Indian Economy, 5th edition (128 page)

The theory is that large-cap shares have lesser growth potential since the turnover and profits of large companies are already high in the context of that particular market. On the other hand, mid-cap shares are considered an attractive avenue for investing because their growth rate should be faster. It is analogous to investing in an emerging market, like India, as compared to a mature market. However, on the flip side, mid-cap shares are of small companies where revenue and profits could be more volatile than large companies. At the same time, the availability of shares for trading in the secondary market is also limited in comparison to large-cap shares.

The
free float factor
, as it is called, is a key to active trading in shares since investors want an easy entry and exit. Typically, the promoter holding in these companies is high and there is very little public shareholding. Thus, a volatile financial performance and an inadequate free-float make investing in mid-cap shares more risky than big company shares. Moreover, the faster growth argument is obviously a generalisation which may or may not hold for individual companies.

The National Stock Exchange manages an index called CNX Midcap 200. The objective of such an index is to capture the movement in the mid-cap shares segment. According to the NSE, CNX Midcap 200 represents about 77 per cent of the total market capitalisation of the mid-cap universe and 75 per cent of the total trade value. This index provides investors a broad-based benchmark for comparing portfolio returns in the mad-cap segment.

Merchant banking

A financial world business of providing various financial services other than lending such as public issue management, underwriting such issues, loan syndication management, mergers and acquisition related services, etc.

MEZZANINE FINANCING

Mezzanine financing is defined as a financial instrument which is a
mix
of ‘debt and equity’ finance. It is a debt capital that gives the lender the rights to convert to an ownership or equity interest in the company. It is listed as an asset on company’s balance sheet. As it is treated as equity in a company’s balance sheet, it allows the company to access other traditional sources of finance.

In the hierarchy of creditors, mezzanine finance is subordinate to
senior debt
but ranks higher than
equity
. The return on mezzanine finance is higher in relation to debt finance but lower than equity finance. It is also available quickly to the borrower with
little
or
no collateral
. The concept of mezzanine financing is just catching up in India. Mezzanine financing is used mainly for small and medium enterprises, infrastructure and real estate.
ICICI Venture’s Mezzanine Fund
was the first fund in India to focus on mezzanine finance opportunities.

MIBID

The Mumbai Inter Bank Bid (MIBID) is the weighted average interest rate at which certain banks in Mumbai are ready to borrow from the call money market.

MIBOR

The Mumbai Inter Bank
o
ffer Rate (MIBOR) is the weighted average interest rate at which certain banks/institutions in Mumbai are ready to lend in the call money market.

Middle Class

We keep hearing and reading use the term ‘middle class’ frequently. But who are the middle classes? There are still no universally accepted criteria for defining the middle class. Simply put, they are neither rich nor poor. Even the income criterion has not been settled. According to the National Council of Applied Economic Research (NCAER), a family with an annual income between Rs. 3.4 lakh and Rs. 17 lakh (at the 2009-10 price levels) falls in the middle class category. According to NCAER, by 2015-16, India will be a country of 53.3 million middle class households or about 267 million people.

Microcredit

Smaller credit/loan to small and needy borrowers who are outside the reach of commercial banks, for the purpose of undertaking productive activities.

Misery index

An index of economic misery that is sum of the rates of inflation and unemployment for an economy–higher the value greater is the misery.

Monetary Neutrality

The idea that changes in money supply have no effect on real economic variables (such as output, real interest rates, unemployment etc.,) if money supply increases by 10 per cent, for example, the price will increase by the same level.

A core belief of Classical Economics, the idea was put forth by David Hume in the 18
th
century. Today this is not considered a valid idea.

Money illusion

A phrase coined by J. M. Keynes to denote the misleading thinking among people that they are getting richer as a result of inflation when in reality the value of money decreases.

The phrase is used by some economists to argue that a small amount of inflation may not be a bad thing and could even be beneficial as it may help to ‘grease the wheels’ of the economy – a feeling of getting richer (let it be illusory itself!).

Moral hazard

One among the two kinds of market failure often associated with the insurance sector. It means that the people with insurance cover may take greater risks than the uncovered ones as they know they are protected so the insurer may get more claims it bargained for. the other kind of market failure is the
adverse selections
also related to insurance business.

MOST FAVOURED NATION

As per the WTO agreements, member countries cannot
normally
discriminate between their trading partners. If any country grants one country a special favour such as a lower customs duty rate for one of their products the same would need to be extended to all other WTO members. This principle is known as Most Favoured Nation (MFN) treatment.

MFN is governs trade in
goods
. MFN is also a priority in the General Agreement on Trade in
Services
(GATS) and the Agreement on Trade-Related Aspects of
Intellectual Property
Rights (TRIPS). However, there are some
exceptions
under WTO regime which allow mwmber countries to –

(i)
Set up a ‘free trade agreemen’t that applies only to
goods
traded within the group (discriminating against goods from outside).

(ii)
Give developing countries special access to their markets.

(iii)
Raise barriers against products that are considered to be traded unfairly from specific countries.

(iv)
To discriminate, in limited circumstances, in services.

But the agreements only permit these exceptions under strict conditions. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services for all its trading partners whether developed or developing.

Multi-fibre Arrangement (MFA)

Up to the end of the Uruguay Round (1986–94), textile and clothing trade were negotiated bilaterally and governed by the rules of MFA, introduced in 1974. This provided for the application of selective quantitative restrictions (quota) when surges in imports of particular products caused, or threatened to cause, serious damage to the industry of the importing country. The Multi-fibre Arrangement was a major departure from the basic GATT rules and particularly the principles of non-discrimination.

On January 1, 1995 MFA was replaced by the WTO Agreement on Textiles and Clothing (ATC) which sets out a transitional process for the ultimate removal of these quotas in stages. The MFA regime, however, continued till December 31, 2004 until quota was completely phased out.

In the MFA regime, higher quota was allocated to various countries irrespective of cost competitiveness. Apparel exports from countries like Nepal, Bangladesh, Sri Lanka, Taiwan, and other South East Asian nations thrived due to quota protection in the lucrative EU and the US markets. But most of these nations lack competitive edge. Their market share was expected to be grabbed by countries like China and India as they offer cheaper and better products.

The ATC was a transitional instrument meant for progressively integrating textile and clothing products into GATT 1994. It laid down the integration procedure and stipulated how members should integrate textile products into the rules of GATT 1994 over the 10-year period which ended on December 31, 2004. The process was to be carried out progressively in three stages (3, 4, and 3 years) with all textile products being integrated at the end of the 10-year period.

First stage began on January 1, 1995 with the integration by members of products representing not less than 16 per cent of its total 1990 imports of all products under quota. At stage 2, on January 1, 1998, not less than a further 17 per cent was integrated. At stage 3, on January 1, 2002, not less than a further 18 per cent was integrated. Finally at the end, on January 1, 2005, all the remaining products (amounting upto 49 per cent of 1990 imports into a member) stood integrated and the ATC was terminated.

mutual funds

The key consideration while investing in a mutual fund are
safety, liquidity
, and
return.
Safety is assured when investors are able to get back their money. Liquidity enables investors exit the fund any time. There are no assured returns from mutual funds and they vary with the scheme under each fund. The schemes are structured to suit the risk-bearing capacity of unit holders and the nature of deployment of funds by the various schemes.

The structure of mutual funds is governed by the Securities and Exchanges Board of India under the SEBI (Mutual Fund) Regulations 1996. These regulations make it mandatory for mutual funds to have a three-tier structure–a sponsor, a trustee, and an asset management company (AMC). The sponsor is the promoter of the mutual fund and appoints the trustees. The trustees are responsible to the investors in the mutual fund and appoint the AMC for managing the investment portfolio.

The AMC is the business face of the mutual fund, as it manages all the affairs of the mutual fund. The mutual fund and the AMC have to be registered with the SEBI. SEBI regulations also provide for who can be a sponsor, trustee, and AMC, and specify the format of agreements between these entities. These agreements provide for the rights, duties, and obligations of these three entities.

Mutual funds are the preferred route for investors, particularly small and retail investors, who do not have the knowledge or time to directly trade in the equity and debt markets. The funds are managed by qualified investment professionals and other service providers who are paid for their services. Portfolio diversification, professional management, and, reduced risk are among the myriad advantages of mutual funds.

Mutual funds invest in multiple asset classes, enable continuous evaluation and provide higher flexibility in investment plans.

Investors in mutual funds have a wide choice from an assorted variety of funds and schemes with several products on offer. Competition in the industry has led to innovative changes in standard products by fund houses. The product choice enables investors to choose options that suit their return requirement and risk appetite. They can combine the options to arrive at their own mutual fund portfolios that will fit their financial planning objectives. The funds are invested in a portfolio of marketable securities, reflecting the investment objective. The value of the portfolio and investors’ holdings alter with change in the market value of investments.

Mutual funds predominantly invest in equity shares and debt instruments. Under
equity funds,
one can invest in diversified equity schemes, primary market schemes, index based funds, and sectoral funds.

Debt funds
invest predominantly in debt markets. Diversified debt funds, income funds, gilt funds, liquid and money market funds, fixed term plans, and floating rate funds are among the categories of debt funds. While equity funds suit growth objectives, debt funds fit income objectives.

Mutual fund houses also offer
balanced funds
and
money market funds.
Balanced funds invest in equity and debt in specified proportions while money market funds are preferred by institutional investors which churn their investments depending on the need and view.

Narrow banking

Short-term lending in risk-free asset is narrow banking. A suggestion for such banking was given by the
c
ommittee on Financial System (CFS) in 1991 for the weak banks of India.

NASDAQ

The National Association of Security Dealers Automated Quotation (NASDAQ) is a US stock exchange based in New York which specialises in the high-tech companies’ shares. A similar exchange
Techmark
exists in London too. (It is an arm of the London Stock Exchange.)

Nash equilibrium

A concept in game theory named after John Nash, a mathematician and Nobel prize winning economist, which occurs when each player is pursuing their best possible strategy in the full knowledge of the strategies of all the other players–once the equilibrium is reached, none of the players has any incentive to change their strategy.

Neo-classical economics

The school of economics based on the writings of Alfred Marshall (1842–1924) which replaced the classical economics by the 19
th
century, also known as the
‘marginal revolution’.

NEW PENSION SCHEME

Pension reforms in India have evolved primarily in response to the need of reform in the Government pension system. This had been designed to make a shift from defined-benefit to defined-contribution by putting a cap on Government’s liability towards civil servants’ pension. As a result of implementation of the New Pension System (NPS), all employees of the Central Government and Central autonomous bodies, with the exception of the armed forces, are now covered by this defined-contribution scheme with effect from January 1, 2004. Subsequently, 27 State Governments have notified and joined the NPS for their employees. The NPS to was opened to all citizens of India on May 1, 2009, on voluntary basis - the challenge is to spread the message of the NPS and old age income security to people in the unorganized sector across the country.