Mutual Fund

A mutual fund is a trust that pools the saving of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them.

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and the Reserve Bank of India. The History of mutual fund in India can be broadly divided into four distinct phases:

First Phase (1964-87)

Unit Trust of India (UTI) was established in 1963 by an act of parliament, it was set up by the Reserve Bank of India and functioned under the regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end of 1988 Unit had 6700 crore of assets under management.

Second Phase (1987-93)

1987 marked the entry of non-UTI, public sector mutual fund setup by the public sector banks and life insurance corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI mutual fund was the first non-UTI mutual fund established in June 1987 followed by CanBank Mutual Fund (December 1987), Punjab National Bank Mutual Fund (August 1989), Indian Bank Mutual Fund (Novemeber 1989), Bank of India (June 1990), Bank of Baroda Mutual Fund (October 1992). LIC established its Mutual Fund in June 1989 while GIC set up its Mutual Fund in December 1990.

Third Phase (1993-2003)

With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was a year in which the first Mutual Fund regulation came into being, under which all mutual funds except UTI were to be registered and governed. The erstwhile Kothari Poneer (now Merged with Franklin Templeton) was the first private sector Mutual fund registered in July 1993.

The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulation in 1996. The industry now function under the SEBI (Mutual Fund) Regulation 1996.

Fourth Phase (Since February 2003)

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the specified undertaking of the Unit Trust of India with assets under management of 29,835 crore as at the end of Jan 2003, representing broadly the assets of US 64 scheme, assured return and certain other schemes. The specified undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations.

The second is the UTI Mutual Fund, sponsored by SBI, PNB, BoB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI had in Mach 2000 more than 76,000 crore of assets under management with the setting up of UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among the different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth.

Bombay Stock Exchange (BSE) of India

The oldest stock market in Asia, BSE stands for Bombay Stock Exchange and was initially known as "The Native Share and Shock Brokers Association". Incorporated in 1875, BSE became the first exchange in India to be certified by the administration. It attained a permanent authorization from the Indian Government in 1956 under Securities Contracts (Regulation) Act, 1956.

Over the year, the exchange company has played an essential part in hte expansion of Indian investment market. At present the association is functioning as incorporated body integrated under stipulations of Companies Act, 1956.

While BSE is now synonymous with Dalal Street, it was not always so. The first venues of the earliest stock brokers meetings in the 1850s were in rather natural environs - under banyan trees - in front of the Town Hall, where Horniaman Circle is now situated.

A decade later, the brokers moved their venue to another set of foliage, this time under banyan trees at the junction of Meadows Streets and what is now called Mahatma Gandhi Road.

As number of brokers increased, they had to shift from place to place, but they always overflowed to the streets. At last, in 1874, the brokers found a permanent place, and one that they could, quite literally, call their own, the new place was, aptly, called Dalal Street (Brokers Street).

In 2002, name "The Stock Exchange, Mumbai" was changed to Bombay Stock Exchange. Subsequently on August 19, 2005 the Exchange turned into a corporate entity from an association of persons (AoP). And renamed as Bombay Stock Exchange Limited.

BSE which had introduced the securities trading in India, replaced its own outcry system of trading in 1995, with the totally automated trading through the BSE Online Trading (BOLT) system. The BOLT network was expanded nationwide in 1997.

Recommendation of the K.C. Chakrabarty Committee on Recapitalisation of RRBs

The Government of India had constituted a committee in September 2009 (Chairman Dr K. C. Chakrabarty) to study the current levels of capital-to-risk-waited asset ratio (CRAR) of RRBs and to suggest a road map for achieving a CRAR of 9% by March 2012. The committee was also required to suggest the acquired capital structure for RRBs given their business level, so that their CRAR is sustainable and provides for future growth and compliance with regulatory requirements. The committee submitted its report to the Government of India on April 30, 2010.

The following are the main recommendations of the committee on reacpitalisation of RRBs:

• The Committee carried out an assessment of capital requirement for all 82 RRBs to enable them to have CRAR of at least 7% as on March 31, 2011 and at least 9% from March 31, 2012 onward. The recapitalisation requirement would be Rs. 2200 crore for 40 out of 82 RRBs. This amount may be released in two installments i.e., Rs. 1338 crore in 2010-11 and Rs. 863 crore 2011-12. The remaining 42 RRBs will not acquire any capital and will be able to maintain CRR of at least 9% as on March 31, 2012 and thereafter on their own.
• The committee noted that some of the weak RRBs, particularly in North-Eastern and Eastern regions, might not be able to fully meet all the projected business parameters despite generally achieving acceptable growth. The committee, therefore suggest that an additional amount of Rs. 700 crore may be kept to meet such contingencies and need based additional capitalisation provided to such RRBs once their draft balance sheets are prepared.
• The recapitalisation of Rs. 2200 crore to 40 RRBs should be one time measure, and released subject to signing of memorandum of understanding (MoU) by the chairman of the RRB and on achieving the performance parameters specified in MoU. As per section 5 of the RRB Act, the authorized capital of RRB is Rs. 5 Crore. As a result recapitalisation amount are kept as share capital deposit. The committee has recommended that the accumulated losses on March 31, 2010 may be written off against the available share capital deposits and the balance amount of share capital deposit may be appropriated as paid-up capital further, in view of expanding business of the RRB, the committee recommended to increase in the authorized capital RRBs to Rs. 500 crore.
• In order to build public confidence, in due course, RRB with higher net worth may be allowed to access capital from the market.
• For improving the functioning of the RRB, change of sponsor banks may be considered, where ever required.
• RRB with a net worth of Rs. 100 crore or more as on March 2009 may be permitted to pay dividend on April 1, 2013 onward. RRBs to be recapitalised in the current phase may be allowed to pay dividend only after achieving a sustainable CRAR of at least 9%.
• RBI may prescribe "Fit and Proper" criteria for chairman of RRB. The sponsor may depute officer conforming to such criteria as Chairman on a tenure basis and wherever needed, such officers may be recruited by them from open market and the deputed to RRBs. The compensation of chairman may be de-linked from existing salary structure of commercial banks and be more market oriented and a system of incentives and disincentives linked to performance benchmarks approved by the board may be built in the compensation package.
• The board as a body as well as individual board members may be made accountable for the banks performance and individual board need to be assigned specific responsibilities as per their expertise.
• Wherever required, sponsor banks may recruit suitable person from the market, including staff of the RRB in their own service and then depute them as general managers in RRBs.

MCA-21 E-Governance Project- an Effort to Facilitate Business in India

As a regulator and enabler for corporate growth in the country, the Ministry of Corporate Affairs has been working on two key initiatives, to reform the legislative framework and to embark on e-Governance initiatives that will facilitate service delivery in a user friendly, efficient and economic manner.

            To facilitate business in India a pioneering e-Governance initiative ‘MCA21’ was launched by the Ministry in January 2007. The initiative has been successful in achieving its aim of providing speed and certainty in the delivery of MCA services to its stakeholders. This project has adopted a service oriented approach in the design and delivery of Government services, whereby stakeholders have easy and secure access to MCA services, through the infrastructure setup for the purpose, at any time and from any place and in a manner that best suits them. The system has brought a fine balance between stakeholder facilitation and control, through a blend of well-defined goals and performance metrics.

           

            Although, MCA 21 has been progressing at a constant velocity to provide better services to the citizens and corporate alike, year 2012 has been the one standing out in terms of rolling out newer initiatives. These initiatives have benefited citizens, corporate and government agencies alike. 

Online Payments Using NEFT

MCA 21 has been allowing three modes of payment by the companies, Credit cards, Netbanking (5 designated banks) and Paper challans; all these modes had limitations for the companies with bank accounts in banks other than the 5 designated banks and physical visits to the branches of the designated banks for filing challans.

By introduction of National Electronic Funds Transfer mode of payment, companies having bank account in any bank can make e-payments by using the NEFT method.

Key benefits of NEFT:

·         Reduces the Payee’s effort (branch visit is not required)

·         Reduces the time for funds transfer (2-5 hours)

·         Reduces the dependency on the limited number of banks

Initiatives Taken by the Government for Unearthing and Curbing Black Money: A Fact Sheet

Initiatives taken by the Investigation Division of Central Board of Direct Taxes (CBDT) for unearthing black money :

I.                   The Government of India has commissioned a study on unaccounted income/ wealth both inside and outside the country bringing out the nature of activities engendering money laundering and its ramifications on national security. The study is being conducted by three national institutes viz. National Council of Applied Economic Research (NCAER), National Institute of Public Finance & Policy (NIPFP) and National Institute of Financial Management (NIFM), with inputs from various ministries/departments. The study will be completed by the end of 2012.

II.                A  Directorate of Criminal Investigation (DCI) has been created as an attached office of the Central Board of Direct Taxes (CBDT) to track financial transactions relating to illegal / criminal activities, including illicit cross-border transactions, from the direct tax angle and bring such activities to justice. Creation of DCI is also in line with FATF recommendations to exclusively deal with tax crimes, including direct taxes.

III.             CBDT is coordinating with the Election Commission of India (ECI) for controlling political expenditure and verification of affidavits filed by candidates of political parties.

IV.            In order to strengthen the existing laws relating to black money, the Government constituted a Committee under the Chairman, CBDT to examine the measures to strengthen the existing legal and administrative framework to deal with the menace of generation of black money through illegal means including, inter alia,

a) Declaring wealth generated illegally as national asset;

b) Enacting / amending laws to confiscate and recover such assets; and

c) Providing for exemplary punishment against its perpetrators.

The Committee submitted its report to the Government on 29^th March 2012. The report has been sent to different Ministries / Organisations and State Governments for necessary action.

V.               Information received under DTAA – Information from Germany & France has been investigated. Tax evasion of more than Rs.600 crore detected and taxes of Rs.200 crore has already been realized. Prosecution proceedings have been launched in 17 cases pertaining to LGT Bank accounts. Assessment proceedings have been initiated in cases relating to HSBC accounts. Further information from outside the country is awaited in several cases. Information received from different countries under the automatic exchange of information arrangement is appropriately utilized for the purpose of investigation and assessment.

VI.            Search & Seizure, Surveys – In the last three financial years, the Investigation wing of the CBDT has detected undisclosed income of over Rs.32,000 crore besides seizing undisclosed assets valued at over Rs.2,600 crore. The Income Tax Department (ITD) has further detected undisclosed income of Rs.17,325 crore in surveys conducted at business premises.

VII.         Tax Prosecutions – Out of 1,548 prosecution cases disposed of during the last three financial years, the ITD has obtained conviction in 97 cases besides fiscal compounding in 771 cases of admitted tax evasion, leading to a success rate of 56.1 percent.

RBI permitted Banks to lend to Telecom Companies for the Upcoming Auction for Spectrum

The Reserve Bank of India (RBI) permitted banks to lend to telecom companies for the upcoming auction for spectrum, subject to conditions such as mortgaging the spectrum to the lenders. The RBI had laid down a few pre-conditions for financing of telecom firms for the auction of airwaves to protect banks against potential defaults.
The Union cabinet on 3 August 2012 approved a proposal that allows telecom companies bidding for airwaves to mortgage spectrum to raise funds from banks. The government set a reserve or base price of Rs 14000 crore for the auction.
That banks were revising their lending rates in specific maturities without lowering the base rate concerned the RBI. This activity of the banks resulted in the transmission of monetary policy signals by the central bank to be ineffective. The base rate is supposed to be responsive to changes in monetary conditions.
The RBI had formed a committee to assess the monetary policy transmission mechanism and also loan products offering fixed interest rate. The RBI want banks to enact changes in lending rates through their respective benchmark base rates for floating-rate loans.

India’s Stand on ILO Conventions Briefed to the Parliamentary Consultative Committee of M/O Labour & Employment

The Consultative Committee members of the Ministry of Labour & Employment have urged the Government to ensure due patronage to the traditional skill while going for the ratification of Conventions adopted by the International Labour Organisation (IlO) on Labour issues, especially in the arena of Child Labour. The members have also called for expediting the cause of providing a minimum pension of Rs. 1000 per month to the EPF beneficiaries as well as to ensure proper registration of workers in the unorganized sectors particularly the construction workers.

The meeting of Consultative Committee of Labour & Employment Ministry which held yesterday evening was convened for providing in insight to the members of the various conventions of ILO as ratified by the Government of India on time to time. Speaking on the occasion, Union Labour & Employment Minister Shri Mallikarjun Kharge who chaired the meeting, said India, a Founding Member of the ILO, has been a permanent member of the ILO Governing Body since 1922. ILO has now expanded its membership to 185 nations. The first ILO Office in India started in 1928. The decades of productive partnership between the ILO and its constituents has mutual trust and respect as underlying principles and is grounded in building sustained institutional capacities and strengthening capacities of partners. It has a two-directional focus for socio-economic development: overall strategies and ground-level approaches.

The Minister said the approach of India with regard to International Labour Standards has always been positive. The ILO instruments have provided guidelines and useful framework for the evolution of legislative and administrative measures for the protection and advancement of the interest of labour. It has always been the practice in India that we ratify a Convention when we are fully satisfied that our laws and practices are in conformity with the relevant ILO Convention. The ILO has so far adopted 189 Conventions and 201 Recommendations. Out of 189 ILO Conventions, India has so far ratified 43 Conventions which includes 4 (four) core or fundamental human rights Conventions.

He said we have ratified 4 core conventions and 3 priority/governance conventions. The 4 core conventions ratified by us are Forced Labour Convention (No.29), Abolition of Forced Labour Convention (No.105), Equal Remuneration Convention (No.100) and Discrimination (Employment Occupation) Convention (No.111), and the 3 priority conventions ratified are Labour Inspection Convention (No.81), Employment Policy Convention (No.122) and Tripartite Consultations (International Labour Standards) (No.144). Even where for certain reasons where we may not be in a position to ratify a Convention, we have generally voted in favour of the Convention reserving its position as far as its future ratification is concerned.

The journey of ILO over the last more than nine decades has been eventful and full of important milestones. However, the primary function of ILO is standard setting and their application. Many of the ILO Conventions are outdated and need to be revised as identified by Cartier Working Party. Even the core conventions have failed to achieve universal ratification due to lack of flexibility. Our concern is that ILO should undertake in-depth analysis to put in place a standards strategy which encourages steps like progressive ratification of a Convention. The choice of topics for future standard setting should be widened according to the requirements of all ILO member states having diverse socio-economic conditions. In the years to come, ILO must maintain its leadership in the subjects related to labour since it has the unique advantage of tripartite structure, transparency and the ability to obtain inputs from real economy, Shri Kharge added.

Shri Kharge said the challenges being faced by the Member states on Ratification and promotion of fundamental and governance ILO Conventions are due to non-conformity with national laws and lack of technical assistance. He said India’s stand is that the process of ratification of these conventions should be a gradual one and adequate time should be given to the Member States for creating favourable conditions for ratification, taking into account the socio-economic realities of each Member state. The link-up of the four Governance Conventions to the Social Justice Declaration should be more of promotional in nature. We should adopt a more pragmatic and realistic approach for ratification and promotion of these conventions through creating awareness, building capacities of the constituents, advocacy, training and technical cooperation.

A power point presentation on the preparedness and attention paid by the Government at the ILO meetings was also presented during the meeting.

Inflow of FDI

According to the UNCTAD’s World investment Report, 2012, Foreign Direct Investment (FDI) inflows of US $ 684399 million were received in developing economies of the World during 2011, of which India received 4.6%.  FDI inflows, in respect of some of the developing economies, including India, during 2011, are as under:-

DEVELOPING ECONOMIES	2011 US $ (MILLION)
China	123985
Hong Kong, China	83156
Brazil	66660
Singapore	64003
British Virgin Islands	53717
India	31554
Mexico	19554
Indonesia	18906
Chile	17299

            According to the UNCTAD’s World Investment Report, 2012, Foreign Direct Investment (FDI) inflows of US $ 31554 million have been received in India during 2011, as against FDI inflows of US $ 24159 received during 2010.

India’s Fiscal Deficit reached 37 Percent of the Budget Estimate

According to the latest data released by the Controller General of Accounts (CGA) on 1 August 2012, India's fiscal deficit in the first quarter (April-June) of the fiscal year 2012-13 stood at 1.90 lakh crore rupees which was 37 percent of the entire budget estimate.

The Union Government in the budget 2012 had pegged the fiscal deficit for the financial year 2012-13 at 5.13 lakh crore, or 5.1 percent of total GDP. Fiscal deficit during the corresponding period of fiscal year 2011-12 was 39 percent of the budget estimates amounting 1.63 lakh crore rupees.

The revenue receipts, however, increased in the first three months of fiscal year 2012-13. The revenue receipt during the given period stood at 1.18 lakh crore rupees, which was 12.7 percent of the budget estimates. Total expenditure of the government stood at 3.12 lakh crore rupees, or 21 percent of the budget estimates.

Securities and Exchange Board of India inaugurated their local office in Jaipur

Securities and Exchange Board of India (SEBI) inaugurated their local office here. Jaipur is known as the Pink City. It is the largest city in Rajasthan State.

Securities and Exchange Board of India(SEBI) inaugurated their local office in Jaipur on 4 August 2012. It was inaugurated by Rajeev Kumar Agarwal, the member of SEBI. The office will be responsible to look after all the regulatory aspects of investor protection, investor education and all the other responsibilities within Rajasthan state.

India’s NSE became the World’s Largest Bourse in Equity Segment as per WFE’s Global Ranking

As per the latest global ranking compiled and published by the World Federation of Exchanges (WFE) in August 2012, the National Stock Exchange of India (NSE) become the world’s largest bourse in terms of the number of trades in equity segment for the first six months of 2012. A total of 735474 trades took place in the equity segment of NSE in the January-June period of 2012, making it the world’s largest exchange on this parameter. NSE was followed by NYSE Euronext and Nasdaq OMX at the second and the third positions.
Industry experts attributed the recent position of NSE acquired by the bourse to growing investor base, use of latest technology and new products. NSE's platform is connected to two lakh trading terminals in more than 2000 towns and cities across the country.
NSE is the second largest exchange globally after Korea Exchange for index options. Eurex was the third largest exchange worldwide in terms of total number of index options traded during the first six months of 2012.
BSE recorded a total of 187824 trades during this period in its equity segment. The total number of listed companies is much larger in case of the BSE, the exchange however lags behind NSE significantly in terms of volume and value of trades.
The latest data published by WFE indicated that investors from tier-three cities contributed more than 45 per cent of total cash market retail turnover in the financial year 2011- 12. The tier-three cities account for more than half of the total retail investor base on NSE platform.

Bombay Stock Exchange Sensitive Index

The BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index composed of 30 stocks with the base April 1979 = 100. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. These companies account for around one-fifth of the market capitalization of the BSE. 

  

Companies in the Sensex 

Name	Sector
ACC	Cement
Bajaj Auto	Automobiles (2/3 wheelers)
BHEL	Capital Goods
Bharti Airtel	Telecom and Retail
Cipla	Pharma
Dr. Reddy’s Laboratories	Pharma
Grasim Industries	Diversified
Gujarat Ambuja Cements	Cement
HDFC	Finance
HDFC Bank	Finance
Hero Honda Motors	Automobile (2 wheelers)
Hindalco Industries	Metal, Metal Products & Mining
Hindustan Lever Limited	FMCG
ICICI Bank	Banking & Finance
Infosys	Information Technology
ITC Limited	FMCG
Larsen & Toubro	Capital Goods & Construction.
Maruti Udyog	Automobiles
NTPC	Power
ONGC	Oil & Gas
Ranbaxy Laboratories	Pharma
Reliance Communications	Telecom
Reliance Energy	Power
Reliance Industries	Diversified
Satyam Computer Services	Information Technology
State Bank of India	Banking & Finance
Tata Consultancy Services	Information Technology
Tata Motors	Automobiles
Tata Steel	Metal, Metal Products & Mining
Wipro	Information Technology

Rural development ministry plans big push to MNREGA to tackle drought

The rural development ministry is preparing for a big push to its flagship employment generation programme as drought has depressed demand for farm labour. The ministry has written to state governments asking them to identify development projects under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) to ensure there's enough work available for those in need.

Rural development minister Jairam Ramesh has already written to state chief ministers affected by deficient rainfall, asking them to prepare a list of new projects that could be incorporated in the MNREGA programme.

Ramesh is now touring drought-hit states of Maharashtra, Karnataka, Gujarat and Rajasthan with agriculture minister Sharad Pawar to assess the water scarcity situation.

While the all-India rainfall deficiency average at 21%, some states like Karnataka, Maharashtra, Gujarat and Rajasthan have been worse off with deficiencies as high as 64% and 78%.

The Centre wants to expedite the implementation of new projects under MNREGA to generate enough jobs as demand for employment goes up, mainly from agricultural workers.

Although allocation for NREGA was curtailed to Rs 33,000 crore this budget from Rs 40,000 crore in 2011-12, states have surplus left over from the previous year.

MNREGA has provided 5.50 crore families or nearly one in four rural households with over 250 crore person-days of work under the programme.

Delay in payments and leakages have, however, dented the scheme's initial popularity, which many attributed as one of the reasons for UPA's return to power in 2009.

Banks may move to screen-based rate for MIBOR

Banks are likely to move to actual dealt rates on a trading platform to determine overnight interbank lending rates, as regulators worldwide push for more transparent systems in the wake of the Libor scandal, officials close to the plan said.

Some Indian bankers fear that the current polling system used to determine the Mumbai interbank offered rate (MIBOR) could be similarly vulnerable to manipulation.

"Traders are closely looking at whether it will be desirable to use traded data as a benchmark."

The moves in India parallel similar efforts by regulators from London to Singapore to reform the way benchmarks for interbank borrowing rates are fixed following the investigations into the rigging of the London interbank offered rate (Libor).

Libor and other similar benchmarks are used to price trillions of dollars worth of loans and derivative contracts.

In India, Reuters and the National Stock Exchange conduct separate polling, asking banks for their assessments MIBOR, which is used as a benchmark for interest rate swaps, overnight call money, collaterised borrowing and lending obligations (CBLO), floating rate bonds and short-term corporate loans.

The debt and money market body Fixed Income Money Market and Derivatives Association ( FIMMDA) is expected to make the final decision on a new system in a month, after sounding out banks and CCIL.

Private sector bank--YES Bank, one of the lenders currently participating in polling for MIBOR, would welcome a switch.

Pakistan allows National Bank of Pakistan & United Bank to open branches in India

Pakistan's central bank has allowed two banks to open branches in India as part of efforts to normalise economic and trade relations between the two countries.

State Bank of Pakistan (SBP) Governor Yasin Anwar told the media that the National Bank of Pakistan and the United Bank Ltd had been given the "green signal" to operate in India.

In a major decision, India  allowed investment from Pakistan paving way for Islamabad to normalise bilateral economic ties by implementing much-delayed Most Favoured Nation (MFN) status for New Delhi.

India's move to allow Pakistani investments has been welcomed by businessmen on both sides of the border.

Earlier this year, Pakistan switched over to a negative list regime for trade with India, paving the way for giving the Most Favoured Nation-status to the neighbouring country.

However, recent reports have indicated that Pakistan has decided to link progress in normalising trade relations to the resolution of other issues, like the Kashmir issue and the Sir Creek border dispute.

Trade between India and Pakistan is worth a little more than $2 billion dollars and the two sides have agreed to increase it to $6 billion dollars by 2014. 

Credit Rating

Credit rating is done for debt instruments such as debentures, fixed deposits, commercial papers, bonds, etc.
The company which issues debt instruments is called an issuer or issuing company. The issuer, issues these instruments to collect finance from the investors.
The investor looks at the credit rating of the instrument and the issuer before investing. If the credit rating is a high, investor will invest in the company. That is, he will purchase the debentures, etc. issued by that company. If the credit rating is low, he will not purchase the debentures, etc. of that company. So, credit rating guides the investor while investing.
Credit rating is an opinion about a debt instrument and its issuer. It tells the investor, whether the debt instrument is safe or risky. That is, it tells whether the company will be able to pay the interest and repay the principal amount in time. Credit rating is only an opinion. It is not a recommendation. It does not ask an investor to buy, hold or sell an instrument.
So, credit rating is an opinion about the future ability and legal obligation of the issuer to make timely payments of principal amount and interest on their debt instruments. Credit rating is done by independent credit-rating agencies like S & P, which is based in USA, while CRISIL, CARE and ICRA Ltd., which are based in India. Credit rating is done by experts after examining various factors. The rating is expressed in alphabetical or alphanumeric symbols. For e.g. if the rating of debenture is AAA (Triple A), then it is considered to have the highest safety for the investor. However, if the credit rating is D, then the debenture is considered to be very risky for the investor. The issuing company asks the credit-rating agency to rate its instrument. This is done before issuing the instrument. The agency collects and studies information about the issuing company. Then it gives a rating for the instrument. This rating is not permanent. It is reviewed periodically.

Benefits of Credit Rating to Investors

The advantages, importance or benefits of credit rating to the investors are:

1. Helps in Investment Decision : Credit rating gives an idea to the investors about the credibility of the issuer company, and the risk factor attached to a particular instrument. So the investors can decide whether to invest in such companies or not. Higher the rating, the more will be the willingness to invest in these instruments and vise-versa.
2. Benefits of Rating Reviews : The rating agency regularly reviews the rating given to a particular instrument. So, the present investors can decide whether to keep the instrument or to sell it. For e.g. if the instrument is downgraded, then the investor may decide to sell it and if the rating is maintained or upgraded, he may decide to keep the instrument until the next rating or maturity.
3. Assurance of Safety : High credit rating gives assurance to the investors about the safety of the instrument and minimum risk of bankruptcy. The companies which get a high rating for their instruments, will try to maintain healthy financial discipline. This will protect them from bankruptcy. So the investors will be safe.
4. Easy Understandability of Investment Proposal : The rating agencies gives rating symbols to the instrument, which can be easily understood by investors. This helps them to understand the investment proposal of an issuer company. For e.g. AAA (Triple A), given by CRISIL for debentures ensures highest safety, whereas debentures rated D are in default or expect to default on maturity.
5. Choice of Instruments : Credit rating enables an investor to select a particular instrument from many alternatives available. This choice depends upon the safety or risk of the instrument.
6. Saves Investor's Time and Effort : Credit ratings enable an investor to his save time and effort in analyzing the financial strength of an issuer company. This is because the investor can depend on the rating done by professional rating agency, in order to take an investment decision. He need not waste his time and effort to collect and analyse the financial information about the credit standing of the issuer company.

Benefits of Credit Rating to Company

The merits, advantages, benefits of credit rating to the issuing company are:

1. Improves Corporate Image : Credit rating helps to improve the corporate image of a company. High credit rating creates confidence and trust in the minds of the investors about the company. Therefore, the company enjoys a good corporate image in the market.
2. Lowers Cost of Borrowing : Companies that have high credit rating for their debt instruments will get funds at lower costs from the market. High rating will enable the company to offer low interest rates on fixed deposits, debentures and other debt securities. The investors will accept low interest rates because they prefer low risk instruments. A company with high rating for its instruments can reduce the cost of public issue to raise funds, because it need not spend heavily on advertising for attracting investors.
3. Wider Audience for Borrowing : A company with high rating for its instruments can get a wider audience for borrowing. It can approach financial institutions, banks, investing companies. This is because the credit ratings are easily understood not only by the financial institutions and banks, but also by the general public.
4. Good for Non-Popular Companies : Credit rating is beneficial to the non-popular companies, such as closely-held companies. If the credit rating is good, the public will invest in these companies, even if they do not know these companies.
5. Act as a Marketing Tool : Credit rating not only helps to develop a good image of the company among the investors, but also among the customers, dealers, suppliers, etc. High credit rating can act as a marketing tool to develop confidence in the minds of customers, dealer, suppliers, etc.
6. Helps in Growth and Expansion : Credit rating enables a company to grow and expand. This is because better credit rating will enable a company to get finance easily for growth and expansion.

Demerits of Credit Rating

The disadvantages, limitations or demerits of credit rating are listed below.

1. Possibility of Bias Exist : The information collected by the rating agency may be subject to personal bias of the rating team. However, rating agencies try their best to provide an unbiased opinion of the credit quality of the company and/or instrument. If not, they will not be trusted.
2. Improper Disclosure May Happen : The company being rated may not disclose certain material facts to the investigating team of the rating agency. This can affect the quality of credit rating.
3. Impact of Changing Environment : Rating is done based on present and past data of the company. So, it will be difficult to predict the future financial position of the company. Many changes take place due to changes in economic, political, social, technological, legal and other environments. All this will affect the working of the company being rated. Therefore, rating is not a guarantee for financial soundness of the company.
4. Problems for New Companies : There may be problems for new companies to collect funds from the market. This is because, a new company may not be in a position to prove its financial soundness. Therefore, it may receive lower credit ratings. This will make it difficult to collect funds from the market.
5. Downgrading by Rating Agency : The credit-rating agencies periodically review the ratings given to a particular instrument. If the performance of a company is not as expected, then the rating agency will downgrade the instrument. This will affect the image of the company.
6. Difference in Rating : There are cases, where different ratings are provided by various rating agencies for the same instrument. These differences may be due to many reasons. This will create confusion in the minds of the investor.

Structure of Indian Money Market

The entire money market in India can be divided into two parts. They are organised money market and the unorganized money market. The unorganised money market can also be known as an unauthorized money market. Both of these components comprise several constituents. The following chart will help you in understanding the organisational structure of the Indian money market.

Components, SubMarkets of Indian Money Market:

After studying above organisational chart of the Indian money market it is necessary to understand various components or sub markets within it. They are explained below.

1. Call Money Market : It an important sub market of the Indian money market. It is also known as money at call and money at short notice. It is also called inter bank loan market. In this market money is demanded for extremely short period. The duration of such transactions is from few hours to 14 days. It is basically located in the industrial and commercial locations such as Mumbai, Delhi, Calcutta, etc. These transactions help stock brokers and dealers to fulfill their financial requirements. The rate at which money is made available is called as a call rate. Thus rate is fixed by the market forces such as the demand for and supply of money.
2. Commercial Bill Market : It is a market for the short term, self liquidating and negotiable money market instrument. Commercial bills are used to finance the movement and storage of agriculture and industrial goods in domestic and foreign markets. The commercial bill market in India is still underdeveloped.
3. Treasury Bill Market : This is a market for sale and purchase of short term government securities. These securities are called as Treasury Bills which are promissory notes or financial bills issued by the RBI on behalf of the Government of India. There are two types of treasury bills. (i) Ordinary or Regular Treasury Bills and (ii) Ad Hoc Treasury Bills. The maturity period of these securities range from as low as 14 days to as high as 364 days. They have become very popular recently due to high level of safety involved in them.
4. Market for Certificate of Deposits (CDs) : It is again an important segment of the Indian money market. The certificate of deposits is issued by the commercial banks. They are worth the value of Rs. 25 lakh and in multiple of Rs. 25 lakh. The minimum subscription of CD should be worth Rs. 1 Crore. The maturity period of CD is as low as 3 months and as high as 1 year. These are the transferable investment instrument in a money market. The government initiated a market of CDs in order to widen the range of instruments in the money market and to provide a higher flexibility to investors for investing their short term money.
5. Market for Commercial Papers (CPs) : It is the market where the commercial papers are traded. Commercial paper (CP) is an investment instrument which can be issued by a listed company having working capital more than or equal to Rs. 5 cr. The CPs can be issued in multiples of Rs. 25 lakhs. However the minimum subscription should at least be Rs. 1 cr. The maturity period for the CP is minimum of 3 months and maximum 6 months. This was introcuced by the government in 1990.
6. Short Term Loan Market : It is a market where the short term loan requirements of corporates are met by the Commercial banks. Banks provide short term loans to corporates in the form of cash credit or in the form of overdraft. Cash credit is given to industrialists and overdraft is given to businessmen.

Indian Money Market - Features

Every money is unique in nature. The money market in developed and developing countries differ markedly from each other in many senses. Indian money market is not an exception for this. Though it is not a developed money market, it is a leading money market among the developing countries.

Indian Money Market has the following major features or characteristics :-

1. Dichotomic Structure : It is a significant aspect of the Indian money market. It has a simultaneous existence of both the organized money market as well as unorganised money markets. The organized money market consists of RBI, all scheduled commercial banks and other recognized financial institutions. However, the unorganized part of the money market comprises domestic money lenders, indigenous bankers, trader, etc. The organized money market is in full control of the RBI. However, unorganized money market remains outside the RBI control. Thus both the organized and unorganized money market exists simultaneously.
2. Seasonality : The demand for money in Indian money market is of a seasonal nature. India being an agriculture predominant economy, the demand for money is generated from the agricultural operations. During the busy season i.e. between October and April more agricultural activities takes place leading to a higher demand for money.
3. Multiplicity of Interest Rates : In Indian money market, we have many levels of interest rates. They differ from bank to bank from period to period and even from borrower to borrower. Again in both organized and unorganized segment the interest rates differs. Thus there is an existence of many rates of interest in the Indian money market.
4. Lack of Organized Bill Market : In the Indian money market, the organized bill market is not prevalent. Though the RBI tried to introduce the Bill Market Scheme (1952) and then New Bill Market Scheme in 1970, still there is no properly organized bill market in India.
5. Absence of Integration : This is a very important feature of the Indian money market. At the same time it is divided among several segments or sections which are loosely connected with each other. There is a lack of coordination among these different components of the money market. RBI has full control over the components in the organized segment but it cannot control the components in the unorganized segment.
6. High Volatility in Call Money Market : The call money market is a market for very short term money. Here money is demanded at the call rate. Basically the demand for call money comes from the commercial banks. Institutions such as the GIC, LIC, etc suffer huge fluctuations and thus it has remained highly volatile.
7. Limited Instruments : It is in fact a defect of the Indian money market. In our money market the supply of various instruments such as the Treasury Bills, Commercial Bills, Certificate of Deposits, Commercial Papers, etc. is very limited. In order to meet the varied requirements of borrowers and lenders, It is necessary to develop numerous instruments.

Recent Reforms in Indian Money Market

Indian Government appointed a committee under the chairmanship of Sukhamoy Chakravarty in 1984 to review the Indian monetary system. Later, Narayanan Vaghul working group and Narasimham Committee was also set up. As per the recommendations of these study groups and with the financial sector reforms initiated in the early 1990s, the government has adopted following major reforms in the Indian money market.

Reforms made in the Indian Money Market are:-

1. Deregulation of the Interest Rate : In recent period the government has adopted an interest rate policy of liberal nature. It lifted the ceiling rates of the call money market, short-term deposits, bills rediscounting, etc. Commercial banks are advised to see the interest rate change that takes place within the limit. There was a further deregulation of interest rates during the economic reforms. Currently interest rates are determined by the working of market forces except for a few regulations.
2. Money Market Mutual Fund (MMMFs) : In order to provide additional short-term investment revenue, the RBI encouraged and established the Money Market Mutual Funds (MMMFs) in April 1992. MMMFs are allowed to sell units to corporate and individuals. The upper limit of 50 crore investments has also been lifted. Financial institutions such as the IDBI and the UTI have set up such funds.
3. Establishment of the DFI : The Discount and Finance House of India (DFHI) was set up in April 1988 to impart liquidity in the money market. It was set up jointly by the RBI, Public sector Banks and Financial Institutions. DFHI has played an important role in stabilizing the Indian money market.
4. Liquidity Adjustment Facility (LAF) : Through the LAF, the RBI remains in the money market on a continue basis through the repo transaction. LAF adjusts liquidity in the market through absorption and or injection of financial resources.
5. Electronic Transactions : In order to impart transparency and efficiency in the money market transaction the electronic dealing system has been started. It covers all deals in the money market. Similarly it is useful for the RBI to watchdog the money market.
6. Establishment of the CCIL : The Clearing Corporation of India limited (CCIL) was set up in April 2001. The CCIL clears all transactions in government securities, and repose reported on the Negotiated Dealing System.
7. Development of New Market Instruments : The government has consistently tried to introduce new short-term investment instruments. Examples: Treasury Bills of various duration, Commercial papers, Certificates of Deposits, MMMFs, etc. have been introduced in the Indian Money Market.

These are major reforms undertaken in the money market in India. Apart from these, the stamp duty reforms, floating rate bonds, etc. are some other prominent reforms in the money market in India. Thus, at the end we can conclude that the Indian money market is developing at a good speed.

Public Debt In India

During recent years, public debt in India has been growing at an alarming rate. The under developed nature of the economy & institutional credit deficiencies makes the financing of economic development a complicated problem.  Hence the government has to play a key role in stimulating the rate of capital formation & in promoting the economic development of the economy.

So public debt can be used by the government as means for mobilising the resources.
  

Internal Debt

The internal debt is a major component of public debt of the central government of India.
The following are the various components of internal debt. 

1. Market Loan
These have a maturity period of 12 months or more at the time of issue and are generally interest bearing. The government issues such loans almost every year. These loans are raised in the open market by sale of securities or otherwise. Total market loans as at the end of March 2005 are estimated at Rs. 7,58,999 crores. 

2. Bonds

The Government borrows funds by way of issue of bonds. The government obtains funds through the issue of bonds such as National Rural Development Bonds, Central Investment Bonds. The bonds are issued at different maturity periods, which may range from 3 years to 10 years period. They provide medium-term to long-term funds to the government.

3. Treasury Bills
A major source of short-term funds for the government is obtained by issue of treasury bills. At present, government issues 91 day and 364 day treasury bills. The treasury bills are purchased by commercial banks and others. 

4. Special Floating and Other Loans

These represents India's contribution towards share capital of international financial institutions like IMF, World Bank, International Development Agency and so on. These are non-negotiable and non-interest bearing securities. The Government of India is liable to pay the amount at the call of these institutions. Accordingly, it is a short-term debt upon the Government of India.

5. Special securities issued by RBI
The government obtains temporary loans for a period of maximum 12 months from RBI and issues special securities, which are non-negotiable and non-interest bearing. Such securities provide short term funds to the Government.

6. Ways and Mean Advances
The Government of India obtains ways and means advances from the Reserve Bank of India to meet its short period expenditure. These debts are purely temporary in nature and are usually repaid within three months.

7. Securities against small savings

Since 1999-2000, under the new accounting system, national small savings have been converted into the Central Government securities. As a result there has been a sharp increase in internal debt and corresponding decline in small savings.

External Debt

External debt refers to the liabilities of the Indian Government, public sector, private sector and financial institutions to overseas parties.
The government of India has raised foreign loans from U.S.A, U.K, France, U.S.S.R, Japan, etc.
External Debt rose from Rs. 31,525 crores in 1990-91 to Rs. 68,392 crores in 2005-06.
The external debt can be broadly divided into two groups :

A. Long term debt :

1. Multilateral borrowings,
2. Bilateral borrowings
3. Loans from IMF, World Bank, etc.

B. Short term debt :
It is to be noted that the overall external debt of India comprises of Government debt and Non-government debt. The Government debt is owed by Govemment authorities, both Central and State Governments, whereas the non-Government debt is owed by private parties in India. In terms of composition, India's external debt has shifted in favour of private debt over the last decade.

 Other Internal Liabilities

The government does not include liabilities under Public Debt. However, the government is liable to make repayment of these liabilities. 

1. Small Savings

In recent years small savings have increased due to rising money income in the economy.
Recently the Government of India launched a number of small savings instruments. These include 9% Relief Bonds 1987, Kisan Vikas Patras, Indira Vikas Patras, etc.

2. Provident Funds
Provident funds are divided into two categories :-

1. Employee Provident Funds meant for employees.
2. Public Provident Funds meant for general public.

3. Other accounts

Other accounts include Postal Insurance and Life Annuity Fund, Borrowings against Compulsory Deposits, Income Tax Annuity Deposit, Special Deposit of Non-Government Provident Fund and Outstanding Amount.

4. Reserve Funds and Deposits
Reserve Funds and Deposits are divided into two categories :-

1. Interest bearings and
2. Non-interest bearings.

They include depreciation and reserve funds of Railways, Department of Post, Telecommunication, Deposits of Local Funds, Departmental and Judicial Deposits, Civil Deposits, etc.

NSTFDC and SBI Sign Refinance Agreement

The National Scheduled Tribe Finance and Development Corporation (NSTFDC) and State Bank of India (SBI) signed a Refinance Agreement on August 1 in the presence of Shri V. Kishore Chandra Deo, Union Minister of Panchayati Raj and Tribal Affairs. The agreement was signed by the Shri Gur Saroop Sood, Chairman-cum-Managing Director of NSTFDC and Shri A. Krishna Kumar, Managing Director and Group Executive (NB) of SBI. On the occasion, Shri Kishore Chandra Deo said that this is a significant occasion when State Bank of India, the largest Public Sector Bank in the country, has entered into an arrangement with NSTFDC for channelizing concessional loans to the Scheduled Tribes. This also reflects positively on the SBI that they not only cater to the large business houses and high net worth individuals and industrialists but are also committed to economic upliftment of the weaker sections of the society.

The Minister said that today’s arrangements would open a new era towards micro financing of needy Scheduled Tribes by NSTFDC through SBI. Under the arrangements, NSTFD would provide refinance to SBI for loans extended to Self Help Group comprising all ST members. ST beneficiaries would pay concessional interest rate of 6% p.a. only. This arrangement would open doors of more than 14000 branches of SBI to the needy Scheduled Tribes Community for seeking loans upto RS. 5 lakh at the concessional rate.

He informed that the NSTFDC is an apex organization or economic development of Scheduled Tribes, was set up in April 2001 under the Ministry of Tribal Affairs. This Corporation provides financial assistance to Scheduled Tribes at concessional rates of interest for taking up income generation activities. The Corporation in its 11 years of operations has sanctioned financial assistance for schemes costing around Rs. 2200 crore. of this NSTFDC share is around Rs. 1200 crore, while the balance has been met by way of margin money/subsidy/promoters contribution. This financial assistance has benefited around Rs. 5 lakh STs throughout the country.

Shri Deo said that most of the STs are geographically isolated and under-privileged on most of the development indices. This calls for specific need based intervention from developmental agencies and not a ‘one size fit all’ approach. He said that within the framework of schemes of NSTFDC, a tribal can take up any vocation suited to his/her aptitude, skill set, habitat etc. There is a complete flexibility in this regard. He can opt to obtain assistance for agricultural or services or transport or even industrial sector activity. NSTFDC’s recently launched Education Loan Scheme is also calibrated to empower ST students for obtaining professional/technical education and for pursuing Ph.D in India. The NSTFDC is not only implementing its schemes through State Channelizing Agencies but is also increasingly exploring the avenues of reaching out through Public Sector Banks and Regional Rural Banks who have entered into agreements with NSTFDC.