Accounting Implication on Foreign Currency Transactions

Accounting Implication

Economic cycle/crisis

What the crisis means for the real economy
1. No access to funds
2. Significantly higher cost of capital
3. Weak stock markets
4. Bonus for cash
5. Reduced cash flow
6. Credit losses
7. Significant balance sheet risks
8. Bursting of the profit bubble
9. Continued volatility
10. Protectionism
11. Wave of industry consolidation
12. More government intervention
13. Re-regulation
14. Change in consumer behaviour
15. Every industry will be affected How To Deal with The Difficult Times Ahead

1.Watch your cash
2.Reduce trade credit
3.Start working capital initiatives
4.Restructure your debt
5.Develop a stress test scenario
6.Act now on cost and organisational efficiency
7.Reassess your investment program
8.Re-evaluate off-shore manufacturing
9.Adapt product portfolio
10.Look for out of the box pricing
11.Divest non-core businesses
12.Engage in selective M&A
13.Manage financial policies and investor messaging
14.Look for opportunities
15.Install a crisis monitoring team
16.Plan for the upturn
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Financial Management Questions

Here are typical questions for financial management which can be asked in various types of exams

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Dematerialisation of Securities

Dematerialisation is the process by which physical securities of an investor are converted to an equivalent number of securities in electronic form and credited in the investor's account with the DP. One can do this for shares in pledged condition also though with the permission of the pledgee. One can dematerialise odd lot shares also. Requests for dematerialisation shall need to be submitted only in a Dematerialisation Request Form (DRF).
2.1. Documents required
2.1.1. Completely filled up Demat Request Form (DRF) in triplicate for each ISIN along with defaced physical securities.
2.1.2. Transposition form, if applicable

2.2. Availability of forms
2.2.1. Ensure adequate stock of DRFs with you.
2.2.2. Requisition for DRF should be put to dematrating@ as per procedure mentioned in Requisitioning Stationery from CPO section.

2.3. Scrutiny of the demat request: Each demat request must be scrutinised by the branch at the time of accepting the same from the customers. If there is any discrepancy then it should be immediately pointed out to the client advising the steps for rectification. Advice the customer to take the help of Sample Filled in DRF for filling up the DRF correctly.

The scrutiny of Demat request involves the following:

2.3.1. Eligibility of Security for Demat: It must be ensured that security mentioned on the certificates is eligible for Demat.

To check eligibility, refer to the ISIN Book. You may also check the same in the New ISIN Query on DeposisWeb. Enter the first few characters of the company name in the text box for the same. Select the type of security from the drop down. Also specify the face value of the security. On hitting 'Go' the matching results are displayed. Check if the status is 'Active' and that it is 'Available for Demat'. Scrips that are not available for Demat have been highlighted with Red Colour with a remark "Scrip not available for demat".

If the name of a company has changed, it is expected that the customer will bring the certificates in the new company name. However, even if the certificates are in the old company name, they can be dematerialised under the same ISIN as earlier. When you use the ISIN query using the old name or the new name, the appropriate record will come up automatically showing the old company name also in brackets. We need not now rely on the customer's information that the name has changed and end up accepting requests which may not have been under demat.

Branch officials are advised not to accept any certificates for Dematerialisation from customers under the ISINs for National Savings Certificate (NSC)/Kisan Vikas Patra.

2.4. Following guidelines are to be followed for accepting dematarialisation requests from NRI customers:
2.4.1. NRI-Repatriable category accounts:
2.4.1.1. Duly filled in DRF along with the physical share certificates should be accepted by the branch official.
2.4.1.2. The RBI approval should be present on the share certificate. In case the approval is not present the branch official should obtain any of the below mentioned documents:

(i) Copy of letter of Allotment issued by the Company / Registrar
(ii) Copy of the letter from the company stating that the shares were allotted on repatriable basis under RBI permission No.

2.4.1.3. Copy of the share application which will state that the share application is on repatriation basis and linking of the application to the allotment letter whose quantity will match with the shares to be dematerialised.
2.4.1.4. In absence of any of the above-mentioned documents the DRFs will to be rejected.


2.4.2. Resident / NRI- Non Repariable category:
2.4.2.1. If the certificates submitted for demat are in Repatriable category, the following should be adhered:
1. Inform the client about the mismatch between the account and the certificates category.
2. If the client confirms that he wants to still dematerialize the same with intention, the branch official should obtain a declaration letter addressed to the company from the client confirming his change of status signed by all the holders.

2.5. Demat request forms (DRFs) submitted at branches are scrutinized at the Central Processing Office, Mumbai (CPO) before being forwarded to the Registrar. Any rejection during this scrutiny means that the certificates are sent back to the customer. Since the certificates have been punched and stamped, the customer has to first get duplicate certificates from the Registrar. To avoid customer dissatisfaction arising from such rejections, it is imperative that the DRFs are scrutinized meticulously at the branch on receipt from the customer and the DRFs should be returned to the customer for rectification, if required.

To assist you in such scrutiny, we have made modifications in the ISIN search module - we have introduced a “Remarks Column”, which will help you to guide the customer and reduce rejections arising from some common errors. An illustration of the remarks in each situation is given below:

There are also instances where there is an inordinate delay on the part of Registrar to confirm the demat request. NSDL maintains a list of such errant companies/registrars. To enable you to alert customers when accepting demat requests from them, the following remark will be given against such ISINs :

“As per NSDL - Company with long pending demat requests and not responding/ services stopped by the RTA. Please alert client that dematerialisation may get inordinately delayed
.”
There are cases where the name of a company has changed. In such cases, the certificates could be in old name as well as new name. Both need to be processed under the same ISIN. The old name is also updated and the ISIN can be queried using both the new name and the old name.

Sub-division/consolidation of shares - face value is different

There are instances where the shares of a company are split or consolidated. In a split, the share of a company with face value Rs. 10 may be split into 10 shares of face value Rs. 1 each. In such cases, the certificates and the ISIN representing the share of face value Rs. 10 are discontinued. A new ISIN is allotted to the share of face value Re. 1 and new certificates are sent to the share holders by the company.

In such cases, if a shareholder comes with a demat request with the old certificates, the same should not be accepted. Demat requests with only new certificates can be accepted.

In the ISIN query, in such cases, two rows will appear

• one with the face value Rs. 10 but it will not be available for demat

• another with the face value Re. 1 and available for demat

To avoid incorrect acceptance, apart from matching the name of the company and the security on the screen, also verify that the face value on the certificates matches exactly with the face value appearing on the screen for the ISIN and that ISIN is available for demat.

2.6. Single ISIN in one DRF: Securities having the same ISIN only can be submitted under a single DRF. However, multiple folio nos. of the same pattern of holders relating to the same ISIN can be dematerialised under a single DRF. Certificates of the same security having different ISIN (this is possible in case of partly paid up shares and non-pari passu shares) should not be accepted in the same DRF form.

2.7. Partly Paid up shares and Pari Passu Status: NSDL provides different ISIN to Non Pari Passu shares and to partly paid-up shares of a company. Verify the certificates carefully and mention the correct ISIN. A non-pari passu share is one, which is issued after the last record date and is eligible for dividend on pro- rata basis.

2.8. Lock - in status: Locked-in certificates of a security must be submitted under separate DRF. The same should not be mixed with free securities. In case of locked-in securities the lock-in reason & lock-in release date must be filled up in the DRF. Amongst lock-in securities belonging to the same ISIN but having different lock-in release dates or lock-in reason, separate DRF requests have to be made.

2.9. Names differing on account of full name and initials: Demat requests received from client(s) with name(s) not matching exactly with the name(s) appearing on the certificates merely on account of initials not being spelt out fully or put after or prior to the surname, can be processed. However, the client should be informed this is possible only if the signature(s) of the client(s) on the DRF tallies with the specimen signature(s) available with the Issuers or its R & T agent.

To give an example, the shareholder may have opened the depository account in the name of Sushil Ramesh Shah but his name on the share certificate may appear as S. R. Shah or Sushil R Shah etc.

2.10. Holding Pattern: The combination and the order of holders' names on DRF and as printed on the Certificates should be identical with that in the DP account. For knowing the holding pattern of the account, check the same in DeposisWeb - Queries & Reports - Account Information.
2.11. If the shares are in the name of X, Y (X as first holder and Y as second holder) it cannot be dematerialised in the account of either X or Y alone. Also if the shares are in the name of X, they cannot be dematerialised in the account of X, Y (X as first holder and Y as second holder).

2.12. Further, if the shares are in the name of X, Y (X as first holder and Y second holder) and the account is in the name of Y, X (Y as first holder and X as second holder), then these shares cannot be dematerialised in this account only on the basis of DRF (see exception below). The dematerialisation can be done in the account where the holding pattern is X., Y (X as first holder and Y as second holder).

Exception: Where the combination of holders is the same in the certificates and in the demat account, and the difference is only in the order in which the name of the holders appear on the share certificates and in the demat account, dematerialisation is possible. Here, the customer has to submit a Transposition Request Form along with the DRF.

2.13. Signature Verification: The DRF must be signed by all the account holder's and should be in the same order. Branches should verify client’s signatures affixed on the DRF and ensure that signatures perfectly match as per our system records. On verifying the signature on the DRF, if branch finds that there is a mismatch in the signature as signed on the DRF with that of the records in the system then they should not accept the DRF and request the client to affix the correct signature as per DP records.
Simultaneously branch should check with the client if he has a different signature registered with the Company / Registrar, and if so request the client to affix the signatures on the DRF with a remark “Signature as per R & T".

If the demat request is being submitted by a PoA (Power of Attorney) holder, a copy of the PoA should be submitted. Where the customer claims that the PoA is already registered with the Registrar, the PoA Registration No. should be mentioned on the DRF.

2.14. Details of Certificates: The details of certificates such as the folio no., certificate no., & distinctive no. must be filled up correctly in the DRF. Also, the number of certificates annexed with the DRF should tally with the number of certificates mentioned on the DRF. The certificates should be attached in the same order as mentioned in the DRF.

CAUTION: Verify this properly because if there are any mismatches between the certificate details mentioned on the DRF and the certificates attached with the DRF, the liability is on ICICI Bank for any missing certificates.

2.15. Defacing of the Certificates: All the certificates must be defaced by putting a stamp or by writing ''SURRENDERED FOR DEMATERIALISATION” by the client. However, defacing should be done only after checking the eligibility of security, as defaced securities cannot be sold in physical form. If defacing has been done by mistake then the customer should be advised to send the same to registrar for replacement.
However, the request should not be accepted if the certificates are mutilated or defaced in such a way that the material information is not readable.
In case of government securities, the same should not be defaced or mutilated either by punching holes or by any other means.

2.16. Transfer - cum - Demat: SEBI has withdrawn Transfer cum Demat since Feb. 10, 2004. Hence the branch should entertain no request under this facility.

2.17. Transmission - cum - Demat:
In case of certificates held jointly, on the death of any one or more of the joint holder(s) mentioned on the certificate, the surviving joint holder(s) can get the name(s) of the deceased deleted from the physical certificate(s) and get the securities dematerialised in the DP account of the surviving holder(s) by following the procedures mentioned below:
2.17.1. The following documents should be submitted along with the DRF :

• A copy of the death certificate duly attested by notary.

• Transmission form for Dematerialisation / Deletion cum Demat form.

2.17.2. Verify that the certificates are registered in the name of the Client(s) along with the name(s) of the deceased and the order of the names of the surviving holders is the same as in the Demat account.

2.18. Receiving Demat Request and acknowledging the same
2.18.1. The DRF is in triplicate.
2.18.2. Branches should ask the customer to write / stamp
2.18.3. DP ID and CLIENT ID on the face of EVERY Physical Share Certificate submitted by him for demat. ("DP ID and CLIENT ID" should be clearly visible on the share certificates. It should not be mentioned on the printed details of the certificates). This will ensure better control for the certificates submitted by the client.

2.18.4. "Surrendered for dematerialisation" should be mentioned on the face of every share certificate.

Kindly ensure that the DRF accepted at the branch bears the date of submission, date of acceptance, branch stamp and signature of the demat officer on all copies of the DRFs. Failure to do so will invite audit observations.

2.18.5. On receipt of duly filled DRF, Branch should cancel the physical share certificates by drawing two parallel lines across the physical share certificates and punch two holes on the top of the share certificates (i.e. name of the company should be punched ) and then forward the physical share certificates to CPO - Goregaon Office for processing .

2.18.6. All DRFs accepted are to be dispatched to Central Processing Office (CPO) on the date of receipt from the client. Failure to dispatch on time causes delay in processing and dispatch of certificates to respective registrars. Dispatch of DRFs (to Registrar) after 7 days from the date of receipt invites monetary penalty from NSDL / SEBI.

2.18.7. Kindly ensure that the DRF accepted at the branch bears the date of submission, date of acceptance, branch stamp and signature of the demat officer on all copies of the DRFs. Failure to do so will invite audit observations.

2.18.8. If everything is proper, issue the acknowledgement to the customer from Registrar's Copy (white copy). Retain the Branch copy (yellow colour) at the branch. Send the Registrar's copy & CPO copy (white and blue) to the Central Processing Office (CPO) at Goregaon, Mumbai.

2.19. Inwarding in the System
The DRF should be immediately inwarded in the Inwarding module on DeposisWeb. In case the system is not available, then the DRF's must be inwarded at end of day. Please refer to DeposisWeb section for help on inwarding of DRF.

2.20. Packeting & Depspatching of DRF
At the end of the day, all DRFs inwarded for the day should be 'packeted' and 'despatched' in DeposisWeb along with other documents received during the day.

2.21. Despatch of Demat Requests to Central Processing Office (CPO):
The DRF along with the physical securities should be despatched to the CPO with a covering letter.
In case the DRF cannot be inwarded due to unavailability of the system then a covering letter should be prepared in the below mentioned format
The POD (courier receipt) must be filed along with the copy of covering letter for your records.

2.22. Processing of DRFs at Central Processing Office (CPO)
2.22.1. Entry of DRF: The DRF team at CPO does the entry of the DRFs received at the CPO. At this level the complete details provided by the client in the DRF is captured in the Deposis (Back office system for ICICI Bank Demat Services).

2.22.2. Objection of DRF: If there is any discrepancy in the DRF the same is objected in the system.
2.22.2.1. An Objection reason is attached to the objected DRF.

2.22.2.2. The Demat Request is returned to the client alongwith a letter mentioning the objection reason at his correspondence address.

2.23. Generation of Demat Request Number.
2.23.1. If the DRF is in order, another user verifies the entered details and the DRF are authorised.
2.23.2. At the end of the day all the authorised DRFs are uploaded in the NSDL system and the Demat Request No. (DRN) is generated.
2.23.3. The DRNs are released in the DPM (NSDL system); this transmits the electronic request to the respective registrar.

2.24. Despatch of DRF to the Registrar
2.24.1. The DRN is updated on the Demat Request Forms.
2.24.2. The DP Authorised section is completed.
2.24.3. The DRFs along with the security certificates and a covering letter are despatched to the respective Issuer or its Registrar & Transfer Agent not later than seven days of accepting the same from the customer.
2.25. Processing of Demat Request by the Registrar
2.25.1. Confirmation of Demat Request
2.25.2. The registrar on receipt of Demat request verifies the details with that in his record.
2.25.3. If the Demat Request is in order the registrar confirms the DRN in the NSDL system and the physical securities are destroyed. The free account of the client gets credited with equivalent quantity of securities.

2.26. Rejection of Demat Request
2.26.1. Demat requests submitted at branches, after due scrutiny, are forwarded by the Central Processing Office, Mumbai (CPO) to the respective Registrars. Registrars, after due scrutiny, confirm the requests enabling credit in the demat account of the customer.
2.26.2. If the request is rejected by CPO, the certificates are sent back to the customer directly by post. If the request is rejected by the Registrar, the certificates are sent back to the DP (at the CPO) and CPO sends the same to the customers directly by post.
2.26.3. For such rejected requests, DeposisWeb now provides the following information also :

• If the request has been rejected by the Registrar, whether the certificates have been received by CPO or not and the date on which the same have been received at CPO.

• If the certificates sent by CPO to the customer by post have been returned undelivered, the date on which it was received back at CPO and the reason for the return. Further if the certificates have been redispatched on request by the customer/branch, the date of such redespatch.

2.26.4. The information is available under "Status of Request" on DeposisWeb. On the page, specify demat account no., DRF as the document type and DRF no. as document no. and submit. On the result page, click the Indoc no. hyperlink for details. The details page would include the following two additional blocks. These blocks are:

• "Certificates Received Back" as given below :

The date is the date on which the lot of certificates was received. Quantity is the quantity of securities represented by the lot of certificates. If this block does not appear for a rejected demat request, it means that the certificates are yet to be received at CPO.

• “Return By Post Details" as given below:

RBP No. Is a system-generated no. for each instance of return by post. The return date is the date on which the certificates were received back at CPO. Remarks contains the reason for the return. If the certificates have been redispatched, Redispatch date and Redispatch Out no. will contain the date of such redespatch and the system-generated Outward No. The current status of certificates sent back to customer will appear in the Status of RBP column.
If redispatched certificates are returned undelivered again, another record will appear below the earlier record.
If this block does not appear for a rejected demat request, it means that certificates have not been returned to CPO. They are either delivered to the customer or are in transit.

2.27. Loss of documents after accepting from the client
2.27.1. After the DRF and certificates are submitted by the Client at the branch, in exception circumstances, they may get lost in the following ways:

• Misplaced at the Branch before they are sent to the CPO

•  Intercepted in transit between Branch and CPO

• Misplaced at the CPO before entering the same on the NSDL system

• In case the DRF is rejected either at the CPO itself (where certificates are sent back to the customer from CPO) or at the Registrar end (where certificates are sent to the CPO and there onwards to the customer), any misplacement/interception in between.

2.27.2. In the above cases, inform the CPO immediately. In these cases, the CPO requests the Registrar for the procedure to be followed to resolve the case. The procedure typically requires execution of an indemnity by the client.

2.27.3. The CPO executes the indemnity on non-judicial stamp paper and forwards the same to the client for them to sign and return to the CPO. The CPO sends the same to the Registrar along with the forwarding letter for issue duplicate share certificate/credit in the demat account.

2.27.4. Where required, the Registrar will issue Duplicate Share Certificate(s) and send the same to the Client directly. Subsequently, Client may submit the same with fresh DRF for demat. In other cases, the Registrar may also directly credit the demat account.

2.28. Storage of DRF copy at Branch: The status of the DRF is 'Sent to CPO' on inwarding the request at the Branch. Subsequently, the status changes after being processed by the CPO.

Branches are supposed to store a copy of each DRF forwarded by them to CPO. It is suggested that Branches after inwarding and forwarding the DRF request to CPO, should file the branch copies of DRF date-wise. Every Monday, they should verify in Deposis - Status of Request for all DRFs inwarded during the week previous to the previous week for confirming change in Status. Accordingly, the copies should be destroyed.

Care should be taken to ensure that the destruction of the Branch copy is done only after confirming the change in the status of the request.

Risk Reward Relationship

Whenever we talk about investments, there is always some risk associated with all of them. Risk is the most dreaded word in all the financial markets across the globe. Any person, who is operating in the financial markets, in whatever capacity, has to face risk. So the question in most minds is, what exactly this RISK is? What does it mean?
In general terms, risk means any deviation from expectations. In Financial parlance, risk means any deviation from the expected returns. More specifically, the probability that the returns from any asset will differ from the expected yields is the risk inherent in that asset. We all face risk in our lives in one way or the other. So lets have an understanding of the risk.

Risk inherent in equity investments
Equity investment is the most risky investment in all the financial markets. So one needs to have an understanding of risks associated with equity investments. Broadly, there are two types of risks associated with equity investments, viz., systematic risk and unsystematic risk. Lets have an understanding of these two types of risks.
Systematic risk: or the market risk, as it is called, this is the variation in the return on any scrip due to market movements. For example, suppose the Government announces a corporate tax cut or rise across the board, it is going to effect all the stocks in the market in the same way. This is the systematic risk of scrip, which exists because of market movements.
There is nothing much one can do about systematic risk of a security because it arises due to some extraneous variables. But there still exists some techniques, which help to hedge against the systematic risk of a security.
A good measure of an asset’s systematic risk is its Beta. Beta is calculated by regressing the returns of a particular asset on market returns. It can be interpreted as, say the beta of a stock is 1.25, then whenever the market moves by 1%, the stock will move by 1.25%.

Unsystematic risk: is the variation in the return of a scrip due to that scrip specific factors or movements. For example, say the Government announces tax sops to companies in a particular sector, it is going to effect the prices of the stocks of companies which are operating in that sector and not all the stocks.

Measuring risk
We can measure risk in two ways – Ex post and Ex ante risk measurement. Ex post measurement is done after the happening of an event and Ex ante measurement is done before the happening of an event.

Ex post Risk
When risk is measured ex post, it is measured as Variance from the mean value. That is, it is the statistical measure of Variance associated with the returns on a particular asset. For example, if one wants to measure risk associated with a particular stock, he will take the returns generated on the stock over a period of time and then he will find out the variance in the return of that particular stock. That variance will be the risk of that stock.

Ex ante Risk
When it is measured ex ante, it is measured as the probability that the returns from an asset will deviate from the mean or the expected returns. For this, if the variable has a normal distribution, the Theory of Normal distribution can be easily applied to find out the probability of this deviation. Otherwise subjective estimates of the probability have to be made.
For example, say the changes in a stock price have normal distribution. One can take the mean return based on the past return of the stock. Then, using the Standard Normal probability distribution, he can find out the probability of the return on that stock falling below that mean or expected return.
If the stock price is not normally distributed, then he will have to make subjective estimates of probabilities of getting a particular return. Using that, he can find out what is the expected return on that stock. Then the risk on that stock is the statistical measure of variance in return of that stock from the expected return.

Hedging risks associated with equity investments
Risk Hedging encapsulates all the activities required to ensure that the exposure, one is having, on account of the risk, doesn’t transform into loss. That is, the exposure is only a notional loss, which might transform into actual loss on happening of a particular event, but if necessary steps are taken to control, manage and diversify away the risk, this exposure can be controlled. All the activities undertaken to do so collectively comes under the purview of risk hedging.
In the following section, we present some of the commonly used techniques for managing risks:

Use of derivatives: Derivatives are most commonly used to hedge against the market risk. The use of the type of derivative instrument depends upon the expectations. An example will make the point clear. Say, you have 100 Reliance shares, the market price of which is presently RS. 300. Now you expect that the price of Reliance might go down in the future due to some reason. To hedge yourself against this risk, you can buy a Put option on Reliance’s stock and lock in a price. If the price actually falls, you can sell those shares at the price you contracted through Put option. If you expect prices to rise and you want to buy shares in the future, you can buy a Call option on Reliance’s stock.
To learn more about derivative basics, click here (a link to our derivative channel).
As of now, the use of derivatives on individual securities is not allowed in India. Sometime back, the use of any derivative instrument was not allowed in India. But now the SEBI has allowed the use of Index Futures on BSE and NSE. Soon, these Futures instruments will start trading on other exchanges also. And in due of course of time, the entire range of derivative instruments will be allowed in India.
Making a portfolio: To guard yourself against market risk, you can also make a portfolio of stocks whose returns are negatively correlated with each other. If you make a portfolio of two stocks whose correlation co-efficient is –1 (minus 1), then your market risk is minimized.

Cash Flow

Think of cash as the lifeblood of every business. Without cash flow, no business can function and without an accurate picture of cash flow, no investor can have a complete picture of a company.
A company's statement of cash flows reflects how readily the business can pay its bills, and it provides important information about a company's sources and uses of cash. But measuring cash flow solely from a balance sheet or an income statement is difficult and potentially misleading. That's because not all revenue is received when a company earns it, and not all expenses are paid when incurred. (For an explanation of financial statements, see "What's the Deal With Financial Statements?" plus "Understanding the Income Statement" and "How to Read a Balance Sheet," presented earlier in this series.)
The difference between an income statement and a statement of cash flows is roughly analogous to the difference between a credit card statement and a checkbook ledger. A credit card statement includes charges that haven't been paid off yet, while an updated checkbook ledger indicates where cash has been spent and whether there's enough to pay off debts like a credit card bill. Similarly, a company's expenses and revenues are recorded on an income statement, regardless of whether cash has changed hands yet. A statement of cash flows, on the other hand, traces where cash came from and where it was used.
The statement also separates cash generated by the normal operations of a company from that gleaned through other investing and financing activities, as seen in the sample statement of cash flows of the hypothetical XYZ Corp.
Statement of cash flows for XYZ Corp. for the year ending
Dec. 31, 1999 (in millions)

From operations
Net income Rs.30
Plus depreciation 15
Plus decrease in receivables (less increase) (20)
Less increase in inventories (10)
Plus increase in accounts payable (less decrease) 0
Net increase (decrease) in cash from operations 15

From investing
Less purchase of equipment (150)

From financing
Bonds issued 100

Net increase (decrease) in cash (35)
Cash at beginning of year 127
Cash at end of year Rs. 92

Cash flow from operations:
Cash flow from operations starts with net income (from the income statement) and adjusts out all of the non-cash items. Income and expenses on the income statement are recorded when a company earns revenue or incurs expenses, not necessarily when cash is received or paid. To figure out how much cash the company received or spent, net income is adjusted for any sales or expenditures made on credit and not yet paid with cash.
Examples of these adjustments are shown above. XYZ had Rs.20 million in sales to customers who had not paid the company as of the end of the year, so this increase in receivables is subtracted. XYZ also reported Rs.15 million in depreciation expense (the portion of long-lasting assets, such as buildings, that is written off each year); depreciation is not a cash item, so it is added back. Finally, XYZ purchased Rs.10 million of additional inventory that was not sold as of year end. Because the inventory was not sold, it is not considered an expense. But because cash was used in the purchase, the Rs.10 million is subtracted from net income. Net cash received from XYZ's operations, after the above adjustments, was Rs.15 million.

Cash flow from investing
Cash flow from investing includes cash received from or used for investing activities, such as buying stocks in other companies or purchasing additional property or equipment. XYZ Corp. had no cash receipts from investing in 1999 but spent Rs.150 million to purchase equipment.

Cash flow from financing
Cash flow from financing activities includes cash received from borrowing money or issuing stock and cash spent to repay loans. XYZ Corp. received Rs.100 million in cash from issuing bonds in 1999.

Sizing up operating performance
Of the three main sources of cash flow, analysts look to that from operations as the most important measure of performance. If operations alone don't generate positive cash flow, that may be cause for concern. In addition, a decrease in cash flow due to a sharp increase in inventory or receivables can signal that a company is having trouble selling products or collecting money from customers. However, analysts look at the relative amount of these changes if accounts receivable have gone up by the same percentage as sales revenues, the increase may not be unusual.

Ratio Analysis

Ratio Analysis
Ratio Analysis is the most commonly used analysis to judge the financial strength of a company. A lot of entities like research houses, investment bankers, financial institutions and investors make use of this analysis to judge the financial strength of any company.
This analysis makes use of certain ratios to achieve the above-mentioned purpose. There are certain benchmarks fixed for each ratio and the actual ones are compared with these benchmarks to judge as to how sound the company is. The ratios are divided into various categories, which are mentioned below:

Profitability ratios
Profitability ratios speak about the profitability of the company. The various profitability ratios used in the analysis are, operating margin (operating profit divided by net sales), gross margin (gross profit divided by net sales) net profit margin (net profit divided by net sales), return on equity (net profit divided by net worth of the company) and return on investment (operating profit divided by total assets). As obvious from the name, the higher these ratios the better for the company.

Solvency ratios
These ratios are used to judge the long-term solvency of a firm. The most commonly used ratios are – Debt Equity ratio (total debt divided by total equity), Long term debt to equity ratio (long term debt divided by equity). While the accepted norm for debt equity ratio differs from industry to industry, the usual accepted norm for D/E is 2:1. It should not be more than this. For certain industries, a higher D/E is accepted, e.g., in banking industry, a debt equity ratio of 12:1 is acceptable.

Liquidity ratios
These ratios are used to judge the short-term solvency of a firm. These ratios give an indication as to how liquid a firm is. The most commonly used ratios are – Current ratio (all current assets divided by current liabilities) and quick ratio (current assets except inventory divided by current liabilities). The accepted norm for current ratio is 1.5:1. It should not be less than this.

Turnover ratios
These ratios give an indication as to how efficiently a company is utilizing its assets. The most commonly ratios are sales turnover ratio, inventory turnover ratio (average inventory divided by net sales) and asset turnover ratio (net sales divided by total assets). The higher these ratios, the better for the company.

Valuation Ratios
Valuation ratios give an indication as to whether the stock is underpriced or overpriced at any point of time. The most commonly used ratios are Price to Earnings (P/E) ratio and price to book value (PBV) ratio. But care has to be taken while interpreting these ratios. While P/E ratio of a company should be compared with the industry P/E and the P/E of the competitors, it is the PBV that can distort.
While a lower PBV usually means a lower valuation, there can be a case where a low PBV can be because of a very huge capital base of the company. In such a case, the stock might be overvalued but the PBV will indicate that the stock is undervalued. On the other extreme, a higher PBV usually means overvalued stock but that can also be because the company has a very small capital base. So care has to taken while interpreting these ratios.

Coverage ratios
These ratios give an indication about the repayment capabilities of a company. The most commonly used coverage ratios are Interest coverage ratio (Interest outstanding divided by earnings before interest and taxes) and debt service coverage ratio (earnings before interest and taxes plus all non cash charges divided by interest outstanding plus the term loan repayment installment). The acceptable norm for DSCR is 2:1.

Value Analysis

What is Fundamental Analysis?
Fundamental analysis is the analysis, wherein the investment decisions are taken on the basis of the financial strength of the company. There are two approaches to fundamental analysis, viz., E-I-C analysis or the Top Down approach to Fundamental analysis and C-I-E analysis or the Bottom up approach. In the following section, we explain both these approaches.

Economy-Industry-Company Analysis
In the Top down approach, first of all the overall Economy is analyzed to judge the general direction, in which the economy is heading. The direction in which the economy is heading has a bearing on the performance of various industries. Thats why Economy analysis is important. The output of the Economy analysis is a list of industries, which should perform well, given the general trend of the economy and also an idea, whether to invest or not in the given economic conditions.

Measuring a Company's Financial Health
Gaining a true picture of a company's finances means not only scrutinizing the financial statements but also analyzing relationships among various assets and liabilities, thus highlighting trends in a company's performance and changes in its financial strength relative to its competitors.
This section explains how to read a company's financial statements. Measures of value :
Book value is based on historical costs, not current values, but can provide an important measure of the relative value of a company over time. Book value can be figured as assets minus liabilities, or assets minus liabilities and intangible items such as goodwill; either way, the figure that results is the company's net book value. This is contrasted with its market capitalization, or total share price value, which is calculated by multiplying the outstanding shares by their current market price.
You can also compare a company's market value to its book value on a per-share basis. Divide book value by the number of shares outstanding to get book value per share and compare the result to the current stock price to help determine if the company's stock is fairly valued. Most stocks trade above book value because investors believe that the company will grow and the value of its shares will, too. When book value per share is higher than the current share price, a company's stock may be undervalued and a bargain to investors. In fact, the company itself may be a bargain, and hence a takeover target.
Price/earnings ratio (P/E) is the more common yardstick of a company's value. It is the current stock price divided by the earnings per share for the past year. For example, a stock selling for $20 with earnings of $2 per share has a P/E of 10. While there's no set rule as to what's a good P/E, a low P/E is generally considered good because it may mean that the stock price has not risen to reflect its earning power. A high P/E, on the other hand, may reflect an overpriced stock or decreasing earnings. As with all of these ratios, however, it's important to compare a company's ratio to the ratios of other companies in the same industry.

A measure of solvency
Debt-to-equity ratio provides a measure of a company's debt level. It is calculated by dividing total liabilities by shareholders' equity. A ratio of 1-to-2 or lower indicates that a company has relatively little debt. Ratios vary, however, depending on a company's size and its industry, so compare a company's financial ratios with those of its industry peers before drawing conclusions.

Measures of liquidity
Current ratio. Current assets divided by current liabilities yields the current ratio, a measure of a company's liquidity, or its ability to meet current debts. The higher the ratio, the greater the liquidity. As a rule of thumb, a healthy company's current ratio is 2-to-1 or greater.

Company Valuation

Whenever people talk about equity investments, one must have come across the word "Valuation". In financial parlance, Valuation means how much a company is worth of. Talking about equity investments, one should have an understanding of valuation.
Valuation means the intrinsic worth of the company. There are various methods through which one can measure the intrinsic worth of a company. This section is aimed at providing a basic understanding of these methods of valuation. They are mentioned below:

Net Asset Value (NAV)
NAV or Book value is one of the most commonly used methods of valuation. As the name suggests, it is the net value of all the assets of the company. If you divide it by the number of outstanding shares, you get the NAV per share.
One way to calculate NAV is to divide the net worth of the company by the total number of oooutstanding shares. Say, a company’s share capital is Rs. 100 crores (10 crores shares of Rs. 10 each) and its reserves and surplus is another Rs. 100 crores. Net worth of the company would be Rs. 200 crores (equity and reserves) and NAV would be Rs. 20 per share (Rs. 200 crores divided by 10 crores outstanding shares).
NAV can also be calculated by adding all the assets and subtracting all the outside liabilities from them. This will again boil down to net worth only. One can use any of the two methods to find out NAV.
One can compare the NAV with the going market price while taking investment decisions.

Discounted Cash Flows Method (DCF)
DCF is the most widely used technique to value a company. It takes into consideration the cash flows arising to the company and also the time value of money. That’s why, it is so popular. What actually happens in this is, the cash flows are calculated for a particular period of time (the time period is fixed taking into consideration various factors). These cash flows are discounted to the present at the cost of capital of the company. These discounted cash flows are then divided by the total number of outstanding shares to get the intrinsic worth per share.

Balance Sheet Basics

Balance Sheet is the snap shot of financial strength of any company at any point of time. It gives the details of the assets and the liabilities of the company. Understanding balance sheet is very important because it gives an idea of the financial strength of the company at any given point of time. Following is the balance sheet of Global Telesystems for the year ending on 31st Mar' 2000:
As on 31-3-00
Assets
Gross Block 3978.55
Net Block 2790.57
Capital WIP 66.72
Investments 454.33
Inventory 610.81
Receivables 1546.81
Other Current Assets 3673.67
Balance Sheet Total 9142.92

Liabilities
Equity Share Capital 434.12
Reserves 5815.65
Total Debt 2096.69
Creditors and Acceptances 393.91
Other current liab/prov. 402.55
Balance Sheet Total 9142.92

Let us take a look at each of its components.
Assets
Gross block is the sum total of all assets of the company valued at their cost of acquisition. This is inclusive of the depreciation that is to be charged on each asset. Net block is the gross block less accumulated depreciation on assets. Net block is actually what the asset are worth to the company.
Capital work in progress, sometimes at the end of the financial year, there is some construction or installation going on in the company, which is not complete, such installation is recorded in the books as capital work in progress because it is asset for the business.
If the company has made some investments out of its free cash, it is recorded under the head investments. Inventory is the stock of goods that a company has at any point of time. Receivables include the debtors of the company, i.e., it includes all those accounts which are to give money back to the company. Other current assets include all the assets, which can be converted into cash within a very short period of time like cash in bank etc.

Equity Share capital is the owner's equity. It is the most permanent source of finance for the company. Reserves include the free reserves of the company which are built out of the genuine profits of the company. Together they are known as net worth of the company.
Total debt includes the long term and the short debt of the company. Long term is for a longer duration, usually for a period more than 3 years like debentures. Short term debt is for a lesser duration, usually for less than a year like bank finance for working capital.
Creditors are those entities to which the company owes money. Other liabilities and provisions include all the liabilities that do not fall under any of the above heads and various provisions made.
Role of Balance Sheet in Investment Decision making
After analyzing the income statement, move on to the balance sheet and continue your analysis. While the income statement recaps three months' worth of operations, the balance sheet is a snapshot of what the company's finances look like only on the last day of the quarter. (It's much like if you took every statement you received from every financial institution you have dealings with — banks, brokerages, credit card issuers, mortgage banks, etc. — and listed the closing balances of each account.)
When reviewing the balance sheet, keep an eye on inventories and accounts receivable. If inventories are growing too quickly, perhaps some of it is outdated or obsolete. If the accounts receivable are growing faster than sales, then it might indicate a problem, such as lax credit policies or poor internal controls. Finally, take a look at the liability side of the balance sheet. Look at both long-term and short-term debt. Have they increased? If so, why? How about accounts payable?
After you've done the numerical analysis, read the comments made by management. They should have addressed anything that looked unusual, such as a large increase in inventory. Management will also usually make some statements about the future prospects of business. These comments are only the opinion of management, so use them as such.
When all is said and done, you'll probably have some new thoughts and ideas on your investments. By all means, write them down. Use your new benchmark as a basis for analyzing your portfolio next time. Spending a few minutes like this each quarter reviewing your holdings can help you stay on track with your investment goals.

Call Money Markets

The call money market is an integral part of the Indian Money Market, where the day-to-day surplus funds (mostly of banks) are traded. The loans are of short-term duration varying from 1 to 14 days. The money that is lent for one day in this
market is known as "Call Money", and if it exceeds one day (but less than 15 days) it is referred to as "Notice Money". Term Money refers to Money lent for 15 days or more in the InterBank Market.

Banks borrow in this money market for the following purpose:
• To fill the gaps or temporary mismatches in funds
• To meet the CRR & SLR mandatory requirements as stipulated by the Central bank
• To meet sudden demand for funds arising out of large outflows.
Thus call money usually serves the role of equilibrating the short-term liquidity position of banks

Call Money Market Participants :
1.Those who can both borrow as well as lend in the market - RBI (through LAF) Banks, PDs

2.Those who can only lend Financial institutions-LIC, UTI, GIC, IDBI, NABARD, ICICI and mutual funds etc.

Reserve Bank of India has framed a time schedule to phase out the second category out of Call Money Market and make Call Money market as exclusive market for Bank/s & PD/s.

The most active segment of the money market has been the call money market, where the day to day imbalances in the funds position of scheduled commercial banks are eased out. The call notice money market has graduated into a broad and vibrant institution .

Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money,
borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money".
When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.

The entry into this field is restricted by RBI. Commercial Banks, Co-operative Banks and Primary Dealers are allowed to borrow and lend in this market. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are
allowed to access to Call/Notice money market only as lenders. Reserve Bank of India has recently taken steps to make the call/notice money market completely inter-bank market. Hence the non-bank entities will not be allowed access to this market beyond December 31, 2000.

From May 1, 1989, the interest rates in the call and the notice money market are market determined. Interest rates in this market are highly sensitive to the demand - supply factors. Within one fortnight, rates are known to have moved from a low of 1 - 2 per cent to dizzy heights of over 140 per cent per annum. Large intra-day variations are also not uncommon. Hence there is
a high degree of interest rate risk for participants. In view of the short tenure of such transactions, both the borrowers and the lenders are required to have current accounts with the Reserve Bank of India. This will facilitate quick and timely debit and credit operations. The call market enables the banks and institutions to even out their day to day deficits and surpluses of
money. Banks especially access the call market to borrow/lend money for adjusting their cash reserve requirements (CRR).
The lenders having steady inflow of funds (e.g. LIC, UTI) look at the call market as an outlet for deploying funds on short term basis.

The overnight call money or the inter-bank money market rate is presumably the most closely watched variable in day-to-day conduct of monetary operations and often serves as an operating target for policy purposes. The choice of operating tactics
from quantity to rate based targeting, following the IS/LM based analysis of Poole (1970), has been largely accepted in favour of interest rate targeting, because of the diminished link between monetary aggregates and economic objectives of monetary
policy as a result of the fast pace of financial innovations. Most central banks, therefore, presently use indirect instruments in an attempt to maintain the short term interest rate at a desirable level with the use of appropriate liquidity management practices. The most common of these instruments of liquidity management is the central banks’ repo facility which enables modulation of the marginal liquidity on a day to day basis so as to ensure stable conditions in the money market and, particularly, to maintain the short term money market rate as close as possible to the official/policy rate. Changes in the short-term policy rate made by central banks provide signals to markets, and various segments of the financial system, therefore, respond by adjusting interest rates/returns depending on their sensitivity and the efficacy of the transmission mechanism. Economic implications for investment and spending decisions of producers and households follow as usual,
thereby affecting the working of the real sector viz., changing aggregate demand and supply, and eventually inflation and growth in the economy. It is, therefore, clear that the interest rate stance of a central bank and its implications for economic activity and inflation play an important role in the conduct of monetary policy.
The objective of the paper is, therefore, to assess the volatility pattern of the call money rate in India during the last three years and to estimate its sensitivity vis-à-vis the Reserve Bank of India’s liquidity adjustment facility (LAF) auction decisions for the purpose of eliciting underlying market characteristics. Attempt is made to provide evidence, albeit indirectly, on how
regulatory changes related to other instruments in the money market may have affected the functioning of the interbank call money market. Finally, some evidence is also offered on the link between money market volatility and interest sensitive
financial markets, particularly the government securities market.
The remainder of the paper is structured as follows. Section I provides an overview of liquidity management in India while cross-country experience is set out in Section II. Data used in the analysis are explained in Section III. Methodology used and the empirical analysis are presented in Section IV and concluding observations are given in Section V.

THERE seems to be a role reversal of sorts in the inter-bank call money market. Excepting a few big fish, most nationalised banks, traditionally lenders in the overnight lending and borrowing market, have turned borrowers.

With a large portion of their funds locked in government securities, many public-sector banks are now facing dearth of liquidity in patches, say bankers.

" We have even borrowed up to Rs 600-700 crore on a particular day'', said an official in a public-sector banker.

The increased demand for funds seems to be due to a combination of factors - - a pick-up in credit disbursal witnessed over the past month, being the prominent among them. Other requirements are more routine needs such as fulfilment of statutory norms, the cash reserve requirement, deposit redemption and asset-liability management of these banks.

" With demand for large funds coming from the oil sector over the past 6-8 weeks, we have been resorting to borrowing in the call money market as a stop-gap arrangement for funding needs,'' confided the treasury head of a public-sector bank. The rates in the call money market had been low and `attractive' in the 5.50-5.60 per cent range, much lower than the average cost of funds at 6.75 per cent, he added.

Public-sector banks are locked into their holdings in government securities at the moment. Said the treasury head of a nationalised bank: "We had bought these g-secs at higher prices and therefore it does not make sense to sell them now and
book losses when the market is dull.''

With prices dropping in the g-secs market over the past fortnight as much as Rs 5-10, public sector banks are sitting on depreciation in the value of their holding. On an average 40-45 per cent of most nationalised banks' balance sheets were invested in `zero-risk' government securities, said a debt market analyst. However, the liquidity in the system has not vanished over-night. Bankers are keeping their fingers crossed with the hope that g-sec prices will rise once again on quelling of tensions in West Asia.

If and when g-sec prices rise again, the banks can sell their stocks, realise funds plus book profits.

Meanwhile, there have also been some unusual lenders in the call money market which include private-sector banks, who are by nature borrowers. "Having sold our positions in g-secs over the past fortnight, we are now sitting on pots of cash, which have to be lent out,'' said the trading head of a private sector.

Call money rates ruled at around 7.75-8% last week. Demand remained modest despite a scheduled auction of Rs 5,000 crore and was adequately matched by available supplies. Consequently, call rates were steady.

Also, as liquidity was aided by RBI’s reported intervention in the forex market (buying dollars), inter-bank rates remained supported at around the current levels.

The average repo numbers at the liquidity adjustment facility window stood at Rs 12,149 crore against Rs 13,332 crore previously, while the average reverse repo figure was up at Rs 210 crore against Rs 171 crore of the previous week.
The cumulative collateralised borrowing and lending obligation volumes for the week fell to Rs 72,994 crore from Rs 97,246 crore.

The overnight weighted average yield was lower at 7.2366% against 7.2439% in the previous week. Inter-bank rates would re-align in case RBI tightens rates in the policy review.

Rates on the call money market ended in a range of 7.7-7.9%, down from the previous closing levels of 7.8-8%. RBI mopped up bids worth only Rs 210 crore through the reverse repo operations at the second session of liquidity adjustment.

On the other hand, the central bank infused funds worth Rs 12,115 crore through the repo operations under both sessions. The bond market did witness some improvement in volumes on Tuesday, while prices rose by almost 20 paise.

Traders expected the inflation to soften in the weeks ahead, and interest rates to rise at a slower pace, after the government cut import duty on some items. The yield on the benchmark 8.07% 2017 bond ended at 7.87%, lower than the previous close
of 7.9%.

Traders widely expect a 25 basis point increase in interest rates when RBI announces its quarterly policy review on January 31.

The government reduced import duties on a variety of items late on Monday after annual inflation hit a two-year high of 6.12%, breaking above the central bank’s estimate of 5-5.5% at March-end.