Wednesday, August 7, 2013
Banking Terms - Set 10 (RuPay, UKPA, Wholesale value payments, AVS, Class action)
Class Action
Situation where interested parties seek restitution for financial loss. The security holder may be offered the opportunity to join a class action proceeding and would need to respond with an instruction. In Simple terms, it is a lawsuit being made against the company.
AVS( Address Verification Service)
Address Verification Service - a service supported by Visa, MasterCard, Discover and American Express that verifies the cardholder's billing address against the one on file with the issuer. AVS is designed to help combat fraud in non-face-to-face transactions.Wholesale / Large Value Payments
Wholesale or Large value payments are generally of very large amounts, which are mainly exchanged between banks or between participants in the financial markets and usually require urgent and timely settlement.UK Payments Administration Ltd (UKPA)
The UK Payments Administration Ltd (UKPA) (previously APACS, the Association for Payment Clearing Services) is a UK trade organization that brings together all payment systems organizations and gives banks, building societies and card issuers a forum where they can work together on non-competitive issues. UKPA currently has 28 members and operates three clearing companies under its umbrella: BACS, CHAPS and CCCL.RuPay
RuPay is the Indian domestic card payment network being set up by National Payments Corporation of India (NPCI) at the behest of banks in India. This project has been conceived by Indian Banks Association and has the approval of Reserve Bank of India.Banking Terms - Set 9 (Payment Gateway, Withholding, TAN, RAN, Pay-as-you-earn)
Tax lien
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belong to such person.Ex: If xyz company didn’t pay tax for current year, Govt has right to collect tax by selling its property.
Revenue Anticipation Note (RAN)
A municipal bond that is repaid with expected revenues from the project being financed by the bond. RANs have a maturity of one year or less and the expected revenue can come from a variety of sources, such as sales, fees or rate increases. Typically, RANs are used to raise money immediately to finance a large project.Ex: Suppose Government want to help farmers by constructing a Mart from them in various locations. They will issue bond with 2% interest and payable in future, and it will repay bond buyers from rents of mart.
Tax Anticipation Note (TAN)
A short-term debt security issued by a state or local government to finance an immediate project that will be repaid with future tax collections. State and local governments use tax anticipation notes to borrow money, typically for one year or less and at a low interest rate, in order to finance a capital expenditure such as the construction of a road or school. The government then uses the following year's tax revenue to repay the TANs.Ex: Suppose Government needs 100cr to cover budget deficit, it will issue bond with 6% interest and payable at next May, so it can pay out from tax collected in March. This bond will be paid first from collected tax amount.
Withholding ("Pay-as-you-earn" taxation)
Also known as the FIT: federal income tax withholding. This is pay-as-you-earn taxation. Taxes are taken out of your wages or other income before you receive the money. They are deposited in an IRS account and you are credited for these taxes when you file your return. Taxes also may be withheld from other income, such as dividends and interest.For example, You have bought 10 shares from IBM each worth 10$. After 2 years, you sell all of them (each worth 20$ now). You get the profit of 100$. Based on the Government's withholding percentage (for example 28%), you are required to deduct the amount from your income (100$) and pay 28$ to the Government. It may be refunded if it is determined, when a tax return is filed.
Payment Gateway
A system of technologies and processes that allow merchants to electronically submit payment transactions to the payment processing networks. Payment Gateways help other Processors conduct secure business on the internet using Secure Socket Layer (SSL) technology. They provide a system that passes credit card data, authorization requests, and authorization responses over the Internet using encryption technology.Banking Terms - Set 8 (Payment Hub, Tax loss carry back, Tax Opinion, TARGET)
Trans-European Automated Real-time Gross settlement Express Transfer (TARGET)
The TARGET system is defined as a payment system composed of the RTGS system (in countries with 'Euro' currency) and the European Central Bank (ECB) payment mechanism. RTGS systems of non-participating countries may also be connected, provided that they are able to process the Euro alongside their national currency. The domestic RTGS systems and the ECB payment mechanism are interconnected according to common procedures to allow cross-border transfers throughout the European Union to move from one system to another system.Tax loss carry forward
Tax benefit allowing an individual or organization to reduce a tax liability by applying net operating losses incurred in the previous year against income reported in current years. IRS tax rules permit carrying forward losses over next five years, resulting in a less tax.Ex: For year 2011, Mike had loss in business of -$3000. In year 2012, he made profit of $5000. While filing tax, he can show 2011 loss and pay tax amount for $2000 only.
Tax Opinion
Legal opinion issued by a bond issuer's tax attorney stating, for computation of federal income tax, how a collateralized mortgage obligation will be treated by its holders. In municipal bonds, the tax opinion also states that the bond conforms to statutes making the bond interest exempt from federal income taxes.Ex: section 80C states Government issued NSC bonds are tax-free.
Tax loss carry back
Tax benefit allowing an individual or organization to reduce a tax liability by applying net operating losses incurred in the current fiscal year against income reported in earlier years. IRS tax rules permit carrying back losses (the excess of allowable deductions over gross income) over the three prior years, resulting in a tax refundEx: For year 2011, Mike has paid $3000 as tax for his profit. But in year 2012, his business went down. He can recover it by refilling 2011 tax by showing current year loss.
Payment Hub
A Payment Hub enables financial institutions to implement a centralized payments infrastructure that facilitates origination through instruction management to execution across the enterprise. It enables the bank to have a centralized release of RTGS payment instructions and to intervene when necessary before a stipulated cut-off time to transmit the instructions on a timely basis. The Payment Hub enables Financial Institutions to move away from the silo approach in a controlled manner to significantly reduce time-to-market, migration risk and maintenance costs whilst providing a future proof, component based payment infrastructure.Banking Terms - Set 7 (Underpayment Penalty, VITA, Mandatory & Voluntary Corporate Action)
Voluntary Corporate Action
Voluntary corporate actions provide the shareholders an option to respond or select from a list of possible actions. The Stakeholder can also choose not to participate in the Corporate Action.E.g. Exchange Offer – Event by which Holders can exchange there securities for
- Cash
- another security
- do not exchange
Mandatory Corporate Action with Option
Mandatory corporate actions with options can be defined as, shareholder will be given options to choose from of which one will be default. Stakeholders who are not participating in the action will be offered the default option.E.g. Optional Stock Dividend [Shareholders can either choose to get dividend in Cash (or) Equity, default being Equity].
Mandatory Corporate Action
Mandatory corporate actions are Mandated on the Stakeholders and will not have any option to choose from.E.g. Calls [Calling back the bonds/equities that is present in the market].
Volunteer Income Tax Assistance (VITA)
Volunteer Income Tax Assistance (VITA) sites are available in most communities to help with tax return preparation. People volunteer their time to help their neighbors. The service is free to those with limited or moderate income people, non-English-speaking, the elderly and the disabled. Some VITA sites even offer free electronic filing.Ex: VITA is in USA, Similarly in India, Few sites like simpletaxindia.net, mytaxindia.com provide information on tax filing.
Underpayment Penalty
The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you did not pay enough tax throughout the year, you may have to pay a penalty for underpayment of estimated tax. Most taxpayers will avoid this penalty if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.Ex: You made estimated tax payments of $4,00 per quarter, thinking that $16,00 would be enough to cover 90% of your tax liability in a year. It turned out that $18,00 was required to cover 90% of your tax liability, so you should have paid an additional $50 per quarter. The underpayment penalty at the 8% rate for this situation.
Banking Terms - Set 6 (Cash Dividend, SEPA for Mobile, Full Call, Partial Call/Draw, Cash Merger)
Cash Merger
Merger is a Corporate Action, in which two (or) more entities are collaborated as a means to facilitate rapid growth. Now, in Cash Merger, the acquiring firm buys the target firm's stock by paying cash to the latter's stakeholders. Usually, in Cash Merger the target firm's stakeholders are removed from the picture and the target (company) comes under the control of bidder's shareholders.E.g. Company A has a market value of $1M with stocks counting to 100,000. Hence, the stock price will be $10 each; whereas the market value of the same is at $12. Now, company B has decided to acquire company A by paying $13 per share. So, company B will end up paying $1.3M to acquire company A.
Partial Call/Draw
A Corporate Action in which a Company/Firm is calling back a portion of its bonds that it has floated in the market. The company will be paying the principal amount as cash to stake holders and in some cases interest also will be paid. A portion of the holdings of the stakeholders will be bought back by the company in this event.E.g. Company A has 10000000 bonds in market. It announces a Partial call for calling back 500000 bonds with a principal rate of Rs 10000 per 1000 bonds and an interest rate of Rs 100 per 1000 bonds.
Full Call
A Corporate Action in which a Company/Firm is calling back all its bonds that it has floated in the market. The company will be paying the principal amount as cash to stake holders and in some cases interest also will be paid. This is a mandatory event and stakeholders have to participate in the action. All the holdings of the stakeholders will be bought back by the company in this event.Eg. Company A has 10000000 bonds in market. It announces a Full call with a principal rate of Rs 10000 per 1000 bonds and an interest rate of Rs 100 per 1000 bonds.
SEPA for Mobile
The European Payments Commission (EPC) has created a Strategy and Roadmap on Mobile-Payments that aims to enable more efficient and faster adoption of payments via the Mobile Channel while leveraging existing SEPA instruments:- Mobile Contactless Payment (SEPA card-based): handset interacts (contactless) with Point Of Sale (POS) terminal to perform payment transaction ("Tap-and-Go")
- Mobile Remote Payment (SEPA card or SEPA Credit Transfer-based): handset can be used to purchase goods and services via internet/web browser, telephone voice/data call or to perform account to account payments.
Cash Dividend
When a corporation earns a surplus profit, it might decide to share a percentage of the profit with the shareholders and distribute the same equally among its shareholders. In stock dividend, Dividend is paid as Cash.E.g. Company A has 10000 shareholders and it earns a surplus profit decides to give dividend of $1 per share. Then each holder will get a cash dividend of Re 1 for every share they hold.
Banking Terms - Set 5 (Cash & Stock Merger, Mandatory Exchange, Name Change, Mandatory Conversion)
Mandatory Conversion
This is a kind of Corporate Action in which convertible assets are considered. Here, such kind of assets is converted into another form at a predetermined price at a specified date.E.g. Company A has announced Mandatory Conversion for its Convertible bonds, like each convertible bond of value $100 will be receiving 10 shares of the Company. A person holding bonds worth $10000 of Company A will then be receiving 1000 shares when this conversion is being executed. Usually, the conversion ratio [i.e. In what proportion the bonds will be converted] is fixed at the time of issuing the convertible security.
Name Change
A corporate action in which a company/entity has announced a change in its corporate name, say after a merger/acquisition, when two companies become one - they have to adopt one of the old names (or) a new name such a kind of action is termed as Name Change. The underlying security name also changes with no change in the value.E.g. Company A & Company B has been merged and they have decided to rename the new entity/corporation as "C".
Mandatory Exchange
It is a kind of Corporate Action, in which one company's securities are exchanged for other company. This Corporate Action is a mandated one and shareholders have to exchange their shares.E.g. Company A has decided to exchange its shares with Company B's. So, the shareholders of Company A, will be receiving shares of Company B at a specified rate by the Company A.
Cash & Stock Merger
Merger is a Corporate Action, in which two (or) more entities are collaborated as a means to help in rapid growth. In this type of Merger, the shareholders of the firm that is being acquired will be paid with cash (and) stock of the new entity that is being formed.E.g. Company A has a market value of $1M with the stocks accounting to 500,000, hence the stock price will be $2 each, whereas the market value of the same is at $3. Now, company B (whose market value is also at $3) has decided to acquire company A by distributing its (Company B) shares to the A’s Shareholders and the payment will be like 50% holdings and 50 % Cash. Now, a holder who holds Company A’s 100 shares will get 50 shares of company B and $150.
Stock Merger
Merger is a Corporate Action, in which two (or) more entities are collaborated as a means to facilitate rapid growth. Now, in Stock Merger, the acquiring firm buys the target firm’s stock by issuing its own stock. Usually, in this kind of Merger, Payment will be in the form of acquiring company's stock issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter.
E.g. Company A has a market value of $1M with the stocks accounting to 500,000, hence the stock price will be $2 each, whereas the market value of the same is at $3.Now, company B (whose market value is at $6) has decided to acquire company A by distributing its (Company B) shares to the A’s Shareholders at a ratio of 2:1. Now, a holder who holds Company A’s 100 shares will get 50 shares of company B’s share.
Banking Terms - Set 4 (SWIFT, DRIP, Bankruptcy, Rights Issue, Rights Redemption)
Rights Redemption
It is an opportunity that is given to the shareholders to redeem the rights they hold and receive cash in place of that. Usually, the redeemable shares [rights] have a nominal value which will be paid/given to the shareholder when it is redeemed. Moreover, for some stocks there will be a set date as when it can be redeemed whereas others will be redeemed at the company's discretion.For example: Shareholders of the company A who own rights issued by the company can redeem the rights at the rate (Say 10$ per right) announced by the firm once a rights redemption event is announced by the firm. The holders have to take part in the action as this would be a mandatory action.
Rights Issue
A rights issue is a kind of corporate action in which the company offers its current shareholders the right to buy new shares in the company at a discount to the market price. Companies use rights issues as a way of raising funds. (i.e.) Distribution of a security or privilege that gives the shareholder an entitlement or right to take part in a future event.For example: Company A has announced a rights issue where it says like for every four shares that a shareholder has as of now will be offered one more share at some discounted price to the market value.
The rights themselves can be traded in the market, they are known as nil paid shares (or nil paid rights). Any sale or purchase of nil paid shares in the market will be subject to the usual commission charges. If a person decides to take up the right to buy new shares then the nil paid shares can be converted into ordinary shares at the take up price.
Bankruptcy
A legal status of an organization that cannot repay the debts it owes to creditors. In most jurisdictions, it involves a formal court ruling, often initiated by the debtor and securities may become valueless.E.g. Company A being in a position not to pay its debts in any way, has announced bankruptcy and the 100,000 shares of the company which the public holds goes valueless, there by all the shareholders of the company sharing the loss. Real time example being the bankruptcy announcement of Lehman Brothers of USA [Largest of its kind in US].
DRIP [Dividend Re-Investment Plan]
A Dividend payment kind of corporate action, in which, holders will have their dividend amount reinvested as additional shares of the issuing company in the market, by the issuer itself [usually, with no brokerage fees and sometimes at a slight discount].E.g. Market Value of a Company A is Rs. 200 and it has announced a dividend of Rs. 2 per share for a dividend re-investment opportunity/plan, in which the investor is allowed to re-invest[buy] the same in Company A's shares at a discounted price of Rs. 180 [a 10% discount to the present market value].Hence, a person holding 10000 shares of Company A will be receiving 111 shares, instead of a dividend amount of Rs. 20000.
Society for Worldwide Interbank Financial Telecommunication (SWIFT)
A cooperative organization created and owned by banks that operates a network which facilitates the exchange of payment and other financial messages between financial institutions (including broker-dealers and securities companies) throughout the world. A SWIFT payment message is an instruction to transfer funds; the exchange of funds (settlement) subsequently takes place over a payment system or through correspondent banking relationships.Banking Terms - Set 3 (Straight through processing, Consent, PINK, Bid-Tender, Mini Tender)
Mini Tender
A mini-tender is an offer to acquire a company's shares directly from current investors in an amount less than 5% of issued stock.E.g. Company A having a total share count of 100,000 at a market price of Rs.35 has announced a tender offer to purchase 10000 of the outstanding shares at a price value of Rs.37.
Bid-Tender
The tender offer which is a open offer or invitation by a prospective acquirer to all stockholders of a publicly traded corporation to tender their stock for sale at a specified price during a specified time usually the price will be above the market value. Here the shareholder will be given a biddable option wherein he can bid the price between a ranges of value issued by the issuer Or else he can also choose the option to tender for the price issued by the company itself.E.g. Company A having a total share count of 10,00,000 at a market price of Rs.35 has announced a tender offer to purchase 2,00,000 of the outstanding shares at a price value of Rs.37 or bid the price the between 37 to 40 for tendering.
PINK
A Corporate Action type [stands for Pay In Kind], which deals with Interest payment in any kind, except cash, distributed to holders of an interest bearing asset. It usually pays out in additional debt or equity, instead of cash. Payment-in-kind securities are attractive to companies/persons who would prefer not to make cash outlays instead wishing to have it in other formats/assets.Example: A company which announces pay in kind event will be paying out its shareholders additional securities at a rate determined by the company.
Consent
This is a kind of corporate action which is a Procedure that aims to obtain consent of holder to a proposal by the issuer or a third party intended to progress on an event/action [which the company is intend to begin] to the next stage. In this method, the proposer of the resolution (usually, the company) signs the written resolution and sends it (as one or more copies) to other directors and/or shareholders who give their approval by signing it. When all the required signatures have been obtained, the action taken is documented by an entry in the firm's minute book.For example, a company may require consent to tender their shares for CASH and the company may pay a consent fee for the holders who go with the tender option.
Straight through processing
The capture of trade details directly from front-end trading systems and complete automated processing of confirmations and settlement instructions without the need for rekeying or reformatting data.Banking Terms - Set 2 (Check 21 Act, Warrants, Capital Gains Distribution, Derivatives, Odd Lot)
Odd Lot
An odd lot tender is an offer to shareholders with odd lots, to sell those shares at a given price. Odd lot offer is usually for Tenders where in Firm will be purchasing back their shares in market from holders who hold very less numbers of shares, usually Odd lots are considered to be anything less than the standard 100 shares for stocks.E.g. If the board lot is for 100 and a shareholder holds 150 shares, an odd lot tender will give the shareholder to dispose of 50 shares at a given price. When the odd lot is announced by the concerned organization the above shareholder will be able to place his bid for those 50 shares which he holds other than the standard 100s group.
Derivatives
A financial instrument whose characteristic/value depends upon the characteristics/value of an underlying security, which can be of any kind like currency, bond, equity (or) commodity. Investors may purchase or sell derivatives in order to manage the risk associated with the underlying security, as a means to safeguard against fluctuations in value. It’s a kind of high risk technique and complicated too.E.g. a FOREIGN investor buying shares of a company may be exposed to exchange rate risk [currency exchange] so, to hedge this risk, investors will usually purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back to his home country's.
Capital Gains Distribution
The Corporate event pays shareholders an amount in cash issued from the Capital account. There is no reduction to the face value of a single share (or the share has no par value). The number of circulating shares remains unchanged. Many funds allow automatic reinvestment of capital gains instead of distribution. Capital gains distributions will be taxed, as capital gains to the person receiving the distribution.E.g. Capital gains distribution occurs when a mutual fund manager liquidates underlying positions that have made gains since they were added to the fund.
Warrants
Warrants are the securities that give an entitlement for the holder to purchase shares in a specific company at a set price, at a future date. A Shareholder willing to exercise Warrants will pay the exercise price [price at which a warrant holder can purchase/sell the underlying securities] to receive new share(s) for every Warrant held. As a holder of Warrants, the shareholder would hope that the price of the share rises above the exercise price so that he/she can buy the shares for less than the market price.E.g. if Company A issues bonds with warrants attached, each bondholder will get a $1,000 face-value bond and the right to purchase 100 shares of Company A at $20 per share over the next five years.
The Check Clearing for the 21st Century Act - Check 21 Act
The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create substitute checks. Check 21 is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation.Banking Terms - Set 1 (TPPA, Bond, Proxy Voting, Dutch Auction, Share Premium)
Share Premium
This corporate event pays shareholders an amount in cash/issue bonus shares to the shareholders, from the shares premium reserve. Share Premium is what the company gains, when it sells its shares at a price higher than the face value of the same [Company having a history of good financial performance may sell its shares at a higher price].E.g. If a company sells its share whose face value is $1 at a price of $2, the company earns a share premium of $1 per share.
Dutch Auction
An action by a party wishing to acquire a security. Holders of the security are invited to make an offer to sell, within a specific price range. The acquiring party will buy from the holder with lowest offer.E.g. An investor places a bid for 50 shares at $50 while another investor offers at $45 etc... Once all the bids are submitted, units that are going to be sold will be allotted to the bidders from the highest bids down. But, each bidder will pay the lowest price of all the allotted bids (i.e.) even the investor who has placed a bid for $50 for 50 shares will end up paying only $40, considering that as the last successful bid.
Proxy Voting
Every publicly traded company has an annual general meeting where management presents several decisions that need shareholder approval. The approval is given by means of voting for or against each decision. Shareholders may attend the meeting in person or vote by proxy - electronically or by mail via their brokers and custodian.Issues covered in a proxy statement can include proposals for new additions to the board of directors, information on bonus and any declarations made by company management etc.
Bond
A bond is a debt instrument requiring the issuer (also called the debtor or borrower) to repay to the lender/investor, the amount borrowed plus interest (coupons) over a specified period of time.Usually, it’s of three types: Short term[1-5 yrs.], Medium term [5-12 yrs.] & Long term [> than 12 yrs.]
E.g. A company as a means to raise funds for its needs, will issue bonds with certain face value and buy money from the lenders [third party who are buying those bonds] which will be repaid to the bondholders during maturity/call-back.
Third Party Payment Aggregators (TPPA) or Merchant Aggregators
Merchant Aggregators or Payment Aggregators are service providers through which e-commerce merchants can process their payment transactions. Aggregators allow merchants to accept credit card and bank transfers without having to setup a merchant account with a bank or card association. The merchant is paid by the aggregator. Payment aggregators typically hold consumer credit card information to allow for faster purchases or hold money in an account to allow for future purchases. Firms such as PayPal, Google Checkout and Amazon Payments are examples of Payment Aggregators.
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