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Capital Market – Equity

Financial Intermediaries → Regulate flow of cash b/w businesses & people / Economy & public

Disintermediation            →  If these intermediaries are removed & companies raise money directly from public

Capital Market India


Money Market Miscellaneous Terms

Ways and Means Advances

  • Government – temporary mismatch in receipt and payment
  • RBI helps to fill mismatch fixes limit
  • This mismatch is not counted under fiscal deficit

 

Misc. Debt Instruments

T-Bills
  • Upto 364 days maturity period
  • Sold at discounted price by the government
  • Later bought at Par value
Commercial Papers
  • Same as T Bills but sold by Corporates
Certificate of deposits
  • Same as T Bills but sold by Banks & Financial Institutes

 

Call money & Notice money

  • Short term borrowing among banks and FI
  • No collateral required
  • Mainly raised to fulfill CRR
  • If raised for 1 day Known as call money
  • Over 1 day upto 14 days Known as notice money

 Difference between T Bills & G Securities

T Bills G Sec
  • Sold for upto 364 days
  • Sold for 1 to 20-30 years
  • Sold at discounted price & bought at par value
  • Rs. 100 value T bill will be sold at Rs. 80 for 14 days
  • Sold at Par value with scheduled interest on principle amount
  • Rs. 1000 value G sec for 8% annual interest for 20 years
  • T-Bills are zero coupon securities
  • T-Bills don’t pay interest rate
  • OMC, Fertilizer companies are provided G Sec in place of subsidies sometimes

 

Zero coupon bondsWithout coupons bonds Sold at a discounted price


 Equities

  • Company has to provide some % of shares out of its 100%
  • Shareholders get dividend from profit
  • Examples of Equity include IPO, Shares, Venture capital funds, Angel Investor fund
  • Have last claim during liquidation of company

 

Securities: Debt vs Equity

Debt (Bond) Equity (Shares)
  • Have complete ownership & control over the company
  • Don’t have to share profit with anyone
  • Can claim income tax deduction for paying loan
  • Requires less paperwork & time to borrow money from market
  • Have to pay said interest irrespective of profit or loss
  • May have to mortgage property or asset to mortgage loan
  • Don’t have complete control & ownership of the company
  • If company make loss, then it doesn’t have to share profit with shareholders
  • No regular interest rate payment as in case of bonds

 

Shares

  • Shares provide ownership in the companies
  • Under the Company law, one has to constitute a board of directors and hold annual general meeting of the shareholders
  • Board of Directors decides the dividend % of profit to the shareholders & investment of rest of the profit.
  • For important policy decision, one will have to take votes of the shareholders
  • One can become CEO of his own company & can withdraw an annual salary along with the dividend profit from the shares he hold
  • An individual who owns 45 % share capital does not own45 % of that company’s assets. There is a difference between the sale of shares in a company and the sale of assets of that company.

 

Venture Capitalist

  • A company that provides money, to start or expand your company but in return demand part of ownership
  • Invest in big projects after studying their business plans & make an initial investment of US $ 250,000 to US $ 1.5 million.
  • Venture Capitalist companies themselves borrow money from other companies like mutual funds, pension funds or may issue their own ‘bonds’to get money.

 

Angel Investors

  • Rich gentlemen who finance startup companies for getting partial ownership and or assured returns on investment, after few years
  • An Angel investor doesn’t mind taking huge risk by helping even small timers with totally unique and untested idea, if he think that it’ll grow up to huge success in future.
  • Few examples financed by Angel investors Amazon online shopping website and Starbucks coffee chain, Apple computers

 

Share versus stock

  • Suppose a company has issued 1000 shares, worth Rs. 10 each & You paid Rs. 500 to purchase 50 shares of this company
  • This means you own “50 Shares” of this company and “stock of Rs. 500” in this company.
  • When we talk about shares we refer to the number of papers held by you
  • When we talk about stocks, we refer to the money value of those papers held by you

 

Underwriter

  • Formulates security papers to cover all the technically things, paperwork, SEBI regulations etc. for IPO / Bonds sales
  • May offer an insurance of buying the IPO/Bonds if others don’t buy it e.g. Kotak Mahindra, ICICI

 

IPO vs FPO

Initial public offerings (IPO)
  • Company’s raising money for the 1st time by issuance of shares in primary market is known as IPO
  • All IPO, FPO & Bonds issued by the companies are known as Primary market operations
  • Fresh securities From company to the investors directly
Follow on public offerings (FPO)
  • Those coming out subsequently again to raise more money from the market via selling more shares is known as FPO
  • After initial offerings when they stabilize in market & traded (bought & sold) at prices decide by buyers and sellers are known as Secondary Market Operations

 


 

How IPOs are issued in Primary Market?

Promoter of Company
  • Issue Red Herring prospectus to SEBI
  • Red Herring prospectus contains all Business Info (promoters, directors, B plan) except Price & date of issue of shares

 

Underwriter
  • Takes care of following work

 

  • Printing of shares
  • Allotment of shares
  • Public issues of share
  • IPO shares guarantee

 

  • In US underwriters are known as Investment Bankers
  • In UK underwriters are known as Merchant Bankers

 

IPO value calculation
Fixed pricing Method 1 lakh equity shares to be issued in market

  • Par value Rs. 30 + Premium value Rs. 20
  • Final Price of share (30+20) = Rs. 50
  • IPO Total value 50 lakh
Book Building Method 

  • Applications for issuing 5 lakh shares

 

  • Rs. 500 x 10,000 shares
  • Rs. 200 x 25,000 shares
  • Rs. 125 x 40,000 shares
  • Rs. 100 x 50000 shares

 

  • 125 cutoff Because 5 lakh shares booked till this price
  • All willing to buy shares above Rs. 125 will get shares for Rs. 125

 


 

Bonus Shares

  • When company provides extra shares to shareholders instead of dividend in a specific year at no extra cost
  • Means company paid the money to purchase shares on your behalf

 

Employee stock option scheme

  • Company issues shares to its employee at a discount price to make the employees committed to the success of company
  • If the company makes more profit, they can walk away with higher dividends.
  • Generally such shares have minimum lock in period of one or two years

 

Rights Issue

  • Existing shareholders given first right to purchase new shares according to their existing shareholding
  • If they refuse offer to common public
  • Not applicable to IPO but on FPO

 

Issuing additional shares after IPO to raise more money for business, but under the companies act, you can issue additional shares to the existing shareholders only. This is called “rights issue of shares” (Generally at discounted rates to shareholders) – Mainly done to raise more money & reduce debt to equity ratio

 

Debt Equity ratio
  • Credit rating agency look into a company’s performance, assets, liability everything & one of the thing they’re most interested in, is “Debt to Equity” Ratio
  • More “Debt to Equity” Ratio lower the rating provided by these agencies

 

Share splitting

  • Presently 1 share x Rs. 1000 face value
  • After share splitting 100 share x Rs. 10 face value

 

  • Provide liquidity to investor viz. can easily sell Rs. 10 share than Rs. 1000 share
  • Increases retail participation
  • Doesn’t increase company’s market capitalization or its value

 

Central Public Sector Enterprises – Exchange Traded Funds (CPSE –ETF)

  • Type of disinvestment, in which government’s shares are being sold to private players lets say Goldman Sach
  • Goldman Sach put these shares on sale at stock exchange so, that general public can buy it.
  • Minimum order has to be Rs. 5000
  • First time investor (whose annual income is below Rs. 12 lakh) will get tax benefit under Rajiv Gandhi Equity Savings Scheme (Up to Rs. 50k)

 

Rajiv Gandhi Equity Savings Scheme (RGESS)
  • New tax saving scheme, announced in Budget 2012 which aims to attract more (middle class and lower middle class) people to invest in securities market
  • Mainly to divert them from investing money in gold, which increases current account deficit and creates more problems for Indian economy

 

Conditions Benefits
  • Annual income must be below 12 lakhs
  • Must be first investment in securities market
  • Lock in period of three years
  • Must purchase approved shares / mutual funds only
  • For investment upto 50000, one can get 50 % deduction in income tax
  • One can invest money in installments. No need to invest 50000 in one shot
  • Don’t have to pay tax on dividend paid by the company

 


 

Derivatives

  • Which derive value from assets viz.
  • Physical Assets (Home, Office, Machinery)
  • Debt / equity
  • Forex
  • Commodity
  • Derivatives Future / forward contracts Sell / Purchase / Execution of order at future date
  • Derivative options To minimize risk on future/forward contracts
  • Call option Right to buy, but no obligation to buy
  • Put option Right to sell, but no obligation to sell

 

Some terminologies associated with equity market

Free float market cap (FFMC) Price of each share x total number of shares with public
Stag investor One who buys IPOs to resell it in future
Bull investor Hopes that prices will rise, hence purchase more of shares
Bear investor Fears that prices will fall, hence sells more of shares
Sensex Weighted average of FFMC of top 30 companies of BSE
Nifty Weighted average of FFMC of top 50 companies of NSE

 

Share market position

  • Down in situations of War, Inflation & political instability
  • UP in case of soft monetary policy, relaxing FDI norms, M & A rumors

 

Problems with Paper shares

  • Delivery problem.
  • Fear of theft
  • Transfer delay

 

Solution → Dematerialization
  • A person can open up a Demat account with the help of Pan card, Bank account & Address proof
  • Depositary participants like SBI, HDFC, ICICI etc. provide you an online platform to buy / sell shares electronically
  • Net shares bought /sold are kept with the depositary participants in paper format
  • Depositary participant emails the record of net shares bought / sold to NSDL or CSDL
  • NSDL or CSDL then issues shares in electronic format to depositary participants

 

  • NSDL National Securities Depository Limited Deals with National Stock Exchange (NSE)
  • CSDL Central Depository Services Limited Deals with Bombay Stock Exchange (BSE)
  • They are electronic depositories to hold all the securities electronically in de-materialised format
India Yearbook English India Yearbook Hindi Economic Survey 2017

1 Comment

  1. sir please correct the mistake in difference between equity and debt

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