Direct Taxes Taxes whose impact and incidence are on the same person. The taxes levied on income, and wealth taxes are instances of direct taxes.

Discount This refers to:

1. The margin by which a security's market price is lower than its face value.
2. In security analysis, it means the adjustment in security prices consequent to the assimilation of new information about a company, or news in general. An illustration is the increase in the price of a stock following the news of the company bagging big sale orders.
3. Reduction in the sale price of goods.

Discount Rate The interest rate used in calculating the PRESENT VALUE of future cash flows.

Disinvestments The sale of shareholding by an individual or institution in order to raise cash.

Diversification The process of spreading out investments so as to limit exposure and reduce risk. Individuals do this by investing in shares of different companies or by combining stocks with DEBENTURES, MUTUAL FUND shares, FIXED DEPOSITS and other investment vehicles. Companies achieve diversification by venturing into new and unrelated business areas. 




EEFC Account This refers to the Exchange Earners' Foreign Currency Account, a scheme introduced in 1992 for exporters and residents receiving foreign exchange. A certain percentage of the earnings may be maintained in this account in order to limit exchange rate risk in case of future imports or for other specified purposes. 

Efficient Portfolio A diversified selection of stocks resulting in a least risk PORTFOLIO for a given rate of return. At that level of RISK, no other portfolio provides superior returns. Combining shares from different unrelated industries helps to neutralize the UNSYSTEMATIC RISK inherent in each security.


EOQ The acronym for Economic Order Quantity, a term that relates to INVENTORY management. It is the optimum size of order which minimizes the cost of purchasing and holding inventories.
Equity Grading A service offered by the credit rating agency, ICRA Limited, under which the agency assigns a grade to an equity issue, at the request of the prospective issuer. This symbolic indicator conveys the agency's opinion on the relative quality of equity being offered, on the basis of its in-depth study of the company and all relevant factors. It takes into account the earning prospects, risk and financial strength associated with the issuer, which reflect its managerial competence, industry outlook, competition, etc. credit rating agency, ICRA Limited, under which the agency assigns a grade to an equity issue, at the request of the prospective issuer. This symbolic indicator conveys the agency's opinion on the relative quality of equity being offered, on the basis of its in-depth study of the company and all relevant factors. It takes into account the earning prospects, risk and financial strength associated with the issuer, which reflect its managerial competence, industry outlook, competition, etc. There are 12 grades starting with ERAI (signifying excellent earning prospects with low risk) and ending with ERD3 (representing poor earning prospects and high risk). The agency also offers the service of Equity Assessment, which is at the request of an investor. This appraisal is a one-time exercise and is in the form of a report that is intended to help investors in their investment decisions.


Equity Share A security that represents ownership interest in a company. It is issued to those who have contributed capital in setting up an enterprise. Apart from a PUBLIC ISSUE, equity shares may originate through an issue of BONUS SHARES, CONVERTIBLE securities, WARRANTS, GDRS, etc. An alternative term that is sometimes used is 'COMMON STOCK' or simply, 'STOCK'.

Escrow Cash, securities or other valuable instruments that are held by a third party to ensure that the obligations under a contract are discharged. The escrow mechanism is a technique of mitigating the risk to lenders and it is used typically in infrastructure projects such as power, roads or telecom. For example, an escrow account can be set up at a bank for depositing the payments of electricity bills.

Euro The common European currency that will come into being with the formation of the European Union. This economic union has given birth to the European Monetary Union tht will be characterized by a common CENTRAL BANK and MONETARY POLICY, besides the common currency. Elimination of exchange rate risk and reduction of transaction costs between members are seen as major benefits of the common currency. The circulation of the Euro is slated to take place in 2002 and it is expected to emerge as an important international currency. More specifically, it will compete with the US dollar as a reserve currency.

Euro Issue An issue of securities to raise funds outside the domestic market. Euro issues by Indian companies have been by way of GDRS or EUROCONVERTIBLE BONDS. The advantages associated with Euro issues are :

1. Reduced cost of capital owing to lower interest rates and floatation costs.
2. Efficient pricing that maximizes mobilization.
3. No immediate dilution of voting control.
4. Greater visibility due to international exposure.
5. Inflow of foreign currency funds.

Euro issues must conform to the guidelines issued by the Central Government. Among other thing, prior permission for an issue must be obtained from the Ministry of Finance. (See GDR and FOREIGN CURRENCY CONVERTIBLE BOND). 

Euro bond A bond denominated in a currency different from that of the country in which it is sold. 

Financial Futures These are contracts guaranteeing delivery of specified financial instruments on a future date, at a predetermined price. The financial instruments traded in the U.S. futures markets consist of foreign currencies and debt securities e.g., TREASURY BILLS, long-term U.S. Treasury BONDS, COMMERCIAL PAPER, etc. The futures contracts on debt securities are commonly known as interest-rate futures. They offer companies, banks and institutions a means to insulate themselves from adverse interest rate movements through HEADING. The objective behind hedging is to establish in advance, a certain rate of interest for a given time period. That apart, financial futures offer considerable profit potential which attracts speculators and individual investors too.

Financial Institution A non-banking financial intermediary (company corporation or co-operative society) carrying on any of the activities specified in the relevant section of the Reserve Bank of India Act. These activities include lending, investing in shares and other securities, HIRE-PURCHASE, insurance and CHIT FUNDS.
 In general, this term refers to the Development Finance Institutions such as IDBI and IFCI, as well as the Unit Trust of India (UTI) and the Life Insurance Corporation of India (LIC). 

Financial Leverage The ability to magnify earnings available to equity shareholders, by the use of debt or fixed-charge securities. Generally, the higher the amount of debt in relation to total financing, the greater will be the impact on profits available to equity shareholders, other things being equal. 

DFL =	Percentage change in EPS
	Percentage change in PBIT

The Money Market is that segment of the financial markets wherein financial instruments having maturities of less than one year are traded. These different instruments are listed below :

Instrument	Typical MATURITY (in days)
CALL MONEY and NOTICE MONEY	1 and up to 14
REPOS	14
INTER-BANK TERM MONEY	15 TO 90
BILL OF EXCHANGE	90
TREASURE BILL	91 AND 364
INTER-BANK PARTICIPATION
CERTIFICATE	91 TO 180
CERTIFICATE OF DEPOSIT	90 TO 364
COMMERCIAL PAPER	30 TO 364
INTERCORPORATE DEPOSIT	90

 The Capital Market is that segment of the financial markets in which securities having maturities exceeding one year are traded. Examples include DEBENTURES, PREFERENCE shares and EQUITY SHARES.


Fiscal Policy The use of tax and expenditure powers by a government. Government all over the world, are vested with the task of creating infrastructure (e.g., roads, ports, power plants, etc.) and are also required to ensure internal and external security. These responsibilities entail government expenditures on various fronts – capital outlays, the defense forces, police, the administrative services and others. Taxes are a major source of revenue to meet these outflows. Thus, the Union Government collects income tax, EXCISE DUTY, customs duty, etc., through its different arms.

Floating Exchange Rate The exchange rate of a currency that is allowed to float, either within a narrow specified band around a reference rate, or totally freely according to market forces. These forces of demand and supply are influenced by factors, such as, a nation's economic health, trade performance and BALANCE OF PAYMENTS position, interest rates and INFLATION.

Floating Rate Bond A debt security whose COUPON RATE is periodically adjusted upwards or downwards, usually within a specified band, on the basis of a benchmark interest rate or an index. These securities, also termed 'Indexed Bonds', were introduced to offer investors protection from INFLATION and INTEREST RATE RISK that are inherent in a DEBENTURE or BOND bearing a fixed coupon. When interest rates and bond YIELDS go up, the coupon is raised as indicated by the issuer. The disadvantage is when rtes fall, because the bondholder's coupon receipts will fall. Moreover, the downward revision of the coupon would also preclude any CAPITAL GAINS by way of price appreciation, accruing to the holder. In India e.g., the first such instrument was introduced by the State Bank of India in December 1993. The bonds carry a floating rate of interest for 3 percent over the bank's maximum term deposit rate, with a minimum coupon rate of 12 percent per annum; the coupon rate will be adjusted at regular intervals of six months on January 1 and July 1 throughout the tenure of the instrument.


Foreign Currency Convertible Bond (FCCB) An unsecured debt instrument denominated in a foreign-currency and issued by an Indian company which is convertible into shares, or in some cases into GDRs, at a predetermined rate. That is, the CONVERSION PRICE and the exchange rate are fixed. The BOND which bears a certain coupon enables the issuing company to economize on interest cost by tapping foreign markets and also to postpone a DILUTION in the EARNINGS PER SHARE. The advantage to the investor is the option of retaining the security as a bond till REDEMPTION, if the stock does not rise to the desired level. Moreover, the interest rate on the security is higher as compared to bonds of foreign companies. Subject to the rules prevailing, put and call OPTIONS may be attached to the instrument. The put enables investors to sell their bonds back to the issuer. The call allows the issuer to undertake REFINANCING or to force conversion. Incidentally, one dimension of FCCBs is that they add to India's external debt. Moreover, until conversion, the interest is paid in foreign currency. If the option to convert is not exercised, redemption too will entail an outflow of foreign currency. Therefore, the exchange risk, i.e., the depreciation cost, must be taken into consideration. In some respects, an 'Alpine Convertible' bond (issued to Swiss investors) scores over others; the issue costs are lower and the placement process is shorter.


Forfeiting This refers to the sale of export receivables. It amounts to DISCOUNTING receivables by a forfeiting company, but without recourse to the exporter. Therefore, it serves to convert as sale of goods on credit into a cash sale. Under this arrangement, the exporter receives the proceeds on surrendering to the forfeiter, the endorsed debt instrument duly accepted by the importer and co-accepted by his bank. Unless otherwise specified, the forfeiter bears the risk of default in payment by the importer. So, the forfeiter's fee depends on the country of the importer apart from the due date of payment. For instance, the fee for forfeiting bills accepted by an importer in Uganda could be higher than for an importer in U.K. in India, the EXIM BANK introduced forfeiting in 1992. Authorized Dealers in foreign exchange may also enter this business.

Forfeiture It means the deprivation of shares held by an investor, usually as a consequence of default in paying money, called upon allotment, to the company. As a result of a forfeiture, the investor ceases to be a shareholder insofar as the forfeited shares are concerned; however, he remains liable for the sum due.
Formula Plans These are mechanistic methods of timing decisions relating to the buying and selling of securities. There are different formula plans that include the Constant Dollar Plan and the Constant and Variable Ratio Plans. These methods are for the patient, conservative investor who seeks protection from large losses and is not confident of timing his decisions correctly.


Forward Contract A transaction which binds a seller to deliver at a future date and the buyer to correspondingly accept a certain quantity of a specified commodity at the price agreed upon, which is known as the 'Forward Rate'. A forward contract is distinct from a futures contract because the terms of the former can be tailored to one's needs whereas, the latter is standardized in terms of quantity, quality and delivery month for different commodities. In other words, forward contracts are customized contracts that enable the parties to choose delivery dates and trading units to suit their requirements. (See also COMMODITY FUTURES.)

Forward Discount The differential by which a currency is less expensive in the forward market as compared to the SPOT MARKET.
Forward Premium The amount by which a currency's forward rate exceeds the spot market rate.


Futures Market A market in which contracts for future delivery of certain commodities or securities are traded.

Goodwill The value of intangible facets of a business such as its name, reputation and location, which is reflected in the excess of its acquisition price over the fair value of its tangible assets.

Gross Domestic Product (DGP) This is a comprehensive measure of the economic activity that takes place in a country during a certain period. It is the total value of final goods and services produced in an economy in a year. The computation is on the basis of value added – the contribution of a producing enterprise is the difference between the value of its finished product and the cost of materials used.

Hence, national output is the total value added by all producing enterprises. More specifically, gross domestic product is expressed as

C + I + G + (X – M)

Where
C stands for consumption, which is the expenditure by consumers on consumption goods and services.
I is 'Gross private Domestic Investment' representing the acquisition of new capital goods (e.g., plant and machinery) and inventory additions by business enterprises, as well as construction of factories, houses, etc.
G denotes government expenditure on goods and services.
(X-M) represents the difference between exports (S) and imports (M) of goods and services.

Havala Transaction An Indian term which refers to a mode of transfering of funds out of India or into the country, bypassing official and legal channels. As an example, an individual may transfer his ill-gotten cash to a discreet bank in a foreign country. Using the havala route, he gives the rupees to an intermediary in India, who then arranges a reciprocal deposit of an equivalent amount to his account in the chosen bank. At a later date, the funds could be brought into India through another havala transaction. Since such deals circumvent official channels, there is a loss to the nation in terms of the net inflow of foreign exchange.

Hedging The action of combining two or more transactions so as to achieve a risk-reducing position. The objective, generally, is to protect a profit or minimize a loss that may result on a transaction.

For instance, a SHORT SALE could be employed to lock in a price gain on a LONG TRANSACTION. As demonstrated in Appendix II, hedging is useful with futures contracts too. A disadvantage with hedging, however, is that it results in less than the maximum profit that could have accrued.

Hire-Purchase Arrangement A transaction by which an ASSET is acquired on payment of regular installments comprising the PRINCIPAL and interest spread over a specified period. Although the asset gets transferred on payment of the last installment, the hirer can avail of DEPRECIATION and deduction of interest cost for computing taxable income.
Hundi An Indian term for a negotiable instrument that is similar to a BILL OF EXCHANGE.

Hypothecation This refers to the pledging of assets as security for funds borrowed. Bank lending for working capital involves a hypothecation of INVENTORIES and book debts. Under this arrangement, the CURRENT ASSETS remain with the borrower, but in case of default, the bank may seek recovery of the loan by instituting a lawsuit to seize the hypothecated assets, which can later be sold.

Dividend The payment made by a company to its shareholders. Legal and financial considerations have a bearing on the level of dividend to be paid. For instance, dividends may be paid out of profits alone; so also, a growing company needs funds to finance its expansion and hence may pay only a modest dividend, in order to conserve resources. 

Dow Theory A theory to ascertain the emergence of a primary trend (a trend which indicates either a bullish or bearish phase) in the stock market. It seeks confirmation of whether a long-term market advance or decline is under way, by examining the movement of the Dow Jones Industrial Average in conjunction with the Dow Jones Transportation Average. These averages are summary measures of stock prices in the U.S.

Dumping The sale of goods in a foreign market at a price that is below the price realized in the home country, after allowing for all costs of transfer including transportation charges and duties. The motive may be to enhance revenues, offload surplus stocks or a predatory intent of killing foreign competition. Earnings Per Share (EPS) The net profits of a company expressed on a per (EQUITY) SHARE basis. It is arrived at by dividing the figure of profits after taxes and DIVIDENDS paid on PREFERENCE SHARES, if any, by the number of equity shares outstanding. Therefore, it does not reveal the potential impact of dilution in earnings on account of securities such as convertibles or warrants that may be outstanding. Moreover, an improvement in EPS does not necessarily indicate a more productive use of the total amount of funds available with a firm.

Economic Value Added (EVA) A tool for evaluating and selecting stocks for investment, and also used as a measure of managerial performance. An American consultancy firm, Stern Stewart is credited with the development of this tool in the late eighties. It is calculated by subtracting the total cost of capital from the after-tax operating profits of a company.

EVA = After-tax Operating Profits – Total cost of capital

Efficient Portfolio A diversified selection of stocks resulting in a least risk PORTFOLIO for a given rate of return. At that level of RISK, no other portfolio provides superior returns. Combining shares from different unrelated industries helps to neutralize the UNSYSTEMATIC RISK inherent in each security.