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Money Laundering
  • By: admin
  • Date: 17 Feb 2020
  • Finance
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Over the decades, money laundering has become a prevalent issue. Both government and financial institutions are constantly looking for new ways to prevent money laundering. It is the process by which criminally derived property may be laundered are extensive. Money laundering refers to convert the illegally earned money into legitimate money. It is the way to hide the illegally acquired money. The government does not receive any tax on the money earned due to money laundering as they do not have any accounting for this.

In money laundering, money is invested in such a way that even the investigating agencies can’t trace the primary source of wealth. The person who manipulates the money is called as a launderer.

Indian laws governing money laundering

Prevention of Money-laundering Act (PMLA), 2002: Initially, the money laundering act was enacted in the year 2002, but it has been amended in the year 2005, 2009 and 2012.

The Money laundering act is enacted for the following reasons:

  • To prevent the activity of money laundering.
  • To impound and seize the property obtained from money laundering.
  • To deal with the issues related to money laundering in India.
  • The act has put concealment of funds, acquisition of a possession, use of proceeds of crime and possession of money in the criminal list.
  • SEBI, RBI and IRDA (Insurance Regulatory and Development Authority) are also brought under the purview of the PMLA.
  • The provision of this act shall also apply to all financial institutions like banks, mutual funds, insurance companies and their other financial intermediaries.
  • The money of a criminal may be laundered without the assistance of the financial sector, but the reality is that billions of dollars of criminally derived money are mainly laundered through financial institutions.

Anti - Money Laundering:

The term anti-money laundering refers to the policies and regulations that force financial institution to monitor their clients to prevent money laundering and corruption. The Anti-money laundering laws entered the global arena after the Financial Action Task Force (FATF) was created. After putting the framework, FATF began to systematically identify what countries did not have proper legislation in relation to money laundering. The financial institutions play an essential role in the financial world. The employees of the financial institutions must be adequately trained to prevent and handle the money laundering. Every bank employee is trained in anti-money laundering, and they are legally bound to report any suspicious activity.

Stages of Money Laundering:

The money laundering has been described in three distinct phases as follows:

  • Placement: It is the stage at which criminally derived funds are placed in the financial system and economy.
  • Layering: Layering is the substantive stage of the process in which the property is washed, and its ownership and source are disguised.
  • Integration: It is the final stage where the laundered property is re-introduced in the legitimate economy.

Penalties for Money Laundering:

The PMLAprescribed under section 4 that any person found guilty of Money laundering shall be punishable with rigorous imprisonment from 3 - 7 years and a penalty of Rs 5 lakh.

Also, any offence under the Narcotic Drugs and Psychotropic Substances Act, 1985, the maximum punishment may extend to 10 years.

The PMLA gives vast powers to the Director or any other officer, not below the rank of any other officer not below the rank of Dy. Director to attach the property.

The authority may by the order attach the property for a period not exceeding 180 days from the date of order.

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Role of lawyers in Corporate Finance

By: admin Finance 12 Feb 2020

The role of Corporate Finance lawyers is to advise the companies on the aspects of buying and selling the business. They guide the procedure to comply with the company law, raising of funds, compliance with foreign laws, mergers and acquisition with public or private companies, etc. The Companies Act, 2013 have come up with more ideas related to finance the companies with the help of the qualified lawyers.

Role of Lawyers in Corporate is as follows:

The role of the finance lawyer in corporate is to ensure that the transactions done by corporate are legal. The corporates should be aware of their legal rights and duties. The finance lawyer should possess the knowledge of tax laws, contract law, intellectual property rights, securities law, banking law and any other laws related to the business corporations for which they work.

  • Corporate lawyers need to draft, review, amend or add any conditions or exceptions whenever required in the documents related to the corporation. They usually negotiate the deals between parties on behalf of the corporation as being impartial and with a lawful objective.
  • The corporate lawyer should act as a mediator in the meetings. They need to negotiate, understand the circumstances of parties and help to suggest and discuss the pros and cons of the deal.
  • A corporate lawyer must restrict and guide the company from investing in the case of shares, debentures and other securities. The companies, outside India, can be exempted from certain restriction, and the laws of a specific foreign country shall be applied.
  • He should frame the restriction on loan or guarantee given to the director or any other person. This provision from the Companies Act, 2013 was first applied to public companies, and now it is also extended to private companies.
  • Corporate lawyers should know the company and business laws. They must understand the aspects of the legal entities and assist the company in various transactions beneficial for the management and operation of the business.
  • They should conduct due diligence on the target company, assessing the existing liabilities. In mergers and acquisitions, corporate lawyers shall enter into negotiations with the entity, along with a memorandum of understanding. They need to correspond by filing notices in case of acquisition and merger. They also draft the finance-related agreements for the companies.
  • The lawyer should draft the shareholder agreement, for finalizing the transaction and advise the company regarding shares issued concerning the requirement.
  • They also draft the Memorandum of Incorporation for new entities and lodge it at the Companies and Intellectual protection Commission together with documents affecting the name changes of the target company.
  • The loans and borrowings shall be limited. The securities and guarantees on behalf of the company shall be restricted to 60% of the paid-up share capital, 100% of its reserves and premium or whichever is more. Such conditions can be overcome by passing a special resolution in a general meeting of the company. The lawyers should be aware of these facts and implement the same.
  • In the case of deposits, they can be accepted from its members and also from the other members, whereas in private companies, the deposits can be taken only from its members. All these facts related to the deposits of the company regarding registration, maintaining the details of separate bank account, loans should be known to a corporate lawyer.

They should be aware of all techniques to create finance and earn profits to commence the business. They should also suggest about the current loan systems, banking systems, etc.

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Financial Risk Management

By: Finance 02 Aug 2019

Financial Risk is one of the significant concerns of every business. To understand the techniques of risk management, it is essential to realise the concept and types of risk. Risk is referred to like the chances of having an unexpected outcome. Any action that leads to loss of any type is termed as Risk. There are different types of risks that business firms can come across and needs to overcome. 

The risks can be mainly classified into the following models:

Business Risk: These types of risks are usually faced by business enterprises to maximise the profit and value of shareholder. As the companies undertake high-cost risks to launch the new product for enhancing the higher sales in the market.

Non- Business Risk: The risks that arise out of economic and political imbalances is defined as Non- Business Risk. Business firms cannot control these types of firms.

Financial Risk: Financial Risk is the risk that involves financial loss to the business firms. It generally arises due to the losses and instability in the financial market caused by changes in stock prices, interest rates, currencies and more.

Types of Financial Risks:

It is one of the high-priority kinds of risk in every business. Financial Risk is induced due to the movement in the market as it includes the gathering of various factors. Due to this, financial Risk can be classified into multiple types such as Credit Risk, Market Risk, Legal Risk, Liquidity Risk, and Operational Risk.

Credit Risk: When any firm fails to fulfil the obligations towards their counterparties, then it is called as Credit Risk. It can be classified into Sovereign Risk and Settlement Risk. Sovereign Risk arises due to difficulties in the policies of foreign exchange. Whereas, on the other hand, settlement risk occurs when one party makes the payment, and the other party fails to fulfil the obligations.

Market Risk: It arises due to the change in prices of financial instrument. It can be further classified as Directional (caused due to movement in stock price, interest rates, etc.) and Non-Directional Risk (volatility risks).

Legal Risk: This risk arises from legal constraints such as lawsuits and legal notices. Whenever a company faces the financial loses out of legal proceedings, it is a legal Risk.

Liquidity Risk: This risk arises out of an inability to execute the transactions in the market. It can be classified into Funding Liquidity Risk and Asset Liquidity Risk. Asset liquidity risk arises due to insufficient buyers or insufficient sellers against the buying and selling the orders.

Operational Risk: This risk arises due to operational failures such as technical failure and mismanagement. It can be further classified into Model risk and Fraud risk. It arises due to the lack of controls and model risk to the incorrect model application.

Stages in Financial Risk Management:

Identification of the risk: The risk can be managed by identifying the financial risk and the cause of the same. It is good to start with the balance sheet of the company as it specifies the liabilities, debt, risk of the rate of interest, exposure of foreign-exchange, etc. The cash flow statement and the income statement shall be observed to see how it fluctuates, and the impact of the same on the organisation.

Quantifying the exposure: It is necessary to analyse the risk or to put the numerical value of risk identified by the firm. The analysis can take place with the help of statistics such as the method of regression and standard deviation to measure the exposure of the company to various factors of risk.

Decision making: After analysing the source of risk, the firm should decide the way to deal with the risk. The decision should be made by taking into consideration the multiple factors such as the aim of the company,   business environment, its appetite and the cost of mitigation to reduce the risk.

To reduce the financial risk, the organization should reduce the volatility of the cash flow, fix the rate of interest on loans, manage the cost of operation, improvise the payment terms, exposure of the price of the commodity, variations in the price of raw materials.
  
The financial risk is usually managed by the owner or managers of the organisation. The organisation also take the consultation from the Financial Risk Manager to manage risk faced by them and to recommend the actions for the welfare of the company.
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All About Equated Monthly Installment (EMI)

By: admin Finance 25 Apr 2019

An EMI or Equated Monthly Installment is a fixed amount payment made by a borrower to a lender at a specified date of every month. The monthly instalments are used to pay off both the interest and the principal each month so that after the specified number of years, the loan is paid off in full."

The benefit of an EMI is that they know exactly how much money they will need to pay for their loan each month, making the personal budget process easier.

An EMI is a financial term used for loan repayments. It is a quick and easy method to pay off the loan. When a borrower takes a loan from the bank or Non-Banking Financial Company (NBFC), the repayment of the loan is done mainly in instalments. The fixed financial instalments are known as EMIs. The amount of EMI depends on the principal loan amount, tenure and the interest rate. This monthly instalment is supposed to be paid on a fixed date to the bank by cheque or by electronically. 

How EMIs work?

EMI is a fixed payment of amount every month as part repayment of a loan or a purchase. It constitutes the principal amount to be paid along with a certain rate of interest. The interest depends on the amount borrowed and the duration for which it is borrowed. The principal element is lesser than the interest element in the initial period of repayment and the rate of interest will decrease progressively and the principal amount will increase over the period of repayment.

How to calculate EMI?

EMI calculators require a few factors/parameters to produce the desired results.
- Loan amount
- Tenure period
- Interest Rate
- Processing Fee (If any)


Following are the few advantages and disadvantages of the EMI scheme 

Advantages:

Freedom of Buying Expensive Utilities: EMI gives a chance to buy expensive utilities which one won’t be able to buy. EMI helps you to buy anything and everything, be it expensive household items, a vehicle, gifts, jewellery or a house. The consumers get a chance to divide the amount in monthly instalments and pay it off easily.

Easy to Repay: The borrower can pay the loan in instalments by opting for EMI. The amount is decided on the basis of the principal loan amount, time, interest rate and the borrower’s capacity of repayment. EMI makes it easier for the borrowers to pay the said amount in small portions every month. Hence they don’t have to pinch their monthly expenses to afford various utilities.

Flexible EMI Options by Banks: Many banks nowadays offer various flexible EMI options to the borrowers. The EMIs are decided as per the borrower’s needs. The instalment and tenure are decided by the borrower as per his or her convenience.

Affordability: EMIs gives the consumers the freedom to afford things that they won’t be able to make complete payments for. It lets the consumer make payments in instalments allowing them the freedom to purchase which they can’t make lump-sum payments.

The absence of a Middleman: The EMI is directly paid to the lender and there are no hassles of a middleman.

Disadvantages:

Longer Duration of Debts: The borrowers have to pay the monthly instalments until they pay the principal amount and the amount of interest rate. In terms of a car loan or home loans, the tenure goes as long as 20 to 30 years. Which means a borrower spends almost half of his or her life repaying the loan. Which restricts the borrowers from buying any other utilities in.

No Early Repayment: If a borrower wants to pay back the loan earlier than actual duration by using extra savings or a bonus, banks do not offer an easy option to do so. Many banks and NBFCs charge an early repayment fee. Which makes it difficult further for borrowers to pay off the loan earlier even if they could.

Charges on missing EMIs: If a borrower misses or forgets to pay the EMI by the given date, the banks and NBFCs charge the borrower with late fees. Missing multiple EMIs may lead the borrower to face legal action and their collateral can be taken.

Extra Amount: The borrower has to pay an extra amount than the actual borrowed amount in the form of the interest rate. As the principal amount and interest rate are combined to form an EMI, the borrower can’t avoid paying this extra amount.

Additional Amount: Additional amount in terms of interest. One need not pay interest if the payment is made at once.

Penalty for Prepayment: Many institutions do not allow prepayment and in case they do there will be a serious penalty that one will have to bear for the prepayment.

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