finance basic ncfm module

8/12/2019 finance basic NCFM module

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CONTENTS

INVESTMENT BASICS.......................................................................................................6

What is Investment?...............................................................................................................

Why should one invest? .............................................................................................................6When to start Investing?.........................................................................................................What care should one take while investing?......................................................................7What is meant by Interest?......................................................................................................What factors determine interest rates?...............................................................................7What are various options available for investment?......................................................8What are various Shortterm financial options available for investment?.............8What are various !ongterm financial o ptions available for investment?.............."What is meant by a Stock #$change?................................................................................%&What is an '#(uity)*Share?......................................................................................................%What is a '+ebt Instrument)?.................................................................................................%%

What is a +erivative?..............................................................................................................What is a ,utual -und?...........................................................................................................What is an Inde$?...................................................................................................................What is a +epository? ...............................................................................................................12What is +emateriali/ation?.....................................................................................................%

SECURITIES ...........................................................................................................................13

What is meant by 'Securities)?..............................................................................................%0

What is the function of Securities ,arket?.......................................................................%0Which are the securities one can invest in?.....................................................................%0

REGULATOR ................................................................................................................................14Why does Securities ,arket need 1egulators?...............................................................%2Who regulates the Securities ,arket?................................................................................%2What is S#3I and what is its role?.......................................................................................%2

PARTICIPANTS ............................................................................................................................15Who are the participants in the Securities ,arket?......................................................%4Is it necessary to transact through an intermediary?..................................................%4What are the segments of Securities ,arket?................................................................%4

PRIMARY MARKET............................................................................................................16

What is the role of the '5rimary ,arket)? .........................................................................16

What is meant by -ace alue of a share*debenture? ..................................................16What do you mean by the term 5remium and +iscount in a Security ,arket?.%6

ISSUE OFSHARES ......................................................................................................................17Why do companies need to issue shares to the public? .............................................17What are the different kinds of issues? .............................................................................17What is meant by Issue price?..............................................................................................%8What is meant by ,arket apitalisation?..........................................................................%8

What is the difference between public issue and private placement?...................%"What is an Initial 5ublic ffer 9I5:?..................................................................................%"

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3.2

4.

4.1

4.1.1

Who decides the price of an issue? .....................................................................................19What does 'price discovery through 3ook 3uilding 5rocess) mean?......................%"What is the main difference between offer of shares through book building andoffer of shares through normal public issue?..................................................................&What is utff 5rice?.............................................................................................................What is the floor price in case of book building? ...........................................................20What is a 5rice 3and in a book built I5?........................................................................&

Who decides the 5rice 3and?.................................................................................................%What is minimum number of days for which a bid should remain open duringbook building?........................................................................................................................an open outcry system be used for book building?...................................................%

an the individual investor use the book building facility to make anapplication?............................................................................................................................;ow does one know if shares are allotted in an I5*offer for sale ? What is thetimeframe for getting refund if shares not allotted?....................................................%;ow long does it take to get the shares listed after issue?.......................................%What is the role of a '1egistrar) to an issue?...................................................................+oes lobal +epository 1eceipts?..............................................................6

SECONDARY MARKET.....................................................................................................27

INTRODUCTION ...........................................................................................................................27

What is meant by Secondary market?...............................................................................7What is the role of the Secondary ,arket?......................................................................7

What is the difference between the 5rimary ,arket and the Secondary ,arket?...........................................................................................................................................................27

Stock Exchange .........................................................................................................28

What is the role of a Stock #$change in buying and selling shares?.....................8What is +emutualisation of stock e$changes?................................................................8;ow is a demutualised e$change different from a mutual e$change?..................8urrently are there any demutualised stock e$changes in India?..........................8

4.1.2 Stock Trading ..................................................................................................................29What is Screen 3ased rading?............................................................................................"

What is


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;ow does an investor get access to internet based trading facility?....................."What is a ontract rowth Stock * alue Stock? .......................................37;ow can one ac(uire e(uity shares?..................................................................................08What is 3id and =sk price?.....................................................................................................0

What is a 5ortfolio?.................................................................................................................What is +iversification?...........................................................................................................What are the advantages of having a diversified portfolio?......................................0"

4.2.2. Det Investment..........................................................................................................4!

What is a '+ebt Instrument)?.................................................................................................2&What are the features of debt instruments?....................................................................2&What is meant by 'Interest) payable by a debenture or a bond?............................2%What are the Segments in the +ebt ,arket in India? .................................................41Who are the 5articipants in the +ebt ,arket?................................................................2%=re bonds rated for their credit (uality? ...........................................................................41;ow can one ac(uire securities in the debt market?...................................................2%

DERIVATIVES .......................................................................................................................42

What are ypes of +erivatives?............................................................................................2What is an 'ption 5remium)? ...............................................................................................42What is 'ommodity #$change)? ..........................................................................................43What is meant by 'ommodity)?...........................................................................................20What is ommodity derivatives market? ..........................................................................43What is the difference between ommodity and -inancial derivatives?...............20

DEPOSITORY .........................................................................................................................44

;ow is a depository similar to a bank?..............................................................................22

Which are the depositories in India?..................................................................................22What are the benefits of participation in a depository? ..............................................44Who is a +epository 5articipant 9+5:?...............................................................................24+oes one need to keep any minimum balance of securities in his account withhis +5? ............................................................................................................................................45

What is an ISI


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8.

8.1

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;ow can one convert physical holding into electronic holding i.e. how can onedematerialise securities?.........................................................................................................2an odd lot shares be dematerialised?..............................................................................26+o dematerialised shares have distinctive numbers?..................................................26an electronic holdings be converted into 5hysical certificates?.............................26an one dematerialise his debt instruments@ mutual fund units@ governmentsecurities in his demat account?..........................................................................................26

MUTUAL FUNDS...................................................................................................................4

What is the 1egulatory 3ody for ,utual -unds?............................................................27

What are the benefits of investing in ,utual -unds?...................................................27What is


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What is #ffective =nnual return?..........................................................................................7;ow to go about systematically analy/ing a company?..............................................70What is an =nnual 1eport?.....................................................................................................72Which features of an =nnual 1eport should one read carefully?.............................72

What is a 3alance Sheet and a 5rofit and !oss =ccount Statement? What is thedifference between 3alance Sheet and 5rofit and !oss =ccount Statements of acompany?..............................................................................................................................

2What do these sources of funds represent?.....................................................................77

What is the difference between #(uity shareholders and 5referentialshareholders?.........................................................................................................................What is the difference between secured and unsecured loans under !oan-unds?...................................................................................................................................7"What is meant by application of funds?............................................................................7"What do the subheadings under the -i$ed =ssets like '>ross block)'+epreciation)@ '


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1. I!"#$%#!% B'$()$

*+'% ($ I!"#$%#!%,

he money you earn is partly spent and the rest saved for meeting future

e$penses. Instead of keeping the savings idle you may like to use savings in

order to get return on it in the future. his is called Invest ment.

*+- $+/0 !# (!"#$%,

ne needs to invest toA

earn return on your idle resources

generate a specified sum of money for a specific goal in lifemake a provision for an uncertain future

ne of the important reasons why one needs to invest wisely is to meet the

cost ofIn"#ation.Inflation is the rate at which the cost of living increases.

he cost of living is simply what it costs to buy the goods and services you

need to live. 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. -or e$ample@ if there was a 6B inflation rate for the ne$t & years@ a

1s. %&& purchase today would cost 1s. 0% in & years. his is why it is

important to consider inflation as a factor in any longterm investment

strategy. 1emember to look at an investmentCs CrealC rate of return@ which is

the return after inflation. he aim of investments should be to provide a

return above the inflation rate to ensure that the investment does notdecrease in value. -or e$ample@ if the annual inflation rate is 6B@ then the

investment will need to earn more than 6B to ensure it increases in value.

If the afterta$ return on your investment is less than the inflation rate@ then

your assets have actually decreased in valueD that is@ they wonCt buy as

much today as they did last year.

*+#! % $%'% I!"#$%(!,

he sooner one starts investing the better. 3y investing early you allow your

investments more time to grow@ whereby the concept of compounding 9as

we shall see later: increases your income@ by accumulating the principal and

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0.

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the interest or dividend earned on it@ year after year. he three golden rules

for all investors areA

Invest early

Invest regularly

Invest for long term and not short term

*+'% )'# $+/0 !# %'# +(0# (!"#$%(!,

3efore making any investment@ one must ensure toA

obtain written documents e$plaining the investment

read and understand such documents

verify the legitimacy of the investment

find out the costs and benefits associated with the investment

assess the riskreturn profile of the investment

know the li(uidity and safety aspects of the investment

ascertain if it is appropriate for your specific goals

compare these details with other investment opportunities available

e$amine if it fits in with other investments you are considering or you

have already made

%&. deal only through an authorised intermediary

%%. seek all clarifications about the intermediary and the investment

%. e$plore the options available to you if something were to go wrong@

and then@ if satisfied@ make the investment.

hese are called theT$e#ve Im%ortant Ste%s to Investing.

*+'% ($ #'!% - I!%##$%,

When we borrow money@ we are e$pected to pay for using it E this is known

as Interest. Interest is an amount charged to the borrower for the privilege

of using the lender)s money. Interest is usually calculated as a percentage of

the principal balance 9the amount of money borrowed:. he percentage rate

may be fi$ed for the life of the loan@ or it may be variable@ depending on the

terms of the loan.

*+'% ')%$ #%#(!# (!%##$% '%#$,

When we talk of interest rates@ there are different types of interest rates

rates that banks offer to their depositors@ rates that they lend to theirborrowers@ the rate at which the >overnment borrows in the

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3ond*>overnment Securities market@ rates offered to investors in small

savings schemes like overnment borrowings

Supply of money

Inflation rate

he 1eserve 3ank of India and the >overnment policies which

determine some of the variables mentioned above

*+'% '# "'(/$ %(!$ '"'(0'0# (!"#$%#!%,

ne may invest inA

P+-$()'0 '$$#%$like real estate@ gold*Fewellery@ commodities etc.

and*or

F(!'!)('0 '$$#%$such as fi$ed deposits with banks@ small saving

instrume nts with post offices@ insurance*provident*pension fund etc.

or securities market related instruments like shares@ bonds@

debentures etc.

*+'% '# "'(/$ S+%%# (!'!)('0 %(!$ '"'(0'0#

(!"#$%#!%,

3roadly speaking@ savings bank account@ money market*li(uid funds andfi$ed deposits with banks may be considered as shortterm financial

investment optionsA

S'"(!$ B'! A))/!%is often the first banking product people

use@ which offers low interest 92B4B p.a.:@ making them only

marginally better than fi$ed deposits.

M!#- M'#% L(:/( F/!$are a speciali/ed form of mutual

funds that invest in e$tremely shortterm fi$ed income instruments

and thereby provide easy li(uidity. Gnlike most mutual funds@ money

market funds are primarily oriented towards protecting your capital

and then@ aim to ma$imise returns. ,oney market funds usually yield

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better returns than savings accounts@ but lower than bank fi$ed

deposits.

F(;# D#$(%$ (%+ B'!$are also referred to as term deposits

and minimum investment period for bank -+s is 0& days. -i$ed

+eposits with banks are for investors with low risk appetite@ and may

be considered for 6% months investment period as normallyinterest on less than 6 months bank -+s is likely to be lower than

money market fund returns.

*+'% '# "'(/$ L!%# (!'!)('0 %(!$ '"'(0'0#

(!"#$%#!%,

5ost ffice Savings Schemes@ 5ublic 5rovident -und@ ompany -i$ed

+eposits@ 3onds and +ebentures@ ,utual -unds etc.

P$% O()# S'"(!$


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annually or annually. hey can also be cumulative fi$ed deposits

where the entire principal alongwith the interest is paid at the end of

the loan period. he rate of interest varies between 6"B per annum

for company -+s. he interest received is after deduction of ta$es.

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said to have &@&&@&&& e(uity shares of 1s %& each. he holders of such

shares are members of the company and have voting rights.

*+'% ($ ' =D#% I!$%/#!%>,

+ebt instrument represents a contract whereby one party lends money toanother on predetermined terms with regards to rate and periodicity of

interest@ repayment of principal amount by the borrower to the lender.

In the Indian securities markets@ the term 'bond) is used for debt

instruments issued by the entral and State governments and public sector

organi/ations and the termdeenture)is used for instruments issued by

private corporate sector.

*+'% ($ ' D#("'%("#,

+erivative is a product whose value is derived from the value of one or morebasic variables@ called underlying. he underlying asset can be e(uity@ inde$@

foreign e$change 9fore$:@ commodity or any other asset.

+erivative products initially emerged as hedging devices against fluctuations

in commodity prices and commoditylinked derivatives remained the sole

form of such products for almost three hundred years. he financial

derivatives came into spotlight in post%"7& period due to growing instability

in the financial markets. ;owever@ since their emergence@ these products

have become very popular and by %""&s@ they accounted for about two

thirds of total transactions in derivative products.

*+'% ($ ' M/%/'0 F/!,

= ,utual -und is a body corporate registered with S#3I 9Securities #$change

3oard of India: that pools money from individuals*corporate investors and

invests the same in a variety of different financial instruments or securities

such as e(uity shares@ >overnment securities@ 3onds@ debentures etc.

,utual 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. ,utual funds issue units to the investors. he 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.

he investment obFectives outlined by a ,utual -und in its prospectus are

binding on the ,utual -und scheme. he investment obFectives specify theclass of securities a ,utual -und can invest in. ,utual -unds invest in

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various asset classes like e(uity@ bonds@ debentures@ commercial paper and

government securities. he schemes offered by mutual funds vary from fund

to fund. Some are pure e(uity schemesD others are a mi$ of e(uity and

bonds. Investors are also given the option of getting dividends@ which are

declared periodically by the mutual fund@ or to participate only in the capital

appreciation of the scheme.

*+'% ($ '! I!#;,

=n Inde$ shows how a specified portfolio of share prices are moving in order

to give an indication of market trends. It is a basket of securities and the

average price movement of the basket of securities indicates the inde$

movement@ whether upwards or downwards.

*+'% ($ ' D#$(%-,

= depository is like a bank wherein the deposits are securities 9vi/. shares@debentures@ bonds@ government securities@ units etc.: in electronic form.

*+'% ($ D#'%#('0(@'%(!,

+emateriali/ation is the process by which physical certificates of an investor

are converted to an e(uivalent number of securities in electronic form and

credited to the investor)s account with hisDe%ository *artici%ant9+5:.

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t

2. SECURITIES

*+'% ($ #'!% - =S#)/(%(#$>,

he definition of 'Securities) as per the Securities ontracts 1egulation =ct

9S1=:@ %"46@ includes instruments such as shares@ bonds@ scrips@ stocks or

other marketable securities of similar nature in or of any incorporate

company or body corporate@ government securities@ derivatives of securities@

units of collective investment scheme@ interest and rights in securities@

security receipt or any other instruments so declared by the entral

>overnment.

*+'% ($ %+# /!)%(! S#)/(%(#$ M'#%,

Securities ,arkets is a place where buyers and sellers of securities can enterinto transactions to purchase and sell shares@ bonds@ debentures etc.

-urther@ it performs an important role of enabling corporates@ entrepreneurs

to raise resources for their companies and business ventures through public

issues. ransfer of resources from those having idle resources 9investors: to

others who have a need for them 9corporates: is most efficiently achieved

through the securities market. Stated formally@ securities markets provide

channels for reallocation of savings o investments and entrepreneurship.

Savings are linked to investments by a variety of intermediaries@ through a

range of financial products@ called 'Securities).

*+()+ '# %+# $#)/(%(#$ !# )'! (!"#$% (!,

Shares

>overnment Securities

+erivative products

Gnits of ,utual -unds etc.@ are some of the securities investors in the

securities market can invest in.

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2.1 R#/0'%

*+- #$ S#)/(%(#$ M'#% !## R#/0'%$,

he absence of conditions of perfect competition in the securities marketmakes the role of the 1egulator e$tremely important. he regulator ensures

that the market participants behave in a desired manner so that securities

market continues to be a maFor source of finance for corporate and

government and the interest of investors are protected.

*+ #/0'%#$ %+# S#)/(%(#$ M'#%,

he responsibility for regulating the securities market is shared by

+epartment of #conomic =ffairs 9+#=:@ +epartment of ompany =ffairs

9+=:@ 1eserve 3ank of India 913I: and Securities and #$change 3oard of

India 9S#3I:.

*+'% ($ SEBI '! +'% ($ (%$ 0#,

he Securities and #$change 3oard of India 9S#3I: is the regulatory

authority in India established under Section 0 of S#3I =ct@ %"". S#3I =ct@

%"" provides for establishment of Securities and #$change 3oard of India

9S#3I: with statutory powers for 9a: protecting the interests of investors in

securities 9b: promoting the development of the securities market and 9c:

regulating the securities market. Its regulatory Furisdiction e$tends over

corporates in the issuance of capital and transfer of securities@ in addition to

all intermediaries and persons associated with securities market. S#3I has

been obligated to perform the aforesaid functions by such measures as it

thinks fit. In particular@ it has powers forA

1egulating the business in stock e$changes and any other securities

markets

1egistering and regulating the working of stock brokers@ subEbrokers

etc.

5romoting and regulating selfregulatory organi/ations

5rohibiting fraudulent and unfair trade practic es

alling for information from@ undertaking inspection@ conducting

in(uiries and audits of the stock e$changes@ intermediaries@ self E

regulatory organi/ations@ mutual funds and other persons associated

with the securities market.

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2.2 P'%()('!%$

*+ '# %+# '%()('!%$ (! %+# S#)/(%(#$ M'#%,

he securities market essentially has three categories of participants@

namely@ the issuers of securities@ investors in securities and the

intermediaries@ such as merchant bankers@ brokers etc. While the corporates

and government raise resources from the securities market to meet their

obligations@ it is households that invest their savings in the securities

market.

I$ (% !#)#$$'- % %'!$')% %+/+ '! (!%##('-,

It is advisable to conduct transactions through an intermediary. -or e$ample

you need to transact through a trading member of a stock e$change if youintend to buy or sell any security on stock e$changes. Kou need to maintain

an account with a depository if you intend to hold securities in demat form.

Kou need to deposit money with a banker to an issue if you are subscribing

to public issues. Kou get guidance if you are transacting through an

intermediary. hose a S#3I registered intermediary@ as he is accountable for

its activities. he list of registered intermediaries is available with

e$changes@ industry associations etc.

*+'% '# %+# $##!%$ S#)/(%(#$ M'#%,

he securities market has two interdependent segmentsA the primary 9newissues: market and the secondary market. he primary market provides the

channel for sale of new securities while the secondary market deals in

securities previously issued.

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3. PRIMARY MARKET

*+'% ($ %+# 0# %+# =P('- M'#%>,

he primary market provides the channel for sale of new securities. 5rimary

market provides opportunity to issuers of securitiesD >overnment as well as

corporates@ to raise resources to meet their re(uirements of investment

and*or discharge some obligation.

hey may issue the securities at face value@ or at a discount*premium and

these securities may take a variety of forms such as e(uity@ debt etc. hey

may issue the securities in domestic market and*or international market.

*+'% ($ #'!% - F')# V'0/# ' $+'#?##!%/#,

he nominal or stated amount 9in 1s.: assigned to a security by the issuer.

-or shares@ it is the original cost of the stock shown on the certificateD for

bonds@ it is the amount paid to the holder at maturity. =lso known as par

value or simply par. -or an e(uity share@ the face value s usually a very

small amount 91s. 4@ 1s. %&: and does not have much bearing on the price

of the share@ which may (uote higher in the market@ at 1s. %&& or 1s. %&&&

or any other price. -or a debt security@ face value is the amount repaid to

the investor when the bond matures 9usually@ >overnment securities and

corporate bonds have a face value of 1s. %&&:. he price at which the

security trades depends on the fluctuations in the interest rates in the

economy.

*+'% -/ #'! - %+# %# P#(/ '! D($) /!% (! '

S#)/(%- M'#%,

Securities are generally issued in denominations of 4@ %& or %&&. his is

known as the -ace alue or 5ar alue of the security as discussed earlier.

When a security is sold above its face value@ it is said to be issued at a

5remium and if it is sold at less than its face value@ then it is said to be

issued at a +iscount.

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3.1 I$$/# S+'#$

*+- )'!(#$ !## % ($$/# $+'#$ % %+# /0(),

,ost companies are usually started privately by their promoter9s:. ;owever@

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. So companies invite the public to contribute towards the e(uity

and issue shares to individual investors. he way to invite share capital from

the public is through a+*u#ic Issue).Simply stated@ a public issue is an offer

to the public to subscribe to the share capital of a company. nce this is

done@ the company allots shares to the applicants as per the prescribed

rules and regulations laid down by S#3I.

*+'% '# %+# (##!% (!$ ($$/#$,

5rimarily@ issues can be classified as a 5ublic@ 1ights or 5referential issues

9also known as private placements:. While public and rights issues involve a

detailed procedure@ private placements or preferential issues are relatively

simpler. he classification of issues is illustrated belowA

I!(%('0 P/0() O#(! IPOis when an unlisted company makes either a

fresh issue of securities or an offer for sale of its e$isting securities or both

for the first time to the public. his paves way for listing and trading of the

issuer)s securities.

A 00 ! /0() #(! F/%+# I$$/#is when an already listed

company makes either a fresh issue of securities to the public or an offer for

sale to the public@ through an offer document.

R(+%$ I$$/#is when a listed company which proposes to issue fresh

securities to its e$isting shareholders as on a record date. he rights are

normally offered in a particular ratio to the number of securities held prior to

the issue. his route is best suited for companies who would like to raise

capital without diluting stake of its e$isting shareholders.

A P###!%('0 ($$/#is an issue of shares or of convertible securities by

listed companies to a select group of persons under Section 8% of the

ompanies =ct@ %"46 which is neither a rights issue nor a public issue. his

is a faster way for a company to raise e(uity capital. he issuer companyhas to comply with the ompanies =ct and the re(uirements contained in

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the hapter pertaining to preferential allotment in S#3I guidelines which

interalia include pricing@ disclosures in notice etc.

C0'$$(()'%(! I$$/#$

I$$/#$

5ublic

Initial 5ublic ffering

1ights 5referential

-urther 5ublic ffering

-resh Issue ffer for Sale -resh Issue ffer for Sale

*+'% ($ #'!% - I$$/# ()#,

he price at which a companyCs shares are offered initially in the primary

market is called as the Issue price. When they begin to be traded@ themarket price may be above or below the issue price.

*+'% ($ #'!% - M'#% C'(%'0($'%(!,

he market value of a (uoted company@ which is calculated by multiplying

its current share price 9market price: by the number of shares in issue is

called as market capitali/ation. #.g. ompany = has %& million shares in

issue. he current market price is 1s. %&&. he market capitalisation of

comp any = is 1s. %&&& million.

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*+'% ($ %+# (##!)# #%##! /0() ($$/# '! ("'%#

0')##!%,

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@ it is a public issue. 3ut if the

issue is made to a select set of people@ it is called private placement. =s per

ompanies =ct@ %"46@ an issue becomes public if it results in allotment to 4&persons or more. his means an issue can be privately placed where an

allotment is made to less than 4& persons.

*+'% ($ '! I!(%('0 P/0() O# IPO,

=n Initial 5ublic ffer 9I5: is the selling of securities to the public in the

primary market. It is when an unlisted company makes either a fresh issue

of securities or an offer for sale of its e$isting securities or both for the first

time to the public. his paves way for listing and trading of the issuer)s

securities. he sale of securities can be either through book building or

through normal public issue.

*+ #)(#$ %+# ()# '! ($$/#,

Indian primary market ushered in an era of free pricing in %"". -ollowing

this@ the guidelines have provided that the issuer in consultation with

,erchant 3anker shall decide the price. here is no price formula stipulated

by S#3I. S#3I does not play any role in price fi$ation. he company and

merchant banker are however re(uired to give full disclosures of the

parameters which they had considered while deciding the issue price. here

are two types of issues@ one where company and !ead ,erchant 3anker fi$ a

price 9called fi$ed price: and other@ where the company and the !ead,anager 9!,: stipulate a floor price or a price band and leave it to market

forces to determine the final price 9price discovery through book building

process:.

*+'% #$ =()# ($)"#- %+/+ B B/(0(! P)#$$>

#'!,

3ook 3uilding is basically a process used in I5s for efficient price discovery.

It is a mechanism where@ during the period for which the I5 is open@ bids

are collected from investors at various prices@ which are above or e(ual to

the floor price. he offer price is determined after the bid closing date.

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*+'% ($ %+# '(! (##!)# #%##! # $+'#$ %+/+

/(0(! '! # $+'#$ %+/+ !'0 /0() ($$/#,

Priceat which securities will be allotted is not known in case of offer of

shares through 3ook 3uilding while in case of offer of shares through normal

public issue@ price is known in advance to investor. Gnder 3ook 3uilding@

investors bid for shares at the floor price or above and after the closure ofthe book building process the price is determined for allotment of shares.

In case of 3ook 3uilding@ thedemandcan be known everyday as the book

is being built. 3ut in case of the public issue the demand is known at the

close of the issue.

*+'% ($ C/%O P()#,

In a 3ook building issue@ the issuer is re(uired to indicate either the price

band or a floor price in the prospectus. he actual discovered issue price can

be any price in the price band or any price above the floor price. his issueprice is called Lutff 5riceM. he issuer and lead manager decides this after

considering the book and the investors) appetite for the stock.

*+'% ($ %+# 0 ()# (! )'$# /(0(!,

-loor price is the minimum price at which bids can be made.

*+'% ($ ' P()# B'! (! ' /(0% IPO,

he prospectus may contain either the floor price for the securities or a priceband within which the investors can bid. he spread between the floor and

the cap of the price band shall not be more than &B. In other words@ it

means that the cap should not be more than %&B of the floor price. he

price band can have a revision and such a revision in the price band shall be

widely disseminated by informing the stock e$changes@ by issuing a press

release and also indicating the change on the relevant website and the

terminals of the trading members participating in the book building process.

In case the price band is revised@ the bidding period shall be e$tended for a

further period of three days@ subFect to the total bidding period not

e$ceeding ten days.

20


21/92

*+ #)(#$ %+# P()# B'!,

It may be understood that the regulatory mechanism does not play a role in

setting the price for issues. It is up to the company to decide on the price or

the price band@ in consultation with ,erchant 3ankers.

*+'% ($ (!(/ !/# '-$ +()+ ' ( $+/0#'(! #! /(! /(0(!,

he 3ook should remain open for a minimum of 0 days.

C'! #! /%)- $-$%# # /$# /(0(!,


22/92

*+'% ($ %+# 0# ' =R#($%'> % '! ($$/#,

he 1egistrar finali/es 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. he !ead ,anager coordinates with the

1egistrar to ensure follow up so that that the flow of applications fromcollecting bank branches@ processing of the applications and other matters

till the basis of allotment is finali/ed@ dispatch security certificates and

refund orders completed and securities listed.

D#$ NSE "(# '!- ')(0(%- IPO,

Kes.


23/92

information to the public. his disclosure includes information like the reason

for raising the money@ the way money is proposed to be spent@ the return

e$pected on the money etc. his information is in the form of '5rospectus )

which also includes information regarding the si/e of the issue@ the current

status of the company@ its e(uity capital@ its current and past performance@

the promoters@ the proFect@ cost of the proFect@ means of financing@ product

and capacity etc. It also contains lot of mandatory information regardingunder$ritingand statutory compliances. his helps investors to evaluate

short term and long term prospects of the company.

*+'% #$ =D'% O# )/#!%> #'!,

'ffer document) means*ros%ectusin case of a public issue or offer for sale

and,etter o" -""erin case of a rights issue which is filed with the 1egistrar

of ompanies 91: and Stock #$changes 9S#s:. =n offer document covers

all the relevant information to help an investor to make his*her investment

decision.

'+raft ffer document) means the offer document in draft stage. he draft

offer documents are filed with S#3I@ atleast % days prior to the filing of the

ffer +ocument with 1*S#s. S#3I may specify changes@ if any@ in the

draft ffer +ocument and the issuer or the lead merchant banker shall carry

out such changes in the draft offer document before filing the ffer

+ocument with 1*S#s. he +raft ffer +ocument is available on the S#3I

website for public comments for a period of % days from the filing of the

+raft ffer +ocument with S#3I.

*+'% ($ '! =A(# P$#)%/$>,

'=bridged 5rospectus) is a shorter version of the 5rospectus and contains allthe salient features of a 5rospectus. It accompanies the application form of

public issues.

*+ #'#$ %+# =P$#)%/$>?=O# D)/#!%$>,

>enerally@ the public issues of companies are handled by+&erchant ankers)

who are responsible for getting the proFect appraised@ finali/ing the cost of

the proFect@ profitability estimates and for preparing of '5rospectus). he

'5rospectus) is submitted to S#3I for its approval.

23


24/92

*+'% #$ !# #'! - =L)(!>,

'!ockin) indicates a free/e on the sale of shares for a certain period of time.

S#3I guidelines have stipulated lockin re(uirements on shares of promoters

mainly to ensure that the promoters or main persons@ who are controlling

the company@ shall continue to hold some minimum percentage in the

company after the public issue.

*+'% ($ #'!% - =L($%(! S#)/(%(#$>,

!isting means admission of securities of an issuer to trading privileges

9dealings: on a stock e$change through a formal agreement. he prime

obFective of admission to dealings on the e$change is to provide li(uidity

and marketability to securities@ as also to provide a mechanism for effective

control and supervision of trading.

*+'% ($ ' =L($%(! A###!%>,

=t the time of listing securities of a company on a stock e$change@ the

company is re(uired to enter into a listing agreement with the e$change.

he 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

e$change.

*+'% #$ =D#0($%(! $#)/(%(#$> #'!,

he term '+elisting of securities) means permanent removal of securities of a

listed company from a stock e$change. =s a conse(uence of delisting@ thesecurities of that company would no longer be traded at that stock

e$change.

*+'% ($ SEBI>$ R0# (! '! I$$/#,

=ny company making a public issue or a listed company making a rights

issue of value of more than 1s 4& lakh is re(uired to file a draft offer

document with S#3I for its observations. he company can proceed further

on the issue only after getting observations from S#3I. he validity period of

S#3I)s observation letter is three months only i.e. the company has to open

its issue within three months period.

24


25/92

D#$ (% #'! %+'% SEBI #)#!$ '! ($$/#,

S#3I does not recommend any issue nor does take any responsibility either

for the financial soundness of any scheme or the proFect for which the issue

is proposed to be made or for the correctness of the statements made or

opinions e$pressed in the offer document. S#3I mainly scrutini/es the issue

for seeing that ade(uate disclosures are made by the issuing company in theprospectus or offer document.

D#$ SEBI %' '# !#>$ !#- $'#,

he investors should make an informed decision purely by themselves based

on the contents disclosed in the offer documents. S#3I 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. ;owever@ the investors are generally advised to study all the material

facts pertaining to the issue including the risk factors before considering any

investment. hey are strongly warned against relying on any 'tips) or newsthrough unofficial means.

3.2 F#(! C'(%'0 I$$/'!)#

C'! )'!(#$ (! I!(' '($# #(! )/#!)- #$/)#$,

Kes. Indian companies are permitted to raise foreign currency resources

through two main sourcesA a: issue of foreign currency convertible bonds

more commonly known as '#uro) issues and b: issue of ordinary sharesthrough depository receipts namely '>lobal +epository 1eceipts

9>+1s:*=merican +epository 1eceipts 9=+1s:) to foreign investors i.e. to the

institutional investors or individual investors.

*+'% ($ '! A#()'! D#$(%- R#)#(%,

=n =merican +epositary 1eceipt 9O=+1O: is a physical certificate evidencing

ownership of =merican +epositary Shares 9O=+SsO:. he term is often used

to refer to the =+Ss themselves.

25


26/92

*+'% ($ '! ADS,

=n =merican +epositary Share 9O=+SO: is a G.S. dollar denominated form of

e(uity ownership in a nonG.S. company. It represents the foreign shares of

the company held on deposit by a custodian bank in the companyCs home

country and carries the corporate and economic rights of the foreign shares@

subFect to the terms specified on the =+1 certificate.

ne or several =+Ss can be represented by a physical =+1 certificate. he

terms =+1 and =+S are often used interchangeably.

=+Ss provide G.S. investors with a convenient way to invest in overseas

securities and to trade nonG.S. securities in the G.S. =+Ss are issued by a

depository bank@ such as H5,organ hase 3ank. hey are traded in the

same manner as shares in G.S. companies@ on the


27/92

4. SECONDARY MARKET

4.1 I!%/)%(!

*+'% ($ #'!% - S#)!'- '#%,

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 #$change. ,aFority of the trading is done in the secondary market.

Secondary market comprises of e(uity markets and the debt markets.

*+'% ($ %+# 0# %+# S#)!'- M'#%,

-or the general investor@ the secondary market provides an efficientplatform for trading of his securities. -or the management of the company@

Secondary e(uity markets serve as a monitoring and control conduitRby

facilitating valueenhancing control activities@ enabling implementation of

incentivebased management contracts@ and aggregating information 9via

price discovery: that guides management decisions.

*+'% ($ %+# (##!)# #%##! %+# P('- M'#% '! %+#

S#)!'- M'#%,

In the primary market@ securities are offered to public for subscription for

the purpose of raising capital or fund. Secondary market is an e(uity tradingvenue in which already e$isting*preissued securities are traded among

investors. Secondary market could be either auction or dealer market. While

stock e$change is the part of an auction market@ vertheounter 9: is

a part of the dealer market.

27


28/92

4.1.1 S%) E;)+'!#

*+'% ($ %+# 0# ' S%) E;)+'!# (! /-(! '! $#00(!$+'#$,

he stock e$changes in India@ under the overall supervision of the regulatory

authority@ the Securities and #$change 3oard of India 9S#3I:@ provide a

trading platform@ where buyers and sellers can meet to transact in

securities. he trading platform provided by roup. ;ere@ the broker members of

the e$change are both the owners and the traders on the e$change and

they further manage the e$change as well. his at times can lead to conflictsof interest in decision making. = demutualised e$change@ on the other hand@

has all these three functions clearly segregated@ i.e. the ownership@

management and trading are in separate hands.

C/#!%0- '# %+## '!- #/%/'0($# $%) #;)+'!#$ (!

I!(',

urrently@ two stock e$changes in India@ the


29/92

4.1.2 S%) T'(!

*+'% ($ S)##! B'$# T'(!,

he trading on stock e$changes in India used to take place through open

outcry without use of information technology for immediate matching or

recording of trades. his was time consuming and inefficient. his imposed

limits on trading volumes and effic iency. In order to provide efficiency@

li(uidity and transparency@


30/92

*+'% ($ ' C!%')% N%#,

ontract


31/92

l

*+- $+/0 !# %'# ! ' #)!(@# $%) #;)+'!# !0-

/-(!?$#00(! $+'#$,

=n investor does not get any protection if he trades outside a stock

e$change. rading at the e$change offers investors the best pricesprevailing at the time in the market@ lack of any counterparty risk which is

assumed by thec#earing cor%oration0access to investor grievance and

redressal mechanism of stock e$changes@ protection upto a prescribed limit@

from the Investor 5rotection -und etc.

% ! ( %+# # $/ # ($ #($%##,

ne can confirm it by verifying the registration certificate issued by S#3I. =

brokerCs registration number begins with the letters 'I


32/92

If your financial advisor or broker advises you to invest in a company

you have never heard of@ be cautious. Spend some time checking out

about the company before investing.

+o not be attracted by announcements of fantastic results*news

reports@ about a company. +o your own research before investing inany stock.

+o not be attracted to stocks based on what an internet website

promotes@ unless you have done ade(uate study of the company.

Investing in very low priced stocks or what are known as penny

stocks does not guarantee high returns.

3e cautious about stocks which show a sudden spurt in price or

trading activity.

=ny advise or tip that claims that there are huge returns e$pected@

especially for acting (uickly@ may be risky and may to lead to losing

some@ most@ or all of your money.

*+'% D>$ '! D!>%$ $+/0 '! (!"#$% #' (! (! +#!

(!"#$%(! (! %+# $%) '#%$,

#nsure that the intermediary 9broker*subbroker: has a valid S#3I

registration certificate.

#nter into an agreement with your broker*subbroker setting out

terms and conditions clearly.

#nsure that you give all your details in the 'Tnow Kour lient) form.

#nsure that you read carefully and understand the contents of the

'1isk +isclosure +ocument) and then acknowledge it.

Insist on a contract note issued by your broker only@ for trades done

each day.

#nsure that you receive the contract note from your broker within 2

hours of the transaction.

#nsure that the contract note contains details such as the broker)s

name@ trade time and number@ transaction price@ brokerage@ service

ta$@ securities transaction ta$ etc. and is signed by the =uthorised

Signatory of the broker.

o cross check genuineness of the transactions@ log in to the


33/92

Issue account payee che(ues*demand drafts in the name of your

broker only@ as it appears on the contract note*S#3I registration

certificate of the broker.

While delivering shares to your broker to meet your obligations@

ensure that the delivery instructions are made only to the designated

account of your broker only.

Insist on periodical statement of accounts of funds and securitiesfrom your broker. ross check and reconcile your accounts promptly

and in case of any discrepancies bring it to the attention of your

broker immediately.

5lease ensure that you receive payments*deliveries from your broker@

for the transactions entered by you@ within one working day of the

payout date.

#nsure that you do not undertake deals on behalf of others or trade

on your own name and then issue che(ues from a family members )*

friends) bank accounts.

Similarly@ the +emat delivery instruction slip should be from your

own +emat account@ not from any other family members)*friends)

accounts.

+o not sign blank delivery instruction slip9s: while meeting securitypayin obligation.


34/92

you verify +5 statement periodically say every month*

fortnight to ensure that no unauthorised transactions

have taken place in your account.

authori/ation given by you has been properly used for

the purpose for which authori/ation has been given.

in case you find wrong entries please report in writing

to the authori/ed intermediary.+on)t accept unsigned*duplicate contract note.

+on)t accept contract note signed by any unauthorised person.

+on)t delay payment*deliveries of securities to broker.

In the event of any discrepancies*disputes@ please bring them to the

notice of the broker immediately in writing 9acknowledged by the

broker: and ensure their prompt rectification.

In case of subbroker disputes@ inform the main broker in writing

about the dispute at the earliest and in any case not later than 6

months.

If your broker*subbroker does not resolve your complaints within a

reasonable period 9say within %4 days:@ please bring it to the

attention of the 'Investor >rievances ell) of the


35/92

A0 rights issue at 1s. %4@ would entitle a shareholder to receive

shares for every 0 shares held at a price of 1s. %4 per share.

onus SharesShares issued by the companies to their shareholders

free of cost based on the number of shares the shareholder owns.

*re"erence shareswners of these kind of shares are entitled to afi$ed dividend or dividend calculated at a fi$ed rate to be paid

regularly before dividend can be paid in respect of e(uity share. hey

also enFoy priority over the e(uity shareholders in payment of

surplus. 3ut in the event of li(uidation@ their claims rank below the

claims of the company)s creditors@ bondholders*debenture holders.

(umu#ative *re"erence Shares= type of preference shares on which

dividend accumulates if remained unpaid. =ll arrears of preference

dividend have to be paid out before paying dividend on e(uity

shares.

(umu#ative (onverti#e *re"erence Shares= type of preference

shares where the dividend payable on the same accumulates@ if notpaid. =fter a specified date@ these shares will be converted into

e(uity capital of the company.

B!


36/92

a:

b:

4.2.1 E:/(%- I!"#$%#!%

*+- $+/0 !# (!"#$% (! #:/(%(#$ (! '%()/0',

When you buy a share of a company you become a shareholder in that

company. Shares are also known as #(uities. #(uities have the potential to

increase in value over time. It also provides your portfolio with the growth

necessary to reach your long term investment goals. 1esearch studies have

proved that the e(uities have outperformed most other forms of

investments in the long term. his may be illustrated with the help of

following e$amplesA

ver a %4 year period between %""& to &&4@


37/92

most other forms of investments@ investing in e(uity shares offers the

highest rate of return@ if invested over a longer duration.

*+()+ '# %+# ')%$ %+'% (!0/#!)# %+# ()# ' $%),

3roadly there are two factorsA 9%: stock specific and 9: market specific. hestockspecific factor is related to people)s e$pectations about the company@

its future earnings capacity@ financial health and management@ level of

technology and marketing skills.

he market specific factor is influenced by the investor)s sentiment towards

the stock market as a whole. his factor depends on the environment rather

than the performance of any particular company. #vents favourable to an

economy@ political or regulatory environment like high economic growth@

friendly budget@ stable government etc. can fuel euphoria in the investors@

resulting in a boom in the market. n the other hand@ unfavourable events

like war@ economic crisis@ communal riots@ minority government etc. depress

the market irrespective of certain companies performing well. ;owever@ theeffect of marketspecific factor is generally shortterm. +espite ups and

downs@ price of a stock in the long run gets stabili/ed based on the stock

specific factors. herefore@ a prudent advice to all investors is to analyse and

invest and not speculate in shares.

*+'% ($ #'!% - %+# %#$ %+ S%) ? V'0/# S%),

%+ S%)$ rowth stocks@ alue

stocks etc. ompanies whose potential for growth in sales and earnings are

e$cellent@ are growing faster than other companies in the market or otherstocks in the same industry are called the >rowth Stocks. hese companies

usually pay little or no dividends and instead prefer to reinvest their profits

in their business for further e$pansions.

V'0/# S%)$S >&&8 %%.2&B bond refers to a entral >overnment bond

maturing in the year &&8 and paying a coupon of %%.2&B. Since entral

>overnment bonds have a face value of 1s.%&& and normally pay coupon

semiannually@ this bond will pay 1s. 4.7& as si$ monthly coupon@ until

maturity.

40


41/92

*+'% ($ #'!% - =I!%##$%> '-'0# - ' ##!%/# ' !,

Interest is the amount paid by the borrower 9the company: to the lender

9the debentureholder: for borrowing the amount for a specific period of

time. he interest may be paid annual@ semiannually@ (uarterly or monthly

and is paid usually on the face value 9the value printed on the bond

certificate: of the bond.

*+'% '# %+# S##!%$ (! %+# D#% M'#% (! I!(',

here are three main segments in the debt markets in India@ vi/.@ 9%:

>overnment Securities@ 9: 5ublic Sector Gnits 95SG: bonds@ and 90:

orporate securities.

he market forovernment Securitiescomprises the entre@ State and

Statesponsored securities. In the recent past@ local bodies such as

municipalities have also begun to tap the debt markets for funds. Some of

the 5SG bonds are ta$ free@ while most bonds including government

securities are not ta$free. orporate bond markets comprise of commercialpaper and bonds. hese bonds typically are structured to suit the

re(uirements of investors and the issuing corporate@ and include a variety of

tailor made features with respect to interest payments and redemption.

*+ '# %+# P'%()('!%$ (! %+# D#% M'#%,

>iven the large si/e of the trades@ +ebt market is predominantly a wholesale

market@ with dominant institutional investor participation. he investors in

the debt markets are mainly banks@ financial institutions@ mutual funds@

provident funds@ insurance companies and corporates.

A# !$ '%# %+#( )#(% :/'0(%-,

,ost 3ond*+ebenture issues are rated by specialised credit rating agencies.

redit rating agencies in India are 1ISI!@ =1#@ I1= and -itch. he yield

on a bond varies inversely with its credit 9safety: rating. he safer the

instrument@ the lower is the rate of interest offered.

)'! !# '):/(# $#)/(%(#$ (! %+# #% '#%,

Kou may subscribe to issues made by the government*corporates in the

primary market. =lternatively@ you may purchase the same from thesecondary market through the stock e$changes.

41


42/92

5. DERIVATIVES

*+'% '# T-#$ D#("'%("#$,

F'$


43/92

*+'% ($ =C(%- E;)+'!#>,

= ommodity #$change is an association@ or a company of any other body

corporate organi/ing futures trading in commodities. In a wider sense@ it is

taken to include any organi/ed market place where trade is routed through

one mechanism@ allowing effective competition among buyers and among

sellers E this would include auctiontype e$changes@ but not wholesalemarkets@ where trade is locali/ed@ but effectively takes place through many

nonrelated individual transactions between different permutations of buyers

and sellers.

*+'% ($ #'!% - =C(%->,

-1= -orward ontracts 91egulation: =ct@ %"4 defines LgoodsM as Levery

kind of movable property other than actionable claims@ money and

securitiesM. -utures) trading is organi/ed in such goods or commodities as

are permitted by the entral >overnment. =t present@ all goods and

products of agricultural 9including plantation:@ mineral and fossil origin are

allowed for futures trading under the auspices of the commodity e$changes

recogni/ed under the -1=.

*+'% ($ C(%- #("'%("#$ '#%,

ommodity derivatives market trade contracts for which the underlying

asset is commodity. It can be an agricultural commodity like wheat@

soybeans@ rapeseed@ cotton@ etc or precious metals like gold@ silver@ etc.

*+'% ($ %+# (##!)# #%##! C(%- '! F(!'!)('0

#("'%("#$,

he basic concept of a derivative contract remains the same whether the

underlying happens to be a commodity or a financial asset. ;owever there

are some features which are very peculiar to commodity derivative markets.

In the case of financial derivatives@ most of these contracts are cash settled.

#ven in the case of physical settlement@ financial assets are not bulky and

do not need special facility for storage. +ue to the bulky nature of the

underlying assets@ physical settlement in commodity derivatives creates the

need for warehousing. Similarly@ the concept of varying (uality of asset does

not really e$ist as far as financial underlyings are concerned. ;owever in the

case of commodities@ the (uality of the asset underlying a contract can vary

at times.

43


44/92

6. DEPOSITORY

($ ' #$(%- $((0' % ' '!,

= +epository can be compared with a bank@ which holds the funds for

depositors. =n analogy between a bank and a depository may be drawn as

followsA

BANK

;olds funds in an account

ransfers funds between

accounts on the instruction of

the account holder

-acilitates transfers without

having to handle money

-acilitates safekeeping of

DEPOSITORY

;old securities in an account

ransfers securities between

accounts on the instruction of the

account holder.

-acilitates transfers of ownership

without having to handle securities.

-acilitates safekeeping of shares.

money

*+()+ '# %+# #$(%(#$ (! I!(',

here are two depositories in India which provide demateriali/ation of

securities. he


45/92

a

#ase of nomination facility

hange in address recorded with +5 gets registered electronically

with all companies in which investor holds securities eliminating the

need to correspond with each of them separately

ransmission of securities is done directly by the +5 eliminatingcorrespondence with companies

onvenient method of consolidation of folios*accounts

;olding investments in e(uity@ debt instruments and >overnment

securities in a single accountD automatic credit into demat account@ of

shares@ arising out of split*consolidation*merger etc.

*+ ($ ' D#$(%- P'%()('!% DP,

he +epository provides its services to investors through its agents called

depository participants 9+5s:. hese agents are appointed by the depositorywith the approval of S#3I. =ccording to S#3I regulations@ amongst others@

three categories of entities@ i.e. 3anks@ -inancial Institutions and S#3I

registered trading members can become +5s.

D#$ !# !## % ## '!- (!(/ '0'!)# $#)/(%(#$ (!

+($ '))/!% (%+ +($ DP,


46/92

,aintaining a client)s securities account

ollecting the benefits or rights accruing to the client in respect of

securities

Teeping the client informed of the actions taken or to be taken by the

issue of securities@ having a bearing on the benefits or rights accruing

to the client.

)'! !# )!"#% +-$()'0 +0(! (!% #0#)%!() +0(!

(.#. + )'! !# #'%#('0($# $#)/(%(#$,

In order to dematerialise physical securities one has to fill in a +emat

1e(uest -orm 9+1-: which is available with the +5 and submit the same

along with physical certificates one wishes to dematerialise. Separate +1-

has to be filled for each ISI< number.

C'! 0% $+'#$ # #'%#('0($#,

Kes@ odd lot share certificates can also be dematerialised.

D #'%#('0($# $+'#$ +'"# ($%(!)%("# !/#$,

+ematerialised shares do not have any distinctive numbers. hese shares

are"ungi#e0which means that all the holdings of a particular security will

be identical and interchangeable.

C'! #0#)%!()

)#%(()'%#$,

+0(!$ # )!"#%# (!% P+-$()'0

Kes. he process is calledemateria#isation.If one wishes to get back your

securities in the physical form one has to fill in the 1emat 1e(uest -orm

911-: and re(uest your +5 for rematerialisation of the balances in your

securities account.

C'! !# #'%#('0($# +($ #% (!$%/#!%$G /%/'0 /!

/!(%$G "#!#!% $#)/(%(#$ (! +($ #'% '))/!%,

Kes. Kou can dematerialise and hold all such investments in a single demat

account.

46


47/92

7. MUTUAL FUNDS

*+'% ($ %+# R#/0'%- B- M/%/'0 F/!$,

Securities #$change 3oard of India 9S#3I: is the regulatory body for all the

mutual funds. =ll the mutual funds must get registered with S#3I.

*+'% '# %+# #!#(%$ (!"#$%(! (! M/%/'0 F/!$,

here are several benefits from investing in a ,utual -undA

S'00 (!"#$%#!%$


48/92

*+'% ($ NAV,


49/92

Some of the 1isk to whic h ,utual -unds are e$posed to is given belowA

M'#% ($

If the overall stock or bond markets fall on account of overall

economic factors@ the value of stock or bond holdings in the fundCs

portfolio can drop@ thereby impacting the fund performance.

N!'#% ($

3ad news about an individual company can pull down its stock price@

which can negatively affect fund holdings. his risk can be reduced

by having a diversified portfolio that consists of a wide variety of

stocks drawn from different industries.

I!%##$% '%# ($

3ond prices and interest rates move in opposite directions. When

interest rates rise@ bond prices fall and this decline in underlying

securities affects the fund negatively.

C#(% ($

3onds are debt obligations. So when the funds invest in corporate

bonds@ they run the risk of the corporate defaulting on their interest

and principal payment obligations and when that risk crystalli/es@ it

leads to a fall in the value of the bond causing the


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D("#$((# /!$

hese funds invest in companies spread across sectors. hese

funds are generally meant for riskaverse investors who want

a diversified portfolio across sectors.

S#)% /!$

hese funds invest primarily in e(uity shares of companies in

a particular business sector or industry. hese funds are

targeted at investors who are bullish or fancy the prospects of

a particular sector.

I!#; /!$

hese funds invest in the same pattern as popular market

indices like SN5


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(0% F/!$

hese funds invest in entral and State >overnment securities. Since

they are >overnment backed bonds they give a secured return and

also ensure safety of the principal amount. hey are best suited for

the medium to longterm investors who are averse to risk.

B'0'!)# F/!$

hese funds invest both in e(uity shares and fi$edincome bearing

instruments 9debt: in some proportion. hey provide a steady return

and reduce the volatility of the fund while providing some upside for

capital appreciation. hey are ideal for medium to longterm

investors who are willing to take moderate risks.

O! %+# '$($ F0#;((0(%-

O#!#!# F/!$

hese funds do not have a fi$ed date of redemption. >enerally they

are open for subscription and redemption throughout the year. heir

prices are linked to the daily net asset value 9


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*+'% '# %+# (##!% (!"#$%#!% 0'!$ %+'% M/%/'0 F/!$

#,

he term )investment plans) generally refers to the services that the funds

provide to investors offering different ways to invest or reinvest. he

different investment plans are an important consideration in the investmentdecision@ because they determine the fle$ibility available to the investor.

Some of the investment plans offered by mutual funds in India areA

%+ P0'! '! D("(#! P0'!

= growth plan is a plan under a scheme wherein the returns from

investments are reinvested and very few income distributions@ if any@

are made. he investor thus only reali/es capital appreciation on the

investment. Gnder the dividend plan@ income is distributed from time

to time. his plan is ideal to those investors re(uiring regular income.

D("(#! R#(!"#$%#!% P0'!

+ividend plans of schemes carry an additional option for

reinvestment of income distribution. his is referred to as the

dividend reinvestment plan. Gnder this plan@ dividends declared by a

fund are reinvested in the scheme on behalf of the investor@ thus

increasing the number of units held by the investors.

*+'% '# %+# (+%$ %+'% '# '"'(0'0# % ' M/%/'0 F/! +0#

(! I!(',

=s per S#3I 1egulations on ,utual -unds@ an investor is entitled toA

%. 1eceive Gnit certificates or statements of accounts confirming

your title within 6 weeks from the date your re(uest for a unit

certificate is received by the ,utual -und.

. 1eceive information about the investment policies@ investment

obFectives@ financial position and general affairs of the scheme.

0. 1eceive dividend within 2 days of their declaration and receive

the redemption or repurchase proceeds within %& days from the

date of redemption or repurchase.

2. he trustees shall be bound to make such disclosures to the unit

holders as are essential in order to keep them informed about any

information@ which may have an adverse bearing on their

investments.

52


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4. 74B of the unit holders with the prior approval of S#3I can

terminate the =, of the fund.

6. 74B of the unit holders can pass a resolution to windup the

scheme.

7. =n investor can send complaints to S#3I@ who will take up the

matter with the concerned ,utual -unds and follow up with them

till they are resolved.

*+'% ($ ' F/! O# )/#!%,

= -und ffer document is a document that offers you all the information you

could possibly need about a particular scheme and the fund launching that

scheme. hat way@ before you put in your money@ youCre well aware of the

risks etc involved. his has to be designed in accordance with the guidelines

stipulated by S#3I and the prospectus must disclose details aboutA

Investment obFectives

1isk factors and special considerations

Summary of e$penses

onstitution of the fund

>uidelines on how to invest

rgani/ation and capital structure

a$ provisions related to transactions

-inancial information

*+'% ($ A)%("# F/! M'!'##!%,

When investment decisions of the fund are at the discretion of a fund

manager9s: and he or she decides which company@ instrument or class of

assets the fund should invest in based on research@ analysis@ market news

etc. such a fund is called as an actively managed fund. he fund buys and

sells securities actively based on changed perceptions of investment from

time to time. 3ased on the classifications of shares with different

characteristics@ 'active) investment managers construct different portfolio.

wo basic investment styles prevalent among the mutual funds are >rowth

Investing and alue InvestingA

53


54/92

%+ I!"#$%(! S%-0#

he primary obFective of e(uity investment is to obtain

capital appreciation. = growth manager looks for

companies that are e$pected to give above average

earnings growth@ where the manager feels that theearning prospects and therefore the stock prices in

future will be even higher. Identifying such growth

sectors is the challenge before the growth investment

manager.

V'0/# (!"#$%#!% S%-0#

= alue ,anager looks to buy companies that they

believe are currently undervalued in the market@ but

whose worth they estimate will be recogni/ed in the

market valuations eventually.

*+'% ($ P'$$("# F/! M'!'##!%,

When an investor invests in an actively managed mutual fund@ he or she

leaves the decision of investing to the fund manager. he fund manager is

the decision maker as to which company or instrument to invest in.

Sometimes such decisions may be right@ rewarding the investor handsomely.

;owever@ 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. here are

mutual funds that offer Inde$ funds whose obFective is to e(ual the return

given by a select market inde$. Such funds follow a passive investment

style. hey do not analyse companies@ markets@ economic factors and then

narrow down on stocks to invest in. Instead they prefer to invest in aportfolio of stocks that reflect a market inde$@ such as the


55/92

while at the same time having low e$penses in fund. here are various

passively managed funds in India today some of them areA

5rincipal Inde$ -und@ an inde$ fund scheme on SN5


56/92

*+'% ($ '! ETF,

hink of an e$changetraded fund as a mutual fund that trades like a stock.

Hust like an inde$ fund@ an #- represents a basket of stocks that reflect an

inde$ such as the


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8. MISCELLANEOUS

8.1 C'%# A)%(!$

*+'% '# C'%# A)%(!$,

orporate actions tend to have a bearing on the price of a security. When a

company announces a corporate action@ 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 ac(uisition etc. 3y understanding these different types

of processes and their effects@ an investor can have a clearer picture of what

a corporate action indicates about a companyCs financial affairs and how thataction will influence the companyCs share price and performance.

orporate actions are typically agreed upon by a companyCs 3oard of

+irectors and authori/ed by the shareholders. Some e$amples are

dividends@ stock splits@ rights issues@ bonus issues etc.

*+'% ($ #'!% - =D("(#!> #)0'# - )'!(#$,

1eturns received by investors in e(uities come in two forms a: growth in the

value 9market price: of the share and b: dividends. +ividend is distribution

of part of a companyCs earnings to shareholders@ usually twice a year in the

form of a final dividend and an interim dividend. +ividend is therefore a

source of income for the shareholder.


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*+'% ($ #'!% - D("(#! -(#0,

+ividend yield gives the relationship between the current price of a stock

and the dividend paid by its) issuing company during the last % months. It

is calculated by aggregating past yearCs dividend and dividing it by the

current stock price.

#$ampleA

=3 o.

Share priceA 1s. 06&

=nnual dividendA 1s. %&

+ividend yieldA .77B 9%&*06&:

;istorically@ a higher dividend yield has been considered to be desirable

among investors. = high dividend yield is considered to be evidence that a

stock is underpriced@ whereas a low dividend yield is considered evidence

that the stock is overpriced. = note of caution here though. here have been

companies in the past which had a record of high dividend yield@ only to go

bust in later years. +ividend yield therefore can be only one of the factors in

determining future performance of a company.

*+'% ($ ' S%) S0(%,

= stock split is a corporate action which splits the e$isting shares of a

particular face value into smaller denominations so that the number of

shares increase@ however@ the market capitali/ation or the value of shares

held by the investors post split remains the same as that before the split.

-or e.g. If a company has issued %@&&@&&@&&& shares with a face value of 1s.

%& and the current market price being 1s. %&&@ a for% stock split would

reduce the face value of the shares to 4 and increase the number of the

company)s outstanding shares to @&&@&&@&&&@ 9%@&&@&&@&&&X9%&*4::.onse(uently@ the share price would also halve to 1s. 4& so that the market

capitali/ation or the value shares held by an investor remains unchanged. It

is the same thing as e$changing a 1s. %&& note for two 1s. 4& notesD the

value remains the same .

!et us see the impact of this on the share holderA !etCs say company =3

is trading at 1s. 2& and has %&& million shares issued@ which gives it a

market capitali/ation of 1s. 2&&& million 91s. 2& $ %&& million shares:. =n

investor holds 2&& shares of the company valued at 1s. %6@&&&. he

company then decides to implement a 2for% stock split 9i.e. a shareholder

holding % share@ will now hold 2 shares:. -or each share shareholders

currently own@ they receive three additional shares. he investor will

therefore hold %6&& shares. So the investor gains 0 additional shares for

58


59/92

each share held. 3ut this does not impact the value of the shares held by

the investor since post split@ the price of the stock is also split by 4B

9%*2th:@ from 1s. 2& to 1s.%&@ therefore the investor continues to hold 1s.

%6@&&& worth of shares.


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a:

b:

c:

*+'% ($ B/-') S+'#$,

= buyback can be seen as a method for company to invest in itself by buying

shares from other investors in the market. 3uybacks reduce the number of

shares outstanding in the market. 3uy back is done by the company with

the purpose to improve the li(uidity in its shares and enhance the

shareholders) wealth. Gnder the S#3I 93uy 3ack of Securities: 1egulation@%""8@ a company is permitted to buy back its share fromA

#$isting shareholders on a proportionate basis through the offer

document.

pen market through stock e$changes using book building process.

Shareholders holding odd lot shares.

he company has to disclose the pre and postbuyback holding of the

promoters. o ensure completion of the buyback process speedily@ the

regulations have stipulated time limit for each step. -or e$ample@ in the

cases of purchases through stoc k e$changes@ an offer for buy back should

not remain open for more than 0& days. he verification of shares received

in buy back has to be completed within %4 days of the closure of the offer.

he payments for accepted securities has to be made within 7 days of the

completion of verification and bought back shares have to be e$tinguished

within 7 days of the date of the payment.

8.2 I!#;

*+'% ($ %+# N(%- (!#;,

SN5


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8.3 C0#'(! & S#%%0##!% '! R##$$'0

*+'% ($ ' C0#'(! C'%(!,

= learing orporation is a part of an e$change or a separate entity andperforms three functions@ namely@ it clears and settles all transactions@ i.e.

completes the process of receiving and delivering shares*funds to the buyers

and sellers in the market@ it provides financial guarantee for all transactions

e$ecuted on the e$change and provides risk management functions.


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*+'% ($ '! A/)%(!,

n account of nondelivery of securities by the trading member on the pay

in day@ the securities are put up for auction by the #$change. his ensures

that the buying trading member receives the securities. he #$change

purchases the re(uisite (uantity in auction market and gives them to the

buying trading member.

*+'% ($ ' B)0$/#?R#) '%#,

3ook closure and record date help a company determine e$actly the

shareholders of a company as on a given date. 3ook closure refers to the

closing of the register of the names of investors in the records of a

company. ompanies announce book closure dates from time to time. he

benefits of dividends@ bonus issues@ rights issue accrue to investors whose

name appears on the companyCs 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@ get them registered in thebooks of the company and become entitled for the benefits such as bonus@

rights@ dividends etc. With the depositories now in place@ the buyers need

not send shares physically to the companies for registration. his is taken

care by the depository since they have the records of investor holdings as

on a particular date electronically with them.

*+'% ($ ' N#0("#- #(,

Whenever a company announces a book closure or record date@ the

e$change sets up a nodelivery period for that security. +uring this period

only trading is permitted in the security. ;owever@ these trades are settledonly after the nodelivery period is over. his is done to ensure that

investorCs entitlement for the corporate benefit is clearly determined.

*+'% ($ '! E;("(#! '%#,

he date on or after which a security begins trading without the dividend

included in the price@ i.e. buyers of the shares will no longer be entitled for

the dividend which has been declared recently by the company@ in case they

buy on or after the e$dividend date.

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*+'% ($ '! E;'%#,

he first day of the nodelivery period is the e$date. If there is any

corporate benefits such as rights@ bonus@ dividend announced for which book

closure*record date is fi$ed@ the buyer of the shares on or after the e$date

will not be eligible for the benefits.

*+'% #)/$#$ '# '"'(0'0# % (!"#$%?)0(#!% ##$$(!+($ (#"'!)#$,

Kou can lodge complaint with the Investor >rievances ell 9I>: of the

#$change against brokers on certain trade disputes or nonreceipt of

payment*securities. I> takes up complaints in respect of trades e$ecuted

on the


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9. CONCEPTS & MODES OF ANALYSIS

*+'% ($ S(0# I!%##$%,

S(0# I!%##$%


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Z

Z

*+'% ($ C/! I!%##$%,

C/! I!%##$%enerally the interest rate is (uoted annually. #.g. %&B per annum.

ompound interest may involve calculations for more than once a year@ each

using a new principal@ i.e. 9interest Y principal:. he first term we must

understand in dealing with compound interest is conversion period.

onversion period refers to how often the interest is calculated over the

term of the loan or investment. It must be determined for each year or

fraction of a year.

#.g.A If the interest rate is compounded semiannually@ then the number of

conversion periods per year would be two. If the loan or deposit was for five

years@ then the number of conversion periods would be ten.

65

8/12/2019 finance basic NCF

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