FAQ Page 1 - आरबीआय - Reserve Bank of India
FAQs on Non-Banking Financial Companies
Classification of NBFCs into sub-groups
Annual Return on Foreign Liabilities and Assets (FLA) under FEMA 1999
Some Useful Definitions
Ans: It covers (1) foreign equity in branches and all shares (except non-participating preference shares) in subsidiaries and associates; (2) contributions such as the provision of machinery, land & building(s) by a direct investor to a DIE by equity participation; (3) acquisition of shares by a DIE in its direct investor company, termed as reverse investment (i.e. claims on DI).
External Commercial Borrowings (ECB) and Trade Credits
G. END-USES
Government Securities Market in India – A Primer
If market interest rate levels rise, the price of a bond falls. Conversely, if interest rates or market yields decline, the price of the bond rises. In other words, the yield of a bond is inversely related to its price. The relationship between yield to maturity and coupon rate of bond may be stated as follows:
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When the market price of the bond is less than the face value, i.e., the bond sells at a discount, YTM > > coupon yield.
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When the market price of the bond is more than its face value, i.e., the bond sells at a premium, coupon yield > > YTM.
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When the market price of the bond is equal to its face value, i.e., the bond sells at par, YTM = coupon yield.
Business restrictions imposed on Paytm Payments Bank Limited vide Press Releases dated January 31 and February 16, 2024
Bharat Bill Payment System (BBPS)
Coordinated Portfolio Investment Survey – India
Some important definitions and concepts
Ans: When actual market values are not available, an estimate is required. Alternative methods of approximating market value of shareholders’ equity in a direct investment enterprise include the following:
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Recent transaction price: Unlisted instruments may trade from time to time, and recent prices, within the past year, at which they were traded may be used. Recent prices are a good indicator of current market values to the extent that conditions are unchanged. This method can be used as long as there has been no material change in the corporation’s position since the transaction date. Recent transaction prices become increasingly misleading as time passes and conditions change.
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Net asset value: Appraisals of untraded equity may be conducted by knowledgeable management or directors of the enterprise or provided by independent auditors to obtain total assets at current value less total liabilities (excluding equity) at market value. Valuations should be recent (within the past year) and should preferably include intangible assets.
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Present value and price-to-earnings ratios: The present value of unlisted equity can be estimated by discounting the forecast future profits. At its simplest, this method can be approximated by applying a market or industry price-to-earnings ratio to the (smoothed) recent past earnings of the unlisted enterprise to calculate a price. This method is most appropriate in which there is a paucity of balance sheet information but earnings data are more readily available.
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Market capitalization method: Book values reported by enterprises can be adjusted at an aggregate level by the statistical compiler. For untraded equity, information on “own funds at book value” can be collected from enterprises, and then adjusted with ratios based on suitable price indicators, such as the ratio of market capitalization to book value for listed companies in the same economy with similar operations. Alternatively, assets that enterprises carry at cost (such as land, plant, equipment, and inventories) can be revalued to current period prices using suitable asset price indices.
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Own funds at book value: This method for valuing equity uses the value of the enterprise recorded in the books of the direct investment enterprise, as the sum of (a) paid-up capital (excluding any shares on issue that the enterprise holds in itself and including share premium accounts); (b) all types of reserves identified as equity in the enterprise’s balance sheet (including investment grants when accounting guidelines consider them company reserves); (c) cumulated reinvested earnings; and (d) holding gains or losses included in own funds in the accounts, whether as revaluation reserves or profits or losses. The more frequent the revaluation of assets and liabilities, the closer the approximation to market values. Data that are not revalued for several years may be a poor reflection of market values.
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Apportioning global value: The current market value of the global enterprise group can be based on the market price of its shares on the exchange on which its equity is traded, if it is a listed company. Where an appropriate indicator may be identified (e.g., sales, net income, assets, or employment), the global value may be apportioned to each economy in which it has direct investment enterprises, on the basis of that indicator, by making the assumption that the ratio of net market value to sales, net income, assets, or employment is a constant throughout the transnational enterprise group. (Each indicator could yield significantly different results from the others).
Retail Direct Scheme
Nomination related queries
Domestic Deposits
II. Deposits of Non-Residents Indians (NRIs)
Indian Currency
C. Different Types of Bank Notes and Security Features of banknotes
Both old and new design notes usually circulate together for a while. The old design notes are then gradually withdrawn from circulation when they become unfit to be re-issued.
Core Investment Companies
Core Investment Companies (CICs)
Ans: The application form for CICs-ND-SI available on the Bank’s website can be downloaded and filled in and submitted to the Regional Office of the DNBS in whose jurisdiction the Company is registered along with necessary supporting documents mentioned in the application form.
All you wanted to know about NBFCs
B. Entities Regulated by RBI and applicable regulations
Foreign Investment in India
Answer: The following persons can acquire capital instruments on the stock exchanges:
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FPIs registered with SEBI
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NRIs
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Other than (a) and (b) above, a person resident outside India, can acquire capital instruments on stock exchange, subject to the condition that the investor has already acquired and continues to hold the control of such company in accordance with SEBI (Substantial Acquisition of Shares and Takeover) Regulations and subject to conditions specified in Annex I of the Master Direction – Foreign Investment in India.
FAQs on Non-Banking Financial Companies
Classification of NBFCs into sub-groups
Annual Return on Foreign Liabilities and Assets (FLA) under FEMA 1999
Some Useful Definitions
Ans: The other capital component (receivables and payables, except equity and participating preference shares investment) of direct investment covers the outstanding liabilities or claims arising due to borrowing and lending of funds, investment in debt securities, trade credits, financial leasing, share application money etc., between direct investors and DIEs and between two DIEs that share the same direct Investor. Non-participating preference shares owned by the direct investor are treated as debt securities & should be included in ‘other capital’.
External Commercial Borrowings (ECB) and Trade Credits
G. END-USES
Government Securities Market in India – A Primer
24.1 An investor who purchases a bond can expect to receive a return from one or more of the following sources:
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The coupon interest payments made by the issuer;
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Any capital gain (or capital loss) when the bond is sold/matured; and
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Income from reinvestment of the interest payments that is interest-on-interest.
The three yield measures commonly used by investors to measure the potential return from investing in a bond are briefly described below:
i) Coupon Yield
24.2 The coupon yield is simply the coupon payment as a percentage of the face value. Coupon yield refers to nominal interest payable on a fixed income security like G-Sec. This is the fixed return the Government (i.e., the issuer) commits to pay to the investor. Coupon yield thus does not reflect the impact of interest rate movement and inflation on the nominal interest that the Government pays.
Coupon yield = Coupon Payment / Face Value
Illustration:
Coupon: 8.24
Face Value: ₹100
Market Value: ₹103.00
Coupon yield = 8.24/100 = 8.24%
ii) Current Yield
24.3 The current yield is simply the coupon payment as a percentage of the bond’s purchase price; in other words, it is the return a holder of the bond gets against its purchase price which may be more or less than the face value or the par value. The current yield does not take into account the reinvestment of the interest income received periodically.
Current yield = (Annual coupon rate / Purchase price) X100
Illustration:
The current yield for a 10 year 8.24% coupon bond selling for ₹103.00 per ₹100 par value is calculated below:
Annual coupon interest = 8.24% x ₹100 = ₹8.24
Current yield = (8.24/103) X 100 = 8.00%
The current yield considers only the coupon interest and ignores other sources of return that will affect an investor’s return.
iii) Yield to Maturity
24.4 Yield to Maturity (YTM) is the expected rate of return on a bond if it is held until its maturity. The price of a bond is simply the sum of the present values of all its remaining cash flows. Present value is calculated by discounting each cash flow at a rate; this rate is the YTM. Thus, YTM is the discount rate which equates the present value of the future cash flows from a bond to its current market price. In other words, it is the internal rate of return on the bond. The calculation of YTM involves a trial-and-error procedure. A calculator or software can be used to obtain a bond’s YTM easily (please see the Box III).
YTM Calculation YTM could be calculated manually as well as using functions in any standard spread sheet like MS Excel. Manual (Trial and Error) Method Manual or trial and error method is complicated because G-Secs have many cash flows running into future. This is explained by taking an example below. Take a two year security bearing a coupon of 8% and a price of say ₹ 102 per face value of ₹ 100; the YTM could be calculated by solving for ‘r’ below. Typically, it involves trial and error by taking a value for ‘r’ and solving the equation and if the right hand side is more than 102, take a higher value of ‘r’ and solve again. Linear interpolation technique may also be used to find out exact ‘r’ once we have two ‘r’ values so that the price value is more than 102 for one and less than 102 for the other value.
Spread Sheet Method using MS Excel In the MS Excel programme, the following function could be used for calculating the yield of periodically coupon paying securities, given the price. YIELD (settlement,maturity,rate,price,redemption,frequency,basis) Wherein; Settlement is the security's settlement date. The security settlement date is the date on which the security and funds are exchanged. Maturity is the security's maturity date. The maturity date is the date when the security expires. Rate is the security's annual coupon rate. Price is the security's price per ₹100 face value. Redemption is the security's redemption value per ₹100 face value. Frequency is the number of coupon payments per year. (2 for Government bonds in India) Basis is the type of day count basis to use. (4 for Government bonds in India which uses 30/360 basis) |
Business restrictions imposed on Paytm Payments Bank Limited vide Press Releases dated January 31 and February 16, 2024
Aadhar enabled Payment System (AePS)
Coordinated Portfolio Investment Survey – India
Contact Details for query related to CPIS
Ans: Queries/clarifications on CPIS may be sought from the RBI at the following address:
International Investment Position Division (IIPD)
Department of Statistics and Information Management (DSIM)
Reserve Bank of India
C-9/5 th Floor, Bandra - Kurla Complex, Bandra East
Mumbai, Maharashtra – 400 051
Email : cpis@rbi.org.in
Government Securities Market in India – A Primer
Day count convention refers to the method used for arriving at the holding period (number of days) of a bond to calculate the accrued interest. As the use of different day count conventions can result in different accrued interest amounts, it is appropriate that all the participants in the market follow a uniform day count convention.
For example, the conventions followed in Indian market are given below.
Bond market: The day count convention followed is 30/360, which means that irrespective of the actual number of days in a month, the number of days in a month is taken as 30 and the number of days in a year is taken as 360.
Money market: The day count convention followed is actual/365, which means that the actual number of days in a month is taken for number of days (numerator) whereas the number of days in a year is taken as 365 days. Hence, in the case of T-Bills, which are essentially money market instruments, money market convention is followed.
In some countries, participants use actual/actual, some countries use actual/360 while some use 30/actual. Hence the convention changes in different countries and in different markets within the same country (eg. Money market convention is different than the bond market convention in India).
Core Investment Companies
Core Investment Companies (CICs)
Ans: The NBFC would have to apply to RBI with full details of the plan and exemptions could be considered on a selective basis on the merits of the case.
Retail Direct Scheme
Nomination related queries
Domestic Deposits
II. Deposits of Non-Residents Indians (NRIs)
Indian Currency
C. Different Types of Bank Notes and Security Features of banknotes
Central banks the world over change the design of their banknotes and introduce new security features primarily to make counterfeiting difficult and to stay ahead of counterfeiters. India also follows the same policy.
All you wanted to know about NBFCs
B. Entities Regulated by RBI and applicable regulations
Foreign Investment in India
FAQs on Non-Banking Financial Companies
Classification of NBFCs into sub-groups
Annual Return on Foreign Liabilities and Assets (FLA) under FEMA 1999
Some Useful Definitions
Ans: An enterprise is said to have a centre of economic interest and to be a resident unit of a country (economic territory) when the enterprise is engaged in a significant amount of production of goods and/or services in that centre or when it owns land or buildings located in that centre. The enterprise must maintain at least one production establishment in the country and must plan to operate the establishment indefinitely or over a long period of time.
Coordinated Portfolio Investment Survey – India
updated: डिसें 01, 2023
Special instructions for banks
Ans: No, investments made by branches of your bank located outside India should not be included in CPIS.
External Commercial Borrowings (ECB) and Trade Credits
G. END-USES
Business restrictions imposed on Paytm Payments Bank Limited vide Press Releases dated January 31 and February 16, 2024
Money Transfer through UPI/ IMPS
Foreign Investment in India
Domestic Deposits
III. Advances
Indian Currency
C. Different Types of Bank Notes and Security Features of banknotes
The security features in MG Series 2005 and MG (New) Series banknotes are as under:
i. Security Thread: The silver coloured machine-readable security thread in ₹10, ₹20 and ₹50 denomination banknotes is windowed on front side and fully embedded on reverse side. The thread fluoresces in yellow on both sides under ultraviolet light. The thread appears as a continuous line from behind when held up against light. ₹100 and above denomination banknotes have machine-readable windowed security thread with colour shift from green to blue when viewed from different angles. It fluoresces in yellow on the reverse and the text will fluoresce on the obverse under ultraviolet light.
ii. Intaglio Printing: The portrait of Mahatma Gandhi, Reserve Bank seal, Guarantee and promise clause, Ashoka Pillar emblem, RBI’s Governor's signature and the identification mark for the visually impaired persons are printed in intaglio in denominations ₹100 and above.
iii. See through register: On the left side of the note, a part of the numeral of each denomination is printed on the obverse (front) and the other part on the reverse. The accurate back to back registration makes the numeral appear as one when viewed against light.
iv. Water Mark and electrotype watermark: The banknotes contain the portrait of Mahatma Gandhi in the watermark window with a light and shade effect and multi-directional lines. An electrotype mark showing the denominational numeral in each denomination banknote also appears in the watermark widow and these can be viewed better when the banknote is held against light.
v. Colour Shifting Ink: The numeral 200, 500 & 2000 on the ₹200, ₹500 and ₹2000 banknotes are printed in a colour-shifting ink. The colour of these numerals appears green when the banknotes are held flat but would change to blue when the banknotes are held at an angle.
vi. Fluorescence: The number panels of the banknotes are printed in fluorescent ink. The banknotes also have dual coloured optical fibres. Both can be seen when the banknotes are exposed to ultra-violet lamp.
vii. Latent Image: In the banknotes of ₹20 and above in the MG-2005 Series, the vertical band next to the (right side) Mahatma Gandhi’s portrait contains a latent image, showing the denominational value as the case may be. The value can be seen only when the banknote is held horizontally and light allowed to fall on it; otherwise this feature appears only as a vertical band. In the MG (New) Series banknotes, the latent image exists in denominations ₹100 and above.
viii. Micro letterings: This feature appears at different places on the banknotes and can be seen better under a magnifying glass.
ix. Additional Features introduced since 2015
• New Numbering Pattern
The numerals in both the number panels of the banknotes are in ascending size from left to right while the first three alpha-numeric characters (prefix) will remain constant in size.
• Angular Bleed Lines and Increase in the size of Identification Marks
Angular Bleed Lines have been introduced in banknotes - 4 lines in 2 blocks in ₹100, 4 angular bleed lines with two circles in between in ₹200, 5 lines in 3 blocks in ₹500, 7 in ₹2000. In addition, the size of the identification marks in denominations ₹100 and above have been increased by 50 percent.
Information about the above security features present in the Indian banknotes denomination-wise is also available on the website www.rbi.org.in>>press releases. Alternately, information can also be accessed from /en/web/rbi/-/notifications/master-circular-detection-and-impounding-of-counterfeit-notes-11610
Core Investment Companies
Core Investment Companies (CICs)
Ans: CICs need not meet the principal business criteria for NBFCs.
All you wanted to know about NBFCs
B. Entities Regulated by RBI and applicable regulations
FAQs on Non-Banking Financial Companies
Classification of NBFCs into sub-groups
Retail Direct Scheme
Investment and Account holdings related queries
While the primary auctions are conducted generally on specified days of the week as given in the table below, these days may differ due to holidays or other considerations. Half yearly indicative calendars are published on RBI website for Government of India’s dated securities and Sovereign Gold Bonds whereas quarterly indicative calendars are published for Treasury Bills and State Development loans. For details visit /en/web/rbi
S. No. | Government security | Primary auction usually held on |
1 | Government of India Treasury Bills (T-Bills) | Wednesdays |
2 | Government of India dated securities (dated G-Sec) | Fridays |
3 | State Development Loans (SDLs) | Tuesdays |
4 | Sovereign Gold Bonds (SGB) | Weekly windows announced by RBI in its press release |
Annual Return on Foreign Liabilities and Assets (FLA) under FEMA 1999
Some Useful Definitions
Ans:
Foreign Subsidiary: An Indian entity is called as a Foreign Subsidiary if a non-resident investor owns more than 50% of the voting power/equity capital OR where a non-resident investor and its subsidiary(s) combined own more than 50% of the voting power/equity capital of an Indian enterprise.
Foreign Associate: An Indian entity is called as Foreign Associate if non-resident investor owns at least 10% and no more than 50% of the voting power/equity capital OR where non-resident investor and its subsidiary(s) combined own at least 10% but no more than 50% of the voting power/equity capital of an Indian enterprise.
Special Purpose Vehicle: A special purpose Vehicle (SPV) is a legal entity (usually a limited company of some type or, sometimes, a limited partnership) created to fulfil narrow, specific or temporary objectives. SPV have little or no employment, or operations, or physical presence in the jurisdiction in which they are created by their parent enterprises, which are typically located in other jurisdictions (economies). They are often used as devices to raise capital or to hold assets and liabilities and usually do not undertake significant production.
External Commercial Borrowings (ECB) and Trade Credits
G. END-USES
Government Securities Market in India – A Primer
It is calculated as per the following formula
![T- Bill calculated](/documents/87730/28909807/GOVTSEC20082019_2.jpg)
Business restrictions imposed on Paytm Payments Bank Limited vide Press Releases dated January 31 and February 16, 2024
Money Transfer through UPI/ IMPS
Coordinated Portfolio Investment Survey – India
updated: डिसें 01, 2023
Special instructions for banks
Ans: Yes, it should be included.
Government Securities Market in India – A Primer
27.1 Duration (also known as Macaulay Duration) of a bond is a measure of the time taken to recover the initial investment in present value terms. In simplest form, duration refers to the payback period of a bond to break even, i.e., the time taken for a bond to repay its own purchase price. Duration is expressed in number of years. A step by step approach for working out duration is given in the Box IV below.
Calculation for Duration First, each of the future cash flows is discounted to its respective present value for each period. Since the coupons are paid out every six months, a single period is equal to six months and a bond with two years maturity will have four time periods. Second, the present values of future cash flows are multiplied with their respective time periods (these are the weights). That is the PV of the first coupon is multiplied by 1, PV of second coupon by 2 and so on. Third, the above weighted PVs of all cash flows is added and the sum is divided by the current price (total of the PVs in step 1) of the bond. The resultant value is the duration in no. of periods. Since one period equals to six months, to get the duration in no. of year, divide it by two. This is the time period within which the bond is expected to pay back its own value if held till maturity. Illustration: Taking a bond having 2 years maturity, and 10% coupon, and current price of ₹101.79, the cash flows will be (prevailing 2 year yield being 9%):
Duration in number of periods = 379.28/101.79 = 3.73 Duration in years = 3.73/2 = 1.86 years |
More formally, duration refers to:
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The weighted average term (time from now to payment) of a bond's cash flows or of any series of linked cash flows.
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The higher the coupon rate of a bond, the shorter the duration (if the term of the bond is kept constant).
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Duration is always less than or equal to the overall life (to maturity) of the bond.
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Only a zero coupon bond (a bond with no coupons) will have duration equal to its maturity.
What is Modified Duration?
27.2 Modified duration (MD) is a modified version of Macaulay Duration. It refers to the change in value of the security to one per cent change in interest rates (Yield). The formula is
Illustration
In the above example given in Box IV, MD = 1.86/(1+0.09/2) = 1.78
Duration is useful primarily as a measure of the sensitivity of a bond's market price to interest rate (i.e., yield) movements. It is approximately equal to the percentage change in price for one percent change in yield. For example the duration is the approximate percentage by which the value of the bond will fall for a 1% per annum increase in market interest rate. So, a 15-year bond with a duration of 7 years would fall approximately 7% in value if the interest rate increased by 1% per annum. In other words, duration is the elasticity of the bond's price with respect to interest rates. This ignores convexity explained in para 24.7
What is PV 01?
27.3 PV01 describes the actual change in price of a bond if the yield changes by one basis point (equal to one hundredth of a percentage point). It is the present value impact of 1 basis point (0.01%) (1%=100 bps) movement in interest rate. It is often used as a price alternative to duration (a time measure). Higher the PV01, the higher would be the volatility (sensitivity of price to change in yield).
Illustration
From the modified duration (given in the illustration under 27.2), we know that the security value will change by 1.78% for a change of 100 basis point (1%) change in the yield. In value terms that is equal to 1.78*(101.79/100) = ₹ 1.81.
Hence the PV01 = 1.81/100 = ₹0.018, which is 1.8 paise. Thus, if the yield of a bond with a Modified Duration of 1.78 years moves from say 9% to 9.05% (5 basis points), the price of the bond moves from ₹101.79 to ₹101.70 (reduction of 9 paise, i.e., 5x1.8 paise).
What is Convexity?
27.4 Calculation of change in price for change in yields based on duration works only for small changes in yields. This is because the relationship between bond price and yield is not strictly linear. Over large variations in yields, the relationship is curvilinear i.e., the reduction in option free bond price is less than the change calculated based only on duration for yield increase, and increase in option free bond price will be more than the change calculated based only on duration for yield decrease. This is measured by a concept called convexity, which is the change in duration of a bond due to change in the yield of the bond.
Indian Currency
C. Different Types of Bank Notes and Security Features of banknotes
In addition to the security features listed above, banknotes issued after introduction of MG series-2005 have the year of printing on the reverse of the banknotes which is not present in the pre-2005 series.
Core Investment Companies
Core Investment Companies (CICs)
Ans: A holding company not meeting the criteria for a CIC laid down in para 2 of Notification No DNBS. (PD) 219/CGM(US)-2011 dated January 5, 2011 would require to register as an NBFC. However, if such company wishes to register as CIC-ND-SI/ be exempted as CIC, it would have to apply to RBI with an action plan achievable within the specific period to reorganize its business as CIC. If it is not able to do so, it would need to comply with NBFC requirements and prudential norms.
All you wanted to know about NBFCs
B. Entities Regulated by RBI and applicable regulations
Foreign Investment in India
Retail Direct Scheme
Investment and Account holdings related queries
G-Secs are credit risk free instruments in domestic currency. However, there are market risks if you sell before maturity. You may refer to ‘Government Securities Market- A primer’, published on RBI website, to understand various risks associated with government securities.
Annual Return on Foreign Liabilities and Assets (FLA) under FEMA 1999
Some Useful Definitions
Ans: Participating preference shares are those shares which have one or more of the following rights:
(a) To receive dividend, out of surplus profit after paying the dividend to equity shareholders.
(b) To have share in surplus assets remaining after the entire capital is paid in case of winding up of the company.
On the other hand, non-participating preference shares are those shares which do not have any of the above said rights.