Description
Describes various financial instruments for investment like national saving certificate, treasury bills, commercial bills, ADRs, GDRs, zero coupon bond, relief bonds, foreign bonds, foreign currency convertible bonds, index bonds, commercial paper, floating rate bonds, certificate of deposits.
Social security certificate
Trade credit
Definition: An arrangement to buy goods or services on account, that is, without making immediate cash payment For many businesses, trade credit is an essential tool for financing growth. Trade credit is the credit extended to you by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you're using trade credit. When you're first starting your business, however, suppliers most likely aren't going to offer you trade credit. They're going to want to make every order c.o.d. (cash or check on delivery) or paid by credit card in advance until you've established that you can pay your bills on time. While this is a fairly normal practice, you can still try and negotiate trade credit with suppliers. One of the things that will help you in these negotiations is a properly prepared financial plan. When you visit your supplier to set up your order during your startup period, ask to speak directly to the owner of the business if it's a small company. If it's a larger business, ask to speak to the CFO or any other person who approves credit. Introduce yourself. Show the officer the financial plan you've prepared. Tell the owner or financial officer about your business, and explain that you need to get your first orders on credit in order to launch your venture. Depending on the terms available from your suppliers, the cost of trade credit can be quite high. For example, assume you make a purchase from a supplier who decides to extend credit to you. The terms the supplier offers you are two-percent cash discount with 10 days and a net date of 30 days. Essentially, the suppliers is saying that if you pay within 10 days, the purchase price will be discounted by two percent. On the other hand, by forfeiting the two-percent discount, you're able to use your money for 20 more days. On an annualized basis, this is actually costing you 36 percent of the total cost of the items you are purchasing from this supplier! (360 ( 20 days = 18 times per year without discount; 18 ( 2 percent discount = 36 percent discount missed.) Cash discounts aren't the only factor you have to consider in the equation. There are also late-payment or delinquency penalties should you extend payment beyond the agreedupon terms. These can usually run between one and two percent on a monthly basis. If you miss your net payment date for an entire year, that can cost you as much as 12 to 24 percent in penalty interest.
Effective use of trade credit requires intelligent planning to avoid unnecessary costs through forfeiture of cash discounts or the incurring of delinquency penalties. But every business should take full advantage of trade that is available without additional cost in order to reduce its need for capital from other sources.
Inter Corporations deposits
Inter-corporate deposits are deposits made by one company with another company, and usually carry a term of six months. The three types of inter-corporate deposits are: three month deposits, six month deposits, and call deposits. Three month deposits are the most popular type of inter-corporate deposits. These deposits are generally considered by the borrowers to solve problems of short-term capital inadequacy. This type of short-term cash problem may develop due to various issues, including tax payment, excessive raw material import, breakdown in production, payment of dividends, delay in collection, and excessive expenditure of capital. The annual rate of interest given for three month deposits is 12%. Six month deposits are usually made with first class borrowers, and the term for such deposits is six months. The annual interest rate assigned for this type of deposit is 15%. The concept of call deposit is different from the previous two deposits. On giving a one day notice, this deposit can be withdrawn by the lender. The annual interest rate on call deposits is around 10%. The inter-corporate deposits market shows a number of interesting characteristics. The biggest advantage of inter-corporate deposits is that the transaction is free from bureaucratic and legal hassles. The business world otherwise is regulated by a number of rules and regulations. The existence of the inter-corporate deposits market shows that the corporate world can be regulated without rules. The market of inter-corporate deposits maintains secrecy. The brokers in this market never reveal their lists of lenders and borrowers, because they believe that if proper secrecy is not maintained the rate of interest can fall abruptly. The market of inter-corporate deposits depends crucially on personal contacts. The decisions of lending in this market are largely governed by personal contacts.
National Savings Certificate
National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at all post office counters in the country. It is a long term safe savings option for the investor. The scheme combines growth in money with reductions in tax liability as per the provisions of the Income Tax Act, 1961. The duration of a NSC scheme is 6 years. Features NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 for a maturity period of 6 years. There is no prescribed upper limit oninvestment.
Individuals, singly or jointly or on behalf of minors and trust can purchase a NSC by applying to the Post Office through a representative or an agent. One person can be nominated for certificates of denomination of Rs. 100- and more than one person can be nominated for higher denominations. The certificates are easily transferable from one person to another through the post office. There is a nominal fee for registering the transfer. They can also be transferred from one post office to another. One can take a loan against the NSC by pledging it to the RBI or a scheduledbank or a co-operative society, a corporation or a government company, a housingfinance company approved by the National Housing Bank etc with the permission of the concerned post master. Though premature encashment is not possible under normal course, under sub-rule (1) of rule 16 it is possible after the expiry of three years from the date of purchase of certificate. Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88. Return It is having a high interest rate at 8% compounded half yearly. Post maturity interest will be paid for a maximum period of 24 months at the rate applicable to individual savings account. A Rs1000 denomination certificate will increase to Rs. 1601 on completion of 6 years. Interest rates for the NSC Certificate of Rs 1000
Year 1 year 2 year 3 year 4 years 5 years 6 years
Advantages
Rate of Interest Rs 81.60 Rs 88.30 Rs 95.50 Rs103.30 Rs 111.70 Rs 120.80
Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88. NSCs can be transferred from one person to another through the post office on the payment of a prescribed fee. They can also be transferred from one post office to another. The scheme has the backing of the Government of India so there are no risks associated with your investment. How to start?
Any individual or on behalf of minors and trust can purchase a NSC by applying to the Post Office through a representative or an agent. Payments can be made in cash, cheque or DD or by raising a debit in the savings account held by the purchaser in the Post Office. The issue of certificate will be subject to the realization of the cheque, pay order, DD. The date of the certificate will be the date of
realization or encashment of the cheque. If a certificate is lost, destroyed, stolen or mutilated, a duplicate can be issued by the post-office on payment of the prescribed fee.
Swaps
An exchange of streams of payments over time according to specified terms. The most common type is an interest rate swap, in which one party agrees to pay a fixed interest rate in return for receiving a adjustable rate from another party In general, the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximize revenue or minimize financing costs. This may entail selling one securities issue and buying another in foreign currency; it may entail buying a currency on the spot market and simultaneously selling it forward. Swaps also may involve exchanging income flows; for example, exchanging the fixed rate coupon stream of a bond for a variable rate payment stream, or vice versa, while not swapping the principal component of the bond. Swaps are generally traded over-the-counter. A financial transaction in which two counterparties agree to exchange streams of payments over a period of time according to a predetermined rule. For example, the counterparties may swap interest payments, with each paying the other's interest on the same amount of principal. Usually a fixed rate interest obligation is swapped for a floating rate interest obligation, so that both parties can match the form of interest they owe on their debts with the form of interest income they expect to receive on their assets -- fixed with fixed, or floating with floating. Or, the counterparties may swap payments in one denomination of currency for payments in another country's currency. Both interest rate swaps and currency swaps are designed to lessen market exposure of paying off debt in an environment of potentially changing interest rates.
Treasury bills
Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price. Types Of Treasury Bills There are different types of Treasury bills based on the maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 12months Treasury bills etc. In India, at present, the Treasury Bills are the 91-days and 364-days Treasury bills. Benefits Of Investment In Treasury Bills No tax deducted at source
Zero default risk being sovereign paper Highly liquid money market instrument Better returns especially in the short term Transparency Simplified settlement High degree of tradeability and active secondary market facilitates meeting unplanned fund requirements.
Features Form The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialised form. Minimum Amount Of Bids Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only and in multiples thereof. Eligibility: All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills. Repayment The treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai. Availability All the treasury Bills are highly liquid instruments available both in the primary and secondary market. Day Count For treasury bills the day count is taken as 365 days for a year. Yield Calculation The yield of a Treasury Bill is calculated as per the following formula: (100-P)*365*100 Y= -----------------P*D Y = discounted yield P= Price D= Days to maturity
Wherein
Example A cooperative bank wishes to buy 91 Days Treasury Bill Maturing on Dec. 6, 2002 on Oct. 12, 2002. The rate quoted by seller is Rs. 99.1489 per Rs. 100 face values. The YTM can be calculated as following: The days to maturity of Treasury bill are 55 (October – 20 days, November – 30 days and December – 5 days) YTM = (100-99.1489) x 365 x 100/(99.1489*55) = 5.70% Similarly if the YTM is quoted by the seller price can be calculated by inputting the price in above formula.
COMMERCIAL BILLS Commercial bills can be traded by offering the bills for rediscounting. Banks provide credit to their customers by discounting commercial bills. This credit is repayable on maturity of the bill. In case of need for funds, and can rediscount the bills in the money market and get ready money. Commercial bills ensure improved quality of lending, liquidity and efficiency in money management. It is fully secured for investment since it is transferable by endorsement and delivery and it has high degree of liquidity. The bills market is highly developed in industrial countries but it is very limited in India. Commercial bills rediscounted by commercial banks with financial institutions amount to less than Rs 1,000 crore. In India, the bill market did not develop due to (1) the cash credit system of credit delivery where the onus of cash management rest with banks and (2) an absence of an active secondary market. Measures to Develop the Bills Market: One of the objectives of the Reserve Bank in setting up the Discount and finance House of India was to develop commercial bills market. The bank sanctioned a refinance limit for the DFHI against collateral of treasury bills and against the holdings of eligible commercial bills. With a view to developing the bills market, the interest rate ceiling of 12.5 per cent on rediscounting of commercial bills was withdrawn from May 1, 1989. To develop the bills market, the Securities and Exchange Board of India (SEBI) allowed, in 1995-96, 14 mutual funds to participate as lenders in the bills rediscounting market. During 1996-97, seven more mutual funds were permitted to participate in this market as lenders while another four primary dealers were allowed to participate as both lenders and borrowers. In order to encourage the ‘bills’ culture, the Reserve Bank advised banks in October 1997 to ensure that at least 25 percent of inland credit purchases of borrowers be through bills.
Size of the Commercial Bills market: The size of the commercial market is reflected in the outstanding amount of commercial bills discounted by banks with various financial institutions. The share of bill finance in the total bank credit increased from 1993-94 to 1995-96 but declined subsequently. This reflects the underdevelopment state of the bills market. The reasons for the underdevelopment are as follows: The Reserve Bank made an attempt to promote the development of the bill market by rediscounting facilities with it self till 1974. Then, in the beginning of the 1980s, the availability of funds from the Reserve Bank under the bill rediscounting scheme was put on a discretionary basis. It was altogether stopped in 1981. The popularity of the bill of exchange as a credit instrument depends upon the availability of acceptance sources of the central bank as it is the ultimate source of cash in times of a shortage of funds. However, it is not so in India. The Reserve Bank set up the DFHI to deal in this instrument and extends refinance facility to it. Even then, the business in commercial bills has declined drastically as DFHI concentrates more on other money market instruments such as call money and treasury bills. It is mostly foreign trade that is financed through the bills market. The size of this market is small because the share of foreign trade in national income is small. Moreover, export and import bills are still drawn in foreign currency which has restricted their scope of negotiation. A large part of the bills discounted by banks are not genuine. They are bills created by converting the cash-credit/overdraft accounts of their customers. The system of cash-credit and overdraft from banks is cheaper and more convenient than bill financing as the procedures for discounting and rediscounting are complex and time consuming. This market was highly misused in the early 1990s by banks and finance companies which refinanced it at times when it could to be refinanced. This led to channeling of money into undesirable uses. American Depositary Receipt - 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. An American Depositary Receipt (or ADR) represents the ownership in the shares of a foreign company trading on US financial markets. The stock of many non-US companies trades on US exchanges through the use of ADRs. ADRs enable US investors to buy
shares in foreign companies without undertaking cross-border transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of USbased companies. Each ADR is issued by a US depository bank and can represent a fraction of a share, a single share, or multiple shares of foreign stock. An owner of an ADR has the right to obtain the foreign stock it represents, but US investors usually find it more convenient simply to own the ADR. The price of an ADR is often close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. In the case of companies incorporated in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government. Depository banks have numerous responsibilities to an ADR holder and to the non-US company the ADR represents. The first ADR was introduced by JPMorgan in 1927, for the British retailer Selfridges&Co. The largest depository bank is the Bank of New York Mellon. Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADS). 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.
Global Depositary Receipt - GDR
What Does Global Depositary Receipt - GDR Mean?
1. 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. 2. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros.
A Global Depository Receipt or Global Depositary Receipt (GDR) is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. Global Depository Receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets. Prices of GDRs are often close to values of related shares, but they are traded & settled independently of the underlying share.
Zero coupon bond
A Zero coupon bond (also called a discount bond or deep discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity.[1] It does not make periodic interest payments, or so-called "coupons," hence the term zero-coupon bond. Investors earn return from the compounded interest all paid at maturity plus the difference between the discounted price of the bond and its par (or redemption) value. Examples of zerocoupon bonds include U.S. Treasury bills, U.S. savings bonds, long-term zero-coupon bonds,[1], and any type of coupon bond that has been stripped of its coupons. In contrast, an investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures. Some zero coupon bonds are inflation indexed, so the amount of money that will be paid to the bond holder is calculated to have a set amount of purchasing power rather than a set amount of money, but the majority of zero coupon bonds pay a set amount of money known as the face value of the bond. Zero coupon bonds may be long or short term investments. Long-term zero coupon maturity dates typically start at ten to fifteen years. The bonds can be held until maturity or sold on secondary bond markets. Short-term zero coupon bonds generally have maturities of less than one year and are called bills. The U.S. Treasury bill market is the most active and liquid debt market in the world.
INSTRUMENTS
Relief Bonds
Drought Relief Bonds' alias 'Rahat Patras' were introduced on December 1, 1987 to enable the government to fight the unprecedented drought. It is not known whether they helped to fight the drought but they certainly attracted a flood of investors. After the drought was contained, DRBs were scheduled to go off the counter in February 1988. However, since the instrument had become extremely popular, it was extended and the word drought was deleted. The interest rate on Relief Bonds was reduced gradually over the years. Then came another name change. FA03 discontinued Relief Bonds and introduced (what was essentially the same instrument) in its new avtaar - Savings Bonds. These came in two flavours: • • Tax-free bonds with a term of five years. The interest is 6.5 per cent payable half yearly (= 6.61 per cent) on January 1 and July 1. Taxable bonds with a term of 6 years. The interest is 8 per cent payable half yearly (= 8.16 per cent) on February 1 and August 1.
Section 80L & TDS For over a year after its launch, there was no clarity about i) applicability of Section 80L and if indeed applicable, would the extra deduction of Rs 3,000 specially allotted for government securities besides the general deduction of Rs 12,000 be available for these bonds and ii) possibility of the interest suffering TDS and if so, at what rate. Finally, in a press release dated February 9, 2004, RBI clarified, in the case of taxable Savings Bonds, "in accordance with the provision of Section 80L of the I.T. Act the interest on the Government Securities/bonds will enjoy a tax deduction up to Rs 15,000 p.a." Government of India, vide Notification F 4 (10) - W&M /2003 dt 13.1.04 declared, "Tax is to be paid by the bond holder as per provisions of the Income Tax Act, 1961 on the interest income earned from investments in 8 per cent Savings (Taxable) Bonds, 2003. However, tax (TDS) will not be deducted at source." These two are very crucial decision-oriented factors for any meaningful investment planning. After the clarification, the taxable Savings Bonds have become suddenly attractive even for high net worth individuals. Features • • • Individuals, may hold the bonds singly or jointly, or on `anyone or survivor' basis or on behalf of a minor as father, mother or legal guardian. HUFs also can subscribe. These are not available to NRIs. Investors can opt for either half-yearly or cumulative interest. For the tax-free bond, the cumulative value at maturity is Rs 1,376.90 on a face value of Rs 1,000 and it is Rs. 1,480.25 for the taxable bond. The old bonds will continue to enjoy the old rates until their maturity.
• • •
There is no maximum limit on investment in the bonds. Investments can be made in multiples of Rs 1,000. The tax-free bonds shall not be transferable except by way of gift to a relative as defined in Section 6 of the Indian Companies Act, 1956, by execution of an appropriate transfer form and execution of an affidavit by the holder. The taxable bonds cannot be gifted. The bonds shall not be tradeable in the secondary market and shall not be eligible as collateral for loans from banks, financial institutions and non-banking financial companies (NBFC) etc.
Premature encashment Tax-free Bonds can be surrendered after a minimum lock-in of three years from the date of issue, any time after the sixth half year but redemption payment will be made on the following interest payment due date. Thus the effective date of premature encashment will be July 1 and January 1 every year. However, 50 per cent of the interest due and payable for the last six months of the holding period will be recovered in such cases both in respect of cumulative and non-cumulative bonds. In sum Since the pure-growth, open-ended, debt-based schemes appear to have possibly outlived their utility, these Savings Bonds have gradually emerged as a good parking place for investible funds for small investors and high net worth individuals. Even for retired persons, as can be seen from the above table, as much as Rs 812,000 can be invested on a tax-free basis. Considering the interest rates generally available on other fixed income instruments, make hay while the sun shines.
National Savings Scheme 1992
Discontinued from 01.11.2002 Opening of new account and also accepting deposits in the existing account will not be accepted.
Interest Rate
8.5% per annum. (w.e.f. 1st March 2002)
Investment Limits and Denominations
Deposits in multiple of Rs. 100/- Minimum Rs. 100/- and no Maximum Limits Accounts can be opened in all HPOs and selected Sub Post Offices. A separate account shall be opened in a Post Office by every depositor for each year.
1. In case of depositor being individuals an account may be opened by: a. a single adult or b. two adults jointly, the amount due on the account being payable-
i. to both jointly or survivor or ii. to either of them or survivor c. a guardian on behalf of a minor 2. Hindu undivided family. 3. Association of persons or Body of individuals. Features and Tax Rebate
Deposits (not interest) will be covered under section 88 of Income Tax Act and depositor can claim 20 % deduction from Income Tax. Interest on the account will be tax free up to the limit of Rs. 12,000/- every year under section 80-L of Income Tax Act.
Withdrawal
The interest credited in the account can be withdrawn at any time at the option of the depositor the deposits may be withdrawn after the expiry of four years from the end of the year in which the account was opened, at the option of the depositor. The account can be closed on expiry of 4 years from the end of the year in which the account was opened. The deposits or interest amount if not withdrawn after it becomes due, will continue to earn interest at the rate of 8.5% p.a. up to the date of its withdrawal
National Saving Certificate
National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at all post office counters in the country. It is a long term safe savings option for the investor. The scheme combines growth in money with reductions in tax liability as per the provisions of the Income Tax Act, 1961. The duration of a NSC scheme is 6 years. NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 for a maturity period of 6 years. Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88. Act: The Government Savings Certificates Act, 1959 ACT No. 46 OF 1959 Government body: Indian Post Office Web Reference: http://www.indiapost.gov.in/Netscape/6yearsNSC.html
How the instrument works:
Interest Rate Period during which purchased From 01.01.1999 15.01.2000 01.03.2001 01.03.2002 01.03.2003 Features
1. One person can be nominated for certificates of denomination of Rs. 100- and more than one person can be nominated for higher denominations. Maturity period is 6 years. No premature encashment is permitted in the normal course. 2. PREMATURE ENCASHMENT under sub-rule (1) of rule 16 after the expiry of three years from the date of purchase of certificate.
To 14.01.2000 28.02.2001 28.02.2002 28.02.2003 onwards
Maturity Value for a Denomination of Rs.100.00 Rs.195.60 Rs.190.12 Rs.174.52 Rs.169.59 Rs.160.10
Table below for a certificate of Rs.100 denomination and at a proportionate rate for a certificate of any other denomination.
Table Period from the date of the certificate to the date of its encashment.
Issued from 01.03.2001 to 28.02.2002 126.43 131.71 136.90 142.48 147.98 153.89
Issued from 01.03.2002 to 28.02.2003 124.62 129.51 134.29 139.43 144.46 149.83
01.03.2003 onwards
Three years or more, but less than three years and six months Three years and six months or more, but less than four years. Four years or more, but less than four years and six months. Four years and six months or more, but less than five years. Five years or more, but less than five years and six months. Five years and six months or more, but less than six years
121.15 125.09 129.16 133.36 137.69 142.16
Deposits with bank
Controlling Body RBI Web reference: http://www.webindia123.com/finance/bank/fix.htm
Description
A fixed deposit is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of 15 days to five years and above, thereby earning a higher rate of interest in return. Investor gets a lump sum (principal + interest) at the maturity of the deposit. Bank fixed deposits are one of the most common savings scheme open to an average investor. Fixed deposits also give a higher rate of interest than a savings bank account. The facilities vary from bank to bank. Some of the facilities offered by banks are overdraft (loan) facility on the amount deposited, premature withdrawal before maturity period (which involves a loss of interest) etc. Bank deposits are fairly safer because banks are subject to control of the Reserve Bank of India
Features
Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India (RBI) with regard to several policy and operational parameters. The banks are free to offer varying interests in fixed deposits of different maturities. Interest is compounded once a quarter, leading to a somewhat higher effective rate. The minimum deposit amount varies with each bank. It can range from as low as Rs. 100 to an unlimited amount with some banks. Deposits can be made in multiples of Rs. 100/-. Before opening a FD account, try to check the rates of interest for different banks for different periods. It is advisable to keep the amount in five or ten small deposits instead of making one big deposit. In case of any premature withdrawal of partial amount, then only one or two deposit need be prematurely encashed. The loss sustained in interest will, thus, be less than if one big deposit were to be encashed. Check deposit receipts carefully to see that all particulars have been properly and accurately filled in. The thing to consider before investing in an FD is the rate of interest and the inflation rate. A high inflation rate can simply chip away your real returns.
Returns
The rate of interest for Bank Fixed Deposits varies between 4 and 11 per cent, depending on the maturity period (duration) of the FD and the amount invested.
Interest rate also varies between each bank. A Bank FD does not provide regular interest income, but a lump-sum amount on its maturity. Some banks have facility to pay interest every quarter or every month, but the interest paid may be at a discounted rate in case of monthly interest. The Interest payable on Fixed Deposit can also be transferred to Savings Bank or Current Account of the customer. The deposit period can vary from 15, 30 or 45 days to 3, 6 months, 1 year, and 1.5 years to 10 years.
Deposits with Company
Description
Company Fixed Deposit market in India has an interesting phase of evolution. It basically grew out of the need of Corporate Sector for raising short term finance and requirements of small investors to earn superior returns as compared to returns offered by the Banks. The concept of company fixed deposits was started in India in 1964 by Bajaj Capital Ltd. by launching first ever Company Fixed Deposit of Oberoi Group - East India Hotels Ltd.(now EIH Ltd.).The success of East India Hotels prompted others private and public sector companies which started accepting deposits from public. Since then company deposit market has grown by leaps and bounds. Today, company deposit market has grown to approximately Rs.25,000 crores. Hundreds of top companies belonging to reputed industrial houses like Tata, Birla, Escorts, Godrej etc. and government companies like HUDCO are accepting deposits from public. The numbers of depositors have increased to around 5 million. The benefits of company deposit are numerous like superior returns from reputed companies, fixed and assured returns, premature encashment, simplicity of transactions, TDS benefits, wide choice, all these features have made company deposits a preferred instrument of investment.
Features • Company Fixed Deposits are non transferable that means there is no fear of FD receipt being stolen. In case it falls into wrong hands, it cannot be misused. The FD holder in such a case should write to the company which shall issue duplicate deposit receipt upon execution of an indemnity and cancel the previous one. No income tax is deducted at source if the interest income is upto Rs 5000/-in one financial year. One can spread his investment in more than one company, so that interest from one company does not exceed Rs. 5000/Further, advantage of investing in company fixed deposits is that one can analyse the company before investing in it because companies accepting deposits are old-established reputed companies with proven track records.
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It is also important that company fixed deposit should be made for short term , i.e., tenure should be for 1-3 years depending upon the rate of interest.This will help the investor to switch to other company if need be
Foreign Bonds
Regulatory Body: RBI A bond that is issued in a domestic market by a foreign entity, in the domestic market's currency. Foreign bonds are regulated by the domestic market authorities and are usually given nicknames that refer to the domestic market in which they are being offered. Since investors in foreign bonds are usually the residents of the domestic country, investors find them attractive because they can add foreign content to their portfolios without the added exchange rate exposure. Types of foreign bonds include bulldog bonds, matilda bonds, and samurai bonds.
Eurobond
A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. It can be categorised according to the currency in which it is issued. London is one of the centers of the Eurobond market, but Eurobonds may be traded throughout the world - for example in Singapore or Tokyo. Eurobonds are named after the currency they are denominated in. For example, Euroyen and Eurodollar bonds are denominated in Japanese yen and American dollars respectively. A Eurobond is normally a bearer bond, payable to the bearer. It is also free of withholding tax. The bank will pay the holder of the coupon the interest payment due. Usually, no official records are kept. The majority of Eurobonds are now owned in 'electronic' rather than physical form. The bonds are held and traded within one of the clearing systems (Euroclear and Clearstream being the most common). Coupons are paid electronically via the clearing systems to the holder of the Eurobond (or their nominee account).
Foreign Currency Convertible Bond
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. Earlier, corporates were in a rush to issue FCCBs as it was the preferred route to raise capital. However, some interesting changes may happen in the FCCB accounting norms. It is suggested that the redemption premium on FCCBs, which corporates usually would charge off against the share premium account, may now need to be expensed. And that may hit companies who have done large FCCB issues.
Index Bonds
This study examines the demand for index bonds and their role in hedging risky asset returns against currency risks in a complete market where equity is not hedged against inflation risk. Avellaneda's uncertain volatility model with non-constant coefficients to describe equity price variation, forward price variation, index bond price variation and rate of inflation, together with Merton's intertemporal portfolio choice model, are utilized to enable an investor to choose an optimal portfolio consisting of equity, nominal bonds and index bonds when the rate of inflation is uncertain. A hedge ratio is universal if investors in different countries hedge against currency risk to the same extent. Three universal hedge ratios (UHRs) are defined with respect to the investor's total demand for index bonds, hedging risky asset returns (i.e. equity and nominal bonds) against currency risk, which are not held for hedging purposes. These UHRs are hedge positions in foreign index bond portfolios, stated as a fraction of the national market portfolio. At equilibrium all the three UHRs are comparable to Black's corrected equilibrium hedging ratio. The Cameron-MartinGirsanov theorem is applied to show that the Radon-Nikodym
derivative given under a P -martingale, the investor's exchange rate (product of the two currencies) is a martingale. Therefore the investors can agree on a common hedging strategy to trade exchange rate risk irrespective of investor nationality. This makes the choice of the measurement currency irrelevant and the hedge ratio universal without affecting their values.
Non voting shares
Non-voting stock is stock that provides the shareholder very little or no vote on corporate matters, such as election of the board of directors or mergers. This type of share is usually implemented for individuals who want to invest in the company’s profitability and success at the expense of voting rights in the direction of the company. Preferred stock typically has nonvoting qualities. Not all corporations offer voting stock and non-voting stock, nor do all stocks usually have equal voting power. Warren Buffett’s Berkshire Hathaway corporation has two classes of stocks, Class A (Voting stocks -Ticker symbol: BRKA) and Class B (Non-voting stocks - Ticker symbol: BRKB). The Class B stocks carry 1/200th of the voting rights of the Class A, but 1/30th of the dividends.
Takeover Non-voting stock may also thwart hostile takeover attempts. If the founders of a company maintain all of the voting stock and sell nonvoting stock only to the public, takeover attempts are unlikely. They may occur only if the founders are willing to tender an offer by an unfriendly bidder. There are consequences to not releasing voting rights to common shareholders; these include fewer supplicants for a friendly takeover, displeased shareholders as a result of the corporation’s limited growth potential, and difficulty finding bidders for additional non-voting shares in the market. The finance minister must be wondering why there is such a brouhaha, when he was merely trying to meet a demand voiced vigorously by corporates themselves. Indeed, it is ironic that FIIs are reported to have reacted strongly against NVS, although such shares are allowed in many countries, including the US and Britain. In 1984, when General Motors proposed to issue such shares, New York Stock Exchange (NYSE) started recognising dual class shares with unequal voting rights, contrary to its earlier practice. Although shares with dual voting rights had all along been on the US statute book, NYSE had banned them till 1984, when it retracted its objections primarily because of fear of loss of business to competing stock exchanges. It did so by temporarily, issuing a moratorium on its earlier ban. Thus even in the Mecca of stock markets viz the US, dual voting shares are allowed and indulged in by respected corporates, such as General Motors. Starting from 1986, this practice of NYSE has been formalised. With the other competing stock exchanges, NASDAQ and American Stock Exchange, allowing listing of securities with unequal voting powers, there is no question of NVS being illegitimate in the US. The declared objective of NVS is to use such dual class shares as a defence mechanism against hostile take overs. Granted, corporate democracy is important. The defining principle of current American corporate law seems to be, if the existing shareholders agree to the creation of a new type of shares with no voting rights, why should we object? This is also the principal driving force behind Mr Chidambaram's proposal. At a recent meeting of corporate representatives, one entrepreneur pointed out, that he was somewhat mystified by the angry reactions of some FIIs to the proposal. Perhaps, this is because of a fear of fall of equity prices. Ofcourse, there could be a fall in value of the prices of existing stock of shares whenever additional shares are issued. But, this could happen even with new voting shares. Some experts feel that in a situation where NVS are being issued, the value of voting shares per se could go up, under certain circumstances.
Floating Rate Bonds
To make the government borrowing porgramme attractive in times of rising interest rates, the Reserve Bank of India (RBI) has mooted the introduction of floating rate bonds (FRBs). Usually, banks and primary dealers shun securities in a rising market because a rise in yields means fall in price of the bonds and results in a loss of value. Dealers say that an FRB carries a variable coupon unlike fixed rate government bonds. These variable coupons are pegged as a spread over a fixed rate like that of the 364 day t- bill or current market yield of the benchmark ten year bond. The Clearing corporation of India (CCIL) is working on a new issuance and auction format structure for FRBs which is being inbuilt into the NDS current auction format. The auction format will also help price FRBs in the secondary market. CCIL acts as a clearing corporation for government securities and money market deals routed through the RBI. This step is part of complete review of the current auction procedure for government securities aimed at improving efficiency. The idea is to reduce the time gap between bid submission and declaration of auction results and withdrawal of facility of bidding in physical form. A suggestion to design the secured web system, facilitating direct participation of non NDS members in auction of government securities, is also being considered.
SEBI
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both
development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91. The BOARD The basic objectives of the Board were identified as: • • • • to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and for matters connected therewith or incidental thereto.
Since its inception SEBI has been working targetting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market. SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor. Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons: • • • • It It It It acts as a barometer for market behavior; is used to benchmark portfolio performance; is used in derivative instruments like index futures and index options; can be used for passive fund management as in case of Index Funds.
Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 is a real landmark.
Read http://finance.indiamart.com/india_business_information/sebi_introduction.html for furthur info
Commercial Paper
Introduction Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP, as a privately placed instrument, was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers, satellite dealers? and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. Guidelines for issue of CP are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. The guidelines for issue of CP incorporating all the amendments issued till date is given below for ready reference. Who can Issue Commercial Paper (CP) Corporates, primary dealers (PDs) and the all-India financial institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India are eligible to issue CP. A corporate would be eligible to issue CP provided: (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore; (b) company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s. Rating Requirement All eligible participants shall obtain the credit rating for issuance of Commercial Paper from either the Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such other credit rating agencies as may be specified by the Reserve Bank of India from time to time, for the purpose. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has not fallen due for review. Denominations CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by a single investor should not be less than Rs.5 lakh (face value).
Read - Master Circular – Guidelines for Issue of Commercial Paper for more info
Certificate of Deposits
Introduction Certificates of Deposit (CDs) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. The guidelines for issue of CDs incorporating all the amendments issued till date are given below for ready reference. Eligibility CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Aggregate Amount Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments, viz., term money, term deposits, commercial papers and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. Minimum Size of Issue and Denominations Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs. 1 lakh and in the multiples of Rs. 1 lakh thereafter. Who can Subscribe CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc. NonResident Indians (NRIs) may also subscribe to CDs, but only on nonrepatriable basis which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market. Maturity
The maturity period of CDs issued by banks should be not less than 7 days and not more than one year. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue. Discount/ Coupon Rate CDs may be issued at a discount on face value. Banks/FIs are also allowed to issue CDs on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market-based. The issuing bank/FI is free to determine the discount/coupon rate. The interest rate on floating rate CDs would have to be reset periodically in accordance with a pre-determined formula that indicates the spread over a transparent benchmark. Reserve Requirements Banks have to maintain the appropriate reserve requirements, i.e., cash reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs. Transferability Physical CDs are freely transferable by endorsement and delivery. Dematted CDs can be transferred as per the procedure applicable to other demat securities. There is no lock-in period for the CDs. Loans/Buy-backs Banks/FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity. Format of CDs Banks/FIs should issue CDs only in the dematerialised form. However, according to the Depositories Act, 1996, investors have the option to seek certificate in physical form. Accordingly, if investor insists on physical certificate, the bank/FI may inform the Chief General Manager, Financial Markets Department, Reserve Bank of India, Central Office, Fort, Mumbai - 400 001 about such instances separately. Further, issuance of CDs will attract stamp duty. A format (Annex I) is enclosed for adoption by banks/FIs. There will be no grace period for repayment of CDs. If the maturity date happens to be holiday, the issuing bank should make payment on the immediate preceding working day. Banks/FIs may, therefore, so fix the period of deposit that the maturity date does not coincide with a holiday to avoid loss of discount / interest rate.
Security Aspect Since physical CDs are freely transferable by endorsement and delivery, it will be necessary for banks to see that the certificates are printed on good quality security paper and necessary precautions are taken to guard against tampering with the document. They should be signed by two or more authorised signatories. Payment of Certificate Since CDs are transferable, the physical certificate may be presented for payment by the last holder. The question of liability on account of any defect in the chain of endorsements may arise. It is, therefore, desirable that banks take necessary precautions and make payment only by a crossed cheque. Those who deal in these CDs may also be suitably cautioned. The holders of dematted CDs will approach their respective depository participants (DPs) and have to give transfer/delivery instructions to transfer the demat security represented by the specific ISIN to the ‘CD Redemption Account’ maintained by the issuer. The holder should also communicate to the issuer by a letter/fax enclosing the copy of the delivery instruction it had given to its DP and intimate the place at which the payment is requested to facilitate prompt payment. Upon receipt of the Demat credit of CDs in the “CD Redemption Account”, the issuer, on maturity date, would arrange to repay to holder/transferor by way of Banker’s cheque/high value cheque, etc. Read - Master Circular – Guidelines for Issue of Certificates of Deposit for more info
Kisan Vikas Patra
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Minimum Investment Rs. 500/- No maximum limit. Rate of interest 8.40% compounded annually. Money doubles in 8 years and 7 months. Two adults, Individuals and minor through guardian can purchase. Companies, Trusts, Societies and any other Institution not eligible to purchase. Non-Resident Indian/HUF are not eligible to purchase. Facility of encashment from 2 ½ years. Maturity proceeds not drawn are eligible to Post office Savings account interest for a maximum period of two years. Facility of reinvestment on maturity. Patras can be pledged as security against a loan to Banks/Govt. Institutions.
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Patras are encashable at any Post office before maturity by way of transfer to desired Post office. Patras are transferable to any Post office in India. Patras are transferable from one person to another person before maturity Duplicate can be issued for lost, stolen, destroyed, mutilated and defaced patras. Nomination facility available. Facility of purchase/payment of Kisan vikas Patras to the holder of Power of attorney. Rebate under section 80 C not admissible. Interest income taxable but no TDS Deposits are exempt from Wealth tax
doc_287936467.doc
Describes various financial instruments for investment like national saving certificate, treasury bills, commercial bills, ADRs, GDRs, zero coupon bond, relief bonds, foreign bonds, foreign currency convertible bonds, index bonds, commercial paper, floating rate bonds, certificate of deposits.
Social security certificate
Trade credit
Definition: An arrangement to buy goods or services on account, that is, without making immediate cash payment For many businesses, trade credit is an essential tool for financing growth. Trade credit is the credit extended to you by suppliers who let you buy now and pay later. Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you're using trade credit. When you're first starting your business, however, suppliers most likely aren't going to offer you trade credit. They're going to want to make every order c.o.d. (cash or check on delivery) or paid by credit card in advance until you've established that you can pay your bills on time. While this is a fairly normal practice, you can still try and negotiate trade credit with suppliers. One of the things that will help you in these negotiations is a properly prepared financial plan. When you visit your supplier to set up your order during your startup period, ask to speak directly to the owner of the business if it's a small company. If it's a larger business, ask to speak to the CFO or any other person who approves credit. Introduce yourself. Show the officer the financial plan you've prepared. Tell the owner or financial officer about your business, and explain that you need to get your first orders on credit in order to launch your venture. Depending on the terms available from your suppliers, the cost of trade credit can be quite high. For example, assume you make a purchase from a supplier who decides to extend credit to you. The terms the supplier offers you are two-percent cash discount with 10 days and a net date of 30 days. Essentially, the suppliers is saying that if you pay within 10 days, the purchase price will be discounted by two percent. On the other hand, by forfeiting the two-percent discount, you're able to use your money for 20 more days. On an annualized basis, this is actually costing you 36 percent of the total cost of the items you are purchasing from this supplier! (360 ( 20 days = 18 times per year without discount; 18 ( 2 percent discount = 36 percent discount missed.) Cash discounts aren't the only factor you have to consider in the equation. There are also late-payment or delinquency penalties should you extend payment beyond the agreedupon terms. These can usually run between one and two percent on a monthly basis. If you miss your net payment date for an entire year, that can cost you as much as 12 to 24 percent in penalty interest.
Effective use of trade credit requires intelligent planning to avoid unnecessary costs through forfeiture of cash discounts or the incurring of delinquency penalties. But every business should take full advantage of trade that is available without additional cost in order to reduce its need for capital from other sources.
Inter Corporations deposits
Inter-corporate deposits are deposits made by one company with another company, and usually carry a term of six months. The three types of inter-corporate deposits are: three month deposits, six month deposits, and call deposits. Three month deposits are the most popular type of inter-corporate deposits. These deposits are generally considered by the borrowers to solve problems of short-term capital inadequacy. This type of short-term cash problem may develop due to various issues, including tax payment, excessive raw material import, breakdown in production, payment of dividends, delay in collection, and excessive expenditure of capital. The annual rate of interest given for three month deposits is 12%. Six month deposits are usually made with first class borrowers, and the term for such deposits is six months. The annual interest rate assigned for this type of deposit is 15%. The concept of call deposit is different from the previous two deposits. On giving a one day notice, this deposit can be withdrawn by the lender. The annual interest rate on call deposits is around 10%. The inter-corporate deposits market shows a number of interesting characteristics. The biggest advantage of inter-corporate deposits is that the transaction is free from bureaucratic and legal hassles. The business world otherwise is regulated by a number of rules and regulations. The existence of the inter-corporate deposits market shows that the corporate world can be regulated without rules. The market of inter-corporate deposits maintains secrecy. The brokers in this market never reveal their lists of lenders and borrowers, because they believe that if proper secrecy is not maintained the rate of interest can fall abruptly. The market of inter-corporate deposits depends crucially on personal contacts. The decisions of lending in this market are largely governed by personal contacts.
National Savings Certificate
National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at all post office counters in the country. It is a long term safe savings option for the investor. The scheme combines growth in money with reductions in tax liability as per the provisions of the Income Tax Act, 1961. The duration of a NSC scheme is 6 years. Features NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 for a maturity period of 6 years. There is no prescribed upper limit oninvestment.
Individuals, singly or jointly or on behalf of minors and trust can purchase a NSC by applying to the Post Office through a representative or an agent. One person can be nominated for certificates of denomination of Rs. 100- and more than one person can be nominated for higher denominations. The certificates are easily transferable from one person to another through the post office. There is a nominal fee for registering the transfer. They can also be transferred from one post office to another. One can take a loan against the NSC by pledging it to the RBI or a scheduledbank or a co-operative society, a corporation or a government company, a housingfinance company approved by the National Housing Bank etc with the permission of the concerned post master. Though premature encashment is not possible under normal course, under sub-rule (1) of rule 16 it is possible after the expiry of three years from the date of purchase of certificate. Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88. Return It is having a high interest rate at 8% compounded half yearly. Post maturity interest will be paid for a maximum period of 24 months at the rate applicable to individual savings account. A Rs1000 denomination certificate will increase to Rs. 1601 on completion of 6 years. Interest rates for the NSC Certificate of Rs 1000
Year 1 year 2 year 3 year 4 years 5 years 6 years
Advantages
Rate of Interest Rs 81.60 Rs 88.30 Rs 95.50 Rs103.30 Rs 111.70 Rs 120.80
Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88. NSCs can be transferred from one person to another through the post office on the payment of a prescribed fee. They can also be transferred from one post office to another. The scheme has the backing of the Government of India so there are no risks associated with your investment. How to start?
Any individual or on behalf of minors and trust can purchase a NSC by applying to the Post Office through a representative or an agent. Payments can be made in cash, cheque or DD or by raising a debit in the savings account held by the purchaser in the Post Office. The issue of certificate will be subject to the realization of the cheque, pay order, DD. The date of the certificate will be the date of
realization or encashment of the cheque. If a certificate is lost, destroyed, stolen or mutilated, a duplicate can be issued by the post-office on payment of the prescribed fee.
Swaps
An exchange of streams of payments over time according to specified terms. The most common type is an interest rate swap, in which one party agrees to pay a fixed interest rate in return for receiving a adjustable rate from another party In general, the exchange of one asset or liability for a similar asset or liability for the purpose of lengthening or shortening maturities, or raising or lowering coupon rates, to maximize revenue or minimize financing costs. This may entail selling one securities issue and buying another in foreign currency; it may entail buying a currency on the spot market and simultaneously selling it forward. Swaps also may involve exchanging income flows; for example, exchanging the fixed rate coupon stream of a bond for a variable rate payment stream, or vice versa, while not swapping the principal component of the bond. Swaps are generally traded over-the-counter. A financial transaction in which two counterparties agree to exchange streams of payments over a period of time according to a predetermined rule. For example, the counterparties may swap interest payments, with each paying the other's interest on the same amount of principal. Usually a fixed rate interest obligation is swapped for a floating rate interest obligation, so that both parties can match the form of interest they owe on their debts with the form of interest income they expect to receive on their assets -- fixed with fixed, or floating with floating. Or, the counterparties may swap payments in one denomination of currency for payments in another country's currency. Both interest rate swaps and currency swaps are designed to lessen market exposure of paying off debt in an environment of potentially changing interest rates.
Treasury bills
Treasury Bills are money market instruments to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price. Types Of Treasury Bills There are different types of Treasury bills based on the maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 12months Treasury bills etc. In India, at present, the Treasury Bills are the 91-days and 364-days Treasury bills. Benefits Of Investment In Treasury Bills No tax deducted at source
Zero default risk being sovereign paper Highly liquid money market instrument Better returns especially in the short term Transparency Simplified settlement High degree of tradeability and active secondary market facilitates meeting unplanned fund requirements.
Features Form The treasury bills are issued in the form of promissory note in physical form or by credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialised form. Minimum Amount Of Bids Bids for treasury bills are to be made for a minimum amount of Rs 25000/- only and in multiples thereof. Eligibility: All entities registered in India like banks, financial institutions, Primary Dealers, firms, companies, corporate bodies, partnership firms, institutions, mutual funds, Foreign Institutional Investors, State Governments, Provident Funds, trusts, research organisations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills. Repayment The treasury bills are repaid at par on the expiry of their tenor at the office of the Reserve Bank of India, Mumbai. Availability All the treasury Bills are highly liquid instruments available both in the primary and secondary market. Day Count For treasury bills the day count is taken as 365 days for a year. Yield Calculation The yield of a Treasury Bill is calculated as per the following formula: (100-P)*365*100 Y= -----------------P*D Y = discounted yield P= Price D= Days to maturity
Wherein
Example A cooperative bank wishes to buy 91 Days Treasury Bill Maturing on Dec. 6, 2002 on Oct. 12, 2002. The rate quoted by seller is Rs. 99.1489 per Rs. 100 face values. The YTM can be calculated as following: The days to maturity of Treasury bill are 55 (October – 20 days, November – 30 days and December – 5 days) YTM = (100-99.1489) x 365 x 100/(99.1489*55) = 5.70% Similarly if the YTM is quoted by the seller price can be calculated by inputting the price in above formula.
COMMERCIAL BILLS Commercial bills can be traded by offering the bills for rediscounting. Banks provide credit to their customers by discounting commercial bills. This credit is repayable on maturity of the bill. In case of need for funds, and can rediscount the bills in the money market and get ready money. Commercial bills ensure improved quality of lending, liquidity and efficiency in money management. It is fully secured for investment since it is transferable by endorsement and delivery and it has high degree of liquidity. The bills market is highly developed in industrial countries but it is very limited in India. Commercial bills rediscounted by commercial banks with financial institutions amount to less than Rs 1,000 crore. In India, the bill market did not develop due to (1) the cash credit system of credit delivery where the onus of cash management rest with banks and (2) an absence of an active secondary market. Measures to Develop the Bills Market: One of the objectives of the Reserve Bank in setting up the Discount and finance House of India was to develop commercial bills market. The bank sanctioned a refinance limit for the DFHI against collateral of treasury bills and against the holdings of eligible commercial bills. With a view to developing the bills market, the interest rate ceiling of 12.5 per cent on rediscounting of commercial bills was withdrawn from May 1, 1989. To develop the bills market, the Securities and Exchange Board of India (SEBI) allowed, in 1995-96, 14 mutual funds to participate as lenders in the bills rediscounting market. During 1996-97, seven more mutual funds were permitted to participate in this market as lenders while another four primary dealers were allowed to participate as both lenders and borrowers. In order to encourage the ‘bills’ culture, the Reserve Bank advised banks in October 1997 to ensure that at least 25 percent of inland credit purchases of borrowers be through bills.
Size of the Commercial Bills market: The size of the commercial market is reflected in the outstanding amount of commercial bills discounted by banks with various financial institutions. The share of bill finance in the total bank credit increased from 1993-94 to 1995-96 but declined subsequently. This reflects the underdevelopment state of the bills market. The reasons for the underdevelopment are as follows: The Reserve Bank made an attempt to promote the development of the bill market by rediscounting facilities with it self till 1974. Then, in the beginning of the 1980s, the availability of funds from the Reserve Bank under the bill rediscounting scheme was put on a discretionary basis. It was altogether stopped in 1981. The popularity of the bill of exchange as a credit instrument depends upon the availability of acceptance sources of the central bank as it is the ultimate source of cash in times of a shortage of funds. However, it is not so in India. The Reserve Bank set up the DFHI to deal in this instrument and extends refinance facility to it. Even then, the business in commercial bills has declined drastically as DFHI concentrates more on other money market instruments such as call money and treasury bills. It is mostly foreign trade that is financed through the bills market. The size of this market is small because the share of foreign trade in national income is small. Moreover, export and import bills are still drawn in foreign currency which has restricted their scope of negotiation. A large part of the bills discounted by banks are not genuine. They are bills created by converting the cash-credit/overdraft accounts of their customers. The system of cash-credit and overdraft from banks is cheaper and more convenient than bill financing as the procedures for discounting and rediscounting are complex and time consuming. This market was highly misused in the early 1990s by banks and finance companies which refinanced it at times when it could to be refinanced. This led to channeling of money into undesirable uses. American Depositary Receipt - 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. An American Depositary Receipt (or ADR) represents the ownership in the shares of a foreign company trading on US financial markets. The stock of many non-US companies trades on US exchanges through the use of ADRs. ADRs enable US investors to buy
shares in foreign companies without undertaking cross-border transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of USbased companies. Each ADR is issued by a US depository bank and can represent a fraction of a share, a single share, or multiple shares of foreign stock. An owner of an ADR has the right to obtain the foreign stock it represents, but US investors usually find it more convenient simply to own the ADR. The price of an ADR is often close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. In the case of companies incorporated in the United Kingdom, creation of ADRs attracts a 1.5% stamp duty reserve tax (SDRT) charge by the UK government. Depository banks have numerous responsibilities to an ADR holder and to the non-US company the ADR represents. The first ADR was introduced by JPMorgan in 1927, for the British retailer Selfridges&Co. The largest depository bank is the Bank of New York Mellon. Individual shares of a foreign corporation represented by an ADR are called American Depositary Shares (ADS). 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.
Global Depositary Receipt - GDR
What Does Global Depositary Receipt - GDR Mean?
1. 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. 2. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros.
A Global Depository Receipt or Global Depositary Receipt (GDR) is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. Global Depository Receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets. Prices of GDRs are often close to values of related shares, but they are traded & settled independently of the underlying share.
Zero coupon bond
A Zero coupon bond (also called a discount bond or deep discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity.[1] It does not make periodic interest payments, or so-called "coupons," hence the term zero-coupon bond. Investors earn return from the compounded interest all paid at maturity plus the difference between the discounted price of the bond and its par (or redemption) value. Examples of zerocoupon bonds include U.S. Treasury bills, U.S. savings bonds, long-term zero-coupon bonds,[1], and any type of coupon bond that has been stripped of its coupons. In contrast, an investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures. Some zero coupon bonds are inflation indexed, so the amount of money that will be paid to the bond holder is calculated to have a set amount of purchasing power rather than a set amount of money, but the majority of zero coupon bonds pay a set amount of money known as the face value of the bond. Zero coupon bonds may be long or short term investments. Long-term zero coupon maturity dates typically start at ten to fifteen years. The bonds can be held until maturity or sold on secondary bond markets. Short-term zero coupon bonds generally have maturities of less than one year and are called bills. The U.S. Treasury bill market is the most active and liquid debt market in the world.
INSTRUMENTS
Relief Bonds
Drought Relief Bonds' alias 'Rahat Patras' were introduced on December 1, 1987 to enable the government to fight the unprecedented drought. It is not known whether they helped to fight the drought but they certainly attracted a flood of investors. After the drought was contained, DRBs were scheduled to go off the counter in February 1988. However, since the instrument had become extremely popular, it was extended and the word drought was deleted. The interest rate on Relief Bonds was reduced gradually over the years. Then came another name change. FA03 discontinued Relief Bonds and introduced (what was essentially the same instrument) in its new avtaar - Savings Bonds. These came in two flavours: • • Tax-free bonds with a term of five years. The interest is 6.5 per cent payable half yearly (= 6.61 per cent) on January 1 and July 1. Taxable bonds with a term of 6 years. The interest is 8 per cent payable half yearly (= 8.16 per cent) on February 1 and August 1.
Section 80L & TDS For over a year after its launch, there was no clarity about i) applicability of Section 80L and if indeed applicable, would the extra deduction of Rs 3,000 specially allotted for government securities besides the general deduction of Rs 12,000 be available for these bonds and ii) possibility of the interest suffering TDS and if so, at what rate. Finally, in a press release dated February 9, 2004, RBI clarified, in the case of taxable Savings Bonds, "in accordance with the provision of Section 80L of the I.T. Act the interest on the Government Securities/bonds will enjoy a tax deduction up to Rs 15,000 p.a." Government of India, vide Notification F 4 (10) - W&M /2003 dt 13.1.04 declared, "Tax is to be paid by the bond holder as per provisions of the Income Tax Act, 1961 on the interest income earned from investments in 8 per cent Savings (Taxable) Bonds, 2003. However, tax (TDS) will not be deducted at source." These two are very crucial decision-oriented factors for any meaningful investment planning. After the clarification, the taxable Savings Bonds have become suddenly attractive even for high net worth individuals. Features • • • Individuals, may hold the bonds singly or jointly, or on `anyone or survivor' basis or on behalf of a minor as father, mother or legal guardian. HUFs also can subscribe. These are not available to NRIs. Investors can opt for either half-yearly or cumulative interest. For the tax-free bond, the cumulative value at maturity is Rs 1,376.90 on a face value of Rs 1,000 and it is Rs. 1,480.25 for the taxable bond. The old bonds will continue to enjoy the old rates until their maturity.
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There is no maximum limit on investment in the bonds. Investments can be made in multiples of Rs 1,000. The tax-free bonds shall not be transferable except by way of gift to a relative as defined in Section 6 of the Indian Companies Act, 1956, by execution of an appropriate transfer form and execution of an affidavit by the holder. The taxable bonds cannot be gifted. The bonds shall not be tradeable in the secondary market and shall not be eligible as collateral for loans from banks, financial institutions and non-banking financial companies (NBFC) etc.
Premature encashment Tax-free Bonds can be surrendered after a minimum lock-in of three years from the date of issue, any time after the sixth half year but redemption payment will be made on the following interest payment due date. Thus the effective date of premature encashment will be July 1 and January 1 every year. However, 50 per cent of the interest due and payable for the last six months of the holding period will be recovered in such cases both in respect of cumulative and non-cumulative bonds. In sum Since the pure-growth, open-ended, debt-based schemes appear to have possibly outlived their utility, these Savings Bonds have gradually emerged as a good parking place for investible funds for small investors and high net worth individuals. Even for retired persons, as can be seen from the above table, as much as Rs 812,000 can be invested on a tax-free basis. Considering the interest rates generally available on other fixed income instruments, make hay while the sun shines.
National Savings Scheme 1992
Discontinued from 01.11.2002 Opening of new account and also accepting deposits in the existing account will not be accepted.
Interest Rate
8.5% per annum. (w.e.f. 1st March 2002)
Investment Limits and Denominations
Deposits in multiple of Rs. 100/- Minimum Rs. 100/- and no Maximum Limits Accounts can be opened in all HPOs and selected Sub Post Offices. A separate account shall be opened in a Post Office by every depositor for each year.
1. In case of depositor being individuals an account may be opened by: a. a single adult or b. two adults jointly, the amount due on the account being payable-
i. to both jointly or survivor or ii. to either of them or survivor c. a guardian on behalf of a minor 2. Hindu undivided family. 3. Association of persons or Body of individuals. Features and Tax Rebate
Deposits (not interest) will be covered under section 88 of Income Tax Act and depositor can claim 20 % deduction from Income Tax. Interest on the account will be tax free up to the limit of Rs. 12,000/- every year under section 80-L of Income Tax Act.
Withdrawal
The interest credited in the account can be withdrawn at any time at the option of the depositor the deposits may be withdrawn after the expiry of four years from the end of the year in which the account was opened, at the option of the depositor. The account can be closed on expiry of 4 years from the end of the year in which the account was opened. The deposits or interest amount if not withdrawn after it becomes due, will continue to earn interest at the rate of 8.5% p.a. up to the date of its withdrawal
National Saving Certificate
National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at all post office counters in the country. It is a long term safe savings option for the investor. The scheme combines growth in money with reductions in tax liability as per the provisions of the Income Tax Act, 1961. The duration of a NSC scheme is 6 years. NSCs are issued in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000 for a maturity period of 6 years. Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be treated as fresh investment in NSC for that year and tax benefits can be claimed under section 88. Act: The Government Savings Certificates Act, 1959 ACT No. 46 OF 1959 Government body: Indian Post Office Web Reference: http://www.indiapost.gov.in/Netscape/6yearsNSC.html
How the instrument works:
Interest Rate Period during which purchased From 01.01.1999 15.01.2000 01.03.2001 01.03.2002 01.03.2003 Features
1. One person can be nominated for certificates of denomination of Rs. 100- and more than one person can be nominated for higher denominations. Maturity period is 6 years. No premature encashment is permitted in the normal course. 2. PREMATURE ENCASHMENT under sub-rule (1) of rule 16 after the expiry of three years from the date of purchase of certificate.
To 14.01.2000 28.02.2001 28.02.2002 28.02.2003 onwards
Maturity Value for a Denomination of Rs.100.00 Rs.195.60 Rs.190.12 Rs.174.52 Rs.169.59 Rs.160.10
Table below for a certificate of Rs.100 denomination and at a proportionate rate for a certificate of any other denomination.
Table Period from the date of the certificate to the date of its encashment.
Issued from 01.03.2001 to 28.02.2002 126.43 131.71 136.90 142.48 147.98 153.89
Issued from 01.03.2002 to 28.02.2003 124.62 129.51 134.29 139.43 144.46 149.83
01.03.2003 onwards
Three years or more, but less than three years and six months Three years and six months or more, but less than four years. Four years or more, but less than four years and six months. Four years and six months or more, but less than five years. Five years or more, but less than five years and six months. Five years and six months or more, but less than six years
121.15 125.09 129.16 133.36 137.69 142.16
Deposits with bank
Controlling Body RBI Web reference: http://www.webindia123.com/finance/bank/fix.htm
Description
A fixed deposit is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of 15 days to five years and above, thereby earning a higher rate of interest in return. Investor gets a lump sum (principal + interest) at the maturity of the deposit. Bank fixed deposits are one of the most common savings scheme open to an average investor. Fixed deposits also give a higher rate of interest than a savings bank account. The facilities vary from bank to bank. Some of the facilities offered by banks are overdraft (loan) facility on the amount deposited, premature withdrawal before maturity period (which involves a loss of interest) etc. Bank deposits are fairly safer because banks are subject to control of the Reserve Bank of India
Features
Bank deposits are fairly safe because banks are subject to control of the Reserve Bank of India (RBI) with regard to several policy and operational parameters. The banks are free to offer varying interests in fixed deposits of different maturities. Interest is compounded once a quarter, leading to a somewhat higher effective rate. The minimum deposit amount varies with each bank. It can range from as low as Rs. 100 to an unlimited amount with some banks. Deposits can be made in multiples of Rs. 100/-. Before opening a FD account, try to check the rates of interest for different banks for different periods. It is advisable to keep the amount in five or ten small deposits instead of making one big deposit. In case of any premature withdrawal of partial amount, then only one or two deposit need be prematurely encashed. The loss sustained in interest will, thus, be less than if one big deposit were to be encashed. Check deposit receipts carefully to see that all particulars have been properly and accurately filled in. The thing to consider before investing in an FD is the rate of interest and the inflation rate. A high inflation rate can simply chip away your real returns.
Returns
The rate of interest for Bank Fixed Deposits varies between 4 and 11 per cent, depending on the maturity period (duration) of the FD and the amount invested.
Interest rate also varies between each bank. A Bank FD does not provide regular interest income, but a lump-sum amount on its maturity. Some banks have facility to pay interest every quarter or every month, but the interest paid may be at a discounted rate in case of monthly interest. The Interest payable on Fixed Deposit can also be transferred to Savings Bank or Current Account of the customer. The deposit period can vary from 15, 30 or 45 days to 3, 6 months, 1 year, and 1.5 years to 10 years.
Deposits with Company
Description
Company Fixed Deposit market in India has an interesting phase of evolution. It basically grew out of the need of Corporate Sector for raising short term finance and requirements of small investors to earn superior returns as compared to returns offered by the Banks. The concept of company fixed deposits was started in India in 1964 by Bajaj Capital Ltd. by launching first ever Company Fixed Deposit of Oberoi Group - East India Hotels Ltd.(now EIH Ltd.).The success of East India Hotels prompted others private and public sector companies which started accepting deposits from public. Since then company deposit market has grown by leaps and bounds. Today, company deposit market has grown to approximately Rs.25,000 crores. Hundreds of top companies belonging to reputed industrial houses like Tata, Birla, Escorts, Godrej etc. and government companies like HUDCO are accepting deposits from public. The numbers of depositors have increased to around 5 million. The benefits of company deposit are numerous like superior returns from reputed companies, fixed and assured returns, premature encashment, simplicity of transactions, TDS benefits, wide choice, all these features have made company deposits a preferred instrument of investment.
Features • Company Fixed Deposits are non transferable that means there is no fear of FD receipt being stolen. In case it falls into wrong hands, it cannot be misused. The FD holder in such a case should write to the company which shall issue duplicate deposit receipt upon execution of an indemnity and cancel the previous one. No income tax is deducted at source if the interest income is upto Rs 5000/-in one financial year. One can spread his investment in more than one company, so that interest from one company does not exceed Rs. 5000/Further, advantage of investing in company fixed deposits is that one can analyse the company before investing in it because companies accepting deposits are old-established reputed companies with proven track records.
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It is also important that company fixed deposit should be made for short term , i.e., tenure should be for 1-3 years depending upon the rate of interest.This will help the investor to switch to other company if need be
Foreign Bonds
Regulatory Body: RBI A bond that is issued in a domestic market by a foreign entity, in the domestic market's currency. Foreign bonds are regulated by the domestic market authorities and are usually given nicknames that refer to the domestic market in which they are being offered. Since investors in foreign bonds are usually the residents of the domestic country, investors find them attractive because they can add foreign content to their portfolios without the added exchange rate exposure. Types of foreign bonds include bulldog bonds, matilda bonds, and samurai bonds.
Eurobond
A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. It can be categorised according to the currency in which it is issued. London is one of the centers of the Eurobond market, but Eurobonds may be traded throughout the world - for example in Singapore or Tokyo. Eurobonds are named after the currency they are denominated in. For example, Euroyen and Eurodollar bonds are denominated in Japanese yen and American dollars respectively. A Eurobond is normally a bearer bond, payable to the bearer. It is also free of withholding tax. The bank will pay the holder of the coupon the interest payment due. Usually, no official records are kept. The majority of Eurobonds are now owned in 'electronic' rather than physical form. The bonds are held and traded within one of the clearing systems (Euroclear and Clearstream being the most common). Coupons are paid electronically via the clearing systems to the holder of the Eurobond (or their nominee account).
Foreign Currency Convertible Bond
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. Earlier, corporates were in a rush to issue FCCBs as it was the preferred route to raise capital. However, some interesting changes may happen in the FCCB accounting norms. It is suggested that the redemption premium on FCCBs, which corporates usually would charge off against the share premium account, may now need to be expensed. And that may hit companies who have done large FCCB issues.
Index Bonds
This study examines the demand for index bonds and their role in hedging risky asset returns against currency risks in a complete market where equity is not hedged against inflation risk. Avellaneda's uncertain volatility model with non-constant coefficients to describe equity price variation, forward price variation, index bond price variation and rate of inflation, together with Merton's intertemporal portfolio choice model, are utilized to enable an investor to choose an optimal portfolio consisting of equity, nominal bonds and index bonds when the rate of inflation is uncertain. A hedge ratio is universal if investors in different countries hedge against currency risk to the same extent. Three universal hedge ratios (UHRs) are defined with respect to the investor's total demand for index bonds, hedging risky asset returns (i.e. equity and nominal bonds) against currency risk, which are not held for hedging purposes. These UHRs are hedge positions in foreign index bond portfolios, stated as a fraction of the national market portfolio. At equilibrium all the three UHRs are comparable to Black's corrected equilibrium hedging ratio. The Cameron-MartinGirsanov theorem is applied to show that the Radon-Nikodym
derivative given under a P -martingale, the investor's exchange rate (product of the two currencies) is a martingale. Therefore the investors can agree on a common hedging strategy to trade exchange rate risk irrespective of investor nationality. This makes the choice of the measurement currency irrelevant and the hedge ratio universal without affecting their values.
Non voting shares
Non-voting stock is stock that provides the shareholder very little or no vote on corporate matters, such as election of the board of directors or mergers. This type of share is usually implemented for individuals who want to invest in the company’s profitability and success at the expense of voting rights in the direction of the company. Preferred stock typically has nonvoting qualities. Not all corporations offer voting stock and non-voting stock, nor do all stocks usually have equal voting power. Warren Buffett’s Berkshire Hathaway corporation has two classes of stocks, Class A (Voting stocks -Ticker symbol: BRKA) and Class B (Non-voting stocks - Ticker symbol: BRKB). The Class B stocks carry 1/200th of the voting rights of the Class A, but 1/30th of the dividends.
Takeover Non-voting stock may also thwart hostile takeover attempts. If the founders of a company maintain all of the voting stock and sell nonvoting stock only to the public, takeover attempts are unlikely. They may occur only if the founders are willing to tender an offer by an unfriendly bidder. There are consequences to not releasing voting rights to common shareholders; these include fewer supplicants for a friendly takeover, displeased shareholders as a result of the corporation’s limited growth potential, and difficulty finding bidders for additional non-voting shares in the market. The finance minister must be wondering why there is such a brouhaha, when he was merely trying to meet a demand voiced vigorously by corporates themselves. Indeed, it is ironic that FIIs are reported to have reacted strongly against NVS, although such shares are allowed in many countries, including the US and Britain. In 1984, when General Motors proposed to issue such shares, New York Stock Exchange (NYSE) started recognising dual class shares with unequal voting rights, contrary to its earlier practice. Although shares with dual voting rights had all along been on the US statute book, NYSE had banned them till 1984, when it retracted its objections primarily because of fear of loss of business to competing stock exchanges. It did so by temporarily, issuing a moratorium on its earlier ban. Thus even in the Mecca of stock markets viz the US, dual voting shares are allowed and indulged in by respected corporates, such as General Motors. Starting from 1986, this practice of NYSE has been formalised. With the other competing stock exchanges, NASDAQ and American Stock Exchange, allowing listing of securities with unequal voting powers, there is no question of NVS being illegitimate in the US. The declared objective of NVS is to use such dual class shares as a defence mechanism against hostile take overs. Granted, corporate democracy is important. The defining principle of current American corporate law seems to be, if the existing shareholders agree to the creation of a new type of shares with no voting rights, why should we object? This is also the principal driving force behind Mr Chidambaram's proposal. At a recent meeting of corporate representatives, one entrepreneur pointed out, that he was somewhat mystified by the angry reactions of some FIIs to the proposal. Perhaps, this is because of a fear of fall of equity prices. Ofcourse, there could be a fall in value of the prices of existing stock of shares whenever additional shares are issued. But, this could happen even with new voting shares. Some experts feel that in a situation where NVS are being issued, the value of voting shares per se could go up, under certain circumstances.
Floating Rate Bonds
To make the government borrowing porgramme attractive in times of rising interest rates, the Reserve Bank of India (RBI) has mooted the introduction of floating rate bonds (FRBs). Usually, banks and primary dealers shun securities in a rising market because a rise in yields means fall in price of the bonds and results in a loss of value. Dealers say that an FRB carries a variable coupon unlike fixed rate government bonds. These variable coupons are pegged as a spread over a fixed rate like that of the 364 day t- bill or current market yield of the benchmark ten year bond. The Clearing corporation of India (CCIL) is working on a new issuance and auction format structure for FRBs which is being inbuilt into the NDS current auction format. The auction format will also help price FRBs in the secondary market. CCIL acts as a clearing corporation for government securities and money market deals routed through the RBI. This step is part of complete review of the current auction procedure for government securities aimed at improving efficiency. The idea is to reduce the time gap between bid submission and declaration of auction results and withdrawal of facility of bidding in physical form. A suggestion to design the secured web system, facilitating direct participation of non NDS members in auction of government securities, is also being considered.
SEBI
In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both
development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91. The BOARD The basic objectives of the Board were identified as: • • • • to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and for matters connected therewith or incidental thereto.
Since its inception SEBI has been working targetting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market. SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor. Another significant event is the approval of trading in stock indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons: • • • • It It It It acts as a barometer for market behavior; is used to benchmark portfolio performance; is used in derivative instruments like index futures and index options; can be used for passive fund management as in case of Index Funds.
Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 is a real landmark.
Read http://finance.indiamart.com/india_business_information/sebi_introduction.html for furthur info
Commercial Paper
Introduction Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP, as a privately placed instrument, was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers, satellite dealers? and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. Guidelines for issue of CP are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. The guidelines for issue of CP incorporating all the amendments issued till date is given below for ready reference. Who can Issue Commercial Paper (CP) Corporates, primary dealers (PDs) and the all-India financial institutions (FIs) that have been permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India are eligible to issue CP. A corporate would be eligible to issue CP provided: (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4 crore; (b) company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s. Rating Requirement All eligible participants shall obtain the credit rating for issuance of Commercial Paper from either the Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such other credit rating agencies as may be specified by the Reserve Bank of India from time to time, for the purpose. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. The issuers shall ensure at the time of issuance of CP that the rating so obtained is current and has not fallen due for review. Denominations CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by a single investor should not be less than Rs.5 lakh (face value).
Read - Master Circular – Guidelines for Issue of Commercial Paper for more info
Certificate of Deposits
Introduction Certificates of Deposit (CDs) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. The guidelines for issue of CDs incorporating all the amendments issued till date are given below for ready reference. Eligibility CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Aggregate Amount Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments, viz., term money, term deposits, commercial papers and inter-corporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. Minimum Size of Issue and Denominations Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs. 1 lakh and in the multiples of Rs. 1 lakh thereafter. Who can Subscribe CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc. NonResident Indians (NRIs) may also subscribe to CDs, but only on nonrepatriable basis which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market. Maturity
The maturity period of CDs issued by banks should be not less than 7 days and not more than one year. The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of issue. Discount/ Coupon Rate CDs may be issued at a discount on face value. Banks/FIs are also allowed to issue CDs on floating rate basis provided the methodology of compiling the floating rate is objective, transparent and market-based. The issuing bank/FI is free to determine the discount/coupon rate. The interest rate on floating rate CDs would have to be reset periodically in accordance with a pre-determined formula that indicates the spread over a transparent benchmark. Reserve Requirements Banks have to maintain the appropriate reserve requirements, i.e., cash reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs. Transferability Physical CDs are freely transferable by endorsement and delivery. Dematted CDs can be transferred as per the procedure applicable to other demat securities. There is no lock-in period for the CDs. Loans/Buy-backs Banks/FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity. Format of CDs Banks/FIs should issue CDs only in the dematerialised form. However, according to the Depositories Act, 1996, investors have the option to seek certificate in physical form. Accordingly, if investor insists on physical certificate, the bank/FI may inform the Chief General Manager, Financial Markets Department, Reserve Bank of India, Central Office, Fort, Mumbai - 400 001 about such instances separately. Further, issuance of CDs will attract stamp duty. A format (Annex I) is enclosed for adoption by banks/FIs. There will be no grace period for repayment of CDs. If the maturity date happens to be holiday, the issuing bank should make payment on the immediate preceding working day. Banks/FIs may, therefore, so fix the period of deposit that the maturity date does not coincide with a holiday to avoid loss of discount / interest rate.
Security Aspect Since physical CDs are freely transferable by endorsement and delivery, it will be necessary for banks to see that the certificates are printed on good quality security paper and necessary precautions are taken to guard against tampering with the document. They should be signed by two or more authorised signatories. Payment of Certificate Since CDs are transferable, the physical certificate may be presented for payment by the last holder. The question of liability on account of any defect in the chain of endorsements may arise. It is, therefore, desirable that banks take necessary precautions and make payment only by a crossed cheque. Those who deal in these CDs may also be suitably cautioned. The holders of dematted CDs will approach their respective depository participants (DPs) and have to give transfer/delivery instructions to transfer the demat security represented by the specific ISIN to the ‘CD Redemption Account’ maintained by the issuer. The holder should also communicate to the issuer by a letter/fax enclosing the copy of the delivery instruction it had given to its DP and intimate the place at which the payment is requested to facilitate prompt payment. Upon receipt of the Demat credit of CDs in the “CD Redemption Account”, the issuer, on maturity date, would arrange to repay to holder/transferor by way of Banker’s cheque/high value cheque, etc. Read - Master Circular – Guidelines for Issue of Certificates of Deposit for more info
Kisan Vikas Patra
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Minimum Investment Rs. 500/- No maximum limit. Rate of interest 8.40% compounded annually. Money doubles in 8 years and 7 months. Two adults, Individuals and minor through guardian can purchase. Companies, Trusts, Societies and any other Institution not eligible to purchase. Non-Resident Indian/HUF are not eligible to purchase. Facility of encashment from 2 ½ years. Maturity proceeds not drawn are eligible to Post office Savings account interest for a maximum period of two years. Facility of reinvestment on maturity. Patras can be pledged as security against a loan to Banks/Govt. Institutions.
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Patras are encashable at any Post office before maturity by way of transfer to desired Post office. Patras are transferable to any Post office in India. Patras are transferable from one person to another person before maturity Duplicate can be issued for lost, stolen, destroyed, mutilated and defaced patras. Nomination facility available. Facility of purchase/payment of Kisan vikas Patras to the holder of Power of attorney. Rebate under section 80 C not admissible. Interest income taxable but no TDS Deposits are exempt from Wealth tax
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