For the past few weeks we were mostly dealing with the capital markets section, so we thought lets shift our focus little bit towards Banking and International finance. The term which we will introduce to you is ESCROW.
ESCROW
The word derives from the old French word escroue, meaning a scrap of paper or a roll of parchment; this indicated the deed a third party held until a transaction was completed.
Simply defined, an ESCROW is a deposit of funds, a deed or other instrument by one party for the delivery to another party upon completion of a particular condition or event.
example: If you intend to buy $5,000 worth of merchandise from a supplier via escrow, you and the supplier select an escrow agent, often a bank, set up an escrow account with an agreement that says, 'When I receive a satisfactory shipment from my supplier, release the money to him.' The escrow account is useful because you as buyer know that you will not pay until you have the product that you need. The supplier knows that the money exists and that he can access it by supplying the goods as ordered.
Types
1) Internet escrow
2) Banking
3) Intellectual property
4) Law
5) Real estate
Even though there are different types of escrow, the basic premise remains the same It is used to build trust & bring transparency between the players involved in the trade.
Lets now look into the inner aspects of escrow
Why do we need an escrow?
Whether you are the buyer, seller, lender, or borrower, you want the assurance that no funds or property will change hands until ALL of the instructions in the transaction have been followed. The escrow holder has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.
note: Be sure to choose an independent licensed escrow provider who is 100% neutral , licensed by the Department of Corporations (DOC), requiring adherence to the most stringent standards in the industry, and whose sole business is providing escrow.
How does it work?
The principals to the escrow – buyer, seller, lender, borrower – cause escrow instructions, most usually in writing, to be created, signed and delivered to the escrow officer. If a broker is involved, he will normally provide the escrow officer with the information necessary for the preparation of your escrow instructions and documents.
The escrow officer will process the escrow, in accordance with the escrow instructions, and when all conditions required in the escrow can be met, the escrow will be "closed." Each escrow, although following a similar pattern, will be different in some respects, as it deals with YOUR property and the transaction at hand.
Duties of an escrow holder
1) following the instructions given by the principals and parties to the transaction in a timely manner.
2) handling the funds and/or documents in accordance with instructions.
3) paying all bills as authorized and responding to authorized requests from the principals.
4) closing the escrow only when all terms and conditions have been met; and, distributing the funds in accordance with instructions and porviding an accounting for the same – the Closing, or Settlement Statement.
Recent news involving escrow
President Barack Obama wants BP Plc to set up an escrow account to pay the claims for damages caused by its oil spill in the Gulf of Mexico. They want to make sure the money is escrowed for the businesses and want to make sure the money is independently administered so it’s not slow-walked. BP Plc agreed to set up $20 bn escrow fund to compensate for the oil spill damages.
For more information on escrow, please follow the below links
http://www.allisonmccloskeyescrow.com/what-is-escrow.asp
http://articles.esources.co.uk/id/111/
http://en.wikipedia.org/wiki/Escrow
http://www.msnbc.msn.com/id/37725103/ns/disaster_in_the_gulf/
http://www.business-standard.com/india/news/us-wants-bp-to-setescrow-account-for-oil-spill-damages/398109/
Srikanth Reddy
MBA Core 09-11
Wednesday, July 28, 2010
Monday, July 19, 2010
Financial Term of the Week --- IDR
Indian Depository Receipt (IDR)
The IDR is an instrument issued by a foreign corporation in India, it is similar to ADR(American Depository Receipt) & GDR(Global Depository Receipt). In this case the depository receipt is created by an Indian depository(say National Security Depository Limited (NSDL)..), denominated in Indian Rupees, against the underlying equity shares of the issuing(foreign) company.
How does this work?
The issuer company(here a foreign company) deposits a large number of its shares with a custodian bank, against which a depository(NSDL) issues receipts. There are agreements amongst these parties taking care of legal and procedural aspects. Each receipt is represented by a fixed number of underlying shares(usually 2,4 or a fraction).
The depository banks have numerous responsibilities towards depository receipt holders and also the issuer. These receipts are then sold to investors and, on listing, these receipts behave exactly like regular stocks, their prices then depend upon market conditions.
Why do foreign companies want to go for an IDR?
There are many reasons why a foreign entity wants to raise money through IDR route
1) Against a limited number of Foreign Institutional Investors (FII's) in their local market, many more can be tapped if listed in India.
2) If the foreign company were to issue fresh stock in India for raising capital it has to comply with the stringent,cumbersome procedures of the regulatory authorities (SEBI), which is a main deterrent.
3) It is easier for the investors to trade in foreign companies in local bourses.
An IDR would have the following features:
Overseas Custodian : It is a foreign bank having branches in India and requires approval from Finance Ministry for acting as custodian and Indian depository has to be registered with SEBI.
Approvals for issue of IDRs : IDR issue will require approval from SEBI and application can be made for this purpose 90 days before the issue opening date.
Listing : These IDRs would be listed on stock exchanges in India and would be freely transferable.
Eligibility conditions for overseas companies to issue IDRs:
Capital : The overseas company intending to issue IDRs should have paid up capital and free reserve of atleast $ 100 million.
Sales turnover : It should have an average turnover of $ 500 million during the last three years.
Profits/dividend : Such company should also have earned profits in the last 5 years and should have declared dividend of at least 10% each year during this period.
Sales turnover : It should have an average turnover of $ 500 million during the last three years.
Profits/dividend : Such company should also have earned profits in the last 5 years and should have declared dividend of at least 10% each year during this period.
Debt equity ratio : The pre-issue debt equity ratio of such company should not be more than 2:1.
Extent of issue : The issue during a particular year should not exceed 15% of the paid up capital plus free reserves.
Redemption : IDRs would not be redeemable into underlying equity shares before one year from date of issue.
Denomination : IDRs would be denominated in Indian rupees, irrespective of the denomination of underlying shares.
Benefits : In addition to other avenues, IDR is an additional investment opportunity for Indian investors for overseas investment.
Extent of issue : The issue during a particular year should not exceed 15% of the paid up capital plus free reserves.
Redemption : IDRs would not be redeemable into underlying equity shares before one year from date of issue.
Denomination : IDRs would be denominated in Indian rupees, irrespective of the denomination of underlying shares.
Benefits : In addition to other avenues, IDR is an additional investment opportunity for Indian investors for overseas investment.
Standard Chartered plc is the first company to have publicy elicited interest in making a IDR issue in India. It raised $540 mn and the IDR was priced at 104 and got listed at 106 on NSE and is currently trading at 111.9 on NSE (19th July).
for more information on IDR
Srikanth Reddy
MBA Core 09-11
Tuesday, July 6, 2010
SENSEX - The Barometer of Indian Capital Markets
When you ask a lay person what is the current state of Indian economy, we generally hear "as the market is in red (falling) for the past one week so our economy's growth is also slowing down and will be falling ", this response shows that many people view SENSEX as the indicator of Indian economy, in reality which is not the case, so this article is an attempt to unveil the reality or fact about the SENSEX and how is it calculated/computed.
The Sensex has a very important function. It is supposed to be an indicator of the stocks in the BSE (not the Indian economy) to show whether the stocks are generally going up or down. To show this accurately, the Sensex is calculated taking into consideration stock prices of 30 different BSE listed companies. It is calculated using the “free-float market capitalization” method. This is a world wide accepted method as one of the best methods for calculating a stock market index.
Please note: The method used for calculating the Sensex and the 30 companies that are taken into consideration are changed from time to time. This is done to make the Sensex an accurate index and so that it represents the BSE stocks properly.
To really understand how the Sensex is calculated, we simply need to understand what the term “free-float market capitalization” means. (As mentioned earlier, the Sensex is calculated on basis of the “free-float market capitalization” method) But, before we understand what “free-float market capitalization” means, we must understand what “market capitalization” means.
You probably think that you have never heard of the term “market capitalization” before. You have! When you are talking about “mid-cap”, “small-cap” and “large-cap” stocks, you are talking about market capitalization, Market cap or market capitalization is simply the worth of a company in terms of it’s shares. To put it in a simple way, if you were to buy all the shares of a particular company, what is the amount you would have to pay? That amount is called the “market capitalization”. To calculate the market cap of a particular company, simply multiply the “current share price” by the “number of shares issued by the company”.
Having seen what market cap is and how to find out the market cap of a particular company, let us try to understand the concept of “free-float market cap”. Many different types of investors hold the shares of a company. like the Govt. of India may hold some of the shares, some of the shares may be held by the “founders” or “directors” of the companys, some of the shares may be held by the FDI’s etc. Now, only the “open market” shares that are free for trading by anyone, are called the “free-float” shares. When we are calculating the Sensex, we are interested in these “free-float” shares.
According to the BSE, any shares that DO NOT fall under the following criteria, can be considered to be open market shares:
a) Holdings by founders/directors/ acquirers which has control element
b) Holdings by persons/ bodies with "controlling interest"
c) Government holding as promoter/acquirer
d) Holdings through the FDI Route
e) Strategic stakes by private corporate bodies/ individualsEquity held by associate/group companies (cross-holdings)
f) Equity held by employee welfare trustsLocked-in shares and shares which would not be sold in the open market in normal course.
A simple way to understand the “free-float market cap” would be the total cost of buying all the shares in the open market.
So, having understood what the “free float market cap” is, now what? How do you find out the value of the Sensex at a particular point? Well, it’s pretty simple
First: Find out the “free-float market cap” of all the 30 companies that make up the Sensex
Second: Add all the “free-float market cap’s” of all the 30 companies
Third: Make all this relative to the Sensex base. The value you get is the Sensex value.
The “third” step probably confused you. To understand it, you will need to understand “ratios and proportions” from 5th standard mathematics.
Think of it this way: Suppose, for a “free-float market cap” of Rs.100,000 Cr the Sensex value is 4000 Then, for a “free-float market cap” of Rs.150,000 Cr the Sensex value will be
(150,000 / 100,000 )* 4000 = 6000.
so the current value of Sensex is calculated based on base period of SENSEX which is 1978 - 79 and the base value is 100 index points. This is often indicated by the notation 1978 - 79 =100.
Please Note: Every time one of the 30 companies has a “stock split” or a "bonus" etc. appropriate changes are made in the “market cap” calculations.
Now, there is only one question left to be answered, which 30 companies, why those 30 companies, why no other companies?
The 30 companies that make up the Sensex are selected and reviewed from time to time by an “index committee”. This “index committee” is made up of academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.
The main criteria for selecting the 30 stocks is as follows:
1) Market capitalization: The company should have a market capitalization in the Top 100 market capitalization’s of the BSE. Also the market capitalization of each company should be more than 0.5% of the total market capitalization of the Index.
2) Trading frequency: The company to be included should have been traded on each and every trading day for the last one year. Exceptions can be made for extreme reasons like share suspension etc.
3) Number of trades: The scrip should be among the top 150 companies listed by average number of trades per day for the last one year.
4) Industry representation: The companies should be leaders in their industry group.Listed history: The companies should have a listing history of at least one year on BSE.
5) Track record: In the opinion of the index committee, the company should have an acceptable track record.
for more information on the SENSEX
http://www.bseindia.com/about/abindices/bse30.asp
Hope this article has cleared some of the doubts/myths about the SENSEX value,
follow this space for many more informational articles.
Article Contributed by
Mohit Sachdeva
MBA Core - II year
The Sensex has a very important function. It is supposed to be an indicator of the stocks in the BSE (not the Indian economy) to show whether the stocks are generally going up or down. To show this accurately, the Sensex is calculated taking into consideration stock prices of 30 different BSE listed companies. It is calculated using the “free-float market capitalization” method. This is a world wide accepted method as one of the best methods for calculating a stock market index.
Please note: The method used for calculating the Sensex and the 30 companies that are taken into consideration are changed from time to time. This is done to make the Sensex an accurate index and so that it represents the BSE stocks properly.
To really understand how the Sensex is calculated, we simply need to understand what the term “free-float market capitalization” means. (As mentioned earlier, the Sensex is calculated on basis of the “free-float market capitalization” method) But, before we understand what “free-float market capitalization” means, we must understand what “market capitalization” means.
You probably think that you have never heard of the term “market capitalization” before. You have! When you are talking about “mid-cap”, “small-cap” and “large-cap” stocks, you are talking about market capitalization, Market cap or market capitalization is simply the worth of a company in terms of it’s shares. To put it in a simple way, if you were to buy all the shares of a particular company, what is the amount you would have to pay? That amount is called the “market capitalization”. To calculate the market cap of a particular company, simply multiply the “current share price” by the “number of shares issued by the company”.
Having seen what market cap is and how to find out the market cap of a particular company, let us try to understand the concept of “free-float market cap”. Many different types of investors hold the shares of a company. like the Govt. of India may hold some of the shares, some of the shares may be held by the “founders” or “directors” of the companys, some of the shares may be held by the FDI’s etc. Now, only the “open market” shares that are free for trading by anyone, are called the “free-float” shares. When we are calculating the Sensex, we are interested in these “free-float” shares.
According to the BSE, any shares that DO NOT fall under the following criteria, can be considered to be open market shares:
a) Holdings by founders/directors/ acquirers which has control element
b) Holdings by persons/ bodies with "controlling interest"
c) Government holding as promoter/acquirer
d) Holdings through the FDI Route
e) Strategic stakes by private corporate bodies/ individualsEquity held by associate/group companies (cross-holdings)
f) Equity held by employee welfare trustsLocked-in shares and shares which would not be sold in the open market in normal course.
A simple way to understand the “free-float market cap” would be the total cost of buying all the shares in the open market.
So, having understood what the “free float market cap” is, now what? How do you find out the value of the Sensex at a particular point? Well, it’s pretty simple
First: Find out the “free-float market cap” of all the 30 companies that make up the Sensex
Second: Add all the “free-float market cap’s” of all the 30 companies
Third: Make all this relative to the Sensex base. The value you get is the Sensex value.
The “third” step probably confused you. To understand it, you will need to understand “ratios and proportions” from 5th standard mathematics.
Think of it this way: Suppose, for a “free-float market cap” of Rs.100,000 Cr the Sensex value is 4000 Then, for a “free-float market cap” of Rs.150,000 Cr the Sensex value will be
(150,000 / 100,000 )* 4000 = 6000.
so the current value of Sensex is calculated based on base period of SENSEX which is 1978 - 79 and the base value is 100 index points. This is often indicated by the notation 1978 - 79 =100.
Please Note: Every time one of the 30 companies has a “stock split” or a "bonus" etc. appropriate changes are made in the “market cap” calculations.
Now, there is only one question left to be answered, which 30 companies, why those 30 companies, why no other companies?
The 30 companies that make up the Sensex are selected and reviewed from time to time by an “index committee”. This “index committee” is made up of academicians, mutual fund managers, finance journalists, independent governing board members and other participants in the financial markets.
The main criteria for selecting the 30 stocks is as follows:
1) Market capitalization: The company should have a market capitalization in the Top 100 market capitalization’s of the BSE. Also the market capitalization of each company should be more than 0.5% of the total market capitalization of the Index.
2) Trading frequency: The company to be included should have been traded on each and every trading day for the last one year. Exceptions can be made for extreme reasons like share suspension etc.
3) Number of trades: The scrip should be among the top 150 companies listed by average number of trades per day for the last one year.
4) Industry representation: The companies should be leaders in their industry group.Listed history: The companies should have a listing history of at least one year on BSE.
5) Track record: In the opinion of the index committee, the company should have an acceptable track record.
for more information on the SENSEX
http://www.bseindia.com/about/abindices/bse30.asp
Hope this article has cleared some of the doubts/myths about the SENSEX value,
follow this space for many more informational articles.
Article Contributed by
Mohit Sachdeva
MBA Core - II year
Subscribe to:
Posts (Atom)
