Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts

preference shares in india


Share capital of a company is categorized into preference and equity shares. It forms part of net-worth. 


Important terms:
Convertible - owner has a right to convert preference shares into equity shares at a later date. Those which don't carry this option is non-convertible preference shares.

Retractable (also Term Preferred Share) – the owner of the preferred shares have a right, at some period of time, to force the company to buy back their preferred shares.

Cumulative preference shares are preference shares on which the unpaid dividend accumulates as arrears.

Non-cumulative preference shares - if a company does not pay annual dividends then the investor does not have the right to claim any forgone dividends in the future.

Redeemable / Callable – company have the right to force the preferred shares to be sold back to the company at a set price or for an equivalent amount of common shares.


   ->  all rights & limitation are applicable to Public company or a private company which is a subsidiary of a public company. A private company can issue any terms to preference share holders through its Articles of Association. But if the private company goes public then those Preference shares issued with higher rights have to be redeemed or restructured.


Preference shares of a public company carry a preferential right to: 

 i) dividend at a fixed rate or amount,

 ii) repayment of capital in case of winding-up of co. 


 Limitation/obligation 
iii) limited voting rights, only in such matters which affects them, (equity shareholder controls the co.). It may acquire voting rights in situations where dividend is not paid.

iv) they have to be redeemed within 20 yrs from their issue.



 Risks:

Insolvency Risk: It may be questionable whether any assets remain after all other creditors have been paid to go to the preferred shareholders.

Credit risk involves any change in the financial strength of the company as to its ability to pay dividends and repay principal on maturity.


Rate of dividend payable to a foreign company on preference shares issued by an Indian company cannot exceed 300 basis points over the prime lending rate of the State Bank of India prevailing as on the date of the board meeting on which issue of preference shares was recommended. (FEMA)


The Banking Regulation (Amendment) Bill, 2005, proposes to permit banks to issue preference shares subject to the condition that preference shareholders will not acquire voting rights if the bank defaults in the payment of dividend.

MCQs on Finance

Best of luck !

1) Which is the Currency of Malaysia?
a) Malaysian Dollor b) Bhat c) Ringgit d) lira e) Rupiah

2) Which of the following is true about Convertibility of Rupee?
i) Rupee is fully convertible on the current account.
ii) Rupee is partially convertible on the capital account.
iii) Rupee is partially convertible on the current account.
iv) Rupee is non-convertible on the capital account.

a) i & ii only
b) i & iv only
c) ii & iii only
d) none of these

3) Full form of AUM?
a) All under management
b) All asset under-manageable
c) Assets under management
d) Always under management

4) What does full current account convertability of Rupee means?
i) Residents can make & recieve trade related payments in foreign currency & vice-versa.
ii) Can convert local financial assets into foreign assets.
iii) residents can purchase real estate abroad.
iv) for education & tourism purpose Rupee can be converted in restricted manner only.
v) Indian companies can buy foreign companies without restrictions out of Indian resources.

a) i & iii only
b) i, ii & v only
c) ii & iv only
d) i & iv only

5) In stock market parlance what does the term 'bearish' associated to?
a) index in upward trend
b) index in downward trend
c) index volatile & moving both ways
d) index showing not much activity.

6) Expand CAD?
a) Capital account deficit
b) Concurrent audit
c) Current Account deficit.
d) Convertible account deficit.

7) BSE's stock market index - Sensex is based on __ no. of large companies/scrips?
a) 25
b) 30
c) 50
d) 100

8) In stock market parlance what does the term 'short' associated to?
a) a trader sell a scrip/co. first & buys it later.
b) a trader short on money.
c) time period of 5 mins before the market closes.
d) a trader buys a scrip first & sells it later.

9) Which of the following is true about Derivatives?
i) They derive their value from an underlying asset.
ii) Its basically a financial contract refering future price.
iii) They are used to hedge risk in a transaction or for speculation purpose.
iv) They are available in OTC (Over-the-counter) market as well as Exchanges like NSE.

a) i only
b) i & ii only
c) i, ii & iii only
d) All the above.

10) Which of the following is true about Options?
i) they are basically derivative products only.
ii) there is no obligation to honor the contract.
iii) Premium is paid for not honoring the contract.
iv) 'Call option' gives holder right to sell underlying asset at prefixed rate.
v) 'Put option' gives holder right to buy underlying asset at prefixed rate.

a) i, ii only
b) i, ii & iii only.
c) i, iv & v only
d) all the above.

11) Which of the following is true about Futures?
i) these are derivatives products only.
ii) there is no obligation to honor the contract.
iii) they are listed on an exchange.
iv) they are used for hedging & speculation.

a) i & ii only
b) i, iii  & iv only
c) i & iii only
d) all the above.

12) Which of the following is true about Forward Contracts?
i) they are Over-the-counter derivative products
ii) traded on one-to-one basis among parties & mutually agreed terms.
iii) its used for hedging risk
iv) they are listed on an exchange.

a) i only
b) i & ii only
c) ii, iii & iv only
d) i, ii & iii only

13) Which of the following is true about recent Interest Rate Futures contract launched in India?
i) underlying security is either 10 year GoI bond (G-sec) or 91 day T-bill.
ii) contract to buy or sell a debt instrument.
iii) these are non-standard OTC contracts
iv) these are standaridized contracts available on MCX-FX, NSE & BSE.
v) they are basically derivative products only

a) i & v only
b) i, ii, iv & v only
c) i, ii, iii & v only
d) all the above.

14) Which of the following is true about Hedge funds?
i) they are meant for ultra rich individuals.
ii) they invest very aggressively in any class, from G-sec to any exotic derivatives.
iii) they can charge upto 20% of net profit, and do not share losses.
iv) they are virtually unregulated
v) they can market publicly.

a) i, ii only
b) i, ii & iv only
c) i, ii, iii & iv only
d) all the above

15) Which of the following is true about Swaps?
i) Swap is an exchange of cash-flows.
ii) in an Interest-rate swap, basis for calculation of Interest is changed e.g. from floating to fixed or vice-versa.
iii) in Currency Swap, cash flow of one currency is changed to another currency.
iv) Swaps are used to hedge currency & interest rate risks.

a) i only
b) i & ii only
c) i & iv only
d) all of above.

16) Which of the following is true about Volatility Index (Vix)?
i) It captures mood of the market, high volatility is associated with fall in market.
ii) If Vix more than 30%, stock market investors are in fear zone.
iii) A low Vix associated with price rise.
iv) India Vix is based only Nifty 50 Option prices.

a) i & iii only
b) iv only
c) ii & iii only
d) all the above.

17) Whats REIT?
a) REal IT
b) Realistic Infra Technology fund
c) Reference for IT index
d) Real Estate Investment Trust

18) Full form of EURIBOR?
a) EUropean reference for labor market
b) EU's bechmark index
c) Euro Inter-Bank offered rate.
d) EU libor rate

19) 50 basis points means?
a) 5.00 %
b) 0.50 %
c) 0.05%
d) 50.00 %

20) What is meant by Arbitrage?
a) its nothing but name of a movie.
b) practice of taking advantage of a price difference between two or more markets.
c) hedging practice
d) an pre-budget activity.


Tip: boost memory and clear govt exams


Ans:
1) C. Thailand- Bhat. Turkey- Lira. Indonesia- Rupiah.
2) A.
3) C.
4) D.
5) B. And the term "Bullish" refers when Index is in upward trend.
6) C.
7) 30. NSE's Nifty is based on 50 large companies.
8) A. The term 'Long' refers to "buy first, sell later".
9) D. Derivative products includes OTC (forward contracts), Futures (forward contracts on exchanges), Options, Swaps
10) B. Options as the name suggests has no obligation. Call option is right to buy (think you are calling for price), Put option is right to sell (think you are putting 'it' on OLX to sell).
11) B. Furutes have obligation to honor the contract, think of it as buying/selling shares on NSE - you can't go back on trade you've done.
12) D.
13. B. IRF was recently re-launched for 3rd time in India.
14) C. Hedge funds can't market publicly.
15) D.
16) D.
17) D.
18) C.
19) B.
20) B.

Banking History | Private banks

Birth of RBI
By early 30s, there were >1200 banks in India! With Great depression of 1930s, Indian banks started to collapse - so British Indian Govt set-up RBI to supervise over banks in 1934.

Post Independence
Target of banks were merchants, upper middle class. They were not aiding Five-year plans of GOI (like cheaper loans to farmers). They were owned by industrialists & their policies were meant for their benefit. Hence GOI started nationalizaling banks.

Nationalisation: 1955 SBI, 1969- 14 banks, 1980 - 6 banks. Now govt majority share holder, GOI can pick board-of-directors, policy of its choice.

=>Now Banks were forced to give loans at very cheap rates, recovery became an issue (no quick legal recource available at that time), RBI kept CRR & SLR high (15, 40 % resp) all this means banks are left with little money to lend. No business expansion leads to decline in exports, in some ways it lead to BOP crises of 1991.

Narsimhan Committee I (by GOI in 1991)


Bank licences: 1st Round (1993):10 licences given, out of which 6 are running successfully viz. ICICI, HDFC, UTI (Axis bank in 2007), IDBI, Indus, DCB. Four banks failed at various stages.


Narsimhan Committee II (1998)
Introduce VRS. Legal reforms in loan Recovery => SARFAESI 2002.
Computerization, Electronic fund transfers (ECS, NEFT, RTGS). Allow more private & foreign players.

New Bank licences 2nd round (2001): Kotak Mahindra, Yes Bank.
New Bank licences 3rd Round (2013-14: Given to 2 out of 25: IDFC, Bandhan.

Pro & Against arguments for New Pvt Banks can be read here.

Few takeaways are:

-> As per census 2011:
Only 67% of Urban households & 54% of rural households are getting banking services.

-> Existing banks not sufficient for 100% financial inclusion.
only one in two Indians have bank account
Only one in seven Indians gets loan from banks (others have to rely on money lenders who charge 36% compound interest rate!)

-> "Inside RBI this is seen as an Experiment. RBI wants local/ niche banks". Bandhan is a micro-finance company based in WB. Giving license to it is RBI's push for Financial Inclusion, where "Lead banks/ mainstream banks" have failed.

Equipped with a licence Bandhan can now raise money from public @ 6-7 % & lend it at 10-15% as against ~20-24% it charges now. Read full ET article here. Now it needs to be seen how a NBFC makes transition to becoming a bank & how successful  it'll be for the rural poor.






Credit Information in India

Why India need more CICs & what's their problems?

Credit gives life to economic growth of a country. Credit information cos (CICs) keeps database of financial history of people/firms so that banks/FIs can make informed decision to give loans or credit.

Around 90% of our population has never borrowed from the formal financial system and hence does not have any credit history. Under the circumstances, they are quite likely to be denied credit by the lending institutions. CICs collects data from banks/FIs/ micro FIs themselves.

They came under heavy criticism in 2008 financial crises after CICs and Rating agencies failed to warn of poor asset quality and systemic risks in US. Recently spotlight shifted on CICs after they failed to warn on bank's deteriorating asset quality in India.

4 CICs in India—-Credit Information Bureau (India) Ltd (CIBIL), Experian India, Highmark and Equifax Credit Information Services Private Ltd.

CIBIL established in 2000, started business in 2004.


Why we need CICs?

1) Credit flows to  a sizeable number of individuals/small business owners who do not have a prior credit history, and who have an important role to play in growth of the country.
2) Credit is provided to SME (small and medium enterprises sector which employs large workforce) quicker and at affordable prices.
3) Banks can make informed decision to not only give credit cards, Car loan, Home loan but for commercial loans too. And ensure that these loans are safe. Good lending practices helps in having healthy assets, and minimum NPA (non preforming loans).
4) Alert bankers, supervisiors of risks building up in the system.

At the level of a regulator: provide important inputs for the banking supervisors in monitoring systemic risks. A further use at a regulatory level may be to analyze appropriate capital and provisioning strategies for banks and, in particular, to assess whether current capital and provisioning regulations match up to actual risks.


Issues with RBI.

a) Quality of Data: Data furnished by banks to CICs (credit informatio cos) is incomplete/ inaccurate, even Microfinance institutes furnish better quality data about borrowers. Quality checks by CICs now resulting in improving 'hit rate' (event of finding some financial history/ score). US has a hit rate of 85%, India's 75% not bad.


b) Alternate source of data: Sizable no. of Individuals/ Small business owners don't have a financial history, World bank studies suggested inclusion of non-financial payment data like mobile bills, electricity bills for lending decisions. Meaning if someone is paying electricity bills regularly then lenders may take a call that he'll pay his EMIs too. 

c) Customer Grievance Redressal Mechanism: Its a big issue. There have been numerous complaints about the CICs handing out incorrect reports to the consumers who have to then run from pillar to post to get these corrected.

d) to increase competition in the credit information area. FDI limit has also been increased for companies. This is to make these reports cheaper, affordable for all players.

Recent Regulatory / Supervisory Measures
Central Repository of Information on Large Credits(CRILC): Repository of large credit exposure of individuals and Cos having exposure (both fund and non-fund based) of more than Rs. 5 crore. RBI has suggested CICs to collect information of exposure of even less than 5 crore.




 This is a student's attempt to understand speech of Dr. KC Chakrabarty, DG, RBI. 

Indian Debt & Derivatives Markets - Issues


This note is based on presentation by Sh Harun R Khan, DG, RBI. I am just attempting to understand his speech. I don't claim to be an expert on finances, students are advised (I was typing adviced - read the difference here) - you are advised to add if I miss something.

Regulation of Financial Markets
Financial market participants are 'glass half full' people, and regulators as their 'glass half empty' counterparts. Market participants- see opportunity for reward, regulators see exposure to risk.

Recent financial crisis has demonstrated the need for effective regulation, inadequacy of “free market paradigm”. From ‘light touch’ to ‘comprehensive regulation & efficient supervisory framework’


Global initiatives for regulating financial markets besides fiscal and monetary measures are:

Dodd-Frank Act: the largest financial regulation overhaul in US since the 1930s, to prevent repeat of 2008 financial crisis. Sweeping new rules for banks, hedge funds and complex financial transactions called derivatives.

Volcker Rule (part of Dodd-Frank): aims to limit risky behavior within banks. Banks that take retail deposits would not be allowed to engage in proprietary trading that is not directly related to the market making and trading they do for customers. These banks would also be prohibited from owning or sponsoring hedge funds or private equity funds.

Vicker’s commission in UK - biggest reforms to the banking sector.

EMIR (European Market Infrastructure Regulation): purpose - to improve transparency and reduce the risks associated with the derivatives market.



RBI’s approach: three broad principles

1) wider menu of financial products to enable economic agents (producers, consumers) to hedge emergent risks & meet funding requirements
2) introduction of new products should follow a graduated process (think Interest rate derivatives)
3) improved robustness of the market infrastructure for trading, settlement and reporting (think NSEL crises)


-> RBI prefer stability and safety over short term market activity, two main focus – building resilience and increasing liquidity.


Building Resilience of Debt & Derivatives Markets

1) Requirements for registration and reporting: To ensure that safe & financially strong entities have access to the financial system [e.g.  Primary Dealer authorisation; criteria to enter CDS market]. CDS (Credit default swap) is an agreement where the seller of the CDS will compensate the buyer in the event of a loan default or other credit event.

2) To promote transparency [e.g. reporting requirements for G-Sec trades, OTC derivatives].


Requirements for capital and collateral
3) To ensure that strong financial firms are doing business in financial sector- like Basel 3 guidelines for banks.
4) Ensure credit risk in transactions is managed through appropriate collateral – margins for derivatives.


Orderly market rules
5) To protect the integrity of market prices for encouraging wider market participation & providing credible price information for the economic agents (think benchmarks/ gold price rigging). Prices of products needs to be rational - CDS needs to be linked to underlying exposure its taking (CDS agreement should be followed in letter & spirit)

6) FIMMDA code of conduct for Dispute Resolution Mechanism.

7) Limits on IRF positions (interest rate futures)

8) “Suitability and appropriateness requirements for derivatives”


Enhancing Liquidity in Debt & Derivatives Markets

1) Liquidity in government securities market remains low despite regular issuance across yield curve and state-of-the-art infrastructure in place.

2) Actions have been initiated/completed in nearly 70% of the recommendations of the Gandhi Committee (RBI's Working Group on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives Markets).

3) Market Making
Allocate specific securities to each PD (Primary dealer) for market making in them and if required, rotate it (recommendation of Gandhi Committee). It may be operationalised by next fiscal.

4) Short selling (basically means sell first, buy later)
RBI increased the short sell limits in a sequential manner; and would take appropriate action keeping in view the needs of market participants and imperatives of financial stability.


In the presentation Sh Harun Khan pointed out recent measures and issues of RBI which I think needs more elaboration, which I'll prepare and post here. The topics are:

Interest Rate Futures
CD/CP
Repo in Corporate Debt
Enhancing Foreign Investment Limits in G-Sec and Corporate Bonds
maintaing credibility of Financial Benchmarks
OTC Derivatives Market Reforms


So we've a lot of work to do.

State Development loans

Everybody knows GOI raises debt but ever wondered how states raise it?

State Development Loans (SDLs) - debt issued by State Govts to fund their deficits. RBI coordinates in selling securities.

SDLs qualify as SLR security (Statutory Liquity Ratio), and LAF - Repos (Liquidity adjustment facility) meaning banks, PD (Primary dealers) can raise short-term money from RBI under Repo facility. And they are approved investment for provident, pension funds etc.

SDL's are traded electronically on NDS-OM (Negotiated Dealing System - Order matching) and in the voice market (NDS). Participants include Banks, insurance cos, provident & pension funds, MFs.

Each state has limits to issue security each year. SDLs carry higher coupon rates than GOI-Sec, though trading is very low.


All states, good or bad financially managed both, are able to raise capital without much difference in coupon rates, which is an anomaly of course. RBI is stressing the need for fair pricing and valuation of SDLs. Its a matter of debate whether to equate pricing of SDL as corporate bonds.

Read this article for more.