FINANCIAL TERMS

FINANCIAL TERMS (MISC)

FOREIGN DIRECT INVESTMENT (FDI)

Investment made by foreign companies / institutions directly or in partnership with some Indian company to start their own work in our country. FDI is usually long term investment. For example, LG, Samsung setting up their plants in India.

FOREIGN INSTITUTIONAL INVESTORS (FII)

It refers to investment made by foreign companies / institutions in the share market of India, for buying various securities. Unlike FDI, it is usually short term investment.

DEPTT. OF INDUSTRIAL POLICY AND PROMOTION (DIPP)

A department under Ministry of Commerce and Industry which is responsible for formulation and implementation of policy for industrial growth in the country and for attracting Foreign Direct Investment in the country.

FOREIGN INVESTMENT PROMOTION BOARD (FIPB)

It is a body under Department of Economic Affairs under Ministry of Finance. Its basis objective is to provide single window clearance for Foreign Direct Investment proposals of upto Rs. 1200 crores.

EXTERNAL COMMERCIAL BORROWINGS (ECB)

It refers to the foreign currency loans taken by Indian companies from overseas institutions.

EMERGING MARKET ECONOMIES

These are the countries which are enjoying good growth of their GDP. Few such countries are Brazil, Russia, India, China, and South Africa. These countries have formed a separate group known as BRICS to promote and protect their mutual interests.

DIRECT TAX CODE (DTC)

The government proposes to merge all the laws relating to various direct taxes such as income tax, wealth tax, corporate tax etc. into one new code by the name DTC. The parliament is yet to pass the bill for DTC.

GOODS AND SERVICES TAX (GST)

The government proposes to merge all the laws relating to various indirect taxes such as sale tax, VAT, excise and customs and replace them with new GST.

GENERAL ANTI AVOIDANCE RULES (GAAR)

These rules were introduced in 2012-13 budget with the objective to counter “aggressive tax avoidance tactics.” It empowers officials to deny the tax benefits on transactions or arrangements which have been done solely for avoiding incidence of tax and do not have any genuine business consideration. Govt. appointed Parthasarthi Shome Committee to review the implementation of GAAR guidelines. It recommended postponement of GAAR to April 1, 2016.

INFLATION

It refers to a persistent rise in the price levels of commodities and services, leading to a fall in the currency’s purchasing power. Excess of money supply is primary factor leading to inflation and hence, decrease in money supply leads to decrease in inflation and vice a versa.

HYPERINFLATION

It is just inflation at an extremely high rate. Usually this also means the inflation is out of control and its level is not precisely predictable.

STAGFLATION (STAGNATION + INFLATION)

It is a situation marked by inflation accompanied with stagnation in the economy, marked by increasing unemployment.

DEFLATION

It is a situation marked by decline in general price levels, often caused by a reduction in the supply of money or credit.

WHOLESALE PRICE INDEX (WPI)

It is an index that tracks the wholesale prices of a representative basket of goods comprising of various food / non food items and power / fuel items. Changes in this index are used to measure inflation in India. The purpose of the WPI is to monitor price movements that reflect supply and demand position of various items in the economy. Present WPI has 2004-05 as the base year and is released on monthly basis by the Ministry of Commerce and Industry.

The government has appointed Mr. Saumitra Chaudhuri, Member Planning Commission as Chairman of Committee to restructure and move to new base year for Index of Industrial Production (IIP) and Wholesale Price Index (WPI).

CONSUMER PRICE INDEX (CPI)

It is an index that tracks the consumer level prices of representative basket of goods comprising five major food groups – fuel and light, housing, clothing and miscellaneous. It has 2010 as the base year. The CPI also reflects price movements in the services sector, which makes up around 55% of India’s economy but is not included in the WPI. RBI monitors inflation in terms of CPI.

INDEX OF INDUSTRIAL PRODUCTION (IIP)

IIP conveys the status of production in the industrial sector of an economy in a given period of time, in comparison with a fixed reference point in the past. The IIP numbers are released every month in India. IIP has 2004-05 as the base year. IIP has 3 main components: Manufacturing -75.53%, Mining – 14.16% and Electricity – 10.32%.

Within the IIP, a group of 8 major industries is called ‘Core Sector’ and it has a weightage of 37.90% within the IIP. These 8 industries include: Coal, Crude Oil, Natural Gas, Petroleum refinery products, Fertilizers, Steel, Cement and Electricity.

Both, CPI and IIP are issued on monthly intervals by the Central Statistical Office, Ministry of Statistics and Programme Implementaion. 

GROSS DOMESTIC PRODUCT (GDP)

It is the market value of all the goods and services produced in a country in a year (including production by foreign nationals). It represents the size of economy. Growth rate of GDP indicates the growth rate of economy.

Latest data released by the Central Statistical Office (CSO) has estimated value of India’s GDP at current market prices at Rs. 113.55 trillion, achieving a growth rate of 4.7% in 2013-14.

SECTORS OF ECONOMY

Economy of a country has 3 major sections: Primary (Agriculture and Mining), Secondary (Manufacturing) and Tertiary (Services).

GROSS NATIONAL PRODUCT (GNP)

It is the market value of all the goods and services produced by the nationals of a country in a year. Thus, it includes goods and services produced by all the Indians, both inside and outside India.

RECESSION

It is a situation marked by continuous negative growth or shrinkage of GDP, usually for over 2 quarters. It is visible in terms of slowdown in industrial production, employment, real income and wholesale – retail trade.

If the recession continues for a longer period, usually for more than 3 quarters, the situation is called ‘Depression’.

GROSS NATIONAL INCOME (GNI)

GNI comprises of total value of goods and services produced within a country (i.e. its Gross Domestic Product), together with its income perceived from other countries (notably interest and dividends), less similar payments made to other countries.

PER CAPITA INCOME

Per capita income or average income or income per person is a measure of mean income within an economic aggregate, such as a country or city. It is calculated by taking a measure of all sources of income in the aggregate (such as GDP or GNI) and dividing it by the total population.

NATIONAL INVESTMENT AND MANUFACTURING ZONES (NIMZ)

India has decided to establish NIMZs to promote and encourage domestic manufacturing activity. Units established in NIMZs will be offered incentives and special concessions.

BREAK EVEN POINT (BEP)

When a business is started, usually it takes some time to generate profits. The point at which total expenses are equal to total revenues is called ‘Break Even Point’. At this point, there is neither profit nor loss in the business. The unit is in loss till it attains BEP and it starts earning profits after crossing the BEP.

FACTORING

It refers to business of sale of book debts by a firm (client) to a financial institution (factor) on the understanding that the factor will pay for the book debts as and when they are collected. Normally, the factor makes a part payment (usually upto 80%) immediately after the deal is done, thereby providing immediate liquidity to the Client. Most of the banks also do factoring.

DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA)

It is essential a bilateral agreement entered into between two countries to avoid taxation of same income in both the countries and to promote and foster economic trade and investment between the two countries. It also helps in receiving information about various aspects of black money from other countries. India has signed DTAA with over 80 countries.

TAX INFORMATION EXCHANGE AGREEMENT (TIEA)

It is a specific agreement entered into by 2 countries to seek information on tax related matters with the objective of minimizing the incidence of tax avoidance and check on generation of black money. India has signed TIEA with several countries.

INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

It is a set of accounting standards, developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of pubic company financial statements. 120 coutries around world, including India have agreed to comply with IFRS. This will promote international trade by facilitating easy comparison of balance sheets of companies in different countries.

EXTENSIBLE BUSINESS REPORTING LANGUAGE (XBRL)

It is the official computer language approved for the purpose of implementation of IFRS.

DISINVESTMENT

It refers to selling of shares in the open market, by the government in its public sector undertakings with a view to raise funds for government expenditure. The target for disinvestment for the year 2013-14 has been kept at Rs. 40,000 Cr.

TREASURY BILLS

Treasury Bills are instruments issued by RBI at a discount to the face value to raise funds for the government. They form an integral part of the money market. Generally, these are issued in 3 different maturities – 91 days, 182 days and 364 days. These are also treated as ‘negotiable instruments’.

G-SECS OR GILTS (GOVERNMENT SECURITIES)

Like T-bills, gilts are issued by RBI on behalf of the Government. These instruments form a part of the borrowing programme approved by Parliament in the Finance Bill each year (Union Budget). Typically, they have a maturity ranging from 1 year to 20 years.

PUBLIC DEBT OFFICE

It is an autonomous government agency which acts as the investment banker to the government and raises funds from the markets for the government. In India this role is played by the RBI.

SERVICE TAX

It is a tax levied on rendering of any kind of service except certain services motioned in the “negative list” issued by the Central Government. It is an indirect tax (Akin to Excise Duty or Sale Tax) which means that normally, the service provider pays the tax and recovers the amount from the recipient of that service.

• Service tax is payable if the annual value of services rendered exceeds Rs. 10 Lacs.
• Rate of service tax is 12% plus education cess of 3%, making it 12.36% effectively.
• Service tax collected during the month has to be deposited in govt. account by the 5^th of next month.

SAHAJ AND SUGAM

These are the names of the simplified income tax return forms recently introduced by the Income Tax Department. Sahaj is for individuals having salaried income and Sugam is for individuals having income through business.

PERMANENT ACCOUNT NUMBER (PAN)

It is issued by Income Tax Department. It is a 10 digit alpha numeric number wherein first five and last digit is alpha and middle four digits are numeric e.g. ABCDJ1234K.

TAX DEDUCTION ACCOUNT NUMBER (TAN)

Issued by Income Tax Department to persons / institutions responsible for deduction of tax of source. As per income tax guidelines, payments for certain specified purposes like salary, rent, professional fees etc. has to be made only after deducting the tax at source, known as TDS (Tax Deducted at Source). Non compliance with TDS provisions is a legal offence.

DOCUMENT IDENTIFICATION NUMBER (DIN)

Issued by Income Tax Department for various documents, returns etc. filed with them, for easy identification and tracking documents.

TAX INFORMATION NETWORK (TIN)

It is an online portal of Income Tax Department to render a variety services online to the assesses like enquiry about PAN / TAN, TDS, filing of returns etc.

Another full form of TIN is Taxpayer Identification Number issued by the State tax authorities to the business entities which deposit VAT, sales tax etc.

RAJIV GANDHI EQUITY SAVINGS SCHEME (RGESS)

It is a new equity based tax savings scheme introduced in 2012 for encouraging the savings by the small investors for investing in share market. The Scheme gives tax benefits up to Rs. 50,000 to investors whose annual income is below Rs. 12 lakh.

FORM-16/16-A

These forms are official receipts of TDS issued by the person / institution deducting the TDS. Form 16 is used for TDS on salaries and Form 16-A is used for TDS on all other payments. TDS collected during a month has to be deposited in govt. account by 7th of the nest month.

FORM-15 G/H

These forms are used by individuals who want to seek exemption from TDS and undertake to deposit the income tax, if any, by them. This option is available only on interest income. In other words, TDS will not be done for individuals who have submitted these forms.

FORM-15 G is used by persons below 60 years of age and form 15 H is used by persons of age 60 and above. If the interest on bank deposit exceeds Rs. 10,000 in a financial year, it is subject to TDS @ 10 per cent.

E-COMMERCE

E-Commerce refers to the methods used to conduct business and financial transactions online. When a company sell a product over the internet and the buyers the product online, they are participating in the internet marketplace and contributing to e-commerce. This mode of sale purchase is getting very popular these days across the world. Under e-commerce transaction can be done round the clock and across the globe.

PONZI SCHEME

A Ponzi scheme is an investment fraud that involves the payment of assured returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.

VENTURE CAPITAL

New companies that have good potential to grow but do not have required funds go in for venture capital. Wealthy investors like to invest their capital in such businesses with a long-term growth perspective. Such investments are known as venture capital and the investors are called venture capitalists.

ANGEL INVESTORS

These are the highly successful entrepreneurs and CEOs who have generated good amount of wealth for themselves and are interested in investing in startup / early stage ventures which have the potential of creating good results and high returns.

CII – Confederation of Indian Industry

FICCI – Federation of Indian Chambers of Commerce and Industry

ASSOCHAM – Associated Chambers of Commerce and Industry of India – all three are prominent apex bodies of trade and business in India, representing large numbers of corporate houses.

NASSCOM – The National Association of Software and Services Companies.

BUSINESS ENTITIES

A business can be started by an individual in the form of “sole proprietorship”. However, when more than one person has to start a business, it has to be in one of the three legally prescribed forms only – a partnership firm, a company or a limited liability partnership firm.

PARTNERSHIP FIRM

As per The Indian Partnership Act – 1932, any two or more persons can form a partnership firm. Maximum number is restricted to 20 for general firms and 10 for banking firms. In such firms, all the partners are liable for the act of other partners and their liability is unlimited.

COMPANY

As per Companies Act, 2013, a company is a separate legal entity having perpetual succession. This means company is like a independent person, created by law and it continues to be in existence till it is wound up. Closure of a company is called ‘winding up or liquidation’ of company.

• A company can be private or public. In both the cases, liability of the members is restricted to their share holding.
• A company has to be registered with the Registrar of Companies.
• In private limited company, there has to be minimum two shareholders and maximum could be upto 200.
• In public limited company (name ending with ‘Ltd.’), minimum number of shareholders is 7 and maximum – No Limit.
• As per new law, even one person can start a company, to be called – One Person Company (OPC)

LIMITED LIABILITY PARTNERSHIP FIRM (LLP)

As per Limited Liability Partnership Act 2008, any two or more person (no upper limit) can form a LLP. Members of LLP have limited liability similar to share holders of company.

HINDU UNDIVIDED FAMILY (HUF)

It is another business entity, usually formed Hindus to carry out their ancestral business, However, HUF is by convention only and is not defined in any law. The head of HUF is the senior most member of the family, known as ‘Karta’ and all other members are known as ‘co-parceners’ (Humwaris).

SOME FOREIGN EXCHANGE TERMS

As per Indian laws, Indian citizens are not allowed to deal in foreign currency in any manner, except as permitted by RBI. Govt. has enacted FEMA for this purpose. Instructions for day to day transaction in FX are issued by RBI through the Exchange Control Manual (ECM).

The organizations authorized by RBI to deal in FX are called ‘Authorized Dealer’ (ADs). Association of these dealers is called Foreign Exchange Dealers Association of India (FEDAI).

FEMA – Foreign Exchange Management Act, 1999.

DGFT – Directorate General of Foreign Trade.

NRI – Non Resident Indians are persons of Indian origin whose stay in Indian is less than 182 days in the preceding financial year.

NRE A/c – Non Resident (External) accounts are opened in Indian rupees in Indian banks by the NRIs. Funding of these accounts can be done only through foreign sources.

FCNR ACCOUNT

Foreign Currency Non Resident accounts are Fixed Deposit accounts opened in foreign currency in Indian banks by NRIs. These can be opened in 6 currencies, viz. USD, GBP, EURO, CAD, JPY and AUD. Funding of these accounts can be done through foreign sources only.

FOREIGN CURRENCY CONVERTIBLE BONDS (FCCB)

These are foreign currency loans raised by Indian Corporate by way of issuing bonds to foreign investors.

EXIM POLICY

It refers to Export – Import policy. It is for 5 year period with separate annual plan for each year. Presently, we are into 2014-19 plan period.

BALANCE OF TRADE

The difference between export receipts and import payments is known as balance of trade. If the exports are more than imports, balance of trade is positive, also known as trade surplus. If imports are more than exports, as in our country, than balance of trade is negative, or trade deficit.

BALANCE OF PAYMENT (BOP)

It is the difference between total outflow and total inflow of foreign currency from and in a country during a specific time period. When the outflow is more than the inflow, BoP is said to be negative or deficit as is the case in our country. The same is also known as Current Account Deficit (CAD). If outflow is less than inflow, BoP is positive or surplus.

CAPITAL / CURRENT ACCOUNT

Foreign trade transactions for the country as a whole are accounted for through two accounts – capital and current. The transactions related to sale purchase of permanent capital assets, land and building, currencies, securities etc. are routed through capital account. All other general trade and services transactions are routed through current account. Current account has two heads – visible and invisible. Transactions related to general trade goods are termed as visible and those relating to services and remittances are termed as invisibles.

PACKING CREDIT / PRE SHIPMENT CREDIT

It is the loan given by bank to finance the export consignments. Simply, another name for export finance.

LETTER OF CREDIT – LC

It is a confirmed undertaking document issued by the bank of the importer / buyer on behalf of importer in the favour of exporter, assuring him his full payment, subject to fulfillment of terms and conditions prescribed by the importer.

NOSTRO ACCOUNTS

It is the foreign currency accounts opened in foreign country by the Indian Banks. For example, SBI opening a US Dollar account in a bank in USA.

VOSTRO ACCOUNTS

It is the Indian rupees accounts opened in India by the Foreign Banks. For example, American Express Bank opening a Rupee account with a branch of SBI in India.

CECA: Comprehensive Economic Co-Operation Agreement is an agreement signed by Indian with many countries to facilitate trade in goods where both the countries agree to offer some concessions to each other.

CEPA: Comprehensive Economic Partnership Agreement is more comprehensive than CECA and covers both goods and services and also offers facilities to encourage trade related investments.