economic terms

CENVAT-------IS RELATED TO EXCISE DUTY





OVER DRAFT FACILITY----CURRENT ACCOUNT

A TAX IMPOSED ON THE PROPERTY INHERITED AT THE DEATH OF ITS PREVIOUS OWNER IS CALLED ESTATE DUTY





FPO------FOLLOW ON PUBLIC OFFER








THE REASON FOR DECREASE IN NATIONAL INCOME----



INFLATION IS DESCRIBED AS REGRESSIVE FORM OF TAXATION BECAUSE IT  AFFECTS THE POOR AND VULNERABLE SECTIONS MORE








QUANTITY OF MONEY DOESNT INFLUENCE VELOCITY OF CIRCULATION OF MONEY

ALL OTHERS LIKE CREDIT FACILITIES, BUSINESS CONDITIONS, SELLING COST OF BUSINESS FIRMS INFLUENCE IT




DISPOSABLE INCOME------IS EQUAL TO PERSONAL INCOME MINUS TAXES


ANNUAL RATE OF INFLATION OF ALL COMMODITIES IN 2009-2010 ----


The snob effect is a phenomenon often observed in the field of microeconomics that refers to the situation where the demand for a certain good for individuals of a higher income level is inversely related to the demand for the good by individuals of a lower income level. The "snob effect" contrasts most other microeconomic models, in that the demand curve can have a positive slope, rather than the typical negatively sloped demand curve of normal goods.

DEMONSTRATION EFFECT----CONSUMER MOTIVATED TO BUY A COMMODITY NOT BECOS DER S A NEED OR S INCOME S INCREASED, BUT BECOS THE NEIGHBOURS HVE PURCHASED IT.





The term 'GNP' includes value of allgood sand services that
are produced___ [A]Within National Territory [B]By nationally owned resources
worldwide [C]By foreign Owned resources as well national resources within national
boundary [D]None of the above


BROAD MONEY--------Broad money is Currency with public + time deposits of pubic with bank + demand deposits




TWO GOODS HAVE NO RELATIONSHIP WITH EACH OTHER, THE CROSS ELASTICITY AMONG THEM IS 0


WHILE CALCULATING PRICE ELASTICITY OF DEMAND COSUMER'S INCOME SHOULD BE CONSTANT

Index of Industrial Production (IIP) in simplest terms is an index which details out the growth of various sectors in an economy. E.g. Indian IIP will focus on sectors like mining, electricity and manufacturing. Also base year needs to be decided on the basis of which all the index figures would be arrived at. In case of India the base year has been fixed at 1993-94 hence the same would be equivalent to 100 Points but now it changed its based year to 2004-2005.

Index of Industrial Production (IIP) is an abstract number, the magnitude of which represents the status of production in the industrial sector for a given period of time as compared to a reference period of time.

The all India IIP is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period with respect to that in a chosen base period. It is compiled and published monthly by the Central Statistics Office (CSO) with the time lag of six weeks from the reference month.
Housing Startup Index(HSUI) soon to be launched in India is in the pattern of IIP.

A consumer price index (CPI) measures changes in the price level of consumer goods and services purchased by households. The CPI in the United States is defined by the Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services."^[1]

The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Sub-indexes and sub-sub-indexes are computed for different categories and sub-categories of goods and services, being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages, salaries, pensions, for regulating prices and for deflating monetary magnitudes to show changes in real values. In most countries, the CPI is, along with the population census and the USA National Income and Product Accounts, one of the most closely watched national economic statistics.It is compiled and published monthly 

As a pure measure of inflation, the CPI has some flaws:
1) new product bias (new products are not counted for a while after the appear)
2) discount store bias (consumers who care won't pay full price)
3) substitution bias (variations in price can cause consumers to respond by substituting on the spot, but the basic measure holds their consumption of various goods constant)
4) quality bias (product improvements are under-counted)
5) formula bias (overweighting of sale items in sample rotation)

The Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods. Some countries (like India and The Philippines) use WPI changes as a central measure of inflation. However, United States now report a producer price index instead.

The Wholesale Price Index or WPI is "the price of a representative basket of wholesale goods. Some countries use the changes in this index to measure inflation in their economies, in particular India – The Indian WPI figure was earlier released weekly on every Thursday and influenced stock and fixed price markets. The Indian WPI is now updated on a monthly basis. The Wholesale Price Index focuses on the price of goods traded between corporations, rather than goods bought by consumers, which is measured by theConsumer Price Index. The purpose of the WPI is to monitor price movements that reflect supply and demand in industry, manufacturing and construction. This helps in analyzing both macroeconomic and microeconomic conditions.It is compiled and published monthly.


* Anti - Inflationary measures :
- Raising the bank rates
- Raising the reserve ratio requirements
- Rationing of credit.

NOT anti inflationary measures :
--Purchasing the securities in the Open Market.
This is because Purchasing the securities in the Open Market would lead to more liquidity system and more liquidity means more money will chase the same goods.

* If RBI wants to increase the Cash Reserves commercial Banks, the most probable step to be taken by it : But bonds in the Open Market. When RBI bank buys bonds in the open market, Banks get money and Cash reserve would increase.


* The Govt of India has recently launched a "Youth to the Edge" pilot scheme in North East India to introduce Youth from rest of India to the North Eastern Culture.The Pilot scheme aims to introduce youth from rest of India to the North Eastern Region (NER) and organize and combined adventure activities along with the youth from NER.They will also be given exposure about local culture, traditions and lifestyle. Conduct of adventure training will benefit participants by inculcating spirit of adventure, environmental awareness, national integration, casualty evacuation, promotion of adventure tourism, channelizing youth energy in positive direction, sense of self employment and self recognition.

All  Scheduled Commercial Banks (excluding RRBs)

Guidelines on the Base Rate

Following the announcement in the Annual Policy Statement for the year 2009-10,  Reserve Bank of India constituted a Working Group on Benchmark Prime Lending Rate (Chairman: Shri Deepak Mohanty) to review the present  benchmark prime lending rate (BPLR) system and suggest changes to make credit pricing more transparent. The Working Group submitted its report in October 2009 and the same was placed on the Reserve Bank’s website for public comments. Based on the recommendations of the Group and the suggestions from various stakeholders, the draft guidelines on Base Rate were placed on the Reserve Bank’s website in February 2010.

2. In the light of the comments/suggestions received, it has been decided that banks switch over to the system of Base Rate. The BPLR system, introduced in 2003, fell short of its original objective of bringing transparency to lending rates. This was mainly because under the BPLR system, banks could lend below BPLR. For the same reason, it was also difficult to assess the transmission of policy rates of the Reserve Bank to lending rates of banks. The Base Rate system is aimed at enhancing transparency in lending rates of banks and enabling better assessment of transmission of monetary policy. Accordingly, the following guidelines are issued for implementation by banks.

Base Rate

1. The Base Rate system will replace the BPLR system with effect from July 1, 2010. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. Banks may choose any benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparently.  An illustration for computing the Base Rate is set out in the Annex.  Banks are free to use any other methodology, as considered appropriate, provided it is consistent and is madeavailable for supervisory review/scrutiny, as and when required.
2. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate and by including such other customer specific charges as considered appropriate.
3. In order to give banks some time to stabilize the system of Base Rate calculation, banks are permitted to change the benchmark and methodology any time during the initial six month period i.e. end-December 2010.
4. The actual lending rates charged may be transparent and consistent and be madeavailable for supervisory review/scrutiny, as and when required.

Applicability of Base Rate

5. All categories of loans should henceforth be priced only with reference to the Base Rate. However, the following categories of loans could be priced without reference to the Base Rate: (a) DRI advances (b) loans to banks’ own employees (c) loans to banks’ depositors against their own deposits.
6. The Base Rate could also serve as the reference benchmark rate for floating rate loan products, apart from external market benchmark rates. The floating interest rate based on external benchmarks should, however, be equal to or above the Base Rate at the time of sanction or renewal.
7. Changes in the Base Rate shall be applicable in respect of all existing loans linked to the Base Rate, in a transparent and non-discriminatory manner.
8. Since the Base Rate will be the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate. Accordingly, the current stipulation of BPLR as the ceiling rate for loans up to Rs. 2 lakh stands withdrawn. It is expected that the above deregulation of lending rate will increase the credit flow to small borrowers at reasonable rate and  direct bank finance will provide effective competition to other forms of high cost credit.
9. Reserve Bank of India will separately announce the stipulation for   export credit.

Review of Base Rate

10. Banks are required to review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committees (ALCOs) as per the bank’s practice. Since transparency in the pricing of lending products has been a key objective, banks are required to exhibit the information on their Base Rate at all branches and also on their websites. Changes in the Base Rate should also be conveyed to the general public from time to time through appropriate channels. Banks are required to provide information on the actual minimum and maximum lending rates to the Reserve Bank on a quarterly basis, as hitherto.

Transitional issues

11. The Base Rate system would be applicable for all new loans and for those old loans that come up for renewal. Existing loans based on the BPLR system may run till their maturity. In case existing borrowers want to switch to the new system, before expiry of the existing contracts, an option may be given to them, on mutually agreed terms. Banks, however, should not charge any fee for such switch-over.

12. In line with the above Guidelines, banks may announce their Base Rates after seeking approval from their respective ALCOs/ Boards.

Effective date

13. The above guidelines on the Base Rate system will become effective on July 1, 2010.

red herring prospectusred herring prospectus

Red herring prospectus

A red herring prospectus, as a first or preliminary prospectus, is a document submitted by a company (issuer) as part of a public offering of securities (either stocks or bonds). Most frequently associated with an initial public offering (IPO), this document, like the previously submitted Form S-1 registration statement, must be filed with the Securities and Exchange Commission (SEC).

A red herring prospectus is issued to potential investors, but does not have complete particulars on the price of the securities offered and quantum of securities to be issued. The front page of the prospectus displays a bold red disclaimer stating that information in the prospectus is not complete and may be changed, and that the securities may not be sold until the registration statement, filed with the SEC, is effective. Potential investors may not place buy orders for the security, based solely on the information contained within the preliminary prospectus. Those investors may, however, express an "indication of interest" in the offering, provided that they have received a copy of the red herring at least 48 hours prior to the public sale. After the registration statement becomes effective, and the stock is offered to the public, indications of interest may be converted to purchase orders, at the buyer's discretion. The final prospectus must then be promptly delivered to the buyer.

Contents

"Red-herring prospectus" means a prospectus that does not have complete particulars on the price of the securities offered and quantum of securities offered. The red herring statement contains:

1. purpose of the issue;
2. disclosure of any option agreement;
3. underwriter's commissions and discounts;
4. promotion expenses;
5. net proceeds to the issuing company (issuer);
6. balance sheet;
7. earnings statements for last 3 years, if available;
8. names and address of all officers, directors, underwriters and stockholders owning 10% or more of the current outstanding stock;
9. copy of the underwriting agreement;
10. legal opinion on the issue;
11. copies of the articles of incorporation of the issuer.

[edit]Prospectus

Since the registration statement (SEC Form S-1) is a very lengthy and complex document, the Securities Act of 1933 requires the preparation of a shorter document, known as a prospectus, for investors to read. The Preliminary (or Red Herring) Prospectus is distributed during the quiet period, before the registration statement has become effective with theSecurities and Exchange Commission (SEC). Upon the registration becoming effective, a "Final Prospectus" is prepared and distributed which includes the final public offering price and the number of shares issued. Only then, can the public offering of shares be completed.

[edit]Name

The name "Red Herring" relates to the red lettered disclaimer displayed on the front page of each preliminary prospectus. That disclaimer contains information similar to the following: "A Registration Statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. Information contained herein is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective."

The wording can be, and usually is, slightly different with each individual filing. An example is the recent Facebook red herring.

[edit]Registration

The minimum period between the filing of a Registration and its effective date is 20 days, called the "cooling-off period." This is the minimum number of days. The SEC can deem the registration "deficient" in which case registration does not become effective until the deficiencies are corrected. The SEC does not approve the securities registered with it, does not pass on the investment merits, nor guarantee the accuracy of the statements within the registration statement or prospectus. The SEC merely attempts to make certain that all pertinent information is disclosed.

Finance Minister: ‘No tax on investments made via P-Notes’
In order to set at rest the enduring dubiousness over tax dues of overseas investors, Finance Minister Pranab
Mukherjee attempted to assure overseas investors that entities investing in stock markets via P-Notes (Participatory
Notes) would not be expected to pay taxes in India. He held that since Indian tax authority would not go beyond
Financial Investor [FIIs] to check the details about the P-Note holders, so a question of liability for tax in India of the PNote
holder would not arise.
Under the P-Note mechanism, even those Foreign Institutional Investors who are not registered with SEBI are allowed
to invest in the Indian equity market. Mr. Mukherjee remarked that as P-Note holders make their investment in stock
market via FIIs, the Income-tax Department would examine the tax liability of the FIIs.
This elucidation from Finance Minister has come in the as a result of a written communication to him by the ASIFMA
and the SIFMA which called attention to the fact ‘that such burdensome taxation could imperil this significant source
of capital for India’s businesses’.

Following the deal struck by Kotak Mahindra Bank worth $5 million India received its first investment through the qualified framework investor (QFI) route. The deal formally put an end to speculation that India’s attempt to get investors to buy shares directly will go kaput.

Kotak Mahindra Bank has concluded the deal worth $5 million for a US-based client, said a finance ministry official. The scheme to attract investment through the Qualified Framework Investor route is expected to attract investment worth about $30 billion in 2012-13 period thereby helping the country fund a chunk of the current account deficit pegged at 4.2% of GDP in 2011-12.

The finance ministry had in the recent past conducted road shows in five countries in the Gulf region--Riyadh, Dubai, Muscat, Kuwait and Bahrain - to project India as the incredible investment destination for wealthy investors.

Qualified Foreign Investors (QFI): A person or a trust resident in a country which is a member of the Financial Action Task Force (FATF) can invest directly in India. Such a person or trust is termed as Qualified Foreign Investors.

Investment Regime for QFI (QFI): QFIs have been permitted to invest in all the three segments of the Indian Capital Market namely- Mutual Funds (MFs), Equity and Corporate Debt.

Reason why Government is promoting QFI route: The wealthy investors, the finance ministry felt should be encouraged to invest directly so that the stable in-flows could fund the current account deficits

the annual average economic growth target revised by
the Planning Commission for the 12th Plan (2012-17) from the 9 per cent envisaged
earlier-----8.2 per cent

Maharatna status

In 2009, the government established the Maharatna status, which raises a company's investment ceiling from Rs. 1,000 crore to Rs. 5,000 crore.The Maharatna firms can now decide on investments of up to 15 per cent of their net worth in a project; the Navaratna companies could invest up to Rs 1,000 crore without explicit government approval.

Criteria

The six criteria for eligibility as Maharatna are:

1.    Having Navratna status.

2.    Listed on Indian stock exchange with minimum prescribed public shareholding under SEBI regulations.

3.    An average annual turnover of more than Rs. 20,000. ^[4]crore during the last 3 years. Earlier it was Rs 25,000 Crore. ^[5]

4.    An average annual net worth of more than Rs. 10,000^[6] crore during the last 3 years. Earlier it was Rs. 15,000 crore. ^[7]

5.    An average annual net profit after tax of more than Rs. 2500 crore during the last 3 years. Earlier it was Rs. 5000 crore. ^[8]

6.    Should have significant global presence/international operations.^[9]

List of Maharatna

1.    Coal India Limited ^[10]

2.    Indian Oil Corporation Limited ^[11]

3.    NTPC Limited ^[12]

4.    Oil and Natural Gas Corporation Limited ^[13]

5.    Steel Authority of India Limited

Navratna status

Navratna was the title given originally to nine Public Sector Enterprises (PSEs), identified by the Government of India in 1997 as having comparative advantages, which allowed them greater autonomy to compete in the global market.^[14] The number of PSEs having Navratna status has been raised to 16,^[15] The government is likely to accord the coveted status to Engineers India Limited, which is under consideration.

List of Navratnas

1.    Bharat Electronics Limited

2.    Bharat Heavy Electricals Limited

3.    Bharat Petroleum Corporation Limited

4.    GAIL (India) Limited

5.    Hindustan Aeronautics Limited

6.    Hindustan Petroleum Corporation Limited

7.    Mahanagar Telephone Nigam Limited

8.    National Aluminium Company Limited

9.    National Mineral Development Corporation Limited

10. Neyveli Lignite Corporation Limited

11. Oil India Limited

12. Power Finance Corporation Limited

13. Power Grid Corporation of India Limited

14. Rashtriya Ispat Nigam Limited

15. Rural Electrification Corporation Limited

16. Shipping Corporation of India Limited

Miniratna Status

In addition, the government created another category called Miniratna. Miniratnas can also enter into joint ventures, set subsidiary companies and overseas offices but with certain conditions. In 2002, there were 61 government enterprises that were awarded Miniratna status. However, at present, there are 66 government enterprises that were awarded Miniratna status.

Category I

This designation applies to PSEs that have made profits continuously for the last three years or earned a net profit of Rs. 30 crore or more in one of the three years. These miniratnas granted certain autonomy like incurring capital expenditure without government approval up to Rs. 500 crore or equal to their net worth, whichever is lower.

1. Airports Authority of India 2. Antrix Corporation Limited 3. Balmer Lawrie & Co. Limited 4. Bharat Dynamics Limited 5. BEML Limited 6. Bharat Sanchar Nigam Limited 7. Bridge & Roof Company (India) Limited 8. Central Warehousing Corporation 9. Central Coalfields Limited 10. Chennai Petroleum Corporation Limited 11. Cochin Shipyard Limited 12. Container Corporation of India Limited 13.Dredging Corporation of India Limited 14. Engineers India Limited 15. Ennore Port Limited 16. Garden Reach Shipbuilders & Engineers Limited 17. Goa Shipyard Limited 18. Hindustan Copper Limited19. HLL Lifecare Limited 20. Hindustan Newsprint Limited 21. Hindustan Paper Corporation Limited 22. Housing and Urban Development Corporation 23. India Tourism Development Corporation 24.Indian Railway Catering and Tourism Corporation 25. IRCON International Limited 26. Kudremukh Iron Ore Company Limited. 27. Mazagaon Dock Limited 28. Mahanadi Coalfields Limited 29.Manganese Ore (India) Limited 30. Mangalore Refinery and Petrochemicals Limited 31. Mishra Dhatu Nigam Limited 32. Minerals and Metals Trading Corporation of India 33. MSTC Limited 34. National Fertilizers Limited 35. National Seeds Corporation Limited 36. NHPC Limited 37. Northern Coalfields Limited 38. Numaligarh Refinery Limited 39. ONGC Videsh Limited 40. Pawan Hans Helicopters 41.Rashtriya Chemicals & Fertilizers Limited 42. RITES Limited 43. Satluj Jal Vidyut Nigam 44. Security Printing and Minting Corporation of India Limited 45. South Eastern Coalfields Limited 46. State Trading Corporation of India Limited 47. Tehri Hydro Development Corporation Limited 48. Telecommunications Consultants (India) Limited 49. Western Coalfields Limited 50. Water & Power Consultancy (India) Limited

Category II

This category include those PSEs which have made profits for the last three years continuously and should have a positive net worth. Category II miniratnas have autonomy to incurring the capital expenditure without government approval up to Rs. 250 crore or up to 50% of their net worth whichever is lower.

51. Bharat Pumps & Compressors Limited

52. Broadcast Engineering Consultants (I) Limited

53. Central Mine Planning & Design Institute Limited

54. Ed.CIL (India) Limited

55. Engineering Projects (India) Limited

56. FCI Aravali Gypsum & Minerals India Limited

57. Ferro Scrap Nigam Limited

58. HMT (International) Limited

59. HSCC (India) Limited

60. India Trade Promotion Organisation

61. Indian Medicines & Pharmaceuticals Corporation Limited

62. M E C O N Limited

63. National Film Development Corporation Limited

64. National Small Industries Corporation Limited

65. P E C Limited

66. Rajasthan Electronics & Instruments Limited

India is coping with serious economic crisis, needs key reforms: FICCI
As per the FICCI, the economic situation is grave with its low growth, high inflation, high fiscal deficit and the highest
ever trade account deficit and it needs urgent addressal in the form of refoms. The body has called for bold steps like
allowing FDI in multi-brand retail, Rate-cuts, and limit funding of welfare programs to instill growth.
Suggestions by FICCI:
 Timely implementation of Goods and Services Tax (GST) which can change the dynamics of Indian industry and
exports. It can also add 2% to the GDP. It will also increase Tax administration and Tax collection
 Immediate moderation of monetary policy and reduce interest rates by 2% points ,CRR by 1% point, Repo rate by
1%
 Re-examine the Land Acquisition Bill, as the bill restricts the use of irrigated multi-cropped land for infrastructure
development
 To decontrol the prices of diesel and other oil products
 Repatriation of black money immediately that could alleviate the balance of payment situation
 immediate halt on any additional welfare spending with efficacious distribution of already allocated fund
 To take measures to provide accelerated depreciation and to scrap MAT for infrastructure projects
 Setting up of a coal regulator and allowing coal swapping as an instrument to optimize physical movement of coal
in the country
 To bring new policies including the National Manufacturing Policy and theNational Electronics Policy to foster
manufacturing










Forex Reserves of India tumble, looses 1.74 Billion Dollar
Current Affairs Published on www.gktoday.in from January 1, 2012 to
September 10, 2012
 India’s Foreign exchange reserve plunged by $1.74 billion to $290 billion
 The RBI data showed a sharp fall in the India’s Forex reserves
 The Forex reserves has slipped by 1.80 billion dollar, 1.37 billion dollar and 2.18 billion dollar, respectively, in the
last 3 weeks
 The drop in forex reserve mainly attributed to sale of dollar by the RBI to rescue continuously falling rupee.
 The Indian rupee marked a record low in recent weeks and stood at 55.54 against the dollar on June 1, 2012










Q4 GDP growth drops sharply to 5.3%, lowest in 9 years
Yearly economic growth of India dipped to a 9-year low of 5.3% in the January-March 2012 quarter. Even during the
2008-09, the year when India was facing the hit by the global financial meltdown, growth rate was higher at 6.7%. It is
the lowest growth rate since 4.0% in 2002-03.

Some of the factors being attributed to for the low GDP growth rate:
 Euro zone debt crisis
 Lack of economic reforms
 High interest rates
 Poor investment and widening trade gap
 Low performing manufacturing sector
 Swelling Current Account Deficit
 Governments unpredictable regulations and tax











Arbitrage
In Business Language, the purpose of the arbitrage is to enter into a set of financial obligations to get profits with no
risk. It is usually done by taking advantages of differences in the interests rates, exchange Rates or commodity prices
between one market to another if the rates of both the markets are known and if the profits to be gained are
outweighing the costs of operation. That is why, arbitrage is non-speculative. Regarding risk in arbitrage, please note
that in principle and in academic use, an arbitrage is risk-free; in common use, as in statistical arbitrage, it may refer to
expected profit, though losses may occur, and in practice, there are always risks in arbitrage, some minor (such as
fluctuation of prices decreasing profit margins), some major (such as devaluation of a currency or derivative).
Example of Arbitrage:
We suppose that the exchange rates in London are £5 = $10 = ¥1000 and the exchange rates in Tokyo are ¥1000 = $12
= £6. Converting ¥1000 to $12 in Tokyo and converting that $12 into ¥1200 in London, for a profit of ¥200, would be
arbitrage. In reality, this "triangle arbitrage" is so simple that it almost never occurs. But more complicated foreign
exchange arbitrages, such as the spot-forward arbitrage (see interest rate parity) are much more common.




Asset Liability Management
Asset Liability Management (ALM) is a term pertaining to the managing and balancing the risks arising out of a bank’s
assets viz. loans and liabilities viz. deposits. Various kinds of risks that banks have to manage include credit risks,
market risks — which include interest rates — and liquidity risk management. In India, the banks have to follow the
guidelines prescribed by the Reserve Bank of India for Asset Liability Management. The RBI rules, in turn, are based on
the norms followed globally as prescribed by the Bank for International Settlements, a body of central banks from
across the world. Accordingly, there are three pillars of ALM as follows:
1. Information systems
2. Organization
3. Processes
The Reserve Bank of India has mandated that the board of a commercial bank
should have the overall responsibility for management of risks and should decide
on the risk management policy of the bank and set limits for liquidity, interest
rate, foreign exchange and equity price risks. For this, the banks are required to
make a decision-making unit responsible for balance sheet planning from risks — return perspective, including the
strategic management of interest rate and liquidity risks. This is called asset liability committee or ALCO, which
includes the chief executive of the bank. ALCO considers the product pricing for both deposits and advances, desired maturity profile of the incremental assets and liabilities. ALCO is mandated to articulate the current interest rate view
of the bank and bases its decisions for future business strategy on this view.




Concept of Alternative Investments
The traditional investments are in stocks, bonds, cash, or property. The other investment avenues have been put into the
Alternative Investments, though there is no proper definition of AI. Some of the alternative investments include the
commodities, private equity, hedge funds, venture capital, and financial derivatives as well as assets such as paintings, other
arts, wines, antiques coins and stamps.
The gains in these assets would be called capital gains and provisions accordingly would apply to them. Most of the
alternative investment funds raise capital from High Net Worth Investors (HNIs) with a view to investing in accordance
with a defined investment policy for the benefit of those investors.
Regulation of Alternative Investments in India
Till now there has been no substantial regulatory framework in India for handling the Alternative Investments Funds.
Recently, SEBI has proposed the to create regulations for alternative investment funds under the title SEBI (Alternative
Investment Fund) Regulations. Under the new regulatory framework, the following come:
1. Venture Capital Funds
2. PIPE (Private Investment in Public Equity ) Funds
3. Private Equity Fund
4. Debt Funds
5. Infrastructure Equity Fund
6. Real Estate Fund
7. SME Fund
8. Social Venture Funds
9. Strategy Fund (Residual Category, including all varieties of funds such as hedge funds, if any).



Route Dispersal Guidelines
The core philosophy behind the route dispersal guidelines is that via these, the government makes the airline operators
accept the social obligation to fly to the northeast and other remote parts of the country. The DGCA had first framed and
issued the guidelines in 1994, whereby, all routes were divided into three categories viz. Category – I, II and III.
Route categorization was based on traditionally surplus generating routes (Category – I), loss making routes (Category
– II) and the remaining routes (Category – III).
 Category – I routes were largely inter-metro routes and generated surplus that cross subsidized losses largely
on Category – II routes that served regions of difficult terrain and destination in remote areas.
 Category – II routes included routes connecting airports in North-Eastern region, Jammu and Kashmir,
Andaman & Nicobar and Lakshadweep.
 Category – III routes were routes other than those included in Category – I and Category – II.
It was obligatory on the part of scheduled airlines to deploy on Category – II, IIA and III routes, a specified percentage of
capacity deployed in Category – I routes as per the following:
1. On Category – II routes, at least 10% of the capacity deployed on routes in Category – I.
2. On Category – IIA routes, at least 10% of the capacity deployed on routes in Category – II.
3. On Category – III routes, at least 50% of the capacity deployed on routes in Category – I.
Overhaul of the Route Dispersal Guidelines
It’s obvious that if there were no route dispersal guidelines, no airline operator would like to fly to unviable routes
connecting cities in the north-eastern region, Jammu & Kashmir, Andaman & Nicobar Islands and Lakshadweep. At

present, the aviation ministry is planning to re-work the Route Dispersal Guidelines. The new route dispersal
guidelines would require airlines to increase flights to small cities and towns. This will boost air transport
infrastructure, they can also balloon costs for airlines that don't have smaller aircraft and prefer operating only on
profitable metro routes.
The government is considering an overhaul of the route dispersal guidelines (RDG) that mandate airlines to fly unviable
routes connecting cities in the north-eastern region, Jammu & Kashmir, Andaman & Nicobar Islands and Lakshadweep.
The review may involve re-categorisation of 25-odd cities, changing the geographical spread of the RDG. Domestic
airlines have been seeking relief in terms of the amount of mandatory flying required to meet the guidelines.



Concept of GAAR and Shome Panel Report
GAAR refers to General Anti-Avoidance Rules.
 Avoidance means an attempt to reduce tax liability through legal means, i.e. to regulate your affairs in such a
way that you pay the minimum tax imposed by the Act as opposed to the maximum. For example, Suresh
makes a company XYZ to sell some product. The company XYZ pays 25% tax, but if Suresh himself sold the
products he would pay 30%. Suresh has formed the company only to save 5% tax.
 Please note that Tax Evasion and Tax avoidance are two different things. While Avoidance is legal management
to avoid tax, evasion is illegal means to reduce tax liabilities, i.e. falsification of books, suppression of income,
overstatement of deductions, etc.
 Tax planning, as opposed to tax evasion which is illegal, is an accepted practice whereby the tax-payer uses
provisions of the law or loopholes to minimise his tax liability.
Some countries, in addition to GAAR, have Specific Anti-Avoidance Rules (SAAR) to plug particular loopholes in the law
or prevent some types of transactions that result in loss to Revenue. GAAR has been a part of the tax code of Canada
since 1988, Australia since 1981, South Africa from 2006 and China from 2008. Australia and China also have SAAR in
place to check abuse of tax treaties and transfer pricing.
Implication of GAAR implementation
 The implication of GAAR is that the Income-tax department will have powers to deny tax benefit if a
transaction was carried out exclusively for the purpose of avoiding tax.
 For example, if an entity is set up in Mauritius with the sole intention of claiming exemption from capital gains
tax, the tax authorities have the right to deny the claim for exemption provided under the India-Mauritius tax
treaty.
How will it work?
The Income Tax Commissioner will be empowered to declare an arrangement as an Impermissible Avoidance
Arrangement (IAA) if:
 The whole, a step or a part of the arrangement has been entered with the objective of obtaining tax benefit, and
 The arrangement creates rights and an obligation not normally created in arm’s length transactions or results
in direct or indirect misuse or abuse of the provisions of the code or lack commercial substance in whole or
part, or is not bonafide.
This is so far reaching in nature that almost each and every transaction, which results in saving tax could be regarded as
an IAA.
This means that GAAR enables tax authorities to declare any arrangement entered into by a taxpayer as an IAA. If it is so
declared, then the tax authorities can disregard, combine or re-characterize any step of such arrangement or the entire
arrangement, disregard any accommodating party involved in such arrangement, treat the transaction as if it had not
been entered into or carried out, reallocate any income or expenditure, look through any arrangement by disregarding any
corporate structure, re-characterize debt as equity or vice-versa and so on.
In effect, for tax purposes, any transaction can be treated in a manner different from the manner in which it is carried
out if it is regarded as an IAA.
Parthasarathy Shome Panel
The Parthasarathy Shome panel was formed by PM of India in 2012, for drawing up the final guidelines on GAAR and
mainly to bring about tax clarity and address the concerns of foreign investors. Instead of only FIIs, the panel was asked
also to look into issues pertaining to all non-resident tax payers.
 With various recommendations to revive the inflow of foreign capital, the panel has advocated postponement of
the controversial tax provision by three years till 2016-17 along with abolition of capital gains tax on transfer of
securities.
 Further, it has suggested that the GAAR provisions should not be invoked to examine the genuineness of the
foreign investor entities’ residency in the island nation of Mauritius. Other major recommendations are –
Salient Recommendations
 Defer implementation of GAAR: The implementation of GAAR shall be deferred by three years on
administrative grounds for which intensive training of tax officers, who would specialise in the finer aspects of
international taxation, is needed. The deferral of GAAR by three years on the basis of economic conditions and
administrative realities would help mature the thinking in respect of GAAR and accelerate the decision on
investment in foreign direct investment (FDI). It identifies the need for training of tax officers and a timebound
disposal of the proceedings to ensure effective implementation.
 Threshold of tax benefit: GAAR should be made applicable only if the monetary threshold of tax benefit is
Rs.3 crore and more with changes in Income Tax Rules 1962. The committee recommendation of a monetary
threshold of tax benefit would filter the smaller tax conflicts out and on the other hand would suggest the need
of continued responsive legislation on specific tax-avoidance practices to ensure that the legitimate revenue is
raised through voluntary compliance. It clearly highlights that the GAAR is not recommended to be used as
revenue raising measure
 Mauritius issue: GAAR should not be invoked to examine the genuineness of the residency FII from Mauritius
and the government should retain the provisions of the CBDT circular issued in the Year 2000 on acceptance of
Tax Residence Certificate (TRC) issued by Mauritius. Over 44 per cent of foreign investment in India comes
through Mauritius and Singapore. For investments from Singapore and elsewhere, the benefits offered by India
through bilateral treaties should supersede domestic tax laws and it is a constructive step in this regard.

 Applying GAAR: GAAR should apply “only in cases of abusive, contrived and artificial arrangements”, the
Shome panel suggested that the I-T Act may be amended to provide that only arrangements which have the
main purpose (and not one of the main purposes) of obtaining tax benefit should be covered under GAAR. The
report has recognized the business needs in difficult times of undertaking the corporate restructuring and
clearly recommends that in a court-approved corporate restructuring, GAAR would not be invoked. Even the
intra-group transactions with no effect on overall tax revenue have been recommended to be insulated from
the GAAR. This clearly shows the pragmatic approach to the recommendations
 Increase Securities Transaction Tax (STT): The Shome Committee has proposed to do away with short-term
capital gains tax by increasing the transaction tax. It asked the government should abolish the tax on gains
arising from transfer of listed securities, whether in the nature of capital gains or business income, to both
residents as well as non-residents. In order to make the proposal tax neutral, the government may consider
increasing the rate of Securities Transaction Tax (STT) appropriately. The proposition seems to be that what
the tax which India collects on account of short-term capital gains is, domestically as well as cross border. That
number does not seem to be particularly a large number. The thought of the committee seems to say, why not
abolish the short-term capital gains tax and if at all there is a deficit, why not tweak the securities transactions
tax a bit.
 Panel of GAAR: the Approving Panel (AP) for purposes of invoking GAAR provisions should consist of five
members, including Chairman, who should be a retired judge of the High Court. Besides, two members should
be from outside government and persons of eminence drawn from the fields of accountancy, economics or
business, with knowledge of matters of income- tax, and two members should be chief commissioners of
income-tax or one Chief Commissioner and one Commissioner. It also suggested that GAAR can be invoked only
with the approval of the Commissioner.
Shome panel has not only considered the economic realities, but also took full cognizance of the realities on
implementation challenges. The report, if considered as an expression of views by the government, makes good
headway in bridging the trust between the taxpayer and the revenue department.




National Investment Fund
A major question in context with the Disinvestment in India has been the routing and utilization of the money obtained
via disinvestment. As we know that the process of disinvestment is not favoured socially because goes against the
interest of socially disadvantageous people and society at large.
In January 2005, the Government decided to constitute a 'National Investment Fund' (NIF) into which the realization
from sale of minority shareholding of the Government in profitable CPSEs would be channelized. The income from the
fund is used in investment in various social projects, capital investment in some selected profitable and revivable
enterprises. This is based upon the idea that disinvestment does not affect the social objectives of the government.
Please note that the money obtained from disinvestment is shown in India’s receipt budget as other non-tax revenue.
Prior to the global economic crisis in 2008-09, 75 per cent of the corpus of NIF were utilised for social sector schemes and
25 per cent for revival for sick PSUs. However, since November 2009, the disinvestment proceeds are entirely routed to
Consolidated Fund to be used for funding social sector schemes.
The proceeds first go to Consolidated Fund of India under the designated Head such as other non-Tax revenue.
Thereafter, these amounts are appropriated from the CFI, with due approval of parliament and transferred to the
selected Fund Managers through CEO of NIF.
Similarly, the income from NIF is deposited in CFI and would be appropriated from it for specific purposes as per the
scheme of appropriation approved from time to time.
The corpus of the National Investment Fund is of permanent nature, this means that generally only income generated is
used for social expenditures and investments and the corpus is kept permanent. However, it is not a hard and fast
rule. Earlier the government decided that the proceeds from disinvestment of CPSEs for a period of three years – from
April 2009 to March 2012 – i.e. disinvestment proceeds during this period would be available in full for meeting the
capital expenditure requirements of selected social sector programmes
decided by the Planning Commission/Department of Expenditure.
NIF is professionally managed by selected Public Sector Mutual Funds.
75% of the annual income of the Fund is used to finance selected social
sector schemes, which promote education, health and employment.
The residual 25% of the annual income of the Fund is used to meet the capital investment requirements of profitable
and revivable CPSEs that yield adequate returns, in order to enlarge their capital base to finance expansion/
diversification.
Schemes in which NIF income is invested:
1. Mahatma Gandhi National Rural Employment Guarantee Scheme
2. Indira Awas Yojana
3. Rajiv Gandhi Gramin Vidyutikaran Yojana

4. Jawaharlal Nehru National Urban Renewal Mission
5. Accelerated Irrigation Benefits Programme
6. Accelerated Power Development Reform Programme
Current Issue: Reorientation of NIF
In July 2012, it was reported that the government is considering a complete re-orientation of the disinvestment
proceeds management mechanism, by turning the Department of Disinvestment (DoD) into a department for
government equity and investment management, on the lines of the proposed Department of Government Debt
Management. The Department of Disinvestment had given a suggestion to the Government that a holding company or
trust can be established on behalf of the government. The proposal also seeks to completely change the system of
utilisation of money garnered through government stake sale in public sector companies. Under the new plan,
disinvestment proceeds will remain in a specially assigned public account as a specified equity fund, which would be
available to the government as ways and means elbow room, allowing the government borrowing to reduce to that
extent.
The proposed plant seeks to turn the National Investment Fund (NIF) into the proposed Sovereign equity fund. This
fund will then be segregated into following three, keeping in mind specified objectives of the government.
1. One third of the proceeds would go to the public account. The amount credited in the fund with the interest
accrued would be available to the government as a ways and means window.
2. One third of the disinvestment proceeds and the interest accrued would be utilised either for securing energy
and raw materials assets abroad by public sector companies or available to the government as ways and
means. This will add to the sovereign fund planned for this purpose by the Planning Commission and currently
being discussed by the economic affairs department
3. One third would be kept as corpus and the interest income would be invested for meeting specified objectives,
including meeting the capital investment requirement of profitable and revivable public sector companies.
The proposals further say that the interest amount accruing to the third fund could also be utilised for public-private
partnership projects for providing vocational training facilities in the northeast, Jammu and Kashmir and Naxal-affected
areas, and in funding critical infrastructure projects like railway bridges for small and medium towns



NIF : Fund Managers
 UTI Asset Management Company Ltd.
 SBI Funds Management Company (Pvt.)
Ltd.
 LIC Mutual Fund Asset Management
Company Ltd.





Understanding Disinvestment and Privatization
• Disinvestment and Privatization are two different terms in technical sense, though both involve the sale of
Government's share in the Public Sector Undertakings.
• The term privatization is used for a stake sell in which there is a transfer of 51% or more equity to the private
players. In disinvestment, the government sells only a part of the equity which is essentially less than 51% so that
ownership and management rights can be hold by the Government itself.
Rationale behind Disinvestment
The rationale behind the disinvestment and privatization are as follows:
 It is believed that the private ownership leads to better use of resources and their more efficient allocation.
 The proliferation of market based economy resulted in the fact that State could no longer meet the
growing demands of the economy. It was believed that the government can deliver better results when it
responds according to the market driven forces.
 Globalization and WTO commitments need quick restructuring of the Public Sector Undertakings. If
they are not able to adapt to this, they would not be able to survive. Public enterprises, because of the nature of
their ownership, can restructure slowly and hence the logic of privatization gets stronger. Besides, techniques
are now available to control public monopolies by regulation/competition, and investment of public money to
ensure protection of consumer interests is no longer a convincing argument.
Objective of Disinvestment
The Industrial Policy Statement of 1991 had envisaged the disinvestment of a part of Government holdings in select
Private sector companies. This became necessary because of the withdrawal of the budgetary support of 60 percent by
the government to the loss making units in those times. The disinvestment policy in July 1991 had outlined the
following objectives:
 To meet the budgetary needs
 To improve overall economic efficiency
 To reduce fiscal deficit
 To diversify the ownership of PSU for enhancing efficiency of individual enterprise
 To raise funds for technological upgradation, modernization and expansion of PSUs
 To raise funds for golden handshake (VRS)
The Rangarajan Committee on disinvestment 1993
The Rangarajan Committee of 1993 was constituted by the government for making recommendations in context with
the disinvestment. The committee said that
 The units to be disinvested should be identified and disinvestment could be made upto any level, except in
defence and atomic energy where the government should retain the majority holding in equity.
 Disinvestment should be a transparent process duly protecting the right of the workers.
 An autonomous body for the smooth functioning and monitoring of the disinvestment programme should be
established. This recommendation led to the Disinvestment Commission in 1996 as an advisory body having a full
time chairman and four part-time members. The Commission was required to advise the government on the
extent, made, timing and princing of disinvestment.
 It suggested four modes of disinvestment viz. Trade sale, Strategic Sale, Offer of shares and Closure or
sale of Assets.



Strategic Sale : Major Route for disinvestment in India
In Strategic sale, the disinvestment / privatization take place by
auctioning a state-owned enterprise to the highest bidder. It is in contrast
with the minority sale where shares in an enterprise are sold as public
offers. The emphasis on strategic sale in Indian privatisation is relatively
recent in origin. From 1991 until 2000, the general policy was to sell
minority shares in public sector companies. In March 2000, the the finance
minister’s budget speech spoke of a “fresh impetus to privatization
programme that will emphasise increasingly on strategic sales of
identified PSUs.” The first important strategic sale in India was of Modern
Foods to the multinational subsidiary, Hindustan Lever during times of
NDA Government. The strategic sale invited lesser criticism from political
parties mainly because the process is aimed at maximizing revenues to
the government. Today, strategic sale is the most important route of
disinvestment of Indian PSUs.

 In its budget speech of 2000-01, the government
emphasized that more emphasis would now be paid
on the strategic sale of public sector enterprises.
Later Developments
Up to November 1999, the Disinvestment commission
had submitted 12 reports to the government covering
58 public sector enterprises. On 30th November 1999,
the term of the Commission expired. However, it was
reconstituted in July 2001. Initially the Department of
Disinvestment was constituted which was later on
upgraded as the ministry of disinvestment in order to streamline and speed up the process of disinvestment including
restructuring.
 The Disinvestment Commission also recommended creation of separate disinvestment fund in which the
disinvestment proceeds would be placed to be used for the purpose of financial restructuring of the concerned
unit before disinvestment and for carrying out voluntary retirement schemes. It also suggested merger of
National Renewal Fund with the disinvestment fund.
Current Issues
As we read above, post 2000, the focus of the disinvestment has shifted to strategic sale of the identified public sector
units. For the period 1991-2012, the progress of disinvestment has been a normal and Government could seldom
collect more than what it had targeted. The pace of disinvestment has been largely restricted due to political opposition.
Does we disinvest only loss making companies?
The policy at privatization pursued by the NDA regime was disinvestment of the profit making CPSUs. However, later
UPA Government declared that no profit making PEs will be disinvested. However, currently, it is not a policy of the
Government to disinvest or privatize only profit making or only loss making companies.
What is the Philosophy of the Government?
The Government says that as long as the it retains control over the PE, and its public sector character is not affected, the
government may dilute its equity and raise resources to meet the social needs at the people. Thus, the government
takes the Disinvestment and privatization as useful economic tools and wishes to use them selectively.
Examples of companies in which disinvestment has taken place:
 Shipping Credit and Investment Corporation of India
 Container Corporation of India Ltd.
 Videsh Sanchar Nigam Ltd. (VSNL)
 Oil and Natural Gas Corporation (ONGC)
 Gas Authority of India Ltd. (GAIL)
 Steel Authority of India Ltd. (SAIL)
 Mahanagar Telephone Nigam Ltd. (MTNL)
 Indian Petrochemicals Corporation Ltd. (IPCL)
 Power Grid Corporation
 Shipping Corporation of India
 National Aluminum Company (NALCO)
 National Fertilisers Ltd. (NFL)
 Indian Airlines
 Dredging Corporation
 LNG Petro Net
 Madras Refineries Ltd.
 Hindustan Zinc Ltd.


 Maruti Udyog Ltd.
 Modern Food Industries (India) Ltd.
 Indian Tourism Development Corporation (10 Hotels)
 Hotel Corporation of India etc
Challenges before disinvestment
 Process of disinvestment is not favoured socially as it is against the interest of socially disadvantageous people.
 Political pressure from left and opposition
 Loss making units don’t attract investment so easily.
 Lack of well defined investment policy
The disinvestment process needs to be taken up more seriously by the government. The Government should try to
come out with a time bound programme to conduct the process with transparency in all the activities need to reach.
Some consensus is very essential. Only then the real benefits can be reaped