Insurance industry Software Packages

XYCOR - Xybernet
Cogen(P&C) - CSC
CYBERLIFE - CSC
ELIXIR - MASTEK
INGENIUM - EDS

Insurer JVs in India

ICICI - Prudential (UK) life
ICICI - LOMBARD (UK) General

SBI - CARDIF SA (FR, holding compny of BNP Paribas) Life (credit insurer)

BAJAJ - ALLIANZ (GER)

TATA - AIG ( US)

HSBC - ORIENTAL BANK CANARA BANK

DABUR - AVIVA

BIRLA - SUNLIFE (CAN)

HDFC - STANDARD LIFE (UK) ( Mutual insurance co)

MAX - New York Life Insurance (US)

Kotak Mahindra - OLD Mutual Plc (south africa)

Bharati - AXA ( French)

Indian Farmers Fertilizer Co-operative Limited (IFFCO) - TOKIO (Japan)

Source - http://www.bimaonline.com/cgi-bin/insurers/allbajaj.asp

Laissez-faire ideology

Laissez-faire is a French phrase meaning "let it be" (litterally,"Let do").

The term laissez-faire is often used interchangeably with the term "free market".

From the French diction first used by the 18th century physiocrats as an injunction against government interference with trade, it became used as a synonym for strict free market economics during the early and mid-19th century. It is generally understood to be a doctrine that maintains that private initiative and production are best allowed to roam free, opposing economic interventionism and taxation by the state beyond that which is perceived to be necessary to maintain individual liberty, peace, security, and property rights.

In the laissez-faire view, the state has no responsibility to engage in intervention to maintain a desired wealth distribution or to create a welfare state to protect people from poverty, instead relying on charity and the market system. Laissez-faire also embodies the notion that a government should not be in the business of granting privileges. As such, advocates of laissez-faire support the idea that the government should not create legal monopolies or use force to damage de facto monopolies. Supporters of laissez-faire also support the notion of free trade on the grounds that the state should not use protectionist measures, such as tariffs and subsidies, in order to curtail trade through national frontiers.

Credit Analysis & Research Ltd. (CARE),

Credit Analysis & Research Ltd. (CARE), incorporated in April 1993, is a credit rating, information and advisory services company promoted by Industrial Development Bank of India (IDBI), Canara Bank, Unit Trust of India (UTI) and other leading banks and financial services companies. In all CARE has 14 shareholders.

CIBIL : Credit Information Bureau (India) Ltd

(CIBIL in association with Dun & Bradstreet & Transunion)
The Credit Information Bureau (India) Ltd (CIBIL) has been launched for banks, FIs and other financiers to share retail and commercial customer information. The bureau, the first of its kind in India, will provide both positive and negative information on bank borrowers.

Until today, banks had no way of checking the credit worthiness of retail customers while the scene was a bit better on the corporate lending front since competitor banks, vendors, suppliers helped in understanding the worthiness of the borrower.

Satish Mehta, managing director (CIBIL), said, ``Banks have already started accessing the credit records on customers. Currently 5.5 million records of retail customers have been generated. CIBIL will help banks take speedier and more objective credit decisions possibly at a lower price. At a systemic level, it should help bring down NPAs currently pegged at Rs 70,000 crore.''
CIBIL provides data on the current total outstanding debt. It gives both positive data such as the address of the customer and loan repayment records as well as negative data like penalties and defaults. As of now, only 13 out of 87 members have shared their entire customer data with CIBIL. The challenge is in getting valid information particularly from PSU banks many of which are not fully computerised and do not maintain accurate MIS reports.
Neeraj Swaroop, head-retail, HDFC Bank, said, ``This is a great step forward for the banking system and we will soon start accessing records from CIBIL. However, the data may become rich only over 3-6 months as more players share data.'' For a bank to access the CIBIL database of customers, it can post a query through the Internet, through lease lines or in the CD format. CIBIL will respond in a matter of seconds through the same mode.

CIBIL, promoted by HDFC and State Bank of India, will work on the principle of reciprocity. Only those members who provide data will have access to information from CIBIL.

Listing gains

the return on the IPO scrip at the close of listing day over the allotment price

Pure Spin-Offs

In a pure spin-off, a parent company distributes 100% of its ownership interests in a subsidiary operation as a dividend to its existing shareholders. After the spin-off, there are two separate, publicly held firms that have exactly the same shareholder base. This procedure stands in contrast to an initial public offering (IPO), in which the parent company is actually selling (rather than giving away) some or all of its ownership interests in a division. The spin-off process is a fundamentally inefficient method of distributing stock to people who may not necessarily want it. For the most part, investors were investing in the parent companies business. Once the shares are distributed, often they are sold without regard to price or fundamental value. This tends to depress the stock initially. In addition, institutions typically are sellers of spin-off stocks for various reasons (too small, no dividend, no research, etc.). Index funds are forced to sell the spin indiscriminately if the company is not included in a particular index. This type of selling can create excellent opportunities for the astute investor to uncover good businesses at favorable prices. Often, after the spin, freed from a large corporate parent, pent-up entrepreneurial forces are unleashed. The combination of accountability, responsibility, and more direct incentives (stock options) typically shows up in the operating performance post spin.

Options

Options - An option is the right, but not the obligation, to buy (call option) or sell (put option) a financial asset at a predetermined price (called the exercise price or strike price) at some particular date in the future. The option price will depend on the prospects of changes in the price of the underlying security to which it relates.In a 'European' option the buyer only has the right to exercise the option on the expiry date, whereas an 'American' option may be exercised at any time up to the expiry date. In both cases, however, they can be traded rather than exercised at any time.

Types of Investors

Investors are broadly devided into two types :--

a) Retail Investors or Individual Investors - Individual investors who buy and sell securities for their personal account, and not for another company or organization

b) Instutional investors : A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional investors face fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.

Financial Derivatives

Derivatives is a generic term for a variety of financial instruments. Unlike financial instruments such as stocks and bonds, a derivative is usually a contract rather than an asset. Essentially, this means you buy a promise to convey ownership of the asset, rather than the asset itself. The legal terms of a contract are much more varied and flexible than the terms of property ownership. In fact, it's this flexibility that appeals to investors. "A good toolbox of derivatives allows the modern investor the full range of investment strategy" and "the sophisticated management of risk," according to the derivatives specialists at NumaWeb.
Futures and options are two commonly traded types of derivatives. An options contract gives the owner the right to buy or sell an asset at a set price on or before a given date. On the other hand, the owner of a futures contract is obligated to buy or sell the asset.

Note : Derivative Securities are niether Debt nor Equity type of security.

Fidelity Bond

A fidelity bond is a form of protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
While called bonds, these obligations to protect an employer from employee-dishonesty losses are really insurance policies. These insurance policies protect from losses of company monies, securities, and other property from employees who have a manifest intent to cause the company loss.

USA PATRIOT Act

USA PATRIOT Act.
A 2001 U.S. federal law containing anti-money laundering provisions that require financial institutions to
(1) verify the identification of financial account holders;
(2) establish internal anti-money laundering programs that meet specified minimum standards;
(3) cooperate with other financial institutions to deter money laundering; and
(4) report suspected money laundering transactions.

Also known as the Patriot Act.

Title Insurance

Title insurance is insurance against loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. It is available in many countries but it is principally a product developed and sold in the United States. It is meant to protect an owner's or lender's financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.
Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate. Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance to protect their interest in the collateral of loans secured by real estate. Some mortgage lenders, especially non-institutional lenders, may not require title insurance.

For more details visit : http://en.wikipedia.org/wiki/Title_insurance

Escrow capitalization

Many borrowers feel that they are entitled to share the interest that the lender earns by investing these tax and insurance funds in the escrow account. If an escrow account were not required, a borrower could deposit tax and insurance money in an interest-bearing account until a payment was due.

There is one method of escrow collection in which the portion of the borrower’s monthly payment required to pay taxes and insurance is deducted each month from the balance owed on the mortgage. Then, when the institution makes a tax or insurance payment for the customer, the amount of the payment is added back to the principal balance. Since this reduces the amount of loan interest that a customer pays, it amounts to earning interest on escrow balances at the same rate of interest as on the mortgage loan. This method is sometimes called escrow capitalization and, although beneficial to consumers, it is seldom used by lending institutions today because of its high cost.

Mortgage Escrow Account

This is an amount of money maintained at a lending institution in order to pay
the annual taxes and insurance on mortgaged property. Approximately one-twelfth of
the estimated annual cost of taxes and insurance is paid into the account each month
from the borrower’s monthly mortgage payment. Then the lending institution pays the
taxes and insurance from this account when they are due. An escrow account is
required by many lending institutions in order to insure that the taxes and insurance
premiums are paid on time.
It is, in a sense, a budgeting device which requires borrowers to set aside
enough money to pay their taxes when due. If there is not enough money in the
customer’s escrow account at the time of tax payment, sometimes lenders will advance
the funds at no charge, and allow the customer to pay back the advance through higher
escrow payments.
Escrow accounts also reduce tax collection costs for local governments. The
lending institution usually makes one large tax payment to each tax collector, which
saves the government the cost of collecting many small checks from individual
borrowers over a period of time.

Reverse Merger

One of the options available to small- to medium-sized privately held companies that are looking to raise additional capital or to make acquisitions is the reverse merger. The reverse merger originated as an alternative to the traditional initial public offering (IPO) process for companies that want the benefits of being a public company without the expense and complexities of the
traditional IPO.

In a reverse merger a private company merges with a publicly listed company that
doesn’t have any assets or liabilities. The publicly traded corporation is called a “shell”
since all that remains of the original company is the corporate shell structure. By
merging into such an entity the private company becomes public.

Mortgage-Backed Securities (MBS)

Mortgage-backed securities (MBS) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Mortgage loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi-governmental, or private entity. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization.
Most MBSs are issued by the Government National Mortgage Association (Ginnie Mae), a U.S. government agency, or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises. Ginnie Mae, backed by the full faith and credit of the U.S. government, guarantees that investors receive timely payments. Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the U.S. government, have special authority to borrow from the U.S. Treasury. Some private institutions, such as brokerage firms, banks, and homebuilders, also securitize mortgages, known as "private-label" mortgage securities.
Mortgage-backed securities exhibit a variety of structures. The most basic types are pass-through participation certificates, which entitle the holder to a pro-rata share of all principal and interest payments made on the pool of loan assets. More complicated MBSs, known as collaterized mortgage obligations or mortgage derivatives, may be designed to protect investors from or expose investors to various types of risk. An important risk with regard to residential mortgages involves prepayments, typically because homeowners refinance when interest rates fall. Absent protection, such prepayments would return principal to investors precisely when their options for reinvesting those funds may be relatively unattractive.

Understanding Liquid Funds

1) Meaning : Liquid Funds are basically debt funds which invest in near risk free instruments
like call money & commercial papers.

2) Returns : Liquid funds in the last one year , has given a return of 7% ( as of July 07).

3) Risk : Investing in Liquid Funds can nearly assure your invested capital.

4) Maturity : While analysing Fund portfolio, just check its average maturity.For instance, 15
days denotes that the fund holds instruments maturing in 15 days.

5) Expense Ratio : Expense ratio of liquid funds is usually less than 1% p.a.

6) Taxation : The recent budget (2007) had proposed that liquid and money market funds
pay a dividend distribution tax (DDT) of 25% ; previously it was 12.5 %.

7) Dividend or Growth : One can buy either Dividend or Growth options of Liquid Fund.

Passive vs Active Mutual Funds

Would you put money into an actively managed equity fund or would you rather prefer to plough your money into passively managed index funds.
What’s the difference you would prefer to ask? Here’s one of the major difference. While an index fund puts your money into the benchmark index – sensex or Nifty, a diversified fund would invest into the broader market.
As a thumb rule, index funds are likely to deliver returns inline with the benchmark indices and are therefore preferred by dynamic investors during volatile times. Passively managed funds do not try to beat the index, but simply aim to track it by investing in companies precisely in accordance with the constituents of an index. The managers of the fund have far lower expenses, and the charges to investors are lower than for active funds.
While investing in passive mutual funds or index funds investors should not choose just any fund. Not all passively managed funds in India fail to deliver returns in line with the benchmarks. An ETIntelligence Group study since the beginning of the bull run showcases that almost half the passively managed funds under performed the benchmarks by a margin larger than acceptable. A little deviation is okay. But more than say 1-2% per annum is too much. Some of this underperformance could be due to expense ratios, which are 1% to 1.5%. This is too large compared to international trends. In the US, passive funds charge around 0.5%. This is fair, since passive funds are not required any active fund management. So there is no reason they should charge high fees, which are not too different from active funds.
Blame that on the tracking errors. To that add loads and you make a little less than 12%, on an average, of what the benchmarks deliver. This is true under various periods of time). Is this fair?
On the other hand, pick the right active fund and you could rake in a moolah. Take for instance Reliance Growth – if you invested Rs 10,000 in April 2003, just when the bull run started, it would now be a staggering 8 times more. And over varied periods of times, diversified funds have outperformed, though out performance seems to have declined in these volatile times. In the West, where markets are matured, its seen that out performance by actively managed diversified mutual funds is minimal. Most of these actively managed funds actually under perform too. But, in India, its seen that actively managed funds always out perform the benchmarks by huge margins. One important element to note here is the fact that many sectoral funds or small and mid cap funds, which may out perform during a bull phase may start showcasing negative returns in volatile times when the sector starts under performing. These may be high risk high gain funds. Therefore, an ac- diversified fund is haps the best bet for a lay investor.
Whatever may be the case, the difference is huge when you look at returns from passive funds and the actively managed ones. So what are active funds and how do these active fund managers work? Active funds attempt to meet the goal of out performing benchmark indices through the right mix of asset allocation, stock picking and market timing. Many fund managers talk about focusing on the ‘bottom-up’ stock picking approach. In short this means, selecting stocks on the basis of each individual company’s strengths rather than a sectoral approach considering what is happening in the wider economy.
Finally, what’s the conclusion? Its simple. Those investors who want a product that closely mirrors a major index, such as the Nifty or the Sensex, a passive fund is probably the wisest move. But, the question is why pay fund managers for getting mediocre returns?

Liberalization Provision - Insurance

Most Commercial and Personal insurance policies contain a liberalization clause or condition. When an insurance company offers enhanced benefits for policies newer than the one you hold, the liberalization clause adds those enhancements automatically. Examples of enhancements include dollar amount increases, or coverage of additional property.
There’s no additional premium charge for enhancements. Because individual states regulate insurance, enhancements come into effect only after your state implements the changes.

Leverage

Leverage is a notion whose meaning has evolved as a result of financial innovation during recent decades. Traditionally, leverage related to the relative proportions of debt and equity funding a venture. The higher the proportion of debt, the more leverage. A leveraged venture entailed more risk and potential reward for equity holders.

Consider a stylized example. A corporation is established by ten investors. Each puts up USD 100 in equity. There is no debt. After one year, the corporation will be liquidated. At that time, if its net assets are worth USD 900, each equity investor will realize a –10% return. If assets are worth USD 1100, each investor will realize a 10% return.

Now consider the same corporation, but financed differently. The same ten investors each put up USD 100, but only five of them hold equity. The other five hold debt. Debt holders are guaranteed to receive USD 105. At the end of the year, if the corporation's assets are worth USD 900, there will be USD 375 left over after paying debt holders. Each equity investor will realize a –25% return. If, on the other hand, the corporation's assets are worth 1100 at year end, there will be USD 575 left over after paying debt holders. Each equity investor will realize a 15% return.

As the examples illustrate, debt financing magnifies the risk as well as the possible reward for equity holders. Traditionally, the word "leverage" referred to the use of debt financing. In recent decades, that meaning has shifted to encompass any technique that similarly magnifies risk and reward for an investor.

United States Financial Regulation

Until 1863, US banks were regulated by the states. The Federal Government had twice established a national bank, but abandoned both efforts. In 1863, the Civil War had been raging for two years, and the Federal Government was desperately short of cash. Secretary of the Treasury Salmon P. Chase came up with an innovative source of financing. The Federal Government would charter national banks that would have authority to issue their own currency so long as it was backed by holdings in US Treasury bonds. The idea was implemented as the National Currency Act, which was completely rewritten two years later as the National Banking Act. The act formed the Office of the Comptroller of the Currency (OCC) with authority to charter and examine national banks. In this way, a dual system of banking was launched, with some banks chartered and regulated by the states and others chartered and regulated by the OCC.

The 1913 Federal Reserve Act formed the Federal Reserve System (the Fed) as a central bank and lender of last resort. The system included several regional Federal Reserve Banks and a seven-member governing board. National banks were required to join the system, and state banks were welcome to. Federal Reserve notes were introduced as a national currency whose supply could be managed by the Fed. The notes were issued to reserve banks for subsequent transmittal to banking institutions as needed. The new notes supplanted the OCC's purpose related to currency, but that organization continued to be the primary regulator of national banks.

Prior to 1933, US securities markets were largely self-regulated. As early as 1922, the New York Stock Exchange (NYSE) imposed its own capital requirements on member firms. Firms were required to hold capital equal to 10% of assets comprising proprietary positions and customer receivables.
By 1929, the NYSE capital requirement had developed into a requirement that firms hold capital equal to:
5% of customer debits;
a minimum 10% on proprietary holdings in Treasury or municipal bonds;
30% on proprietary holdings in other liquid securities; and
100% on proprietary holdings in all other securities.
During October 1929, the US stock market crashed, losing 20% of its value. The carnage spilled into the US banking industry where banks lost heavily on proprietary stock investments. Fearing that banks would be unable to repay money in their accounts, depositors staged a “run” on banks. Thousands of US banks failed.

During October 1929, the US stock market crashed

Dow Jones Industrial Average: 1929The Roaring ‘20s were over, and the Great Depression had begun. During this period, the US Congress passed legislation designed to prevent abuses of the securities markets and to restore investors’ confidence.
The 1933 Banking Act combined a bill sponsored by Representative Steagall to establishing federal deposit insurance with a bill sponsored by Senator Glass to segregate the banking and securities industries.

> More commonly known as the Glass-Steagal Act, it distinguished between:
> commercial banking, which is the business of taking deposits and making loans,

and investment banking, which is the business of underwriting and dealing in securities.
All banks were required to select one of the two roles and divest businesses relating to the other. Chase National Bank and the National City Bank both dissolved their securities businesses. Lehman Brothers dissolved its depository business. The First Bank of Boston split off its securities business to form First Boston. JP Morgan elected to be a commercial bank, but a number of managers departed to form the investment bank Morgan Stanley.

Glass-Steagall also formed the Federal Deposit Insurance Corporation (FDIC) to provide deposit insurance for commercial banks. All member banks of the Federal Reserve were required to participate. Other banks were welcome to participate upon certification of their solvency. The FDIC was funded with insurance premiums paid by participating banks. Deposits were insured up to USD 2,500—if a bank failed, the FDIC would make whole depositors for losses on deposits up to USD 2,500. That insurance level has since been increased to USD 100,000.
Two other acts addressed the securities markets. The 1933 Securities Act focused on primary markets, ensuring disclosure of pertinent information relating to publicly offered securities. The 1934 Securities Exchange Act focused on secondary markets, ensuring that parties who trade securities—exchanges, brokers and dealers—act in the best interests of investors. Certain securities—including US Treasury and municipal debt—were exempted from most of these acts' provisions.
The Securities Exchange Act established the Securities and Exchange Commission (SEC) as the primary regulator of US securities markets. In this role, the SEC gained regulatory authority over securities firms. Called broker-dealers in US legislation, these include investment banks as well as non-banks that broker and/or deal non-exempt securities. The 1938 Maloney Act clarified this role, providing for self regulating organizations (SRO’s) to provide direct oversight of securities firms under the supervision of the SEC. SRO’s came to include the National Association of Securities Dealers (NASD) as well as national and regional exchanges. Commercial banks continued to be regulated by the OCC or state regulators depending upon whether they had federal or state charters.
In 1938, the Securities Exchange Act was modified to allow the SEC to impose its own capital requirements on securities firms, so the SEC started to develop a Net Capital Rule. Its primary purpose was to protect investors who left funds or securities on deposit with a securities firm. In 1944, the SEC exempted from this capital rule any firm whose SRO imposed more comprehensive capital requirements. Capital requirements the NYSE imposed on member firms were deemed to meet this criteria.
An investment company is a mechanism for investors to pool money to be invested by professional managers. The company sells shares to the investors and a manager invests the proceeds on their behalf. The notion includes both open-end and closed end-mutual funds. Investment companies became popular in the 1920s. A number of incidents of abuse prompted Congress to pass the Investment Company Act in 1940. With a few exceptions—which encompass most of today's hedge funds—this granted the SEC regulatory authority over investment companies.
Between 1967 and 1970, the NYSE experienced a dramatic increase in trading volumes. Securities firms were caught unprepared, lacking the technology and staff to handle the increased workload. Back offices were thrown into confusion trying to process trades and maintain client records. Errors multiplied, causing losses. For a while, this “paperwork crisis” was so severe that the NYSE reduced its trading hours and even closed one day a week. In 1969, the stock market fell just as firms were investing heavily in back office technology and staff. Trading volumes dropped, and the combined effects of high expenses, decreasing revenues and losses on securities inventories proved too much for many firms. Twelve firms failed, and another 70 were forced to merge with other firms. The NYSE trust fund, which had been established in 1964 to compensate clients of failed member firms, was exhausted.

The US stock market declined through 1969.

Dow Jones Industrial Average: 1969

In the aftermath of the paperwork crisis, Congress founded the Securities Investor Protection Corporation (SIPC) to insure client accounts at securities firms. It also amended the Securities Exchange Act to require the SEC to implement regulations to safeguard client accounts and establish minimum financial responsibility requirements for securities firms.
As a backdrop to these actions, it came to light that the NYSE had failed to enforce its own capital requirements against certain member firms at the height of the paperwork crisis. With its trust fund failing, it is understandable that the NYSE didn’t want to push more firms into liquidation. This inaction marked the end of SROs setting capital requirements for US securities firms.

In 1975, the SEC updated its capital requirements, implementing a Uniform Net Capital Rule (UNCR) that would apply to all securities firms trading non-exempt securities. As with earlier capital requirements, the capital rule’s primary purpose was to ensure that firms had sufficient liquid assets to meet client obligations. Firms were required to detail their capital calculations in a quarterly Financial and Operational Combined Uniform Single (FOCUS) report.
During the Great Depression, the Fed had implemented Regulation Q that, among other things, capped the interest rates commercial banks could offer on savings account deposits. The intent was to prevent bidding wars between banks trying to grow their depositor bases. Rising interest rates during the 1970s contributed to a migration of larger institutional deposits to Europe, where interest rates were not limited by Regulation Q. The emergence of money market funds, which pooled cash to invest in money market instruments, caused further erosion of bank deposits.
In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act. Among other things, this terminated the Regulating Q ceiling on savings account interest rates, effective in 1986. In response to this and an ongoing decline in bank capital ratios, bank regulators implemented minimum capital requirements for banks. There was some debate about what should be included in a bank's capital. This was resolved by defining two classes of capital. A bank's primary capital would be a bank's more permanent capital. It was defined as owners' equity, retained earnings, surplus, various reserves and perpetual preferred stock and mandatory convertible securities. Secondary capital, which was more transient, included limited-life preferred stock and subordinated notes and debentures. In 1981, the Fed and OCC implemented one capital requirement, and the FDIC implemented another. Generally, these specified minimum primary capital ratios of between 5% and 6%, depending on a bank's size.
Because these requirements were based on a bank's assets, they were particularly susceptible to regulatory arbitrage. Various modifications were made to the primary capital requirements, but it was soon clear that basing capital requirements on a capital ratio was unworkable. In 1986, the Fed approached the Bank of England and proposed the development of international risk-based capital requirements. This led to the 1988 Basel Accord, which replaced the asset-based primary capital requirements for US commercial banks. The concepts of primary and secondary capital were incorporated into the new accord as tier 1 and tier 2 capital.
As time went on, the Glass-Steagal separation of investment and commercial banking was gradually eroded. Some of this stemmed from regulatory actions. Much of it stemmed from market developments not anticipated by the act.
Glass-Steagall did not prevent commercial banks from engaging in securities activities overseas. By the mid 1980s, US commercial banks such as Chase Manhatten, Citicorp and JP Morgan had thriving overseas securities operations. Currencies were not securities under the Glass-Steagall Act, but since exchange rates were allowed to float in the early 1970s, they have entailed similar market risk. In 1933, futures markets were small and transacted primarily in agricultural products, so they were not included in the legal definition of securities. Also, depression era legislators did not anticipate the emergence of active OTC derivatives markets, so most derivatives did not fall under any definition of securities. By the early 1990s, commercial banks were taking significant market risks, actively trading foreign exchange, financial futures and OTC derivatives. They did so while enjoying FDIC insurance and membership in the Federal Reserve system. Neither of these benefits was available to the investment banks with whom they were increasingly competing.
Commercial banks focused on the prospect of repealing Glass-Steagal and related legislation. This would open the door to the creation of financial supermarkets that combined commercial banking, investment banking and insurance. Due to the nature of their business, commercial banks generally had more robust balance sheets than investment banks, and they could expect to dominate such a new world. There would be profits from cross-selling deposit taking, lending, investment banking, brokerage, investment management and insurance products to a combined client base. There would also be troublesome conflicts of interest.
While he was chairman of the Federal Reserve, Paul Volker fought efforts to ease the separation between commercial and investment banking. Allen Greenspan replaced Volker in 1987, and he brought with him a more accommodating attitude. Section 20 of the Glass-Steagall Act had always granted modest exemptions allowing commercial banks to engage in limited securities activities as a convenience to clients who used the bank’s other services. Tentatively under Volker, but aggressively under Greenspan, the Fed reinterpreted Section 20 to expand that authorization. In various rulings during the late 1980s, the Fed granted certain commercial banks authority under Section 20 to underwrite commercial paper, municipal revenue bonds, mortgage-backed securities and even corporate bonds. In October 1989, JP Morgan became the first commercial bank to underwrite a corporate bond, floating a USD 30MM bond issue for the Savannah Electric Power Company. A flood of commercial bank underwritings followed.
The Fed also allowed commercial banks to acquire investment bank subsidiaries through which they might underwrite and deal in all forms of securities, including equities. These became known as Section 20 subsidiaries. There were limitations on the use of Section 20 subsidiaries. The most restrictive was a cap on the revenue a commercial bank could derive from securities activities under Section 20. In 1986, the Fed had set this cap at 5%. It was expanded to 10% in 1989 and again in 1996 to 25%.
Congress attempted to repeal Glass-Steagall in 1991 and again in 1995. Both attempts failed, but the stage was set. The Fed had already gutted much of Glass-Steagall. Commercial banks were deriving considerable revenues from investment banking activities. Their lobbyists had arrayed considerable forces in Congress ready to make another attempt. Glass-Steagall was teetering, and all that was needed was for someone to step forward and topple her.
That is what John Reed and Sanford Weill did. Reed was CEO of Citicorp, a large commercial bank holding company. Weill was CEO of Travelers Group, a diverse financial services organization. It had origins in insurance but had recently acquired the two investment banks Salomon and Smith Barney and merged them into a single investment banking subsidiary. In 1998, Reed and Weill merged their firms, forming Citigroup, a financial services powerhouse spanning commercial banking, investment banking and insurance. This was an aggressive move that could easily have been blocked by regulators. A permissive Fed was supportive of the deal, which forced the hand of Congress. In 1956, Congress had passed the Bank Holding Company Act, which had supplemented Glass-Steagall by limiting the services commercial banks could offer clients. The Citicorp-Travelers merger violated the 1956 act, but there was a loophole. The Holding Company Act allowed for a two-year review period—with an optional extension to five years—before the Fed would have to act. The newly formed Citigroup was the world's largest financial services organization, but it was operating under a five-year death sentence. If Congress didn't pass legislation during those five years, Citigroup would have to divest some of its businesses.
Pressure on Congress was immense. In 1999, they passed the Financial Services Modernization Act, and President Clinton signed it into law. The act is also known for the names of its sponsors—the Gramm-Leach-Bliley Act—but detractors have called it the Citigroup Authorization Act. This sweeping legislation finally revoked the Glass-Steagall separation of commercial and investment banking. It also revoked the 1956 Bank Holding Company Act. It permitted the creation of financial holding companies (FHCs) that may hold commercial banks, investment banks and insurance companies as affiliated subsidiaries. Those subsidiaries may sell each others products. Within a year of the new act's passage, five hundred bank holding companies formed FHCs.
Although it was sweeping, the Financial Services Modernization Act was, in some respects, a half measure. It dramatically transformed the financial services industry, but it did little to transform the regulatory framework. Prior to the act, commercial banks, investment banks and insurance companies had been separate, and they had oversight from separate regulators—the Fed and OCC for commercial banks, the SEC for investment banks, and state regulators for insurance companies. Who would now oversee the new FHCs that combined all three industries? The answer is no one. The act adopted a "functional" approach to regulation. The Fed and OCC now regulate the commercial banking functions of FHCs. The SEC regulates their investment banking functions. State insurance regulators regulates their insurance functions. The act has opened the door to abuses across functions, but no regulator is clearly positioned to identify and address these.
At the same time that Glass-Steagall was being torn down, dramatic growth in the OTC derivatives market led to concern that there was no regulator with clear authority to oversee that market. A 1982 amendment to the Securities Exchange Act specified that options on securities or baskets of securities were to be regulated by the SEC. This left structures such as forwards and swaps outside the SEC's jurisdiction. It also excluded derivatives on interest rates or foreign exchange. A regulator with authority most relevant to these derivatives was one whose original purpose was unrelated to financial markets. This was the Commodity Futures Trading Commission (CFTC).
Congress formed the CFTC under the 1974 Commodity Exchange Act (CEA). It had exclusive jurisdiction to regulate commodity futures and options. Whether this authority encompassed OTC financial derivatives was not legislatively clear and motivated several law suits.
As a debate raged over how OTC derivatives should be regulated—or if they even should be regulated—there was pressure for the the CFTC to act. Because its authority was not clear, the CFTC hesitated, and market participants were generally opposed to the CFTC intervening. Position papers were written by industry groups and government agencies. Inevitably, there were some turf skirmishes as different regulatory agencies tried to position themselves for a role in any new regulatory regime. A strong argument against increased regulation of OTC derivatives was that it would drive the market overseas—as had happened 20 years earlier to the market for USD deposits.
Finally, Congress acted in 2000 by passing the Commodity Futures Modernization Act (CFMA). This amended the 1974 Commodity Exchange Act, exempting all OTC derivatives. The CFTC was not to regulate OTC derivatives. The market was to remain largely unregulated.
Overheated technology stocks formed a bubble that collapsed during 2000. In 2001, the broader market also fell sharply. On September 11 of that year, terrorists hijacked airliners, slamming two of them into New York's World Trade Center. Another hit the Pentagon in Washington, and a fourth fell in a Pennsylvania field. With the terrorist attacks, the bad news seemed to accelerate. Within weeks, the Wall Street Journal was reporting on a brewing scandal at energy trading powerhouse Enron. The firm had been using accounting gimmicks and outright deception to inflate profits and hide debt. In December, it filed for bankruptcy—the largest in US history. In 2002, that record was broken by the bankruptcy of telecommunications firm WoldCom, which had inflated its 2000-2001 income by a whopping USD 74.4 billion. Enron and WorldCom were just the two most prominent in a slew of bankruptcies and accounting scandals, which included Global Crossing, Tyco, Rite Aid, Xerox, and others. In 2002, Accounting firm Arthur Andersen was convicted of a single charge stemming from its lackluster auditing of Enron. That action forced Andersen, one of the largest and most respected auditors in the world, to go out of business. In 2005, the US Supreme Court overturned the decision, concluding that the presiding judge had given the jury faulty instructions. This decision came too late to save Arthur Andersen.
There was plenty of blame to go around. Corporate executives had cooked books while lining their pockets. Analysts at investment banks had recommended stocks they knew were dogs in a quid pro quo that ensured banking business from those same firms. Accounting firms had been cross-selling consulting services to audit clients. Increasingly, their auditors had shied away from challenging management of firms so as to not jeopardizing those lucrative consulting engagements.

Amidst the gloom and finger-pointing, Congress passed the 2002 Sarbanes-Oxley Act, fondly known as "sox." This is a sweeping law that increases management accountability, mandates a variety of internal controls at firms, and strengthens the role of auditors. Accounting firms are largely prohibited from simultaneously auditing and consulting to any given client. A new federal agency, called the Public Company Accounting Oversight Board, (PCAOB or Peek-a-Boo), is to oversee accounting firms. Corporations must test internal controls regularly. To avoid conflicts, those tests must be performed by an outside firm other than the external auditor. Sarbanes-Oxley has been variously described as ineffective, overly costly to corporations, or too demanding. Maybe some of the criticism is reasonable—or maybe not. Time will tell.
In 2004, the Basel Committee finalized its new Basel II accord on bank regulation. US regulators perceive this as primarily relevant for internationally active banks. They intend to apply it to just ten of the largest US banks. Another ten will have the choice to opt-in. Other US banks will remain subject to existing US regulations, including those adopted under the original Basel Accord.

The Road Less Travelled

Robert Frost(1916)

Two roads diverged in a yellow wood, And sorry I could not travel both And be one traveler, long I stood And looked down one as far as I could To where it bent in the undergrowth;

Then took the other, as just as fair, And having perhaps the better claim, Because it was grassy and wanted wear Though as for that the passing there Had worn them really about the same,

And both that morning equally lay In leaves no step had trodden black. Oh, I kept the first for another day! Yet knowing how way leads onto way, I doubted if I should ever come back.

I shall be telling this with a sigh Somewhere ages and ages hence; Two roads diverged in a wood, and I took the one less traveled by, And that has made all the difference.

IRDA regulations for Microinsurance

Regulations by IRDA pertaining to Microinsurance as of July 2007

a) life insurance companies are required to sell 7%, 9%, 12%, 14% and 16% of their policies in rural areas in the first, second, third, fourth and fifth financial years, respectively.

b) Non-life insurers need to earn 5% of their gross written premium from rural areas after the third year of operation.

c) Both life and non-life insurers have to insure 20,000 lives from the social sector in the fifth year of operation.

The social sector includes the informal and unorganised sector, and economically vulnerable and backward classes from the rural and urban areas.

Proposals in the anvil
Rural products must offer minimum sum assured of Rs 5,000 for general and life insurance policies .
Health insurance for family and Personal accident per person will have to be a minimum of Rs 10,000 .
Social products can’t offer sum assured beyond Rs 30,000 for general insurance covers and health cover for individual and family floaters.

DICGC -Deposit Insurance and Credit Guarantee Corporation

Economic literature points out that deposit insurance is not insurance of deposits per se but insurance against instability in the system consequent upon the failure of one or more banks.

Insurance of bank deposits is intended to give a measure of protection to depositors, particularly the smaller depositors, from the risk of loss of their savings arising from bank failures. Such protection infuses confidence in the minds of the public and contributes to the growth of the banking system by assisting in development of banking habits and mobilization of resources by the bank. These resources in turn can be utilized for purposes which are accorded national priority. Establishment of the Deposit Insurance Corporation came in the wake of certain bank failures in fifties and early sixties and consequent efforts to restore the confidence of the depositing public in the banking system by safeguarding their interests.

The Indian Counterpart of US's FDIC ( Federal Deposit Insurance Corporation)

Deposit Insurance Scheme Institutional Coverage:
The deposit insurance scheme was introduced with effect from 1 January 1962. The Scheme provides automatic coverage for deposits of all commercial banks (including regional rural banks) received in India. Following an amendment to the Deposit Insurance and Credit Guarantee Corporation Act in 1968, similar coverage is also extended in respect of deposits with co-operative banks in such of the states, as have passed the enabling legislation amending their local co-operative societies Acts. In terms of geographical coverage, the benefit of deposit insurance now stands extended to the entire banking system leaving uncovered only 69 cooperative banks in such of the states as have yet to pass the necessary legislation.

Extent of Insurance cover:
Under the scheme, in the event of liquidation, reconstruction or amalgamation of an insured bank, every depositor of that bank is entitled to repayment of his deposits in all branches of that bank, held by him in the same capacity and right, subject to a monetary ceiling of Rs.1,00,000/-.
Insurance premium:
The consideration for extension of insurance coverage to banks is payment of an insurance premium at the rate of 5 paise per annum per hundred rupees. The premium is collected at half-yearly intervals. The banks are required to bear this fee so that the protection of insurance in available to the depositors free of cost. The corporation can levy a maximum premium of up to Rs. 0.15 per Rs. 100 per annum.

Payment of Insurance claims:
When a bank goes into liquidation, the corporation pays to every depositor, through the liquidator, the amount of deposits up to Rs.1,00,000/-. When bank is amalgamated with an other bank and the scheme of amalgamation does not entitle the depositor to get credit for the full amount of his deposit, the corporation pays to each depositor the difference between the full amount of the deposit (or Rs.1,00,000/- whichever is less) and the amount actually received by him under the scheme of amalgamation. After settling a claim, the liquidator/transferee bank is required to repay to the corporation, by virtue of such rights of subrogation, recoveries effected by it from out of the assets of the insured bank in liquidation/amalgamation.

The Head Office of the DICGC is located at:
Marshall Building Annexe, 3rd Floor, Shooraji Vallabhdas Marg, Mumbai – 400 001
e-mail: dicgc@rbi.org.in
URL: http://www.dicgc.org.in/index.htm

It has branch offices at Calcutta, Madras, New Delhi and Nagpur.

Subprime

Subprime – A term referring to borrowers with a less-than-perfect credit history, also called B&C credit.

BCG Matrix

The BCG Matrix was created by the The Boston Consulting Group (BCG) and it became on of the most well-known portfolio management Decision Making Tools in the early 1970's. It is based on the product life cycle theory, and it is used to prioritize the product portfolio in a company or department. There are two dimensions - market share and market growth. The basis premise in using the Matrix is that the higher the market share a product has, the higher the growth rate and the faster the market for that product grows.
The BCG Matrix was created in order to alleviate the standard one-size fits all in their time. It is useful to a company to achieve balance between the four categories of products a company produces. Market decisions are also well made by considering and using the Porter's Five Forces
















Four segments in the BCG matrix:
1. Cash Cows (high market share, low growth) - Keep investments low, while keeping profits high. Profits and cash generation should be higher because of low growth.
2. Dogs (low market share, low growth) - Liquidate, if they are not delivering cash. Avoid and reduce the number of these an organization maintains. Keep an eye out for expensive revival strategies - a dog is typically always a dog.
3. Stars (high market share, high growth) - Invest further in these - they incur high costs, but they are market leaders and should also generate lots of cash. Stars may balance on net cash flow, but the organization should try to maintain market share on this would because rewards are likely
4. Question marks (low market share, but high growth) - These have poor cash inflow, but have high demands and low returns due to low market share. Efforts should be made to change market share. If this isn't possible, this will likely turn into a dog as growth slows.

Caution should be taken as high market share isn't the only consideration. High market share doesn't necessarily mean profit. Growth isn't necessarily the only valid measurement factor. Occasionally, dogs can earn more cash than cash cows.

law of diminishing returns

In economics, diminishing returns is also called diminishing marginal returns or the law of diminishing returns. According to this relationship, in a production system with fixed and variable inputs (say factory size and labor), beyond some point, each additional unit of variable input yields less and less additional output. Conversely, producing one more unit of output costs more and more in variable inputs. This concept is also known as the law of diminishing returns, law of increasing relative cost, or law of increasing opportunity cost. Although ostensibly a purely economic concept, diminishing marginal returns also implies a technological relationship. Diminishing marginal returns states that a firm's short run marginal cost curve will eventually increase. It is possibly among the best-known economic "laws."

A simple example
Suppose that one kilogram (kg) of seed applied to a plot of land of a fixed size produces one ton of harvestable crop. You might expect that an additional kilogram of seed would produce an additional ton of output. However, if there are diminishing marginal returns, that additional kilogram will produce less than one additional ton of harvestable crop (on the same land, during the same growing season, and with nothing else but the amount of seeds planted changing). For example, the second kilogram of seed may only produce a half ton of extra output. Diminishing marginal returns also implies that a third kilogram of seed will produce an additional crop that is even less than a half ton of additional output. Assume that it is one quarter of a ton.

Economies of scale

Economies of scale and diseconomies of scale refer to an economic property of production that affects cost if quantity of all input factors are increased by some amount. If costs increase proportionately, there are no economies of scale; if costs increase by a greater amount, there are diseconomies of scale; if costs increase by a lesser amount, there are positive economies of scale. When combined, economies of scale and diseconomies of scale lead to ideal firm size theory, which states that per-unit costs decrease until they reach a certain minimum, then increase as the firm size increases further.
Economies of scale refers to the decreased per unit cost as output increases.

Locality of reference - Comp Science

In computer science, locality of reference, sometimes also called the principle of locality, is a concept which deals with the process of accessing a single resource multiple times. There are three basic types of locality of reference: temporal, spatial and sequential:
Temporal locality
The concept that a resource that is referenced at one point in time will be referenced again sometime in the near future.
Spatial locality
The concept that the likelihood of referencing a resource is higher if a resource near it has been referenced.
Sequential locality
The concept that memory is accessed sequentially.

Locality can also be defined as the property of a program in execution causing it to reference pages that it has recently referenced. Locality is caused by loops in code that tend to reference arrays or other data structures by indices.

EPS : Earning Per Share

The portion of a company's profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company's profitability.
Calculated as:

( Net Income - Dividends on Preferred Stock )
----------------------------------------------
Average Outstanding Shares


In the EPS calculation, it is more accurate to use a weighted-average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio. For example, assume that a company has a net income of $25 million. If the company paid out $1 million in preferred dividends and had 10 million shares for one half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million. Then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.

Stock market index

A stock market index is a listing of stock and a statistic reflecting the composite value of its components. It is used as a tool to represent the characteristics of its component stocks, all of which bear some commonality such as trading on the same stock market exchange, belonging to the same industry, or having similar market capitalizations.

Stock market indices may be classed in many ways :-
A broad-base index represents the performance of a whole stock market
Proxy, reflects investor sentiment on the state of the economy.

The most regularly quoted market indices are broad-base indices comprised of the stocks of large companies listed on a nation's largest stock exchanges.

Some of widely followed indices are :-
American Dow Jones Industrial Average and S&P 500 Index
British FTSE 100
the French CAC 40
the German DAX
Japanese Nikkei 225
Hong Kong Hang Seng Index

Indian Stock Market Indices :
a) SENSEX : This is a index for BSE ( Bombay Stock Exchange) comprising of 30 stocks
b) S&P CNX NIFTY ( Standard & Poor Crisil NSE indeX) : This is the index of stocks getting traded at NSE ( National Stock Exchange , Delhi) comprising of 50 stocks.

Difference Between Merger & Acquisition

In a general sense, mergers and takeovers (or acquisitions) are very similar corporate actions - they combine two previously separate firms into a single legal entity.
Significant operational advantages can be obtained when two firms are combined and, in fact, the goal of most mergers and acquisitions is to improve company performance and shareholder value over the long-term.
The motivation to pursue a merger or acquisition can be considerable; a company that combines itself with another can experience boosted economies of scale, greater sales revenue and market share in its market, broadened diversification and increased tax efficiency.

However, the underlying business rationale and financing methodology for mergers and takeovers are substantially different. A merger involves the mutual decision of two companies to combine and become one entity; it can be seen as a decision made by two "equals". The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders.

A typical merger, in other words, involves two relatively equal companies, which combine to become one legal entity with the goal of producing a company that is worth more than the sum of its parts. In a merger of two corporations, the shareholders usually have their shares in the old company exchanged for an equal number of shares in the merged entity. For example, back in 1998, American Automaker, Chrysler Corp. merged with German Automaker, Daimler Benz to form DaimlerChrysler. This has all the makings of a merger of equals as the chairmen in both organizations became joint-leaders in the new organization. The merger was thought to be quite beneficial to both companies as it gave Chrysler an opportunity to reach more European markets and Daimler Benz would gain a greater presense in North America.

A takeover, or acquisition, on the other hand, is characterized by the purchase of a smaller company by a much larger one. This combination of "unequals" can produce the same benefits as a merger, but it does not necessarily have to be a mutual decision. A larger company can initiate a hostile takeover of a smaller firm, which essentially amounts to buying the company in the face of resistance from the smaller company's management. Unlike in a merger, in an acquisition, the acquiring firm usually offers a cash price per share to the target firm's shareholders or the acquiring firm's share's to the shareholders of the target firm according to a specified conversion ratio. Either way, the purchasing company essentially finances the purchase of the target company, buying it outright for its shareholders.
An example of an acquisition would be how the Walt Disney Corporation bought Pixar Animation Studios in 2006. In this case, this takeover was friendly, as Pixar's shareholders all approved the decision to be acquired.Target companies can employ a number of tactics to defend themselves against an unwanted hostile takeovers, such as including covenants in their bond issues that force early debt repayment at premium prices if the firm is taken over.

Public Offering of Securities Insurance (POSI)

Public Offering of Securities Insurance (POSI)
The Indian capital markets are witnessing an unprecedented boom and corporate India is all set to leverage this opportunity to raise funds and achieve their corporate objectives. However, this increased market exposure leads to increased stakeholder litigation and with this increase in litigation comes a growing awareness of the responsibilities incumbent on the directors and officers of companies.This is especially true when the company makes a public offering of its securities. Signatories of a public prospectus have a personal responsibility for its contents and could therefore be found personally liable for the losses of securities holders arising from misrepresentations within the prospectus. These potential liabilities arising out of the issue of a prospectus can be very large. Most securities actions are fuelled by unfulfilled investor expectations, so as well as being substantial, legal actions can also occur much after the transaction. IPO Insurance (also known as Public Offering of Securities Insurance - POSI) addresses these uncertainties by ring-fencing securities exposures in a single premium, transaction-specific policy.

Raising capital in a risky world
Investors and analysts have always scrutinized the prospectuses of companies raising capital for Stock exchange listings, mergers, expansions, etc. The scrutiny does not stop once the transaction has been completed. Shareholders and investors want to know how well their money has been invested and that also in an unforgiving environment. The need for specialist insurance protection for issuers of securities has never been greater, and yet an alarming number of public offerings go ahead without suitable protection for the issuing company and its directors, officers and employees.

What does POSI cover?
POSI protects the insureds against securities claims arising from an offering of a company’s securities
POSI can also cover liabilities arising from negotiations, discussions and decisions in connection with the offering
Cover includes punitive and exemplary damages

What are the benefits of POSI?
POSI gives companies the opportunity to ring-fence the significant and long-term
exposure presented by securities offerings
POSI being a transaction specific product ensures suitable coverage to the insureds and
protects the existing D&O contracts
Accounting rules may allow for the POSI premium to be capitalized against the offer
proceeds, without being considered as a bottom line deduction from the
company’s profit and loss account
POSI is a transaction specific product and the policy period can be customized to provide
protection for upto six years

Whom does the cover apply to?
The POSI policy covers to the company and its directors, officers and employees for securities claims brought against them in connection with the offering

Who can buy a POSI policy?
POSI is designed for any company that is raising capital through the publication of a prospectus. It can provide cover for introductory offerings (IPO), secondary offerings and can also cover private placements


Other related Coverages are :
Directors & Officers Liability Insurance Policy ( D & O )
Professional Indemnity Insurance (PI / E&O)

Arbitrage

In economics and finance, arbitrage is the practice of taking advantage of a price differential between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, a risk-free profit. A person who engages in arbitrage is called an arbitrageur.

If the market prices do not allow for profitable arbitrage, the prices are said to constitute an arbitrage equilibrium or arbitrage free market. An arbitrage equilibrium is a precondition for a general economic equilibrium.

Portfolio Immunization

In finance, interest rate immunization is a strategy that ensures that a change in interest rates will not affect the value of a portfolio.

Interest rate immunization can be accomplished by several methods, including
a) cash flow matching
b) duration matching
c) volatility and convexity matching.
It can also be accomplished by trading in bond forwards, futures, or options.

Other types of financial risks, such as foreign exchange risk or stock market risk, can be immunized using similar strategies.
If the immunization is incomplete, these strategies are usually called hedging.
If the immunization is complete, these strategies are usually called arbitrage.

Prisoner's dilemma

The Prisoner's dilemma was originally framed by Merrill Flood and Melvin Dresher working at RAND in 1950. Albert W. Tucker formalized the game with prison sentence payoffs and gave it the "Prisoner's Dilemma" name (Poundstone, 1992).

The classical prisoner's dilemma (PD) is as follows:
Two suspects, A and B, are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal: if one testifies for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both stay silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must make the choice of whether to betray the other or to remain silent. However, neither prisoner knows for sure what choice the other prisoner will make. So this dilemma poses the question: How should the prisoners act?

The dilemma arises when one assumes that both prisoners only care about minimizing their own jail terms. Each prisoner has two options: to cooperate with his accomplice and stay quiet, or to defect from their implied pact and betray his accomplice in return for a lighter sentence. The outcome of each choice depends on the choice of the accomplice, but each prisoner must choose without knowing what his accomplice has chosen to do.

CRISIL

CRISIL : Credit Rating Information Services of India Limited

CRISIL is India's leading Ratings, Research, Risk and Policy Advisory Company. CRISIL’s majority shareholder is Standard & Poor's, a division of The McGraw-Hill Companies and the world's foremost provider of financial market intelligence.
CRISIL offers domestic and international customers a unique combination of local insights and global perspectives, delivering independent information, opinions and solutions that help them make better informed business and investment decisions, improve the efficiency of markets and market participants, and help shape infrastructure policy and projects. Its integrated range of capabilities includes credit ratings and risk assessment; energy, infrastructure and corporate advisory; research on India's economy, industries and companies; global equity research; fund services; and risk management.

Other major Credit Rating Agencies in India:--
ICRA - Investment information & Credit Rating Agency of India
CARE - Credit Analysis & Research Limited
DCR India - Duff & Phelps Credit Rating India Private Ltd
ONICRA Credit Rating Agency of India Ltd

Geographic region's Acronyms

ASPAC : ASia PACific
EAME : Europe Africa Middle East
EAFE : Europe Asia Far East
BRIC : Brazil Russia India China

Duty of Best Execution - Trading

According to the Nasdaq Trader Manual

The duty of “best execution” arises from the common law duty of loyalty owed by a broker to its retail customers. The Securities and Exchange Commission (SEC) has stated that “when an agent acts on behalf of a customer in a transaction, the agent is under a duty to exercise reasonable care to obtain the most advantageous terms for the customer.” … The SEC has stated that, as a general manner, the duty of best execution refers to your duty to seek to
execute your customer’s order in the best available market.

Capital expenditure

Capital expenditures ("capex") are expenditures used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. In accounting, a capital expenditure is added to an asset account ("capitalized"), thus increasing the asset's basis (the cost or value of an asset as adjusted for tax purposes). Capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset.
Included in such amounts is spending on:
1) acquiring fixed assets
2) bringing them into business
3) legal costs of buying buildings
4) carriage inwards on machinery bought
5) any other cost needed for a fixed asset ready for use.

An ongoing question of the accounting of any company is whether certain expenses should be capitalized or expensed. Costs that are expensed in a particular month simply appear on the financial statement as a cost that was incurred that month. Costs that are capitalized, however, are amortized over multiple years. Capitalized expenses show up on the balance sheet. Most ordinary business expenses are clearly either expensable or capitalizable, but some expenses could be treated either way, according to the preference of the company.

The counterpart of capital expenditure is operational expenditure ("OpEx").
Operating expenditures (often abbreviated to OPEX) are the on-going costs for running a product, business, or system.

For example, the purchase of a photocopier is the CAPEX, and the annual paper and toner cost is the OPEX. For larger systems like businesses, OPEX may also include the cost of workers and facility expenses such as rent and utilities.

Brief History of Insurance in India

INSURANCE IN INDIA
The insurance sector in India has come a full circle from being an open competitive market to nationalisation and back to a liberalised market again. Tracing the developments in the Indian insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries.

A brief history of the Insurance sector
The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta.

Some of the important milestones in the life insurance business in India are:
1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.
1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses.
1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public.
1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

The General insurance business in India, on the other hand, can trace its roots to the
Triton Insurance Company Ltd., the first general insurance company established in the
year 1850 in Calcutta by the British.

Some of the important milestones in the general insurance business in India are:
1907: The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business.
1957: General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices.
1968: The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up.
1972: The General Insurance Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.

Insurance sector reforms
In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction.
The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector.
The reforms were aimed at “creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognising that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms…”

In 1994, the committee submitted the report and some of the key recommendations
included:
i) Structure
· Government stake in the insurance Companies to be brought down to 50%
· Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations
· All the insurance companies should be given greater freedom to operate
ii) Competition
· Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the industry
· No Company should deal in both Life and General Insurance through a single entity
· Foreign companies may be allowed to enter the industry in collaboration with the domestic companies
· Postal Life Insurance should be allowed to operate in the rural market
· Only one State Level Life Insurance Company should be allowed to operate in each state
iii) Regulatory Body
· The Insurance Act should be changed
· An Insurance Regulatory body should be set up
· Controller of Insurance (Currently a part from the Finance Ministry) should be made independent
iv) Investments
· Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%
· GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time)
v) Customer Service
· LIC should pay interest on delays in payments beyond 30 days
· Insurance companies must be encouraged to set up unit linked pension plans
· Computerisation of operations and updating of technology to be carried out in the insurance industry

The committee emphasised that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry.
Hence, it was decided to allow competition in a limited way by stipulating the minimum
capital requirement of Rs.100 crores. The committee felt the need to provide greater
autonomy to insurance companies in order to improve their performance and enable them
to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body.

The Insurance Regulatory and Development Authority
Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in
Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies.
The other decisions taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies was the launch of the IRDA’s online service for issue and renewal of licenses to agents.
The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products, which are expected to be introduced by early next year.
Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. In the private sector 12 life insurance and 6 general insurance companies have been registered.

Insurance : Policy Surrender Options (Indian Context)

If you are wondering why and how to exit your policy, here’s what experts have to say on how to make the best out of your insurance plan even while exiting. Although of late some of the ULIPs are posting better returns than other investment options, it is always advisable to keep a tab on the market and invest in better options. But that does not necessarily mean that you lose all of what you have invested in an insurance plan.

First things first. The Insurance Act provides for a return to the policyholder of an amount that is representative of the reserve and this is referred to as the ‘surrender value’ or ‘cash value’. The Act also stipulates that every insurance policy shall acquire a guaranteed surrender value, if at least three years premiums have been paid. In case of term policies, generally, the policy lapses if the premium is not paid and no benefit could be availed by the individual. Therefore, before exiting, an investor should take note of what kind of policy he have.

“Many ULIP investors have exited in the recent past after realising that the policy doesn’t quite fit into their scheme of things. In such a scenario, the policy is considered to have lapsed. However, it should be understood that the policy is not necessarily forfeited i.e. the policy’s value doesn’t become nil. The Insurance Act does not allow for forfeiture as every policy acquires a reserve based on the premiums already paid,” says Ashish Kapur, CEO Invest Shoppe India.

WHY EXIT?
Ideally, one should continue with the insurance policy as the yield/ returns from the insurance policy come primarily towards the end of the policy — at the time of maturity. There can, however, be reasons for quitting such as financial constraints to pay the premium on a regular basis or better investment options. “One should look into factors like premium paid, bonus accumulated vis-a-vis the surrender value/ reduced benefits that one will get before deciding to discontinue a policy,” says Vikas Vasal, director, KPMG India. According to Manoj Agarwal, head, insurance advisory, SKP Securities, one should discontinue the existing ULIPs only if the fund is not performing well or the cost involved in the policy is too high — more than 20% of the premium. The other important reason to discontinue the policy can be mismatch in the expectation and delivery of the policy. “Many times policies are misrepresented by the agents. If it is a very high cost policy, then it is advisable to discontinue the policy,” says Mukesh Gupta, director, Wealthcare Securities.

EXIT ROUTES

This will depend on the specifics of each policy. However, in general, the exit routes are — surrender the policy, conversion into paid up and trading the policy.
a) Surrender the policy: If someone needs to discontinue the policy in the first five years, he should consider the surrender charges. The fund value of a ULIP in the initial years can be rather disappointing. In effect, the surrender value, which is a percentage of the fund value, can be even smaller. “The prime reason for this is that in the initial few years, a substantial proportion of the premium paid is utilised for servicing the various expenses related to the policy — as high as 25% in some cases. This means that the proportion of the premium used to provide for the surrender value is not the entire premium amount. Rather it is the premium net of expenses,” says Kapur. However, there is no maturity value in a term policy and therefore, whenever the policy is surrendered, one does not get back anything than the premium paid till date is forfeited. But in some term insurance plans, there is a refund of premium also at the end of the term (premium is higher in comparison to pure risk cover policy). In such cases, it is advisable to read the terms of the policy.
b) Making it paid-up: Apart from the option of surrendering your policy, insurers like LIC also provide other options like making a policy ‘paid-up’, whereby the policy remains in force with a reduced sum assured, depending upon the number of premiums paid. “Returns in the conventional products are dependent upon the overall performance of the company and the investment norms laid out by IRDA. So it is always advisable not to surrender the policy. Rather one can make his/ her policy paidup in such case,” reasons Agarwal.
c) Trading policy: As per a recent decision of the Mumbai High Court, trading of insurance policies has been held to be valid. In extreme cases, where funds are required immediately, this option may be looked into. “However, this option should be exercised with due care and only after studying all the pros and cons associated with it,” cautions Vasal.

Although it is not advisable to discontinue the policy if only few premiums are left, the option of exiting a policy can be exercised if the insurer requires money urgently and does not need life insurance protection. This is especially true in ULIP policies having a term of more than 10 years. There are no surrender charges left at this stage and the fund value can be used to meet any contingency.

Whatever be the reason for exiting your insurance plan, you should always keep in mind the adverse effects of discontinuing the cover as it may disturb your financial and risk management plans.

ESOP

ESOP : Employee Stock OPtion

Under any Esop, a company first grants options to its employees. The option stays with employee as it is for some time. This is called the vesting period. Employee can exercise the option after the vesting period and acquire share against it. When an employee exercises an option, employer has to allot and transfer requisite number of shares in the company to employee. Employee cannot transfer or sell the option during vesting period. An employee can chooses not to exercise the option at all even after it has vested with him

What is a FICO score?

A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will pay their bills. Fair, Isaac began its pioneering work with credit scoring in the late 1950s and, since then, scoring has become widely accepted by lenders as a reliable means of credit evaluation. A credit score attempts to condense a borrowers credit history into a single number. Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed. The Federal Trade Commission has ruled this to be acceptable.
Credit scores are calculated by using scoring models and mathematical tables that assign points for different pieces of information which best predict future credit performance. Developing these models involves studying how thousands, even millions, of people have used credit. Score-model developers find predictive factors in the data that have proven to indicate future credit performance. Models can be developed from different sources of data. Credit-bureau models are developed from information in consumer credit-bureau reports.

Credit scores analyze a borrower's credit history considering numerous factors such as:
a) Late payments
b) The amount of time credit has been established
c)The amount of credit used versus the amount of credit available
d) Length of time at present residence
e) Negative credit information such as bankruptcies, charge-offs, collections, etc.

There are really three FICO scores computed by data provided by each of the three bureaus––Experian, Trans Union and Equifax. Some lenders use one of these three scores, while other lenders may use the middle score.