jyoti nivas college autonomous post graduate centrefa) e-journal march 2017 issue.pdf · that help...

Jyoti Nivas CollegeAutonomous

Post Graduate Centre

Presents

SEONE-JOURNAL

(MARCH-2017)

ByM.Com (FA)

Jyoti Nivas College PG Centre SEON (MARCH-2017)

EMERGING TRENDS IN ACCOUNTING AND FINANCE

INTRODUCTION TO ACCOUNTING AND FINANCEAccounting is concerned with collecting, analysing and communicating financial information.

This information is useful for those people who need to make decisions and plans about

businesses, including those who need to control those businesses.

For example, the managers of businesses may need accounting information to decide whether

to:

Develop new products or services

Increase or decrease the price or quantity of existing products and services

Borrow money to help finance the business

Increase and decrease the operating capacity of the business

Change the method of purchasing, production or distribution

Finance, like accounting, exists to help decision makers. It is concerned with the ways in

which funds for a business are raised and invested. It is important that funds are raised in a

way that is appropriate to the needs of the business, and an understanding of finance should

help in identifying:

The main forms of finance available

The costs and benefits of each form of finance

The risks associated with each form of finance

The role of financial markets in supplying finance

MEANING AND DEFINITION OF ACCOUNTING AND FINANCE

ACCOUNTING

Practice and body of knowledge concerned primarily

with

Methods of recording transactions

Keeping financial records

Performing internal audits

Reporting and analysing financial information to

the management

Advising on taxation matters

It is a systematic process of identifying, recording, measuring, classifying, verifying,

summarizing, interpreting and communicating financial information. It reveals profit and loss

for a given period, and the value and nature of a firm’s assets, liabilities and owner’s equity

Accounting provides information on the,

Resources available to a firm

The means employed to finance those resources, and


The results achieved through their use

FINANCE

Finance describes the management, creation and study of money, banking, credit, investments,

assets and liabilities that make up financial system, as well as the study of those financial

instruments.

OBJECTIVES OF ACCOUNTING AND FINANCE:

ACCOUNTING

1. To maintain full and systematic records of business transactions: Accounting is a

language of business transactions. The main objective of accounting is to maintain a

full and systematic record of all business transactions.

2. To ascertain profit or loss of the business: Business is runs to earn profits. A

comparison of income and expenditure gives either profit or loss

3. To depict financial position of the business: A businessman is also interested in

ascertaining his financial position at the end of a given period. A position statement

called Balance Sheet is prepared in which assets and liabilities are shown.

4. To provide accounting information to the interested parties: There are various parties

who are interested in accounting information, like bankers, creditors, tax authorities,

prospective investors, researchers, etc.

FINANCE

1. To ensure regular and adequate supply of funds to the concern.

2. To ensure adequate returns to the shareholders which will depend upon the earning

capacity, market price of the share, expectations of the shareholders.

3. To ensure optimum funds utilization. Once the funds are procured, they should be

utilised in maximum possible way at least cost.

4. To ensure safety to investments, i.e funds should be invested in safe ventures so that

adequate rate of return can be achieved.


5. To plan sound capital structure. There should be sound and fair composition of capital

so that a balance is maintained between debt and equity capital.

ADVANTAGES AND DISADVANTAGES OF ACCOUNTING:

ADVANTAGES

Provides financial information about the business

Provides assistance to management

Helps in comparison of financial results

Helps in decision making

Accounting information can be used as an evidence in legal matters

Helps in valuation of the business

DISADVANTAGES

Accounting ignores non- monetary transactions

Accounting information is sometimes based on estimates which may be unrealistic

Window dressing may lead to faulty results

Accounting information can be manipulated and thus cannot be considered as the true

test of performance

ADVANTAGES AND DISADVANTAGES OF FINANCE:

ADVANTAGES

The funds are committed to your business and to your intended projects.

Outside investors expect the business to deliver value

They can also assist with strategy and key decision making

Investors are often prepared to provide follow up funding as the business grows.

DISADVANTAGES

Finance is demanding, costly and time consuming, and may take management focus

away from the core business activities

Depending on the investor, you will lose certain amount of your power to make

management decisions

There can be legal and regulatory issues to comply with when raising finance

Business will have to invest time to provide regular information for the investor to monitor.

EMERGING TRENDS IN ACCOUNTING AND FINANCE

THEMES OF ACCOUNTING

a) THE COMPANIES ACT 2013

The Companies Act 2013 is an Act of the Parliament of India which regulates incorporation

of a company, responsibilities of a company, directors, and dissolution of a company. The


2013 Act is divided into 29 chapters containing 470 sections as against 658 Sections in the

Companies Act, 1956 and has 7 schedules. The Act has replaced The Companies Act, 1956 (in

a partial manner) after receiving the assent of the President of India on 29 August 2013. The

Act came into force on 12 September 2013 with few changes like earlier private companies

maximum number of member was 50 and now it will be 200. A new term of "one person

company" is included in this act that will be a private company and with only 98 provisions of

the Act notified. A total of another 184 sections came into force from 1 April 2014.

BRIEF DESCRIPTION OF NEW CONCEPTS

One Person Company is a company with only one person as a member. That one

person will be the shareholder of the company. It avails all the benefits of a private

limited company such as separate legal entity, protecting personal assets from business

liability, and perpetual succession. One Person Company (OPC) is a Company

registered with ONLY ONE PERSON as its shareholder. An OPC is classified as a

private company under Companies Act.

Woman Director: Every Listed Company /Public Company with paid up capital of Rs

100 Crores or more / Public Company with turnover of Rs 300 Crores or more shall

have at least one Woman Director.

Corporate Social Responsibility Clause (135) Every company having net worth of

rupees five hundred crore or more, or turnover of rupees one thousand crore or more or

a net profit of rupees five crore or more during any financial year shall constitute a

Corporate Social Responsibility Committee of the Board consisting of three or more

directors, out of which at least one director shall be an independent director.

Registered Values - Valuation by registered values. Clause (247) (1) Where a

valuation is required to be made in respect of any property, stocks, shares, debentures,

securities or goodwill or any other assets (herein referred to as the assets) or net worth

of a company or its liabilities under the provision of this Act, it shall be valued by a

person having such qualifications and experience and registered as a value in such

manner, on such terms and conditions as may be prescribed and appointed by the audit

committee or in its absence by the Board of Directors of that company.

Class action suits (clause 245) For the first time, a provision has been made for class

action suits. It is provided that specified number of member(s), depositor(s) or any

class of them, may, if they are of the opinion that the management or control of the

affairs of the company are being conducted in a manner prejudicial to the interests of

the company or its members or depositors, file an application before the Tribunal on

behalf of the members or depositors.


b) EMERGING ASPECTS OF FINANCIAL REPORTING PRACTICES

Financial reporting is one of the most important and crucial aspects of any business.

Outsourcing financial reporting is an excellent idea that can help you channelize all the aspects

of your accounting and financial services.

When you want to disclose the financial status of the organization to the management, it is

then that you need proper financial reporting. It is the process of producing financial

statements which include notes to the financial statements, balance sheet, income statement,

statement of cash flows, quarterly and annual reports to stockholders and many other factors.

Financial reporting should go through stringent ethical standards since it is governed by

statutory and common law. Here are a few aspects of financial reporting:

1. Account Management of asset: Management of fixed assets is one of the prime aspects of

financial reporting. In today’s world outsourcing financial reporting to a third party

organization is a wise decision. Account management of assets needs a team of skillful

professionals who have extensive knowledge and expertise in managing financial reports.

2. Budgeting and forecasting: Two major aspects of financial reporting that help to improve

business is forecasting the business expenses that are ought to occur and maintain a calculative

budget that works perfectly with it. Outsourcing your financial reporting to a professional third

party helps you to get more time in hand to focus on other areas. Since the outsourcing

companies have teams of professional accountants who are highly experienced in making

budget, this brings your business more productive output.

3. Cash flow statements and balance sheet: Balance sheet keeps a track of every business

transaction that takes place. Similarly cash flow helps to bring a continuous flow in business

without worrying about how to make an expense. By outsourcing financial reporting you can

get your business balance sheet maintained by someone who has the best expertise for it. To

make sure you do not miscalculate or miss any transaction in the balance sheet outsourcing

helps in keeping the financial reporting up-to-date.

There are a few outsourcing companies that offer excellent accounting and financial services

that help your business grow. These outsourcing companies aim to help you evolve your

business in such a cut throat competition. Industry-expertise, spectrum of knowledge, expertise

in accounting and financial services, etc. are some of the advantages that you get in your

business once you outsource accounting and financial services to a company.

c) IFRS AND ACCOUNTING STANDARDS


International Financial Reporting Standards (IFRS) are designed as a common global

language for business affairs so that company accounts are understandable and comparable

across international boundaries. They are a

consequence of growing international

shareholding and trade and are particularly

important for companies that have dealings in

several countries. They are progressively

replacing the many different national

accounting standards. They are the rules to be

followed by accountants to maintain books of accounts which are comparable, understandable,

reliable and relevant as per the users internal or external.

IFRS began as an attempt to harmonize accounting across the European Union but the value of

harmonization quickly made the concept attractive around the world. However, it has been

debated whether or not de facto harmonization has occurred. Standards that were issued by

IASC (the predecessor of IASB) are still within use today and go by the name International

Accounting Standards (IAS), while standards issued by IASB are called IFRS. IAS were

issued between 1973 and 2001 by the Board of the International Accounting Standards

Committee (IASC). On 1 April 2001, the new International Accounting Standards Board

(IASB) took over from the IASC the responsibility for setting International Accounting

Standards. During its first meeting the new Board adopted existing IAS and Standing

Interpretations Committee standards (SICs). The IASB has continued to develop standards

calling the new standards "International Financial Reporting Standards".

Criticisms of IFRS are (1) that they are not being adopted in the US, (2) a number of criticisms

from France and (3) that IAS 29 Financial Reporting in Hyperinflationary Economies had no

positive effect at all during 6 years in Zimbabwe's hyperinflationary economy. The IASB

offered responses to the first two criticisms, but has offered no response to the last criticism

while IAS 29 was as of March 2014 being implemented in its original ineffective form in

Venezuela and Belarus.

The following are the general features in IFRS:

Fair presentation and compliance with IFRS: Fair presentation requires the faithful

representation of the effects of the transactions, other events and conditions in

accordance with the definitions and recognition criteria for assets, liabilities, income

and expenses set out in the Framework of IFRS

Going concern: Financial statements are present on a going concern basis unless

management either intends to liquidate the entity or to cease trading, or has no realistic

alternative but to do so.Accrual basis of accounting: An entity shall recognize items as

assets, liabilities, equity, income and expenses when they satisfy the definition and

recognition criteria for those elements in the Framework of IFRS.

Materiality and aggregation: Every material class of similar items has to be presented

separately. Items that are of a dissimilar nature or function shall be presented separately

unless they are immaterial.

Offsetting: Offsetting is generally forbidden in IFRS. However certain standards

require offsetting when specific conditions are satisfied (such as in case of the


accounting for defined benefit liabilities in IAS 19 , and the net presentation of deferred

tax liabilities and deferred tax assets in IAS 12

rt).Frequency of reporting: IFRS requires that at least annually a complete set of

financial statements is presentedHOW EVER listed companies generally also publish

interim financial statements (for which the accounting is fully IFRS compliant) for

which the presentation is in accordance with IAS 34 Interim Financing Reporting.

Comparative information: IFRS requires entities to present comparative information in

respect of the preceding period for all amounts reported in the current period's financial

statements. In addition comparative information shall also be provided for narrative and

descriptive information if it is relevant to understanding the current period's financial

statements.] The standard IAS 1 also requires an additional statement of financial

position (also called a third balance sheet) when an entity applies an accounting policy

retrospectively or makes a retrospective restatement of items in its financial statements,

or when it reclassifies items in its financial statements. This for example occurred with

the adoption of the revised standard IAS 19 (as of 1 January 2013) or when the new

consolidation standards IFRS 10-11-12 were adopted (as of 1 January 2013 or 2014 for

companies in the European Union).

Consistency of presentation: IFRS requires that the presentation and classification of

items in the financial statements is retained from one period to the next unless:

a. it is apparent, following a significant change in the nature of the entity's

operations or a review of its financial statements, that another presentation or

classification would be more appropriate having regard to the criteria for the

selection and application of accounting policies in IAS 8; or

b. an IFRS standard requires a change in presentation

INDIAN ACCOUNTING STANDARDS


Indian Accounting Standards (abbreviated as Ind-AS) in India accounting standards

were issued under the supervision and control of Accounting Standards Board (ASB),

which was constituted as a body in the year 1977. ASB is a committee under Institute

of Chartered Accountants of India (ICAI) which consists of representatives from

government department, academicians, other professional body’s viz. ices, acai,

representatives from ASSOCHAM, CII, FICCI, etc.

The Ind AS are named and numbered in the same way as the corresponding

International Financial Reporting Standards (IFRS). National Advisory Committee on

Accounting Standards (NACAS) recommend these standards to the Ministry of

Corporate Affairs (MCA). MCA has to spell out the accounting standards applicable

for companies in India. As on date MCA has notified 39 Ind AS. This shall be applied

to the companies of financial year 2015-16 voluntarily and from 2016-17 on a

mandatory basis.

Based on the international consensus, the regulators will separately notify the date of

implementation of Ind-AS for the banks, insurance companies etc. Standards for the

computation of Tax has been notified as ICDS in February 2015

LIST OF ACCOUNTING STANDARD

Ind As No. Name of Indian Accounting Standard

Ind AS 101 First-time Adoption of Indian Accounting Standards

Ind AS 102 Share Based Payment

Ind AS 103 Business Combinations

Ind AS 104 Insurance Contracts

Ind AS 105 Non-Current Assets Held for Sale and Discontinued Operations


Ind As No. Name of Indian Accounting Standard

Ind AS 106 Exploration for and Evaluation of Mineral Resources

Ind AS 107 Financial Instruments: Disclosures

Ind AS 108 Operating Segments

Ind AS 109 Financial Instruments

Ind AS 110 Consolidated Financial Statements

Ind AS 111 Joint Arrangements

Ind AS 112 Disclosure of Interests in Other Entities

Ind AS 113 Fair Value Measurement

Ind AS 114 Regulatory Deferral Accounts

Ind AS 115 Revenue from Contracts with Customers

Ind AS 1 Presentation of Financial Statements

Ind AS 2 Inventories

Ind AS 7 Statement of Cash Flows

Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Ind AS 10 Events after Reporting Period

Ind AS 11 Construction Contracts

Ind AS 12 Income Taxes

Ind AS 16 Property, Plant and Equipment

Ind AS 17 Leases

Ind AS 18 Revenue

Ind AS 19 Employee Benefits

Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance

Ind AS 21 The Effects of Changes in Foreign Exchange Rates

Ind AS 23 Borrowing Costs

Ind AS 24 Related Party Disclosures

Ind AS 27 Separate Financial Statements

Ind AS 28 Investments in Associates and Joint Ventures

Ind AS 29 Financial Reporting in Hyper inflationary Economies

Ind AS 32 Financial Instruments: Presentation

Ind AS 33 Earnings Per Share

Ind AS 34 Interim Financial Reporting

Ind AS 36 Impairment of Assets

Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

Ind AS 38 Intangible Assets

Ind AS 40 Investment Property

Ind AS 41 Agriculture

d) CORPORATE GOVERNANCE


It is a process set up for the firms based on certain systems and principles by which a company

is governed. The guidelines provided ensure that the company is directed and controlled in a

way so as to achieve the goals and

objectives to add value to the

company and also benefit the

stakeholders in the long term.

The high profile corporate

governance failure scams like the

stock market scam, the UTI scam,

Ketan Parikh scam, Satyam scam,

which was severely criticized by

the shareholders, called for a need

to make corporate governance in India transparent as it greatly affects the development of the

country.

To understand the scope of the legal framework and study the amendments, proxy advisory

firms analyze the role of directors and how they are impacted by changes in the amendments.

Proxy firms offer analytical data for the shareholders and corporate advisory services to

companies.

OBJECTIVES OF CORPORATE GOVERNANCE

Transparency in corporate governance is essential for the growth, profitability and stability of

any business. The need for good corporate governance has intensified due to growing

competition amongst businesses in all economic sectors at the national, as well as international

level.

The Indian Companies Act of 2013 introduced some progressive and transparent processes

which benefit stakeholders, directors as well as the management of companies. Investment

advisory services and proxy firms provide concise information to the shareholders about these

newly introduced processes and regulations, which aim to improve the corporate governance in

India.

Corporate advisory services are offered by advisory firms to efficiently manage the activities

of companies to ensure stability and growth of the business, maintain the reputation and

reliability for customers and clients. The top management that consists of the board of

directors is responsible for governance. They must have effective control over affairs of the

company in the interest of the company and minority shareholders. Corporate governance

ensures strict and efficient application of management practices along with legal compliance in

the continually changing business scenario in India.


e) CORPORATE SOCIAL RESPONSIBILITY

India`s new Companies Act 2013

(Companies Act) has introduced several

new provisions which change the face of

Indian corporate business" Companies Act

2013 (Companies Act) has introduced

several new provisions which change the

face of Indian corporate business. One of

such new provisions is Corporate Social

Responsibility (CSR). The concept of CSR

rests on the ideology of give and take.

Companies take resources in the form of

raw materials, human resources etc from the

society. By performing the task of CSR

activities, the companies are giving

something back to the society.

Ministry of Corporate Affairs has recently notified Section 135 and Schedule VII of the

Companies Act as well as the provisions of the Companies (Corporate Social Responsibility

Policy) Rules, 2014 (CRS Rules) which has come into effect from 1 April 2014.

Applicability: Section 135 of the Companies Act provides the threshold limit for applicability

of the CSR to a Company i.e. (a) net worth of the company to be Rs 500 crore or more; (b)

turnover of the company to be Rs 1000 crore or more; (c) net profit of the company to be Rs 5

crore or more. Further as per the CSR Rules, the provisions of CSR are not only applicable to

Indian companies, but also applicable to branch and project offices of a foreign company in

India.

CSR Committee and Policy: Every qualifying company requires spending of at least 2% of its

average net profit for the immediately preceding 3 financial years on CSR activities. Further,

the qualifying company will be required to constitute a committee (CSR Committee) of the

Board of Directors (Board) consisting of 3 or more directors. The CSR Committee shall

formulate and recommend to the Board, a policy which shall indicate the activities to be

undertaken (CSR Policy); recommend the amount of expenditure to be incurred on the

activities referred and monitor the CSR Policy of the company. The Board shall take into

account the recommendations made by the CSR Committee and approve the CSR Policy of the

company.

Definition of the term CSR: The term CSR has been defined under the CSR Rules which

includes but is not limited to:

• Projects or programs relating to activities specified in the Schedule; or

• Projects or programs relating to activities undertaken by the Board in pursuance of

recommendations of the CSR Committee as per the declared CSR policy subject to the

condition that such policy covers subjects enumerated in the Schedule.


This definition of CSR assumes significance as it allows companies to engage in projects or

programs relating to activities enlisted under the Schedule. Flexibility is also permitted to the

companies by allowing them to choose their preferred CSR engagements that are in conformity

with the CSR policy.

Activities under CSR: The activities that can be done by the company to achieve its CSR

obligations include eradicating extreme hunger and poverty, promotion of education,

promoting gender equality and empowering women, reducing child mortality and improving

maternal health, combating human immunodeficiency virus, acquired, immune deficiency

syndrome, malaria and other diseases, ensuring environmental sustainability, employment

enhancing vocational skills, social business projects, contribution to the Prime Minister's

National Relief Fund or any other fund set up by the Central Government or the State

Governments for socio-economic development and relief and funds for the welfare of the

Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women and

such other matters as may be prescribed.

Local Area: Under the Companies Act, preference should be given to local areas and the areas

where the company operates. Company may also choose to associate with 2 or more

companies for fulfilling the CSR activities provided that they are able to report individually.

The CSR Committee shall also prepare the CSR Policy in which it includes the projects and

programmes which is to be undertaken, prepare a list of projects and programmes which a

company plans to undertake during the implementation year and also focus on integrating

business models with social and environmental priorities and process in order to create share

value.

The company can also make the annual report of CSR activities in which they mention the

average net profit for the 3 financial years and also prescribed CSR expenditure but if the

company is unable to spend the minimum required expenditure the company has to give the

reasons in the Board Report for non-compliance so that there are no penal provisions are

attracted by it

f) GREEN ACCOUNTING


A new system of sustainable accounting, known as Green Accounting, has emerged.“It permits

the computation of income for a nation by taking into account the economic damage and

depletion in the natural resource base of an economy.”

Green accounting is a type of accounting that attempts to factor environmental costs into the

financial results of operations. It has been argued that gross domestic product ignores the

environment and therefore policymakers need a revised model that incorporates green

accounting. The major purpose of green accounting is to help businesses understand and

manage the potential quid pro quo between traditional economics goals and environmental

goals. It also increases the important information available for analyzing policy issues,

especially when those vital pieces of information are often overlooked. Green accounting is

said to only ensure weak sustainability, which should be considered as a step toward ultimately

a strong sustainability.

It is a controversial practice however, since depletion may be already factored into accounting

for the extraction industries and the accounting for externalities may be arbitrary. It is obvious

therefore that a standard practice would need to be established in order for it to gain both

credibility and use. Depletion is not the whole of environmental accounting however, with

pollution being but one factor of business that is almost never accounted for specifically. Julian

Lincoln Simon, a professor of business administration at the University of Maryland and a

Senior Fellow at the Cato Institute, argued that use of natural resources results in greater

wealth, as evidenced by the falling prices over time of virtually all nonrenewable resources.

THEMES OF FINANCE

a) THE CHALLENGES FACING BANKING AND INSURANCE SERVICES

1. Not making enough money. Despite all of the headlines about banking profitability,

banks and financial institutions still are not making enough return on investment, or the

return on equity, that shareholders require.


2. Consumer expectations. These days it’s all about the customer experience, and many

banks are feeling pressure because they are not delivering the level of service that

consumers are demanding, especially in regards to technology.

3. Increasing competition from financial technology companies. Financial technology

companies are usually start-up companies based on using software to provide financial

services. The increasing popularity of Finance Tech companies is disrupting the way

traditional banking has been done. This creates a big challenge for traditional banks

because they are not able to adjust quickly to the changes – not just in technology, but also

in operations, culture, and other facets of the industry.

4. Regulatory pressure. Regulatory requirements continue to increase, and banks need to

spend a large part of their discretionary budget on being compliant, and on building

systems and processes to keep up with the escalating requirements.

THE CHALLENGES OF INSURANCE SERVICES

1. Technology and big data - Turning the promise of new technology and big data into

commercial successes. This includes capitalizing on the opportunities in mobile and web-

based services, using big data and predictive analytics effectively, and overcoming the

problems associated with legacy technologies.

2. Growth - Low growth in mature economies with the potential for high growth in

emerging economies.

3. Customer focus - The need to create better, more comprehensive customer relationships

and make it easier for customers to do business with insurance companies.

4. Regulation - Operating under multiple regulatory jurisdictions and complying with

changing rules with regard to such things as capital requirements, transparency and

reporting, and customer interaction.

5. Alternative investments - Managing more complex portfolios with nontraditional assets

in a low interest rate, low economic growth environment.

6. Leadership - Discomfort regarding the adequacy of talent pipelines for effective

leadership in the future.

HR leaders naturally are at the forefront of responsibility for meeting the challenges of

leadership development. We believe HR's role in the remaining challenges will be quite

critical, because success will so heavily depend on attracting and managing the right

human capital. Insurance has always been an industry that relies heavily on expertise and

specialized skills in its workforce. And while some advancements will disembody human

expertise and embed it in systems.

b) CAPITAL MARKET

A capital market is a financial market in which long-term debt or equity-backed

securities are bought and sold. Capital markets are defined as markets in which money is

provided for periods longer than a year. Capital markets channel the wealth of savers to those

who can put it to long-term productive use, such as companies or governments making long-


term investments Financial regulators,oversee the capital markets in their jurisdictions to

protect investors against fraud, among other duties.

Modern capital markets are almost invariably hosted on computer-based electronic

trading systems; most can be accessed only by entities within the financial sector or the

treasury departments of governments and corporations, but some can be accessed directly by

the public. There are many thousands of such systems, most serving only small parts of the

overall capital markets. Entities hosting the systems include stock exchanges, investment

banks, and government departments. Physically the systems are hosted all over the world,

though they tend to be concentrated in financial centres like London, New York, and Hong

Kong.

A capital market can be either a primary market or a secondary market. In primary

markets, new stock or bond issues are sold to investors, often via a mechanism known as

underwriting. The main entities seeking to raise long-term funds on the primary capital

markets are governments (which may be municipal, local or national) and business enterprises

(companies). Governments issue only bonds, whereas companies often issue either equity or

bonds. The main entities purchasing the bonds or stock include pension funds, hedge funds,

sovereign wealth funds, and less commonly wealthy individuals and investment banks trading

on their own behalf. In the secondary markets, existing securities are sold and bought among

investors or traders, usually on an exchange, over-the-counter, or elsewhere. The existence of

secondary markets increases the willingness of investors in primary markets, as they know

they are likely to be able to swiftly cash out their investments if the need arises

c) FOREIGN DIRECT INVESTMENT

A foreign direct investment (FDI) is an investment in the form of a controlling

ownership in a business in one country by an entity based in another country. It is thus

distinguished from foreign portfolio investment by a notion of direct control.


The origin of the investment does not impact the definition as an FDI: the investment

may be made either "inorganically" by buying a company in the target country or "organically"

by expanding operations of an existing business in that country.

FDI is one example of international factor movements. A foreign direct investment

(FDI) is a controlling ownership in a business enterprise in one country by an entity based in

another country. Foreign direct investment is distinguished from foreign portfolio investment,

a passive investment in the securities of another country such as public stocks and bonds, by

the element of "control". According to the Financial Times, "Standard definitions of control

use the internationally agreed 10 percent threshold of voting shares, but this is a grey area as

often a smaller block of shares will give control in widely held companies. Moreover, control

of technology, management, even crucial inputs can confer de facto control.

Types of FDI

Horizontal FDI arises when a firm duplicates its home country-based activities at the

same value chain stage in a host country through FDI.

Platform FDI Foreign direct investment from a source country into a destination

country for the purpose of exporting to a third country.

Vertical FDI takes place when a firm through FDI moves upstream or downstream in

different value chains i.e., when firms perform value-adding activities stage by stage in

a vertical fashion in a host country

Methods

The foreign direct investor may acquire voting power of an enterprise in an economy

through any of the following methods:

by incorporating a wholly owned subsidiary or company anywhere

by acquiring shares in an associated enterprise

through a merger or an acquisition of an unrelated enterprise

participating in an equity joint venture with another investor or enterprise

Forms of FDI incentives]

Foreign direct investment incentives may take the following forms

low corporate tax and individual income tax rates

tax holidays

other types of tax concessions


preferential tariffs

d) MICRO FINANCE

Microfinance is a source of financial services for entrepreneurs and small businesses

lacking access to banking and related services. The two main mechanisms for the delivery of

financial services to such clients are: (1) relationship-based banking for individual

entrepreneurs and small businesses; and (2) group-based models, where several entrepreneurs

come together to apply for loans and other services as a group. In some regions, for example

Southern Africa, microfinance is used to describe the supply of financial services to low-

income employees, which is closer to the retail finance model prevalent in mainstream

banking.

For some, microfinance is a movement whose object is "a world in which as many poor

and near-poor households as possible have permanent access to an appropriate range of high

quality financial services, including not just credit but also savings, insurance, and fund

transfers." Many of those who promote microfinance generally believe that such access will

help poor people out of poverty, including participants in the Microcredit Summit Campaign.

For others, microfinance is a way to promote economic development, employment and growth

through the support of micro-entrepreneurs and small businesses.

Microfinance is a broad category of services, which includes microcredit. Microcredit

is provision of credit services to poor clients. Microcredit is one of the aspects of microfinance

and the two are often confused. Critics may attack microcredit while referring to it

indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of

microfinance services, it is difficult to assess impact, and very few studies have tried to assess

its full impact. Proponents often claim that microfinance lifts people out of poverty, but the

evidence is mixed. What it does do, however, is to enhance financial inclusion.


Microfinance and poverty

Financial needs and financial services.

In developing economies and particularly in rural areas, many activities that would be

classified in the developed world as financial are not monetized: that is, money is not used to

carry them out. This is often the case when people need the services money can provide but do

not have dispensable funds required for those services, forcing them to revert to other means of

acquiring them. In their book The Poor and Their Money, Stuart Rutherford and Sukhwinder

Arora cite several types of needs:

Lifecycle Needs: such as weddings, funerals, childbirth, education, home building,

widowhood and old age.

Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or

death.

Disasters: such as fires, floods, cyclones and man-made events like war or bulldozing

of dwellings.

Investment Opportunities: expanding a business, buying land or equipment, improving

housing, securing a job, etc.

People find creative and often collaborative ways to meet these needs, primarily through

creating and exchanging different forms of non-cash value. Common substitutes for cash vary

from country to country but typically include livestock, grains, jewelry and precious metals. As

Marguerite Robinson describes in The Micro finance Revolution, the 1980s demonstrated that

"micro finance could provide large-scale outreach profitably," and in the 1990s, "micro finance

began to develop as an industry" (2001, p. 54). In the 2000s, the micro finance industry's

objective is to satisfy the unmet demand on a much larger scale, and to play a role in reducing

poverty. While much progress has been made in developing a viable, commercial micro

finance sector in the last few decades, several issues remain that need to be addressed before

the industry will be able to satisfy massive worldwide demand. The obstacles or challenges to

building a sound commercial micro finance industry include:

Inappropriate donor subsidies

Poor regulation and supervision of deposit-taking micro finance institutions (MFIs)

Few MFIs that meet the needs for savings, remittances or insurance


Limited management capacity in MFIs

Institutional inefficiencies

Need for more dissemination and adoption of rural, agricultural micro finance

methodologies

Microfinance is the proper tool to reduce income inequality, allowing citizens from lower

socio-economical classes to participate in the economy. Moreover, its involvement has shown

to lead to a downward trend in income inequality (Hermes, 2014).

Financial assistance to microfinance customers

Access to financial services is a key element in the process of socio-economic empowerment

of the financially under-served sections of the society. At ICICI Bank, we support initiatives to

enhance access to financial services by bridging gaps wherever there are missing markets, to

improve livelihood opportunities and productivity in the country and bring more people into

the socio-economic mainstream, thus contributing to the full realisation of India’s vast

untapped market.

We believe that existing financial intermediaries like Micro Finance Institutions (MFIs) can

play a significant role in enhancing the levels of financial inclusion in the country by reaching

out to the ‘last mile’ and thereby sharing the responsibilities of the government and the

mainstream financial sector.

The Bank has been engaging with MFIs over the past decade and is one of the key lenders to

such institutions. Our engagement with the MFIs has evolved over time, and we now focus on:

Establishing a healthy and profitable lending business through relationships with select

MFIs and

Investing in building deeper and concurrent monitoring and control mechanisms to

enable healthy growth of the microfinance sector.

ICICI Bank provides financial assistance to select MFIs in the form of term loans. The Bank

also invests in Pass Through Certificates where the underlying comprises of loans originated

by MFIs. Besides, the Bank also provides other value added services to MFIs like cash

management services, made-to-order current accounts, savings/salary accounts for their staff

and treasury products, which enable them to invest their liquid funds.

MICRO FINANCE AND SOCIAL AND EMPOWERMENT INCLUSION

• In 2010, Indian MFI’s had to face a backlash from loan borrowers and politicians.

There was large scale default on loans because of non-repayment by clients which caused

the top 5 MFI’s to incur heavy losses. Since then MFI’s have reigned in their growth and

have adopted practices that ensure there is no multiple lending. They have also constituted

a self-regulatory organization called MFIN (Microfinance Institutions Network) which

addresses grievances of microfinance clients and ensures the MFI’s are sticking to their

code of conduct

• Expect strong loan portfolio growth for the next 2-3 years. MFI’s are expected to grow

by 30-40% annually which means the top MFI’s in India could double in size over the

next few years.


• Private Equity investors continue to pour in funds into private unlisted microfinance

companies. Many MFI’s have also raised substantial amounts through loan securitization

which shows that banks have once again reposed their confidence in this sector.

• Microfinance has shed it is a non-profit character. In the last decade, microfinance was

the domain of NGO’s but the regulations introduced by RBI has totally altered the

character of the organizations disbursing loans. Since most NGO’s could not meet the

stringent financial adequacy requirements, NBFC’s now account for more than 90% of the

micro-lending taking place in the country.

SOCIAL INCLUSION AND EMPOWERMENT

The ‘Social Inclusion and Empowerment’ project is designed to support the

Government of Mauritius and Non-State Actors in exploring more effective ways of

addressing poverty and the exclusion of vulnerable groups from the socio-economic

benefits that the majority of the population has enjoyed over the past few decades. It will

facilitate capacity development processes to enhance the effectiveness of public and

private sector institutions, NGOs and CSOs in working together under interventions

intended to directly combat poverty and exclusion.

e) TAX REFORMS AND ITS CHALLENGES

The latest results from Paying Taxes 2016 show that many economies are continuing to

make progress in tax reform. At the same time, around the world there is still a lot of

scope for new or further actions to streamline and simplify tax systems, to reduce

economic distortions and reduce the burden imposed on business. Tax reform is

therefore set to remain an important topic for governments around the world for many

years to come.

• Tax reform covers a broad agenda of issues. The Paying Taxes study focuses mainly on

the administrative efficiency of the tax system and the overall burden imposed on business

(measured by the Total Tax Rate). But there is a broader economic dimension to tax

reform too.


• The first theme is to keep tax rates down by widening the tax base and minimizing

exceptions and exemptions. A second strand of economic thinking is to focus taxation on

expenditure and discouraging socially and environmentally damaging activities, in order to

keep down the tax burden on the creation of income and wealth. A third theme is to keep

down rates of taxation on internationally mobile economic activities and productive

resources so the tax regime attracts these resources and activities and they contribute to the

strength of the national economy.

• The UK has implemented major reforms of its taxation of companies aimed at bringing

down the headline rate of corporation tax on profits from 28% to 20% by 2015/16. In his

2013 Budget, the Chancellor of the Exchequer George Osborne argued that this would

give the UK the most competitive corporate tax regime in the G20 with a significantly

lower tax rate on profits than the US, Japan, Germany and France. This reduction in the

tax rate has been partly funded by a restriction of the investment allowances available to

offset capital spending against company tax bills

• The first major issue is that changes to the structure of the tax system create winners

and losers. Individuals or companies which benefit from lower tax rates may not be the

same as those adversely affected by restricting tax exemptions and allowances. Rises in

VAT and other spending taxes – which we have seen in many European countries and we

are now seeing in Japan – squeeze consumers and governments come under pressure to

offset this impact, particularly on poorer households.

EDITED BY

VIDHYA.B

PRIYANKA JOSHI

SHRUTHI


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