1. How is base r ate better than the earlier pricing regime ?

There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen, or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged. If, for example, it is determined that the value of a single unit of local currency is equal to USD 3.00, the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank which it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation), and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary. Floating Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting", as any differences in supply and demand will automatically be corrected in the market. Take a look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and thus stimulating demand for local goods and services. This in turn will generate more jobs, and hence an auto-correction would occur in the market. A floating exchange rate is constantly changing. In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange rate. Sometimes, when a local currency does reflect its true value against its pegged currency, a "black market" which is more reflective of actual supply and demand may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market. In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation; however, it is less often that the central bank of a floating regime will interfere The Base Rate system would be applicable for all new loans and for those old loans that come up for renewal. Existing loans based on the BPLR system may run till their maturity. In case existing borrowers want to switch to the new system, before expiry of the existing contracts, an option may be given to them, on mutually agreed terms. Banks, however, should not charge any. BENEFITS OF THE BASE RATE One biggest benefit with the Base Rate System as cited by policymakers and experts is that it will help the Reserve Bank of India to transmit the changes in policy rates (Repo and Reverse Repo under LAF) in a better manner.

To the Economy The introduction of the base rate system along side removal of interest rate ceiling on small loans and freeing of rupee export credit interest rate brings to fruition over two decades of efforts to deregulate the lending rates of banks. This is expected to enhance the allocating efficiency of the financial intermediation process by banks. Deregulation of lending rate will promote financial inclusion with greater credit flow to agriculture and small business. This, together with other specific measures taken by the Reserve Bank for financial inclusion, will draw borrowers away from the informal financial sector to the formal financial sector and thus, facilitate credit penetration. amount of increase/decrease in the Base Rate. Say for e.g. the interest rate was 10% at the time of signing up for the loan (Base Rate: 8% + other charges 2%). Say the Base Rate changes by 50 bps due to an upward swing in the deposit rates which means now the new interest rate will be 10.5% for the customer (Base Rate 8.5% + other charges 2%). A similar computation if the rates have a downward swing. Since banks have to revise the base rate every quarter, any change in interest rate either downwards or upwards would be passed on to you in a maximum of 3 months. This will address issues of downward stickiness of rates in case of the BPLR regime. For an Existing Borrower- If a borrower already has a loan which is based on the BPLR system there will be no change in the EMI payable. He can continue to service his loan till its maturity under the BPLR system. However if he wishes, he can shift his existing loan to the new Base Rate system at no additional cost before the expiry of your loan. If an existing borrower and wishes to take any top-up loan then the new loan interest rate will be based on the new Base Rate system. While the Base Rate will have a very nominal difference across banks, the primary variable differentiating customers will be the spread which factors in the credit profile of the consumer. Therefore having a good credit profile will help you get better rates. The new system ushers in greater transparency. This will also mean an end to the teaser home loan campaigns launched since banks can no longer lend below their Base Rate. Effects of new base rate regime on other types of retail loans like Auto loan, Consumer loan etc. can similarly be understand. Corporate Borrowings While an upward pressure on rates for corporates availing of at ultra-low rate is imminent, the retail, priority and SME companies will most-likely be able to get a relatively lower rate. Needless to mention, irrespective of the category, borrowers with better credit rating will be able to negotiate a good deal for themselves. 2. What are FCCBs? A type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock. These types of bonds are attractive to both investors and issuers. The investors receive the safety of guaranteed payments on the bond and are also able to take advantage of any large price appreciation in the company's stock. (Bondholders take advantage of this appreciation by means warrants attached to the bonds, which are activated when the price of the stock reaches a certain point.) Due to the equity side of the bond, which adds value, the coupon payments on the bond are lower for the company, thereby reducing its debt-financing costs.

3. What are FCEBs? The FCEB scheme of 2008 has given the Indian corporates an additional avenue for raising funds from overseas by unlocking the value embedded in the shares they hold in other promoter group companies, without causing equity dilution. The scheme seeks to help Indian promoters raise money abroad by issuing foreign currency bonds against the value of their investments in shares of listed group companies. The bonds are described as exchangeable bonds as investors abroad could exchange them into equity shares or warrants of the listed group company before their redemption. So far, holding companies were allowed to raise funds through foreign currency convertible bonds (FCCBs), under which they issue their own shares to subscribers at a predetermined price. However, now a holding company can raise foreign funds by offering its equity holdings in other group companies in the international markets through FCEB. FCEBs means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India in foreign currency and exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. The Eligible Issuer under the scheme is the Issuing Company which shall be part of the promoter group of the Offered Company and shall hold the equity share/s being offered at the time of issuance of FCEB and the Offered Company is the listed company, which is engaged in a sector eligible to receive Foreign Direct Investment and eligible to issue or avail of Foreign Currency Convertible Bond (FCCB) or External Commercial Borrowings (ECB).

4. What are ADR? A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction. This is an excellent way to buy shares in a foreign company while realizing any dividends and capital gains in U.S. dollars. However, ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. ADRs are listed on either the NYSE, AMEX or Nasdaq. What are GDR? A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros.

A GDR is very similar to an American Depositary Receipt. These instruments are called EDRs when private markets are attempting to obtain euros.

5. What are IDR? An Indian Depository Receipt is an instrument denominated in Indian Rupees in the form of a depository receipt created by a Domestic Depository (custodian of securities registered with the Securities and Exchange Board of India) against the underlying equity of issuing company to enable foreign companies to raise funds from the Indian securities Markets. A foreign company which cannot go through the listing process in India but wanting to share the risk and rewards of the issue with Indian shareholders issues an IDR. Standard Chartered Bank is the first company to issue IDR in India. The foreign company IDRs will deposit shares to an Indian depository. The depository would issue receipts to investors in India against these shares. The benefit of the underlying shares (like bonus, dividends etc) would accrue to the depository receipt holders in India. The Ministry of Corporate Affairs of the Government of India, in exercise of powers available with it under section 642 read with section 605A had prescribed the Companies (Issue of Indian Depository Receipts) Rules, 2004 (IDR Rules) vide notification number GSR 131(E) dated February 23, 2004. Standard Chartered PLC became the first global company to file for an issue of Indian depository receipts in India. The rules provide inter alia for (a) Eligibility for issue of IDRs (b) Procedure for making an issue of IDRs (c) Other conditions for the issue of IDRs (d) Registration of documents (e) Conditions for the issue of prospectus and application (f) Listing of Indian Depository Receipts (g) Procedure for transfer and redemption (h) Continuous Disclosure Requirements (i) Distribution of corporate benefits. These rules (principal rules) were operationalised by the Securities and Exchange Board of India (SEBI)the Indian markets regulator in 2006. Operation instructions under the Foreign Exchange Management Act were issued by the Reserve Bank of India on July 22, 2009. The SEBI has been notifying amendments to these guidelines from time to time.