Friday, December 19, 2008

Federal Reserve Of USA Slashes Interest Rate To Zero - Will It Help India?

To tide over the effects of Recession, the Federal Reserve, the Central Bank of the USA, has slashed the rate of interest on loans, taken from the Federal Reserve, to zero. This seems like following the ten-year-old Japanese Model, in which rates of interest were also slashed to zero. The Federal Reserve has stated that the rates of interest taken from them would range between 0% to 0.25%. In other words, the US banks & other Financial Institutions will now practically get Interest Free Loan from the Federal Reserve. As a result of this step, the Investment Cost in the American Economy will be reduced & at the same time people will be encouraged to spent rather than save. The US Economists are of the opinion that they now expect the common people to invest in Share Markets, Mutual Funds etc rather than keeping money in the Banks. The experts are of the opinion that this process will slowly revive the US Economy. Economists are also of the opinion that the slashing of the interest rate will help India boost up her Export Trade since the slashing process will reduce the price of the dollar in relation to the rupee as well as other major currencies of the World. This will definitely help India to boost up her Exports.

Contributed By:
Prof. Jayanta Mitra
(Globsyn Business School)

Thursday, December 11, 2008

Should Redeemable Preference Shares be treated as Debt or Equity?

Corporate houses that have issued redeemable preference shares are treating them as equity capital.

As per the International Financial Reporting Standards (IFRS), redeemable preference shares should be shown under the head long-term financial liability on the liability side.

The company law, in contrast, requires them to be classified as equity capital on the liability side.

The Institute of Chartered Accountants of India (ICAI) had suggested in its standards on financial instruments that companies treat them as long-term liability.

The changes would have impact on the bottom lines of companies negatively. Classifying redeemable preference shares under long-term financial liability will have an impact on the net profit of the company because it will change the way dividend paid on such shares is accounted for. If a redeemable preference share were treated as equity, the returns to those holding the instrument would be in the nature of dividends. On the other hand, if it were treated as long-term liability, the same would be interest, which would be an expense that would lower profits, at the same time it will reduce the tax burden of the company to some extent.

Hence should Redeemable Preference Shares be treated as Debt or Equity?

Contributed By:
Krishnendu Ghosh
(Globsyn Business School)