What is Systemic Risk in Finance?

In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the entire system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries". It refers to the risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market. It is also sometimes erroneously referred to as "systematic risk".

Systemic risk has been associated with a bank run which has a cascading effect on other banks which are owed money by the first bank in trouble, causing a cascading failure. As depositors sense the ripple effects of default, and liquidity concerns cascade through money markets, a panic can spread through a market, with a sudden flight to quality, creating many sellers but few buyers for illiquid assets. These inter-linkages and the potential "clustering" of bank runs are the issues which policy makers consider when addressing the issue of protecting a system against systemic risk. Governments and market monitoring institutions (such as the U.S. Securities and Exchange Commission (SEC), or SEBI in India and central banks often try to put policies and rules in place with the justification of safeguarding the interests of the market as a whole, claiming that the trading participants in financial markets are entangled in a web of dependencies arising from their inter-linkage. In simple English, this means that some companies are viewed as too big and too interconnected to fail. Policy makers frequently claim that they are concerned about protecting the resiliency of the system, rather than any one individual in that system.

Systemic risk should not be confused with market or price risk as the latter is specific to the item being bought or sold and the effects of market risk are isolated to the entities dealing in that specific item. This kind of risk can be mitigated by hedging an investment by entering into a mirror trade.

Insurance is often easy to obtain against "systemic risks" because a party issuing that insurance can pocket the premiums, issue dividends to shareholders, enter insolvency proceedings if a catastrophic event ever takes place, and hide behind limited liability. Such insurance, however, is not effective for the insured entity.

One argument that was used by financial institutions to obtain special advantages in bankruptcy for derivative contracts was a claim that the market is both critical and fragile.

Systemic risk can also be defined as the likelihood and degree of negative consequences to the larger body. With respect to federal financial regulation, the systemic risk of a financial institution is the likelihood and the degree that the institution's activities will negatively affect the larger economy such that unusual and extreme federal intervention would be required to ameliorate the effects.

A general definition of systemic risk which is not limited by its mathematical approaches, model assumptions or focus on one institution, and which is also the first operationalizable definition of systemic risk encompassing the systemic character of financial, political, environmental, and many other risks, was put forth in 2010. 

Also, visit: 
http://www.systemic-risk-hub.org/

Eligibility Ceriteria For Listing A Company in Stock Exchange

As seen on NSE Website: https://www.nseindia.com/getting_listed/content/eligibility_criteria.htm

Qualifications for listing Initial Public Offerings (IPO) are as below:

1. Paid up Capital
   
   The paid up equity capital of the applicant shall not be less than 10 crores * and the capitalization of the applicant's equity shall not be less than 25 crores**
   
   
   * Explanation 1
   
   For this purpose, the post issue paid up equity capital for which listing is sought shall be taken into account.
   
   ** Explanation 2
   
   For this purpose, capitalisation will be the product of the issue price and the post issue number of equity shares. In respect of the requirement of paid-up capital and market capitalization, the issuers shall be required to include, in the disclaimer clause of the Exchange required to put in the offer document, that in the event of the market capitalisation (Product of issue price and the post issue number of shares) requirement of the Exchange not being met, the securities would not be listed on the Exchange.
2. Conditions Precedent to Listing:
   The Issuer shall have adhered to conditions precedent to listing as emerging from inter-alia from Securities Contracts (Regulations) Act 1956, Companies Act 1956, Securities and Exchange Board of India Act 1992, any rules and/or regulations framed under foregoing statutes, as also any circular, clarifications, guidelines issued by the appropriate authority under foregoing statutes.
3. Atleast three years track record of either:
   • the applicant seeking listing; or
   • the promoters****/promoting company, incorporated in or outside India or
   • Partnership firm and subsequently converted into a Company (not in existence as a Company for three years) and approaches the Exchange for listing. The Company subsequently formed would be considered for listing only on fulfillment of conditions stipulated by SEBI in this regard.
   
   For this purpose, the applicant or the promoting company shall submit annual reports of three preceding financial years to NSE and also provide a certificate to the Exchange in respect of the following:
   
   
   • The company has not been referred to the Board for Industrial and Financial Reconstruction (BIFR).
   • The networth of the company has not been wiped out by the accumulated losses resulting in a negative networth
   • The company has not received any winding up petition admitted by a court.
   
   ****Promoters mean one or more persons with minimum 3 years of experience of each of them in the same line of business and shall be holding at least 20% of the post issue equity share capital individually or severally.
4. The applicant desirous of listing its securities should satisfy the exchange on the following:
   • No disciplinary action by other stock exchanges and regulatory authorities in past three years
     
     There shall be no material regulatory or disciplinary action by a stock exchange or regulatory authority in the past three years against the applicant company. In respect of promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) of the applicant company, there shall be no material regulatory or disciplinary action by a stock exchange or regulatory authority in the past one year.
   • Redressal Mechanism of Investor grievance
     
     The points of consideration are:
     
     1. The applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) track record in redressal of investor grievances
     2. The applicant's arrangements envisaged are in place for servicing its investor.
     3. The applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) general approach and philosophy to the issue of investor service and protection
     4. defaults in respect of payment of interest and/or principal to the debenture/bond/fixed deposit holders by the applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) shall also be considered while evaluating a company's application for listing. The auditor's certificate shall also be obtained in this regard. In case of defaults in such payments the securities of the applicant company may not be listed till such time it has cleared all pending obligations relating to the payment of interest and/or principal.
   • Distribution of shareholding
     
     The applicant's/promoting company(ies) shareholding pattern on March 31 of last three calendar years separately showing promoters and other groups' shareholding pattern should be as per the regulatory requirements.
   • Details of Litigation
     
     The applicant, promoters/promoting company(ies), group companies, companies promoted by the promoters/promoting company(ies) litigation record, the nature of litigation, status of litigation during the preceding three years period need to be clarified to the exchange.
   • 
     
   • Track Record of Director(s) of the Company
     In respect of the track record of the directors, relevant disclosures may be insisted upon in the offer document regarding the status of criminal cases filed or nature of the investigation being undertaken with regard to alleged commission of any offence by any of its directors and its effect on the business of the company, where all or any of the directors of issuer have or has been charge-sheeted with serious crimes like murder, rape, forgery, economic offences etc.

Sample Copy: Promissory Note

India Vs. The Developed 'Others'...Bank Prime Lending Rates

In recent years, here are the trends in Commercial Bank Prime Lending Rates:

What do you notice in the graph? What might be the factors that keep India's interest rates at a level where it becomes noncompetitive? Whys is it that all developed countries have low interest rates whereas the underdeveloped countries have high interest rates?

Participate in the discussion and know more...

Note on Capital

Capital has a variety of meanings, but it generally refers to financial resources.

Capital includes financial assets, as well as the machinery and equipment businesses use in production. Investors use capital to buy stocks or mutual funds. Companies raise capital by selling bonds or stocks to finance their operations.

While capital can be currency or cash, it’s not the same thing as money. People use money to buy goods and services for consumption. Capital is more durable, and it creates wealth through investment. Land, cars, patents, software and brand names are all capital. They can be rented out or used to make products, all in an effort to create wealth. Investing capital instead of spending it as money often builds more capital.

Property rights give capital its value, allowing its owners to use it as they want. Since capital generates income, those investors, companies and societies who have the most capital are better off. How a person, firm or country chooses to allocate their capital goes a long way toward determining their level of prosperity.