Price Coverage Ratio (PCR)

As per the RBI stipulation all commercial banks have to augment their PCR to 70 per cent by this
September.
This hike in the provisioning level is decided with a view to enhance the asset quality
in the banking system as additional provisioning would give more cushion to banks given a steep
rise in bad loan levels in the aftermath of the financial downturn.

What is offshore banking unit?

Offshore banking unit (OBU) is the branch of an Indian bank located in a special economic zone
(SEZ), with a special set of rules aimed at facilitating exports from the region. As laws define it, its
a deemed foreign branch of the parent bank situated within India, and it undertakes international
banking business involving foreign currency denominated assets and liabilities. The concept comes
from the practice prevalent in several global financial centres. Here an OBU can accept foreign
currency for business but not domestic deposits from local residents and would be exempt from CRR,
SLR and few other regulatory requirements. This was conceived to prevent competition between
local and offshore banking sectors.

TOBIN Tax
The idea of a tax on financial transactions, similar to one imposed by Brazil , has gradually gained
currency in international circles. In Brazil 's case, this tax, also called Tobin tax, was intended to
restrict the flow of volatile capital from the developed world, which had disturbed the stability of its
economy.

Takeout financing
It is an arrangement, pursuant to which commercial banks, which typically lend short or medium
term, get over this barrier and are able to lend to infrastructure projects. A commercial bank accepts
deposits for a maximum of three years and sometimes for a longer duration, say, five years.
Therefore, in takeout financing which is doing the rounds in the context of infrastructure projects, a
commercial bank sets the ball rolling with a loan for three years and hands over the baton, as it
were, to another bank thereafter and the third bank takes over from the second bank after the sixth
year.
This is like a relay race and hence a teamwork. If one drops the baton, the game would be over.

Mobile banking
The mobile phone as an instrument for conduct of financial transactions holds immense promise.
M-Commerce (mobile commerce or mobile banking) is an area that is rapidly changing the way
people conduct financial transactions and has the potential to be more inclusive due to the
widespread use of mobile phones.
Recognizing the importance of this mode, the Reserve Bank of India issued guidelines for Mobile
Banking Transactions in October 2008. The guidelines permit banks to provide mobile banking
facilities and mandates that all transactions have to originate from one bank account and terminate
in another. The perception in certain quarters has been that the guidelines are restrictive as they do
not permit non-banking entities, especially the mobile service providers (MSPs), to provide such
services.

What is Current Account?

Net flow of goods, services and unilateral transactions (gifts) between countries. A country's balance
of payments on current account includes trade in goods (visible /merchandise); trade in services

(invisibles); payment of factor incomes, including dividends, interests, migrant remittances from
earnings abroad; and international transfers i.e. gifts. Current account is contrasted with capital
account, where transactions do not give rise to incomes, but represent changes in the form in which
assets are held. Current Account can be deficit or surplus depending upon whether outflows are
more or inflows are more.
What is Capital account?
Net result of public and private international investment and lending activities. The capital account
shows the implications of the current transactions for the country's international creditor/debtor
position. Capital movements reflect changes in the ownership of capital assets between residents
and foreigners. FDI, Portfolio investment, Government loans from abroad, commercial borrowings,
banking capital, etc., form part of the Capital Account. The account can be deficit or surplus
depending upon whether outflows are more or inflows are more.
What is Convertibility?
The ability to exchange domestic currency into foreign currency and vice versa without any
Government / Central Banks restrictions or control. It can be on current account or capital account
depending upon the context and restrictions on ability to exchange a currency into another currency.
What is Capital Account Convertibility?
There is no formal definition of capital account convertibility (CAC). However, the Tarapore
committee set up by the Reserve Bank of India to go into the question of CAC in 1997 defined CAC
as the freedom to convert local financial assets into foreign financial assets and vice versa at market
determined rates of exchange. In simple language, what this means is that CAC allows anyone to
freely move from local currency into foreign currency and vice versa for capital account transactions.
Difference between Current and Capital Account Convertibility
Current account convertibility allows free inflows and outflows for all purposes other than for capital
account purposes. In other words, it allows residents to make and receive trade-related payments receive dollars (or any other foreign currency)

Investment-related Options
Equity Instruments
The most popular one here is the equity-linked savings schemes (ELSS) offered by mutual funds.
These have a three-year lock-in period. and individuals who have a risk appetite may consider this
option.
Provident Fund (PF)/Public Provident Fund (PPF)
In India, there is no comprehensive social security scheme; therefore, individuals have to rely
primarily on their own savings/retirement funds. In this context, PF and PPF are two of the most
popular and effective tools to create a pool of funds to meet long-term financial requirement.
Employees contribution towards PF is eligible for deduction. In case of self-employed individuals, in
the absence of a PF, a contribution could be made to the PPF. It is important to note that in case of
PPF, the maximum amount of contribution is restricted to Rs 70,000 per annum under the PPF rules.

Life Insurance Policies & post office Schemes

Life Insurance Policies (LIP)
There are different kinds of life insurance policies, which include term insurance, money-back,
endowment, etc. Term insurance is particularly advisable, wherein by paying a small sum of
premium; a large sum could be assured by an individual.

Post Office Schemes

Investment avenues under the post office schemes include National Savings Certificate (NSC),
Senior Citizen Savings Scheme (SCSS) and the Post Office five-year time deposits. Post offices in
India have a good coverage and the interest rates do not vary frequently in comparison with
banks/other deposits schemes. Therefore, these schemes are also quite popular amongst individual
taxpayers.
Deposits
Term deposit with a scheduled bank for a period of five years or more is quite popular. Similarly,
investments made in bonds issued by the National Bank for Agriculture and Rural Development
(Nabard) and debentures issued by specified companies.

ASSET MANAGEMENT COMPANY (AMC)

AMC is constituted as a Company under the Indian Companies Act, having minimum net-worth of Rs
10. Crores. AMC can do only the following business
a) Asset Management Service,
b) Portfolio Management Service,
c) Portfolio Advisory Services.

NET ASSEST VALUE (NAV)

It is the value of a MF Unit calculated on the valuation date (date of transaction) as
Net Asset of the Scheme / No. of Units Outstanding or (Market value of Investments +Receivables+
Accrued Income + Other Assets less Accrued Expenses +Payables+ Other Liabilities) .The NAV of a
mutual fund moves / fluctuates with market price movements.

EQUITY DERIVATIVES
Equity derivative instruments are specially designed future contracts where an individual can buy /
sell (Call / Put) the underlying equity at a specified future date at an agreed price. The option
contract can be liquidated before maturity without taking or giving delivery of the underlying asset.

Money Market Securities

All debt Securities maturing within One Year are called Money Market Securities, examples:
a) T-Bills,
b) Corporate Deposits (CDs)
c) Commercial Papers (CPs)
d) Call Money,
e) Repo

FINANCIAL PLANNING
Financial Planning, s the term implies would mean identifying all the financial needs of an individual,
thereafter translating the identified needs into a desired monetary goal over a identified future timeframe and making the investments with appropriate asset allocation within the available resources
and having a time frame for investments. The objective of the financial planning is to plan ahead for
deciding the right amount of money required at right hands and at the right time in future.

Private Equity
Private Equity is an equity investment, generally, in a company which is not listed on a stock
exchange. Charesticts of private Equity are :
i. Attractive returns: Private equity can provide significantly high returns as compared to
other forms of investment.
ii. Commitment of Fund: In Private equity, investors make a commitment to invest. The
fund manager draws from these commitments as and when opportunities arise.
iii. Limited liquidity: The investments being in private firms, the investments may remain
invested for as long as ten to twelve years. During this period unless an IPO or strategic sale
occurs, the investor may not get back even the principle amount.
iv. Investment Risks In Private equity and venture capital, investment is made in start-up
companies and financially leveraged companies with growth potential. The failure risk of such
companies is high.

Private Equity Vs Mutual Fund

Private Equity has a number of similarities and differences.
a. Similarities:

Both P.E. and Mutual funds pool investment from investors.

In India, both are organized as Trusts.

Both P.E. funds and Mutual funds could have a number of schemes, although the schemes in
P.E funds are relatively small.

Both charge a portion of the funds as Management fee.
b. Differences

Investment Avenue Private Equity invests in equity or equity like instruments only
compared to Mutual Fund who invest in both debt and equity.

Size of investment - Private Equity investment is large in size compared to Mutual Fund both
for the investors and for the investee company.

Size of the portfolio A P.E. fund invests in a small number of portfolio companies compared
to Mutual Funds.
Determinate Trust: It is a trust registered under Indian Trust Act 1883 where the beneficiaries of
the trust are identifiable, their names and shares are stated in the trust deed and the list of
beneficiaries cannot be altered at a later date.
Domestic Venture Capital Fund (DVCF): A fund is known as a DVCF entity, when the fund (i.e.
the trust or the company) is registered with SEBI as a Venture Capital Fund (VCF) under VCF
regulations. A DVCF gets the advantage of exemption from post-IPO lock-in requirements in case of
listing of the portfolio companies, if the shares were held by the VCF for a period of at least one year
prior to filing of IPO prospectus.
Foreign Venture Capital Investor (FVCI): FVCI may be a foreign person/corporate/overseas
private equity funds, incorporated and established outside India, and registered with SEBI which is
making investment in accordance with SEBI regulations. An FVCI can invest in a VCF under the
automatic route without any prior approval from the GOI or RBI.

Investment Period: This is the period up to which the fund invests in portfolio companies. It
ranges from 4-5 years.
Determinate Trust: It is a trust registered under Indian Trust Act 1883 where the beneficiaries of
the trust are identifiable, their names and shares are stated in the trust deed and the list of
beneficiaries cannot be altered at a later date.
Domestic Venture Capital Fund (DVCF): A fund is known as a DVCF entity, when the fund (i.e.
the trust or the company) is registered with SEBI as a Venture Capital Fund (VCF) under VCF
regulations. A DVCF gets the advantage of exemption from post-IPO lock-in requirements in case of
listing of the portfolio companies, if the shares were held by the VCF for a period of at least one year
prior to filing of IPO prospectus.
Foreign Venture Capital Investor (FVCI): FVCI may be a foreign person/corporate/overseas
private equity funds, incorporated and established outside India, and registered with SEBI which is
making investment in accordance with SEBI regulations. An FVCI can invest in a VCF under the
automatic route without any prior approval from the GOI or RBI.
Investment Period: This is the period up to which the fund invests in portfolio companies. It
ranges from 4-5 years.
Term of the Fund: This is the aggregate life of the fund and includes the investment period, the
investment management period and the divestment period. Normally it ranges from 10-12 years.
Minimum Commitment: It is the minimum amount (determined by the Fund Manager) required for
investment by an investor other than the sponsors.
Drawdown: It describes the schedule to represent fund managers capital requirement. Investors
are asked to contribute as per their commitments with a predetermined advance days notice.
Multiple Closings and Single Closing: A closing of a fund refers to the declaration that the pooled
vehicle is ready with a corpus and is ready to start investing.
If the fund size is small, manager can go for single closing. If the fund size is big e.g. $ 1-5 billion,
then the funds generally garner the target size through multiple closings. As funds are set up as
determinant trusts in India, in case of domestic funds, only single closing is possible.
Internal Rate of Return: The IRR for an investment is the discount rate at which the total present
value of future cash flows equals the cost of the investment.
Hurdle rate: Hurdle, or preferred rate, requires that the investment achieve a minimum rate of
return before the fund managers receives its carried interest. It typically ranges from 5% to 10%.
Base Management Fee: It is the fee paid by the fund to its manager for efficiently managing the
corpus and varies from 1% to 2% of the corpus of the fund based on the fund size and calculated at
an annual basis.
Capital Raising Fees or Placement Fee: It is the fee for raising corpus of the fund from potential
investors by various marketing efforts. The capital raising fee is 1% to 2% of the total capital
contributions received. It is paid by the manager to the sponsors/placement agents.
Placement agents: Placement agents play a marketing and client servicing role during the fund
raising effort by fund manager.
Performance Fee or Carried Interest/Carry: Carried interest or carry is the share of the fund
profits received by the manager. It is paid over and above the hurdle rate.

Clawback: Clawback or look back provision is a review of the total profit distribution from the
partnership at the end of the term. The manager may earn superior performance allocation in the
early part of the life of the fund by selling an asset at a relatively high price, if the remaining pool of
the assets of the fund do not perform well till the date of sale or till the life of the fund, a part or
whole of the earlier carry reverts backs to the fund.
Cherry picking: It is a direct co-investment issue where fund managers as individual investors have
the right, but not the obligation, to co-invest in deals made by the partnership. It can result in a
misalignment of interests as the fund manager may focus on more attractive deals.
Co-Investment: Co-investment occurs when the fund managers or investors invest in entities that
have received funds by the partnership. Crossover co-investment occurs when a partnership
subsequently invests in companies that have already received money from fund managers affiliated
with the partnership.
Defaulting Investor: Investors who fail to make full payment of its capital contribution when it is
due.
Mezzanine capital: It is a form of financing mostly in the form of partially or fully convertible
debentures that carries a higher credit risk because it is exchanged for equity that is not secured by
collateral or assets in the event of bankruptcy or default.
Leverage buyout: A leveraged buy-out (LBO) is an acquisition of a company in which the takeover
is financed predominantly by debt with minimum equity investment. Assets of the acquired company
act as collateral for the debt and interest and principal obligations are met through cash flows of the
refinanced company.
Exit: The fund may exit from the investments through sale of the investments to other investors or
funds; or listing through an IPO of individual portfolio companies on an appropriate securities
exchange. In India, presently, listing of Private Equity funds is not permitted.