Indian Economy, 5th edition (121 page)

Bad debt

An accounting term to show the loans which are unlikely to be paid back by the borrower as the borrower has become insolvent/bankrupt. Banks might write off such bad debts against the profits of the trading as a business cost.

Badla

An Indian term for ‘contango’ associated with the trading system in the stock market which is a postponement of either payments by the share buyer, or the person who needs to deliver the shares against the payment.

Balanced budget

The annual financial statement (i.e., the budget) of a government which has the total expenditures equal to the taxes and other receipts.

Most governments, in practice run unbalanced budgets, i.e., deficit budgets or surplus budgets–either the expenditures being higher or lower than the taxes and the other receipts, respectively. It is done to regulate the economic activities.

Balance of payments

A balance sheet of an economy showing its total external transactions with the world–calculated on the principles of accounting–is an annual concept.

Balloon payment

When the final payment of a debt is more than the previous payments, it is balloon payment.

Basing point price system

A method of pricing in which a differential (i.e., varying) price is fixed for the same product for the customers of the different locations–nearer the customer, cheaper the product. This is done usually to neutralise the transportation cost of the bulky products such as cement, iron and steel, petroleum, etc.

Bellwether stock

A share which often reflects the state of the whole stock market. The technical analysts, associated with the stock market, usually keep a track-record of such shares and go on to forecast the future stock movements.

BFS

For the purpose of supervision and surveillance of the Indian financial system, a Board for Financial Supervision (BFS) was set up by the RBI in November 1994. The board supervises commercial banks, non-banking financial companies (NBFCs), financial institutions, primary dealers, and the
c
learing
c
orporation of India (CCI).

Black-Scholes

A formula devised for the pricing of financial derivatives or options–made explosive growth possible in them by the early 1970s in the US.

Myron Scholes and Robert Merton were awarded Nobel Prize for Economics for their part in devising this formula–the co-inventor
f
ischer Black had died (1995) by then.

Bond

An instrument of raising long-term debt on which the bond-issuer pays a periodic interest (known as
‘coupon’
). In theory, bonds could be issued by governments as well as private companies.

Bonds generally have a maturity period, however, some bonds might not have any definite maturity period (which are known as
‘Perpetual Bonds’
).

Bonds are supported/secured by collateral in the form of immovable property (i.e., fixed assets) while
debentures,
also
used to raise long-term debt, are not supported by any collateral.

Book building

This is a public offer of equity shares of a company. In this process, bids are collected from the investors, in a certain price range fixed by the company. The issue price is fixed after the bid closing date depending on the number of bids received at various price levels. A company that is planning an initial public offer (IPO) appoints a merchant banker as a ‘book runner’. The company issues a prospectus which does not mention the price, but gives other details about the company with regard to issue size, the business the company is in, promotes and future plans among other disclosures. A particular period is fixed as the bid period. The book runner builds an order book, that is, collates the bids from various investors, which shows the demand for the shares. Prospective investors can revise their bid at any time during the bid period. On closure of the book, the quantum of shares ordered and the perspective prices offered are known. The price discovery is a function of demand at various prices, and involves negotiations between those involved in the issue. The book runner and the company conclude the pricing and decide the allocation to each member.

Bracket creep

Increasing incomes due to inflation (via increased dearness allowances, individual income goes for an increase) pushes individuals into higher tax
brackets
and leaves them worse off (as their real income has not increased and their disposable income i.e. income after tax payments, falls) – this phenomenon is known as the bracket creep.

BROAD BASED FUND

This is a fund established or incorporated
outside
India, which has at least 20 investors with no single individual investor holding more than 49 per cent of the shares or units of the fund. If the broad based fund has institutional investor (s), then it is not necessary for the fund to have 20 investors. Further, if the broad based fund has an institutional investor who holds more than 49 per cent of the shares or units in the fund, then the institutional investor must itself be a
broad based fund
.

In India, the entities, proposing to invest
on behalf of broad based funds
, are eligible to be registered as FIIs are – (i) Asset Management Companies, (ii) Investment Manager/Advisor, (iii) Institutional Portfolio Managers, (iv) Trustee of a Trust, and (v) Bank

Brownfield location

A derelict industrial area that has been demolished to accommodate new industries. This is opposite to the
greenfield location
where a new industry is set up in a new area.

Bubble

The price rise of an asset unexplained by the fundamentals and still people interested in holding the assets. After the bursting of the bubble, assets cool down to their real prices.

Budget line

A line on the dual axis graph showing the alternate combinations of goods that can be purchased by a consumer with a given income at given prices.

Bullion

Precious metals such as gold, silver, and platinum that are traded in the form of
bars
and
coins
for investment purposes and are used for jewellery as base metals.

Business Cycle

See the chapter with the same title.

BUSY & SLACK SEASONS

The monetary authorities face the challenge of keeping the growth rate as high as possible, at the same time putting burden of adjustment on luxury and unproductive consumption. Monetary policy is an instrument in this respect. However, the right policies may not be palatable to the political and fiscal authorities, which is a serious problem for the economy.

From May beginning to end-September is the
slack season
and from October beginning to end-April is the
busy season
of the
Indian economy
. During the slack season, crops are generally sown. Agriculture and related businesses are slack and loans taken during the previous busy season tend to be returned. Consequently, the growth rate of money is low or negative. Governments usually borrow heavily during the slack season, since the demand for credit from the commercial sector is not very strong. Since there are no fresh crop arrivals in the market and the demand for crops is steady, the prices are expected to be generally upward in the slack season.

From October, the busy season commences and both agricultural and related industrial productions are high. Since crops arrive in the market during the busy season, prices generally are on the downward drift. It is the seasonal variation in the arrival of crops in the market, in the context of steady demand, that causes prices to fluctuate during the year.

The above pattern has been severely modified in recent years. The government borrows both during the slack and the busy seasons. Industry too is active in both the seasons. Because of greater storage and stocking facilities, the variations in the flows o f agricultural products have been reduced. Money supply expands continuously and prices are generally up throughout.

Buyer’s market

A short period of market situation in which there is excess supply of goods/services forcing price fall to the advantage of the buyers.

Buyouts

Private equity (PE) investors participate in two types of buyouts of firms (a PE-backed buyout simply means that the PE investor takes a controlling stake i.e. between 50–100 per cent in a company):

(i)
Management Buyout (MBO):
In such buyouts, the PE investor usually helps the existing management of the company to buy out the promoters of the company. In return, the PE investor takes a majority stake.

(ii)
Leveraged Buyout (LBO):
In such buyouts, a large portion of fund in acquiring the company is financed by debt–the normal ratio being 70 per cent debt and 30 per cent equity.

CAMELS

An acronym derived from the terms capital adequacy (C), asset quality (A), management (M), earnings (E), liquidity (L) and systems for control (S). The acronym is used as a technique for evaluating and rating the operations and performance of banks all over the world.

Capital

Capital is one of the three main factors of production (
labour
and
natural resources
are the other two), classified into
physical capital
(i.e., factories, machines, office, etc.) and
human capital
(i.e., training, skill, etc.).

In a joint stock company, the capital has various specific terms showing different forms of the
share capital:

(i)
Authorised Capital:
This is the amount of share capital fixed in the Memorandum of Association (MoA) and the article of association of a company as required by the Companies Act. This is also known as the
Nominal
or
Registered Capital.

This is the limit (i.e., nominal value) upto which a company can issue shares. Companies often extend their authorised capital (via an amendment in the MoA) in advance of actual issue of new shares. This allows the timing of capital issue to be fixed in light of the company’s need for new capital and the state of the capital market and allows share options to be excercised accordingly.

(ii)
Paid-up Capital:
The part of the authorised capital of a company that has actually been paid up by the shareholders. A difference may arise because all shares authorised may not have been issued or the issued shares have been only partly paid-up by then.

(iii)
Subscribed Capital:
The capital that has actually been paid by the shareholders (as they might have committed more than this to contribute). It means, the subscribed capital is the actually realised paid-up capital (paid-up capital is subscribed capital plus credit/due on the shareholders).

(iv)
Issued Capital:
The amount of the capital which has been sought by a company to be raised by the issue of shares (it should be kept in mind that this cannot exceed the authorised capital).

(v)
Called-up Capital:
The amount of share capital the shareholders have been
called
to pay to date under the phased payment terms. It is usually equal to the ‘paid-up capital’ of the company except where some shareholders have failed to pay their due installments (known as
calls in arrears
).

Capital adequacy ratio

A regulation on commercial banks, co-operative banks and the non-banking financial companies to maintain a certain amount of capital in relation to their assets (i.e., loans and investments) as a cushion (shock-absorber) against probable losses in their investments and loans.

A concept devised by the Bank for International Settlements (BIS), Basel, the provision was implemented in India in 1992 by the RBI (for more detailed discussion see the chapter on ‘Banking’).

Capital consumption

The capital that is consumed by an economy or a firm in the production process. Also known as
depreciation
.

Capital-output ratio

A measure of how much additional capital is needed to produce each extra unit of the output. Put the other way round, it is the amount of extra output produced by each unit of added capital. The ratio indicates how efficient new investment is in contributing to the growth of an economy.

A capital-output ratio of 3:1 is better to the 4:1 as the former needs only three units extra capital to produce one extra output in comparison to the latter which needs four units for each extra unit output.

Carbon credit

Amidst growing concern and increasing awareness on the need for pollution control, the concept of carbon credit came into vogue as part of an international agreement, known popularly as the Kyoto Protocol. Carbon credits are certificates issued to countries that reduce their emission of GHG (greenhouse gases) which leads to global warming. It is estimated that 60–70 per cent of the GHG emission is through fuel combustion in industries like cement, steel, textiles, and fertilisers. Some GHGs like hydro fluorocarbons, methane, and nitrous oxide are released as byproducts of certain industrial process which adversely affect the ozone layer, leading to global warming.

Kyoto Protocol is a voluntary treaty signed by 141 countries including the European Union, Japan, and Canada for reducing GHG emission by 5.2 per cent below 1990 levels by 2012. However, the US, which accounts for one-third of the total GHG emission is yet to sign this treaty. The preliminary phase of Kyoto Protocol started in 2007 while the second phase starts from 2008. The penalty for non-compliance in the first phase is 40
e
uro per tonne of C
o
2
equivalent and in the second phase the penalty will be hiked to 100
e
uros per tonne of C
o
2
.