What is the difference between commercial and investment banking?
Commercial bank: accepts deposits from customers (retail depositors, commercial depositors etc. and makes consumer and commercial loans using these deposits. It may also offer anciliary services like credit cards
Investment bank: acts as an intermediary between companies and investors. Does not accept deposits, but rather sells investments, advises on M&A, etc. Loans and debt/equity issues originated by the bank are not typically held by the bank, but rather sold to third parties on the buy side through their sales and trading arms.
In fact, it may be more sensible to call investment banks as investment brokers. They are essentially like a real estate broker that connects 2 parties and convinces them to go ahead with a deal in exchange for a commission
How much dividend should we declare? Is there an alternative?
Dividend should be declared based on future needs of the organisation. If the company has positive NPV projects available do not declare dividend, else do.
Alternatives to distribution of dividend:
Buy back of shares: This comes out with advantages such as
a. When the growth potential is limited they use unused cash to buy back shares.
b. Tax gains – Capital Gains is lower rate
c. Market perception: By buying its shares at a price higher than the prevailing market price company signals that its share valuation should be higher. etc.
d. Investors can choose: Everyone has to take dividends. Only those investors wanting return of capital will participate in buy back
WRONG ANSWERS
Stock split: A stock split does not change the wealth of the shareholder, it reduces the market price per share. There is no cash flow
Bonus shares: Essentially same as stock split
Suppose we issued equity to purchase a machinery, how will it be affecting cash flow statement for the entire year?
Ther will be no direct impact in cash flow statement either in Investing activity or financing activity as there is no cash flow. However the tax sheid on depreciation which is added back to net income and it also impacts the tax paid with affects the balance of CFO.
Difference between broad money and narrow money?
The term “narrow money” typically covers the most liquid forms of money, i.e. currency (banknotes and coins) as well as bank-account balances that can immediately be converted into currency or used for cashless payments (overnight deposits, checking accounts, etc). Broad Money is M3
M0 is the sum of Currency in Circulation, Bankers’ Deposits with RBI, and ‘Other’ Deposits with RBI
Components of M0:
Currency in Circulation
Bankers’ Deposits with RBI
‘Other’ Deposits with RBI
Note: ‘Other’ deposits with RBI comprise mainly: (i) deposits of quasi-government and other financial institutions including primary dealers, (ii) balances in the accounts of foreign Central banks and Governments, (iii) accounts of international agencies such as the International Monetary Fund, etc.
M1 (Narrow Money)
M1 is the sum of Currency with the Public, Demand Deposits with the Banking System, and ‘Other’ Deposits with RBI.
Components of M1:
Currency with the Public
Current Deposits with the Banking System
Demand Liabilities Portion of Savings Deposits with the Banking System
‘Other’ Deposits with RBI
In other words, M1 = Currency with the Public + Demand Deposits with the Banking System + ‘Other’ Deposits with RBI
Significance of M1: M1 includes currency with the public and non-interest bearing deposits with the banking sector including that of RBI.
M2
M2 is the sum of Currency with the Public, Current Deposits with the Banking System, Savings Deposits with the Banking System, Certificates of Deposits issued by Banks, Term Deposits of residents with a contractual maturity up to and including one year with the Banking System, and ‘Other’ Deposits with RBI.
Components of M2:
Currency with the Public
Current Deposits with the Banking System
Demand Liabilities of Savings Deposits with the Banking System
‘Other’ Deposits with RBI
Term Deposits of residents with a contractual maturity up to and including one year with the Banking System
Certificates of Deposits issued by Banks
In other words, M2=M1+ Time Liabilities Portion of Savings Deposits with the Banking System + Certificates of Deposit issued by Banks + Term Deposits of residents with a contractual maturity of up to and including one year with the Banking System.
M3 (Broad Money)
M3 is the sum of Currency with the Public, Current Deposits with the Banking System, Savings Deposits with the Banking System, Certificates of Deposits issued by Banks, Term Deposits of residents with the Banking System, Call/Term borrowings from ‘Non-depository’ financial corporations by the Banking System, and ‘Other’ Deposits with RBI.
Components of M3:
Currency with the Public
Current Deposits with the Banking System
Savings Deposits with the Banking System
Certificates of Deposits issued by Banks
Term Deposits of residents with a contractual maturity up to and including one year with the Banking System
‘Other’ Deposits with RBI
Term Deposits of residents with a contractual maturity of over one year with the Banking System
Call/Term borrowings from ‘Non-depository’ financial corporations by the Banking System.
M3=M2+ Term Deposits of residents with a contractual maturity of over one year with the Banking System + Call/Term borrowings from ‘Non-depository’ financial corporations by the Banking System.
Significance of M3: M3 captures the complete balance sheet of the banking sector.
What SLR, CRR, REPO, Reverse Repo and rates?
CRR is a reserve maintained by banks with the RBI. It is a percentage of the banks’ deposits maintained in cash form. SLR is an obligatory reserve that commercial banks must maintain themselves. It is a percentage of commercial banks’ net demand and time liabilities, maintained as approved securities. These are defined liquid securities. Repurchase agreements, or repos, are a form of short-term borrowing used in the money markets, which involve the purchase of securities with the agreement to sell them back at a specific date, usually for a higher price.
Repos and reverse repos represent the same transaction but are titled differently depending on which side of the transaction you’re on. For the party originally selling the security (and agreeing to repurchase it in the future), it is a reverse repurchase agreement (RRP). For the party originally buying the security (and agreeing to sell in the future) it is a repurchase agreement (RP) or repo agreement. These are the monetary measures used by the Reserve Bank of India to deal with the deficiency of funds and liquidity in the market. It is a vital money flow control mechanisms used by the central bank. Bank lending rates are impacted by repo rate and reverse repo rate.
IPO AND BOOK BUILDING PROCESS
An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. (HDFC Standard life Insurance) (Biggest IPO – COAL INDIA – 15200cr) Book building is the process by which an underwriter attempts to determine at what price to offer an initial public offering (IPO) based on demand from institutional investors. An underwriter builds a book by accepting orders from fund managers, indicating the number of shares they desire and the price they are willing to pay.
Book building is a process of price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.
https://economictimes.indiatimes.com/markets/ipos/fpos/what-is-ipo-book-building-process/articleshow/75004763.cms?from=mdr
