Fin-o-pedia issue 99

2013

Top Stories: International

Know Your Basics:  Warehouse Financing  Insider Trading

Know Your Basics:

FIN-O-PEDIA Let’s Talk FINANCE!!

A SIMSREE Finance Forum Initiative | Issue 99 SYDENHAM INSTITUTE OF MANAGEMENT STUDIES, RESEARCH & 2| P a g e

ENTREPRENEURSHIP EDUCATION

Know Your Basics: Warehouse Financing Warehouse financing is a form of financing made available to businesses using assets held in a warehouse as collateral. Many commercial banks offer this service or can refer their customers to partner banks with warehouse financing options.

In warehouse financing, goods held by the borrower are pledged as collateral. They may be transferred to a facility held by the bank or a third party, or they can be left on site and a third party can be given control of the storage area. In all cases, the value of the assets is determined and the bank extends a loan on the basis of this assigned value.

For banks, warehouse financing has the obvious advantage of coming with collateral. If the borrower fails to repay the loan or lags on payments, the goods can be seized and sold to recoup the costs of the loan, along with associated fees. When offering this type of loan, banks consider the value of the goods along with their potential on the sales market. Since the company usually retains the goods with the goal of selling them, the bank can be assured there is a market for them and they will be purchased reasonably quickly by interested buyers in the event of a seizure.

Borrowers may find it advantageous to use their existing inventory as collateral. If the assets need to be stored anyway, there are obvious benefits in using them to secure a loan to buy more inventory or cover other business expenses. As the loan is paid back, collateral can be released, allowing people to sell the goods in a timely fashion as they repay the loan. This financing option may be useful for a business struggling to expand and lacking other forms of collateral, as well as access to capital.

Insider Trading Insider trading is the trading of a public company’s stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company. For example: If the director or any other employee of a company is having some information about the performance or plans or action expected to be taken up by the company, which are not known to the world at large, and uses that information with the intention of making gain, then it is termed as insider trading.

As a measure to protect the investors, SEBI has taken necessary steps to prohibit insider trading by checking and curbing unhealthy and manipulative practices by persons who have more access than others to the information about a company. With this objective in mind, SEBI issued the Securities and Exchange Board of India ([Prohibition of] Insider Trading)

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Regulations, 1992 with comprehensive amendments in 2002. The regulations define an insider as any person who: i. is or was connected with the company or is deemed to have been connected with the company and is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or ii. has received or has had access to such unpublished price sensitive information.

The following are deemed to be price sensitive information:— i.

Periodical financial results of the company; ii.

Intended declaration of dividends (both interim and final); iii.

Issue of securities or buy-back of securities; iv.

Any major expansion plans or execution of new projects; v. Amalgamation, mergers or takeovers; vi.

Disposal of the whole or substantial part of the undertaking; vii.

Significant changes in policies, plans or operations of the company.

The authors of one study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth. However, some economists have argued that insider trading should be allowed and could, in fact, benefit markets.

The rules around insider trading are complex and vary significantly from country to country and enforcement is mixed.

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