Source: https://www.scribd.com/doc/48404293/Capital-markets
Timestamp: 2018-01-21 00:37:26
Document Index: 57012843

Matched Legal Cases: ['§ 31', '§ 32', '§ 4', '§ 44', '§ 78', '§ 83', '§ 84']

Capital markets | Securities (Finance) | Financial Markets
............................................................................................................................................43 What is Commodity derivatives market? ..............................................................................36 What has been the average return on Equities in India? ...................................................................................................30 What is the maximum brokerage that a broker can charge?...................2 What are the products dealt in the Secondary Markets?.44 How is a depository similar to a bank?....................................................................................................................43 What is meant by ‘Commodity’?...........................................................................2.......................................................................................................................................................................................................................2........................................................................How does an investor get access to internet based trading facility?..................................40 What is meant by ‘Interest’ payable by a debenture or a bond?..........................................31 What precautions must one take before investing in the stock markets?.......................43 What is the difference between Commodity and Financial derivatives?................41 What are the Segments in the Debt Market in India? ..................................41 How can one acquire securities in the debt market?.................................................................................39 What is a ‘Debt Instrument’?...................................................................................30 Why should one trade on a recognized stock exchange only for buying/selling shares?.................................................37 What is meant by the terms Growth Stock / Value Stock? .................................................................................................................................45 What is a Custodian?........38 What is a Portfolio?....................................................................42 What are Types of Derivatives?..................................................................................................................40 5..............................................................................30 What details are required to be mentioned on the contract note issued by the stock broker?................................42 What is an ‘Option Premium’? ................32 4....................................................................................31 What Do’s and Don’ts should an investor bear in mind when investing in the stock markets?..............................41 PRODUCTS IN THE S ECONDARY MARKETS ..................45 What is an ISIN?.34 Equity Investment..........................................................................................41 Are bonds rated for their credit quality? ................................................................................................................................................................................ DERIVATIVES ..................................................................................................................44 What are the benefits of participation in a depository? ............44 Which are the depositories in India?..............................................................................2........................................................................................................ Debt Investment.................................................................................................................................................................1 4...................................................................36 Which are the factors that influence the price of a stock?............................................................40 What are the features of debt instruments?......................................................45 3 ......................................................38 What is Bid and Ask price?.......................................................................................................................29 What is a Contract Note?. DEPOSITORY ..........................36 4...................................44 Who is a Depository Participant (DP)?.....................43 6............34 Why should one invest in equities in particular?...........................39 What is Diversification?........................31 How to know if the broker or sub broker is registered?.............................................41 Who are the Participants in the Debt Market?............42 What is ‘Commodity Exchange’? .....................................................................................................................................................................................................................................................................39 What are the advantages of having a diversified portfolio?.....37 How can one acquire equity shares?....45 Does one need to keep any minimum balance of securities in his account with his DP? ..........................................
.......................62 What is a No -delivery period?...............................................................61 What is an Auction?........................................................................................................................................58 Why do companies announce Stock Split?.........................................................................................................................................62 What is an Ex-date?.........................48 What is Entry/Exit Load? ..................63 What is an Investor Protection Fund?................3 INDEX ......................57 What is meant by ‘Dividend’ declared by companies?..............................................47 What is NAV?...........................................................1 MISCELLANEOUS ..................................................................64 What is Compound Interest?.......................48 What are the different types of Mutual funds? .............61 What is a Clearing Corporation?...............57 8.................................52 What is a Fund Offer document?........................62 What is an Ex-dividend date?........................................................................................................................................ how can one dematerialise securities?........................................................................................................52 What are the rights that are available to a Mutual Fund holder in India?..............46 Can electronic holdings be converted into Physical certificates?...How can one convert physical holding into electronic holding i.............................53 What is Active Fund Management?......................................................................................................................46 Do dematerialised shares have distinctive numbers?.............................................................................................................59 What is Buyback of Shares?...........................61 What is Rolling Settlement? .................................47 What are the benefits of investing in Mutual Funds?.............................47 What is the Regulatory Body for Mutual Funds?...................................................................................46 Can one dematerialise his debt instruments........................60 What is the Nifty index?...........................................................49 What are the different investment plans that Mutual Funds offer?...................................................65 What is meant by the Time Value of Money? .........................62 What is a Book-closure/Record date?....................53 What is Passive Fund Management?..................................................... MUTUAL FUNDS..................................................... mutual fund units.......................................................................................................................................................e........................................................60 CLEARING & S ETTLEMENT AND R EDRESSAL............................................................................................................. government securities in his demat account?.................................................................................................................................................................................46 7....................................................70 4 .............................................................................................................................................................58 What is a Stock Split?......................46 Can odd lot shares be dematerialised?......................................................................................................................................................................................................................................................................................................................................................................................57 What is meant by Dividend yield?...........................................................................56 8.................54 What is an ETF?...............................................................................................................................................................................................61 What is Pay-in and Pay-out?.............................................................................................................................................................................................................. CONCEPTS & MODES OF ANALYSIS ..................................................................67 How is time value of money computed?............................................................48 Are there any risks involved in investing in Mutual Funds?.................................................................................60 CORPORATE ACTIONS ....... 8...................................................................63 What recourses are available to investor/client for redressing his grievances?63 What is Arbitration?......................................................2 8.................................57 What are Corporate Actions?............................................63 9..................................................................64 What is Simple Interest? ................................
..........................74 What do these sources of funds represent?............................................................................................................................73 What is an Annual Report?.......................................82 What should one look for in a Profit and Loss account?......................................................................................... ‘Net Block’ and Capital-Work in Progress’ mean?....... RATIO ANALYSIS ....................................................................................................................................................81 What does a Profit and Loss Account statement consists of?.........................................................................................What is Effective Annual return?................................................74 What is a Balance Sheet and a Profit and Loss Account Statement? What is the difference between Balance Sheet and Profit and Loss Account Statements of a company?.74 Which features of an Annual Report should one read carefully?...........................................81 How is balance sheet summarized?...................................85 5 .......................................................................................79 What do the sub-headings under the Fixed Assets like ‘Gross block’ ‘Depreciation’..............................................................................................................................80 What are Current Liabilities and Provisions and Net Current Assets in the balance sheet?......................................................72 How to go about systematically analyzing a company?.....................................................................77 What is the difference between Equity shareholders and Preferential shareholders?...........79 What is meant by application of funds?..................................83 10.................78 What is the difference between secured and unsecured loans under Loan Funds?...................................................................................................................................................................................................
if the annual inflation rate is 6%. then your assets have actually decreased in value. whereby the concept of compounding (as we shall see later) increases your income. if there was a 6% inflation rate for the next 20 years. By investing early you allow your investments more time to grow. which is the return after inflation. This is called Invest ment. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. by accumulating the principal and 6 . Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. then the investment will need to earn more than 6% to ensure it increases in value.1. 100 purchase today would cost Rs. a Rs. The cost of living is simply what it costs to buy the goods and services you need to live. 321 in 20 years. Why should one invest? One needs to invest to: § § § earn return on your idle resources generate a specified sum of money for a specific goal in life make a provision for an uncertain future One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. For example. that is. This is why it is important to consider inflation as a factor in any long-term investment strategy. they won't buy as much today as they did last year. For example. Remember to look at an investment's 'real' rate of return. Inflation is the rate at which the cost of living increases. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. If the after-tax return on your investment is less than the inflation rate. Investment Basics What is Investment? The money you earn is partly spent and the rest saved for meeting future expenses. When to start Investing? The sooner one starts investing the better.
). called the Maturity Date.where the entire principal alongwith the interest is paid at the end of the loan period. What is meant by a Stock Exchange? The Securities Contract (Regulation) Act. NAV is calculated as the value of all the shares held by the fund. which is determined at the end of each trading session. The central or state government. debentures etc. Thus. which are permitted to have nationwide trading since inception. each equity capital of Rs each.000 is divided into 20.00. Mutual Funds: These are funds operated by an investment company which raises money from the public and invests in a group of assets (shares. buying in small amounts and diversification. time or knowledge constraints.000 units of Rs 10 of Rs 10 is called a Share. The rate of interest varies between 6-9% per annum for company FDs. Mutual fund units are issued and redeemed by the Fund Management Company based on the fund's net asset value (NAV). A bond is generally a promise to repay the principal along with a fixed rate of interest on a specified date. regulating or controlling the business of buying. the company then is 10 . such as money market mutual funds which are short term instruments. NSE was incorporated as a national stock exchange.00. whether incorporated or not. What is an ‘Equity’/Share? Total equity capital denominations. in a company the total 2 . It is a substitute for those who are unable to invest directly in equities or debt because of resource.00. Each such unit of a company is divided into equal units of small called a share. divided by the number of units issued. constituted for the purpose of assisting. Mutual Funds are usually long term investment vehicle though there some categories of mutual funds. corporations and similar institutions sell bonds. Benefits include professional money management. selling or dealing in securities. The interest received is after deduction of taxes. in accordance with a stated set of objectives. minus expenses. Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals. For example. Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges.
the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term debenture’ is used for instruments issued by ‘ private corporate sector. debentures etc. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. In the Indian securities markets. What is a Derivative? Derivative is a product whose value is derived from the value of one or more basic variables. Government securities. The holders of such shares are members of the company and have voting rights. since their emergence. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors. However. Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. these products have become very popular and by 1990s. called underlying. repayment of principal amount by the borrower to the lender. The investment objectives specify the class of securities a Mutual Fund can invest in. index.00.000 equity shares of Rs 10 each.said to have 20. What is a Mutual Fund? A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares. foreign exchange (forex). Mutual funds issue units to the investors. they accounted for about twothirds of total transactions in derivative products. What is a ‘Debt Instrument’? Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest. The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. commodity or any other asset. Mutual Funds invest in 11 . The underlying asset can be equity. Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. Bonds.
whether upwards or downwards. debentures. units etc. What is an Index? An Index shows how a specified portfolio of share prices are moving in order to give an indication of market trends.various asset classes like equity. What is Dematerialization? Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP). government securities. It is a basket of securities and the average price movement of the basket of securities indicates the index movement. bonds. bonds. Investors are also given the option of getting dividends. Some are pure equity schemes. commercial paper and government securities. The schemes offered by mutual funds vary from fund to fund. others are a mix of equity and bonds. debentures. What is a Depository? A depository is like a bank wherein the deposits are securities (viz. or to participate only in the capital appreciation of the scheme. shares.) in electronic form. 12 . which are declared periodically by the mutual fund.
Further. scrips. are some of the securities investors in the securities market can invest in. debentures etc. Savings are linked to investments by a variety of intermediaries.2. derivatives of securities. includes instruments such as shares. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most efficiently achieved through the securities market. What is the function of Securities Market? Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares. government securities. SECURITIES What is meant by ‘Securities’? The definition of ‘Securities’ as per the Securities Contracts Regulation Act (SCRA). 13 . called ‘Securities’. securities markets provide channels for reallocation of savings to investments and entrepreneurship. Which are the securities one can invest in? § § § § Shares Government Securities Derivative products Units of Mutual Funds etc. units of collective investment scheme. interest and rights in securities. through a range of financial products. 1956. Stated formally. bonds. security receipt or any other instruments so declared by the Central Government. stocks or other marketable securities of similar nature in or of any incorporate company or body corporate. entrepreneurs to raise resources for their companies and business ventures through public issues.. it performs an important role of enabling corporates. bonds.
SEBI Act. What is SEBI and what is its role? The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act. mutual funds and other persons associated with the securities market. 14 . The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected. self – regulatory organizations. Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices Calling for information from. intermediaries.2. Who regulates the Securities Market? The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA). it has powers for: § § § § § Regulating the business in stock exchanges and any other securities markets Registering and regulating the working of stock brokers. In particular. 1992. conducting inquiries and audits of the stock exchanges. undertaking inspection. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities. Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI). 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the interests of investors in securities (b) promoting the development of the securities market and (c) regulating the securities market.1 Regulator Why does Securities Market need Regulators? The absence of conditions of perfect competition in the securities market makes the role of the Regulator extremely important. in addition to all intermedia ries and persons associated with securities market. sub–brokers etc. Department of Company Affairs (DCA). SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit.
such as merchant bankers. You need to maintain an account with a depository if you intend to hold securities in demat form. You need to deposit money with a banker to an issue if you are subscribing to public issues. You get guidance if you are transacting through an intermediary. investors in securities and the intermediaries. Is it necessary to transact through an intermediary? It is advisable to conduct transactions through an intermediary. as he is accountable for its activities. While the corporates and government raise resources from the securities market to meet their obligations.2. Chose a SEBI registered intermediary. it is households that invest their savings in the securities market. brokers etc. The list of registered intermediaries is available with exchanges. What are the segments of Securities Market? The securities market has two interdependent segments: the primary (new issues) market and the secondary market. the issuers of securities. namely.2 Participants Who are the participants in the Securities Market? The securities market essentially has three categories of participants. industry associations etc. 15 . The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued. For example you need to transact through a trading me mber of a stock exchange if you intend to buy or sell any security on stock exchanges.
Also known as par value or simply par. which may quote higher in the market. When a security is sold above its face value. 100 or Rs. PRIMARY MARKET What is the role of the ‘Primary Market’? The primary market provides the channel for sale of new securities. or at a discount/premium and these securities may take a variety of forms such as equity.3. Government securities and corporate bonds have a face value of Rs. 16 . face value is the amount repaid to the investor when the bond matures (usually. For a debt security. it is said to be issued at a Premium and if it is sold at less than its face value. 10) and does not have much bearing on the price of the share. For shares. then it is said to be issued at a Discount. What is meant by Face Value of a share/debenture? The nominal or stated amount (in Rs. 100). debt etc. 1000 or any other price. Government as well as corporates. the face value is usually a very small amount (Rs. They may issue the securities at face value. The price at which the security trades depends on the fluctuations in the interest rates in the economy. it is the amount paid to the holder at maturity. it is the original cost of the stock shown on the certificate.) assigned to a security by the issuer. 5. Primary market provides opportunity to issuers of securities. to raise resources to meet their requirements of investment and/or discharge some obligation. 10 or 100. What do you mean by the term Premium and Discount in a Security Market? Securities are generally issued in denominations of 5. at Rs. for bonds. For an equity share. This is known as the Face Value or Par Value of the security as discussed earlier. Rs. They may issue the securities in domestic market and/or international market.
Simply stated. Rights or Preferential issues (also known as private placements). Once this is done. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. What are the different kinds of issues? Primarily. the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI. This is a faster way for a company to raise equity capital. The way to invite share capital from the public is through a ‘Public Issue’. issues can be classified as a Public. a public issue is an offer to the public to subscribe to the share capital of a company. However. A Preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act. through an offer document.3. 1956 which is neither a rights issue nor a public issue. The classification of issues is illustrated below: Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. The issuer company has to comply with the Companies Act and the requirements contained in 17 . This paves way for listing and trading of the issuer’s securities. Rights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. A follow on public offering (Further Issue) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. While public and rights issues involve a detailed procedure. So companies invite the public to contribute towards the equity and issue shares to individual investors. private placements or preferential issues are relatively simpler.1 Issue of Shares Why do companies need to issue shares to the public? Most companies are usually started privately by their promoter(s).
g. which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. 18 . disclosures in notice etc. Company A has 120 million shares in issue. What is meant by Market Capitalisation? The market value of a quoted company. E. Classification of Issues Issues Public Rights Preferential Initial Public Offering Further Public Offering Fresh Issue Offer for Sale Fresh Issue Offer for Sale What is meant by Issue price? The price at which a company's shares are offered initially in the primary market is called as the Issue price.the Chapter pertaining to preferential allotment in SEBI guidelines which inter-alia include pricing. The market capitalisation of company A is Rs. When they begin to be traded. 12000 million. 100. the market price may be above or below the issue price. The current market price is Rs.
during the period for which the IPO is open. 19 . There is no price formula stipulated by SEBI. where the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process).What is the difference between public issue and private placement? When an issue is not made to only a select set of people but is open to the general public and any other investor at large. Who decides the price of an issue? Indian primary market ushered in an era of free pricing in 1992. There are two types of issues. This paves way for listing and trading of the issuer’s securities. It is a mechanism where. which are above or equal to the floor price. an issue becomes public if it results in allotment to 50 persons or more. The sale of securities can be either through book building or through normal public issue. What does ‘price discovery through Book Building Process’ mean? Book Building is basically a process used in IPOs for efficient price discovery. 1956. it is a public issue. SEBI does not play any role in price fixation. one where company and Lead Merchant Banker fix a price (called fixed price) and other. What is an Initial Public Offer (IPO)? An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. it is called private placement. But if the issue is made to a select set of people. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price. This means an issue can be privately placed where an allotment is made to less than 50 persons. As per Companies Act. bids are collected from investors at various prices. The offer price is determined after the bid closing date. the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. Following this.
the demand can be known everyday as the book is being built. Under Book Building. But in case of the public issue the demand is known at the close of the issue. What is a Price Band in a book built IPO? The prospectus may contain either the floor price for the securities or a price band within which the investors can bid. What is the floor price in case of book building? Floor price is the minimum price at which bids can be made.What is the main difference between offer of shares through book building and offer of shares through normal public issue? Price at which securities will be allotted is not known in case of offer of shares through Book Building while in case of offer of shares through normal public issue. subject to the total bidding period not exceeding ten days. the bidding period shall be extended for a further period of three days. The spread between the floor and the cap of the price band shall not be more than 20%. 20 . investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares. The actual discovered issue price can be any price in the price band or any price above the floor price. it means that the cap should not be more than 120% of the floor pric e. price is known in advance to investor. In other words. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges. This issue price is called “Cut-Off Price”. by issuing a press release and also indicating the change on the relevant website and the terminals of the trading me mbers participating in the book building process. In case the price band is revised. In case of Book Building. The issuer and lead manager decides this after considering the book and the investors’ appetite for the stock. the issuer is required to indicate either the price band or a floor price in the prospectus. What is Cut-Off Price? In a Book building issue.
What is minimum number of days for which a bid should remain open during book building? The Book should remain open for a minimum of 3 days. Can open outcry system be used for book building? No. within 2 working days the details of credit to demat account / allotment advice and despatch of refund order needs to be completed. As per SEBI. So an investor should know in about 15 days time from the closure of issue.Who decides the Price Band? It may be understood that the regulatory mechanism does not play a role in setting the price for issues. 21 . the Basis of Allotment should be completed with 15 days from the issue close date. in consultation with Merchant Bankers. How does one know if shares are allotted in an IPO/offer for sale? What is the timeframe for getting refund if shares not allotted? As per SEBI guidelines. It is up to the company to decide on the price or the price band. As soon as the basis of allotment is completed. only electronically linked transparent facility is allowed to be used in case of book building. Can the individual investor use the book building facility to make an application? Yes. whether shares are allotted to him or not. How long does it take to get the shares listed after issue? It would take around 3 weeks after the closure of the book built issue.
While a large number of these companies are genuine. Therefore. What is a Prospectus? A large number of new companies float public issues.00 p. A part of the guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of 22 .m. NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network. the session timings can be further extended on specific request by the Book Running Lead Manager.What is the role of a ‘Registrar’ to an issue? The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. dispatch security certificates and refund orders completed and securities listed.m. Does NSE provide any facility for IPO? Yes. to 3. On the last day of the IPO.00 a. quite a few may want to exploit the investors. processing of the applications and other matters till the basis of allotment is finalized. efficient & transparent method for collecting bids using the latest electronic trading systems Costs involved in the issue are far less than those in a normal IPO The system reduces the time taken for completion of the issue process § § The IPO market timings are from 10. NSE’s electronic trading network spans across the country providing access to investors in remote areas. Book Building through the NSE system offers several advantages: § § The NSE system offers a nation wide bidding facility in securities It provide a fair. it is very important that an investor before applying for any issue identifies future potential of a company. The Lead Manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches.
This disclosure includes information like the reason for raising the money. It accompanies the application form of public issues. the way money is proposed to be spent. the return expected on the money etc.information to the public. It also contains lot of mandatory information regarding underwriting and statutory compliances. the current status of the company. the public issues of companies are handled by ‘Merchant Bankers’ who are responsible for getting the project appraised. means of financing. This helps investors to evaluate short term and long term prospects of the company. its current and past performance. the project. ‘Draft Offer document’ means the offer document in draft stage. cost of the project. Who prepares the ‘Prospectus’/‘Offer Documents’? Generally. The draft offer documents are filed with SEBI. The Draft Offer Document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI. SEBI may specify changes. finalizing the cost of the project. in the draft Offer Document and the issuer or the lead merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/SEs. The ‘Prospectus’ is submitted to SEBI for its approval. What is an ‘Abridged Prospectus’? ‘Abridged Prospectus’ is a shorter version of the Prospectus and contains all the salient features of a Prospectus. This information is in the form of ‘Prospectus ’ which also includes information regarding the size of the issue. if any. atleast 21 days prior to the filing of the Offer Document with ROC/SEs. product and capacity etc. 23 . What does ‘Draft Offer document’ mean? ‘Offer document’ means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue which is filed with the Registrar of Companies (ROC) and Stock Exchanges (SEs). its equity capital. the promoters. profitability estimates and for preparing of ‘Prospectus’. An offer document covers all the relevant information to help an investor to make his/her investment decision.
What does ‘Delisting of securities’ mean? The term ‘Delisting of securities’ means permanent removal of securities of a listed company from a stock exchange. the company is required to enter into a listing agreement with the exchange.What does one mean by ‘Lock-in’? ‘Lock-in’ indicates a freeze on the sale of shares for a certain period of time. as also to provide a mechanism for effective control and supervision of trading. What is meant by ‘Listing of Securities’? Listing means admission of securities of an issuer to trading privileges (dealings) on a stock exchange through a formal agreement. The company can proceed further on the issue only after getting observations from SEBI. What is a ‘Listing Agreement’? At the time of listing securities of a company on a stock exchange. shall continue to hold some minimum percentage in the company after the public issue. SEBI guidelines have stipulated lock-in requirements on shares of promoters mainly to ensure that the promoters or main persons. The prime objective of admission to dealings on the exchange is to provide liquidity and marketability to securities. What is SEBI’s Role in an Issue? Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. The validity period of SEBI’s observation letter is three months only i. the company has to open its issue within three months period. The listing agreement specifies the terms and conditions of listing and the disclosures that shall be made by a company on a continuous basis to the exchange. the securities of that company would no longer be traded at that stock exchange. who are controlling the company.e. As a consequence of delisting. 24 .
to the institutional investors or individual investors. the investors are generally advised to study all the material facts pertaining to the issue including the risk factors before considering any investment. They are strongly warned against relying on any ‘tips’ or news through unofficial means. However. What is an American Depository Receipt? An American Depositary Receipt ("ADR") is a physical certificate evidencing ownership of American Depositary Shares ("ADSs").Does it mean that SEBI recommends an issue? SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document. 3. Does SEBI tag make one’s money safe? The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents. SEBI mainly scrutinizes the issue for seeing that adequate disclosures are made by the issuing company in the prospectus or offer document.e. SEBI does not associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through the issue. 25 . The term is often used to refer to the ADSs themselves.2 Foreign Capital Issuance Can companies in India raise foreign currency resources? Yes. Indian companies are permitted to raise foreign currency resources through two main sources: a) issue of foreign currency convertible bonds more commonly known as ‘Euro’ issues and b) issue of ordinary shares through depository receipts namely ‘Global Depository Receipts (GDRs)/American Depository Receipts (ADRs)’ to foreign investors i.
S. they do not eliminate the currency risk associated with an investment in a non-U. GDRs may be used in public or private markets inside or outside US.S. company.S. ADSs provide U. Although ADSs are U. companies.S. securities in the U. company.S. dollars. One or several ADSs can be represented by a physical ADR certificate. such as JPMorgan Chase Bank. a negotiable certificate usually represents company’s traded equity/debt. dollar denominated form of equity ownership in a non-U. The terms ADR and ADS are often used interchangeably. It represents the foreign shares of the company held on deposit by a custodian bank in the company 's home country and carries the corporate and economic rights of the foreign shares. They are traded in the same manner as shares in U.S. What is meant by Global Depository Receipts? Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or markets through a global offering.S. on the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) or quoted on NASDAQ and the over-the-counter (OTC) market.S.What is an ADS? An American Depositary Share ("ADS") is a U. subject to the terms specified on the ADR certificate.S. The underlying shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares. dollar denominated securities and pay dividends in U. investors with a convenient way to invest in overseas securities and to trade non-U. 26 . ADSs are issued by a depository bank. GDR.
enabling implementation of incentive-based management contracts. While stock exchange is the part of an auction market. 27 . and aggregating information (via price discovery) that guides management decisions. What is the difference between the Primary Market and the Secondary Market? In the primary market.4. For the management of the company. the secondary market provides an efficient platform for trading of his securities. SECONDARY MARKET 4. Majority of the trading is done in the secondary market. Secondary market could be either auction or dealer market. Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors. Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities. Over-the-Counter (OTC) is a part of the dealer market. What is the role of the Secondary Market? For the general investor.1 Introduction What is meant by Secondary market? Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market comprises of equity markets and the debt markets.
the ownership.4. where buyers and sellers can meet to transact in securities. This at times can lead to conflicts of interest in decision making.e. i. the three functions of ownership. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. on the other hand. the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well. two stock exchanges in India. Currently are there any demutualised stock exchanges in India? Currently. management and trading are in separate hands. under the overall supervision of the regulatory authority.1. the National Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI) are demutualised. the management and the trading rights at the exchange are segregated from one another. A demutualised exchange. management and trading are concentrated into a single Group. How is a demutualised exchange different from a mutual exchange? In a mutual exchange.1 Stock Exchange What is the role of a Stock Exchange in buying and selling shares? The stock exchanges in India. provide a trading platform. has all these three functions clearly segregated. What is Demutualisation of stock exchanges? Demutualisation refers to the legal structure of an exchange whereby the ownership. 28 . the Securities and Exchange Board of India (SEBI). Here. They can trade through the computerized trading screens available with the NSE trading members or the internet based trading facility provided by the trading members of NSE.
4.2 Stock Trading What is Screen Based Trading? The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. At the server end all trading information is stored in an inmemory database to achieve minimum response time and maximum system availability for users.1. How to place orders with the broker? You may go to the broker’s office or place an order on the phone/internet or as defined in the Model Agreement. is a state of-the-art client server based application. on-line. Investors need to get in touch with an NSE broker providing this service to avail of internet based trading facility. Internet based trading enables an investor to buy/sell securities through internet which can be accessed from a computer at the investor’s residence or anywhere else where the client can access the internet. This imposed limits on trading volumes and efficiency. Its trading system.7%. This was time consuming and inefficient. there is uniform response time of less than one second. fullyautomated screen based trading system (SBTS) where a member can punch into the computer the quantities of a security and the price at which he would like to transact. called National Exchange for Automated Trading (NEAT). which every client needs to enter into with his or her broker. and the transaction is executed as soon as a matching sale or buy order from a counter party is found. liquidity and transparency. NSE introduced a nationwide. 29 . What is NEAT? NSE is the first exchange in the world to use satellite communication technology for trading. It has uptime record of 99. How does an investor get access to internet based trading facility? There are many brokers of the NSE who provide internet based trading facility to their clients. In order to provide efficiency. For all trades entered into NEAT system.
the trading member and the client should keep one copy each. Contract number. What details are required to be mentioned on the contract note issued by the stock broker? A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange.. date of issue of contract note. Constituent (Client) name/Code Number.5% of the value mentioned in the respective purchase or sale note. It is a prerequisite for filing a complaint or arbitration proceeding against the trading member in case of a dispute. Name of partner/proprietor/Authorised Signatory. After verifying the details contained therein. A valid contract note should be in the prescribed form. Quantity and kind of Security bought/sold by the client. Contract notes are kept in duplicate. The contract note inter-alia should have following: § § § § § § § § § § § § Name. settlement number and time period for settlement. address and SEBI Registration number of the Member broker. Securities Transaction Tax and any other charges levied by the broker. What is the maximum brokerage that a broker can charge? The maximum brokerage that can be charged by a broker from his clients as commission cannot be more than 2. Dealing Office Address/Tel. Appropriate stamps have to be affixed on the contract note or it is mentioned that the consolidated stamp duty is paid. Signature of the Stock broker/Authorized Signatory. No. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades.What is a Contract Note? Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. Brokerage and Purchase/Sale rate./Fax no. the client keeps one copy and returns the second copy to the trading member duly acknowledged by him. Trade number and Trade time. stamped with requisite value and duly signed by the authorized signatory. It also helps to settle disputes/claims between the investor and the trading member. Order number and order time corresponding to the trades. Code number of the member given by the Exchange. Service tax rates. 30 . contain the details of trades.
quality of management. its future prospects. economic magazines. How to know if the broker or sub broker is registered? One can confirm it by verifying the registration certificate issued by SEBI. All investments carry risk of some kind. protection upto a prescribed limit. lack of any counter-party risk which is assumed by the clearing corporation. A broker's registration number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’. Do not be misled by market rumours. Take informed decisions by studying the fundamentals of the company. from the Investor Protection Fund etc. past track record etc Sources of knowing about a company are through annual reports. What precautions must one take before investing in the stock markets? Here are some useful pointers to bear in mind before you invest in the markets: § Make sure your broker is registered with SEBI and the exchanges and do not deal with unregistered intermediaries. Find out the business the company is into. access to investor grievance and redressal mechanism of stock exchanges. Ensure that you receive contract notes for all your transactions from your broker within one working day of execution of the trades. § § § § 31 . databases available with vendors or your financial advisor. Trading at the exchange offers investors the best prices prevailing at the time in the market. luring advertisement or ‘hot tips’ of the day. Investors should always know the risk that they are taking and invest in a manner that matches their risk tolerance.Why should one trade on a recognized stock exchange only for buying/selling shares? An investor does not get any protection if he trades outside a stock exchange.
htm. especially for acting quickly. Do not be attracted by announcements of fantastic results/news reports. for trades done each day. transaction price. unless you have done adequate study of the company. Do not be attracted to stocks based on what an internet website promotes. Do your own research before investing in any stock.nseindia.nseindia. most. Ensure that you read carefully and understand the contents of the ‘Risk Disclosure Document’ and then acknowledge it. or all of your money. Investing in very low priced stocks or what are known as penny stocks does not guarantee high returns. Ensure that you receive the contract note from your broker within 24 hours of the transaction. brokerage. securities transaction tax etc. trade time and number. about a company. Ensure that you give all your details in the ‘Know Your Client’ form. § § § § § What Do’s and Don’ts should an investor bear in mind when investing in the stock markets? § § § § § § § Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate. ma y be risky and may to lead to losing some.com/content/equities/ eq_trdverify.§ If your financial advisor or broker advises you to invest in a company you have never heard of. log in to the NSE website (www. Enter into an agreement with your broker/sub-broker setting out terms and conditions clearly. § 32 . and is signed by the Authorised Signatory of the broker. service tax. Spend some time checking out about the company before investing.com) and go to the trade verification facility extended by NSE at www. Any advise or tip that claims that there are huge returns expected. be cautious. To cross check genuineness of the transactions. Be cautious about stocks which show a sudden spurt in price or trading activity. Ensure that the contract note contains details such as the broker’s name. Insist on a contract note issued by your broker only.
Hence. Ensure that you do not undertake deals on behalf of others or trade on your own name and then issue cheques from a family members’/ friends’ bank accounts. While meeting pay in obligation make sure that correct ID of authorised intermediary is filled in the Delivery Instruction Form. Similarly. ensure that the delivery instructions are made only to the designated account of your broker only. Do not accept trades executed under some other client code to your account. within one working day of the payout date. the Demat delivery instruction slip should be from your own Demat account. Cross check and reconcile your accounts promptly and in case of any discrepancies bring it to the attention of your broker immediately. § authorisation is only for limited purpose of debits and credits arising out of valid transactions executed through that intermediary only. Delivery Instruction Slip is a very valuable document.§ § § § § § § § § § § § § Issue account payee cheques/demand drafts in the name of your broker only. While delivering shares to your broker to meet your obligations. Insist on execution of all orders under unique client code allotted to you. 33 . Do not sign blank delivery instruction slip(s) while meeting security payin obligation. not from any other family members’/friends’ accounts. as it appears on the contract note/SEBI registration certificate of the broker. Hence do not give your money as deposit against assurances of returns. When you are authorising someone through ‘Power of Attorney’ for operation of your DP account. Insist on periodical statement of accounts of funds and securities from your broker. do not part your funds to unauthorized persons for Portfolio Management. for the transactions entered by you. ‘Portfolio Management Services’ could be offered only by intermediaries having specific approval of SEBI for PMS. Be cautious while taking funding form authorised intermediaries as these transactions are not covered under Settlement Guarantee mechanisms of the exchange. No intermediary in the market can accept deposit assuring fixed returns. Do not leave signed blank delivery instruction slip with anyone. make sure that: § your authorization is in favour of registered intermediary only. Please ensure that you receive payments/deliveries from your broker.
Familiarise yourself with the rules. Don’t accept contract note signed by any unauthorised person. represents the form of fractional ownership in a business venture. proof of payments/delivery of shares etc. Don’t accept unsigned/duplicate contract note. a 34 . in the absence of sufficient documents. it is very important that you submit copies of all relevant documents like contract notes. inform the main broker in writing about the dispute at the earliest and in any case not later than 6 months. In the event of any discrepancies/disputes. commonly referred to as ordinary share. please bring it to the attention of the ‘Investor Grievances Cell’ of the NSE. Don’t delay payment/deliveries of securities to broker. § authorization given by you has been properly used for the purpose for which authorization has been given. regulations and circulars issued by stock exchanges/SEBI before carrying out any transaction. Remember. While lodging a complaint with the ‘Investor Grievances Cell’ of the NSE. at a price.g.§ § § § § § § § you verify DP statement periodically say every month/ fortnight to ensure that no unauthorised transactions have taken place in your account. please bring them to the notice of the broker immediately in writing (acknowledged by the broker) and ensure their prompt rectification. § 4. If your broker/sub-broker does not resolve your complaints within a reasonable period (say within 15 days). resolution of complaints becomes difficult.2 Products in the Secondary Markets What are the products dealt in the Secondary Markets? Following are the main financial products/instruments dealt in the Secondary market which may be divided broadly into Shares and Bonds: Shares: Equity Shares: An equity share. Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held. § in case you find wrong entries please report in writing to the authorized intermediary. In case of sub-broker disputes. alongwith the complaint. For e.
The difference between the issue price and redemption price represents the return to the holder.2:3 rights issue at Rs. Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price. A debt security is generally issued by a company. All arrears of preference dividend have to be paid out before paying dividend on equity shares. municipality or government agency. at the maturity of the bond. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows: Zero Coupon Bond: Bond issued at a discount and repaid at a face value. A bond investor lends money to the issuer and in exchange. these shares will be converted into equity capital of the company. No periodic interest is paid. Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates. the issuer promises to repay the loan amount on a specified maturity date. But in the event of liquidation. Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. The buyer of these bonds receives only one payment. They also enjoy priority over the equity shareholders in payment of surplus. if not paid. Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements. Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns. 125 per share. It is normally unsecured. 35 . 125. After a specified date. would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. Bond: is a negotiable certificate evidencing indebtedness. bondholders/debenture holders. their claims rank below the claims of the company’s creditors.
Indian stock market has returned about 17% to investors on an average in terms of increase in share prices or capital appreciation annually. Shares are also known as Equities.17% and Reliance 281.2. 2000 (index value 1592.42%. What has been the average return on Equities in India? Since 1990 till date. Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of 78. Dividend is a percentage of the face value of a share that a company returns to its shareholders from its annual profits. This may be illustrated with the help of following examples: a) b) Over a 15 year period between 1990 to 2005.5% dividend annually.90). Therefore.55. Equities are high risk investments. this does not mean all equity investments would guarantee similar high returns. However.86%. It also provides your portfolio with the growth necessary to reach your long term investment goals. SBI 301. Investment in shares of ONGC Ltd for the same period gave a return of 465. Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superio r returns than any other investment. Besides that on average stocks have paid 1.07%. Mr. Compared to 36 .1 Equity Investment Why should one invest in equities in particular? When you buy a share of a company you become a shareholder in that company. Raju invests in Nifty on January 1. Research studies have proved that the equities have outperformed most other forms of investments in the long term. when compared to other investment options. § § Equities are considered the most challenging and the rewarding. The Nifty value as of end December 2005 was 2836. One needs to study them carefully before investing. Nifty has given an annualised return of 17%. Equities have the potential to increase in value over time.4.
However. yet that value may not be reflected in the stock's price. economic crisis. Which are the factors that influence the price of a stock? Broadly there are two factors: (1) stock specific and (2) market specific. On the other hand. Value 37 . resulting in a boom in the market. or may be in an industry that's not fancied by most investors. These companies usually pay little or no dividends and instead prefer to reinvest their profits in their business for further expansions. Value Stocks: The task here is to look for stocks that have been overlooked by other investors and which may have a ‘hidden value’.most other forms of investments. investing in equity shares offers the highest rate of return. The stock-specific factor is related to people’s expectations about the company. Value stocks etc. and so on. can fuel euphoria in the investors. What is meant by the terms Growth Stock / Value Stock? Growth Stocks : In the investment world we come across terms such as Growth stocks. even a company that has seen its stock price decline still has assets to its name . communal riots. a prudent advice to all investors is to analyse and invest and not speculate in shares. However. unfavourable events like war. stable government etc.buildings. Therefore. its future earnings capacity. financial health and management. minority government etc. depress the market irrespective of certain companies performing well. political or regulatory environment like high economic growth. real estate. This factor depends on the environment rather than the performance of any particular company. inventories. are growing faster than other companies in the market or other stocks in the same industry are called the Growth Stocks. Events favourable to an economy. subsidiaries. price of a stock in the long run gets stabilized based on the stockspecific factors. friendly budget. Companies whose potential for growth in sales and earnings are excellent. Despite ups and downs. level of technology and marketing skills. The market specific factor is influenced by the investor’s sentiment towards the stock market as a whole. Many of these assets still have value. the effect of market-specific factor is generally short-term. if invested over a longer duration. These companies may have been beaten down in price because of some bad event.
35 2000 500 50. it might look something like this: Bid (Buy side) Ask (Sell side) ______________________________________________________ Qty. It is this price that you need to know when you have to sell a stock. They like P/E ratio being below a certain absolute limit.55 3000 1300 49. If an investor looks at a computer screen for a quote on the stock of say XYZ Ltd.05 50.65 1450 _____________________________________________________________ Total 5850 8950 _____________________________________________________________ 38 . To buy and sell securities you should approach a SEBI registered trading member (broker) of a recognized stock exchange.85 50. The value investors tend to purchase a company's stock usually based on relationships between the current market price of the company and certain business fundamentals. Total sales at a certain level relative to the company's market capitalization. How can one acquire equity shares? You may subscribe to issues made by corporates in the primary market. and then hold those stocks until the rest of the market realizes the real value of the company's assets. dividend yields above a certain absolute limit. In the primary market. which you intend to sell. Bid is the rate/price at which there is a ready buyer for the stock.) _____________________________________________________________ 1000 50. What is Bid and Ask price? The ‘Bid’ is the buyer’s price. resources are mobilised by the corporates through fresh public issues (IPOs) or through private placements.40 1000 550 50.00 50. this is the rate/ price at which there is seller ready to sell his stock. The seller will sell his stock if he gets the quoted “Ask’ price.e. or market value etc. you may purchase shares from the secondary market. Alternately.50 1500 2500 50.investors look to buy stocks that are undervalued.25 50. Price (Rs. The ‘Ask’ (or offer) is what you need to know when you're buying i.10 50.) Qty. Price (Rs.
art and even real estate etc. What are the advantages of having a diversified portfolio? A good investment portfolio is a mix of a wide range of asset class. However. mutual fund units to items such as gold. fixed deposits. 50. mutual fund units. 39 . bonds.35). The best Sell (Ask) order is the order with the lowest sell price (2000 shares @ Rs. Different securities perform differently at any point in time.Here. The difference in the price of the best bid and ask is called as the Bid-Ask spread and often is an indicator of liquidity in a stock. It is designed to minimize the impact of any one security on overall portfolio performance. debentures.25). you may still have the stability of the bonds in your portfolio. The best Buy (Bid) order is the order with the highest price and therefore sits on the first line of the Bid side (1000 shares @ Rs. on the left-hand side after the Bid quantity and price." If you spread your investments across various types of assets and markets. What is Diversification? It is a risk management technique that mixes a wide variety of investments within a portfolio. Items that are considered a part of your portfolio can include any asset you own-from shares. your entire portfolio does not suffer the impact of a decline of any one security. you'll reduce the risk of your entire portfolio getting affected by the adverse returns of any single asset class. 50. for most investors a portfolio has come to signify an investment in financial instruments like shares. The narrower the difference the more liquid or highly traded is the stock. debentures. Diversification is possibly the best way to reduce the risk in a portfolio. There have been all sorts of academic studies and formulas that demonstrate why diversification is important. whereas on the right hand side we find the Ask quantity and prices. so with a mix of asset types. What is a Portfolio? A Portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). but it's really just the simple practice of "not putting all your eggs in one basket. When your stocks go down.
Similarly. financial assets are not bulky and do not need special facility for storage. etc. most of these contracts are cash settled. soybeans. 1952 defines “goods” as “every kind of movable property other than actionable claims. Even in the case of physical settlement. cotton. the quality of the asset underlying a contract can vary at times. However there are some features which are very peculiar to commodity derivative markets.What is ‘Commodity Exchange’? A Commodity Exchange is an association. allowing effective competition among buyers and among sellers – this would include auction-type exchanges. Futures’ trading is organized in such goods or commodities as are permitted by the Central Government. but effectively takes place through many non-related individual transactions between different permutations of buyers and sellers. At present. Due to the bulky nature of the underlying assets. where trade is localized. What is meant by ‘Commodity’? FCRA Forward Contracts (Regulation) Act. the concept of varying quality of asset does not really exist as far as financial underlyings are concerned. It can be an agricultural commodity like wheat. physical settlement in commodity derivatives creates the need for warehousing. What is Commodity derivatives market? Commodity derivatives market trade contracts for which the underlying asset is commodity. In the case of financial derivatives. However in the case of commodities. mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. silver. but not wholesale markets. all goods and products of agricultural (including plantation). rapeseed. What is the difference between Commodity and Financial derivatives? The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. money and securities”. etc or precious me tals like gold. In a wider sense. it is taken to include any organized market place where trade is routed through one mechanism. 43 . or a company of any other body corporate organizing futures trading in commodities.
Facilitates transfers of ownership without having to handle securities. which holds the funds for depositors. What are the benefits of participation in a depository? The benefits of participation in a depository are: § § § Immediate transfer of securities No stamp duty on transfer of securities Elimination of risks associated with physical certificates such as bad delivery. An analogy between a bank and a depository may be drawn as follows: BANK Holds funds in an account Transfers funds between accounts on the instruction of the account holder Facilitates transfers without having to handle money Facilitates safekeeping of money DEPOSITORY Hold securities in an account Transfers securities between accounts on the instruction of the account holder. Reduction in paperwork involved in transfer of securities Reduction in transaction cost § § 44 . Which are the depositories in India? There are two depositories in India which provide dematerialization of securities. fake securities. The National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). etc. DEPOSITORY How is a depository similar to a bank? A Depository can be compared with a bank. Facilitates safekeeping of shares.6.
You can have zero balance in your account. of shares. debt instruments and Government securities in a single account. a custodian also keeps track of corporate actions on behalf of its clients: 45 . i. Besides safeguarding securities. According to SEBI regulations. three categories of entities. amongst others. Does one need to keep any minimum balance of securities in his account with his DP? No.§ § Ease of nomination facility Change in address recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately Transmission of securities is done directly by the DP eliminating correspondence with companies Convenient method of consolidation of folios/accounts Holding investments in equity. What is an ISIN? ISIN (International Securities Identification identification number for a security. automatic credit into demat account.e. which helps register and safeguard the securities of its clients. These agents are appointed by the depository with the approval of SEBI. Number) is a unique What is a Custodian? A Custodian is basically an organisation. Financial Institutions and SEBI registered trading members can become DPs. § § § Who is a Depository Participant (DP)? The Depository provides its services to investors through its agents called depository participants (DPs). The depository has not prescribed any minimum balance. arising out of split/consolidation/merger etc. Banks.
These shares are fungible. If one wishes to get back your securities in the physical form one has to fill in the Remat Request Form (RRF) and request your DP for rematerialisation o the balances in your f securities account. having a bearing on the benefits or rights accruing to the client. Do dematerialised shares have distinctive numbers? Dematerialised shares do not have any distinctive numbers. government securities in his demat account? Yes. Can odd lot shares be dematerialised? Yes.§ § § Maintaining a client’s securities account Collecting the benefits or rights accruing to the client in respect of securities Keeping the client informed of the actions taken or to be taken by the issue of securities. How can one convert physical holding into electronic holding i. The process is called Rematerialisation. odd lot share certificates can also be dematerialised. Can one dematerialise his debt instruments. mutual fund units. 46 . You can dematerialise and hold all such investments in a single demat account. which means that all the holdings of a particular security will be identical and interchangeable. Can electronic certificates? holdings be converted into Physical Yes. how can one dematerialise securities? In order to dematerialise physical securities one has to fill in a Demat Request Form (DRF) which is available with the DP and submit the same along with physical certificates one wishes to dematerialise.e. Separate DRF has to be filled for each ISIN number.
Regulations: All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor. experience and resources manage the pool of money collected by a mutual fund. Choice: The large amount of Mutual Funds offer the investor a wide variety to choose from. 47 . thus increasing his or her risk. A fund normally invests in companies across a wide range of industries. All the mutual funds must get registered with SEBI. What are the benefits of investing in Mutual Funds? There are several benefits from investing in a Mutual Fund: Small investments: Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments. Spreading Risk: An investor with limited funds might be able to invest in only one or two stocks/bonds. They thoroughly analyse the markets and economy to pick good investment opportunities. a mutual fund will spread its risk by investing a number of sound stocks or bonds. MUTUAL FUNDS What is the Regulatory Body for Mutual Funds? Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. However. An investor can pick up a scheme depending upon his risk/ return profile. Mutual Funds also provide complete portfolio disclosure of the i vestments made by n various schemes and also the proportion invested in each asset type.7. so the risk is diversified. Transparency: Mutual Funds regularly provide investors with information on the value of their investments. Professional Fund Management: Professionals having considerable expertise.
13.11367. The investor receives 10000/13.00% and 2.g.10. Besides incase there is a sudden downturn in an industry or the government comes up with new a re gulation which affects a particular industry or company the fund can again be adversely affected.and the current NAV is Rs.00%.50%. All these investments involve an element of risk.25% and 2. The unit value may vary depending upon the performance of the company and if a company defaults in payment of interest/principal on their debentures/bonds the performance of the fund may get affected. Let us also assume that the NAV is Rs 15/. Let us now assume that the same investor decides to redeem his 761. A load is levied to cover the up-front cost incurred by the mutual fund for selling the fund. The NAV of an open end scheme should be disclosed on a daily basis and the NAV of a close end scheme should be disclosed at least on a weekly basis What is Entry/Exit Load? A Load is a charge. bonds etc. The NAV of a mutual fund are required to be published in newspapers.6146 units. which the mutual fund may collect on entry and/or exit from a fund. (Note that units are allotted to an investor based on the amount invested and not on the basis of no. the price at which the investor invests is Rs.What is NAV? NAV or Net Asset Value of the fund is the cumulative market value of the assets of the fund net of its liabilities. They invest in shares.13 per unit. The investor therefore receives 761. It also covers one time processing costs. 10.000/. Therefore the redemption price per unit works out to Rs.and the exit load is 0. NAV per unit is simply the net value of assets divided by the number of units outstanding. Let us assume an investor invests Rs.00%. Exit loads vary between 0. debentures.13/-. 14.6146 x 14.00%.6146 units. Buying and selling into funds is done on the basis of NAV-related prices. Some funds do not charge any entry or exit load. These funds are referred to as ‘No Load Fund’. All these factors influence the performance of Mutual Funds.13 = 761.925 = Rs. Are there any risks involved in investing in Mutual Funds? Mutual Funds do not provide assured returns. 48 . For e. of units purchased).925. Their returns are linked to their performance. If the entry load levied is 1. Funds usually charge an entry load ranging between 1.
There are different types of equity funds such as Diversified funds. They are best suited for investors who are seeking capital appreciation. They carry the principal objective of capital appreciation of the investment over the medium to long-term. Non-market risk Bad news about an individual company can pull down its stock price. which can negatively affect fund holdings. the value of stock or bond holdings in the fund's portfolio can drop. This risk can be reduced by having a diversified portfolio that consists of a wide variety of stocks drawn from different industries. bond prices fall and this decline in underlying securities affects the fund negatively. thereby impacting the fund performance. it leads to a fall in the value of the bond causing the NAV of the fund to take a beating. What are the different types of Mutual funds? Mutual funds are classified in the following manner: (a) On the basis of Objective Equity Funds/ Growth Funds Funds that invest in equity shares are called equity funds. Interest rate risk Bond prices and interest rates move in opposite directions. 49 . Sector specific funds and Index based funds. they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes. So when the funds invest in corporate bonds. Credit risk Bonds are debt obligations. When interest rates rise.Some of the Risk to which Mutual Funds are exposed to is given below: Market risk If the overall stock or bond markets fall on account of overall economic factors.
These funds are ideal for corporates. They provide easy liquidity. The money collected from the investors is invested only in the stocks. government securities. Index funds These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The period of investment could be as short as a day. commercial paper and other money market instruments. institutional investors and business houses that invest their funds for very short periods. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector. Liquid Funds/Money Market Funds These funds invest in highly liquid money market instruments. Sector funds These funds invest primarily in equity shares of companies in a particular business sector or industry. which represent the index. The objective of such funds is not to beat the market but to give a return equivalent to the market returns. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act. debentures.g. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. 50 . They provide a regular income to the investor. They have emerged as an alternative for savings and shortterm fixed deposit accounts with comparatively higher returns. Tax Saving Funds These funds offer tax benefits to investors under the Income Tax Act. For e. a Nifty index fund will invest only in the Nifty 50 stocks.Diversified funds These funds invest in companies spread across sectors. Debt/Income Funds These funds invest predominantly in high-rated fixed-income -bearing instruments like bonds.
but the discount narrows as maturity nears. They are ideal for medium to long-term investors who are willing to take moderate risks. are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market. b) On the basis of Flexibility Open-ended Funds These funds do not have a fixed date of redemption. Close-ended Funds These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV. 51 . From the investors' perspective. Their prices are linked to the daily net asset value (NAV). They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. Balanced Funds These funds invest both in equity shares and fixed-income -bearing instruments (debt) in some proportion. Generally they are open for subscription and redemption throughout the year. These funds have a fixed date of redemption. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed on stock exchanges (with certain exceptions).Gilt Funds These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. they are much more liquid than closed-ended funds. They are best suited for the medium to long-term investors who are averse to risk.
Some of the investment pla ns offered by mutual funds in India are: Growth Plan and Dividend Plan A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions. because they determine the flexibility available to the investor. This is referred to as the dividend reinvestment plan. Under the dividend plan.What are the different investment plans that Mutual Funds offer? The term ’investment plans’ generally refers to the services that the funds provide to investors offering different ways to invest or reinvest. if any. Receive dividend within 30 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase. 4. thus increasing the number of units held by the investors. What are the rights that are available to a Mutual Fund holder in India? As per SEBI Regulations on Mutual Funds. Dividend Reinvestment Plan Dividend plans of schemes carry an additional option for reinvestment of income distribution. Under this plan. Receive Unit certificates or statements of accounts confirming your title within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund. are made. dividends declared by a fund are reinvested in the scheme on behalf of the investor. This plan is ideal to those investors requiring regular income. financial position and general affairs of the scheme. The trustees shall be bound to make such disclosures to the unit holders as are essential in order to keep them informed about any information. income is distributed from time to time. 2. an investor is entitled to: 1. 52 . 3. investment objectives. Receive information about the investment policies. which may have an adverse bearing on their investments. The different investment plans are an important consideration in the investment decision. The investor thus only realizes capital appreciation on the investment.
instrument or class of assets the fund should invest in based on research. ‘active’ investment managers construct different portfolio. analysis. you're well aware of the risks etc involved. 75% of the unit holders can pass a resolution to wind-up the scheme. What is a Fund Offer document? A Fund Offer document is a document that offers you all the information you could possibly need about a particular scheme and the fund launching that scheme. 75% of the unit holders with the prior approval of SEBI can terminate the AMC of the fund. Based on the classifications of shares with different characteristic s. who will take up the matter with the concerned Mutual Funds and follow up with them till they are resolved. This has to be designed in accordance with the guidelines stipulated by SEBI and the prospectus must disclose details about: § § § § § § § Investment objectives Risk factors and special considerations Summary of expenses Constitution of the fund Guidelines on how to invest Organization and capital structure Tax provisions related to transactions Financial information § What is Active Fund Management? When investment decisions of the fund are at the discretion of a fund manager(s) and he or she decides which company. before you put in your money. Two basic investment styles prevalent among the mutual funds are Growth Investing and Value Investing: 53 . An investor can send complaints to SEBI. The fund buys and sells securities actively based on changed perceptions of investment from time to time. such a fund is called as an actively managed fund.5. That way. market news etc. 6. 7.
There are mutual funds that offer Index funds whose objective is to equal the return given by a select market index. Therefore.§ Growth Investing Style The primary objective of equity investment is to obtain capital appreciation. However. markets. Instead they prefer to invest in a portfolio of stocks that reflect a market index. No attempt is made to try and beat the index. Identifying such growth sectors is the challenge before the growth investment manager. chances are that the decisions might go wrong or may not be right all the time which can lead to substantial losses for the investor. where the manager feels that the earning prospects and therefore the stock prices in future will be even higher. What is Passive Fund Management? When an investor invests in an actively managed mutual fund. there is an element of going wrong in selecting a fund to invest in. such as the Nifty index. The returns generated by the index are the returns given by the fund. This has lead to a huge interest in passively managed funds such as Index Funds where the choice of investments is not left to the discretion of the fund manager. This gives a dual advantage to the investor of having a diversified portfolio 54 . economic factors and then narrow down on stocks to invest in.maker as to which company or instrument to invest in. They do not analyse companies. he or she leaves the decision of investing to the fund manager. § Value investment Style A Value Manager looks to buy companies that they believe are currently undervalued in the market. Research has shown that most fund managers are unable to constantly beat the market index year after year. Such funds follow a passive investment style. rewarding the investor handsomely. Index Funds hold a diversified basket of securities which represents the index while at the same time since there is not much active turnover of the portfolio the cost of managing the fund also remains low. Sometimes such decisions may be right. but whose worth they estimate will be recognized in the market valuations eventually. The fund manager is the decision. Also it is not possible to identify which fund will beat the market index. A growth manager looks for companies that are expected to give above average earnings growth.
IL&FS Index Fund launched by IL&FS Mutual Fund in February 2002. UTI Nifty Fund launched by Unit Trust of India in March 2000. ING Vysya Nifty Plus Fund launched by ING Vysya Mutual Fund in January 2004. Birla Index Fund launched by Birla Sun Life Mutual Fund in September 2002. HDFC Index Fund-Nifty Plan launched by HDFC Mutual Fund in July 2002. LIC Index Fund-Nifty Plan launched by LIC Mutual Fund in November 2002. Canindex Fund launched by Canbank Mutual Fund in September 2004 55 . Franklin India Index Fund launched by Franklin Templeton Mutual Fund in June 2000.while at the same time having low expenses in fund. an index fund scheme on S&P CNX Nifty launched by Principal Mutual Fund in July 1999. Prudential ICICI Index Fund launched by Prudential ICICI Mutual Fund in February 2002. Tata Index Fund launched by Tata TD Waterhouse Mutual Fund in February 2003. Franklin India Index Tax Fund launched by Franklin Templeton Mutual Fund in February 2001. There are various passively managed funds in India today some of them are: Principal Index Fund. Magnum Index Fund launched by SBI Mutual Fund in December 2001.
an ETF's price changes throughout the day. Liquid BeES: An Exchange Traded Fund launched by Benchmark Mutual Fund in July 2003. There are various ETFs available in India. launched by Benchmark Mutual Fund in February 2003. there is no guarantee that they will do so exactly. When buying and selling ETFs. 56 . It is important to remember that while ETFs attempt to replicate the return on indexes. fluctuating with supply and demand. By owning an ETF. isn't a mutual fund. an ETF represents a basket of stocks that reflect an index such as the Nifty.What is an ETF? Think of an exchange-traded fund as a mutual fund that trades like a stock. ETFs trade like stocks. it trades just like any other company on a stock exchange. Another advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. Junior BeES: An Exchange Traded Fund on CNX Nifty Junior. SUNDER: An Exchange Traded Fund launched by UTI in July 2003. Just like an index fund. buy them on margin and purchase as little as one share. such as: NIFTY BeES: An Exchange Traded Fund launched by Benchmark Mutual Fund in January 2002. Because. you get the diversification of an index fund plus the flexibility of a stock. you pay your broker the same commission that you'd pay on any regular trade. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day. An ETF. Bank BeES: An Exchange Traded Fund (ETF) launched by Benchmark Mutual Fund in May 2004. however. you can short sell them.
6 and pays out Rs. 3 per share as a dividend is passing half of its profits on to shareholders and retaining the other half. Directors of a company have discretion as to how much of a dividend to declare or whether they should pay any dividend at all. So a company that has earnings per share in the year of Rs. MISCELLANEOUS 8. usually twice a year in the form of a final dividend and an interim dividend. and how much are being retained by the company to plough back into the business. for instance – Rs. Normally.1 Corporate Actions What are Corporate Actions? Corporate actions tend to have a bearing on the price of a security. bonus issues etc. This makes it easy to see how much of the company's profits are being paid out. By understanding these different types of processes and their effects. 57 . Corporate actions are typically agreed upon by a company's Board of Directors and authorized by the shareholders. Dividend is distribution of part of a company's earnings to shareholders. stock splits. What is meant by ‘Dividend’ declared by companies? Returns received by investors in equities come in two forms a) growth in the value (market price) of the share and b) dividends. 3 per share.8. Some examples are dividends. it is initiating a process that will bring actual change to its securities either in terms of number of shares increasing in the hands on the shareholders or a change to the face value of the security or receiving shares of a new company by the shareholders as in the case of merger or acquisition etc. the dividend is expressed on a 'per share' basis. Dividend is therefore a source of income for the shareholder. When a company announces a corporate action. rights issues. an investor can have a clearer picture of what a corporate action indicates about a company's financial affairs and how that action will influence the company's share price and performance.
000 shares with a face value of Rs.00. whereas a low dividend yield is considered evidence that the stock is overpriced.00.00. The company then decides to implement a 4-for-1 stock split (i. For e. 100 note for two Rs.000*(10/5)). What is a Stock Split? A stock split is a corporate action which splits the existing shares of a particular face value into smaller denominations so that the number of shares increase. they receive three additional shares. 16. Let us see the impact of this on the share holder: . which gives it a market capitalization of Rs.000. 10 and the current market price being Rs. 4000 million (Rs. the share price would also halve to Rs.00. a higher dividend yield has been considered to be desirable among investors. 50 so that the market capitalization or the value shares held by an investor remains unchanged. It is the same thing as exchanging a Rs. the value remains the same . (1. There have been companies in the past which had a record of high dividend yield. It is calculated by aggregating past year's dividend and dividing it by the current stock price. So the investor gains 3 additional shares for 58 . only to go bust in later years. the market capitalization or the value of shares held by the investors post split remains the same as that before the split. Example: ABC Co.Let's say company ABC is trading at Rs. If a company has issued 1. Consequently. 10 Dividend yield: 2. 360 Annual dividend: Rs.00. 50 notes. a shareholder holding 1 share. Dividend yield therefore can be only one of the factors in determining future performance of a company. 40 x 100 million shares). For each share shareholders currently own. however. 40 and has 100 million shares issued.e. a 2 -for-1 stock split would reduce the face value of the shares to 5 and increase the number of the company’s outstanding shares to 2. An investor holds 400 shares of the company valued at Rs.g. 100. Share price: Rs. will now hold 4 shares).What is meant by Dividend yield? Dividend yield gives the relationship between the current price of a stock and the dividend paid by its’ issuing company during the last 12 months. A high dividend yield is considered to be evidence that a stock is underpriced. A note of caution here though.00.77% (10/360) Historically.000. The investor will therefore hold 1600 shares.
some investors may feel the price is too high for them to buy. But this does not impact the value of the shares held by the investor since post split. therefore the investor continues to hold Rs.5 = Rs. 10 for a capitalization of Rs. If a stock were to split 3-for-2. Splitting a stock may lead to increase in the stock's liquidity. Rs. 20 Rs. making it attractive for more investors to buy the share. or small investors may feel it is unaffordable. what motivates a company to split its stock? Though there are no theoretical reasons in financial literature to indicate the need for a stock split. from Rs. An easy way to determine the new stock price is to divide the previous stock price by the split ratio. 100 mill.10. 40 Rs. 4000 mill. 100 mill. of shares Share Price Market Cap. since more investors are able to afford the share and the total outstanding shares of the company have also increased in the market.each share held. 200 mill. but after the stock split the same number of shares can be bought for Rs. 59 . 4000 mill. As the price of a security gets higher and higher. the price of the stock is also split by 25% (1/4th). 4000 mill. 16. Rs. Splitting the stock brings the share price down to a more "attractive" level. Notice that the market capitalization stays the same . Why do companies announce Stock Split? If the value of the stock doesn't change. Rs. 4000 mill. Pre-Split 2-for-1 Split No. In the case of our example. we'd do the same thing: 40/(3/2) = 40/1. divide Rs. there are mainly two important reasons. In our earlier example to buy 1 share of company ABC you need Rs. of shares Share Price Market Cap. This leads us to the second reason. 40 by 4 and we get the new trading price of Rs. 40 Rs. 40 to Rs. Post-Split 4-for-1 No. 4000 million. 400 mill. Rs. generally.it has increased the amount of stocks outstanding to 400 million while simultaneously reducing the stock price by 25% to Rs. The true value of the company hasn't changed. 10 Rs. 40 pre-split.10. 26.60.000 worth of shares. 10.
50 stock index.What is Buyback of Shares? A buyback can be seen as a method for company to invest in itself by buying shares from other investors in the market. The payments for accepted securities has to be made within 7 days of the completion of verification and bought back shares have to be extinguished within 7 days of the date of the payment.2 Index What is the Nifty index? S&P CNX Nifty (Nifty). which is a joint venture between NSE and CRISIL. The verification of shares received in buy back has to be completed within 15 days of the closure of the offer. the regulations have stipulated time limit for each step. is a scientifically developed. in the cases of purchases through stock exchanges. It comprises of some of the largest and most liquid stocks traded on the NSE. The index has been co-branded by Standard & Poor’s (S&P). (IISL). reflecting accurately the market movement of the Indian markets. For example. Open market through stock exchanges using book building process. Under the SEBI (Buy Back of Securities) Regulation. The company has to disclose the pre and post-buyback holding of the promoters. Buy back is done by the company with the purpose to improve the liquidity in its shares and enhance the shareholders’ wealth. 1998. It is maintained by India Index Services & Products Ltd. Nifty is the barometer of the Indian markets. Buybacks reduce the number of shares outstanding in the market. To ensure completion of the buyback process speedily. an offer for buy back should not remain open for more than 30 days. 8. Shareholders holding odd lot shares. 60 . a company is permitted to buy back its share from: a) b) c) Existing shareholders on a proportionate basis through the offer document.
Pay-out day is the day the securities purchased are delivered to the buyers and the funds for the securities sold are given to the sellers by the exchange.3 Clearing & Settlement and Redressal What is a Clearing Corporation? A Clearing Corporation is a part of an exchange or a separate entity and performs three functions. National Securities Clearing Corporation (NSCCL). a 100% subsidiary of NSE. namely. completes the process of receiving and delivering shares/funds to the buyers and sellers in the market. Currently trades in rolling settlement are settled on T+2 basis where T is the trade day. a trade executed on Monday is mandatorily settled by Wednesday (considering two working days from the trade day). 61 . it clears and settles all transactions.e. What is Pay-in and Pay-out? Pay-in day is the day when the securities sold are delivered to the exchange by the sellers and funds for the securities purchased are made available to the exchange by the buyers. The funds and securities pay-in and pay-out are carried out on T+2 days. i. it provides financial guarantee for all transactions executed on the exchange and provides risk management functions. For example.8. At present the pay-in and pay-out happens on the 2nd working day after the trade is executed on the stoc k exchange. What is Rolling Settlement? Under rolling settlement all open positions at the end of the day mandatorily result in payment/ delivery ‘n’ days later. performs the role of a Clearing Corporation for transactions executed on the NSE.
What is an Auction? On account of non-delivery of securities by the trading member on the payin day. This ensures that the buying trading member receives the securities. What is a No-delivery period? Whenever a company announces a book closure or record date. the exchange sets up a no-delivery period for that security. Book closure refers to the closing of the register of the names of investors in the records of a company. the securities are put up for auction by the Exchange. The Exchange purchases the requisite quantity in auction market and gives them to the buying trading member. i. 62 . the buyers need not send shares physically to the companies for registration. This is taken care by the depository since they have the records of investor holdings as on a particular date electronically with them. Companies announce book closure dates from time to time. rights issue accrue to investors whose name appears on the company's records as on a given date which is known as the record date and is declared in advance by the company so that buyers have enough time to buy the shares. rights. The benefits of dividends. dividends etc. buyers of the shares will no longer be entitled for the dividend which has been declared recently by the company.e. bonus issues. these trades are settled only after the no-delivery period is over. in case they buy on or after the ex-dividend date. During this period only trading is permitted in the security. This is done to ensure that investor's entitlement for the corporate benefit is clearly determined. get them registered in the books of the company and become entitled for the benefits such as bonus. With the depositories now in place. However. What is a Book-closure/Record date? Book closure and record date help a company determine exactly the shareholders of a company as on a given date. What is an Ex-dividend date? The date on or after which a security begins trading without the dividend included in the price.
If there is any corporate benefits such as rights. then you can make application for reference to Arbitration under the Bye-Laws of the concerned Stock exchange. If no amicable settlement could be reached through the normal grievance redressal mechanism of the stock exchange. IGC takes up complaints in respect of trades executed on the NSE. What is Arbitration? Arbitration is an alternative dispute resolution mechanism provided by a stock exchange for resolving disputes between the trading members and their clients in respect of trades done on the exchange. in respect of trades executed on the Exchange. The maximum amount of claim payable from the IPF to the investor (where the trading member through whom the investor has dealt is declared a defaulter) is Rs. What recourses are available to investor/client for redressing his grievances? You can lodge complaint with the Investor Grievances Cell (IGC) of the Exchange against brokers on certain trade disputes or non-receipt of payment/securities.What is an Ex-date? The first day of the no-delivery period is the ex-date. dividend announced for which book closure/record date is fixed. through the NSE trading member or SEBI registered sub-broker of a NSE trading member and trades pertaining to companies traded on NSE. 10 lakh. 63 . who has been declared a defaulter. which may arise out of non-settlement of obligations by the trading member. the buyer of the shares on or after the ex-date will not be eligible for the benefits. Payments out of the IPF may include claims arising of non payment/non receipt of securities by the investor from the trading member who has been declared a defaulter. The IPF is utilised to settle claims of such investors where the trading member through whom the investor has dealt has been declared a defaulter. What is an Investor Protection Fund? Investor Protection Fund (IPF) is maintained by NSE to make good investor claims. bonus.
X for 8 months. 10. I = interest P = principal r = interest rate (per year) t = time (in years or fraction of a year) Example: Mr. 10.000 r = 0. There are three components to calculate simple interest: principal. 10. X borrowed Rs.000 from the bank to purchase a household item. interest rate and time. interest would be: I = Rs. 1. 10. Therefore. CONCEPTS & MODES OF ANALYSIS What is Simple Interest? Simple Interest: Simple Interest is the interest paid only on the principal amount borrowed.000 in fifteen months. He agreed to repay the amount in 8 months. 667. 10. Formula for calculating simple interest: I = Prt Where.10 (10% per year) t = 8/12 (this denotes fraction of a year) Applying the above formula. his interest would be: I = Rs.10)*(15/12) = Rs.000*(0. 10.000*(0. the interest would be: P = Rs.000 loan taken by Mr. This is the Simple Interest on the Rs.000 in eight months. plus simple interest at an interest rate of 10% per annum (year). If he repays the amount of Rs.9. If he repays the full amount of Rs. 10.250 64 . the only change is with time. No interest is paid on the interest accrued during the term of the loan.10)*(8/12) = Rs.
5. • For any loan or borrowing unless simple interest is stated. compounded yearly: • At the end of the first year the interest would be (Rs. 500 interest of the first year. E.g. 10% per annum. If the loan or deposit was for five years. Conversion period refers to how often the nterest is calculated over the i term of the loan or investment. In the second year the interest rate of 10% will applied not only to Rs. the interest will include interest calculated on interest. E.000 * 0. 5. then the number of conversion periods would be ten. then the number of conversion periods per year would be two.500) or Rs. one should always assume interest is compounded. Compound interest may involve calculations for more than once a year. When compound interest is used we must always know how often the interest rate is calculated each year. in the second year the interest would be (0. 65 .What is Compound Interest? Compound Interest: Compound interest means that. for the calculation of the interest for the next period. Thus.g. 5. 5. i. The interest accrued on a principal amount is added back to the principal sum. (interest + principal).e.: If the interest rate is compounded semiannually. if an amount of Rs. 500. It must be determined for each year or fraction of a year. 550.10) or Rs.000 is invested for two years and the interest rate is 10%. Generally the interest rate is quoted annually. each using a new principal.000 but also to the Rs. For example. and the whole amount is then treated as new principal. The first term we must understand in dealing with compound interest is conversion period.10 * Rs.
000 x 1.10.449948 = Rs 14. conversion periods over the five years Therefore. or 0.000(1 + 0.48 So at the end of five years Mr.499.000[1+0.499.Formula for calculating Compound Interest: C = P (1+i) n Where C = amount P = principal i = Interest rate per conversion period n = total number of conversion periods Example: Mr.075(5)] = Rs. X would earn Rs. 10.075 / 4. C. or 20.48 – Rs.000) as interest. X invested Rs.000 i = 0. Compounding plays a very important role in investment since earning a simple interest and earning an interest on interest makes the amount received at the end of the period for the two cases significantly different. the amount.14.01875)^20 = Rs 10. 10. 3. is: C = Rs.750. This is also called as Compounding.499. the simple interest earned is Rs. 10.48 (Rs.000 for five years at an interest rate of 7. S = Rs. then the amount that he would earn is calculated by applying the following formula: S = P (1 + rt). P = 10. X had invested this amount for five years at the same interest rate offering the simple interest option. 66 . 10. 4. If Mr.075 t=5 Thus.01875 n = 4 * 5. 13.5% compounded quarterly P = Rs.750 Here.000 r = 0.
5% is what you might get by leaving your money in a savings bank account.54. compounding refers to the re-invest ment of income at the same rate of return to constantly grow the principal amount. 3. When a principal amount is invested. Simply put.29200 20% Rs 12000 Rs 24900 Rs 61900 Rs 154100 Rs 9.08300 15% Rs 11500 Rs 20100 Rs 40500 Rs 81400 Rs 3.20% or more is what you might get if you prudently invest in mutual funds or equity shares. more is the income which keeps getting added back to the principal regularly generating higher rates of return year after year.48 – Rs. Compounding is the process by which interest is earned on interest. X would have earned Rs.A comparison of the interest am ounts calculated under both the method indicates that Mr. The table below shows you how a single investment of Rs 10. the higher the rate of return.750) or nearly 20% more under the compound interest method than under the simple interest method. interest is earned on the original principal plus 67 . An amount invested today has more value than the same amount invested at a later date because it can utilize the power of compounding. The Impact of Power of Compounding: The impact of the power of compounding with different rates of return and different time periods: At end of Year 1 5 10 15 25 5% Rs 10500 Rs 12800 Rs 16300 Rs 20800 Rs 33900 10% Rs 11000 Rs 16100 Rs 25900 Rs 41800 Rs 1. A rupee received now can earn interest in future.4.000 will grow at various rates of return with compounding. 10% is typically the rate of return you could expect from a one-year company fixed deposit. In the second period or year. interest is earned on the principal during the first period or year. Should one care too much whether the rate of return is 5% or 15%? The fact is that with compounding. year after year. The idea behind time value of money is that a rupee now is worth more than rupee in the future.499. 15% . 749.48 (Rs.000 What is meant by the Time Value of Money? Money has time value. The relationship between value of a rupee today and value of a rupee in future is known as ‘Time Value of Money’.
000 now OR Receive Rs. Which of the options would you choose? Rationally. The future value for option B. This clearly illustrates that value of money received today is worth more t han the same amount received in future since the amount can be invested today and generate returns. 10.000 today. and the payment received in three years would be your future value.000 .Interest Rs.000. Over time. would only be Rs.000 + Interest Rs.10. it is better to have money now rather than later. 10.000 plus any interest acquired over the three years. Let us take an example: Suppose you are given two options: (A) (B) Receive Rs. your future value will be Rs. Back to our example: by receiving Rs. you would choose to receive the Rs. 10. on the other hand. 10. 68 . you don't have time on your side. the time value of money demonstrates that. 10. For option B.000 Option B: Rs. So.000 now instead of waiting for three years to get the same amount. To illustrate. this reinvestment process can help an amount to grow significantly. we have provided a timeline: Present Value 0 1 2 Future Value 3 Years Option A: Rs. 10.000 after three years. 10.the interest earned in the first period. all things being equal.10. 10.000 If you are choosing option A. you are poised to increase the future value of your money b investing and gaining interest y over a period of time.
10. Thus. 69 . 10.500. 10.10.10.050 + 1) = Rs.10. Future value of investment at end of first year: = ((Rs. 10.050) + Rs. the future value of your investment at the end of the first year is Rs.Let us take an another example: If you choose option A and invest the total amount at a simple annual rate of 5%.000 x (0. S = amount received at the end of period P = principal amount r = interest rate (per year) This formula denotes the future value (S) of an amount invested (P) at a simple interest of (r) for a period of 1 year. 10.000 by the interest rate of 5% and then adding the interest gained to the principal amount.000 = Rs.050) + Rs.500 You can also calculate the total amount of a one-year investment with a simple modification of the above equation: Original equation: (Rs.000 X (5/100)) + Rs.000 x [(1 x 0.10. which is calculated by multiplying the principal amount of Rs.10.000 = Rs. 10.000 = (Rs. 10.050) + 1] = Rs.10.500 Which can also be written as: S = P (r+ 1) Where.000 x 0.500 Final equation: Rs.10.000 x 0.500 Modified formula: Rs.
1)3 = 2. Example 1 Calculate the value of a deposit of Rs.10)3 = 2. The compounding factor is calculated by taking natural logarithm (log to the base of 2. 2.000 made today. By discrete compounding: FV = 2. future value of money (FV) after a period ‘t’ for which compounding is done at an interest rate of ‘r’.662 By continuous compounding: FV = 2. However. in case of continuous compounding.2.000 * 1.000 * (1+0.How is time value of money computed? The time value of money may be computed in the following circumstances: 1. 3 : years hence if the interest rate is 10%. (1) Future value of a single cash flow Future value of an annuity Present value of a single cash flow Present value of an annuity Future Value of a Single Cash Flow For a given present value (PV) of money. 4.72 70 .7183.000 * e (0.2699.000 * 1. is given by the equation FV = PV (1+r)t This assumes that compounding is done at discrete intervals. 3.10 *3) =2. the future value is determined using the formula FV = PV * ert Where ‘e’ is a mathematical function called ‘exponential’ the value of exponential (e) = 2.331 = Rs.349862 = Rs. 2.7183).000 * (1.
10) + Rs.3000*(1.3310)+Rs..3.3000*(1.57 In case of continuous discounting: PV = FV * e.3000*(1. Future Value of an Annuity An annuity is a stream of equal annual cash flows. For e. + CF*(1+r)1 +CF  (1 + r) t − 1   = CF    r   The term  (1 + r) t − 1    is referred as the Future Value Interest factor for an   r   annuity (FVIFA).a.10)2 + Rs. 18315. is given by the equation In case of discrete discounting: PV = FV / (1+r) t Example 1: What is the present value of Rs. The same can be applied in a variety of contexts.3000*(1. to know the interest rate etc. what will be value of this series of deposits (an annuity) at the end of 5 years? Assume that each deposit occurs at the end of the year. The future value (FVA) of a uniform cash flow (CF) made at the end of each period till the time of maturity ‘t’ for which compounding is done at the rate ‘r’ is calculated as follows: FVA = CF*(1+r) t-1 + CF*(1+r) t-2 + .e. to know how much to save annually to reach the targeted amount. Future value of this annuity is: =Rs. to know accumulated amount after a certain period.30 3.5..3000*(1.3000 =Rs.10)3 + Rs.3756.3000*(1. = Rs.10)4 + Rs.rt 71 . you deposit Rs.4641)+Rs. if the interest rate is 10 % p. Present Value of a Single Cash Flow Present value of (PV) of the future sum (FV) to be received after a period ‘t’ for which discounting is done at an interest rate of ‘r’. Examp le 1: Suppose.3000 = Rs. PV = 5000 / (1.10) + Rs.3000*(1.000 annually in a bank for 5 years and your deposits earn a compound interest rate of 10 per cent.000 payable 3 years hence.10)3 i.g.2.2100)+Rs.3000*(1.
in the second quarter.000/(exp^(0.025.received at the end of each year for 3 continuous years = 2000*[1/1.1/ r*(1+r) t ] is referred as the Present Value Interest factor for an annuity (PVIFA).Example 2: What is the present value of Rs. After one year.7513 = 1818. But.10]^3 = 2000*0. and say you put Rs 1. that the annual return (interest) of an investment is 10%.892562+1502. Present value of an annuity (in case of continuous discounting) is calculated as: PVa = FVa * (1-e. 2000/.10]+2000*[1/1.1 }/ {r * (1+r) t }] The term [(1+r)t . your money would grow to Rs 1. Then.629602 = Rs. your savings would grow to Rs 1. the effect of compounding would become apparent: you would receive another Rs 25 in interest on the original Rs 1. 8187.10]^2+2000*[1/1. but the effective annual return mentioned is something more. 10.297 4. Present Value of an Annuity The present value of annuity is the sum of the present values of all the cash inflows of this annuity. Present value of an annuity (in case of discrete discounting) PVA = FV [{(1+r)t .1*2)) = Rs. 10.000 receivable after 2 years at a discount rate of 10% under continuous discounting? Present Value = 10. The difference between these two measures is best illustrated with an example.9091+2000*0.38%. Why the difference? Essentially.100.000 into this savings account. your effective rate of return will be higher than 10%.704 What is Effective Annual return? Usually while applying for a fixed deposit or a bond it is stated in the application form. or first three months. if the account has a quarterly compounding feature. but you 72 . After the first quarter.181818+1652. 4973. the effective annual return accounts for intrayear compounding and the stated annual return does not.000.rt)/r Example 1: What is the present value of Rs. Suppose the stated annual interest rate on a savings account is 10%.8264+2000*0.
for arriving at the estimated future price. need to be checked. the share is a good buy.38% of Rs. because of quarterly compounding. 73 . Tata Power Company (TPC) Ltd. Corporate Analysis: How has the company been faring over the past few years? Seek information on its current operations. It is very important to see how the industry to which the company belongs is faring. the interest earned in each quarter will increase the interest earned in subsequent quarters. For that you need to understand financial statements of a company i.63 from the Rs. P/E ratio. future demand of its products etc. 0. 100. managerial capabilities. current size of equity etc. the power of quarterly compounding would give you a total of Rs 1.38%. So. Balance Sheet and Profit and Loss Account contained in the Annual Report of a company.103. then check if at the current price. This is termed as Financial Analysis.. The difference of 0.e. At times prospects of an industry may change drastically by any alterations in business environment.38% may appear insignificant. as it does in the example above.80. In other words. Investment analysts call this as Industry Analysis.would also receive an additional Rs 0. National Thermal Power Company (NTPC) Ltd. the effective rate of return is 10. There are accounts that compound monthly. and even some that compound daily. the frequency with which interest is paid (compounded) will have an effect on effective rate of return. belong to the Power Sector/Industry of India. For example. growth plans.. although the stated annual interest rate is 10%. etc. 25 that was paid after the first quarter. Financial Analysis: If performance of an industry as well as of the company seems good. How to go about systematically analyzing a company? You must look for the following to make the right analysis: Industry Analysis: Companies producing similar products are subset (form a part) of an Industry/Sector. This is known as Corporate Analysis. devaluation of rupee may brighten prospects of all export oriented companies. For this look at the financial performance of the company and certain key financial parameters like Earnings Per Share (EPS). And. as our example showed. its past performance vis-à-vis its competitors etc. Specifics like effect of Government policy. or only four times a year. National Hydroelectric Power Company (NHPC) Ltd. By the end of the year. but it can be huge when you're dealing with large numbers.000 is Rs 380! Another thing to consider is that compounding does not necessarily occur quarterly. For instance.
Auditors’ Report (including Annexure to the Auditors Report) Profit and Loss Account. A detailed annual report is sent on request. liabilities. Which features of an Annual Report should one read carefully? One must read an Annual Report with emphasis on the following: § Director’s Report and Chairman’s stateme nt which are related to the current and future operational performance of a company. 1956 should be either in the account form or the report form. loans and advances Miscellaneous expenditure 74 . how i fared profit-wise during the year. according to the Companies Act.What is an Annual Report? An annual report is a formal financial statement issued yearly by a corporate. § § § § What is a Balance Sheet and a Profit and Loss Account Statement? What is the difference between Balance Sheet and Profit and Loss Account Statements of a company? The Balance sheet of a company shows the financial position of the company at a particular point of time. revenues. expenses and earnings . The annual report shows assets. The balance sheet of a company/firm. Notes to accounts attached to the Balance Sheet. Balance Sheet. Balance Sheet: Account Form Liabilities Share Capital Reserves and Surplus Secured loans Unsecured loans Current liabilities and provisions Assets Fixed Assets Investments Current Assets. Remember an annual report of a company is the best source of information about the financial health of a company. as well as other information of t interest to shareholders.how the company stood at the close of the business year. Companies publish annual reports and send abridged versions to shareholders free of cost.
The period of time is an accounting period/year. Cr Rs. company as on 31s t March 2005. It indicates the revenues and expenses during particular period of time. Cr Rs. 2005 SOURCES OF FUNDS Schedule Page Rs. Sources of Funds 1. 2005 Balance sheet as on 31st March. loans and advances Less: Current liabilities and provisions Net current assets (iv) Miscellaneous expenditure and losses The Profit and Loss account (Income Statement). the expense items. The Box-1 gives the balance sheet of XYZ Ltd.. shows the financial performance of the company/firm over a period of time. The accounting report summarizes the revenue items.44 75 . How to interpret Balance Sheet and Profit and Loss Account of a company? Let’s start with Balance Sheet. Cr As at 31st March. Loan Funds (a) Secured loans (b) Unsecured loans II. BOX-1 XYZ COMPANY LTD. 2004 1 SHAREHOLDERS' FUNDS (a) Capital 1 19 103. Application of Funds (i) Fixed Assets (ii) Investments (iii) Current Assets. on the other hand. and the difference between them (net income) for an accounting period.Balance Sheet: Report Form I. Shareholders’ Funds (a) Share Capital (b) Reserves & surplus 2. As at 31st March. April-March.87 104. Let us understand the balance sheet shown in the Box-1.
18 5 INVESTMENTS 6 23 108.70 439.19 464.57 582.07 7 Less: C URRENT LIABILITIES AND PRIVISIONS (a) Current Liabilities (b) Provisions 11 12 26 26 595. LOANS AND ADVANCES (a) Inventories (b) Sundry Debtors (c) Cash and Bank Balances (d) Loans and Advances 7 8 9 10 24 24 25 25 446.97 3 TOTAL FUNDS EMPLOYED 1066.08 387.58 303.67 110.10 526.83 971.14 2 LOAN FUNDS (a) Secured (b) Unsecured 3 4 21 21 353.23 387.47 66.44 484.21 583.00 734.34 129.32 5.20 350.76 101.31 APPLICATION OF FUNDS 4 FIXED ASSETS (a) Gross Block (b) Less: Depreciation (c) Net Block (d) Capital Work in Progress 5 22 946.36 1165.19 82.07 488.83 767.70 483.03 194.76 76 .22 139.84 482.75 870.74 44.48 6 CURRENT ASSETS.25 300.(b) Reserves and Surplus 2 20 479.65 62.89 483.34 458.22 500.44 430.
When a company/firm starts operations.’s capital in 2005 was Rs. 28th June.31 971. say 31s t March. since company’s fund structure and asset position change everyday due to fund inflow and outflow. However. Note that in Box-1 XYZ COMPANY LTD. What do these sources of funds represent? As shown in a sample balance sheet in Box-1. SDF & CO. The shareholders being the owners. Share capital has been further divided into equity capital and preference capital.98 1066.97 As per our report attached For and on behalf of the Board. The balance sheet of a company is a record showing sources of funds and their application for creating/building assets. Equity capital does not have fixed rate of dividend. Bombay 10th July. TYUR Partner. share part of the profit of the company. called shareholders. The preference capital 77 .87 crore. its owners. as dividend. and (b) Loan Fund is the fund borrowed from outsiders. Q. 103. WERT Partner.W. there are two sources of funds: (a) Shareholders’ Fund (also known as Net Worth) is the fund coming from the owners of the company. ASDFG For A. 2004 YYYY ViceChairman and Managing Director ZZZZZZ Secretary NSDF QWER MNBV Bombay. 2004.8 9 10 NET CURRENT ASSETS [(6) less (7)] TOTAL ASSETS (NET) NO TES TO BALANCE SHEET AND CONTINGENT LIABILITIES 13 27 430. Chartered Accountants. contribute funds called Share Capital.31 184. balance sheets are drawn on a specific date. For HIJKL XXXXX Chairman AAAA BBBB CCCC REFGH LKJH TYUB POIUY Directors Chartered Accountants .
and a right to vote in the Annual General Meeting for passing any resolution. Subscribed capital is that part of the issued capital which is subscribed (accepted) by the public. a part of the profit is retained by the company for meeting fund requirements in future. have right to get dividend. What do terms like authorized. Issued capital is that part of the authorized capital which is offered by the company for being subscribed by members of the public or anybody. Preferential Shareholders do not have voting rights. Called up capital is a part of subscribed capital which has been called up by the company for payment.21 crore in 2005. unlike equity shares. and (b) the return of capital on winding up of the Company. The act defines a preference share as that part of share capital of the Company which enjoys preferential right as to: (a) payment of dividend at a fixed rate during the life time of the Company. 387. and are redeemed after a pre-decided period. For example.000 shares of Rs. subscribed.70 crore in 2004 to Rs. After distributing dividends. Also. who therefore.represents contribution of preference shareholders and has fixed rate of dividend. which are shareholders’ property. note that the reserves and surplus increased from Rs. as declared. issued. if 10. In case of XYZ COMPANY LTD.. The retained profits accumulated over the years are called reserves and surplus. 50 per share has been called up. But Preference shares cannot be traded. 100 each have been subscribed by the public and of which Rs. Then the subscribed capital of the § § § 78 . 479. What is the difference between Equity shareholders and Preferential shareholders? Equity Shareholders are supposed to be the owners of the company. called up and paid up capital mean? § Authorized capital is the maximum capital that a company is authorized to raise.
§ Paid Up capital refers to that part of the called up capital which has been actually paid by the shareholders. They are in the form of debentures. They are fixed deposits. What is meant by application of funds? The funds collected by a company from the owners and outsiders are employed to create following assets: Fixed Assets: These assets are acquired for long-terms and are used for business operation.89 crore in case of the XYZ COMPANY LTD. Current Assets. loans from financial institutions and loans from commercial banks. The land and buildings. 526.000 of which the called up capital of the Company is Rs. Current assets are held for a short-term period for 79 . What is the difference between secured and unsecured loans under Loan Funds? Secured loans are the borrowings against the security i.. inter-corporate borrowings. patents. In case of the XYZ COMPANY LTD. but not meant for resale.. fixed assets are worth Rs.e. and copyrights are the fixed assets.0000. 50. which safeguards creditors in the event of any default on the part of the company. Notice that in case of the XYZ COMPANY LTD. machinery. From the called up capital. This is known as creation of charge. loans and advances from promoters. and Advances: This consists of cash and other resources which can be converted into cash during the business operation.75 crore. Investments: The investments are the financial securities created by investing surplus funds into any non-business related avenues for getting income either for long-term or short-term. 2005. and unsecured loans from the banks.Company works out to Rs. Loans. Some of the shareholders might have defaulted in paying the called up money. calls in arrears is deducted to obtain the paid up capital. 1. against mortgaging some immovable property or hypothecating/pledging some movable property of the company. plant. 129. it was Rs.34 crore as on March 31. Such borrowings amount to Rs. The unsecured loans are other short term borrowings without a specific security. 353.00. Such defaulted amount is called as arrears. Thus incomes and gains from the investments are not from the business operations.
Instead. 2005.Rs. finished goods. Straight Line Method (constant annual method) and Written Down Value Method (depreciation rate decreases over a period of time). and pre-paid expenses. For the XYZ COMPANY LTD. Gross Block-Depreciation = Net Block Rs. current assets are worth Rs. This reduction in value is called ‘Depreciation’. The current assets are in the form of raw materials. 80 . What do the sub-headings under the Fixed Assets like ‘Gross block’ ‘Depreciation’. As per accounting convention. cash. 464. 464. 482. are examples of ‘Capital Work in Progress’. Though loss indicates a decrease in the owners’ equity.20 crore.. debtors.65 The c apital/funds used for a new plant under erection.65 crore as on March 31. The Companies Act 1956 stipulates different rates of depreciation for different types of assets and different methods calculating depreciation. loans and advances. It is assumed that every year the worth of an asset falls due to usage. inventories.84. ‘Net Block’ and Capital-Work in Progress’ mean? The total value of acquiring all fixed assets (even though at different points of time) is called ‘Gross Bloc k’ or ‘Gross Fixed Asset’. all fixed assets except land have a fixed life. 1165. Miscellaneous Expenditures and Losses: The miscellaneous expenditures represent certain outlays such as preliminary expenses and pre-operative expenses not written off.. The worth of the fixed assets after providing for depreciation is called ‘Net Block’. 946. which also has to be taken into account while calculating the fixed assets as it will be converted into gross block soon. the share capital can not be reduced with loss. Net Block was Rs. share capital and losses are shown separately on the liabilities side and assets side of the balance sheet. respectively.meeting day-to day operational expenditure.19 = Rs. namely. In case of the XYZ COMPANY LTD. a machine yet to be commissioned etc.
How is balance sheet summarized? A balance sheet indicates matching of sources of funds with application of funds. pensions. Thus in a balance sheet. Net Current Asset figure of Rs.20 crore.). This amount is called ‘Net Current Assets’ or ‘Net Working Capital’. that consist of Fixed Assets (Rs. These are known as ‘Current Liabilities’. The company thus has a liability to pay though the payment is deferred.) and Net Current Assets (Rs.) and Provisions (Rs. Investments (Rs. 1066. payment of tax etc. In short. 595. ‘Total Funds Employed’ to the tune of Rs. 1066.98 cr. unclaimed dividend. In case of the XYZ Company Ltd. Current Liabilities and Provisions are amounts due to the suppliers of goods and services brought on credit. goods and services brought on credit. etc.) from Current Assets worth Rs. 526.58 cr.). reduce the burden of day-today expenditure on current assets by deferring some of the payments. are from the said two Sources of Funds-Shareholders Funds and Loan Funds.What are Current Liabilities and Provisions and Net Current Assets in the balance sheet? A company may receive many of its daily services for which it does not have to pay immediately like for raw materials.. 430. 81 . A company may also accept advances from the customer. accrued expenses. provisions for taxes. 108. These funds have been utilized to fund Total (Net) Assets of Rs. 139 cr. 1165. For daily operations the company requires funds equal to the current assets less the current liabilities. has been arrived at by deducting Current Liabilities (Rs. In case of the XYZ COMPANY LTD. Similarly the company may have to provide for certain other expenses (though not required to be paid immediately) like dividend to shareholders. These are called ‘Provisions’. Current Liabilities and Provisions.75 cr. dividends.98 cr.31 cr. 430. gratuity.22 cr..31 cr. Total Capital Employed = Net Assets. therefore. advances payments received.
and (c) indicate appropriation of profits.99 RUPEES (in crores) As at 31st March. (b). EXPENDITURE TRANSFERRED TO CAPITAL ACCOUNTS 6. BOX – 2 PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MARCH.82 2316. INVESTMENT ALLOWANCE (UTILISED) RESERVE WRITTEN BACK 10.55 (11. Items from 7 to 12 show the profits available for appropriation and items 13 (a).2) (0.54 48.81 148. 2005 2595. The Box-2 exhibits Profit and Loss Account of XYZ Company Ltd. INVESTMENT ALLOWANCE RESERVE ACCOUNT 9.63 49.26 81.10 INCOME 1.91 73. TAX FOR THE YEAR PROFIT AFTER TAX 8. SALE OF PRODUCTS AND OTHER INCOME EXPENDITURE 2. general reserve and balance carried to the balance sheet.57) 1742.What does a Profit and Loss Account statement consists of? A Profit and Loss Account shows how much profit or loss has been incurred by a company from its income after providing for all its expenditure within a financial year.05 4. it shows the profit appropriation towards dividends.44 234. 2004 1969.66 (15.63 (44. DEPRECIATION 4. MANUFACTURING AND OTHER EXPENSES 3. 2005 PARTICULARS RUPEES (in crores) RUPEES (in crores) As at 31st March.2) (0.54 3. One may also know how the profit available for appropriation is arrived at by using profit after tax as well as portion of reserves. TOTAL EXPENDITURE PROFIT BEFORE TAX 7. CAPITAL REDEMPTION RESERVE 2275. Item -1 represents income . Items from 2 to 6 show various expenditure items. Further. INTEREST 5.5 142.75 102.29 45.27) 1820. DEBENTURE REDEMPTION RESERVE 11.57) 82 .37 54.55 92.
each company tries to give maximum stress on its representation/ misrepresentation. ABC Partner For LMN & co.65 127. Chartered Accountants.97 31.71 127. BALANCE BROUGHT FORWARD FROM PREVIOUS YEAR AMOUNT AVAILABLE FOR APPROPRIATIONS 13.54 100 76. Check for the other income carefully. One should consider the following: § Whether there is an overall improvement of sales as well as profits (operating. If so.26 10 86. DEF Partner Mumbai. gross and net) over the similar period (half-yearly or annual) previous year. the profit and loss statement is the most important document presented to the shareholders. it is good.12. 10th July 2004 GHI ViceChairman and Managing Director STU Secretary PQR Chairman 86. NOTES TO PROFIT AND LOSS ACCOUNT * Details as per Directors Report As per our report attached to the Balance Sheet For XYZ & co.65 217.65 41. for here companies have the scope to manipulate.11 217.97 For and on behalf of the Board AAA BBB CCC DDD Directors Mumbai. Therefore. the company’s operational management is good. But if the other income is derived by § 83 .71 33. 28th June 2004 What should one look for in a Profit and Loss account? For a company. Chartered Accountants. APPROPRIATIONS (a) Proposed Dividends* (b) General Reserve (c) Balance credited to Balance Sheet 14. If the other income stems from dividend on the investments or interest from the loans and advances. because such income is steady.
check whether ratio of these costs to sales could be contained over the previous year. § Also check for the increase of all expenditure items viz. High depreciation may suppress the net profits. it reveals the operating conditions are not conducive to making profits. raw material consumption. but it’s good for the cash flow. If so. Evaluate whether the company could make profit from its operations alone. manpower cost and manufacturing. High interest cost is always a cause of concern because the increased debt burden cannot be reduced in the short run. If so. Calculate the earnings per share and the various ratios. be cautious since such income is not an annual occurrence. the company is operationally profitable. The increase in depreciation is attributed to higher addition of fixed assets. If the profit so obtained is positive. In case of half yearly results. administrative and selling expenses. multiply half yearly earnings per share by 2 to get approximately the annualized earnings per share. § § § 84 . after ignoring all other income except sales.selling any assets or land. check the cash profits and compare whether it has risen. For this you should calculate the profits of the company. Similarly. So instead of looking out for the net profits. then the company’s operations are efficient. Scrutinize the depreciation as well as interest for any abnormal increase. which is good for long term operations of the company. which is a healthy sign. See whether the increases in these costs are more than the increase in sales.
Assets Current . (II) Leverage/Capital structure ratio. Higher the current ratio. Properly analyzed and interpreted financial statements can provide valuable insights into a firm’s performance.Assets Current . To extract the information from the financial statements. Certain ratios. (ii) Acid-test Ratio = Quick . (iii) Turnover Ratios. larger is the amount of rupees available per rupee of liability). 85 . greater the short-term solvency (i.e. It is based upon the relationship between current assets and current liabilities. which indicate the liquidity of a firm. and (III) Profitability ratios.Liabilitie s Quick assets are defined as current assets excluding inventories and prepaid expenses. are (i) Current Ratio.10. RATIO ANALYSIS Mere statistics/data presented in the different financial statements do not reveal the true picture of a financial position of a firm.Liabilitie s The current ratio measures the ability of the firm to meet its current liabilities from the current assets. (ii) Acid Test Ratio. (i) Current ratio = Current . a number of tools are used to analyse such statements. The acid-test ratio is a measurement of firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities. Generally speaking 1:1 ratio is considered to be satisfactory. (I) Liquidity ratios: Liquidity refers to the ability of a firm to meet its financial obligations in the short-term which is less than a year. Financial ratios can be broadly classified into three groups: (I) Liquidity ratios. The most popular tool is the Ratio Analysis.
the greater the efficiency of credit management. Debtors Turnover Ratio. the cost of goods sold means sales minus gross profit. Average Collection Period = AverageDebtors AverageDailyCreditSa les Average Collection Period represents the number of days’ worth credit sales that is locked in debtors (accounts receivable). then net sales figure is to be used. Average Collection Period.(iii) Turnover Ratios: Turnover ratios measure how quickly certain current assets are converted into cash or how efficiently the assets are employed by a firm. The important turnover ratios are: Inventory Turnover Ratio. more the efficient of inventory management. Higher the ratio. Please note that the Average Collection Period and the Accounts Receivable (Debtors) Turnover are related as follows: Average Collection Period = 365 Days DebtorsTur nover 86 . Fixed Assets Turnover and Total Assets Turnover Inventory Turnover Ratio = CostofGoodsSold AverageInventory Where. The inventory turnover ratio tells the efficiency of inventory management. ‘Average Inventory’ refers to simple average of opening and closing inventory. Debtors’ Turnover Ratio = NetCreditSales AverageAccounts Re ceivable( Debtors ) The ratio shows how many times accounts receivable (debtors) turn over during the year. Higher the debtors turnover. If the figure for net credit sales is not available.
In other words. Debt-Equity ratio = Total Debt Total Equity The desirable/ideal proportion of the two components (high or low ratio) varies from industry to industry. Total Assets turnover ratio = Net. (i) Debt-Equity ratio reflects relative contributions of creditors and owners to finance the business.Sales NetFixedAssets Total Assets turnover ratio measures how efficiently all types of assets are employed. Broadly there are two sets of ratios: First. The second set of ratios which are calculated from Profit and Loss Account are: The interest coverage ratio and debt service coverage ratio are coverage ratio to leverage risk.Fixed Assets turnover ratio measures sales per rupee of investment in fixed assets. Debt-Asset Ratio = Total Debt Total Assets 87 . The total assets comprise of permanent capital plus current liabilities. Some such ratios are: Debt to Equity and Debt to Asset ratios. It is calculated as follows: Fixed Assets turnover ratio = Net. how efficiently fixed assets are employed. Such long term solvency of a firm can be judged by using leverage or capital structure ratios. (ii) Debt-Asset Ratio: Total debt comprises of long term debt plus current liabilities. the ratios based on the relationship between borrowed funds and owner’s capital which are computed from the balance sheet. Higher ratio is preferred.Sales AverageTotalAssets (II) Leverage/Capital structure Ratios: Long term financial strength or soundness of a firm is measured in terms of its ability to pay interest regularly or repay principal on due dates or at the time of maturity.
term. And . The lenders use this ratio to assess debt servicing capacity of a firm.Tax FixedAssets + CurrentAssets (iv) Return on Capital Employed = Net ProfitAfterTax TotalCapital Employed (Here.on.The second set or the coverage ratios measure the relationship between proceeds from the operations of the firm and the claims of outsiders.loan Interest on Term loan + Re payment of term loan (III) Profitability ratios: Profitability and operating/management efficiency of a firm is judged mainly by the following profitability ratios: (i) Gross Profit Ratio (%) = Gross Profit * 100 Net Sales (ii) Net Profit Ratio (%) = Net Profit * 100 Net Sales Some of the profitability ratios related to investments are: (iii) Return on Total Assets = Pr ofit. (iv) Debt Service Coverage Ratio (DSCR) is a m ore comprehensive and apt to compute debt service capacity of a firm.tax + Depreciation + OtherNoncashExpenditure + Interest . Financial institutions calculate the average DSCR for the period during which the term loan for the project is repayable. (iii) Interest Coverage ratio = Earnings Before Interest and Taxes Interest Higher the interest coverage ratio better is the firm’s ability to meet its interest burden. Total Capital Employed = Total Fixed Assets + Current Assets Current Liabilities) 88 .Before. The Debt Service Coverage Ratio is defined as follows: Pr ofit .Interest .after.
A measure of his well being is reflected by return on equity.The. that is.e. the equity shareholders receive a distribution of profits or assets on liquidation. EPS = Net Profit.Shareholder Number of Ordinary Shares Outstanding (ii) Price-earnings ratios = P/E Ratio = Market Pr ice per Share EPS 89 . It is calculated by dividing the profits available to the shareholders by number of outstanding shares. The profits available to the ordinary shareholders are arrived at as net profits after taxes minus preference dividend. Available. It indicates the value of equity in the market. i.To..(v) Return on Shareholders’ Equity = Net Pr ofit After Tax AverageTotal Shareholders ' Equity or NetWorth (Net worth includes Shareholders’ equity capital plus reserves and surplus) A common (equity) shareholder has only a residual claim on profits and assets of a firm. There are several other measures to calculate return on shareholders’ equity of which the following are the stock market related ratios: (i) Earnings Per Share (EPS): EPS measures the profit available to the equity shareholders per share. the amount that they can get on every share held. only after claims of creditors and preference shareholders are fully met.
20.20 11.60 0.00 69.00.00 90 .Illustration: Balance Sheet of ABC Co. as on March 31.00 16.00 2.00 Assets Fixed Assets (net) Amount 60.80 16.00 Total Net Profit 16.00. in Crore) Liabilities Share Capital (1.00 21.00 3.00 12.40 Amount 16. Expenses Gross Profit Total Administrative and Personnel Expenses Selling and Distribution Expenses Depreciation Interest Net Profit Total Income Tax Equity Dividend Retained Earning Total Market price per equity share = Rs. Ltd.00 Total Gross Profit 120.00 16.00 9.00 1.50 2.00 120.00 Profit & Loss Account of ABC Co. Ltd.00 16.00 16.00 9.00 Amount 13.00 Total 9.00 15. 2005 (Rs.10 each) Reserves & Surplus Secured Loans Unsecured Loans Current Liabilities & Provisions 22.00 25. for the year ending on March 31.50 1.00 4.000 equity shares of Rs.00 9.00 10. 2005: Particulars Opening Stock Purchases Wages and Salaries Other Mfg.80 10.00 Particulars Sales (net) Closing Stock Amount 105.00 Current Assets: Cash & Bank Debtors Inventories Pre-paid expenses Investments Total 100 Total 0.00 2.60 100 23.
00) = 46/38 = 1.00+25.13157 or 13.00 = 0.80 =8.46 Quick Ratio = Quick Assets / Current Liabilities =Current Assets-(inventory + prepaid expenses)/Current Liabilities = [23.36 Debtors Turnover (Debtors) =105/11.57 % Return on Shareholders’ Equity = Net Profit after tax/Net worth = 5.00/105.60+0.40-(10.8983 Ratio= Net Sales/Average account receivables Average Collection period = 365 days / Debtors turnover = 365 days/8.16% 91 .75 Debt to Equity Ratio = Debt/ Equity = (21.8983 = 41 days Fixed Assets Turnover ratio = Net Sales / Net Fixed Assets = 105/60 = 1.75 Inventory Turnover Ratio = Cost of goods sold/Average Inventory = (Net Sales-Gross Profit)/ [(opening stock+closing stock)/2] = (105-16)/ [(15+13)/2] = 89/14 = 6.Current Ratio = Current Assets / Current Liabilities = 23.00)/(16.24% Net Profit Ratio = Net Profit / Net Sales = 9/105.8)]/16.00+22.00 = 1.00/(16.0857 or 8.21 Gross Profit Ratio = Gross Profit/Net Sales = 16.00 = 12.00/16.15238 or 15.40/16.00 = 0.00 = 0.00+22.00) =0.
National Stock Exchange of India Ltd.Credit Analysis & Research Limited ICRA .Initial Public Offer DP .American Stock Exchange OTC.Depository Participant DRF . FMC – Forward Markets Commission NYSE. SEBI .New York Stock Exchange AMEX .NSE’s Certification in Financial Markets NSDL .Credit Rating Information Services of India Limited CARE .Remat Request Form NAV – Net Asset Value EPS – Earnings Per Share DSCR .Investment Information and Credit Rating Agency of India ISC – Investor Service Cell IPF – Investor Protection Fund SCRA .Securities Contract (Regulation) Act SCRR – Securities Contract (Regulation) Rules 92 . NSCCL .National Commodity and Derivatives Exchange Ltd.Central Depository Services (India) Limited NCDEX .Abbreviations: § § § § § § § § § § § § § § § § § § § § § § § § § § § § NSE.Over-the-Counter Market LM – Lead Manager IPO.Demat Request Form RRF .Debt Service Coverage Ratio S&P – Standard & Poor IISL .National Securities Depository Limited CDSL .Securities Exchange Board of India NCFM .National Securities Clearing Corporation Ltd.India Index Services & Products Ltd CRISIL.