It is the measure of the volatility of a security with respect to the financial market. It is used as an estimation of risk and return and is an integral part of the Capital Asset Pricing Model. It determines the variability in expected returns of the security with respect to the financial market. If a security has a beta of 1.4, then for every change in the financial market, the relative change in the stock would be 40% more than the market. Hence, higher the value of Beta of a security, higher the risk and expected returns.
It is a loan advanced under which the lender hasn’t received interest or principal amount for a period of more than 90 Days, that is, the payment on such an asset is overdue. Hence, the loan advanced may cease to become an asset for the lender. Out of order Cash Credit/Overdraft Accounts are also under the purview of the NPA category.
As per RBI’s latest financial stability report, gross NPA’s of scheduled commercial banks is expected to cross over 12%. That is, for every ₹100 lent by these banks, they are expecting to recover ₹12 less.
The NPA’s of SBI are the highest among PSB’s and stands at a towering Rs.2.23 Lakh Crores.
It is any geographic area outside one’s home country which implies minimal amount of taxes. The low rate of tax in these regions is an attractive characteristic and hence is preferred by investors and evaders all over the world. It may or may not involve financial secrecy. Many of them are found in small countries, with the purpose of boosting the economy of that country through registration of various entities and fees charged from them.
In the Cayman Islands, there is no Capital Gains Tax, Corporate Tax, Income Tax or Gift Tax. It doesn’t have tax treaties with any country.
Switzerland, with its top-notch secretive banking system is a popular tax haven, it also doesn’t attract Capital Gains Tax.
Companies like Google and Facebook are registered in Ireland due to its low corporate tax rate.
Singapore is a popular tax haven and applies very low tax on corporate and personal income. The highest personal tax rate bracket in Singapore goes up to 20% only.
ICO (Initial Coin Offering)
It is a technique used by a company to raise funds from the public. The company demands money from the investor and in return, provides a digital token, representing ownership in the company.
ICO’s require less amount of regulation, cost and paperwork and hence are preferred by new and emerging companies. The returns on them are volatile as the value of the cryptocurrency(the digital token here) can vary with the perception of the public.
The concept is analogous to that of an IPO and differs only in the fact that an IPO gives shares to the investor while an ICO gives tokens.
EOS has raised more than $4 billion dollars via ICO, Telegram with $1.7 Billion is second on the list and Dragon making it on the third on the list with staggering $320 million raised via ICO’s.
It is an order which officially bans the trade of goods or services with a country, which may be imposed by a country or an international organization. They are similar to sanctions and are a legal barrier to trade. The UK, USA, Australia, European Union and the United Nations have the power to impose sanctions and embargoes.
It usually leads to the creation of economic and political tensions.
An economic sanction bans only trade between certain goods and services while an embargo is a complete ban on imports from that country or exports to it. The magnitude of an embargo is much more greater than that of an economic sanction.
USA banning import of sugar from Cuba in the 1960’s is a form of import embargo. The US-China Trade War is a form of economic sanction.
Alternative Investment Fund
It is a private fund that pools money from selected investors and is responsible to invest it in accordance to the planned objectives of the fund.
This fund doesn’t come under the regulation of the SEBI mutual Funds act and enjoys minimum regulation in its functioning. Liquidity in such a fund is low as there are only few such funds in existence.
These funds are usually held by Hedge Funds, Private Equity Firms, Institutional Investors, High Net worth Individuals etc. due to the high risk involved, huge investment requirements and its secretive nature.
The minimum investment requirement in an AIF is Rs. 1 Crore. There are three categories of AIFs, created on the basis of their objectives, whether created for social/economic welfare, investment purposes or solely to earn profits.
Recently, RBI wanted SEBI to increase the amount of regulation in AIFs due to certain loopholes in its regulation.
LIBOR(London Interbank Offered Rate)
It is benchmark interest rate which is charged by large and renowned banks from each other and hence acts as a reference rate for short term unsecured interbank loans. It is based on five leading international currencies and seven different maturities ranging from overnight to 12 months.
Hence, there are 35 different Libor rates in total, (5currencies*7maturities).
It provides liquidity to the banks, to meet their short term financial requirements from those banks which have surpluses.
It acts as a barometer to the health of the banking system in times of uncertainty. It can also be used as a predictor of market expectations with respect to central bank interest rates.
It is an over the counter derivative contract under which the price of the currency at which it is to be settled is the underlying asset. The difference between the settlement price and the spot price is the amount exchanged between the counter-parties and actual exchange of currencies doesn’t take place.
It helps those who are directly affected by changes in the day to day forex prices, such as investment banks, hedge funds, importers, exporters or can even be used for speculation. They are primarily used for hedging exposure to foreign currencies.
Decoding it further
Let us take the example of a cloth trader in Philippines who wants to sell his products to a customer in the USA. Let us assume that the current exchange rate is 55 USD/PHP. Now, a buyer in The USA wants to settle this trade at this very date but would be able to make the payment thirty days later.
To secure at this rate, the cloth buyer purchases an NDF contract from a broker/ investment bank. The exchange rate falls to 53 USD/PHP thirty days later and the buyer is able to secure the price of 55 USD/PHP by exercising his NDF. For more in depth knowledge of NDF’s, refer to the BIS Report here- https://www.bis.org/publ/cgfs22fedny5.pdf
How does it impact Indian Rupee?
The offshore NDF market, a 24X7 market, doesn’t come under the purview of the RBI and hence can be used to influence India’s exchange rates in times of global uncertainty by the investment banks, speculators and arbitrageurs by taking advantage of the price difference.
Dollars were found to be at the cheapest when bet by the speculators and arbitrageurs in the Indian Currency Market, at the time of the Turkish Lira Crisis of 2018, hence, the volume of trade by them increased, causing an adverse effect on the spot prices of the Indian Rupee.
NDF’s usually traded in the emerging countries markets as their currency valuation is uncertain and subject to high degree of volatility.
The NDF market, although very volatile is still largely unexplored and not much studied in India. Data on NDF transactions is very limited.
As per the latest estimates of a BIS report, Indian rupee still has an exposure of over Rs. 16,000 crores in the NDF market, which was the 3rd highest in the emerging market currencies.
It is a technique under which a private company becomes public through purchase of a majority of shares of the public company. It takes place usually in the form of Hostile Takeover.The major advantage of such a process is that the company can save time, money and paperwork which is usually involved when a company decides to go to the public. The process can be completed within a few weeks instead of taking months or years.
The company whose shares are being acquired is usually a public shell corporation.
Recently, Manipal Hospitals wanted to become a public company through acquiring a majority stake in Fortis Healthcare, thereby bypassing the lengthy procedure. Reverse Mergers are more popular in the USA and China.
It is a process of raising funds by a company under which it creates securities which are typically backed by debt such as real estate mortgages, commercial mortgages, credit card loans, etc. or by assets. These securities are purchased by third parties who in turn sell them to the investors in the form of Bonds, Collateralised Debt Obligations in the capital market.
The investors are provided return in the form of future cash flows from these assets.
Under the Financial Crisis of 2008, securitisation was a popular way to raise money by companies, which were backed by the ever booming real estate in the early and mid-2000’s.
Securitisation was a major cause of the crisis as the housing bubble burst and the sub prime borrowers defaulted as expected.
If handled responsibly, it can help in reducing risk and portfolio diversification.
Bank For International Settlements
BIS is an International Financial Institution which works as the banker of the central banks. It governs their activities and guides them in decision making, to ensure financial and monetary stability.
The 60 member banks, including the RBI, which are its members, represent countries that make up 95% of the world’s GDP.
It also conducts research upon policy issues concerning the central banks and facilitates dialogue and collaboration amongst them.
In 2015, Former RBI Governor Raghuram G Rajan was appointed the Vice-Chairman of BIS.