Glossary Of Financial Terms starting with P

List of Financial Terms (Alphabet Wise)

Payout Ratio The proportion of earnings available to common stockholders, which is paid out as DIVIDENDS. Hence, if a company whose EARNINGS PER SHARE are Rs.10 pays a dividend of Rs.2 per share, the payout ratio is 20 percent. The payout ratio can be the basis for setting the long-term dividend policy. For instance, a company ma fix its payout ratio at 40 per cent of earnings.

Post-shipment Credit Funds lent by banks in rupees or dollar-denominated credit (PSCFC) to exporters after the shipment of goods. This is useful to exporters who may otherwise suffer a long collection period. Post-shipment finance can be in the form of purchase or DISCOUNTING of export bills, advance against foreign bills presented for collection, advance against cash incentives, etc. Post-shipment and PRESHIPMENT finance entail disbursement fo credit and hence are FUND-BASED. In addition, banks assist exporters through non fund-based facilities such as issuance of letters of guarantee and LETTERS OF CREDIT.

In February 1996, the Reserve Bank of India scrapped the PSCFC scheme. This decision was based on the assessment that the credit provided under the scheme, being concessional, induced exporters to postpone repatriation of export earnings, especially when the rupee was expected to depreciate vvis-à-vis the US dollar. The post-shipment rupee credit continues to be available.

Payback Period The time taken to recover the investment on a project. This is ascertained in the following manner : In the above example, the payback period is estimated at two years and six months, assuming that the cash flow during the first half of the third year will be Rs.50,00. This method has some obvious drawbacks; it does not consider the time value of money nor the cash flows beyond the payback period.

Pre-shipment Credit Funds lent by banks in rupees or foreign currency (PCFC) to exporters, prior to the shipment of goods. Pre-shipment finance can be in the form of packing credit, advance against cash incentives and others. Packing credit is offered to an exporter for purposes of packing and shipment and also manufacture of goods. Such credit may be in the form of a loan, CASH CREDIT or OVERDRAFT facility.

Price-earnings Ratio The market price of a share divided by EARNINGS PER SHARE. This number, also known as the 'Multiple', or 'Multiplier', is often used by investors and analysts to determine the upward potential of a share by comparing its multiplier to that of the particular industry as a whole. The multiplicand can be the expected earnings per share. One simple rule of thumb suggests that the P/E ratio can be as high as the anticipated growth rate of a company.

Primary Market The segment of FINANCIAL MARKETS in which securities are originated. Thus, the transactions for fresh offerings fo EUQUITY SHARES, DEBENTURES, PREFERNENCE SHARES, and other securities are collectively referred to as the primary market. (See FINANCIAL MARKETS.)

Primary Reserve The sum of (a) cash reserves, legally required to be held by a bank and (b) working reserves maintained to facilitate operations such as payments to depositors and credit disbursement. The level of working reserves depends on several factors that include the scale of operations, profile of depositors, business conditions, and size of the SECONDARY RESERVE.

Prime Lending Rate (PLR) The rate of interest charged by banks on WORKING CAPITAL and short term loans to their most credit-worthy borrowers. The prime rate serves as a benchmark for deciding on the interest rate to be charged to other borrowers. Accordingly, major banks and also FINANCIAL INSTITUTIONS in India periodically announce their PLRs depending on their cost of funds and competitive lending rates. From October 1997, the Reserve Bank of India has decided to permit banks to announce separate Prime Term Lending Rates on term loans of three years and beyond. More recently, banks have been given the freedom to have different PLRs for different maturities.

Private Placement The sale, by a company, of its securities to one or a few FINANCIAL INSTITUTIONS through a process of direct negotiations, or to a limited number of individual investors. In contrast, the conventional method of PUBLIC ISSUE invites subscription from investors in general. The advantage of a private placement is the substantial saving in marketing expenses that a public issue entails. A recent trend has been the placement of EQUITY SHARES with foreign financial institutions for sourcing foreign exchange.

Profitability Index (PI) A DISCOUNTED cash flow method used in capital budgeting to evaluate the financial viability of investment proposals. The index (PI) is calculated by the formula : Where the numerator is the sum of the discounted cash inflows (present value) over the life of the project and the denominator is the initial outlay on the project. An investment proposal is viable if the index is greater than unity.

Prospectus A document required to be filed with the Registrar of Companies and also, widely distributed by a public company that seeks to mobilize funds from the public at large. A prospectus contains several details about the company including the following :

• Particulars about the issue-number of shares or other securities for which subscription is invited.
• Dates of opening and closing of the issue.
• Names and addresses of the directors of the company.
• Names of the underwriters and brokers to the issue.
• The purpose for which funds are being raised, i.e., the information about the project, prospects, risk factors and other relevant information.
• Auditors' report.
• Excerpts from the company's Memorandum and Articles of Association such as its main objects rules regarding FORFEITURE of shares and so on.

The format and contents of the prospectus must conform to the relevant provisions of the Companies Act, 1956 and rules laid down by SEBI. (See also MALEGAM COMMITTEE.)

Proxy A document that facilitates the transfer of a share-holders right to vote in favour of another person who may represent and vote on his/her behalf at a general meeting of the company. The term proxy also refers to the person authorized to act on behalf of another.

Public Debt The debt obligations of the Government of India comprising external debt, i.e., loans from foreign countries, international FINANCIAL INSTITUTIONS, etc. and internal debt that includes market loans, TREASURY BILLS, special bearer BONDS and special loans and securities outstanding. A very large portion of the internal debt obligations is held by the Reserve Bank of India.

In a broader sense, public debt includes the debt of Central, State and Local governments and also Government-owned entities. (See also TREASURY BILL and GOVERNMENT SECURITIES.)

Public Issue An invitation to the public at large to subscribe to shares or other securities of a company. A public issue entails numerous tasks such as organizing the syndicate of UNDERWRITERS, brokers and others, preparation of the PROSPECTUS and fulfillment of several formalities including, notably, prior approval from SEBI and the Registrar of Companies.

Canvassing for the issue is done mainly by the brokers who approach prospective investors directly or via sub-brokers and supply application forms and informative brochures. (See also PROSPECTUS.)