General Awareness Indian Economy |Questions & Answers |Notes
Characteristics of Indian Economy
1. Under-developed Economy
It is characterised by
• High population growth rates
• Abundant but unutilised natural resources
• Low rate of capital formation
• Low standard of living characterised by continuous and sustained efforts to raise it through a proper utilisation of available natural, man power, financial and entrepreneurial resources.
2. Mixed Economy
India has a mixed economy because of
• existence of private and public sector industries makes our economy mixed.
• market trends determine production, investment and business dealings in the’private sector. But marketing mechanism is not completely free from the State control.
• existence of the public sector along with free enterprise.
• economic planning since Independence gave it the character of a socialistic enconomy.
3. Federal Economy
As India has a federal form of government, its financial system is federal.
• India has a strong Centre from the point of view of finances.
(i) Use of powers of concurrent taxation is avoided.
(ii) Sources of revenue allotted to Centre are high-yielding and elastic.
(iii) Money, banking and currency are with the Centre.
(iv) Some exclusive sources of revenue are given to the Centre.
• Financial powers are divided between Centre and the States efficiently.
• Three means are used for resource transfer.
• There is flexibility in resource transfer.
It was set up in March 1950, and consists of a Chairman, Deputy Chairman and other members. Prime Minister is its Chairman.
• Assessment of material, capital and human resources of the country.
• Formulation of plans for the most effective and balanced utilisation of the country’s resources.
• Definition of stages in which the plan should be carried out.
• Determination of the nature of the machinery necessary for the implementation of the plan in all its aspects.
• Appraisal from time to time of the progress achieved in the execution of each stage of the plan.
• Public co-operation in national development
• Perspective planning.
National Development Council
It comprises Chief Ministers of all the States and is headed by the Prime Minister.
• To prescribe guidelines for the formulation of National Plan, including assessment of resources for the plan.
• To consider National Plan as formulated by the Planning Commission.
• To consider important quest^tts of social and economic policy affecting national developments.
• To review working of the plan from time to time.
• To recommend such measures as are necessary for achieving aims and targets set out in the National Plan. It includes measures to
(i) secure active participation and co-operation of the people
(ii) improve efficiency of the administrative services
(iii) ensure fullest development of the less advaned regions and sections of the community through sacrifices borne equally by all the citizens to build up resources for national development.
First Five Year Plan (1951-56)
• Highest priority to agriculture
• Achieving self-sufficiency in foodgrains production
• Rehabilitation of the economy devastated by the Second world war and partition
• Building economic overheads and providing social justice.
Second Five Year Plan (1956-61)
• Giving a big push to the economy in order to enable it to take off in the context of economic development
• Rapid industrialisation with particular emphasis on the development of basic and heavy industries, an increase of 25 per cent in national income over the five year period and large expansion of employment opportunities
• Reduction of inequalities in income and wealth and a more even distribution of economic power.
The plan also aimed at increasing the rate of investment from about seven per cent of the national incrome to 11 per cent by 1960-61.
Third Five Year Plan (1961-66)
This plan aimed at securing a marked advance towards self sustaining growth.
• To secure an increase in the national income of over five per cent per annum and at the same time ensure pattern of investment which could sustain this rate of growth during subsequent plan periods.
• To obtain self-sufficiency in production
• To expand basic industries like steel, chemicals, fuel and power, etc.
• To create substantial employment opportunities
• To provide greater equality of opportunities and reducing economic disparities.
Fourth Five Year Plan (1969-74)
In the last two years
Increased food grains production led to a decline in price levels.
The foreign exchange position improved.
By 1969, the economy had absorbed the stocks it had received during the Third Plan..
Fourth Plan was launched in April 1969.
• Progressive achievement of self-reliance
• Growth with justice
• Balanced regional development
• Providing a minimum nutritional level to the people
Fifth Five Year Plan (1974-79)
It was formulated against the backdrop of severe
• Removal of poverty and attainment of self-reliance
• Attaining 5.5 per cent:annual growth in GDP
• Employment generation
• National programme for minimum needs, elementary education, drinking water, medical care in rural areas, nutrition, home sites for landless labour, rural roads, rural electrification and slum • improvements, etc.
• Social welfare
• Emphasis on agriculture
• Development of key and basic industries
• Adequate public procurement and distribution system.
• Export promotion and import substitution
• Restraint on non-essential consumption and reduction in economic, social and regional inequalities.
Sixth Five Year Plan (1980-85)
This plan was formulated for the period 1978-83 by the Janta Party Government and was referred to as the Rolling plan. But in 1980 when Congress (I) came to power, the new government abandoned the concept and a new Sixth plan was prepared for the period 1980-85. This plan was conceptualised considering achievements and shortcoming of the past three decades of planning. Removal of poverty was the foremost objective of the plan, even though it was recognised that task of this magnitude could not be accomplished in a short period of five years. Objective
• Achieving economic and technological self-reliance
• Reducing poverty and unemployment.
• Developing indigenous energy sources.
• Improving quality of life of the poorest through , Minimum Needs Programme.
* Reducing inequalities of income and health
through better redistribution.
• Population control.
• Involving sections of people in the process of development.
Seventh Five Year Plan (1985-90)
Basic objectives of this plan was
• social justice Focus of this plan was on
• Productivity Objectives
• To accelerate growth in foodgifSins production
• To increase employment opportunities
• To raise productivity.
Eighth Five Year Plan (1992-97)
This plan envisaged an aggregate investment of Rs. 7,98, 000 crore — Rs. 3,61,000 crore in the public sector; Rs. 1,49,000 crore in the private sector and Rs.2,88,000 crore in the household sector. Thus, public sector investment amounted to 45.2 per cent of the total domestic investment, allowing a much higher scope for the private sector than had hitherto been given to it.
The public sector had an outlay of Rs.4,34,100 crore— Rs.3,61,000 crore for investment and Rs. 73,100 crore for current outlay. The outlay for Central Sector was Rs. 2,47,865 crore; States Rs.1,79,985 crore; and Union Territories Rs. 6,250 crore.
• Generation of adequate employment to achieve near-full employment by the turn of the century.
• Containment of population growth through active people’s cooperation and an effective scheme of incentives and disincentives.
• Universalisation of illiteracy among the people in the age-group of 15 to 35 years
• Provision of safe drinking water and primary healthcare facilities, including immunisation, accessible to all the villages & entire population and complete elimination of scaverging
• Growth and diversification of agriculture to achieve self-sufficiency in food and generate surpluses for exports
• Strengthening infrastructure (energy, transport, communication, irrigation) in order to support growth process on a sustainable basis. ‘
Average growth rate achieved in this plan in terms of GDP at market prices was 6.8 per cent against target of 5.6 per cent. This was supported by an average investment of 25 per cent of GDP; thereby yielding an ICOR of 3.7, which was significantly less than the assumed figure of 4.1.
Ninth Five Year Plan (1997-2002)
This plan envisages an aggregate investment of Rs. 8,59,200 crore at 1996-97 prices—Rs. 4,89,361 crore in Central sector and Rs. 3,69,839 crore in States sector. Share of the Centre’s plan and that of the States, including Union Territories would be 57 per cent and 43 per cent respectively. The private sector investment is Rs. 5,50,000 crore.
• Priority to agriculture and rural development with a view to generating adequate productivity employment and eradication of poverty.
• Accelerating growth rate of economy with stable prices.
• Ensuring food and nutritional security for all, particularly vulnerable sections of the society.
• Providing basic minimum services of safe drinking water, primary healthcare facilities, universal primary education, shelter and connectivity to all in a time-bound manner
• Containing growth rate of population
• Ensuring environmental sustainability of development process through soical mobilisation and participation of people at all levels.
• Empowerment of women and socially disadvanta-geous groups such as scheduled castes, Scheduled tribes Other Backward classes and Minorities as agents of social economic change and development
• Promoting and developing people’s participatory institutions like Panchayati Raj Institutions, Cooperatives and Self-helping groups
• Strengthening efforts to build self-reliance.
Rate of Growth
This plan aims at the growth rate of 6.5 per cent per annum of the Gross Domestic Product (GDP). It assumes Incremental Capital Output Ratio (ICOR) of 4.3, Saving rate of 26.1 per cent, Current Account Deficit of 2.1 per cent and average rate of investment of 28.2 per cent of GDP at market price. This growth is to be achieved through 3.9 growth rate in agriculture, 8.2 per cent in industry and 11.8 per cent in exports. Thus, growth rate of GDP is in line with 6.8 per cent achieved during Eighth plan.
• To increase production of foodgrains from 199.32 million tonnes in 1996-97 to 234.00 million tonnes in 2001-2002.
• To bring 15 million hectares of more land under irrigation.
• To increase production of finished Steel from 27.38 million tonnes to 38.01 million tonnes.
• To increase exports by 11.8 per cent.
• To create 50 million additional jobs.
• Universal primary education by the end of Ninth plan.
• To decrease poverty ratio from 29.18 per cent in 1996-97 to 17.98 per cent in 2001-02.
• To decrease growth rate of population from 1.85 per cent in 1996-97 to 1.57 per cent in 2001-02.
• Crude Birth Rate (CBR) of 23 per thousand, Infant Mortality Rate (IMR) of 50 per thousand, Couple Protection Rate (CPR) of 60% and Total Fertility Rate (TFR) of 2.6 in 2001-02.
Approach Paper to the Tenth Five Year Plan (2002-07)
National Development Council (NDC) unanimously approved the Approach Paper to the Tenth Five-Year Plan (2002-07) on Sept.l, 2001. It seeks to achieve 8 percent Gross Domestic Product (GDP) growth rate luring the plan period in order to double per capita ncome in next ten years. Plan is scheduled to be launched on April 1, 2002.
Approach Paper also proposes following :
• Stepping up disinvestment target to Rs. 16,000 crore annually
Raising investment ratio to 32 per cent from the present 24 per cent
Increasing tax GDP ratio to 11.7 percent from the current 9.2 per cent;
Reducing poverty ratio to 20 per cent
Reduction in infant and maternal mortality rates
Universal enrolment of children in schools
Raising employment growth rate
Reducing gender gap in literacy and wage rates
1 To provide more villages access to potable drinking water, cleaning polluted rivers, increase in forest cover
– Reduction in population growth rate
It aims at taking democracy to the village level by delegating substance of power to people’s organisation. It was main recommendation of the Balwant Rai Mehta Committee in order to popularise Community Development Projects and make them more effective. It was inaugurated at Nagpur in Rajasthan on October 2, 1959.
• It is a three-tier system with Zila Parishad at district level Panchayat Samiti at block level Gram Panchayat at village level.
• Members of the panchayats are directly elected by the people.
• Panchayat Samitis consist of
Presidents of the Panchayats Few co-opted members to represent Scheduled Castes and women.
• Members of the Zila Parished consist of Presidents of Panchayat Samitis MLA’s elected from that District.
• Functions of the Panchayat Samitis
(i) Elementary education
(ii) Public health
Minor irrigation projects, etc.
• Functions of the Zila Parishad
(i) To co-ordinate plan programmes of Panchayat Samitis.
(i) To supervise their functions.
• Panchayati Raj will devote itself to the following measures :
(i) To increase agriculture production
(ii) Development of rural industry
(iii) Full utilisation of local manpower and resources
(iv) Facilities for education and adult literacy
Constitution Act (73rd Amendment)
In order to activate Panchayati Raj institutions more and to confer on them statutory status, Parliament passed the Constitution (73rd Amendment) Act on Dec. 23, 1992.
It provides for :
• constitution of Gram Sabha in villages
• constitution of three-tier Panchayats at the village and other levels
• direct election of all seats in Panchayats
• reservation of seats for Scheduled Castes and Scheduled Tribes
• reservation of one-third of the total seats at every level of the Panchayati Raj for women
• fixing of tenure of five years for Panchayats.
• Panchayati Raj institutions are in existence almost in all States and Union Territories.
• Today, Gram Panchayats are involved for
(i) identification of beneficiaries in Anti-Poverty Programme
(ii) Integral Rural Development Programme (IRDP) (m)execution of other Rural Development
New Industrial Policy
On July 24, 1991, Union Government announced in Parliament new Industrial Policy, brought major changes to liberalise Indian economy.
Industrial Policy Statement of 1991 is a policy designed to achieve following objectives :
• To attain technological dynamism and international competitiveness
• To maintain a sustained growth in productivity and gainful employment
• To accelerate industrial growth by removing administrative controls inhibiting competition and efficiency.
Main features of Industrial Policy
• Delicensing : Industrial licensing has been abolished for all projects, except in 18 industries which are important for strategic or environmental reasons or which produce goods with high import content.
• Reservation for Public Sector : Areas reserved for the public sector have been narrowed down, and greater participation by private sector in core and basic industries has been permitted. Instead of 17 areas earlier reserved for public sector, only 8 areas are now reserved. These 8 areas are mainly those involving strategic and security concerns.
• Location Policy : Government clearance for the location of projects has been dispensed with, except in the case of 23 cities with a population of more than one million.
• Abolition of Registration Schemes: All existing registration schemes such as delicensed registration, exempted industries registration and DGTD registration have been abolished. Entrepreneurs are now required to file an information memorandum on new projects and substantial expansion.
• Broadbanding: Existing units will be provided a new broadbanding facility to enable them to produce any article without additional investment.
• Abolition of Convertibility Clause : The mandatory clause for the right of the financial institutions to convert the loans into equity has been abolished.
• Private Foreign Investment : The limit of the foreign equity holding has been raised from 40 to 51 per cent in the wide range of industries.
• Automatic Approval for the Technological
Agreement : In high-priority industries,
automatic approval will be available for technology agreement.
• Disinvestment: It provides for disinvestment in Public Sector Undertakings (PSUs) in favour of financial institutions, workers and public.
• Sick units : It also provides for closure of sick public sector undertakings.
• It means total value of goods and services produced annually in a country.
It can be defined in different ways and also interchangeably used with national dividend, national output and national expenditure.
• According to National Income Committee, A national income estimate measures volume of commodities and the services turned out during a given period, counting it without duplication.
• It measures flow of goods and services in the economy i.e., it measures production power of an economy.
National Income Estimation in India
• Simon Kuznet (winner of Nobel Prize in 1971) set the trend of using National Income Aggregates.
• National Income estimation in India was first time done by Dadabhai Nauroji in his book Poverty and Unbritish rule in India in 1867-68.
• First scientific estimation of National income was done by V. R. V. Rao in 1931-32 in his book National Income in British India.
• In 1956, Government established Central Statistical Organization (CSO) which has been annually publishing National Income and related aggregates in a document titled National Accounts Statistics (NAS).
• CSO estimates National Income taking 1999-2000 prices as base year prices. Since 2006, base year has been taken as 1999-2000. Prior to this, 1993¬94 was the base year which was adopted in the year 1999.
Concepts in the National Income
• Gross Domestic Product (GDP):
It is sum total of the value of all final commodities and services produced within the geographical boundary of a country during a given period of time. The sum total is to be calculated by counting the values without duplication.
• Gross National Product (GNP):
GNP = GDP + Net Factor Income Abroad (NFIA)
= GDP + Export – Import
Note : Since India has more imports than exports, its GNP figure is less than that of GDP.
Net National Product (NNP)
NNP = GNP – Depreciation
= GNP – Capital Consumption Allowance = GDP + NFIA – Depreciation
Net Domestic Product (NDP):
NDP = GDP – Depreciation
Per capita income:
per capital income = national income/total population
Methods of estimating National Income
(i) Production method:
In this method net vajue of final goods and services produced in country during a year is taken into consideration. ‘
(ii) Income method:
Total of net incomes earned by working people in different sectors alnd commercial enterprises. Total income = Total rent + Total wages + Total interest + Total profit
(iii) Consumption method:
It is also called expenditure method. It is the addition of total consumption and total savings.
Items excluded from estimation of National Income
(i) Input (intermediate consumption)
(ii) Transfer payments (unilateral payments)
(iii) Old goods
(iv) Shares and bonds in stock exchange
(v) Black money
(vi) Wind fall games
e.g. prizes, winnings from lotteries (iii) Household services
Purchasing Power Parity
• It shows parity (equality/comparison) on the basis of purchasing power of a currency and not conventional exchange rate of a currency. This says … how much.;quantity of goods/commodities or services can be purchased by different currencies, had those product been at the neutral international market.
Money is that commodity which is used generally • (legally as a means of payment) in the settleiment of all transactions including debt.
Functions of Money : •
• Medium of exchange
• Unit of account
• Standard of deferred payment
• Store of value
• Basis of credit creation
• Basis of distribution of national income, etc.
• Indian currency is also called Fiat money
i. e. Money on the Fiat (order) of the government.
• It is also called Legal Tender Money
Reserve Bank of India (RBI)
• It is the Central Bank and supreme monetary authority of India.
• It was established in April 1935 with its central office at Calcutta under the RBI Act, 1934. Now it has its headquarters at Mumbai and four local boards at Kolkata, Delhi, Chennai & Mumbai.
• It was established with 5 crore as its capital as a private shareholders bank.
• It was nationalised on January 1, 1949.
• It’s financial year is from July 1 to June 30.
Functions of RBI
• It acts as a central bank of India.
• It acts as a banker to the Central and State Governments.
Reserve Bank of India manages the currency of India while responsibility of coinage vests with Government of India.
Presently Indian currency system is based on the minimum reserve system, i.e. if RBI is willing to print additional currency, then after from considering technical front, it has to keep only a minimum amount of reserve which will allow it to print as much currency as it is willing to print. Sin^e 1957, minimum reserve shall be of Rs. 200 crore which shall include Gold worth Rs. 115 crore and Forex worth Rs. 85 crore.
Bad money (worn-out notes and currencies) drives good money out of the market
It announces Annual Policy Statement (earlier called monetary and credit policy) to take care of monetary credit and other policy aspects of the economy, It announces the policy in April (slack season) aiid reviews it in October (busy season).
It acts as an advisor to the government.
It acts as banker’s bank and supervisor.
It acts as the controller of money supply and credit. It manages the foreign exchanges.
It collects and publishes all monetary and banking data. It promotes commercial banking, rural (agricultural) credit, industrial finance and export finance, etc.
It issues currency.
It acts as central clearing house for inter bank transactions
• It is defined as the standard rate at which RBI is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase under RBI Act.
• It is generally raised during a period of inflation, which is called Dear Money Policy.
• It is lowered at the time of recession which is called Cheap Money Policy.
Open Market Operation (OMO)
• As defined by RBI, under OMO, RBI purchase and sells the variety of assets such as foreign exchange, gold, government securities and even company shares. However, in practice OMO are confined to purchase and sale of government securities only. RBI generally conduct these operations through banks and financial institutions.
Cash Reserve Ratio (CRR)
Scheduled commercial banks are required to keep certain percentage of their total deposit (Net Demand and Time Liability) in the form of cash reserves with RBI.
• Credit Squeeze or Tight Money Policy means increase in CRR.
• Liberal Money Policy means decrease in CRR.
Statutory Liquidity Ratio (SLR)
• It is the ratio of total deposits of a commercial bank which it has to keep with itself in the form of liquid assets.
Liquid assets may consist of
(i) cash in hand
ii) reserves with RBI
(iii) Excess reserves
(iv) government securities
(v) other encumbered securities
(vi) gold, etc.
Repo and Reverse Repo
• With effect from Oct 29, 2004, RBI has switched over to international usage of the terms Repo and Reverse Repo.
• As per these terms, absorptions of liquidity by the RBI is called Reverse Repo and injection of liquidity is called Repo (earlier these were having the meaning reverse to this).
Other Important terms related to banking Bank Rate
It is the official rate of interest charged by the Reserve Bank of India as the lender of last resort. It is the rate at which the Reserve Bank discounting first-class secrurities including Bill of Exchange. The present rate is 6.5%.
The place, where clerks from banks meet daily, bringing with them all bills paid into their banks or drawn on each one of the other on that day. The bills are exchanged and the outstanding differences settled.
Capital Adequacy Ratio (CAR)
• It is the ratio of capital funds (Share capital + General reserves) to risk weighted assets. This is required, so that banks can countermand the problem if so arised due to the generation of non-performing assets.
• RBI has stipulated CAR at 9%, although at present most of the banks have CAR more than 9%.
Prime Lending Rate (PLR)
• It is the rate of interest which is charged by a commerical bank to its prime borrower or blue chip companies.
• Every bank may set its own PLR level.
• This is more or less a benchmark for the interest rate of the concerned bank.
• Normally, banks charge interest more than PLR to other borrowers.
The provision of banking and related services through more and more use of information technology without direct recourse to the bank by the customer is called virtual banking.
Public Sector Banks
State Bank of India and its Associates
• It was established after the nationalisation of Imperial bank of India in July, 1955. The nationalisation was done on the recommendations of Rural Credit Survey Committee.
• State Bank Group is comprised of State Bank of India and seven associates
Seven Associates ofSBI are
(i) State Bank of Hyderabad
(ii) State Bank of Indore
(iii) State Bank of Saurashtra
(iv) State Bank of Mysore
(v) State Bank of Travancore
(vi) State Bank of Patiala
(vii) State Bank of Bikaner & Jaipur
• Presently there are only 19 nationalised banks (excluding SBI and associates) in the country. Note : Bank of Baroda is having the largest concentration of the branches abroad.
Regional Rural Banks (RRBs)
• These were set up under the RRB act of 1976, as per the recommendations of working group on Rural Banks Chaired by M. Narsimham.
• These are working in every state of India except Sikkim and Goa.
• As on June 30, 2004, there were 196 RRBs. Since 1987, no new RRB has been started as per Kelkar Committee recommendations.
• Scheduled Banks are those banks which are included in the second schedule of the RBI Act, 1934. These banks shall fulfill following conditions :
(i) At least Rs. 5 lakh as capital
(ii) Any activity of the bank shall not be derogatory to the interest of the depositors.
• Those banks which are not included in the second schedule, are called non-scheduled banks.
It is in addition to normal payment of dividend to shareholders by a company or an extra gratuity paid to workers by employers.
These are duties on imports and exports.
It depends only on internal resources and has no outside links with other countries of the world.
It is a deliberate reduction in the value at home currency relatively to foreign currency. It is done by a governmental action and is resorted in order to reduce imports and increase exports.
These duties are charged on goods manufactured within the country.
A system for the purchase of goods by which they are obtained on hire and each payment is also treated as part payment of purchase price.
It is an increase in the quantity of money in circulation without corresponding increase in goods and, therefore, it leads to abnormal rise in price level.
It is the direct tax levied on total income of a person in a year.
It is a bill, which relates to imposition of taxes or borrowings or appropriation out of the Consolidated Fund of India.
An economy in which both the private and public sector play equal part.
It means the State undertaking purchase and sale of certain commodity so as to control market prices and to assure a fair deal to both the consumer and the producer.
Special Drawing Rights (SDRs)
These are drawing rights given to Members by the International Monetary Fund in proportion to their quota in the Fund, so that expanding world trade can be financed on international faith and cooperation. Out of every 1 billion additional SDRs created by IMF, India gets 35 million.
• This is the secondary market which is highly organised market for the purchase and sale of second hand quoted or listed securities.
• The Securities Contract (Regulation) Act 1956, defines Stock Exchange as
an association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.
• There are 24 Stock Exchange in India.
Three Stock Exchanges having power to have nation-wide trading network are
(i) National Stock Exchange (NSE)
(ii) Over The Counter Exchange of India Limited (OTCEI)
(iii) Interconnected Stock Exchange of India Ltd (ISE)
Securities and Exchange Board of India (SEBI)
• It was established in 1988 as a non-statutory body through a resolution of the government for dealing with all matters related to development, regulation, development of securities market and investor protection.
• It was given statutory recognition in 1992.
• It’s head office is situated at Mumbai with its regional offices at Kolkata, Delhi and Chennai.
Bombay Stock Exchange (BSE)
• It is the first stock exchange to be established in India in July 1875 by the brokers in Bombay named as Native Shares Stock Brokers Association.
• It is second biggest stock exchange of India after NSE.
• In 2004, it is ranked fifth in the world in terms of number of transactions.
National Stock Exchange (NSE)
• In 1991, Pherwani Committee recommended the establishment of the National Stock Exchange.
• It was established in November 1992, and it started trading operations from June 30, 1994.
• It was established with an equity capital of 25 crores and it was promoted by IDBI, ICICI, LIC, GIC, SBI and some other institutions.
• It is a country wide, on-line, screen based trading system conforming international standards. Its control centre is at Mumbai.
• It is first demutualised stock exchange in India.
• Companies with minimum capital of Rs. 10 crore or more are eligible for listing in NSE and BSE.
• It is the biggest Stock Exchange of India.
• It is ranked 3rd in the World Stock Exchange Ranking based on the total transaction held NASDAQ is ranked first whild New York Stock Exchange is ranked second.
Global Depository Receipts (GDRs)
• These are a dollar denominated instrument traded on the stock exchanges in Europe or USA or both. Normally, these represents certain number of equity shares.
These represents a fixed ratio of Indian shares. These are issued by a depository which is denominated in theUS Dollars, while actual Indian shares are held by the custodian in India (typically and Indian Institution as ICICI).
• These are negotiable instruments.
• These are also called Euro Equity shares, since 1992, government allowed Indian companies to access international capital markets through it
American Depository Receipts (ADRs)
• These are US-Dollar denominated instruments issued by a depository bank in USA representing ownership in non-USA securities, usually referred to as underlying equity shares.
• These are also negotiable instruments.
• These are usually listed in New York Stock Exchange.
Euro Convertible Bonds (ECB)
• It is an equity linked security which can be converted into shares or into depository receipts.
• It is a foreign currency debt instrument issued by an Indian company.
MUTUAL FUNDS (MFS)
• It is a financial institution that aims at continuously garnering investible resources from individuals and managing these resources professionally to create a portfolio of securities (and sometimes even bullion or real estate) in order to provide uninitiated small investor a reasonable return on his investment through dividends and capital appreciation.
• On the basis of the structure, MFs can be divided
(i) Open ended MFs : Funds which are available for subscription through the year and can be sold and purchased any time. They are highly liquid.
(ii) Close ended MFs : These have stipulated maturity period prior to which these cannot be sold and purchased except on the stock exchanges. They have maturity period usually form 3 years to 15 years.