Glossary Of Financial Terms starting with B

Alphabetical List


Badla System An Indian term for a trading system with a mechanism for deferring either payment for shares purchased or delivery of shares sold. The system, discontinued by the Securities and Exchange Board of India (SEBI), from March 1994, was applicable to A group or 'Specified' shares. For carrying forward a purchase transaction from one settlement period to the next, the buyer normally paid the seller a charge termed badla or 'Contango'. This consideration would be fixed in the badla session. When buyers could not take delivery, badla financiers would step in and help out the buyers. In the reverse but abnormal situation, when the market was in an oversold position and a buyer demanded delivery but the seller could not respond even by borrowing shares, the buyer would be paid a 'Backwardation charge', also known as undha badla. However the buyer could insist on delivery, instead of accepting deferment charges, leading to an auction of the shares in question. The contango or backwardation charge depended on various factors including the extent of outstanding position, short sales, floating stocks, and the prevailing interest rate. The criticism against the badla system has essentially been on two counts: equity and transparency. The system was slanted in favour of short sellers who could, in a normal market situation, earn interest even without owning the shares sold (it has been argued though, that such short selling helps to check speculative and frenzied buying). Also, it was suspected that the contango and backwardation charges reportedly decided at the badla sessions were often untrue. Besides, it appears that the limit of 90 days within which the carryovers were to be settled, was often exceeded.

Some features of the new system of CARRY FORWARD (CF), introduced at the Bombay Stock Exchange in January 1996, are :

  1. Sale or purchase of transactions may be carried forward up to 75 days.
  2. Brokers are to classify the transactions, as to whether for delivery or CF, and report daily.
  3. Badla sessions will be screen-based.
  4. Strict monitoring of brokers' positions with the imposition of various margins: daily, mark-to-market and CF.
A more liberal Modified Carry Forward System based on the recommendations of the J. S. Varma committee was introduced in 1997. Salient features of the new system include an increase in the overall carry forward limit per broker, reduction in daily margin and removal of the limit on financiers.

Balance of Payments A statement that contains details of all the economic transactions of a country with the rest of the world, for a given time period, usually one year. The statement has two parts: the Current Account and the Capital Account.

The 'Current Account' gives a record of a country's: (a) Trade Balance which shows the difference of exports and imports of physical goods such as machinery, textiles, chemicals and tea, (b) 'Invisibles' that comprise services (rendered and received) such as transportation and insurance and certain other flows, notably private transfers by individuals. When imports of goods exceed exports, it is referred to as a 'Trade Deficit'. However, the overall current account position depends on both the trade balance and the performance of 'Invisibles'.

The 'Capital Account' contains details of the inward and outward flows of capital and international grants and loans. Examples of such flows are external assistance, foreign (direct and PORTFOLIO) investments, subscription to Global Depository Receipts or EUROCONVERTIBLE BONDS and deposits of non-residents. Inflows on the capital account are helpful in financing a current account DEFICIT. Any gap that remains is covered by drawing on exchange or gold reserves, or by credit from the International Monetary Fund. Depending on the nature of imports, a deficit on the current account indicates an excess of investment over domestic saving in an economy. So long as this deficit is kept in check (evaluated as a percentage of the CROSS DOMESTIC PRODUCT), the DEBT SERVICE RATIO would remain within manageable limits.

A challenge posed to India some years ago was the upward pressure on the Rupee's exchange rate in the wake of large capital account inflows. So, to maintain the competitiveness of India's exports, the Reserve Bank of India (RBI) resorted to purchases of foreign exchange. However, this has also caused money supply to increase, and the RBI has had to 'sterilize' such monetization by raising the CASH RESERVE RATIO or by engaging in OPEN MARKET OPERATIONS.

Balance Sheet A statement of the financial position of an enterprise, as on a certain date, and in a certain format showing the type and amounts of the various ASSETS owned, LIABILITIES owed, and shareholder's funds.

Bank Guarantee The financial guarantees and performance guarantees issued by banks on behalf of their clients. A financial guarantee assures repayment of money. (e.g. an advance received on an electrification contract), in the event of non-completion of the contract by the client. A performance guarantee provides an assurance of compensation in the event of inadequate or delayed performance on a contract. A deferred payment guarantee promises payment of installments due to a supplier of machinery or equipment.

Bank Rate The rate of interest charged by the Reserve Bank of India (RBI) on financial accommodation extended to banks and FINANCIAL INSTITUTIONS. The support is provided in the form of a bills rediscounting facility and advances or REFINANCE against specified ASSETS (e.g. TREASURY BILLS and DATED SECURITIES) or PROMISSORY NOTES.

The intent behind changing the Bank Rate at certain junctures is to raise or lower the cost of funds that banks obtain from the RBI. This, in turn, would alter the structure of banks' interest rates and thereby serve to curb or encourage the use of credit. However, the Bank Rate is a relatively passive instrument of credit control. In the wake of the East Asian currency crisis, the RBI used the Bank Rate in conjunction with the CASH RESERVE RATIO and other measures to stabilize the exchange rate of the Rupee.

In recent times, it has been RBI's endeavor to make the Bank Rae and effective signaling device as well as a reference rate. However, since frequent changes in the Bank Rate may be undesirable, the short-term REPOS interest rate seems to be a useful supplement in influencing the flow and cost of funds in the short term.

Bear A person who expects share prices in general to decline and who is likely to indulge in SHORT SALES.

Bear Market A long period of declining security prices. Widespread expectations of a fall in corporate profits or a slowdown in general economic activity can bring about a bear market.

Beta (b) A measure of the volatility of a stock in relation to the market. More specifically, it is the index of SYSTEMATIC RISK, indicating the sensitivity of return on a security or a PORTFOLIO to return from the market. It is the slope of the regression line, known as the CHARACTERISTIC LINE, which shows the relationship of an ASSET with the market. For measuring market returns, a proxy such as a broad-based index is used. Thus, if b exceeds 1, the security is more volatile than the market, and is termed an 'Aggressive Security'. For example, a beta of 1.3 implies that a security's return will increase by 13 percent when the return from the market goes up by 10 percent. An asset whose beta is less than 1 is termed a 'defensive security'. Based on this, an aggressive growth strategy would be to invest in high beta stocks when the market is poised for an upswing; similarly, a switchover to low beta stocks is recommended when a downswing is imminent.

Bills of Exchange A credit instrument that originates from the creditor (drawer) on which the DEBTOR (drawee) acknowledges his LIABILITY; after such acceptance, the drawer may get the bill discounted, so as to realize the proceeds immediately. As an illustration, consider the following :

Hindustan Rasayan, a supplier of chemicals, draws a 90- day bill of Rs.6,20,000 on Indian Parma Corporation (drawee) directing the drawee to make payment at the end of 90 days to or to the order of Pyramid Finance Limited (payee).

After the drawee accepts the bill, it is discounted with Pyramid Finance at a DISCOUNT RATE of 20 percent per annum. Hindustan Rasayan thus receives

6,20,000 x (1 – (90/365 x 20/100)) = Rs.5,89,425

The effective interest rate works out to 21 percent :

6,20,000 – 5,89,425    365
-------------------------------
5,89,425                    90

Blue Chip A share of a company that is financially very sound, with an impressive track record of earnings and DIVIDENDS, and which is highly regarded for its competent management, quality products and/or services. Examples in India are Hindustan Lever, Gujarat Ambuja Cements, and Reckitt & Colman among others.

Bond A long-term debt instrument on which the issuer pays interest periodically, known as 'Coupon'. Bonds are secured by COLLATERAL in the form of immovable property. While generally, bonds have a definite MATURITY, 'Perpetual Bonds' are securities without any maturity. In the U.S., the term DEBENTURES refers to long-term debt instruments which are not secured by specific collateral, so as to distinguish them from bonds.

Bond Insurance A form for credit enhancement, which provides a financial guarantee on the obligations of a debt instrument. The purpose of credit enhancement is to increase the safety of debt securities. Apart from financial guarantees, other forms of credit enhancement include letter of credit, overcollateralization, etc. Overcollateralization involves the provision of additional assets as security.

Bonus Shares The issue of shares to the shareholders of a company, by capitalizing a part of the company's reserves. The decision to issue bonus shares, or stock DIVIDEND as in the U.S., may be in response to the need to signal an affirmation to the expectations of shareholders that the prospects of the company are bright; or it may be with the motive of bringing down the share price in absolute terms, in order to ensure continuing investor interest. Following a bonus issue, though the number of total shares increases, the proportional ownership of shareholders does not change. The magnitude of a bonus issue is determined by taking into account certain rules, laid down for the purpose. For example, the issue can be made out of free reserves created by genuine profits or by share PREMIUM collected in cash only. Also, the residual reserves, after the proposed capitalization, must be at least 40 percent of the increased PAID-UP CAPITAL. These and other guidelines must be satisfied by a company that is considering a bonus issue. )See also MARKET CAPITALIZATION.)

Book Building A process used to ascertain and record the indicative subscription bids of interested investors to a planned issue of securities. The advantages of this technique of obtaining advance feedback, are that it results in optimal pricing and removes uncertainty regarding mobilization of funds.

The concept of book building is alien to India's PRIMARY MARKET; so, towards the end of 1995, efforts were under way, to introduce this mechanism as an option in the case of large issues (minimum size: Rs.100 crore). An issue was divided into a 'Placement Portion' and another termed 'Net Offer to the Public'. For the Placement Portion, the exercise of book building enables the issuing company to interact with institutional and individual investors, and collect particulars of the number of shares they would buy at various prices. The procedure is carried out by a lead manager to the issue, called the 'Book Runner'. It commences with the circulation of a preliminary PROSPECTUS and an indicative price band, for the purpose of forming a syndicate of underwriters, comprising FINANCIAL INSTITUTIONS, MUTUAL FUNDS and others. This syndicate, in turn, contacts prospective investors in order to elicit their quotes. These quotes are forwarded to the book runner, who prepares a schedule of the size of orders at different prices. After receiving a sufficient number of orders, the company and the merchant bankers decide the issue price and underwriting particulars. There are some other aspects of book building arising from the guidelines issued by the Securities and Exchange Board of India. A change brought about in 1997 was that the book building process could be applied to the extent of 100 percent of the issue size, for large issues as defined above. Interestingly, the process has been used in India to place debt securities as well.

Book Value It is the amount of NET ASSETS that would be available per EUQUITY SHARE, after a company pays off all LIABILITES including PREFERENCE SHARES from the sale proceeds of all its ASSETS liquidated at BALANCE SHEE values.

Bought-out Deal The sale of securities under a negotiated agreement between an issuer and the investing institution, as an alternative to a PUBLIC ISSUE. The intent on the part of the buyer is to offload the securities later in the market at a profit. Bought-out deals are commonplace in issues of the Over the Counter Exchange of India (OTCEI). The advantage to the issuing company is the saving in time and cost that a public issue would entail. It is a big help to unlisted companies and projects, which must see through a gestation period before tapping the PRIMARY MARKET. For institutions and MUTUAL FUNDS, the route is another avenue for investing funds. However, there could be some disadvantages to the issuer such as interference by the INSTITUTIONAL INVESTOR or restrictive CONVENANTS in the initial subscription agreement. On the other hand, the institutional investor or the sponsor in OTCEI deals, bears the risk of capital loss due to a fall in the price of the securities.

Break-even Point The point where the revenues from a business operation equal the total costs (FIXED COSTS = VARIABLE COSTS). Thus, a profit accrues when revenues exceed the break-even point. The break-even volume is computed by dividing the fixed costs (FC) by the difference between the selling price per unit (SP) and variable cost per unit (VC). For instance, if FC is Rs.4,000, VC is Rs.60 and SP is Rs.85, the break-even volume is 4,000/(85-60) = 160 units of output.

The break-even point in terms of revenues can be determined by dividing the fixed costs by the contribution margin ((SP-VC)/SP). Thus.

4000   = Rs.13,600
((85-60)/85)


which equals the revenues at 160 units.

Bridge Loan A short-term loan granted to a borrower to tide over a temporary funds shortage. Such an accommodation is usually arranged at the time of a PUBLIC ISSUE, when expenditures on a project lead to a DEFICIT, thereby necessitating a bridge loan.

Budget A financial plan that projects receipts and payments of an entity covering a specific period of time, usually one year. Its primary purpose is to achieve financial control. Budgets could be distinguished on the basis of time span, function and flexibility. For instance, budgets may be short-term or long-term; similarly, there are Sales Budgets, Cash Budgets, Capital Expenditure Budgets and other to cover different functions.

Bull A person who expects share prices in general to move up and who is likely to take a long position in the stock market.

Business Risk The risk of business failure, which stems from factors such as the cost structure of a venture (i.e., FIXED COST versus VARIABLE COST), intra-industry competition, and government policies. It is reflected in the variability of profits before interest and taxes.