By Vijeta Singh
Green bonds are like regular bonds, but the money raised from these bonds goes towards the funding of ‘green’ business activities or projects in fields such as renewable energy, sustainable waste management, etc. These bonds are generally certified by Green Bond Principles (issued by International Capital Market Association) and Climate Bond Standards (issued by Climate Bonds Initiative) to ensure they are to finance projects that would generate environmental benefits.
These bonds can be in different forms, the most common being the full recourse green bond which is earmarked exclusively for environmentally beneficial projects. There are other varieties such as green ‘use of proceed’ revenue bonds and green securitized bonds.
Meaning – A correction is a reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index to adjust for an overvaluation. The latest stock market correction occurred on February 8, 2018 as the DJIA and the S&P 500 fell more than 10% from their recent highs hit in late January, 2018.
Corrections are generally temporary price declines interrupting an uptrend in the market or an asset. A correction has a shorter duration than a bear market or a recession, but it can be a precursor to either. A correction is very different from a crash since it measures the percentage decline from the most recent high. A crash is generally considered to be a 10% or more decline, irrespective of the most recent high. For investors, corrections provide a chance to see how truly comfortable they are with market risk, and to make changes to their portfolio if warranted. They also provide investors with an opportunity to potentially add companies at discounted prices, or to dollar cost average down on existing positions.
Meaning – A gypsy swap is a unique method by which a company may raise capital without issuing debt or holding a secondary offering. In many respects, a gypsy swap is similar to a rights offering, except that the restricted party’s equity claim does not elapse and the swap instantly becomes dilutive.
The gypsy swap is broken into two parts:
1. An existing shareholder exchanges freely traded shares for restricted shares (shares restricted by time and/or price constraints) from the issuing company. In economic terms, the existing shareholder neither gains nor loses money from the transaction, although it may have tax consequences.
2. The issuing company then sells the existing shareholder’s freely traded shares to a new investor(s) at a price that may be higher or lower than the current market price. The issuing company now has additional capital and the new investor(s) has equity in the issuing company.
In almost every case, a gypsy swap is a last-ditch financing option because the new investor(s) almost always demands some combination of below-market value price or special consideration from the deal.
Meaning – The additional interest rate an investor receives when selling a lower-yielding bond in exchange for a higher-yielding bond.
The bond with the lower yield generally has a shorter maturity, while the bond with the higher yield will typically have a longer maturity. A certain amount of risk is involved since the bond with a higher yield is often of a lower credit quality. Additionally, the investor can be exposed to interest rate risk with the longer maturity bond. For example, an investor owns a bond issued by Company ABC that has a 4% yield. The investor can sell this bond in exchange for a bond issued by Company XYZ that has a yield of 6%. The investor’s yield pickup is 2% (6% – 4% = 2%). Ideally, a yield pickup would involve bonds that have the same rating or credit risk, though this is not always the case.
By Ishan Kekre & Girish C
A weather derivative is a tool for managing weather risk. It is a financial contract that allows a firm to hedge itself against unexpected and adverse weather. A weather derivative contract or WD derives its value from future weather conditions. Contrary to stereotypical weather insurance, the payout of this kind of derivative is based on a parametric weather index. For instance, the index could be centimeters or millimeters of rainfall. The index could also be a cumulative frequency distribution of temperatures across many locations. The underlying of WD could also be related to snowfall or hurricanes.
Origin of Weather Derivatives
The weather derivative market as compared to other financial instruments is relatively young. The first transaction in the WD market dates back to 1997. The sector developed due to the severe repercussions of El Niño. These events were forecasted correctly by the meteorological community. Firms that had their revenues linked to weather realized the importance of protecting themselves against seasonal weather risks. Many companies who were in the business of dealing with financial futures and options saw WDs as attractive tools to hedge weather risks.
The insurance sector achieved substantial financial consolidation. As a result, there was significant capital to hedge weather risks. Insurance firms started writing options with payoffs linked to weather events. This, in turn, elevated the liquidity for the development of a WD market. Thus, the WD market evolved over the years into a strong over-the-counter market.
By Payal Sachdeva and Tuhina Kumar
- Increase in tax concessions on bad loan provisioning as the Asset Quality Review by RBI has led to a steep increase in provisioning.
- The total requirement of capital infusion by banks till march 2019, as gauged in 2015, is 1,80,000 crores out of which the government has committed to allocate only 70,000 crores under the Indradhanush plan. The rest is expected to be raised by the banks from the markets. This may be difficult due to low valuation of the banks.
- Disinvestment in PSU banks to below 51% to help raise capital.
- Higher allocation to infrastructure, housing and urban development as a boost in the commodity sector would improve the banks’ asset quality.
- Provide a roadmap of incentives for a digital push.
- Enhance capital expenditure for credit demand revival.
Announcements made in the Budget
- Abolishment of FIPB: The Foreign Investment Promotion Board (FIPB) will be abolished in 2017-2018. FIPB is the body responsible for approving FDI proposals which are not cleared through the automatic route. Since 90% of the FDI inflows are through automatic route, the government has taken up this measure. Also, it focusses on ease of doing business.
- Housing Finance: Under the government’s aim to provide housing for all by 2020, the government proposed various measures. National Housing Bank (NHB) will refinance loans worth 20k crore in 2017-2018. This move saw a rise in stocks of HDFC (3.6%) and LIC Housing Finance (2.78%).
- Tax relief on Masala Bonds: The government has announced that the rupee-dominated offshore bonds, called masala bonds will be subjected to a lower tax deducted at source (TDS) of 5%. This would be applicable retrospectively from 1st April 2016. This has been done to provide relief arising due to the appreciation of rupee against a foreign currency.
- Law on Money Laundering: To curb money laundering by high net worth individuals via fake long-term capital gains, the government has tightened the screws on long-term capital gains. Only those equity investments are eligible for long-term capital gains where securities transaction tax (STT) has been paid.
- Move to attract FPI: In order to attract funds from FPI, the finance minister made a proposal to exempt category I and category II FPIs from the provision of indirect tax transfer. Category I foreign portfolio investors include foreign central banks, sovereign wealth funds, and government agencies.
- Recapitalization of banks: The government is going to infuse 10,000 crores out of the 70,000 crores committed under the Indradhanush plan for recapitalization of banks.
- Set up PARA: An idea to set up a centralized Public Sector Asset Rehabilitation Agency (PARA) that will take over banks’ largest and the most challenging bad loans. PARA will help reduce NPAs and restructured loans.
- Amendment in SARFAESI Act: The amendment in the SARFAESI act will allow listing and trading of security receipts issued by securitization company or a reconstruction company on SEBI-registered stock exchanges. This will boost capital flows in the securitization industry and aid in dealing with NPAs.
- Mudra Yojana: The Pradhan Mantri Mudra Yojana has been allocated 2.44 lakh this fiscal as it exceeded the target of 1.22 lakh crore allocated in the year 2015-16.
- Attempt to push Digital Economy: In an attempt to promote digital transactions in the Indian economy, the allocation to BharatNet Project has been increased by Rs 10,000 crore in 2017-18 which will connect 150,000-gram panchayats with high-speed broadband. Also, BHIM, an Aadhaar-based mobile wallet, would be promoted under two schemes, a referral bonus scheme for individuals and a cashback scheme for merchants.
- The Role of SIDBI: Moreover, the government wants to ease loan disbursement, where the Small Industries Development Bank of India (SIDBI) would refinance credit institutions for extending unsecured loans to borrowers at reasonable interest rates based on their digital transaction history.
The government has met most of the expectations except for more capital infusion in the banks. Thus, markets reacted positively to the budget and financial stocks shot up. Both Nifty and Sensex closed at a 3-month high of 28000 and 8700 respectively.
The government’s move towards affordable housing is likely to push CanFin Homes as its loan portfolio is skewed towards the same.