Finance – Debt vs Equity
Debt – Bond
I write on a piece of paper: “To whoever pays me Rs.1000, I’ll pay annual 10% interest rate (Rs.100). And after 5 years, I’ll also repay the principle amount Rs.1000. No “ifs” and “buts”.
This is one type of security paper. We call it “BOND”.
IF you hold my bonds, I’m liable to pay you money no matter what happens. Whether my ice-cream company actually makes profit or goes Kingfisher. I have to keep paying fixed money to you, every year.
If my Bond gets “C” or “D” rating, it means I’m not creditworthy, I may default on this loan, I may run away. So my bond is as junk as Ra.One movie. A wise man will not invest in it.
So, how can I seduce you into purchasing my junk bonds ? By providing Higher Interest rates
This is also known as “High Yield Bond”, because you’re getting higher profit
Gilt Edged Securities
Such bonds which has high credit rating , and so less risks, so if such govt. or companies issues bond , they offer loss rate of interest – k/as Gilt Edged Securities
Bearer Bonds / Bad Guys
Bearer bonds are same as regular bonds, but they don’t have “Holder’s Name” on them. These bearer bonds have coupons attached with them. So, if you don’t want to withdraw the whole money, you can cut a few coupons and sell them to a broker to withdraw partial amount.
Noone can keep a track of who withdrew the money, who’s buying, who’s selling Because there are no “names”, addresses or records. Bad guys like it, because this ensures anonymity.
Government issue bearer bonds – Because at that poin of time , they’re in dire need of money, there is emergency, there is war going on, they cannot waste time in checking the lengthy registration forms. So, Better just sell the bonds to any swinging dude that comes, without asking his name, address, mobile number or email id.
Equity : IPOs and Shares
Equity : Take money from you and giving up of ownership “Assuming that I need 1 crore rupees to start my company and I’ve 30 lakhs in my savings. So, I write on a piece of paper: “ I’ll give 0.0001% ownership of my company to whoever gives me Rs.1000”.
This is again a type of ‘security-paper’. But since I’m sharing a part of ownership with you, in crude terms, we’ll call it “Share”.
Then I print 10,000 such papers. What’s the value of these papers?
10,000 Papers multiplied with Rs.1000 each =1 crore. Voila that’s total money I need.
And since I already have Rs.30 lakhs, I can purchase 3000 shares. (because 3000 papers x Rs. 1000 each = 30 lakhs)
So out of the Total 10,000 shares that I printed, I will own 3,000 shares, so percentage wise I own 30% of this company’s equity.”
If there is 25 lakhs profit , and I have 30 % of company’s shares ,and board of diectors decide to take 10 lacs as dividend , then I distribute Rs. 10 lakhs as Dividend among the shareholders in which I get 3 lacs and shareholders gets 7 lacs . Now about the remaining 15 lakhs, invest them back in the company to expand our production-capacity , buy bigger machines and install new factories .
IPO – Initial Public offering / Shares
When I sell my share papers for the first time, to the public, it is called IPO (initial public offer)
Then you (the buyers of these IPOs), sell these papers to each other, the same paper is called “Share” or “Equities”.
Primary market = this is the Place where IPOs are sold,
Secondary Market= this is the place where IPOs are re-sold as shares.
Physically both things are done in the same place e.g. BSE (Bombay Stock Exchange) but this virtual classification helps in keeping track of things, making statistical analysis etc.
SEBI U K Sinha
“Securities and Exchange Board of India (SEBI) on Thursday asked all listed public sector undertakings (PSUs) to ensure at least 25 per cent public shareholding within three years and unveiled new norms for research analysts, employee stock option schemes as well as reforms to boost the primary market. Under current norms, government undertakings should have at least 10 per cent public shareholding whereas for non-PSU firms the minimum level is 25 per cent.The decision, aimed at ensuring uniformity among listed entities irrespective of their promoters, would also help the government raise close to Rs.60,000 crore from the sale of shares in around 36 listed PSUs where the public shareholding is less than 25 per cent.
Besides, the capital market watchdog has decided to share know your client (KYC) information with entities regulated by other financial sector watchdogs, a move aimed at having common norms across the financial market.
Looking to revive the primary market, the market regulator has eased norms related to the size of an initial public offer (IPO) and pricing of preferential shares while allowing anchor investors to have a greater exposure to the offering. All companies with a post-issue capital above Rs.4,000 crore are compulsorily required to offer at least 10 per cent stake in the IPO. In other IPOs, minimum dilution to public will be 25 per cent, or Rs.400 crore, whichever is lower. Meanwhile, to safeguard investors from manipulative reports and usher in more transparency, the SEBI board has approved detailed norms for ‘research analysts’ that include stringent disclosure requirements. “In India, research analysts were not being regulated. Now we have provided that all the people who are doing research reports they will be regulated, there will be a requirement, registration with SEBI and post-registration they will have certain disclosure requirements,”
Meanwhile, retail investors would now get a 10 per cent reservation in an offer for sale (OFS) and could also look forward to discounts by entities selling shares through this route. Further, the proposal allowing non-promoter shareholders having over 10 per cent stake to use the OFS mechanism has been cleared by the SEBI board. Over 100 companies have tapped the OFS route raising about Rs.50,000 crore since its introduction in February 2012.
SEBI has decided to make OFS route available to the top 200 listed firms by market capitalisation, compared with the top 100 listed companies at present.
The SEBI board also approved an easier set of regulations for employee stock option schemes that among other things would classify ESOP Trusts as a separate category of shareholding entities.
With new regulations for ESOPs, the regulator has allowed companies to have employee stock option programmes where they can buy their own company shares subject to certain conditions.
Further, a transition period of five years has been given to comply with various requirements including re-classification of “shareholding of existing employee benefit schemes separately from ‘promoter’ and ‘public’ category”. Regarding sharing of KYC details with other entities, Mr. Sinha said it was a “move towards aligning one single KYC across the financial market. So this is a first move in that direction which will be very very investor-friendly”.”
Sebi floats crowdfunding rules or collection of funds thru web based paltforms and social networking sites- to help start up companies raise capital and also check misuse of such avenues SEBI’s plan of allowing only ‘accredited investors’, defined as institutions, companies, high networth investors (HNIs) and ‘eligible’ retail investors, to take up crowd-funding Crowd-funding is more democratic — it allows investors with modest sums to come together in large numbers to kick-start a new venture. True, startups are risky investments with high failure rates and poor liquidity (the investor can exit only if the business is listed or sold). But this can easily be contained by ensuring that only a small portion of the investor’s portfolio is deployed in crowd-funding. This could be through a monetary limit (₹60,000 or 10 per cent of net worth, as SEBI suggests), while doing away with the other conditions. The disclosures mooted by SEBI — audited financials and a prospectus describing the business plans and promoters — should adequately inform prospective investors of the risks of startup funding. SEBI’s conditions for the firms who can tap this platform also seem too limiting. The ₹10-crore limit on each issuer appears reasonable to curb systemic risks, but the rule on the age (the entity should be less than four years old) is irrational.
Securities and Exchange Board of India issued an order prohibiting an offshore hedge fund — Factorial Master Fund, which was found guilty of insider trading
ESOS and ESPS – Employee stock option scheme and employee stock purchase scheme
“Qualified institutional placement (QIP) is a capital-raising tool, primarily used in India and other parts of southern Asia, whereby a listed company can issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to a qualified institutional buyer (QIB).
The Securities and Exchange Board of India (Sebi) introduced the QIP process in 2006, to prevent listed companies in India from developing an excessive dependence on foreign capital.
The complications associated with raising capital in the domestic markets had led many companies to look at tapping the overseas markets via Foreign Currency Convertible Bonds (FCCB) and Global Depository Receipts (GDR) to fulfil their needs. To keep a check on this process and to give a push to the domestic markets, QIPs were launched.
Apart from preferential allotment, this is the only other speedy method of private placement whereby a listed company can issue shares or convertible securities to a select group of persons. QIP scores over other methods because the issuing firm does not have to undergo elaborate procedural requirements to raise this capital.
QIP – Qualified institutional placement – Rcom raises 4800 crore thru QIP issue
Primary Market New securities are issure here Adv: Helps businessmen/govt raise funds IPO issued here
Help investors earn profit via dividend/ interest
Financial intermediaries earns in transaction
If lot of money in invested in primary market , It means companies are doing as many new projects / business expansion
Secondary Market The securities issued in primary market, are sold and repurchased here – k/as Share market
ECBs – External commercial borrowings when Indian company borrows money from external (non-Indian / foreign) sources.
Via bank loans, fixed rate bonds, non-convertible shares, optionally convertible or partially convertible preference shares etc.
For minimum average 3 years.
Those campanies can borrow via ECBs if they are registered under Companies Act 1956, in India
Cnt be used for share market or real-estate speculation.
Acquiring another company
Demerits If Rupee sharply weakens dollar (e.g. from 1$=Rs.50 to 1$=Rs.60), then Indian borrower will have to pay more amount of rupees to repay the same amount of loan he previously took. (because first he’ll need to convert his Indian rupee income/profit into dollar then repay the loan).
ECB reforms External Commercial Borrowings Policy during 2012-13
Infrastructure companies Infrastructure companies can borrow in Chinese currency (Renminbi/RMB)
Infrastructure companies can use 25% of the money borrowed via ECB for repaying their previous rupee debts IF they invest 75% of the ECB borrowed money to start new infrastructure projects.
SIDBI Banks as such, are not allowed to borrow via ECB route.
But Small Industries Development Bank (SIDBI) can borrow via ECB route and lend that money to micro, small, and medium enterprises (MSME) sector subject to certain conditions.
National housing bank National Housing Bank (NHB)/ Housing Finance Companies can also borrow via ECB and use that money on low cost / affordable housing units.
P Notes Participatory Notes offshore derivative instrument Tarapore Committee: Recommended Banning P-notes
“Tom Cruz wants to get maximum return on the investment in quickest possible time.
For this, Tom will have to find risky securities (shares/bonds) in third world countries, then invest money from one country to another quickly, depending on how sharemarket moves.
In India, no one can invest in sharemarket without getting PAN card + DEMAD account first. Other nations too have similar mechanism.
But if Tom tries to get PAN card and DEMAT account in each third world country, then his profit will decline- given the cost of running branch office, staff salary, DEMAT fees etc. in each country.
So, to take a shortcut, Tom will contact some ‘middleman’ who is already registered as an FII, has PAN card & DEMAT in India. e.g. HSBC.
Tom gives money to HSBC, with instruction “buy A, B and C shares/bonds in X, Y and Z quantity.”
HSBC buys Indian shares. They’ll be stored in DEMAT account of HSBC, and won’t be given to Tom.
But HSBC then gives a receipt to Tom listing the shares/bonds purchased on his behalf and stored in HSBC’s DEMAT account.
This receipt is called Participatory Note.
Tom has two options
Wait and watch. If the price of those shares go up, call up HSBC to sell them. HSBC returns principal + profit to Tom, after cutting commission. Tom returns the P-note receipt to HSBC.
Sell this P-note receipt to another foreigner say Jerry. Then Jerry again has same two options.”
“OFFSHORE : Because foreigner owning something in India, without coming to India or opening office in India.
DERIVATIVE : Because this receipt doesn’t have value of its own.It “derives” its value from the market value of shares/bonds held by HSBC. Today it may be worth $1000, tomorrow $12000 depending on how the prices of Indian securities move.
INSTRUMENT : Self-explanatory- this is one type of financial instrument to invest abroad.”
1992 SEBI had permitted P-notes, to boost foreign investment in India, after BoP crisis of 1991.
Features P-Note owner doesn’t have voting rights in the shareholder meetings
P-note owner doesn’t own the shares. (because they’re in the DEMAT account of that intermediary FII)
Constitute 13 % of total FII coming to India
P-notes can changed many hands without actual selling of stocks by transferring the receipts , so govt depreiced of capital gains tax on every transaction
P-note investments are Anonymous. Hard to trace the owner. Can be used for money laundering and terror financing.
Hot Money: can leave Indian market very soon based on just one phone call from Tom Cruz to HSBC. Hot money creates heavy rise or fall in share market, so even genuine investors’ money is lost.
Government must tax such P-note holders from next budget 2014 – Parthsarathi Shome
FII has to disclose P-note owner data to SEBI on quarterly basis (every 3 months). But often, within 3 months the P-notes would have changed many hands (e.g Tom to Jerry to Micky to Goofy).
Hedging Short Selling Leverage Arbitrage requires High net worth IndividualsHNIs ( who have huge money or shares )
Insider trading is the trading of a public company’s stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company. In various countries, insider trading based on inside information is illegal. This is because it is seen as unfair to other investors who do not have access to the information. Goldman Sachs director Rajat Gupta
Hedge Funds “Hedge fund is a similar investment game, where High net worth individuals (HNI) pool their money into high risky games to earn high return on investment.
Short seling Borrowing shares , selling for a short period and then buying later
Hedge Fund manager “borrows” 50000 facebook shares from a broker and immediately sells them in share market. ( as he sells , market will have abundant shares with less demand , so price falls.. similar to supplying 5000 kg of onions in the market will reduce price of onions in the market. As share prices will fall , again pay those cheap shares and earn profit
Sometimes share price may not fall down bcoz another Hedge fund manager is buying while you are selling – So you loose money
U need need massive quantity of shares to decrese their prices ( so HNIs are required)
Leverage Borrow money , buy shares and sell those shares later when the prices increase dark pool” trading operations, which allow clients to trade large blocks of shares while keeping prices private. – high frequenct traders skin profits from clients who order a astock at one price , only to end up paying more than the quoted amount after the high frequency firm pushes up the price thru a series of lightening quick transactions. Barclays for fraud over ” Dark Pool ” Trading
Arbitrage When same thing sells for different rates in two markets, Tom can take advantage of arbitrage, to make profit – buy from one stock exchange and sell to other
Mutual Funds You invest money in MF, they invest money in share market and give you profit, after cutting their commission.
Mutual funds could manage funds like Employee Provident Fund Organisation ( EPFO) – U K Sinha
registered as “Asset Management companies (AMC)” EPPO – see ageing
Alternative Investment fund (AIF)
An entity that collects money from people, and invests it.
unlike the regular mutual funds, they donot usually involve in the conventional debt-equity share market type investment.
And They’re not covered under SEBI’s regulations for mutual funds and collective investment schemes.
Such funds / entities are called Alternative Investment fund.
1 These funds have positive spillover effects on the economy. E.g. venture capital funds, small and medium enterprises (SME) funds, social venture funds, and infrastructure funds
SEBI and Government might give them incentives or concessions.
2 Funds that don’t fall under category 1 or 3.
They can invest anywhere in any combination but are prohibited from raising debt, except for meeting their day-to-day
SEBI/Government will not give any specific incentive or concession to them.
3 Funds that have negative externality.
They only work to get short-term benefits/speculation.
E.g Hedge funds.
Rajiv Gandhi Equity Savings Scheme (RGESS)
This was announced in Budget 2012.
Main purpose of this scheme: attract more (middle class and lower middle class) people to invest in securities market. (and divert them from investing money in gold, which increases current account deficit and creates more problems for Indian economy).
Conditions Your annual income must be below 12 lakh. (original figure was Rs.10 lakh, but Chindu raised it in budget 2013).
This must be your first investment in securities market. E.g. if you’ve been already investing purchased some IPOs, shares or invested in mutual funds, then you don’t get tax benefit in this scheme.
Lock in period of three years. (meaning you cannot take out your money before that).
You must purchase approved shares/mutual funds only.
Benefit? For investment upto Rs.50000, you get 50% deduction in income tax.
You can invest money in installments. No need to invest Rs.50000 in on go.
You don’t have to pay tax on dividends paid by the company.
Issues in RGESS To invest in any type of securities (debt or equity), you first need two things 1) PAN card and 2) DEMAT account. Most of the Indians don’t have either PAN card or DEMAT account.
Electronic Voting SEBI
A public limited company has shareholders. And the company needs to take votes of the shareholders before merger-acquisition, election of new board of directors etc.
Earlier this was done through postal ballot.
But in 2012, SEBI made rule: voting must be done through electronic means. (this reduces any mischief or foul play and brings more transparency).
At the moment, SEBI has made electronic voting is made Compulsory for the top 500 listed companies and more companies will be included soon.
SEBI complaints redress system It is a web portal, where you can file online-complaints to SEBI. Saradha Chit fund Scam – SEBI – ED enquiry
Negatives / what if not present
Govt has done so far
Promote awareness about vulnerabilities in financial system
The capital markets reflect the expectations on policy measures to adress the adverse growth-inflation dynamics and saving investment baance
ODI ( Overseas Direct Investment ) eased as per FEMA act
Root Cause analysis of technical error in BSE trading
has made a last-ditch effort to avoid going to prison next week on insider trading charges
Credit Rating Standard and Poor
To assess the credit worthiness of a borrower to meet debt obligations is credit rating
Done by Moody’s S & P ,
CRISIL – Indian credit rating agency