€€ixhsˆ2sss

Debenture/Bond Yields

The numbers tabulated represent the ‰sivh „y we„…‚s„‰ corres-

ponding to the market price and „i‚w „y we„…‚s„‰ in the respective
row and column. For example, an investor who buys a 12.50 per
cent fyxh having three years to we„…‚s„‰ at a price of Rs 85, would
earn a yield of 19.34 per cent per annum by holding the security till
maturity. (However, readers should note the peculiarity of the yield
to maturity which is explained in the text.)

Coupon 12.50% per annum paid semi-annually on Rs 100 par

Market Term to maturity (years)

Price (Rs) 2 3 4
Yield to maturity (%)
75 29.94 24.84 22.33
80 25.98 22.00 20.00
85 22.23 19.34 17.91
90 18.73 16.90 15.98

Coupon 15% per annum paid semi-annually on Rs 100 par

Market Term to maturity (years)

Price (Rs) 2 3 4
Yield to maturity (%)
75 33.09 27.84 25.36
80 28.88 24.89 22.96
85 25.00 22.16 20.74
90 21.44 19.57 18.67

n
 e€€ixhsˆ2s†

Key Financial Ratios

1. Liquidity Ratios

These ratios help to gauge a firm’s ability to meet short-term

obligations.
CU RRENT ASSETS
1. Current Ratio =
CU RRENT LIABILITIES

Current assets - INVENTORIES

2. Acid-Test Ratio =
Current liabilities
These ratios examine the level of current assets relative to the
short-term dues. The acid-test ratio is a more stringent measure of
vs…shs„‰ in comparison with the current ratio and is used when
the liquidity of inventories is doubtful.

2. Activity Ratios

These ratios are meant to ascertain how efficiently a company is

utilizing its various assets.
Receivables
1. Average Collection Period =
Sales/365
Sales
2. Fixed Assets Turnover =
Net fixed assets
Sales
3. Total Assets Turnover =
Total assets
Cost of goods sold (or Sales)
4. Inventory Turnover =
Inventory

Aging Schedule
Since the average collection period is a superficial indicator, the
receivables position can be probed with the help of an aging
PTV q 2Appendix IV

schedule. It is a distribution of the total receivables, according to

the period for which the amounts are due. A simple example is
as follows:

Age of receivables Amount Percentage of total

(in days) (Rs) of receivables
Up to 30 1,00,000 40
31 to 60 80,000 32
61 to 90 70,000 28
2,50,000 100

3. Leverage Ratios

These ratios indicate the extent of debt financing by a company.

1. Debt-Equity Ratio
Current liabilities + Long-term debt
=
SH AREH OLDERS' EQU ITY

2. Fixed Charges Coverage Ratio

Profits before taxes + Interest Charges
+ LEASE Pay ments
=
Interest charges + Lease pay ments
3. Equity Multiplier
Total Assets
=
Total Equity
Total Debt
= 1 +
Total Equity

4. Profitability Ratios

These ratios reveal the effectiveness of a firm’s operations. They

reflect the impact on profitability of a combination of factors—
sale price realization of a firm’s product, its manufacturing and
administrative costs and also its tax planning.
 Appendix IV q PTW

Profits after taxes

1. Net profit Margin =
Sales
Profits after taxes
2. Return on Investment (ROI) =
Total assets
3. Return on Equity
Profits after taxes, available to equity shareholders
=
Shareholders' equity

Du Pont System
The Du Pont analytical method helps to throw more light on the
performance of a company. It is a method of financial analysis
which dissects the important ratio ROI (Return on Total
Investment or Assets) into its constituents as shown below. This
gives a deeper insight into a firm’s working, by indicating how
turnover and profitability have influenced the ROI.
Profits after taxes Sales Profits after taxes
ROI = = ¥
Total assets Total assets Sales
(Also refer igyxywsg †ev…i ehhih (EVA).)
n
PUP q 2Appendix V

Commercial Paper

Rating agency CRISIL ICRA CARE

Rating scale
Highest safety P–1 A1 PR 1
P–2 A2 PR 2
P–3 A3 PR 3
P–4 A4 PR 4
Already in default
or default anticipated P–5 A5 PR 5

Note
A plus or minus sign may sometimes appear with the rating, to
indicate comparative standing within a category. Also, there can be
situations when the ratings assigned to a security issue of a company
by two agencies differ.
n
 e€€ixhsˆ2†s

Interest Factor Tables

Table 1 Future value of one rupee at r% interest rate after n

periods (Future Value of Interest Factor)
F rI
FVIF (r %, n ) = H1 +
n

100 K
r 5% 10% 12% 15% 18% 20% 24%
n
1 1.0500 1.1000 1.1200 1.1500 1.1800 1.2000 1.2400
2 1.1025 1.2100 1.2544 1.3225 1.3924 1.4400 1.5376
3 1.1576 1.3310 1.4049 1.5209 1.6430 1.7280 1.9066
4 1.2155 1.4641 1.5735 1.7490 1.9388 2.0736 2.3642
5 1.2763 1.6105 1.7623 2.0114 2.2878 2.4883 2.9316
10 1.6289 2.5937 3.1058 4.0456 5.2338 6.1917 8.5944
15 2.0789 4.1772 5.4736 8.1371 11.9737 15.4070 25.1956
20 2.6533 6.7275 9.6463 16.3665 27.3930 38.3376 73.8641

Table 2 Present value of one rupee at r % discount rate for n

periods (Present Value of Interest Factor)
1
PVIF (r %, n ) = n
1+
r F I
100H K
r 5% 10% 12% 15% 18% 20% 24%
n
1 .9524 .9091 .8929 .8696 .8475 .8333 .8065
2 .9070 .8264 .7972 .7561 .7182 .6944 .6504
3 .8638 .7513 .7118 .6575 .6086 .5787 .5245
4 .8227 .6830 .6355 .5718 .5158 .4823 .4230
5 .7835 .6209 .5674 .4972 .4371 .4019 .3411
10 .6139 .3855 .3220 .2472 .1911 .1615 .1164
15 .4810 .2394 .1827 .1229 .0835 .0649 .0397
20 .3769 .1486 .1037 .0611 .0365 .0261 .0135
PUR q 2Appendix VI

Table 3 Sum of an annuity of one rupee at the end of every period

for n periods at r% interest rate (Future Value of Annuity Factor)
FVIF (r %, n ) - 1
FVAF (r %, n ) =
(r /100 )
r S7 IH7 IP7 IS7 IV7 PH7 PR7
n
I IFHHHH IFHHHH IFHHHH IFHHHH IFHHHH IFHHHH IFHHHH
P PFHSHH PFIHHH PFIPHH PFISHH PFIVHH PFPHHH PFPRHH
Q QFISPS QFQIHH QFQURR QFRUPS QFSUPR QFTRHH QFUUUT
R RFQIHI RFTRIH RFUUWQ RFWWQR SFPISR SFQTVH SFTVRP
S SFSPST TFIHSI TFQSPV TFURPR UFISRP UFRRIT VFHRVR
IH IPFSUUV ISFWQUR IUFSRVU PHFQHQU PQFSPIQ PSFWSVU QIFTRQR
IS PIFSUVS QIFUUPS QUFPUWU RUFSVHR THFWTSQ UPFHQSI IHHFVISI
PH QQFHTTH SUFPUSH UPFHSPR IHPFRRQT IRTFTPV IVTFTVVH QHQFTHHT

Table 4 Present value of an annuity of one rupee at the end of

every period for n periods at r % interest rate (Present Value of
Annuity Factor)
1 - PVIF (r %, n )
PVAF (r %, n ) =
(r /100 )
r 5% 10% 12% 15% 18% 20% 24%
n
1 0.9524 0.9091 0.8929 0.8696 0.8475 0.8333 0.8065
2 1.8594 1.7355 1.6901 1.6257 1.5656 1.5278 1.4568
3 2.7232 2.4869 2.4018 2.2832 2.1743 2.1065 1.9813
4 3.5460 3.1699 3.0373 2.8550 2.6901 2.5887 2.4043
5 4.3295 3.7908 3.6048 3.3522 3.1272 2.9906 2.7454
10 7.7217 6.1446 5.5602 5.0188 4.4941 4.1925 3.6819
15 10.3797 7.6061 6.8109 5.8474 5.0916 4.6755 4.0013
20 12.4622 8.5136 7.4694 6.2593 5.3527 4.8696 4.1103
n
 fsfvsyq‚e€r‰

Andavolu, K.M., “RBI Draft Corporate Plan”, The Times of

India, August 1, 2 and 3, 1993.
Anthony, R.N. and S. Reece, Accounting Principles, First Indian ed., All
India Traveller Book Seller, Delhi, 1987.
Becketii, S., “Are Derivatives Too Risky, for Banks?”, Discount and
Finance: A Weekly Journal, Mumbai, November 13, 1993.
Bhatia, H.L., Public Finance, 17th ed., Vikas Publishing House, New
Delhi, 1993.
Bhide, Amar, “Reversing Corporate Diversification,” in Donald H.
Chew, ed., The New Corporate Finance: Where Theory Meets Practice,
2nd ed., Irwin McGraw-Hill, Singapore, 1999.
Bhole, L.M., Financial Institutions and Markets, 2nd ed., Tata McGraw-
Hill, New Delhi, 1992.
Bhusnurmath, M., “NCBI Registration Evokes Mixed Response”,
The Economic Times, August 20, 1993.
Brick, J.R. (Ed.), Financial Markets, R.F. Dame, Richmond, Virginia,
1981.
Brigham, Eugene F., and Michael C. Ehrhardt, Financial Management:
Theory and Practice, 10th ed., South-Western, Singapore, 2002.
Chandra, Prasanna, The Investment Game: How to Win, 6th ed., Tata
McGraw-Hill, New Delhi, 1995.
Das, Udaibir S., Yinqiu Lu, Christian Mulder, and Amadou Sy,
"Setting up a Sovereign Wealth Fund: Some Policy and
Operational Considerations," IMF Working Paper, No. 09/179,
August 2009.
Eun, Cheol S., and Bruce G. Resnick, International Financial
Management, 4th ed., Tata McGraw-Hill, New Delhi, 2008.
Farrell Jr., James, L., Portfolio Management, Theory and Application, 2nd
ed., McGraw-Hill, Singapore, 1997.
“Fiscal bills get Parliament okay, FM takes a shot at deficit”, The
Economic Times, July 30, 2003.
Francis, J.C., Investments, 3rd ed., McGraw-Hill, New York, 1980.
PUT q 2Bibliography

Government of India, Ministry of Finance, Economic Survey

2009-10, Oxford University Press, New Delhi, 2010.
Government of India, Twelfth Finance Commission, Public
Notice, The Indian Express, December 9, 2002.
Goyal, M., “Private Equity funds: The New Godmothers”, The
Economic Times (Corporate Dossier), October 3–9, 1997.
Gup, B.E., The Basics of Investing, 2nd ed., John Wiley & Sons, New
York, 1983.
Gupta, S.B., Monetary Economics, 2nd ed., S. Chand & Co., New Delhi,
1988.
Hagin, R.L., The Dow Jones-Irwin Guide to Modern Portfolio Theory, Dow
Jones-Irwin, Homewood, Illinois, 1979.
Hammer, Cornelia, Peter Kunzel, and Iva Petrova, "Sovereign
Wealth Funds: Current Institutional and Operational Practices'
IMF Working Paper, No. 08/254, November 2008.
Johnson, H.J., Financial Institutions and Markets, Int. ed., McGraw-Hill,
Singapore, 1993.
Jorion, Philippe, "The trick of transferring risk", GARP Risk
Review, Issue 05, March/April 2002.
Kamath, S.R., “Short-term Money Market in India”, The Journal of
the Indian Institute of Bankers, July-September, 1992.
Kamath, S.R., “Some Reflections on the Conduct of Monetary
Policy in the Recent Years”, The Journal of the Indian Institute of
Bankers, January-March, 1994.
Krishnan, L. “Local Area Banks: A viable proposition?”, Chartered
Financial Analyst, Hyderabad, October 1996.
Majumdar, B., Concept and Practice of Global Finance, Bharat Publishing
House, New Delhi, 1994.
Malkiel, Burton, G., A Random Walk Down Wall Street, 7th ed., W.W.
Norton & Company, New York, 1999.
Moshinsky, Ben and Aaron Kirchfeld, "Naked swaps crackdown
in Europe rings hollow sans US", The Economic Times,
Ahmedabad, March 12, 2010, p. 8.
National Stock Exchange, Indian Securities Market: A review, Vol.
XI, 2008.
National Stock Exchange, Indian Securities Market: A review,
Vol. X, 2007.
 Bibliography q PUU

Narasimham Committee Report on the Financial System, Standard

Book Co., New Delhi, 1991.
National Stock Exchange of India Ltd., Indian Securities Market,
A Review, Mumbai, 2002.
Nazir, Zeenat, “Some private players say no to govt subsidy for
roads”, The Indian Express, Vadodara, May 3rd, 2007, p. 10.
Rajagopal, J. and Gupta, Vineet, “OFFSHORE FINANCIAL CENTRES:
A beacon on the bay”, The Economic Times, April 8, 1998.
Rangarajan, C., India Integrating into World Economy, Closing
Address, Conference organized by Euromoney, New Delhi,
March 1994.
Rangarajan, C., Trade and Financial Sector Reforms. Inaugural
Address. National Seminar on Trade and Financial Sector
Reforms, NIBM, Pune 1993.
Reddy, A.C., “Private Equity Funds: Succour of Corporates”,
Chartered Financial Analyst, Hyderabad, November 1996.
Reddy, Y.V., Inaugural Address at Primary Dealers Association
of India, Mumbai, March 1998.
Reserve Bank of India Bulletin (Supplement), Report of the
Working Group on Money Supply: Analytics and Methodology
of Compilation, July 1998.
Reserve Bank of India, Annual Report 2001-02, Mumbai, 2002.
Reserve Bank of India, Annual Report 2002-03, Mumbai, 2003.
Reserve Bank of India, Committee (Janakiraman) to enquire into
the Securities Transactions of Banks and Financial
Institutions, Mumbai, April 1993.
Reserve Bank of India, Functions and Working, Mumbai, 1983.
Reserve Bank of India, Report of the Committee on Banking
Sector Reforms, Mumbai, 1998.
Reserve Bank of India, Report of the Committee (Chakravarty)
to Review the Working of the Monetary System, Mumbai,
1985.
Reserve Bank of India, Report on Currency and Finance,
Bombay, 1992–93.
Reserve Bank of India, Report on Trend and Progress of Banking
in India, 2001-02, Mumbai, 2002.
PUV q 2Bibliography

Robinson, R.I., and D. Wrightsman, Financial Markets, 2nd ed.,

McGraw-Hill, New York, 1980.
Ross, Stephen A., Randolph W. Westerfield and Bradford D.
Jordan, Fundamentals of Corporate Finance, 5th ed., Irwin
McGraw-Hill, Boston, 2000.
Sarda, D.P., Handbook on Working Capital Finance, 2nd ed.,
Govind Prakashan, Jaipur, 1994.
Securities and Exchange Board of India, Report of the
Committee on Derivatives, December 1997.
Senapati, Mollica and Madhvendra P. Das, “Credit Derivatives
for ‘risky’ projects”, The Economic Times, July 8, 1998.
Sharpe, William F., Gordon J. Alexander and Jeffery V. Bailey,
Investments, 5th ed., Prentice-Hall of India. New Delhi, 1995.
Shiller, Robert J., Irrational Exuberance, 2nd ed., Currency
Doubleday, New York, 2005.
Sikarwar, Deepshikha, “Ulips set to top FSDC agenda”, The
Economic Times, Ahmedabad, March 4, 2010, p.1.
Singhal, R., “Structured Debt Obligations”, The Economic Times,
March 23, 1995.
Singh, Sandeep and Sanjay Kr Singh, “Market story to stay
intact: ICICI, SBI, Kotak AMCs”, The Indian Express,
Vadodara, September 4, 2007.
Srikanth, P.S., “Ad hoc T-Bills”, The Economic Times, March 17,
1994.
Srikanth, Vandanapu, “Credit Derivatives: The fever is catching
on ...” Chartered Financial Analyst, Hyderabad, June 1996.
Srivastava, R.M., Management of Indian Financial Institutions, 2nd
ed., Himalaya Publishing House, Mumbai, 1991.
“Standard Chartered set to raise Rs. 3,000 crore via maiden
IDR”, The Economic Times, Ahmedabad, March 31, 2010, p. 1.
Stiglitz, Joseph, “America's day of reckoning”, The Economic
Times, Ahmedabad, August 27, 2007.
Tarapore, S.S., “Investor options in an active Government
Securities Market”, Discount and Finance: A Weekly Journal,
Mumbai, June 3, 1995.
Tarapore, S.S., “New Vistas in Monetary Policy”, Valedictory
Address, Bank Management Programme, NIBM, Pune, July
1994.
 Bibliography q PUW

Tarapore, S.S., “Recent Initiatives in the Development of the

Secondary Market in Government Securities”, Discount and
Finance: A Weekly Journal, Mumbai, April 15, 1995.
“The PN Tangle,” The Indian Express, January 25, 2004.
Taxmann’s SEBI Manual Volume 1, 11th edition, Taxmann
Allied Services, New Delhi, 2008.
Van Horne J.C., Financial Management and Policy, 9th ed.,
Prentice-Hall, New Delhi, 1994.
Vinod Kumar, M.P., “Creating Wealth, the EVA Way”,
Chartered Financial Analyst, Hyderabad, July 1994.
“VGF may be extended to edu, health”, The Economic Times,
Ahmedabad, March 24, 2010.
“What are Index Funds?” The Economic Times, August 25, 2003.
“What are p-notes?,” The Economic Times, January 26, 2004.

‡ifƒs„iƒ
http://fincomindia.nic.in/ShowContentOne.aspx?id=4&
Section=1
http://fincomindia.nic.in/ShowContentOne.aspx?id=27&
Section=1
http://icicisecuritiespd.com/ASP/fixedincome/sm_indices
_ibex.htm
http://publication.samachar.com/pubarticle.php?id=8548626&
nextids = 8548625|8548626|8548627|8548629|8548628 & next
Index=2
www.amfiindia.com/navreport.aspx
www.bseindia.com/about/abindices/bse30.asp
www.bseindia.com/about/abindices/bse100.asp
www.cibil.com/overviewin.htm
www.icra.in/Gradings.aspx?id=1
www.iseindia.com/Services/AboutUs.aspx
www.otcei.net/about/
www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=9788
www.rbi.org.in/scripts/PublicationsView.aspx?Id=10939

n
 ƒ…ftig„E‡sƒi2vsƒ„sxq

ƒivig„ih2 „i‚wƒ

fexusxq Priority Sectors

Rediscount
Asset Bubble
Regional Rural Banks
Assets Reconstruction Fund
(RRB)
Bank Guarantees
Recapitalization Bonds
Bank Rate
Scheduled Bank
Busy Season
Slack Season
Call Money
Statutory Liquidity Ratio
Capital Adequacy Ratio
(SLR)
Central Bank
Certificate of Deposit (CD) gy‚€y‚e„i2 psxexgi
Deposit Multiplier
Derivative Usance Aging Schedule
Promissory Note Assignment of Accounts
Excess Reserves Receivable
Fractional Reserve System Bill of Exchange
Health Code System Bond
Inter-Bank Participation Break-even Point
Certificate Bridge Loan
Inter-Bank Term Money Call Provision
Investment Account Capital Structure
Local Area Bank Cat Bonds
Marathe Committee (1991) Commercial Paper (CP)
Microcredit Cost of Capital
Narrow Banks Cost of Goods Sold
National Co-operative Bank Credit Rating
of India Current Ratio
Non-performing Asset Debenture
Notice Money Debenture Redemption
Permanent Investments Reserve (DRR)
Prime Lending Rate Depreciation
PVP q 2Subject-wise Listing

Financial Leverage Exercise Price

Floating Rate Bond Expiration Date
Forfaiting Financial Futures
Hire-Purchase Arrangement Forward Contract
Income Bond Futures Market
Intercorporate Deposit Implied Repo Rate
Internal Rate of Return Implied Volatility
Lease In-the-Money
Leveraged Buyout Index Options
Loan Syndication Interest Rate Cap
Merger Interest Rate Collar
Net Present Value Interest Rate Floor
Operating Cycle L.C. Gupta Committee
Operating Leverage Naked Options
Payback Period Option
Private Placement Options Writer
Public Issue Price Discovery
Ratio Analysis Program Trading
Real Options Stock Index Futures
Retained Earnings Straddle
RUF/NIF Swap
Seed Capital Swaption
Subordinate Debentures Weather Derivatives
Supplier’s Credit
Trade Credit psxexgsev
Treasury Stock sx„i‚wihse‚siƒ
Trust Deed Adverse Selection
Underwrite Disintermediation
Usance bill Exim Bank
Venture Capital Financial Institution
Zero-coupon Bond Financial Intermediation
ICICI
hi‚s†e„s†iƒ
ICRA
At-the-Money IDBI
Commodity Futures IFCI
Derivative IL & FS
 Subject-wise Listing q PVQ

IRBI RBI’s Draft Strategic Plan

Liability Transformation Refinance
Effect Repos
Moral Hazard Reserve Money
NABARD Reverse Repurchase
Non-banking Financial Agreement
Company (NBFC) Secondary Market
Shah Committee Securities Trading Corporation
SIDC/SIIC of India (STCI)
Small Industries Subprime Crisis
Development Tight Money Policy
Bank of India (SIDBI) Treasury Bill
State Financial Corporations Vaghul Committee
(SFC) Ways and Means Advances
Take-out Financing Winner’s Curse
Yield Curve
psxexgsev2 ƒ‰ƒ„iw
sx„i‚xe„syxev
Board for Financial
psxexgi
Supervision (BFS)
Chakravarty Committee ADR
Discount and Finance House BIS
of India Limited (DFHI) Balance of Payments
Double Ready Forward Convertibility (Full)
Financial Markets Covered Interest Arbitrage
Financial Stability and Cross Currency Option
Development Council Cross Rate
Flow of Funds Accounting Debt Service Ratio
Khan Committee Depreciation
M3 Devaluation
Monetary Policy EEFC Account
Monetary Targeting Eurobond
Moral Suasion Eurocurrency Deposit
Narasimham Committee Eurodollar Deposit
Open Market Operations Floating Exchange Rate
Primary Dealer Foreign Currency
Primary Market Convertible Bond
PVR q 2Subject-wise Listing

Foreign Bonds Demutualisation

Forward Discount Dirty Price
Forward Premium Dollar Cost Averaging
GDR Duration
Hot Money Economic Value Added
IDR (EVA)
Interest Rate Parity Efficient Markets
Theorem Hypothesis
LERMS Forfeiture
LIBOR Formula Plans
Offshore Financial Centre Fundamental Analysis
Hedging
Real Effective Exchange
Holding Period Yield
Rate (REER)
Immunization
Revaluation
Inter-connected Stock
Road Shows
Exchange
SDR
Interest Rate Risk
Swap
Intrinsic Value
Tobin Tax Investment Grade
Trilemma Jobber
sx†iƒ„wix„ƒ Junk Bonds
Kerb Dealings
Arbitrage Khokha
Asset Play Long Transaction
Badla System Margin Trading
Behavioural Finance Market Maker
Beta Market Risk
Bond Rating Marketability Risk
Bonus Shares
National Stock Market
Call Risk
System
CCI Formula
(NSMS)
Characteristic Line
Net Worth
Clean Price
Contrarian Non-convertible Debenture
Convertible (NCD)
Corner Non-voting Share (NVS)
Counter Receipt OTC Exchange of India
Defensive Stock (OTCEI)

Preference Share
Price-earnings Ratio
Price-sales Ratio
Prospectus
PSU Bonds
Random Walk Theory
Riding the Yield Curve
Right
SEBI
Sensitive Index
Share Capital
Short Interest
Short Sale
Shorting-against-the-Box
Squeezing the Shorts
Stock Split
Sweat Equity
Taxable Equivalent yield
Warrant
Yield to Maturity
Zero-coupon yield curve
wi‚grex„2 fexusxq
Best Efforts Basis
Bought-out Deal
Investment Banker
Merchant Banker
w…„…ev2 p…xhƒ
Asset Management Company
Asset Transformation Effect
Balanced Fund
Closed-end Fund
Dual Purpose Fund
Ethical Fund
Exchange-traded Funds
Subject-wise Listing q PVS
Go-Go Funds
Hedge Funds
Income Fund
Index Fund
Money Market Fund
Mutual Fund
Net Asset Value
Private Equity Fund
Tracking Error
Sharpe Index
Sovereign Wealth Fund
Specialty Fund
Treynor’s Index
€y‚„pyvsy
wexeqiwix„
Asset Allocation
Capital Asset Pricing Model
Capital Market Line
Efficient Portfolio
Market Portfolio
Markowitz Model
Portfolio
Security Market Line
Single-Index Model
Systematic Risk
Unsystematic Risk
€…fvsg2 psxexgi
Advance Refunding
Budget Deficit
Dated Securities
Deficit Spending
Finance Commission
Fiscal Policy
Funding
PVT q 2Subject-wise Listing

Gilt-edged Securities Breadth of Market

Government Securities Chart Patterns
Gross Fiscal Deficit Charting
Net RBI Credit to the Confidence Index
Government Dow Theory
Primary Deficit Filter Rule
Public Debt Greater Fool Theory
Public Debt Office Head and Shoulders
Refunding Odd-lot Theory
Revenue Bond Point-and-Figure Chart
Revenue Deficit Relative Strength
Toll Bond Selling Climax
Viability Gap Funding Short Interest Theory
Support Level
„eˆe„syx Technical Analysis
Ad Valorem Technical Indicators
Average Tax Rate
Bracket Creep ‡y‚usxq2 ge€s„ev
Capital Gain Cash Credit System
Chelliah Committee Chore Committee
Dividend Stripping Credit Authorization
Excise Duty Scheme (CAS)
Goods and Services Tax Credit Monitoring
Indirect Taxes Arrangement (CMA)
NSC Drawee Bill System
Public Provident Fund Export Credit
(PPF) Fund-based
Rekhi Committee Hypothecation
Service Tax Jilani Committee
VAT Post-shipment Credit
Pre-shipment Credit
„igrxsgev2exev‰ƒsƒ QIS
Accumulation Shetty Committee
Bar Chart Tandon Committee
Bellwether Stock Working Capital
Breakout
n