Financial Terms
Latest-Decoded
RAMA KRISHNA VADLAMUDI
October 9th, 2009 MUMBAI, INDIA
NEW
FINANCIAL TERMS EXPLAINED IN THIS DOCUMENT
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1. BSE IPO Index
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6. Swiss Banking Secrecy
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2. Helicopter Ben
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7. Indian Depository
Receipts IDRs
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3. Defined Pension vs Defined
Contribution
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8. Cloud Computing
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4. New Pension System NPS
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9. Carbon Footprint
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5. Debt Management Office
DMO
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10. Clause 49 of the
Listing Agreement
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Bombay
Stock Exchange’s various Indices have been used extensively by several
investors, domestic institutional investors, Foreign Institutional Investors,
analysts and other market experts. The most famous not only of all the BSE
Indices but also in the entire country is Sensex (BSE’s Sensitive Index)
consisting of 30 blue chip stocks. Other well-known indices include, BSE-100,
BSE-200, BSE-500 and BSE Mid-cap Index. Among the sectoral indices, the heavyweight
ones are: BSE Bankex, BSE Oil & Gas, BSE TECk , BSE Capital Goods and BSE
Power indices.
BSE
had on August 24, 2009 launched a new index called BSE IPO Index. As the name
suggests the new index tracks the value of Indian Public Offers (IPOs). BSE launched this new BSE IPO index that will track the value of
companies for two years after listing subsequent to successful completion of
their initial public offering (IPO). The index will track stocks that have
a free float of more than Rs 100 crore on listing. BSE IPO Index currently has
41 stocks with a free-float market capitalization of Rs 49,500 crore and the
list includes Reliance Power (15.58% weight in BSE IPO Index), Power Grid Corp
(13.88%), NHPC (12.50%), Oil India
(8.31%) and Mundra Port & SEZ (8.25%) (the data are as on October 7, 2009).
The base date of the index is May 3, 2004 and on that date the base index value
is set to 1,000 points. As on August 21, 2009, the IPO Index was at 1,902. It
has since gone up to 1,974 as on October 8, 2009.
Mr
Ben Bernanke, chairman of the US Federal Reserve, is known for his
unconventional views on economy. On a visit to Japan before he became the US Fed
chairman, he is said to have told the Japanese to drop bank notes on the public
from a helicopter to revive an ailing Japanese economy. Since then he is known as “Helicopter Ben.”
DEFINED BENEFIT vs
DEFINED CONTRIBUTION
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The
previous system of pension payments by the Government is called ‘Defined
Benefit’ pension in the sense that the amount of pension to be paid by the
Government at the time of retirement will be fixed (or defined) as per Pension
Rules. Since January 1, 2004, the Government has switched over to a new system
of pension payment called “Defined Contribution” pension method. Under the new
concept, only the amount of monthly contribution to be paid by the employees
will be decided/fixed as a percentage of his basic pay. And the Government will
also make a matching contribution to the respective pension fund. The existing
provisions of ‘Defined Benefit’ pension are not applicable to the new recruits
who have joined on or after January 1, 2004. Under the new method “Defined
Contribution” will not guarantee the amount of pension that will have to be
paid after retirement.
Both
the contributions-employee’s and employer’s-will be given to a recognized
pension fund and the pension fund will generate returns during the period of
employment. At the time of retirement, the pension will be paid according to
the corpus that will be accrued to the Retirement Benefit Account of the
respective employee. The returns generated by the pension fund will be
determined by the market rates and dynamics. Under this “Defined Contribution,”
the amount of pension will not be guaranteed by the Government, but it is
determined by the market rates.
Already,
all the new Central Government employees who have joined on or after January 1,
2004 are compulsorily put under the ‘Defined Contribution’ system. The official
nomenclature for this new concept is New Pension System (Government Employees).
All state government also have been following this new system; except West Bengal, Kerala and Tripura. The NPS is regulated by
Pension Fund Regulatory and Development Authority (PFRDA), a body set up by
Government of India.
The
rationale behind switching over from ‘Defined Benefit’ system to ‘Defined
Contribution’ is that the Governments wants to reduce their massive burden of
pension payments to their employees. Even managements of the Public Sector
Banks have been trying to move over to this new “Defined Contribution” system
for all new employees with a view to reducing their pension liabilities.
However, the employees’ trade unions have been resisting these attempts of the
Bank managements. It may be recalled that General Motors, till recently the
largest carmaker in the world, has suffered heavily due to wage agreements
entered into during 1950s with its trade unions. Even now, the company has been
suffering from huge pension liabilities. It almost went into bankruptcy very
recently.
Defined Pension versus Defined Contribution
Defined Pension
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Defined Contribution
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(like GPF)
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(NPS for Government
employees)
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This is applicable for Government employees who joined before
January 1, 2004
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NPS, based on the concept of defined contribution, is mandatory
for all Government employees who joined on or after January 1, 2004. (Now, it
is widened to include private citizens, with effect from May 1, 2009)
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Employees are assured of a certain amount as pension after
retirement. The pension amount is defined by the Government. Hence, the name
Defined Pension.
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Every month, Government contributes a fixed amount, called
defined contribution, to the employee pension account. The government does
not guarantee any amount to be received as pension.
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Higher pension benefit to employees
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Pension amount will depend on market-related returns generated by
the fund managers
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The Government bears high pension liability
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Government’s liability is limited to the extent of its 10%
monthly contribution in case of government employees
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Assured return
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Market-related return
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(Please also
read about New Pension System given below)
(Before you
go with NPS, please read about ‘Defined Contribution’ given above)
NPS for Government
employees:
The
Central Government had mandatorily brought its new employees (except the Armed
Forces) under the New Pension System (NPS) with effect from January 1, 2004. As
part of the pension reforms process, the Government has moved from ‘defined
pension’ system to a ‘defined contribution’ system. Under the old ‘defined
pension’ system, the Government gives a defined/guaranteed pension to employees
(like GPF); whereas, under the new ‘defined contribution’ system, only the
amount of monthly contribution to be made by the Government is defined. The
NPS, which is based on the ‘defined contribution’ concept, does not assure any
fixed amount of pension. Under the NPS, the pension amount will depend on market-related
returns. Most of the state governments too have announced a similar scheme for
their new employees. The NPS is regulated by Pension Fund Regulatory and
Development Authority (PFRDA), a regulatory body set up by Government of India.
Under
NPS for Government employees, every month, 10 per cent of an employee’s salary
and DA will be deducted from salary and kept in her pension account with
matching contribution from the Government. The savings will be accumulated till
her retirement and maturity amount can be used by the employee for her daily
needs after retirement. After an employee attains the age of 60 years, she can
withdraw her pension. At exit, the individual would, however, be required to
invest at least 40 percent of pension wealth to purchase an annuity. The
annuity so purchased is expected to be useful as pension to support the needs
of the pensioners during their lifetime. The remaining 60 per cent of pension
wealth (accumulated during their service till retirement) can be utilized
freely by the pensioners in their own way. Individuals will have the option of
leaving the pension system before 60 years but with certain additional
conditions.
The
Government had transferred the accumulated funds along with its matching share,
around Rs 1,177 crore, to the three Fund Managers on April 1, 2008. The three
Fund Managers appointed by PFRDA for investment management in July 2007 are LIC
of India, State Bank of India
and UTI Asset Management Company. In the year 2008-09, the fund managers have
managed to earn a decent for the funds kept with them.
NPS was the brainchild of OASIS (2000) report on
Old Age Social and Income Security.
NPS for all citizens other
than Government employees:
In August 2008, the Government had advised PFRDA to extend
the NPS to all citizens. Accordingly, PFRDA had rolled out the NPS to all
citizens other than Government employees effective May 1, 2009. Originally, NPS
was meant for central government employees. Now, the scope of the scheme is
expanded to several other categories, like, employees in the private sector,
small businessmen, self-employed professionals, ordinary people and workers in
the unorganized sector.
The
features of NPS for all citizens (other than Government employees) are slightly
different from NPS for Government employees. The NPS for all citizens envisages
a new set up, that is being established by PFRDA, which enables citizens to
start saving for their retirement right from the day of joining employment.
Maintenance
of NPS records and provision of customer service to all NPS subscribers are
provided by a Central Record-keeping Agency (CRA). National Securities
Depository Limited has been appointed as a CRA by PFRDA. NSDL issues Permanent
Retirement Account Number (PRAN) to NPS subscribers and maintains the database
of PRANs. The PRAN will remain the same even though the NPS subscribers change
their jobs or are transferred to different locations.
DEBT MANAGEMENT OFFICE (DMO)
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Till
a few months back, the country was abuzz with reports that the Government of
India wanted to separate the functions of debt management from Reserve Bank of India and keep
it under a new authority called Debt Management Office under the Ministry of
Finance. As of now, RBI undertakes the issue of Government Securities and
Treasury Bills on behalf of Government of India. Simply speaking, RBI is the
Government’s fund or money manager. According to a calendar issued by GOI, RBI
will arrange for auctions of Government Securities (G-Secs) that will be
subscribed by commercial banks, insurance companies, primary dealers, pension
funds, individuals and others. While RBI manages the internal debt functions;
the external debt and non-marketable debt is looked after by the Ministry of
Finance directly.
Several
committees have highlighted the triangular conflicts of interest for the RBI in
its role as debt manager, regulator of banking system and as a monetary policy
authority. However, veteran central banker, Rakesh Mohan, till recently RBI
Deputy Governor, opines that the time is not ripe for complete separation of
debt management functions from the RBI. Significantly, more than 50 per cent of
the Indian Banking System is owned by the GOI. The debate about this continues
unabated. There are proposals for setting up a National Treasury Management
Agency which will initially take care of foreign currency and inflation-indexed
bonds.
SWISS BANKING SECRECY TOPPLED
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UBS,
one of the largest banks in Switzerland,
has ended the much-acclaimed or maligned Swiss Banking Secrecy provisions by
coming into an agreement with the US authorities for sharing the
details of its customers with the latter. In August 2009, the bank had signed
an agreement with the USIRS (United States Internal Revenue Service) whereby
UBS will hand over details of some 4,450 UBS bank accounts to the US tax
investigators. UBS is forced to share these details with the US authorities in order to avoid any prosecution
or cancellation of its banking license in the US.
INDIAN DEPOSITORY RECEIPTS (IDRs)
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Indian
Depository Receipts allow foreign companies to raise capital in India. These
are issued by a local depository against the shares of a foreign company’s
publicly-traded securities. The salient features of IDRs are:
Ø IDRs are derivative
instruments similar to GDRs or ADSs (Global Depository Receipts and American
Depository Receipts are used by Indian companies to raise capital on foreign
shores)
Ø They are negotiable
instruments
Ø Foreign Institutional
Investors and Mutual Funds are allowed to invest in them
A
foreign company will deposit its shares in an Indian depository (NSDL or CDSL).
The depository would issue receipts, in the form of IDRs, to investors in India against
these shares. The benefits, like dividends or other corporate actions of the
underlying shares will accrue to the IDR holders in India.
Cloud
computing refers to shared computing resources, storing data on a virtual
platform rather than on an individual hard drive. The term ‘cloud computing’
was introduced in 2006 by Eric Schmidt, Google’s Chief Executive.
Cloud
Computing is a new concept that has taken the IT Services by storm around the
world. In a cloud computing scenario, a company can actually move its core data
and other programmes that operate on such data from private machines such as
desktops, personal computers or corporate servers to machines owned and operated
by vendors. Companies, like, Oracle Corporation, IBM, HCL Technologies,
Microsoft, Zoho and Google are offering such services to needy companies. Cloud
computing helps reduce costs, both capital and operating, through economies of
scale. These services are provided over the Internet enabling companies to work
from anywhere in the world and get them connected to the virtual networks or
servers owned by vendors.
Companies
will not store their data with them and instead use the servers or networks
managed by service providers or vendors. As such, companies need to choose the
vendors extremely carefully; otherwise the chances of losing valuable and
important data are very many. So the reliability of vendors is vital for the
success of cloud computing. Overall, cloud computing has its merits and
demerits and individual companies need to assess their own needs before going
for it.
Carbon
dioxide (CO2) and other greenhouse
gases are the main contributors to climate change, including melting of North
and South Poles. The total set of emissions caused directly or indirectly by an
individual organization, event or product is commonly their ‘carbon footprint.’
The inference is that the lesser the carbon footprint the better for the
Environment. Scientists have been cautioning us for several decades that the
ever increasing pollution levels in the Earth’s atmosphere have been damaging
the environment resulting in melting of Poles, raising sea levels, disruption
in global weather patterns like El Nino and occurrence of natural disasters.
Many of the natural disasters that have been causing havoc across the world at
present have been blamed on rising pollution levels, destruction of natural
forests like the Amazon and greenhouses gases. As such, we need to go green
leaving a lesser carbon footprint on Earth.
CLAUSE 49 OF THE LISTING AGREEMENT
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The
Securities and Exchange Board of India (SEBI) is the capital market regulator
in India.
It regulates listed companies on stock exchanges in India through various acts,
regulations and clauses. One of the most important and well-known clauses is
CLAUSE 49 of the Listing Agreement. Listing Agreement is a legally binding
contract between a listed company and the stock exchange(s) on which it is
listed. Clause 49 is extremely vital from a corporate governance point of view.
It is mandatory for all listed companies to comply with the provisions of
Clause 49 of the Listing Agreement. Let us see some of the important provisions
of this clause:
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Not less than 50 per cent of the company’s Board of Directors
should comprise non-executive directors
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Where the chairman of the Board is a non-executive director, at
least one-third of the Board should consist of independent directors
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Where the chairman is an executive director, at least one-half of
the Board should be made up of independent directors (Independent Directors as
defined by SEBI)
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All listed companies with paid-up capital of more than Rs 3 crore,
or a net worth of more than Rs 25 crore at any time, have to comply with the
above rules
