NOTES ON FM

7/31/2019 NOTES ON FM

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Working Capital

Funds required for short term purposes or day to dayexpenses are working capital. Working Capital refers to part of firms capital required for financing short term or rcurrent assetssuch a cash marketable securities, debtors and inventories.

Funds thus, invested in current assets keep revolving fast andare constantly converted into cash and this cash flow out again inexchange for other current assets. Working Capital is also knownas revolving or circulating capital or short-term capital.

Concepts of Working Capital

Gross working capital (GWC)GWC refers to the firms total investment in current assets.

Current assets are the assets which can be converted into cashwithin an accounting year (or operating cycle) and include cash,short-term securities, debtors, (accounts receivable or bookdebts) bills receivable and stock (inventory).

Net working capital (NWC)

NWC refers to the difference between current assets andcurrent liabilities.

Current liabilities (CL) are those claims of outsiders whichare expected to mature for payment within an accounting yearand include creditors (accounts payable), bills payable, andoutstanding expenses.

NWC can be positive or negative.Positive NWC = CA > CLNegative NWC = CA < CL


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Operating cycle or circular cash flow concept

Operating cycle is the time duration required to convertsales, after the conversion of resources into inventories, intocash. The operating cycle of a manufacturing company involvesthree phases:

Acquisition of resources such as raw material,labour, power and fuel etc.Manufacture of the product which includesconversion of raw material into work-in-progress intofinished goods.Sale of the product either for cash or on credit. Creditsales create account receivable for collection.

Start with Raw material -> work in progress ->finishedgoods -> finished goods -> Sales -> debtors -> Cash -> raw Sales-> debtors -> Cash -> raw material. Ends with raw material

CASH RAW MATERIALS

WORK IN PROGRESSCREDITORS

CASH FROM SALES FINISHED GOODS

DEBTORS

PROFITDISTRIBU-TION

Expenses


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Importance of working capital

Risk and uncertainty involved in managing the cash flowsUncertainty in demand and supply of goods, escalation in costboth operating and financing costs

It measures how much in liquid assets a company hasavailable to build its business.An increase in working capital indicates that the business has

either increased current assets (that is received cash, or othercurrent assets) or has decreased current liabilities, for examplehas paid off some short-term creditors.

Current assets Current liabilities

Positive working capital is required to ensure that a firm isable to continue its operations and that it has sufficient fundsto satisfy both maturing short-term debt and upcomingoperational expenses. The management of working capitalinvolves managing inventories, accounts receivable andpayable and cash.

Decisions relating to working capital and short termfinancing are referred to as working capital management .

Disadvantages of Redundant or Excess Working CapitalIdle funds, non- profitable for business, poor ROI

Unnecessary purchasing & accumulation of inventories overrequired level

Excessive debtors and defective credit policy, higher incidence of bad debts Overall inefficiency in the organization. When there is excessive working capital, Credit-worthinesssuffersDue to low rate of return on investments, the market value of shares may fall


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Question 1 :- Overview of Financial Management

Financial Management

Financial Management can be defined as the management of the finances of abusiness / organization in order to achieve financial objectives. FinancialManagement means planning, organizing, directing and controlling the financial activitiessuch as procurement and utilization of funds of the enterprise. It means applying generalmanagement principles to financial resources of the enterprise.

Key objectives of financial management are to Create wealth for the business,generate cash, and to provide an adequate return on investment bearing in mind the risksthat the business is taking and the resources invested.

Three key elements to the process of financial management :(1) Financial Planning :- Management need to ensure that enough funding is available atthe right time to meet the needs of the business. In the short term, funding may be neededto invest in equipment and stocks, pay employees and fund sales made on credit. In themedium and long term, funding may be required for significant additions to the productivecapacity of the business or to make acquisitions.

(2) Financial Control :- Financial control is a critically important activity to help thebusiness ensure that the business is meeting its objectives. Financial control addressesquestions such as:

Are assets being used efficiently?

Are the businesses assets secure?

Do management act in the best interest of shareholders and in accordance withbusiness rules?

(3) Financial Decision-making :- The key aspects of financial decision-making relate toinvestment, financing and dividends. A key financing decision is whether profits earned bythe business should be retained rather than distributed to shareholders via dividends. If dividends are too high, the business may be starved of funding to reinvest in growingrevenues and profits further.

Nature of Financial Management

The finance functions can be divided into three broad categories (i) investmentdecision, (ii) financing decision, and (iii) dividend decision. In other words, the firmdecides how much to invest in short term and long-term assets and how to raise therequired funds


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In making financial decisions, the financial manager should aim at increasing thevalue of the shareholders stake in the firm. This is referred to as the principle of Shareholders Wealth Maximization. Wealth is precisely defined as net presentvalue and it accounts for time value of money and risk.

Shareholders and managers have the principal-agent relationship. In practice, theremay arise a conflict between them.

The finance manager raises capital from the capital markets. He or she should knowhow the capital markets function to allocate capital to the competing firms and howsecurity prices are determined in the capital markets

Functions of Financial Management

1.Estimation of capital requirements: A finance manager has to make estimation withregards to capital requirements of the company. This will depend upon expected costsand profits and future programmes and policies of a concern. Estimations have to bemade in an adequate manner which increases earning capacity of enterprise.

2.Determination of capital composition: Once the estimation have been made, thecapital structure have to be decided. This involves short- term and long- term debtequity analysis. This will depend upon the proportion of equity capital a company ispossessing and additional funds which have to be raised from outside parties.

3.Choice of sources of funds: For additional funds to be procured, a company has manychoices like-a. Issue of shares and debenturesb. Loans to be taken from banks and financial institutionsc. Public deposits to be drawn like in form of bonds.

4.Investment of funds: The finance manager has to decide to allocate funds into profitableventures so that there is safety on investment and regular returns is possible.

5.Disposal of surplus: The net profits decision have to be made by the finance manager.

This can be done in two ways:a. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.b. Retained profits - The volume has to be decided which will depend uponexpansion, innovational, diversification plans of the company.

6.Management of cash: Finance manager has to make decisions with regards to cashmanagement. Cash is required for many purposes like payment of wages andsalaries, payment of electricity and water bills, payment to creditors, meeting currentliabilities, maintenance of enough stock, purchase of raw materials, etc.

7.Financial controls: The finance manager has not only to plan, procure and utilize thefunds but he also has to exercise control over finances. This can be done throughmany techniques like ratio analysis, financial forecasting, cost and profit control, etc.


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Question 2:- Discuss Risk and Return. Briefly describedifference between Systematic and Un-Systematic Risk

Risk :- It is defined as the variability in return from the expected value. The risk varies from individual to individual depending on his risk appetite. There are three types of individuals :- (i) Risk Averse (ii) Risk indifferent(iii) Risk preferred. Normally the individuals are risk averse.

Total Risk can be of two types i.e. Systematic Risk & UnsystematicRisk

Systematic Risk :- It is the market risk and is not controllable. Itdepicts the variability and return because of the changes in the

market return. Systematic Risk is the variability of return on stocks orportfolios associated with changes in return on the market as a whole.

For example, if you have invested in 5 shares of 5 different sectors (Shareslisted on NSE). You can face two situations :- (a) your return from these fiveshares may be plus or minus because of the individual performance of theshares; or (b) your return from these shares may be plus or minus because of the change in the NSE Index. This change in NSE index is due to externalfactors or market forces.

Unsystematic Risk :- It is the risk associated with variability of

return on stocks/portfolio that is not explained by the marketmovement. This kind of risk is controllable or avoidable if youdiversify. Larger number of shares in your portfolio specially fromdifferent sectors will reduce the unsystematic risk.

Unsystematic Risk is the variability of return on stocks or portfolios notexplained by general market movements. It is avoidable throughdiversification.

Return :- Income received on an investment plus any change inmarket price, usually expressed as a percentage of the beginning

market price of the investment.Expected Risk and Preference

A risk-averse investor will choose among investments with the equal ratesof return, the investment with lowest standard deviation and amonginvestments with equal risk she would prefer the one with higher return.


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A risk-neutral or risk indifferent investor does not consider risk andwould always prefer investments with higher returns.

A risk-seeking investor likes investments with higher risk irrespectiveof the rates of return. In reality, most (if not all) investors are risk-averse.


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Characteristic line compares the return on a stock with the return on marketportfolio.

Beta

It is an index of systematic risk. A measure of a portfolio's volatility . It measures the sensitivity of a stocks returns tochanges in returns on the market portfolio. The beta for a

Total Risk = Systematic Risk + Unsystematic Risk Total Risk = Systematic Risk + Unsystematic Risk Total Risk = Systematic Risk + Unsystematic Risk Total Risk = Systematic Risk + Unsystematic Risk

TotalTotalRiskRisk

Unsystematic riskUnsystematic risk

Systematic riskSystematic risk

S T D D E V O F P O R T F O L I O

R E T U R N

NUMBER OF SECURITIES IN THE PORTFOLIO

Factors such as changes innations economy, tax

reforms by the Govt.or a change in the worldsituation.
http://financial-dictionary.thefreedictionary.com/Portfoliohttp://financial-dictionary.thefreedictionary.com/Volatilityhttp://financial-dictionary.thefreedictionary.com/Portfoliohttp://financial-dictionary.thefreedictionary.com/Volatility


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portfolio is simply a weighted average of the individual stock betas in the portfolio.

A beta of 1 means that the security or portfolio is neither morenor less volatile or risky than the wider market. A beta of morethan 1 indicates greater volatility and a beta of less than 1

indicates less.

Beta is an important component of the Capital Asset Pricing Model , which attempts to use volatility and risk to estimateexpected returns .

CovarianceCovariance Sigma Sigma

Rj is the required rate of return for stock j, (+) PremiumRf is the risk-free rate of return,bj is the beta of stock j (measures systematic risk of stock j),RM is the expected return for the market portfolio.

RR = RR + RR - RR
http://financial-dictionary.thefreedictionary.com/Volatilehttp://financial-dictionary.thefreedictionary.com/Riskyhttp://financial-dictionary.thefreedictionary.com/Capital+Asset+Pricing+Modelhttp://financial-dictionary.thefreedictionary.com/Capital+Asset+Pricing+Modelhttp://financial-dictionary.thefreedictionary.com/Expected+Returnshttp://financial-dictionary.thefreedictionary.com/Volatilehttp://financial-dictionary.thefreedictionary.com/Riskyhttp://financial-dictionary.thefreedictionary.com/Capital+Asset+Pricing+Modelhttp://financial-dictionary.thefreedictionary.com/Capital+Asset+Pricing+Modelhttp://financial-dictionary.thefreedictionary.com/Expected+Returns


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Characteristic Lines and Different Betas

RR j j

= RRf f +

j(RR

MM- RR

f f )

MM= 1.01.0

Systematic Risk (Beta)

RRf f

RRMM

R e q u

i r e

d R e

t u r n

R e q u

i r e

d R e

t u r n

RiskRiskPremiumPremium

Risk-freeRisk-freeReturnReturn

EXCESS RETURNON STOCK

Beta < 1Beta < 1(defensive)(defensive)

Beta = 1Beta = 1

Beta > 1Beta > 1(aggressive)(aggressive)

Each characteristiccharacteristiclineline has a

different slope.


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1) If the slope is 1 than Beta is equal to one that means that the returnfrom the stock move in proportion to the return of market portfolio.

2) If the slope is greater than 1, then Beta is greater than 1 that meansthat the return from stock varies proportionally to the return of themarket. (Aggressive )

3) If the slope is less than 1, then Beta is less than 1 and that means thatthe return from stock is less in proportion to the return of the market(Defensive)

RR j j

= RRf f +

j(RR

MM- RR

f f )

MM= 1.01.0

Systematic Risk (Beta)

RRf f

RRMM

R e q u i r e

d R e

t u r n

R e q u i r e

d R e

t u r n

RiskRiskPremiumPremium

Risk-freeRisk-freeReturnReturn


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CAPM (Capital Asset Pricing Model)by Sharpe & Linter in 1960

CAPM is a model that describes the relationship between risk and expected (required) return; in this model, a securitysexpected (required) return is the risk-free rate plus a premium

based on the systematic risk of the security.

The CAPM is one of the most commonly used ways to determine the costof common stock. This cost is the discount rate for valuing commonstocks, and provides an estimate of the cost of issuing common stocks.As per the CAPM, the required rate of return on equity is given by thefollowing relationship:

Ks = Krf + (Km - Krf)

Where: Krf is the risk free rate is the firms beta Km is the return on the market

CAPM model indicates the market efficiency under which the marketprice of a security represents market consensus, estimates of the value of that security. An efficient financial market is where when security pricesreflect all available public information about the economy, financialmarkets and the specific company involved.

It shows the relationship between expected return and unavoidable riskand the valuation of securities that follows in the CAPM Model.

The CAPM Model has the following assumptions :-

1. Capital markets are efficient2. Investors are well informed3. Transaction cost are zero4. No taxes5. No investor is big enough to affect the market price6. There are two types of investment opportunities :-

(a) Risk Free Security (Govt. Securities) where return is knowwith certainty over a particular holding period

(b) Market portfolio of common stocks

Q. 3 : Elaborate the importance of Cash & Receivable Management


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Cash Management :- Cash is most liquid form of current assets. It is thebasic input needed to keep the business running on continuous basis. It isalso the ultimate output expected to be realized by selling the services orproduct manufactured by the firm. The firms need to hold cash for thefollowing three motives:

1. Transaction motive- To buy raw materials, to pay wages and salariesand other operating expenses, to pay taxes and dividend etc.

2. Precautionary Motive- To meet contingencies that may arise in futuredue to unforeseen reasons.

3. Speculative motive- For investing in profit making opportunities as andwhen arise suddenly.

But to meet the above needs of the firm, cash can not be hold inexcess because it will remain idle without contributing any profit to the firm.So, cash may be maintained in such a way that shortage of cash cant hamperthe operations of the firm and excess of cash available may not cause the lossdue to idleness of cash.

Cash management is concerned with the managing of :

cash flows into and out of the firm,cash flows within the firm, andcash balances held by the firm at a point of time by financing deficit or

investing surplus cash

In order to resolve the uncertainty about cash flow prediction and lackof synchronization between cash receipts and payments Management playsan important role by:

(i) Cash Planning - It anticipates the future cash cash flows(Inflow &Outflow) and needs of the firm by developing a projected cash statementcalled Cash Budget. It reduces the possibility of idle cash balances and cashdeficits.

(ii) Managing cash collections or disbursements - After preparing cashbudget , Manager makes his best effort to accelerate cash collection and todecelerate cash disbursement as much as possible.

(iii) Determining the optimum cash balance -The manager decide theappropriate level of cash balance by matching the cost of excess cash anddanger of cash deficiency.


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(iv) Investing surplus cash - The surplus cash balance is invested to earnprofit in short term investment opportunities such as bank deposits,marketable securities or inter-corporate lending.

Thus, the cash management is a complex task and decision taken can affectimportant areas of the firm.

Short-term Forecasting Methods

The receipt and disbursements method :- Under this method,Cash budget is a statement projecting the cash inflows and outflows(receipts and disbursements) of the firm over various interim periods of the budget period. It may be prepared on monthly basis, quarterly orhalf yearly basis.

The adjusted net income method :- This method requires that apro-forma income statement should be prepared for each desired interperiod of the budget period. The net income figures for each period arethen adjusted to a cash basis by deleting the transactions that areaffection the income statements but not the cash balance.

The Proforma balance sheet method :- This method requiresthe preparation of as many pro-forma balane sheets as there areinterim periods in the cash budget. Each item of the balance sheetexcept cash is projected for each period .

Total assets = Total Liabilities + Capital.

Importance and significance of Cash Budget

Cash budget is an effective tool of cash management and it may help themanagement in the following ways :-

a) Identification of the period of cash shortage so that the financialmanager may plan well in advance about arranging the funds at anappropriate time.b) Identification of cash surplus position and duration for which surpluswould be available so that alternative investment of this excess liquiditymay be considered in advancec) Better coordination of the timing of cash inflows and outflows in orderto avoid chances of shortages or surplus of cash etc.


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IMPORTANCE OF RECEIVABLE MANAGEMENT

Receivables represent amount owed to the firm as a result of sale of goods orservices on the credit basis. These are the claims of the firm against itscustomer and form part of current assets. The purpose of maintaining orinvesting in receivables to meet competition and to increase sales and profit .

A firms investment in accounts receivable depends on (a) the volume of creditand (b) the collection period. For ex. If a firms credit sales are Rs.20 lakhs perday and the customers take on an average 45 days to make payment, then thefirms average investment in accounts receivable is 20 lakh x 45 days= 900lakh

Thus, in spite of benefits, it also involves Risk and loss of Interest or profit oninvestment involved and also some costs have to incur on maintainingreceivables, such as:

(i)Financing cost- Accounts receivable tie up a part of the firms financialresources invested for long term financing and through retained earnings.

(ii) Administrative cost - Maintenance of receivable requires the employmentof personnel, office space to keep the records, exp. on account of correspondence.

(iii)Collection cost- The bills are not paid in time, the firm has to make effortsfor their collection, first through correspondence and then through agents.

(iv) Bad debt losses -The amount which the customer fails to pay are known asbad debts. Even after the serious collection efforts, bad debts occur.

To minimize these costs, if co. adopt a tight credit policy, the sales cannot beexpanded. Management helps to take a sound decision by forming a creditpolicy through which the benefits are maximized and costs are minimized. Forthis purpose management try to promote credit sales upto the point wheremarginal profits equals the marginal cost of additional credit sales. At thispoint, the profit will be maximized and the investment in the receivables will beoptimum. Thus, following are the main objectives of trade off receivablemanagement:(i) To obtain optimum value of sales.

(ii) To minimize the cost of credit sales.

(iii) To optimize investment in receivables.

Therefore, the main objective of Receivable management is to establish abalance between profitability and risk. Although level of receivable is affectedby various external factors like standard of the Industry, economic conditions,


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seasonal factors, role of competitors etc., Management can control itsreceivables through Credit Policies, Credit Terms, Credit Standard and CollectionProcedure.

TIME VALUE OF MONEY Types of Interest

Simple Interest :- (i) Interest paid (earned) on only the original amount, or principal borrowed (lent). (ii) Simple interest is the interest that is calculated only on the originalamount (principal), and thus, no compounding of interest takes place.

Compound Interest (i)) Interest paid (earned) on any previous interest earned, as well ason the principal borrowed (lent). (ii)Compound interest is the interest that is received onthe original amount (principal) as well as on any interest earned but not withdrawn duringearlier periods.

Future Value is the value at some future time of a present amount of money, or a series of

payments, evaluated at a given interest rate.The term (1 + i)n is the compound value factor (CVF ) of a lump sum of Re 1, and it

always has a value greater than 1 for positive i, indicating that CVF increases as i and nincrease.

Future Value of an Annuity :- Annuity is a fixed payment (or receipt) each year for a specified number of years. If you rent a flat and promise to make a series of payments over an agreed period, you have created an annuity. The term within brackets is the compoundvalue factor for an annuity of Re 1, which we shall refer as CVFA .

= CVFAn n, i F A

Present Value is the current value of a future amount of money, or a series of payments,evaluated at a given interest rate. Present value of a future cash flow (inflow or outflow) isthe amount of current cash that is of equivalent value to the decision-maker.

The term in parentheses is the discount factor or present value factor ( PVF ), and it isalways less than 1.0 for positive i, indicating that a future amount has a smaller presentvalue.

Present Value of an Annuity : - The term within parentheses is the present value factorof an annuity of Re 1, which we would call PVFA , and it is a sum of single-payment

present value factors.= PVAF

n, i P A

= CVFn n,i F P

,PVFn n i PV F =


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Time preference for money is an individuals preference for possession of a given amountof money now, rather than the same amount at some future time. Three reasons may beattributed to the individuals time preference for money:-

risk

preference for consumptioninvestment opportunities

Required Rate of Return

The time preference for money is generally expressed by an interest rate. This rate will be positive even in the absence of any risk. It may be therefore called the risk-free rate. Aninvestor requires compensation for assuming risk, which is called risk premium.

The investors required rate of return is = Risk-free rate + Risk premium.

Time Value Adjustment :- Two most common methods of adjusting cash flows for time

value of money:

Compoundingthe process of calculating future values of cash flows andDiscountingthe process of calculating present values of cash flows.

Present Value of Perpetuity :- Perpetuity is an annuity that occurs indefinitely .Perpetuities are not very common in financial decision-making:

PerpetuityPresent value of a perpetuity

Interest rate=

COST OF CAPITAL

Cost of Capital :- The firm must earn a minimum of rate of return to cover the cost of generatingfunds to finance investments; otherwise, no one will be willing to buy the firms bonds, preferredstock, and common stock. This point of reference, the firms required rate of return, is called theCOST OF CAPITAL

It is the required rate of return that a firm must achieve in order to cover the cost of generatingfunds in the marketplace. It becomes a guideline for measuring the profitability of differentinvestments. Another way to think of the cost of capital is as the opportunity cost of funds, sincethis represents the opportunity cost for investing in assets with the same risk as the firm.

What impacts the cost of capital?

Riskiness of Earnings The Debt to Equity Mix of the Firm Financial Soundness of the Firm Interest Rate Levels

Riskiness of Earnings

Interest Rate levels

The debt to equitymix of the firm

Financialsoundness of the firm


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Concept of the Opportunity Cost of Capital :_ The opportunity cost is the rate of returnforegone on the next best alternative investment opportunity of comparable risk . Theopportunity cost is the rate of return foregone on the next best alternative investmentopportunity of comparable risk .

WEIGHTED AVERAGE COST OF CAPITAL (WACC) :- The firms WACC is thecost of Capital for the firms mixture of debt and stock in their capital structure.

WACC = wd (cost of debt) + ws (cost of stock/RE) + wp (cost of preferred stock)

The Firms Capital structure is the mix of debt & Equity used to finance the business.

COST OF DEBT (Kd) :- We use the after tax cost of debt because interest payments aretax deductible for the firm.

Kd after taxes = Kd (1 tax rate)

Cost of Preferred Stock (Kp)

Preferred Stock has a higher return than bonds, but is less costly than common stock.WHY?

OCC

.Equity shares

Risk

. Preference shares. Corporate bonds. Government bonds. Risk-free security


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In case of default, preferred stockholders get paid before common stock holders. However,in the case of bankruptcy, the holders of preferred stock get paid only after short and long-term debt holder claims are satisfied.

Preferred stock holders receive a fixed dividend and usually cannot vote on the firmsaffairs.

Kp = preferred stock dividendmarket price of preferred stock Capital Budgeting Techniques

Capital budgeting is the process most companies use to authorize capital spending

on long-term projects and on other projects requiring significant investments of

capital. Because capital is usually limited in its availability, capital projects are

individually evaluated using both quantitative analysis and qualitative information.

Most capital budgeting analysis uses cash inflows and cash outflows rather than

net income calculated using the accrual basis. Some companies simplify the cash

flow calculation to net income plus depreciation and amortization. Others look

more specifically at estimated cash inflows from customers, reduced costs,

proceeds from the sale of assets and salvage value, and cash outflows for the

capital investment, operating costs, interest, and future repairs or overhauls of

equipment.

The Cottage Gang is considering the purchase of $150,000 of equipment for its

boat rentals. The equipment is expected to last seven years and have a $5,000

salvage value at the end of its life. The annual cash inflows are expected to be

$250,000 and the annual cash outflows are estimated to be $200,000.

Payback technique

The payback measures the length of time it takes a company to recover in cash its initial

investment. This concept can also be explained as the length of time it takes the project to generate

cash equal to the investment and pay the company back. It is calculated by dividing the capital


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investment by the net annual cash flow. If the net annual cash flow is not expected to be the same,

the average of the net annual cash flows may be used.

For the Cottage Gang, the cash payback period is three years. It was calculated by

dividing the $150,000 capital investment by the $50,000 net annual cash flow

($250,000 inflows - $200,000 outflows)

The shorter the payback period, the sooner the company recovers its cash investment. Whether a

cash payback period is good or poor depends on the company's criteria for evaluating projects.

Some companies have specific guidelines for number of years, such as two years, while others

simply require the payback period to be less than the asset's useful life.

When net annual cash flows are different, the cumulative net annual cash flows are

used to determine the payback period. If the Turtles Co. has a project with a cost of

$150,000, and net annual cash inflows for the first seven years of the project are:

$30,000 in year one, $50,000 in year two, $55,000 in year three, $60,000 in year

four, $60,000 in year five, $60,000 in year six, and $40,000 in year seven, then its

cash payback period would be 3.25 years. See the example that follows.


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The cash payback period is easy to calculate but is actually not the only criteria for

choosing capital projects. This method ignores differences in the timing of cash

flows during the project and differences in the length of the project. The cash flows

of two projects may be the same in total but the timing of the cash flows could be

very different. For example, assume project LJM had cash flows of $3,000, $4,000,

$7,000, $1,500, and $1,500 and project MEM had cash flows of $6,000, $5,000,

$3,000, $2,000, and $1,000. Both projects cost $14,000 and have a payback of 3.0

years, but the cash flows are very different. Similarly, two projects may have the

same payback period while one project lasts five years beyond the payback period

and the second one lasts only one year.

Net present value

Considering the time value of money is important when evaluating projects with

different costs, different cash flows, and different service lives. Discounted cash

flow techniques, such as the net present value method, consider the timing and

amount of cash flows. To use the net present value method, you will need to knowthe cash inflows, the cash outflows, and the company's required rate of return on its

investments. The required rate of return becomes the discount rate used in the net

present value calculation. For the following examples, it is assumed that cash flows

are received at the end of the period.


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Using data for the Cottage Gang and assuming a required rate of return of 12%, the

net present value is $80,452. It is calculated by discounting the annual net cash

flows and salvage value using the 12% discount factors. The Cottage Gang has

equal net cash flows of $50,000 ($250,000 cash receipt minus $200,000 operating

costs) so the present value of the net cash flows is computed by using the presentvalue of an annuity of 1 for seven periods. Using a 12% discount rate, the factor is

4.5638 and the present value of the net cash flows is $228,190. The salvage value

is received only once, at the end of the seven years (the asset's life), so its present

value of $2,262 is computed using the Present Value of 1 table factor for seven

periods and 12% discount rate factor of .4523 times the $5,000 salvage value. The

investment of $150,000 does not need to be discounted because it is already in

today's dollars (a factor value of 1.0000). To calculate the net present value (NPV),

the investment is subtracted from the present value of the total cash inflows of

$230,452. See the examples that follow. Because the net present value (NPV) is

positive, the required rate of return has been met.

Cash Outflows Cash Inflows

Project Cost $150,000 Cash fromCustomers (1) $250,000

Operating Costs (2) 200,000 Salvage Value 5,000

Estimated Useful Life 7 years

Minimum Required Rate of Return 12%

Annual Net Cash Flows ($250,000 -$200,000) (1) - (2)

$50,000

Present Value of Cash Flows


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Salvage Value ($5,000 .4523)2,262

Total Present Value of Net Cash Inflows 230,452

Less: Investment Cost(150,000)

Net Present Value$ 80,452

When net cash flows are not all the same, a separate present value calculation

must be made for each period's cash flow. A financial calculator or a

spreadsheet can be used to calculate the present value. Assume the same

project information for the Cottage Gang's investment except for net cash

flows, which are summarized with their present value calculations below.

Period Estimated Annual Net CashFlow (1)

12% Discount Factor (2)

Present Value (1) (2)

1 $ 44,000 .8929 $ 39,288

2 55,000 .7972 43,846

3 60,000 .7118 42,708

4 57,000 .6355 36,224

5 51,000 .5674 28,937

6 44,000 .5066 22,290

739,000

.452317,640


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Period Estimated Annual Net CashFlow (1)

12% Discount Factor (2)

Present Value (1) (2)

Totals$350,000 $230,933

The NPV of the project is $83,195, calculated as follows:


Annual Net Cash Flows $230,933

Salvage Value ($5,000 .4523)2,26

Total Present Value of Net Cash Inflows 233,195

Less: Investment Cost(150,000)

Net Present Value$ 83,195

The difference between the NPV under the equal cash flows example ($50,000

per year for seven years or $350,000) and the unequal cash flows ($350,000spread unevenly over seven years) is the timing of the cash flows.

Most companies' required rate of return is their cost of capital . Cost of capital is

the rate at which the company could obtain capital (funds) from its creditors and

investors. If there is risk involved when cash flows are estimated into the future,

some companies add a risk factor to their cost of capital to compensate for

uncertainty in the project and, therefore, in the cash flows.Most companies have more project proposals than they do funds available for

projects. They also have projects requiring different amounts of capital and with

different NPVs. In comparing projects for possible authorization, companies use a

profitability index . The index divides the present value of the cash flows by the required


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of the project for the number of periods. The discount rate that the factor is the

closest to is the internal rate of return. A project for Knightsbridge, Inc., has equal

net cash inflows of $50,000 over its seven-year life and a project cost of $200,000.

By dividing the cash flows into the project investment cost, the factor of 4.00

($200,000 $50,000) is found. The 4.00 is looked up in the Present Value of anAnnuity of 1 table on the seven-period line (it has a seven-year life), and the

internal rate of return of 16% is determined.

Annual rate of return method

The three previous capital budgeting methods were based on cash flows.

Theannual rate of return uses accrual-based net income to calculate a project's

expected profitability. The annual rate of return is compared to the company's

required rate of return. If the annual rate of return is greater than the required rate

of return, the project may be accepted. The higher the rate of return, the higher the

project would be ranked.

The annual rate of return is a percentage calculated by dividing the expected annual net income by

the average investment. Average investment is usually calculated by adding the beginning and

ending project book values and dividing by two.

Assume the Cottage Gang has expected annual net income of $5,572 with an investment of

$150,000 and a salvage value of $5,000. This proposed project has a 7.2% annual rate of return

($5,572 net income $77,500 average investment).


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The annual rate of return should not be used alone in making capital budgeting

decisions, as its results may be misleading. It uses accrual basis of accounting and

not actual cash flows or time value of money.


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Question: - Public Debt Management in India and the prospectus for anindependent Debt management office.Background: The government likes any other independent unit, collect revenue and spend it isalso fact that the revenue collected does not match the expenditure to meet the deficit There may

be sudden spurt in the government expenditure due to war or natural clalamaties the governmenthas to incur heavy expenditure and may run into debt.Public debt has been raised by some rulersfor financing useless purposes. Therefore having deficit budet and raising loans is the irrational

behaviour and should be avoided.These days it is believed that the government of underdevelopedcountry should play active role in the development of economy in this way the budgetary is an

effective tool in accelerating the process of capital accumulation and economic growth this may bedone by borrowing and investing these funds in various projects. In case the government do not barrow the options left

a) either the government make arrangement from its reserve

b) They may sell some of its properties and investment etc.

c) It may creat more currency

d) It may borrow and spent.

The option a) and c) will increase the money flow in the econnmy and may leadto inflation the option b) government use quiet rairely as the the only optionleft to borrow the money from the market In most the countries public debt asregistered a continous upward trend.The question arises that is there any limitborrowing the answer is the will and capacity of government to raise loans. It isexpected that the government should no borrow for consumption purpose andshould borrow for economic compultions or furthering it may borrow forconsumptions purposes such as defence education health and welfarepurposes. The government borrowing adds to their demands and cause upwardpressure on the interest rates. Gurley and Shaw & Redeliffe Committee

emphasize the important role of public debt. They claim that the physicalgrowth of the country can not sustained without a healthy and strong financialsector which necessitates the growth of public debt which provide foundationto the superstructure of credit in the economy. A fear is expressed that unlessrestricted by some means a government may resort to excessive borrowingand get into a debt trap that is a situations in which it has to barrow to servicethe existing debt. In case of foreign the country resources may be drainedout.Public debt as a means of regulating the economy.The government by


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incresing the demand and supply through open market and therefore bychaning the volume of outstanding debt.Where the debt is meant for particularproject such project are estimated to benefit specific area of section of peoplefor example the cost of the dam can be met through public debt and the costof the project can recovered by lavy of charges.The general idea is that thegovernment should not raise debt for consumption . A burden of debt wasemphasized and elaborated by E.D Domer he related the interest payment of

the level of national incone and thus pointed out that asinterest on debt as aproportion of national income rises a larger portion of national income will haveto be taxed to pay that interest. It is to remember that the tax revenuecollected for interest payment is being disbursed to the debt holders. Publicdebt may be claimed to have added the burden of the debt. In India most of the funded public debt and treasury billsare owned by the Reserve Bank of India and other institutions as such it does cause and distributive problems theinterest paid on provident funds and small savings owned by middle class thegovernment resort to indirect taxes which of course tends to inequalities.Foresigns loans must be used for investment purposes by which the productive

capacity of the debtor country will increase out of which the repayment cantake place in that case there will be no burdon if these loans are not investedin the export oriented industries then therewill be balance of paymentproblem. Many African countreis are not in position to return the debt and havewalked into the debt trap.

Debt Management

Hence there is need to formulation and implementation of debt policydesigned to achieve certain objectives. There is a traditional philosphy debtmanagement consisiting of keeping its interest cost to minimum possible and

pay it off as early as possible. Hoever in moderen welfare state uses debtmanagement as a policy tool for achieving various socio econmic objectives of couse every government is still interested in keeping the interest cost. If thisobjective comes into conflits it is sacrificed. Other important objectives beforeauthorities include economic stablization growth employment and overallsoundness of the financial syastem as a whole.

Debt managemen policy has to run in harmony with the monetarymanagement of the country. They both influence stabilization and economicgrowth. Open market operations are usually conducted by sale purchase of government securities. Through general and selective credit controls monetary

policies tries to influence the volume and flow of funds.. The aggregate volumeof outstanding debt reflects a cumulative effect of budgetary policy of thegovernment the volume of debt is increasing and decreasing in the line of defict and surplus. In the case of public debt the management part wouldmainly consist of changing its maturity composition so as to affect its yieldstructure and liquidity content.


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In big countries where the governemtn has more than one layer scuh ascentral and state there can inter governmental problems of coordination if boththe centre and state government are allowed to enter the market the careshould be taken that the timing, amounts, terms and other conditions of theloan do not work cross purposes normally the central government is in aposition to borrow at low rates than state government . Further the differentgovernment should avoid entering the market at the same time or in quick

succession particularly the availability of funds available is limited comparedwith the combined requirement of the government. In India the task of coordination in all these aspects is achieved through the agecy of the ReserveBank of India. It advises them regarding timing terms and amount of loans thatcan be raised without any difficulty.

Debt Management Office World over, debt management is distinct from monetary management.The establishment of a Debt Management Office (DMO) in the Government has been advocatedfor quite some time The DMOs mandate will be to manage debt of the country. It will be anindependent agency that will help the government manage borrowings efficiently. By separatingdebt management from monetary policy functions, policy makers expect the central bank toemerge as an independent central bank which like some of its peers will focus more on inflationcontrol. RBI had first recommended this when Bimal Jalan was the governor. But subsequently, itdissented when a committee set up the government by the then financial minister, Yashwant Sinha,as the then governor, YV Reddy, thought the move will not help unless the fiscal deficit wasreduced. In most of the countries, central banks are only responsible for monetary managementand do not even function as a regulator for banks. In the US, the treasury manages public debt, notthe Fed. In addition to these core problems of conflicts of interest, Indian debt management hasmany other weaknesses. There is no one place in the country where there is a full database of allthe liabilities of GoI. This information is, hence, not used for risk management and optimisation of the financial burden of GoI. There is a big gap between the way mature market economies applysophisticated financial economics for the purpose of devising optimal strategies for debtmanagement, and the state of play in India. As far as the mechanics of implementation areconcerned, the Budget speech says: "[I]n the first phase, a Middle Office will be set up." A midoffice would constitute a single comprehensive database about all liabilities and guarantees of GoI,and a risk management overlay, which improves the risk profile of the overall portfolio. It is thelogical starting point for the construction of the DMO. If the MoF is able to get key staff personswith experience in state-of-the-art debt management in public sector settings, Establishing a debtmanagement office (DMO) would consolidate all debt management functions in a single agency,and be the catalyst for wider institutional reform and transparency about public debt. It isinternationally accepted best practice that debt management should be disaggregated frommonetary policy, and taken out of the realm of the central bank. Most advanced economies havededicated debt management offices. Several emerging economies, including Brazil, Argentina,

Colombia, and South Africa, have restructured debt management in recent years and created aDMO. In the present situation, it is imperative to seek every institutional innovation which canyield even the slightest improvements in the implementation of public borrowing, or slightImprovements in risk management. - Kelkar Report Looking ahead, a sound public borrowingstrategy for India would incorporate three elements. . . An independent Indian debt managementoffice - operating either as an autonomous agency or under the Ministry of Finance - thatregularly auctioned a large quantum of INR denominated Bonds in an IFC in Mumbai. The size of these auctions would be substantial by world standards and would enhance Mumbais stature as an


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IFC. - This is also a good time to carefully think about changing the structure of public debtmanagement, particularly in a way that minimizes financial repression and generates a vibrantgovernment bond market. The Ministry of Finance has announced that an independent DebtManagement Office (DMO) will be set up. This provides an opportunity to think about andincorporate best practices in this field. - Raghuram Rajan Committee Report Need of DMO inIndia Three key issues that influence the design of debt management in India is: - consolidation,conflicts of interest and financial repression.

Consolidation-A well structured debt management office is one where all information about onshore and offshoreliabilities, and contingent liabilities, is centralized into a single database and will enables better information transmission to the bond market. Unification of information also makes possible avariety of strategies for reducing the cost of borrowing. Conflicts of interest the debt management office works as the investment banker for thegovernment, selling bonds and engaging in other portfolio management tasks in close coordinationwith its client, the budget division. Each of these agencies then has a clear focus and conflicts of interest are avoided. Financial repression- Debt management is relatively simple when financial firms are forced to

purchase government bonds through financial repression. In this context, the task of funding

public debt will become more complex. It is hence important to undertake institutional reform thatstrengthens debt management alongside the process of financial sector reforms that eases financialrepression.In India, the debt management function is presently dispersed over several agencies. Broadly,external debt and non marketable debt and other liabilities are largely managed by the Ministry of Finance through various departments and marketable debt is largely managed by the Reserve Bank of India. In course of managing the government debt and financing requirement by the ReserveBank, however, the fiscal operations have been perceived to be overburdening the monetary policyand even leading to blurring of distinction between fiscal and monetary policy operations. Waysand means agreement of the Reserve Bank with the Government in 1997 and prohibition of direct

borrowings by the Central Government from the Reserve Bank under the Fiscal Responsibility and

Budget Management Act, 2003 have provided greater transparency and operational autonomy tothe monetary policy framework. International Scenario in Debt Management office Moving publicdebt management from the Central Bank to a DMO is internationally accepted best practice (IMFand World Bank, 2002). However, there are certain common features across countries that haverestructured and modernized public debt management: The Central Bank no longer manages public debt; there is a clear separation between monetary

policy and public debt management. Debt management is integrated in one entity rather than dispersed over severalDepartments and authorities. The split between external and domestic debt management gives way to integrated debtmanagement, with a front-middle-back office structure. The DMO focuses on making debt management more transparent. The DMO focuses on communicating regularly and clearly with financial markets Maintaining and developing an appropriate framework for efficiently managing the portfolio andthe risks associated with it. Disbursing cash to departments and facilitating departmental cash management. Advancing funds to government entities in accordance with government policy. Providing capital markets services and derivative transactions for departments and governmententities.


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Providing reporting for fiscal forecasting and financial statements. Maintaining a diversified funding base and, where appropriate, enhancing relationships withinvestors who hold, or are potential holders of, New Zealand government securities and withfinancial intermediaries and the international credit rating agencies.Practicable structure of the DMOThere are four models for debt management offices:- A division or unit within the Ministry of Finance.

An executive agency which is not a creature of statute, and operates at arms length from theGovernment. A statutory body which functions at arms length from the Ministry of Finance. A state-owned company that manages public debt.IMF, in its guidelines on Public Debt Management (2001), discussed that operational responsibilityfor debt management is generally separated into front and back offices with distinct functions andaccountabilities, and separate reporting lines. This separation helps to promote the independence of those setting and monitoring the risk management framework and assessing the performance fromthose responsible for executing market transactions. Major functions of the Middle Office, inter alia, include preparation of a medium-term debt management strategy, issuance of periodiccalendars for borrowings, managing Government cash requirements, managing the risks in

Government debt portfolio, developing and maintaining a centralized database on Governmentliabilities, preparing periodical reports on public debt and disseminating debt-related information.Middle Office has begun work on some of these functions such as preparation of a medium termstrategy framework, annual issuance programmes, instrument framework for managing cashsurplus/deficit of the Government, developing a comprehensive debt database, etc. Indian DMOshould be a statutory body corporate with considerable operational autonomy, which functions asan agent of the Central and State Governments. DMO is likely to move away from the currentdivision between managing foreign and domestic debt and towards a front, middle and back office structure. However, the draft Bill does not specify operational arrangements, andconcentrates instead on defining the DMOs management structure. Issues in debt managementoffice:

RBI would like to have control over the proposed National Treasury Management Agency; theFinance Ministry wants the agency in its fold. RBI has built up considerable expertise in market operations. In fact, it is quite likely that thestaff of the Bank may continue to be employed in the NTMA for a couple of years, with deputationallowance, till the government officials learn the ropes. Thus the control of NTMA by thegovernment would only result in increased expenditure without any additional tangible benefit tothe economy. RBI has had a policy of grooming the market for new floatation through conversions of the oldones. If government does not take note of the status of the market flowing from RBI actions theloan programme may come a cropper if the subscribers quote high yields and the government isnot willing to pay them. Thus there could be a conflict between monetary and debt policies in thenew set-up. Once the DMO is established, it will operationalise the decision to issue government securitiesfor MSS when the central government and the RBI decide on it. The operational part is crucial andhas an element of immediacy for the RBI to carry out its monetary function. It cannot lose time byasking the NTMA to act. There will be no change in Policy and Operations area, irrespective of whether the DMO is in theGovernment or with the RBI. Only the nitty-gritty of the actual floatation of loans will be handled

by the DMO.


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Issue of conflict of interest, in the current Indian context where 70 per cent of the banking assetsremain in the public sector banks, setting up of a DMO under the Ministry of Finance may, in fact,exacerbate the conflict between governments role as a debt manager and its status as the owner of a substantial portion of the banking sector.Recent Development:The Reserve Bank of India (RBI) has advised the government to put the creation of a debtmanagement office (DMO) on the backburner because of the huge borrowing programme this

fiscal. The finance ministry is at present working on a Bill to set up a separate DMO, independentof the ministry and the RBI. There is already a middle office housed within the finance ministrythat crunches data, but a full-fledged office will have a far larger role. It will operate on an MoUwith the finance ministry that will decide the amount of bonds to be floated each year, the price of the coupons, the tenor of the papers and even their periodicity.The government plans to legally empower the proposed Debt Management Office (DMO) with themandate to do debt profiling and debt stock analysis of borrowings of the Centre and states.Though the work profile of DMO was to include these functions, the finance ministry wants toexplicitly spell these out as it starts framing the draft legislation. DMO is to take over the ReserveBank of Indias function of managing government debt. It is likely to be in place by the secondhalf of 2010-11The finance ministry has also decided that till the DMO is created, the existing

office, the middle office, within the ministry will be strengthened. The middle office currently hasa three-member structure, with a director-level official as its head. The officials are dawn from RBIand are functioning independent of the ministry, though they are located within the ministry

premises. The middle office is taking care of the governments debt strategy and stock monitoring, though the actual raising of debt is done by RBI. They are free to consult RBI. Whilewelcoming the creation of DMO, state governments have suggested it should aim at bringing downthe cost of borrowing. Besides state governments, the ministry of finance has got suggestions fromvarious stakeholders, experts and multilateral lending agencies like the World Bank, InternationalMonetary Fund and the Asian Development Bank on a report of an internal working group set upfor suggesting the structure of DMO. Most of these suggestions were on the operational aspect of the terms of reference. DMOs activity should be broad-based. The underlying idea is to separate

the functions of government debt management and monetary policy, both currently vested withRBI. It is felt that the present arrangement creates a conflict of interest.Conclusion Process of setting up the proposed independent debt office needs to be carriedforward. In this regard, the Report of the Internal Working Group on Debt Management (October 2008) has laid down the broad road map including the required legislation, institutional andgovernance structure of an independent debt office, its responsibilities and transition issues. Thesteps involved in evolution of the independent debt office need to be traversed in a manner characterized by urgency and transparency on the one hand and caution and coordination on theother. ( Source indiastat.com Dec., 2009 - Jan, 2010 socio - economic voices DebtManagement Office: Relevance and Concern Dr. Nikhil Saket, Senior Assistant Secretary,ICAI, New Delhi )Trends in Outstanding Public DebtThe total public debt (excluding liabilities that are not classified under public debt) of theGovernment increased to ` 37,52,576 crore at end-June 2012 from ` 35,78,244 crore at end-March2012 (Table 8). This represented a Quarter-on-Quarter (QoQ) increase of 4.9 per cent (provisional)compared with an increase of 4.8 per cent in the previous quarter (Q4 of FY12). Internal debtconstituted 90.6 per cent of public debt, compared with 90.1 per cent at the end of the previousquarter. Marketable securities (consisting of Rupee denominated dated securities and treasury bills)accounted for 80.9 per cent of total public debt, compared with 79.9 per cent at end-March 2012.


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The outstanding internal debt of the Government at ` 33, 98,154 crore constituted 33.4 per cent of GDP compared with 36.4 per cent at end-March 2012.

Composition of Public Debt

Item At end-June2012

At end-Mar2012

At end-June2012

At end-Mar2012

(`Crore) (% of Total)1 2 3 4 5Public Debt(1 + 2)

37,52,576 35,78,244 100.00 100.00

1. InternalDebt

33,98,154 32,23,822 90.56 90.10

Marketable 30,34,696 28,60,364 80.87 79.94(a) TreasuryBills

3,28,940 2,67,035 8.77 7.46

(i) 91-daysTreasury Bills

1,65,386 1,24,656 4.41 3.48

(ii) 182-daysTreasury Bills

58,000 52,001 1.55 1.45

(iii) 364-daysTreasury Bills

1,05,555 90,378 2.81 2.53

(b) DatedSecurities

27,05,755 25,93,329 72.10 72.47

Non-marketable

3,63,458* 3,63,458 9.69 10.16

(i) 14-days Treasury Bills

97,800* 97,800 2.61 2.73

(ii) SecuritiesIssued toNSSF

2,08,183* 2,08,183 5.55 5.82

(iii)Compensation and otherbonds

27,849* 27,849 0.74 0.78

(iv) Securitiesissued toInternationalFinancialInstitutions

29,626* 29,626 0.79 0.83

(v) Ways andMeansAdvances

0* - - -

2. ExternalDebt

3,54,422* 3,54,422 9.44 9.90

(i)Multilateral

2,22,581* 2,22,581 5.93 6.22

(ii) Bilateral 99,610* 99,610 2.65 2.78(iii) IMF 31,528* 31,528 0.84 0.88(iv) Rupeedebt

702* 702 0.02 0.02

*:-These data are not available for June 30, 2012. So they are carried overfrom previous quarter.


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Note:- Foreign Institutional Investors (FII) investment in governmentsecurities and treasury bills (`57,828 crore at end-March 2012) is included inthe internal marketable debt.

(Source source public debt management quarterly report April-2012 to June 2012finmin.nic.in)

Parliamentary Committees

The functions of Parliament are not only varied in nature, but considerable in volume. The time atits disposal is limited. It cannot make very detailed scrutiny of all legislative and other matters thatcome up before it. A good deal of Parliamentary business is, therefore, transacted in thecommittees of the House, known as Parliamentary Committees. Parliamentary Committee means aCommittee which is appointed or elected by the House or nominated by the Speaker and whichworks under the direction of the Speaker and presents its report to the House or to the Speaker andthe Secretariat for which is provided by the Lok Sabha Secretariat.

Both Houses of Parliament have a similar committee structure, with a few exceptions. Their

appointment, terms of office, functions and procedure of conducting business are also more or lesssimilar and are regulated as per rules made by the two Houses under Article 118(1) of theConstitution.

By their nature, Parliamentary Committees are of two kinds: Standing Committees and Ad hocCommittees. Standing Committees are permanent and regular committees which are elected or appointed every year or periodically and their work goes on, more or less, on a continuous basis.


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The Financial Committees, DRSCs and some other Committees come under the category of Standing Committees.

:Standing Committees: Among the Standing Committees, the three Financial Committees -Committees on Estimates, Public Accounts and Public Undertakings - constitute a distinct group asthey keep an unremitting vigil over Government expenditure and performance. While members of the Rajya Sabha are associated with Committees on Public Accounts and Public Undertakings, the

members of the Committee on Estimates are drawn entirely from the Lok Sabha.

The Estimates Committee reports on 'what economies, improvements in organisation, efficiency or administrative reform consistent with policy underlying the estimates' may be effected. It alsoexamines whether the money is well laid out within limits of the policy implied in the estimatesand suggests the form in which estimates shall be presented to Parliament.

The Public Accounts Committee scrutinises appropriation and finance accounts of Governmentand reports of the Comptroller and Auditor-General. It ensures that public money is spent inaccordance with Parliament's decision and calls attention to cases of waste, extravagance, loss or nugatory expenditure.

The Committee on Public Undertakings examines reports of the Comptroller and Auditor-General,if any. It also examines whether public undertakings are being run efficiently and managed inaccordance with sound business principles and prudent commercial practices.

Besides these three Financial Committees, the Rules Committee of the Lok Sabha recommendedsetting-up of 17 Department Related Standing Committees (DRSCs). Accordingly, 17 DepartmentRelated Standing Committees were set up on 8 April 1993. In July 2004, rules were amended to

provide for the constitution of seven more such committees, thus raising the number of DRSCsfrom 17 to 24. The functions of these Committees are:

1. to consider the Demands for Grants of various Ministries/Departments of Government of India and make reports to the Houses;2. to examine such Bills as are referred to the Committee by the Chairman, Rajya Sabha or

the Speaker, Lok Sabha, as the case may be, and make reports thereon;3. to consider Annual Reports of ministries/departments and make reports thereon; and4. to consider policy documents presented to the Houses, if referred to the Committee by the

Chairman, Rajya Sabha or the Speaker, Lok Sabha, as the case may be, and make reportsthereon.

Other Standing Committees in each House, divided in terms of their functions, are

1. Committees to Inquire:2. Committees to Scrutinise:3. Committees relating to the day-today business of the House:4. Committee on the Welfare of Scheduled Castes and Scheduled Tribes,5. Joint Committee on Salaries and Allowances of Members of Parliament, Joint Committee

on Offices of Profit examines the composition and character of committees and other bodies appointed by the Central and State governments and Union Territories


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Administrations and recommends what offices ought to or ought not to disqualify a personfrom being chosen as a member of either House of Parliament;

6. The Library Committee consisting of members from both Houses, considers mattersconcerning the Library of Parliament;

7. On 29 April 1997, a Committee on Empowerment of Women with members from both theHouses was constituted with a view to securing, among other things, status, dignity andequality for women in all fields;

8. On 4 March 1997, the Ethics Committee of the Rajya Sabha was constituted. The EthicsCommittee of the Lok Sabha was constituted on 16 May 2000.

Ad hoc Committees: Ad hoc Committees are appointed for a specific purpose and they cease toexist when they finish the task assigned to them and submit a report. The principal Ad hocCommittees are the Select and Joint Committees on Bills. Railway Convention Committee, JointCommittee on Food Management in Parliament House Complex etc also come under the categoryof ad hoc Committees.Such Committees may be broadly classified under two heads:

1. committees which are constituted from time to time, either by the two Houses on a motionadopted in that behalf or by Speaker/Chairman to inquire into and report on specific

subjects, (e.g., Committees on the Conduct of certain Members during President's Address,Committees on Draft Five-Year Plans, Railway Convention Committee, Committee onMembers of Parliament Local Area Development Scheme, Joint Committee on BoforsContracts, Joint Committee on Fertilizer Pricing, Joint Committee to enquire intoirregularities in securities and banking transactions, Joint Committee on Stock MarketScam, Joint Committees on Security in Parliament Complex, Committee on Provision of Computers for Members of Parliament, Offices of Political Parties and Officers of the Lok Sabha Secretariat; Committee on Food Management in Parliament House Complex;Committee on Installation of Portraits/Statues of National Leaders and Parliamentarians inParliament House Complex, etc.), and

2. Select or Joint Committees on Bills which are appointed to consider and report on a

particular Bill. These Committees are distinguishable from the other ad hoc committeesinasmuch as they are concerned with Bills and the procedure to be followed by them as laiddown in the Rules of Procedure and Directions by the Speaker/Chairman.

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