INTRODUCTION TO FINANCIAL MARKET (PART-1) FOR CLASS-XI

CENTRAL BOARD OF SECONDARY EDUCATION, DELHI

23-03-2007

CONTENTS 1. 2. 3. 0. 1. M !"#$% & F'( ()' * I(%$!+,#($% P!', !- M !"#$ S#).(/ !- M !"#$ F'( ()' * S$ $#,#($ A( *-%'% C.,,./'$'#% M !"#$ - I($!./+)$'.(

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INTRODUCTION TO FINANCIAL MARKET-I(CLASS XI)

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TYPES OF MARKETS
Efficient transfer of resources from those having idle resources to others who have a pressing need for them is achieved through financial markets. Stated formally, financial markets provide channels for allocation of savings to investment. These provide a variety of assets to savers as well as various forms in which the investors can raise funds and thereby decouple the acts of saving and investment. The savers and investors are constrained not by their individual abilities, but by the economy's ability, to invest and save respectively. The financial markets, thus, contribute to economic development to the extent that the latter depends on the rates of savings and investment. The financial markets have two major components !oney market "apital market. The M.(#- , !"#$ refers to the market where borrowers and lenders exchange short#term funds to solve their li$uidity needs. !oney market instruments are generally financial claims that have low default risk, maturities under one year and high marketability. The C 4'$ * , !"#$ is a market for financial investments that are direct or indirect claims to capital. %t is wider than the Securities !arket and embraces all forms of lending and borrowing, whether or not evidenced by the creation of a negotiable financial instrument. The "apital !arket comprises the complex of institutions and mechanisms through which intermediate term funds and long#term funds are pooled and made available to business, government and individuals. The "apital !arket also encompasses the process by which securities already outstanding are transferred. The S#)+!'$'#% M !"#$, however, refers to the markets for those financial instruments&claims&obligations that are commonly and readily transferable by sale. The Securities !arket has two interdependent and inseparable segments, the new issues 'primary( market and the stock 'secondary( market.

The )rimary market provides the channel for sale of new securities. The issuer of securities sells the securities in the primary market to raise funds for investment and&or to discharge some obligation. The Secondary market deals in securities previously issued. The secondary market enables those who hold securities to adjust their holdings in response to charges in their assessment of risk and return. They also sell securities for cash to meet their li$uidity needs. The price signals, which subsume all information about the issuer and his business including associated risk, generated in the secondary market, help the primary market in allocation of funds. This secondary market has further two components. *irst, the spot market where securities are traded for immediate delivery and payment. The other is forward market where the securities are traded for future delivery and payment. This forward market is further divided into *utures and +ptions !arket ',erivatives !arkets(. %n futures !arket the securities are traded for conditional future delivery whereas in option market, two types of options are traded. - 4+$ .4$'.( gives right but not an obligation to the owner to sell a security to the writer of the option at a predetermined price before a certain date, while a ) ** .4$'.( gives right but not an obligation to the buyer to purchase a security from the writer of the option at a particular price before a certain date.

.ets now understand these markets in broader sense.

E7UITY MARKET
/efore discussing the e$uities market, we should first understand the basic meaning of markets, their functions and classification.

83 $ '% M !"#$9 - market is a location where buyers and sellers come into contact to exchange goods or services. !arkets can exist in various forms depending on various factors. C ( M !"#$% E:'%$ '( D';;#!#($ F.!,%9 0es, the markets do exist in different forms depending on the nature of location and mode of contact. %t can have a physical location where buyers and sellers come in direct contact with each other or a virtual location where the buyers and sellers contact each other employing advance means of communication. There is another form of market where actual buyers and sellers achieve their objectives through intermediaries. S#)+!'$'#% M !"#$% '( I(/' 2 A( O<#!<'#52 The process of economic reforms and liberali1ation was set in motion in the mid#eighties and its pace was accelerated in 2332 when the economy suffered severely from a precariously low foreign exchange reserve, burgeoning imbalance on the external account, declining industrial production, galloping inflation and a rising fiscal deficit. The economic reforms, being an integrated process, included deregulation of industry, liberali1ation in foreign investment, regime, restructuring and liberali1ation of trade, exchange rate, and tax policies, partial disinvestments of government holding in public sector companies and financial sector reforms. The reforms in the real sectors such as trade, industry and fiscal policy were initiated first in order to create the necessary macroeconomic stability for launching financial sector reforms, which sought to improve the functioning of banking and financial institutions '*%s( and strengthen money and capital markets including securities market. The securities market reforms specifically included
4epeal of the "apital %ssues '"ontrol( -ct, 2356 through which 7overnment used to expropriate and allocate resources from capital market for favored uses8 Enactment of the Securities and Exchange /oard of %ndia -ct, 2339 to provide for the establishment of the Securities and Exchange /oard of %ndia 'SE/%( to regulate and promote development of securities market8 Setting up of :SE in 233;, passing of the ,epositories -ct, 233< to provide for the maintenance and transfer of ownership of securities in book entry form8 -mendments to the Securities "ontracts '4egulation( -ct, 23=< 'S"4-( in 2333 to provide for the introduction of futures and option. +ther measures included free pricing of securities, investor protection measures, use of information technology, demateriali1ation of securities, improvement in trading practices, evolution of an efficient and transparent regulatory framework, emergence of several innovative financial products and services and speciali1ed *%s etc.

These reforms are aimed at creating efficient and competitive securities market subject to effective regulation by SE/%, which would ensure investor protection.

A P!.;'*#2 The corporate securities market in %ndia dates back to the 2> th century when the securities of the East %ndia "ompany were traded in !umbai and ?olkotta. The brokers used to gather under a /anyan tree in !umbai and under a :eem tree in ?olkota for the purpose of trading those securities. @owever the real beginning came in the 2>=ABs with the introduction of joint stock companies with limited liability. The 2><ABs witnessed feverish dealings in securities and reckless speculation. This brought brokers in /ombay together in Culy 2>6= to form the first formally organi1ed stock exchange in the country vi1. The Stock Exchange, !umbai. -hmedabad stock exchange in 2>35 and 99 others followed this in the 9Ath century. The process of reforms has led to a pace of growth almost unparalleled in the history of any country. Securities market in %ndia has grown exponentially as measured in terms of amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitali1ation, trading volumes and turnover on stock exchanges, investor population and price indices. -long with this, the profiles of the investors, issuers and intermediaries have changed significantly. The market has witnessed fundamental institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency, transparency and safety, thanks to the :ational Stock Exchange. %ndian market is now comparable to many developed markets in terms of a number of parameters. S$!+)$+!# (/ S'=# .; $3# M !"#$%2 Today %ndia has two national exchanges, the /ombay Stock Exchange '/SE( and the :ational Stock Exchange ':SE(. Each has fully electronic trading platforms with around 35AA participating broking outfits. *oreign brokers account for 93 of these. There are some 3<AA companies listed on the respective exchanges with a combined market capitali1ation near D29=.=bn. -ny market that has experienced this sort of growth has an e$ually substantial demand for highly efficient settlement procedures. %n %ndia 33.3E of the trades, according to the :ational Securities ,epository, are settled in demateriali1ed form in a TF9 rolling settlement The capital market is one environment. %n addition, the :ational Securities "learing "orporation of %ndia .td ':S"".( and /ank of %ndia Shareholding .td '/+%S.(, "learing "orporation houses of :SE and /SE, guarantee trades respectively. The main functions of the "learing "orporation are to work out 'a( what counter parties owe and 'b( what counter parties are due to receive on the settlement date.
*urthermore, each exchange has a Settlement 7uarantee *und to meet with any unpredictable situation and a negligible trade failure of A.AA;E. The "learing "orporation of the exchanges assumes the counter#party risk of each member and guarantees settlement through a fine#tuned risk management system and an innovative method of online position monitoring. %t also ensures the financial settlement of trades on the appointed day and time irrespective of default by members to deliver the re$uired funds and&or securities with the help of a settlement guarantee fund.

S$-*# .; O4#! $'(>2 %ndian stock markets operated in the age#old conventional style of fact#to#face trading with bids and offers being made by open outcry. -t the /ombay Stock Exchange, about ;,AAA persons would mill around in the trading ring during the trading period of two hours from 29.AA noon to 9.AA p.m. %ndian stock markets basically $uote#driven markets with the jobbers standing at specific locations in the trading ring called trading posts and announcing continuously the two#way $uotes for the scrips traded at the post. -s there is no prohibition on a jobber acting as a broker and vice versa, any member is free to do jobbing on any day. %n actual practice, however, a class of jobbers has emerged who generally confine their activities to jobbing only. -s there are no serious regulations governing the activities of jobbers, the jobbing system is beset with a number of problems like wide spreads between bid and offer8 particularly in thinly traded securities, lack of depth, total absence of jobbers in a large number of securities, etc. %n highly volatile scrips, however, the spread is by far the narrowest in the world being just about A.2 to A.9= percent as compared to about 2.9= per cent in respect of alpha stocks, i.e. the most highly li$uid stocks, at the %nternational Stock Exchange of .ondon. The spreads widen as li$uidity decreases, being as much as 9= to ;A per cent or even more while the average touch of gamma stocks, i.e. the least li$uid stocks at the %nternational Stock Exchange, .ondon, is just about < to 6 per cent. This is basically because of the high velocity of transactions in the active scrips. %n fact, shares in the specified group account for over 6= percent of trading in the %ndian stock markets while over 9= percent of the securities do not get traded at all in any year. 0et, it is significant to note that out of about <,AAA securities listed on the /ombay Stock Exchange, about 2,9AA securities get traded on any given trading day.
The $uestion of automating trading has always been under the active consideration of the /ombay Stock Exchange for $uite sometime. %t has decided to have trading in all the non#specified stocks numbering about 5,2AA totally on the computer on a $uote#driven basis with the jobbers, both registered and roving, continuously keying in their bids and offers into the computer with the market orders getting automatically executed at the touch and the limit orders getting executed at exactly the rate specified. %n !arch 233=, the /SE started the computeri1ed trading system, called /+.T # /SE on#line trading system. %nitially only >2> scripts were covered under /+.T. %n Culy 233=, all scripts 'more than =,AAA( were brought under the computeri1ed trading system. The advantages reali1ed are 'a( improved trading volume8 'b( reduced spread between the buy#sell orders8 c( better trading in odd lot shares, rights issues etc.

H'>3*'>3$% .; $3# H'>3*- A$$! )$'<# I(/' ( E?+'$- M !"#$2 Two major reasons why %ndian securities are now increasingly regarded as attractive to international investors are the relatively high returns compared with more developed global markets as well as the low correlation with world markets.

DEBT MARKET
The :ational Stock Exchange started its trading operations in Cune 2335 by enabling the Gholesale ,ebt !arket 'G,!( segment of the Exchange. This segment provides a trading platform for a wide range of fixed income securities that includes central government securities, treasury bills 'T#bills(, state development loans 'S,.s(, bonds issued by public sector undertakings ')SHs(, floating rate bonds '*4/s(, 1ero coupon bonds 'I"/s(, index bonds, commercial papers '")s(, certificates of deposit '",s(, corporate debentures, S.4 and non#S.4 bonds issued by financial institutions '*%s(, bonds issued by foreign institutions and units of mutual funds '!*s(. To further encourage wider participation of all classes of investors, including the retail investors, the 4etail ,ebt !arket segment '4,!( was launched on Canuary 2<, 9AA;. This segment provides for a nation wide, anonymous, order driven, screen based trading system in government securities. %n the first phase, all outstanding and newly issued central government securities were traded in the retail debt market segment. +ther securities like state government securities, T#bills etc. will be added in subse$uent phases. The settlement cycle is same as in the case of e$uity market i.e., TF9 rolling settlement cycle.

DERI@ATI@ES MARKET
The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk#averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. /y their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by lockingJin asset prices. -s instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. @owever, by locking#in asset prices, derivative products minimi1e the impact of fluctuations in asset prices on the profitability and cash flow situation of risk#averse investors.

D#!'< $'<#% D#;'(#/2 ,erivative is a product whose value is derived from the value of one or more basic variables, called bases 'underlying asset, index, or reference rate(, in a contractual manner. The underlying asset can be e$uity, forex, commodity or any other asset. *or example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the KunderlyingL.
%n the %ndian context the Securities "ontracts '4egulation( -ct, 23=< 'S"'4(-( defines KderivativeL to include J

- security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. - contract, which derives its value from the prices, or index of prices, of underlying securities.

,erivatives are securities under the S"'4(- and hence the trading of derivatives is governed by the regulatory framework under the S"'4(-.

P!./+)$%, P !$')'4 ($% (/ F+()$'.(%2 ,erivative contracts have several variants. The most common variants are forwards, futures, options and swaps. The following three broad categories of participants # hedgers, speculators, and arbitrageurs trade in the derivatives market. @edgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. Speculators wish to bet on future movements in the price of an asset. *utures and options contracts can give them an extra leverage8 that is, they can increase both the potential gains and potential losses in a speculative venture. -rbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. %f, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.
The derivatives market performs a number of economic functions. *irst, prices in an organi1ed derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. Thus derivatives help in discovery of future as well as current prices. Second, the derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. Third, derivatives, due to their inherent nature, are linked to the underlying cash markets. Gith the introduction of derivatives, the underlying market witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. *ourth, speculative trades shift to a more controlled environment of derivatives market. %n the absence of an organi1ed derivatives market, speculators trade in the underlying cash markets. !argining, monitoring and surveillance of the activities of various participants become extremely difficult in these kind of mixed markets. *ifth, an important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. The derivatives have a history of attracting many bright, creative, well#educated people with an entrepreneurial attitude. They often energi1e others to create new businesses, new products and new employment opportunities, the benefit of which are immense. *inally, derivatives markets help increase savings and investment in the long run. Transfer of risk enables market participants to expand their volume of activity.

T-4#% .; D#!'< $'<#%2 The most commonly used derivatives contracts are forwards, futures and options, which we shall discuss these in detail in the *!!#%%

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later. @ere we take a brief look at various derivatives contracts that have come to be used.

*orwards - forward contract is a customi1ed contract between two entities, where settlement takes place on a specific date in the future at todayBs pre# agreed price. *utures - futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. *utures contracts are special types of forward contracts in the sense that the former are standardi1ed exchange#traded contracts. +ptions +ptions are of two types # calls and puts. "alls give the buyer the right but not the obligation to buy a given $uantity of the underlying asset, at a given price on or before a given future date. )uts give the buyer the right, but not the obligation to sell a given $uantity of the underlying asset at a given price on or before a given date. Garrants +ptions generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. .onger#dated options are called warrants and are generally traded over#the#counter. .E-)S The acronym .E-)S means .ong#Term E$uity -nticipation Securities. These are options having a maturity of up to three years. /askets /asket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. E$uity index options are a form of basket options. Swaps Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are %nterest rate swaps These entail swapping only the interest related cash flows between the parties in the same currency and "urrency swaps These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Swaptions Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. 4ather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. - receiver swaption is an option to receive fixed and pay floating. - payer swaption is an option to pay fixed and receive floating.

COMMODITIES MARKET
,erivatives as a tool for managing risk first originated in the commodities markets. They were then found useful as a hedging tool in financial markets as well. %n %ndia, trading in commodity futures has been in existence from the nineteenth century with organi1ed trading in cotton through the establishment of "otton Trade

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-ssociation in 2>6=. +ver a period of time, other commodities were permitted to be traded in futures exchanges. 4egulatory constraints in 23<As resulted in virtual dismantling of the commodities future markets. %t is only in the last decade that commodity future exchanges have been actively encouraged. @owever, the markets have been thin with poor li$uidity and have not grown to any significant level. .etBs look at how commodity derivatives differ from financial derivatives.

D';;#!#()# 6#$5##( C.,,./'$- (/ F'( ()' * D#!'< $'<#%2 The 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. %n the case of financial derivatives, most of these contracts are cash settled. Even 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 exist as far as financial underlying is concerned. @owever in the case of commodities, the $uality of the asset underlying a contract can vary largely. This becomes an important issue to be managed. Ge have a brief look at these issues. )hysical Settlement # )hysical settlement involves the physical delivery of the underlying commodity, typically at an accredited warehouse. The seller intending to make delivery would have to take the commodities to the designated warehouse and the buyer intending to take delivery would have to go to the designated warehouse and pick up the commodity. This may sound simple, but the physical settlement of commodities is a complex process. The issues faced in physical settlement are enormous. There are limits on storage facilities in different states. There are restrictions on interstate movement of commodities. /esides state level octroi and duties have an impact on the cost of movement of goods across locations. Garehousing # +ne of the main differences between financial and commodity derivatives is the need for warehousing. %n case of most exchange traded financial derivatives, all the positions are cash settled. "ash settlement involves paying up the difference in prices between the time the contract was entered into and the time the contract was closed. *or instance, if a trader buys futures on a stock at 4s.2AA and on the day of expiration, the futures on that stock close 4s.29A, he does not really have to buy the underlying stock. -ll he does is take the difference of 4s.9A in cash. Similarly the person, who sold this futures contract at 4s.2AA, does not have to deliver the underlying stock. -ll he has to do is pay up the loss of 4s.9A in cash. %n case of commodity derivatives however, there is a possibility of physical settlement. Ghich means that if the seller chooses to hand over the commodity instead of the difference in cash, the buyer must take physical delivery of the underlying asset. This re$uires the exchange to make an arrangement with warehouses to handle the settlements. The efficacy of the commodities settlements depends on the warehousing system available. !ost international commodity exchanges used certified warehouses '"G@( for the purpose of handling physical settlements. Such "G@ are re$uired to provide storage facilities for participants in

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the commodities markets and to certify the $uantity and $uality of the underlying commodity. The advantage of this system is that a warehouse receipt becomes a good collateral, not just for settlement of exchange trades but also for other purposes too. %n %ndia, the warehousing system is not as efficient as it is in some of the other developed markets. "entral and state government controlled warehouses are the major providers of agri#produce storage facilities. -part from these, there are a few private warehousing being maintained. @owever there is no clear regulatory oversight of warehousing services.

Muality of Hnderlying -ssets # - derivatives contract is written on a given underlying. Nariance in $uality is not an issue in case of financial derivatives as the physical attribute is missing. Ghen the underlying asset is a commodity, the $uality of the underlying asset is of prime importance. There may be $uite some variation in the $uality of what is available in the marketplace. Ghen the asset is specified, it is therefore important that the exchange stipulate the grade or grades of the commodity that are acceptable. "ommodity derivatives demand good standards and $uality assurance&certification procedures. - good grading system allows commodities to be traded by specification.
"urrently there are various agencies that are responsible for specifying grades for commodities. *or example, the /ureau of %ndian Standards '/%S( under !inistry of "onsumer -ffairs specifies standards for processed agricultural commodities whereas -7!-4? under the department of rural development under !inistry of -griculture is responsible for promulgating standards for basic agricultural commodities. -part from these, there are other agencies like E%-, which specify standards for export oriented commodities.

MEANINA AND COMPANIES

FEATURES

OF

PRI@ATE,

PUBLIC

The principal forms of business organi1ation whose securities are traded in the *inancial !arkets in %ndia are "ompanies J both public and private. "ompanies incorporated in %ndia and branches of foreign corporations are regulated by the "ompanies -ct, 23=< 'the -ct(. The -ct, which has been enacted to oversee the functioning of companies in %ndia, draws heavily from the Hnited ?ingdomBs "ompanies -cts and although similar, is more comprehensive. The 4egistrar of "ompanies '4+"( and the "ompany .aw /oard '"./(, both working under the ,epartment of "ompany -ffairs, ensure compliance with the -ct.

T-4#% .; C.,4 ('#%2 - company can be a public or a private company and could have limited or unlimited liability. - company can be limited by shares or by guarantee. %n the former, the personal liability of members is limited to the amount unpaid on their shares while in the latter8 the personal liability is limited by a pre# decided nominated amount. *or a company with unlimited liability, the liability of its members is unlimited. -part from statutory government owned concerns, the most

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prevalent form of large business enterprises is a company incorporated with limited liability. "ompanies limited by guarantee and unlimited companies are relatively uncommon.

P!'< $# C.,4 ('#%2 - private company incorporated under the -ct has the following characteristics
The right to transfer shares is restricted. The maximum number of its shareholders is limited to =A 'excluding employees(. :o offer can be made to the public to subscribe to its shares and debentures. )rivate companies are relatively less regulated than public companies as they deal with the relatively smaller amounts of public money.

- private company is deemed to be a public company in the following situations Ghen 9= percent or more of the private companyBs paid#up capital is held by one or more public company. The private company holds 9= percent or more of the paid#up share capital of a public company. The private company accepts or renews deposits from the public. The private companyBs average annual turnover exceeds 4s. 9=A million during a period of ; consecutive financial years.

P+6*') C.,4 ('#%2 - public company is defined as one, which is not a private company. %n other words, a public company is one on which the above restrictions do not apply. Summary of steps involved in forming a company
STE) 2 STE) 9 STE) ; STE) 5 STE) = STE) < STE) 6 STE) > STE) 3 ST-4T +btaining approval for the proposed name of the company from the 4+" ,rawing up the !emorandum of -ssociation ,rawing up the -rticles of -ssociation 7etting the appropriate persons to subscribe to the !emorandum 'a minimum of 6 for a public company and 9 for a private company( )ayment of 4egistration *ee to the 4+" 4eceipt of "ertificate of %ncorporation +btain a certificate of commencement of business from the 4+" in case of a public company E:,

F.!#'>( C.,4 ('#%2 *oreign investors can enter into the business in %ndia either as a foreign company in the form of a liaison office&representative office, a project office and a branch office by registering themselves with 4egistrar of "ompanies '4+"(, :ew ,elhi within ;A days of setting up a place of business in %ndia or as an %ndian company in the form of a Coint Nenture and wholly owned subsidiary. *or opening of the foreign company specific approval of 4eserve /ank of %ndia is also re$uired.

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TYPES OF IN@ESTMENT A@ENUES

/efore starting with the deep discussion on financial markets, we must know in a broad sense about the types of investment avenues available in these markets. %n other words knowing the alternative financial instruments that are bought and sold in these markets. Ghen a person has more money than he re$uires for current consumption, he would be coined as a potential investor. The investor who is having extra cash could invest it in assets like stock or gold or real estate or could simply deposit it in his bank account. -ll of these activities in a broader sense mean investment. :ow, lets define investment. HO8 DO YOU DEFINE IN@ESTMENT9 Ge can define investment as the process of, Ksacrificing something now for the prospect of gaining something laterL. So, the definition implies that we have four dimensions to an investment J time, todayBs sacrifice and prospective gain. "an we think of Some Transactions, which will $ualify as K%nvestmentsL as per +ur ,efinitionO 2. %n order to settle down, a young couple buys a house for 4s.; lakhs in /angalore. 9. - wealthy farmer pays 4s.2 lakh for a piece of land in his village. ;. - cricket fan bets 4s.2AA on the outcome of a test match in England. 5. - government officer buys PunitsB of Hnit Trust of %ndia worth 4s 5,AAA. =. - college professor buys, in anticipation of good return, 2AA shares of 4eliance %ndustries .td. <. - lady clerk deposits 4s.=, AAA in a )ost +ffice Savings -ccount. 6. /ased on the rumor that it would be a hot issue in the market in no distant future, our friend Cohn invests all his savings in the newly floated share issue of *raternity Electronics .td., a company intending to manufacture audio and video magnetic tapes to start with, and cine sound tapes at a later stage.

I% $3#!# (- ).,,.( ;# $+!# $. ** $3#%# '(<#%$,#($%9 - common feature of all these transactions is that something is sacrificed now for the prospects of gaining something later. *or example, the wealthy farmer in transaction 9 sacrifices 4s.2 lakh now for the prospects of crop income later. The lady clerk in transaction < sacrifices 4s.=,AAA now for the prospect of getting a larger amount later due to interest earned on the savings account. Thus, in a broad sense, all these seven transactions $ualify as investment.
.ets now understand the classification of various investment alternatives.

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FIXED DEPOSITS
The term KfixedL in fixed deposits denotes the period of maturity or tenor. *ixed ,eposits, therefore, pre#supposes a certain length of time for which the depositor decides to keep the money with the bank and the rate of interest payable to the depositor is decided by this tenor. The rate of interest differs from bank to bank and is generally higher for private sector and foreign banks. This, however, does not mean that the depositor loses all his rights over the money for the duration of the tenor decided. The deposits can be withdrawn before the period is over. @owever, the amount of interest payable to the depositor, in such cases goes down 'usually 2E to 9E less than the original rate(. !oreover, as per 4/% regulations there will be no interest paid for any premature withdrawals for the period 2= days to 93 or 2= to 5= days as the case may be. +ther than banks, there are non#banking financial companies and companies who float schemes from time to time for garnering deposits from the public. %n the recent past, however, many such schemes have gone bust and it is very essential to look out for danger signals before putting all your eggs in one basket. THINAS TO LOOK OUT FOR.... "redit rating& reputation of the group The rating is possibly the best way to judge the credit worthiness of a company. @owever, for manufacturing company deposits, it is not mandatory to get a rating. %n such cases, it is better to check the si1e and reputation of the company or the industrial group it belongs to. %nterest rate Githin the same safety level 'or rating(, a higher interest rate is a better option. The difference in some cases can be as high as 2E. ,iversify The portfolio principle applies to company deposits also. %t is always better to spread deposits over different companies and industries so as to reduce risk. )eriod of deposit The ideal period for a company deposit is < months to one year as it offers the li$uidity option. -lso, it gives an opportunity to review the companyBs performance. )eriodic review of the company -s your principal and interest rests in the hand of the company, it is advisable to review the companyBs performance periodically.

83#!# N.$ T. I(<#%$9 "ompanies that offers very high rates of interest, say 2<E or above, when others are offering 29#2;E. "ompanies with poor cash flows. -void unincorporated companies& private limited companies, as it is difficult to judge their performance in absence of information.

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"ompanies with accumulated losses on their balance sheets. "ompanies with a poor dividend paying record.

C.,4 (- F':#/ D#4.%'$%

*ixed deposits in companies that earn a fixed rate of return over a period of time are called "ompany *ixed ,eposits. *inancial institutions and :on#/anking *inance "ompanies ':/*"s( also accept such deposits. ,eposits thus mobili1ed are governed by the "ompanies -ct under Section =>-. These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the company to recover his capital, thus making them a risky investment option. :/*"s are small organi1ations, and have modest fixed and manpower costs. Therefore, they can pass on the benefits to the investor in the form of a higher rate of interest. :/*"s suffer from a credibility crisis. So be absolutely sure to check the credit rating. --- rating is the safest. -ccording to latest 4/% guidelines, :/*"s and companies cannot offer more than 25 per cent interest on public deposits IN@ESTMENT OBBECTI@ES

A!# C.,4 (- F':#/ D#4.%'$% S+'$ 6*# ;.! ( I()!# %# '( M- I(<#%$,#($9 "ompany&:/*" *ixed ,eposit provides for faster appreciation in the principal amount than bank fixed deposits and post#office schemes. @owever, the increase in the interest rate is essentially due to the fact that it entails more risk as compared to banks and post#office schemes. A!# C.,4 (- F':#/ D#4.%'$% S+'$ 6*# ;.! I().,#9 0es, "ompany&:/*" *ixed ,eposits are suitable for regular income with the option to receive monthly, $uarterly, half#yearly, and annual interest income. !oreover, the interest rates offered are higher than banks. T. 83 $ E:$#($ D.#% C.,4 (- D#4.%'$ P!.$#)$ M# A> '(%$ I(;* $'.(9 "ompany&:/*" *ixed ,eposit provides you with limited protection against inflation, with comparatively higher returns than other assured return options. C ( I B.!!.5 A> '(%$
RISK CONSIDERATIONS

C.,4 (- F':#/ D#4.%'$9

H.5 A%%+!#/ C ( I 6# O; A#$$'(> M- F+** I(<#%$,#($ B )"9 "ompany *ixed ,eposits are unsecured instruments, i.e., there are no assets backing them up. Therefore, in case the company&:/*" goes under, chances are that you may not get your principal sum back. %t depends on the strength of the company and its ability to pay back your deposit at the time of its maturity. Ghile investing in an :/*", always remember to first check out its credit rating. -lso, beware of :/*"s offering ridiculously high rates of interest.

17

H.5 A%%+!#/ I% M- I().,#9 :ot at all secured. Some :/*"s have known to default on their interest and principal payments. 0ou must check out the li$uidity position and its revenue plan before investing in an :/*". A!# T3#'! (- R'%"% U('?+# $. C.,4 (- F':#/ D#4.%'$%9 %f the "ompany&:/*" goes under, there is no assurance of your principal amount. !oreover, there is no guarantee of your receiving the regular#interval income from the company. %nflation and interest rate movements are one of the major factors affecting the decision to invest in a "ompany&:/*" *ixed ,eposit. -lso, you must keep the safety considerations and the company&:/*"Bs credit rating and credibility in mind before investing in one. A!# C.,4 (-CNBFC D#4.%'$% ! $#/ ;.! $3#'! )!#/'$ 7+ *'$-9 0es, "ompany&:/*" *ixed ,eposits are rated by credit rating agencies like "-4E, "4%S%. and %"4-. - company rated lower by credit rating agency is likely to offer a higher rate of interest and vice#versa. -n --- rating signifies highest safety, and , or *, means the company is in default.
BUYINA, SELLINA, AND HOLDINA

H.5 /. I B+- C.,4 (-CNBFC F':#/ D#4.%'$9 "ompany *ixed ,eposits forms is available through various broking agencies or directly with the companies. Similar is the case for the :/*"s, Some of the options available are J !onthly income deposits, where interest is paid every month J Muarterly income deposits, where interest is paid once every $uarter J "umulative deposits, where interest is accumulated and paid along with the principal at the time of maturity J 4ecurring deposits, similar to the recurring deposits of banks. 83 $ I% T3# M'(',+, I(<#%$,#($ A(/ T3# R (># O; I(<#%$,#($ ;.! A C.,4 (- C NBFC F':#/ D#4.%'$9 !inimum investment in a "ompany&:/*" *ixed deposit varies from company to company. :ormally, the minimum investment is 4s.=,AAA. *or individual investors, there is no upper ceiling. %n case of recurring deposits, the minimum amount is normally 4s.2AA per month. 83 $ '% T3# D+! $'.( .; T3# C.,4 (-CNBFC F':#/ D#4.%'$ S)3#,#9 "ompany & :/*" *ixed ,eposits have varying duration8 they may vary from a minimum of < months to = years or even more. C ( C.,4 (- FD 6# %.*/ '( $3# S#).(/ !- M !"#$9 :o, a company&:/*" *ixed ,eposit can only be en#cashed at the "ompany& :/*" it was invested in. 83 $ '% $3# L'?+'/'$- .; C.,4 (-CNBFC F':#/ D#4.%'$9 - company&:/*" *ixed ,eposit is li$uid to the extent that premature withdrawal is allowed, but it entails a loss of interest.

18

H.5 '% $3# M !"#$ @ *+# .; C.,4 (-CNBFC ;':#/ D#4.%'$ D#$#!,'(#/, (/ H.5 D. I K##4 T! )" .; I$9 "ompany&:/*" *ixed ,eposits do not have a market value since they canBt be sold or purchased in the secondary market. 83 $ '% T3# M./# .; H.*/'(> C.,4 (-CNBFC F':#/ D#4.%'$9 Ghen a depositor invests in a "ompany&:/*" *ixed ,eposit, a receipt and acknowledgement is issued to him.
TAX IMPLICATIONS %nterest from a "ompany&:/*" *ixed ,eposit is fully taxable, and is not covered under Section >A. of the %ncome Tax -ct. Therefore no deductions are allowed from interest income.

BANK DEPOSITS
Ghen you deposit a certain sum in a bank with a fixed rate of interest and a specified time period, it is called a bank *ixed ,eposit '*,(. -t maturity, you are entitled to receive the principal amount as well as the interest earned at the pre# specified rate during that period. The rate of interest for /ank *ixed ,eposits varies between 5 and < per cent, depending on the maturity period of the *, and the amount invested. The interest can be calculated monthly, $uarterly, half#yearly, or annually, and varies from bank to bank. They are one the most common savings avenue, and account for a substantial portion of an average investorBs savings. The facilities vary from bank to bank. Some services offered are withdrawal through che$ues on maturity8 break deposit through premature withdrawal8 and overdraft facility etc. IN@ESTMENT OBBECTI@ES

H.5 S+'$ 6*# !# F':#/ D#4.%'$% ;.! ( I()!# %# '( M- I(<#%$,#($9 Ghile a /ank *, does provide for an increase in your initial investment, it may be at a lower rate than other comparable fixed#return instruments. Since capital appreciation in any investment option depends on the safety of that option, and banks being among the safest avenues, the increase in investment is modest. A!# F':#/ D#4.%'$% S+'$ 6*# F.! R#>+* ! I().,#9 - /ank *, does not provide regular interest income, but a lump#sum amount on its maturity. Since the lump# sum amount depends on the rate of interest, currently between 5 and < per cent, /ank *,s are not suitable for regular income. T. 83 $ E:$#($ D.#% B (" FD P!.$#)$ M# A> '(%$ I(;* $'.(9 Gith a fixed return, which is lower than other assured return options, banks cannot guard against inflation. %n fact, this is the main problem with /ank *,s as any return has to be calculated keeping inflation in mind.

19

C ( I B.!!.5 A> '(%$ B (" FD%9 0es, in some cases, loans up to 3A per cent of the deposit amount can be taken from the bank against fixed deposit receipts.
RISK CONSIDERATIONS

H.5 %%+!#/ ) ( I 6# .; >#$$'(> ,- F+** I(<#%$,#($ B )"9 -lmost 2AA per cent. /ank ,eposits are the safest investment option after post#office schemes since the banks function according to the parameters set by the 4eserve /ank of %ndia '4/%(, which frames regulations keeping in mind the interest of the investors. H.5 A%%+!#/ I% M- I().,#9 There is no regular income in this option as the payment is made in one lump sum after the expiry of the tenure of the /ank *ixed ,eposit. A!# T3#!# A(- R'%"% U('?+# T. B (" FD%9 :ot really. Since all the banks operating in the country, irrespective of whether they are nationali1ed, private, or foreign, are governed by the 4/%Bs rules and regulations, which give due weight age to the interest of the investor, there is little chance of an investment in a bank deposit going under. %n fact, till recently, all bank deposits were insured under the ,eposit %nsurance Q "redit 7uarantee Scheme of %ndia, which has now been made optional. :evertheless, bank deposits are still among the safest modes of investment. The thing to consider before investing in a *, is the rate of interest and the inflation rate. - high inflation rate can simply chip away your real returns. So, it is critical to take the inflation rate into consideration to arrive at the real rate of interest. A!# B (" FD% ! $#/ ;.! $3#'! C!#/'$ 7+ *'$-9 :o, /ank *,s are not commercially rated. Since /ank *,s are extremely secure8 the only thing to check out while investing in one is the interest rate being offered and your convenience. I($#!#%$ R $#% P - 6*# .( D#4.%'$%
D+! $'.( I($#!#%$ R $#% (D 4. .) E;;#)$'<# 11$3 D#) 200E ;.6= =.AA =.=A <.=A 6.=A 6.6= >.AA

6 days to 25 days '4s.2 cr and above( 2= days to 5= days 5< days to 263 days 2>A days to less than 2 year 2 year to less than ; years ; years to less than = years = years and up to 2A years
Source State /ank of %ndia

BUYINA, SELLINA, AND HOLDINA

20

H.5 D. I O4#( A B (" F':#/ D#4.%'$ A)).+($9 0ou can get a bank *, at any bank, be it nationali1ed, private, or foreign. 0ou have to open a *, account with the bank, and make the deposit. @owever, some banks insist that you maintain a savings account with them to operate a *,. 83 $ '% $3# M'(',+, I(<#%$,#($ (/ $3# R (># .; I(<#%$,#($ ;.! B (" FD%9 !inimum investment in an *, varies from bank to bank. %t could be as low as 4s.=AA in case of nationali1ed banks, and could go up to 4s.2A,AAA in private banks and 4s.=A,AAA in some foreign banks. /anks are free to offer interest rates on their *,s, depending on the interest rate scenario, the governmentBs monetary policy, and their own money supply position. 83 $ '% $3# D+! $'.( .; B (" FD9 /ank *,s have varying duration from 2= days to more than = years. ,epending on their duration, the interest also varies. C ( B (" FD% 6# %.*/ '( T3# S#).(/ !- M !"#$9 :o, a bank *, can only be en#cashed from the bank it was taken from. 83 $ '% $3# L'?+'/'$- .; B (" FD%9 /ank *,s are li$uid to the extent that premature withdrawal of a bank *, is allowed. @owever, that involves a loss of interest. H.5 '% $3# M !"#$ @ *+# .; B (" FD D#$#!,'(#/, (/ 3.5 /. I K##4 T! )" .; I$9 Since /ank *,s cannot be sold in the market8 they do not have a market value. -n individual bank, keeping the market forces in mind, determines the interest on a /ank *,. /anks periodically mail to you account statements or issue passbooks through which you can track your account status. 83 $ '% $3# M./# .; H.*/'(> B (" FD9 Ghen a depositor opens an *, account with a bank, a passbook or an account statement is issued to him, which can be updated from time to time, depending on the duration of the *, and the fre$uency of the interest calculation.
TAX IMPLICATIONS %nterest income from a /ank *, $ualifies for taxation, which means that you pay tax as per your income slab.

R#)+!!'(> B (" D#4.%'$%

Hnder a 4ecurring /ank ,eposit, you invest a specific amount in a bank on a monthly basis for a fixed rate of return. The deposit has a fixed tenure, at the end of which you get your principal sum as well as the interest earned during that period. The rate of interest, calculated $uarterly or as specified by the bank, varies between 5 and < per cent, depending on the maturity period and the amount invested. - 4ecurring /ank ,eposit is a powerful tool for regular savings.

21

IN@ESTMENT OBBECTI@ES

A!# R#)+!!'(> B (" D#4.%'$% S+'$ 6*# ;.! ( I()!# %# '( M- I(<#%$,#($9 4ecurring /ank ,eposit, by definition, is supposed to appreciate in value over time. @owever, the rate at which it appreciates is pre#determined by the rate of interest specified. %t accumulates money at a fixed rate, compounded $uarterly or as the bank may specify, and your investments appreciate regularly during the tenure of the account. Since capital appreciation in any investment option depends on the safety of that option, and banks being among the safest avenues, the increase in investment is modest. 7o for it if you want to set aside a fixed amount every month for savings.
H.5 Y.+! M.(#- A!.5% I( A R#)+!!'(> D#4.%'$

A,.+($ ,.($3)
4s.2AA 4s.=AA 4s.6=A 4s.;,AAA

I(<#%$#/

(4#!

M $+!'$Y# !%F
4s.9,<92 4s.2;,2A< 4s.23,<=3 4s.6>,<;5

A,.+($

I(

R -ssuming a return of = per cent compounded $uarterly

A!# R#)+!!'(> B (" D#4.%'$% S+'$ 6*# F.! I().,#9 :o, a recurring deposit is not meant for regular income since you get a fixed sum at the end of the tenure of the deposit. T. 83 $ E:$#($ /.#% R#)+!!'(> D#4.%'$ P!.$#)$ ,# > '(%$ I(;* $'.(9 Since a recurring deposit offers a fixed rate of return, it cannot guard against inflation if it is more than the rate of return offered by the bank. Gorse, lower the gap between the interest rate on a recurring deposit and inflation, lower your real rate of return. C ( I B.!!.5 A> '(%$ R#)+!!'(> B (" D#4.%'$9 0es, by fulfilling certain conditions, one can apply for a loan against a 4ecurring /ank ,eposit. @owever, again, you will lose out on a part of the interest income if you do go in for a loan against it with the same bank.
RISK CONSIDERATIONS

H.5 A%%+!#/ ) ( I 6# .; A#$$'(> M- F+** I(<#%$,#($ B )"9 -lmost 2AA per cent. -ll banks functioning in the country fall under the jurisdiction of the 4/%, and have to necessarily comply with the rules and regulations stipulated by the central bank under the /anking 4egulation -ct. :ow, the norms specified by the 4/% are fairly stringent, and a reasonably refined system is in place that ensures complete transparency of the bankBs operating procedures and systems, thus making the 4/% aware of the financial health of the bank at all times. !oreover, the 4/%Bs code

22

regarding the :on#)erforming -ssets ':)-s( and the "ash 4eserve 4atio '"44( are pretty elaborate and explicit, thus acting as a safety net for the investor.

H.5 A%%+!#/ '% M- I().,#9 There is no regular income in this option as the payment is made in one lump sum after the expiry of the tenure of the 4ecurring /ank ,eposit. A!# T3#!# (- R'%"% U('?+# $. R#)+!!'(> B (" D#4.%'$%9 :ot really. Since all banks operating in the country, irrespective of whether they are nationali1ed, private, or foreign, are governed by the 4/%Bs stringent rules and regulations, which give due weight age to the interest of the investor, there is little chance of an investment in a 4ecurring /ank ,eposit going under. %n fact, till recently, all bank deposits were insured under the ,eposit %nsurance Q "redit 7uarantee Scheme of %ndia, which has now been made optional, and a lot of banks have opted out of it. :evertheless, bank deposits are among the safest modes of investment. The thing to consider before investing in a 4ecurring /ank ,eposit is the inflation rate. - high inflation rate can simply chip away your returns. So, it is critical to take the inflation rate into consideration to arrive at the real rate of interest. A!# R#)+!!'(> B (" D#4.%'$% ! $#/ ;.! $3#'! C!#/'$ 7+ *'$-9 :o, bank deposits are not commercially rated. Since bank deposits are extremely secure, the only thing to check out while investing in one is the interest rate being offered and your convenience.
BUYINA, SELLINA AND HOLDINA

H.5 /. I B+- R#)+!!'(> B (" D#4.%'$9 - 4ecurring /ank ,eposit account can be opened at any branch of a bank that offers this facility. @owever, some banks insist that you maintain a savings bank account with them to operate a 4ecurring /ank ,eposit account. ,o check up the terms and conditions as they vary from bank to bank. 83 $ !# $3# M'(',+, I(<#%$,#($ (/ $3# R (># .; I(<#%$,#($ ;.! R#)+!!'(> B (" D#4.%'$9 The minimum investment varies from bank to bank. S/% has kept the minimum investment amount at 4s.2AA per month and there is no upper limit on the same. /anks can change their recurring deposit rates depending on the money supply position. %n case you do have a savings bank account with the same bank, the amount due every month for the 4ecurring /ank ,eposit will be automatically deducted from your savings account. 83 $ '% $3# D+! $'.( .; $3# R#)+!!'(> B (" D#4.%'$ S)3#,#9 The 4ecurring /ank ,eposit scheme varies from bank to bank. @owever, the minimum period is at least < months. C ( R#)+!!'(> B (" D#4.%'$ 6# %.*/ '( $3# S#).(/ !- M !"#$9 :o, a 4ecurring ,eposit can only be en#cashed from the bank it was taken from.

23

83 $ '% $3# L'?+'/'$- .; R#)+!!'(> B (" D#4.%'$9 - 4ecurring /ank ,eposit is li$uid to the extent that premature withdrawal is allowed, but it entails a loss of interest. H.5 '% T3# M !"#$ @ *+# .; R#)+!!'(> B (" D#4.%'$ D#$#!,'(#/, (/ 3.5 /. I K##4 T! )" .; I$9 Since a recurring deposit is not traded, it does not have a market value. %nvestors can get regular updates from their bank on the accumulated sum. 83 $ '% $3# M./# .; H.*/'(> R#)+!!'(> B (" D#4.%'$9 Ghen a depositor opens a 4ecurring /ank ,eposit account with a bank, a passbook or an account statement is issued to him.
TAX IMPLICATIONS %nterest income from a 4ecurring /ank ,eposit $ualifies for taxation, which means that you pay tax as per your income slab.

PRO@IDENT FUND E,4*.-##% P!.<'/#($ F+(/ S)3#,#

AENERAL BACKAROUND The Employees )rovident *und 'E)*( was first established on 2 +ctober 23=2 under the E)* +rdinance 23=2 which was subse$uently known as the E)* -ct 23=2. The E)* -ct 23=2 has since then been replaced by the E)* -ct 2332 in Cune 2332. /esides being the worldBs oldest national provident fund, E)* is also one of the most successful funds of its kind, providing a compulsory savings scheme to ensure security and well being in old age. The first contributions were received in Culy 23=9, totaling 4s.9.< million. The E)* is under the jurisdiction of a /oard, which consists of 9A members who are appointed by the !inister of *inance. The E)* /oard is made up of a "hairman, a ,eputy "hairman and 2> other members, which comprise of J = = = ; 7overnment 4epresentatives Employer 4epresentatives Employee 4epresentatives )rofessional 4epresentatives

The E)* /oard is responsible for formulating E)* policies and to ensure implementation of these policies.

24

-part from the /oard, the E)* also has an %nvestment )anel, which is responsible to formulate E)* investment policies. The !inister of *inance also appoints the members of the %nvestment )anel. The )anel is made up of a "hairman, a representative of the 7overnor of /ank :egara !alaysia, a representative from the !inistry of *inance and three others who are experts in financial, business and investment related matters. The E)* @ead$uarters is situated in the E)* building in ?uala .umpur. -part from the @ead$uarters, the E)* has 25 State +ffices and ;; .ocal +ffices throughout the country. THE ROLE OF EPF -s a statutory body and a trustee fund, the main role of the E)* is to provide financial security to its members, especially after retirement, through a compulsory savings scheme. MEMBERS OF EPF Ghen the E)* was first set up, its aim was to safeguard interests of the lower income group of private sector employees. The scheme originally covered workers of 2< years of age and above, who earned not more than 4s.5AA and were on the payroll of an employer with a staff of over 2A. )rior to the E)*Bs establishment, there were a number of private funds in operation for the mining and plantation sectors, which were the mainstay of the economy at the time. "ontributions were not uniform. The then *ederal .abour ,epartment mooted the idea of a uniform scheme for certain categories of workers and the 7overnment decided to implement a compulsory national savings scheme to provide security to the lower#income group. The scheme was extended to all workers except for pension#able public sector employees by the 236As. Today, E)*Bs primary members are the private and non# pension#able public sector employees. HO8 DOES EPF OPERATE9 Hnder the E)* -ct 2332, the employer and employee are re$uired to contribute 'remit a percentage of the employeeBs salary( to E)* based on the rate of contribution set by the E)* -ct. Expatriates 'other than Singapore citi1ens(, foreign workers and domestic servants and their employers are not re$uired to contribute to E)*, but they can voluntarily do so. This contribution will be invested to accumulate interest or dividend. /y the time a member retires, therefore, he has a considerable amount of savings, with compounded dividend, which he can withdraw to provide for his financial needs.

25

RATES OF CONTRIBUTIONS -t present, the statutory rates of contribution for the employer and employee are 29E and 22E of the employeeBs wages respectively. Employers and employees are, however, allowed to elect to contribute at rates higher than the statutory rates. MEMBERSG ACCOUNTS Each memberBs accounts in E)* is subdivided and maintained in ; separate accounts -ccount 2 *or retirement purposes at age == J <AE -ccount 9 *or housing and withdrawal at age =A J ;AE -ccount ; *or health and medical costs 2AE 8ITHDRA8ALS E)* members are entitled to withdraw the full amount of contributions +n the death of the member 'withdrawal made by beneficiaries( +n attaining the age of == years %f the member is prevented from engaging in any further employment by reasons of physical or mental incapacitation +n leaving !alaysia permanently 'for non#!alaysians( Hnder -ccount 9 for the purchase or construction of a residential house or for purposes of reducing a housing mortgage on satisfying the prescribed conditions Hnder -ccount ; to meet medical treatment costs. "ontributors below the age of == years with more than 4s.=A, AAA under -ccount 2 are allowed to invest up to 9AE of their funds in unit trusts beginning from 2336.

EMPLOYEESG PRO@IDENT FUND SCHEME 1H12

E,4*.-## D#;'('$'.(2 KEmployeeL as defined in Section 9'f( of the -ct means any person who is employee for wages in any kind of work manual or otherwise, in or in connection with the work of an establishment and who gets wages directly or indirectly from the employer and includes any person employed by or through a contractor in or in connection with the work of the establishment. M#,6#!%3'42 -ll the employees 'including casual, part time, ,aily wage contract etc.( other then an excluded employee are re$uired to be enrolled as members of the fund the day, the -ct comes into force in such establishment.
EmployeesB )rovident *und Scheme takes care of following needs of the members 2. 4etirement 9. !edical "are ;. @ousing 5. *amily obligation

26

=. Education of "hildren <. *inancing of %nsurance )olices

B %') 8 >#%2 K/asic GagesL means all emoluments, which are earned by employee while on duty or on leave or holiday with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash, but does not include the cash value of any food concession8 any dearness allowance 'that is to say, all cash payment by whatever name called paid to an employee on account of a rise in the cost of living(, house rent allowance, overtime allowance, bonus, commission or any other allowance payable to the employee in respect of employment or of work done in such employment, any present made by the employer. E:)*+/#/ E,4*.-##2 KExclude EmployeeL as defined under pare 9'f( of the EmployeesB )rovident *und Scheme means an employee who having been a member of the fund has withdrawn the full amount of accumulation in the fund on retirement from service after attaining the age of == years8 +r -n employee, whose pay exceeds 4s. *ive Thousand per month at the time, otherwise entitled to become a member of the fund. E:4* ( $'.(2 P)ayB includes basic wages with dearness allowance, retaining allowance, 'if any( and cash value of food concessions admissible there on. H.5 $3# E,4*.-##%G P!.<'/#($ F+(/ S)3#,# 5.!"%2 -s per amendment J dated 99.3.2336 in the -ct, both the employees and employer contribute to the fund at the rate of 29E of the basic wages, dearness allowance and retaining allowance, if any, payable to employees per month. The rate of contribution is 2AE in the case of following establishments
-ny covered establishment with less then 9A employees, for establishments covers prior to 99.3.36. -ny sick industrial company as defined in clause '+( of Sub#section '2( of Section ; of the Sick %ndustrial "ompanies 'Special )rovisions( -ct, 23>= and which has been declared as such by the /oard for %ndustrial and *inancial 4econstruction. -ny establishment, which has at the end of any financial year accumulated losses e$ual to or exceeding its entire net worth. -ny establishment engaged in manufacturing of 'a( jute 'b( breed 'c( coir and 'd( guar gum %ndustries& *actories.

EMPLOYEESG PRO@IDENT FUND INTEREST RATE The rate of interest is fixed by the "entral 7overnment in consultation with the "entral /oard of trustees, EmployeesB )rovident *und every year during !arch&-pril. The interest is credited to the members account on monthly running balance with effect from the last day in each year.

27

BENEFITS 2. - member of the provident fund can withdraw full amount at the credit in the fund on retirement from service after attaining the age of == year. *ull amount in provident fund can also be withdraw by the member under the following circumstance - member who has not attained the age of == year at the time of termination of service. - member is retired on account of permanent and total disablement due to bodily or mental infirmity. +n migration from %ndia for permanent settlement abroad or for taking employment abroad. %n the case of mass or individual retrenchment. 9. %n the case of the following contingencies, the payment of provident fund be made after complementing a continuous period of not less than two months immediately preceding the date on which the application for withdrawal is made by the member Ghere employees of close establishment are transferred to other establishment, which is not covered under the -ct. Ghere a member is discharged and is given retrenchment compensation under the %ndustrial ,ispute -ct, 2356. 8ITHDRA8AL BEFORE RETIREMENT - member can withdraw up to 3AE of the amount of provident fund at credit after attaining the age of =5 years or within one year before actual retirement on superannuation whichever is later. "laim application in form 23 may be submitted to the concerned )rovident *und +ffice. ACCUMULATIONS OF A DECEASED MEMBER -mount of )rovident *und at the credit of the deceased member is payable to nominees& legal heirs. "laim application in form 9A may be submitted to the concerned )rovident *und +ffice. TRANSFER OF PRO@IDENT FUND ACCOUNT Transfer of )rovident *und account from one region to other, from Exempted )rovident *und Trust to Hnexampled *und in a region and vice#versa can be done as per Scheme. Transfer -pplication in form 2; may be submitted to the concerned )rovident *und +ffice. NOMINATION

28

The member of )rovident *und shall make a declaration in *orm 9, a nomination conferring the right to receive the amount that may stand to the credit in the fund in the event of death. The member may furnish the particulars concerning himself and his family. These particulars furnished by the member of )rovident *und in *orm 9 will help the +rgani1ation in the building up the data bank for use in event of death of the member. ANNUAL STATEMENT OF ACCOUNT -s soon as possible and after the close of each period of currency of contribution, annual statements of accounts will be sent to each member of the current establishment or other establishment where the member was last employed. The statement of accounts in the fund will show the opening balance at the beginning of the period, amount contribution during the year, the total amount of interest credited at the end of the period or any withdrawal during the period and the closing balance at the end of the period. !ember should satisfy themselves as to the correctness of the annual statement of accounts and any error should be brought through employer to the notice of the correctness to the )rovident *und +ffice within < months of the receipt of the statement.

P+6*') P!.<'/#($ F+(/ (PPF)

- )ublic )rovident *und '))*( is a long#term savings plan with powerful tax benefits. 0our money grows S > per cent per annum, and this is guaranteed by the 7overnment of %ndia '7+%(. 0ou may consider this option if you are not looking for short#term li$uidity or regular income. :ormal maturity period is 2= years from the close of the financial year in which the initial subscription was made. !aturity values for your ))* account depending on what you invest each year
H.5 Y.+! M.(#- I( A PPF A)).+($ A!.5%

A,.+($ A((+,
4s.2AA 4s.=,AAA 4s.2A,AAA 4s.2=,AAA 4s.;A,AAA 4s.5=,AAA 4s.<A,AAA

I(<#%$#/

P#!

A,.+($ Y# !%F

R#)#'<#/

A;$#!

11

4s.9,3;9 4s.2,5<,<92 4s.9,3;,95; 4s.5,;3,><5 4s.>,63,69> 4s.2;,23,=3; 4s.26,=3,5=6

R 4eturn offered is >E per annum

IN@ESTMENT OBBECTI@ES

H.5 S+'$ 6*# I% A PPF A)).+($ F.! A( I()!# %# I( M- I(<#%$,#($9 - ))* account is not aimed at generating capital appreciation since it has no secondary market. %t is mainly suitable for long#term saving and for availing of tax incentives.

29

The lump#sum amount that you receive on maturity 'at the end of 2= years( is completely tax#free.

I% A P+6*') P!.<'/#($ F+(/ A)).+($ S+'$ 6*# F.! R#>+* ! I().,#9 ))* does not provide any avenues for regular income. %t provides for accumulation of interest income over a 2=#year period, and the lump#sum amount 'principal F interest( is payable on maturity. T. 83 $ E:$#($ /.#% PPF A)).+($ P!.$#)$ M# A> '(%$ I(;* $'.(9 - ))* account does not provide protection against high inflation. %n certain years when the inflation rate is high, the real rate of return on your ))* may be marginal. This depends on the prevailing rate of interest on your ))* at any given time. These rates are notified by the 7+% in the +fficial 7a1ette from time to time, and are calculated in such manner as is specified in the scheme. C ( I B.!!.5 > '(%$ ,- PPF A)).+($9 0es, loans can be availed of from the third to sixth year S 2 per cent per annum if repaid within ;< months. Else, interest on loan is set at < per cent per annum. -mount of such loans will not exceed 9= per cent of the amount that stood to your credit at the end of the second year immediately preceding the year in which the loan is applied for. 0ou will continue to earn interest at the specified rate on your balance in the ))* -ccount after availing of the loan facility.
RISK CONSIDERATIONS

H.5 A%%+!#/ ) ( I 6# .; >#$$'(> M- F+** I(<#%$,#($ B )"9 0our principal is assured. The ))* Scheme has the backing of the 7+%, and is considered completely risk#free. H.5 A%%+!#/ '% M- I().,#9 Since the ))* Scheme is backed by the 7+%, your interest income is assured. I% $3#!# (- R'%"% U('?+# $. PPF S)3#,#9 :o, you can safely put your money in a ))* Scheme, as it is risk#free. -lthough factors like inflation and interest rate fluctuations may determine whether you opt for a ))* -ccount or not, the decision to invest in a ))* -ccount is based on the twin benefits of long#term savings and tax incentives. )lease note that if the government reduces interest rates and you are already operating an account, then the new interest rates will be applicable to your account. Subse$uent interest calculations will be on the new rate of interest. I% $3# PPF S)3#,# ! $#/ ;.! $3#'! C!#/'$ 7+ *'$-9 :o, since the ))* Scheme has the backing of the 7+%, it does not re$uire any commercial rating.
BUYINA, SELLINA, AND HOLDINA

30

H.5 /. I O4#( PPF A)).+($9 - ))* -ccount can be opened in any @ead )ost# +ffice, 7)+, any Selection 7rade )ost +ffice, any branch of the State /ank of %ndia, and selected branches of other nationali1ed banks. 83 $ '% $3# M'(',+, I(<#%$,#($ (/ R (># .; I(<#%$,#($ ;.! M '($ '('(> PPF A)).+($9 The minimum investment in a ))* account is 4s.2AA per annum for each year of the Scheme. The maximum prescribed contribution for tax purposes is 4s.2AA,AAA per annum. The highlight of the scheme is that you can vary your investments between 4s.2AA and 4s.2AA,AAA every year in multiples of 4s.=. The maximum number of installments in a year is 29. :o fixed investment is re$uired. 83 $ '% $3# D+! $'.( .; PPF S)3#,#9 The duration of a ))* account is 2= years, i.e., 2= complete financial years. %f a person opens a ))* account on *ebruary 3, 9AA<, the account will mature on -pril 2, 9A99. Even after the expiry of 2= years, the ))* -ccount can be extended for duration of five years at a time. C ( PPF A)).+($ 6# %.*/ '( $3# S#).(/ !- M !"#$9 :o.

83 $ '% $3# L'?+'/'$- .; M- PPF A)).+($9 +n expiry of five financial years from the end of the financial year in which the initial subscription was made, you have the facility of one withdrawal every year. The maximum amount available for withdrawal is =A per cent of the balance at the end of the year immediately preceding the year of withdrawal or the fourth year immediately preceding the year of withdrawal, whichever is lower. *or instance, if you have 4s.=A,AAA at the end of the fifth financial year, and 4s.3A,AAA at the end of the eighth financial year, you can withdraw up to 4s.9=,AAA '=A per cent of 4s.=A,AAA(. %mportantly, there are no penalties for availing of the withdrawal facility. H.5 '% $3# M !"#$ @ *+# .; M- PPF A)).+($ D#$#!,'(#/9 -s mentioned earlier, since a ))* -ccount does not have a secondary market, it cannot be traded. Therefore, the $uestion of market value of a ))* -ccount does not arise. @owever, investors can get updates on their account balances from the bank where the ))* account is held. 83 $ '% T3# M./# .; H.*/'(> .; A PPF A)).+($9 - ))* -ccount passbook is issued to the depositor by the bank where the account is held, which can be updated from time to time.
P+6*') P!.<'/#($ F+(/
Scheme Tenure %ssue date "losure date %nterest %nterest payment !inimum investment !aximum investment )ublic )rovident *und 2= years and then optional extension in blocks of = years )erpetually open -t the end of the 2=th year >E 0early '"omputed on monthly balance( 4s.=AA 4s.6A,AAA 'for tax benefit( per financial year

31

Tax benefit .oan *acility

Githdrawal

4emarks

Sec.>A" of %.T. -ct 23<2 -vailable. .oans can be obtained up to 9=E of the balance at the end of the 9nd preceding financial year in the ; rd year of opening account. This loan is repayable in ; years at an interest rate 2E above the prevalent ))* rate. Thus the repayment rate is now 29E. -fter the repayment of the first loan is affected, a second loan can be taken. This loan facility ceases after the end of the <th financial year as after that the withdrawal facility starts. -vailable. *rom the 6th year and every year thereafter, the account holder is allowed to withdraw a maximum of =AE of the balance that is to his&her credit at the end of the 5th or the 2st previous financial year, whichever is lower. /enefits are two fold, up to 4s.6A,AAA paid each year in the account is available as a tax rebate and the interest earned is tax free. The account can be opened even at any of the select few nationali1ed banks also.

TAX IMPLICATIONS /esides long#term savings, the most attractive feature of ))* is the tax incentives it offers. The interest income earned in ))* and the lump#sum amount received on maturity or premature withdrawal is completely tax#free as per the pro#visions of the %ncome Tax -ct, 23<2.

LIFE INSURANCE
- life insurance policy is a contract between an individual 'termed as insured( and an insurance company 'insurer( to pay the insured, or his nominated heirs, a specified sum of money on the happening of an event. The event could be the expiry of the insurance policy or the death of the insured before the expiry 'date of maturity( of the policy as per the terms of the policy. %n a simple example, a person takes an insurance policy and nominates his wife as the beneficiary. +n the death of this person, his wife gets the amount for which the life insurance policy was purchased. There are many variants of a life insurance policy 2. 83.*# L';# A%%+! ()# P* (%2 These are low#cost insurance plans where the sum assured is payable on the death of the insured 9. E(/.5,#($ A%%+! ()# P* (%2 Hnder these plans, the sum assured is pay#able on the maturity of the policy or in case of death of the insured individual before maturity of the policy. ;. T#!, A%%+! ()# P* (%2 Hnder these plans, the sum assured is payable only on the death of the insured individual before expiry of the policy. 5. P#(%'.( P* (%2 These plans provide for either immediate or deferred pension for life. The pension payments are made till the death of the annuitant 'person who has a pension plan( unless the policy has provision of guaranteed period.

32

.ife %nsurance "orporation '.%"( is a government company. Till the year 9AAA, the .%" was the sole provider of life insurance policies to the %ndian public. @owever, the %nsurance 4egulatory Q ,evelopment -uthority '%4,-( has now issued licenses to private companies to conduct the business of life insurance. Some of the major private players in the sector are /ajaj -llian1 .ife %nsurance "orporation /irla Sun.ife %nsurance "o. .td. @,*" Standard .ife %nsurance "o. .td. %"%"% )rudential .ife %nsurance "o. .td. %:7 Nysya .ife %nsurance "o. )vt. .td. !-T :ew 0ork .ife %nsurance "o. .td. !et.ife %ndia %nsurance "o. )vt. .td. ?otak !ahindra +ld !utual .ife %nsurance "o. .td. S/% .ife %nsurance "o. .td. T-T- -%7 .ife %nsurance "o. .td. -!) Sanmar -ssurance "o. .td. -N%N- .ife %nsurance "o. )vt. .td. Sahara %ndia .ife %nsurance "o. .td. Shriram .ife %nsurance "o. .td.

IN@ESTMENT OBBECTI@ES

H.5 S+'$ 6*# '% L';# I(%+! ()# P.*')- ;.! ( I()!# %# '( M- I(<#%$,#($9 The role of a life insurance policy is to financially cover the risk of death. %f an individual has dependants who will incur financial loss due to his&her death, then he&she should avail of life insurance policies. @owever, life insurance is often utili1ed for purposes like provision for old age 'pension plans(, childrenBs education, savings alternative, or as a tax#saving alternative. A!# L';# I(%+! ()# P* (% S+'$ 6*# F.! R#>+* ! I().,#9 :ot in general, but annuity or pension plans are often good for the purpose. D. L';# I(%+! ()# P.*')'#% P!.$#)$ M# A> '(%$ I(;* $'.(9 :o, life insurance plans do not offer any protection against inflation. C ( I B.!!.5 A> '(%$ L';# I(%+! ()# P* (9 0es, loans can be raised on the sole security of a policy that has ac$uired loan value. /esides, a life insurance policy is also generally accepted as security even for a commercial loan.
RISK CONSIDERATIONS

H.5 A%%+!#/ ) ( I B# .; A#$$'(> M- F+** I(<#%$,#($ B )"9 "ompanies operating in the .ife %nsurance sector are governed by strict regulations, and are among the safest places to put your money in. 0ou can be assured of getting your

33

investment back. .%" is a government company, and all players in this sector are regulated by the %4,-.

H.5 A%%+!#/ I% M- I().,#9 0our income is assured. %nsurance companies are, in general, safe avenues for putting your money in. A!# T3#!# A(- R'%"% U('?+# T. L';# I(%+! ()# P* (%9 There are no risks associated with putting your money in life insurance plans. %n %ndia, psychological factors affect the buy and sell decisions of .ife %nsurance )lans to a large extent. -lthough insurance schemes are meant mainly for minimi1ing risk, most view it as an avenue for long#term saving and tax savings. This viewpoint depends on the policy and the governmentBs tax incentives. A!# L';# I(%+! ()# P* (% ! $#/ ;.! $3#'! )!#/'$ ?+ *'$-9 :o, neither insurance companies nor their products are commercially rated.
BUYINA, SELLINA, AND HOLDINA

H.5 D. I B+- A( I(%+! ()# P.*')-9 %nsurance policies are sold through insurance agents. 0ou can contact an insurance agent or any branch of the .%" or any other private player for details. 4egular payments 'called premium( have to be made to the company in order to maintain an insurance policy. %n some cases, a lump#sum payment suffices. The normal procedure entails filling up an application form and undergoing a medical examination 'depending on the policy amount and your age(. +n submission of a report by the insurance agent, the company assesses the risk, accepts the proposal, and issues the policy. 83 $ I% T3# M'(',+, I(<#%$,#($ O( A L';# I(%+! ()# P* (9 The minimum investment on a policy depends upon the type of policy, duration, and premium to be paid, and other factors. 83 $ I% T3# D+! $'.( O; A( I(%+! ()# P.*')-9 There is no one standard duration for all insurance policies. ,uration of the policy depends on the specific policy you are applying for. C ( I(%+! ()# P.*')'#% B# S.*/ I( T3# S#).(/ !- M !"#$9 :o, insurance policies cannot be sold in the secondary market. @owever, they can be transferred to another person through assignment of the policy. 83 $ I% T3# L'?+'/'$- O; L';# I(%+! ()# P.*')'#%9 Hsually, life insurance policies do not offer li$uidity. These are meant to be long#term investments of a specific nature i.e., financial cover for dependants of the insured in the event of his&her death. @owever, one can opt for early withdrawal from an insurance policy, albeit with penalties in certain cases. H.5 I% T3# M !"#$ @ *+# O; A L';# I(%+! ()# P.*')- D#$#!,'(#/9 Since there is no secondary market for a life insurance policy, the $uestion of market value of a

34

life insurance policy does not arise. @owever, as mentioned earlier, a policy can be used to pledge against loans.

83 $ I% T3# M./# .; H.*/'(> A L';# I(%+! ()# P.*')-9 .ife insurance policies are held in the form of physical )olicy "ertificates that are issued by the insuring company.
TAX IMPLICATIONS .ife insurance policies are eligible for tax benefits as per the provisions of the %ncome Tax -ct, 23<2. The premium paid, up to 4s.2AA,AAA, totally $ualifies for tax rebate under Section >A of the %ncome Tax -ct, 23<2.

POST OFFICE SA@INAS

)ost +ffice Savings is an investment option that pays annual interest rate of ;.= percent8 "umulatively compounded yearly, and is available through post#offices across the country. IN@ESTMENT OBBECTI@ES

H.5 %+'$ 6*# !# P.%$ O;;')# S <'(>% ;.! ( I()!# %# '( M- I(<#%$,#($9 )ost +ffice Savings are suitable for capital appreciation in the sense that your money grows at a pre#determined rate. Hnlike certain other investment options, where returns are commensurate with the risks, the rate of growth is reasonable8 )ost office savings returns are lower, but safer, growth in investment. Therefore, they are one of the better ways to get relatively li$uid returns for your savings. The only condition is that there is no premature withdrawal facility8 instead you can withdraw it anytime. A!# P.%$ O;;')# S <'(>% S+'$ 6*# ;.! R#>+* ! I().,#9 :o, )ost +ffice Savings are not meant for regular income. Since, as they are cumulated, you get a lump sum 'principal F interest( at the time of withdrawal. T. 83 $ E:$#($ /.#% $3# P.%$ O;;')# S <'(>% P!.$#)$ M# A> '(%$ I(;* $'.(9 They are not the ideal investment option if the rate of inflation is either too high or is fluctuating beyond a limit. Since the rate of return in case of a )ost +ffice Savings is fixed, they cannot guard you against a high rate of inflation. C ( I B.!!.5 A> '(%$ P.%$ O;;')# S <'(>%9 :o, you cannot borrow against a )ost +ffice Savings. The balance in your account can be withdrawn anytime.
RISK CONSIDERATIONS

H.5 A%%+!#/ ) ( I 6# .; A#$$'(> M- F+** I(<#%$,#($ B )"9 Gith 7overnment of %ndia#backing, your principal is as assured as it is in any other post office account.

35

H.5 A%%+!#/ I% M- I().,#9 Gith backing from the 7overnment of %ndia, your interest income from )ost +ffice Savings is assured. I% T3#!# A(- R'%"% U('?+# T. I(<#%$'(> '( P.%$ O;;')# S <'(>%9 :o, there are no risks uni$ue to this investment option. +nly, if the rate of inflation is higher than your rate of returns, or in case the inflation is fluctuating too much, your real returns may be negative also. Gith a low coupon, your real returns will simply disappear during high inflation. So, while investing in a )ost +ffice Savings, keep in mind the prevailing inflation rate and calculate your real returns before opting for one. A!# P.%$ O;;')# S <'(>% ! $#/ ;.! $3#'! C!#/'$ 7+ *'$-9 :o, )ost +ffice Savings, like any other post#office investment instrument, are not commercially rated since they are backed by the 7+% and are extremely safe.
BUYINA, SELLINA, AND HOLDINA

H.5 D. I B+P.%$ O;;')# S <'(>%9 - )ost +ffice Savings account can be opened at any post#office. 83 $ I% T3# M'(',+, I(<#%$,#($ A(/ R (># O; I(<#%$,#($ ;.! P.%$ O;;')# S <'(>%9 The minimum investment in a )ost +ffice Savings could be as low as 4s.9A. *or individuals the maximum deposits can go up to 4s.2AA,AAA, whereas in the case of joint account holders the maximum deposits in a calendar year can go up to 4s.9AA,AAA. 83 $ I% T3# D+! $'.( O; P.%$ O;;')# S <'(>%9 )ost +ffice Savings have no fixed term. The scheme pays annual interest, compounded annually, thus giving a reasonable yield. C ( P.%$ O;;')# S <'(>% B# S.*/ '( T3# S#).(/ !- M !"#$9 :o, )ost +ffice Savings can only be bought from a post#office and can be en#cashed from there itself, anytime. 83 $ '% T3# L'?+'/'$- .; P.%$ O;;')# T',# D#4.%'$9 Since )ost +ffice Savings can be withdrawn anytime, they entail a high degree of li$uidity and marketability. H.5 '% T3# M !"#$ @ *+# .; P.%$ O;;')# S <'(>% D#$#!,'(#/9 Since a )ost +ffice Savings is not traded, it does not have a market value. Hpdates on your )ost +ffice Savings account can be had from the post#office where you have opened an account. -lso, any changes in the interest rates are advertised through national dailies. 83 $ '% T3# M./# .; H.*/'(> .; P.%$ O;;')# S <'(>%9 0ou can open a )ost +ffice Savings either as a single holder, or with a partner under a joint account. +n

36

opening a Savings account, you will receive an account statement stating the amount deposited and the interest to be earned on the account. TAX IMPLICATIONS %nvestment in )ost +ffice Savings account for a maximum investment of 4s.2AA,AAA, per financial year is totally exempt from tax under section >A" of the %ncome Tax -ct, 23<2. The %nterest %ncome is also exempted from tax under section 2A of %ncome Tax -ct, 23<2.
P.%$ O;;')# S <'(>%2 S <'(>% A)).+($
Gho can investU a( Single -ccount -n individual '2> years Q above( - minor who has attained the age of 2A years - guardian on behalf of a minor - guardian of a person of unsound mind b( Coint -ccount J Two or three adults Single -ccount J !inimum 4s.9A and up to 4s.2 lac Coint -ccount J !inimum 4s.9A and up to 4s.9 lac ;.= E 0early 0early "umulative -ny time -mount balance in the account :ot applicable -ny time Nery good Nery safe Secured +pen at any )ost +ffices "he$ue facility !inimum balance low :ot applicable Totally tax free H&s >Ac of %ncome Tax -ct, 23<2 %nterest income exempted from income tax H&s 2A of %ncome Tax -ct, 23<2 0es

@ow much you can investU

@ow much do you earnU Ghen interest is compoundedU Ghen interest is paidU "umulative& :on#cumulativeU Ghen you can withdrawU Ghat do you get on redemptionU )remature withdrawal facilityU )remature withdrawal termsU !arketabilityU %s it safeU %s it securedU %s it convenientU

"an you get a loanU %s the income taxableU -ny other tax concessionsU %s nomination facility availableU

P.%$ O;;')# S <'(>%2 R#)+!!'(> D#4.%'$ A)).+($

Gho can investU a( - Single adult b( Two adults jointly, the amount due on the

37

@ow much you can investU @ow much do you earnU Ghen interest is compoundedU Ghen interest is paidU "umulative& :on#cumulativeU Ghen you can withdrawU

Ghat do you get on redemptionU )remature withdrawal facilityU )remature withdrawal termsU !arketabilityU %s it safeU %s it securedU %s it convenientU "an you get a loanU %s the income taxableU

account being payable To both jointly or survivor To either of them or survivor c( - guardian on behalf of a minor or a person of unsound mind d( - minor who has attained the age of ten years in his own name 4s.2A per month to any amount 6.= E Muarterly 0early "umulative -fter = years Extension of account after maturity period "ontinue account, may be for a further period of five years and make monthly deposits during such extended period. 4etention of amount of repayment beyond maturity period The ,epositor may at his option, continue the account and retain in it the amount of repayment due for a further period up to maximum of five years without making any fresh deposits. -mount balance in the account -fter ; years +nly once up to =AE of the balance 7ood Nery safe Secured +pen at any )ost +ffices =AE of the deposits made in the account may be allowed as loan after the account has been in operation for at least one year Taxable :o T,S :o Gealth Tax 4ebate on advance deposits ,eposits J Six or more but not exceeding eleven deposits made in a calendar month8 4ebate J 4s.2A for an account of 4s.2AA denomination ,eposits J Twelve or more deposits made in a calendar month8 4ebate J 4s.5A for every twelve deposits of 4s.2AA denomination 0es

-ny other tax concessionsU

%s nomination facility availableU

P.%$ O;;')# S <'(>%2 T',# D#4.%'$ A)).+($

Gho can investU a( -n %ndividual 'above 2> years( b( - guardian on behalf of a minor or a person

38

@ow much you can investU @ow much do you earnU

Ghen interest is compoundedU Ghen interest is paidU "umulative& :on#cumulativeU Ghen you can withdrawU Ghat do you get on redemptionU )remature withdrawal facilityU )remature withdrawal termsU !arketabilityU %s it safeU %s it securedU %s it convenientU "an you get a loanU %s the income taxableU -ny other tax concessionsU %s nomination facility availableU

of unsound mind c( - minor who has attained the age of ten years in his own name d( Two individuals 4s.9AA to any amount 2st 0ear <.9=E nd 9 0ear <.=AE ;rd 0ear 6.9=E =th 0ear 6.=AE @alf yearly 0early "umulative -fter the return '2 J = years( -mount balance in the account < months J 29 months '2 year( -fter 29 months '2 year( :o %nterest 9E penalty interest 7ood Nery safe Secured +pen at any )ost +ffices "an be pledged as security for loan Taxable :o T,S :o Gealth Tax 0es

P.%$ O;;')# S <'(>%2 M.($3*- I().,# A)).+($

Gho can investU a( -n %ndividual 'above 2> years( b( - guardian on behalf of a minor or a person of unsound mind c( - minor who has attained the age of ten years in his own name d( Two or three individuals in joint names Single -ccount J !inimum 4s.2AAA and up to 4s. ; lac Coint -ccount J !inimum 4s.2AAA and up to 4s.< lac >E !onthly !onthly :on J "umulative -fter < years -mount balance in the account, plus 2AE bonus on maturity if no withdrawal is made -fter 2 year -fter ; years

@ow much you can investU

@ow much do you earnU Ghen interest is compoundedU Ghen interest is paidU "umulative& :on#cumulativeU Ghen you can withdrawU Ghat do you get on redemptionU )remature withdrawal facilityU

39

)remature withdrawal termsU

!arketabilityU %s it safeU %s it securedU %s it convenientU "an you get a loanU %s the income taxableU -ny other tax concessionsU

%s nomination facility availableU

:o penalty J 9E of deposit deducted if withdrawn after 2 year :o penalty J 2E of deposit deducted if withdrawn after ; years -verage Nery safe Secured +pen at any )ost +ffices Transfer facility to any )ost +ffice :ot applicable Taxable :o T,S :o Gealth Tax !onthly interest can be credited to the savings bank account in the same )ost +ffice 0es

SMALL SA@INAS
Small Savings Schemes are basically of two types

P.%$ O;;')# S <'(>%2 Savings ,eposits8 4ecurring ,eposits8 Time ,eposits8 Q !onthly %ncome -ccount and N $'.( * S <'(>%2 )ublic )rovident *und8 :ational Savings "ertificates8 Q ?isan Nikas )atra

Ge have already discussed the characteristics of )ost +ffice Savings Q )ublic )rovident *und in the earlier sections in this chapter8 we further summari1e the features of the remaining small savings products.
N $'.( * S <'(>%2 P+6*') P!.<'/#($ F+(/ (PPF)
Gho can investU @ow much you can investU @ow much do you earnU Ghen interest is compoundedU Ghen interest is paidU "umulative& :on#cumulativeU Ghen you can withdrawU Ghat do you get on redemptionU )remature withdrawal facilityU a( -n %ndividual 'above 2> years( b( @indu Hndivided *amily c( - guardian on behalf of a minor !inimum 4s.=AA and up to 4s.6A,AAA per annum >E 0early +n maturity "umulative -fter 2= years Extension of account J -ccount may be extended for any block period of five years Entire balance in the account <th 0ear to 2=th 0ear

40

)remature withdrawal termsU .i$uidityU %s it safeU %s it securedU %s it convenientU "an you get a loanU

%s the income taxableU -ny other tax concessionsU %s nomination facility availableU

+nce in a year up to =AE of the balance in 5th preceding or preceding year which ever is lower 7ood Nery safe Secured Even courts cannot attach the ))* balance +pen at any )ost +ffices +r specified bank *rom ;rd to <th 0ear Hp to 9=E of the amount available in the preceding 9nd year Totally tax free 4ebate H&s >Ac of %ncome Tax -ct, 23<2 :o Gealth Tax 0es

N $'.( * S <'(>%2 N $'.( * S <'(>% C#!$';') $#% (NSC @III)

Gho can investU @ow much you can investU @ow much do you earnU Ghen interest is compoundedU Ghen interest is paidU "umulative& :on#cumulativeU Ghen you can withdrawU Ghat do you get on redemptionU )remature withdrawal facilityU )remature withdrawal termsU .i$uidityU %s it safeU %s it securedU %s it convenientU "an you get a loanU %s the income taxableU -ny other tax concessionsU %s nomination facility availableU a( -n %ndividual 'above 2> years( b( Two individuals c( - guardian on behalf of a minor !inimum 4s.2AA and up to any amount, in denomination of 4s.2AA, 4s.=AA, 4s.2AAA and 4s.2A,AAA >E @alf 0early +n maturity "umulative -fter < year -mount outstanding with interest %n exceptional cases +n the death of the holder or any of the holders 7ood Nery safe Secured +pen at any )ost +ffices "an be pledged as a security for loans Taxable :o T,S -nnual accrued interest is also eligible for rebate H&s >Ac of %ncome Tax -ct, 23<2 :o Gealth Tax 0es

N $'.( * S <'(>%2 K'% ( @'" % P $! (K@P)

Gho can investU a( -n %ndividual 'above 2> years(

41

@ow much you can investU @ow much do you earnU Ghen interest is compoundedU Ghen interest is paidU "umulative& :on#cumulativeU Ghen you can withdrawU Ghat do you get on redemptionU )remature withdrawal facilityU )remature withdrawal termsU .i$uidityU %s it safeU %s it securedU %s it convenientU "an you get a loanU %s the income taxableU -ny other tax concessionsU %s nomination facility availableU

b( Two or three individuals in joint names c( - guardian on behalf of a minor !inimum 4s.2AA and up to any amount, in denomination of 4s.2AA, 4s.=AA, 4s.2AAA, 4s.2A,AAA and 4s.=A,AAA >.9=E approximately 0early +n maturity "umulative > years 6 months ,ouble the amount invested -vailable after 9.= years Early withdrawal at fixed rates anytime in case of death of holder or any of the holders )oor Nery safe Secured +pen at any )ost +ffices "an be pledged as a security for loans Taxable :o T,S :o Gealth Tax 0es

AOLD
+f all the choice of investments available, can this yellow metal take pride of the place as a financial investment alternative optionU +pinion on the subject of gold is divided, on several issues J are the yields from an investment in gold positiveU -re its uses productiveU %s the strain on the economy evidentU Should gold be allowed to be brought into %ndia freely for purposes of investment or otherwiseU Gell, yields or no yields, there is hardly an %ndian household that can ignore gold and keep its entire savings in financial assets alone. Every investment has an intrinsic appeal to its holder and to suggest that hundreds of tones of gold is bought every year without regard to its economic value is to suggest that %ndians donBt act rationally. The fact is, they do and probably do it better than others. %ndianBs faith in 7+, and 7+., dates back to the Nedic times8 they worshipped both. -ccording to the Gorld 7old "ouncil 4eport, %ndia stands today as the worldBs largest single market for gold consumption. %n developing countries, people have often trusted gold as a better investment than bonds and stocks. 7old is an important and popular investment for many reasons

42

%n many countries gold remains an integral part of social and religious customs, besides being the basic form of saving. Shakespeare called it Pthe saint J seducing goldB. Superstition about the healing powers of gold persists. -yurvedic medicine in %ndia recommends gold powder and pills for many ailments. 7old is indestructible. %t does not tarnish and is also not corroded by acid J except by a mixture of nitric and hydrochloric acids. 7old has aesthetic appeal. %ts beauty recommends it for ornament making above all other metals. 7old is so malleable that one ounce of the metal can be beaten into a sheet covering nearly a hundred s$uare feet. 7old is so ductile that one ounce of it can be drawn into fifty miles of thin gold wire. 7old is an excellent conductor of electricity8 a microscopic circuit of li$uid gold PprintedB on a ceramic strip saves miles of wiring in a computer. 7old is so highly valued that a single smuggler can carry gold worth 4s.=A lac underneath his shirt. 7old is so dense that all the tones of gold, which has been estimated8 to be mined through history could be transported by one single modern super tanker. *inally, gold is scam#free. So far, there have been no !undra J type or !ehta J type scams in gold.

-pparently, gold is the only product, which has an investment as well as ornamental value. 7oing beyond the narrow logic of yield and maturity values, thus, the lure of this yellow metal continues. IN@ESTMENT OBBECTI@ES

H.5 S+'$ 6*# A!# A.*/ F.! A( I()!# %# I( M- I(<#%$,#($9 - good investment is like an attractive bou$uet J of diverse character, the key is in putting your money in all types of assets J gold included. @oe much of your savings should you invest in any option depends on your risk appetite and wish list. Ghile assessing the value of gold on a stand alone basis the point that needs emphasis is any investment is held on the basis of a Kperceived valueL. Ghen stocks of infotech companies are bought at )E multiples of <A, the $uestion often asked is K-re these stocks worth these kind of exorbitant pricesLU %f at a given time, the major investors think KyesL, the prices may rise further regardless of their book values. -ny financial market player would tell you that what drives the market is not so much the fundamentals as the fancy of a particular scrip at a certain time in the minds of majority of investors. 7old as an investment has some distinct advantages
7oldBs negative correlation with other assets helps reduce the overall volatility of the portfolio. Such lower volatility leads to higher compounded rates of interest. *or those who have any doubts about goldBs credentials as an asset that beats the tide here are a few hard facts that should drive the point home. %n the year 9AA9 gold prices have increased 9;E while the *TSE has gone

43

down by 96E, :-S,-M by ;>E, ,ow Cones by 2>E, and /SE SE:SET has risen a paltry 5E. 7old provides the portfolio with intangible advantages such as providing hedge against financial and economic uncertainty.

A!# A.*/ S+'$ 6*# F.! R#>+* ! I().,#9 :o, 7old are not meant for regular income. Since value#wise they are cumulated, you get a lump sum 'whether profit or loss( at the time you sell or redeem it in the market place. T. 83 $ E:$#($ D. A.*/ P!.$#)$ M# A> '(%$ I(;* $'.(9 7old has been popular in %ndia because historically they acted as a good hedge against inflation. %n that sense this metal have been more attractive than bank deposits or small savings product. Timothy 7reen, a well#known gold expert, reminds us of a historical truth KThe great strength of gold throughout history has not been that you make money by holding it, but rather you do not lose. That ought to remain its best credentialL. research study on gold established a remarkable consistency in the purchasing power of gold over four centuries. %ts purchasing power in the mid#twentieth century was found to be nearly the same as in the middle of the seventeenth century. 0ou can safely invest in gold. /ut take care to keep your jewelry in bank lockers. C ( I B.!!.5 A> '(%$ A.*/9 0es, for centuries, %ndian families have known how to leverage their gold ornaments and obtain cash at times of critical need. .eaving aside the moneylenders and pawnbrokers, there is a well#organi1ed credit system in rural and urban %ndia that has been traditionally lending against gold. Hndoubtedly gold, is the most preferred of all investment assets by many banks, regardless of whether it is a 4egional rural bank or a branch of the mighty State /ank of %ndia. .oan against gold are disbursed at sub#commercial rates, at a days notice with no $uestions asked.
RISK CONSIDERATIONS

H.5 A%%+!#/ C ( I B# O; A#$$'(> M- F+** I(<#%$,#($ B )"9 This precious yellow metal has a store value that surpasses even sovereign investment products. Even if locked up in hidden vaults, gold never loses its glitter. "ontrast this to what hassles you have to go through if your bond certificates or dividend warrants was not en#cashed in timeO 7old is a form of currency that finds global acceptance and is enormously fungible. Hnlike paper currencies, gold is relatively insulated from uncertainties like economic downturn, balance of payment crises, political instability etc. H.5 A%%+!#/ I% M- I().,#9 Since, 7old is not meant for regular income, we cannot discuss its income assurance. %t all depends on the price of gold in the market place. A!# T3#!# A(- R'%"% U('?+# T. I(<#%$'(> I( A.*/9 %t may appear to you that gold could be branded as the most ideal investment since it has li$uidity, safety, convenience and tax efficiency. %tBs known and appealing to almost all. "an we

44

therefore conclude that the thousands of tons of gold amassed in %ndian households makes the best investmentU Ge canBt because, an investment product canBt boast of the other advantages it may have, ignoring its primary purpose, which is of earning a decent rate of return. +n this count, gold scores poorly. The return gold yield is paltry if not negative. 7lobally, gold has been losing its glitter as a product of investment. +ur discussion here is all about financial markets and itBs alternative investment products. 7old may have superb ornamental and hedging values. %t may be prestigious to hold and fashionable to wear. %t may help diversify your portfolio risks. /ut on a comparative scale of yield it ranks low. %nvestments in a product possessing a similar class of safety, convenience and tax efficiency like a bank deposit and mutual funds often offer better yields. So, beyond the customary needs of a few tolas of gold, investors are better placed keeping their savings in other choices. %f you are still enamored by its glitter and canBt shake it off, choose to hold the gold in bullion form8 it is superior alternative to holding gold in jewelry form.

A!# A.*/ ! $#/ ;.! $3#'! )!#/'$ ?+ *'$-9 :o, 7old is not commercially rated since they have a store value that surpasses even sovereign investment products. @owever, worldwide gold is valued for its intrinsic $ualities J itBs not merely a popular product for investment, its accepted as a standard currency anywhere. *or the common man in the %ndian household it is an asset of last resort at times of adversity.
@owever, the proportion of gold in jewelry is measured on the carat 'or karat( scale. The word carat comes from the carob seed, which was originally used to balance scales in +riental /a1aars. )ure gold is designated 95 carat, which compares with the KfinenessL by which bar gold is defined.
P+!# A.*/ C A.*/ A**.-% "aratag *ineness E 7old e
95 99 2> 25 2A 3 2AAA 32<.6 6=A =>;.; 52<.6 ;6= 2AA 32.<6 6= =>.; 52.<6 ;6.=

The most widely used alloys for jewelry in Europe are 2> and 25 carat, although 3 carat is popular in the H?. )ortugal has a uni$ue designation of 23.9 carats. %n the Hnited States 25 carat predominates, with some 2A carat. %n the !iddle East, %ndia and South East -sia, jewelry is traditionally 99 carat 'sometimes even 9; carat(. %n "hina, @ong ?ong and some other parts of -sia, Kchuk kamL or pure gold jewelry of 33A fineness 'almost 95 carat( is popular.

45

BUYINA, SELLINA, AND HOLDINA

H.5 D. I B+- A.*/9 -pparently, gold is the only product, which has an investment as well as ornamental value. +ne can choose to buy gold in bullion as well as jewelry form, from the market. 83 $ I% T3# M'(',+, I(<#%$,#($ A(/ T3# R (># O; I(<#%$,#($ F.! A.*/9 %nvestment in gold varies from individual to individual. The supremacy of gold as an investment option and its store value have suffered severe setback in the world markets, yet in %ndia it is a different ball game. 7old might have lost out to myriad alternative assets in the global arena but nearer home when it comes to gold, emotions run high. .ets look at the magnitude of %ndian obsession with gold
%ndia has a very high savings rate. %n spite of consumerism taking deep roots, savings continue to be at a healthy rate of 95E. -nd half of these savings are invested in gold and real estate and the countless other investment products ranging from bank deposits to stocks have had to settle for the balance half. Estimated known reserves of gold in %ndia are 2;AAA tons which, when valued at a conservative 4s.59AA per 2A grams would amount to a staggering asset value of 4s.=5<AAA crores. This amounts to approximately >AE of the entire deposit in the countryBs entire banking system. %f you add the unknown reserves, the numbers would be colossal. %magine such a wealth being stuck in unproductive form with no economic application whatsoever. %gnoring the indifference to gold in the international markets, %ndian households continue to lap up gold at the first opportunity. %n order to meet the insatiable appetite for gold, the %ndian 7overnment has had to resort to imports since domestic production are still low. -ccording to the Gorld 7old "ouncil, roughly 5AE '9=E of the gold mined abroad is exported to %ndia( of the GorldBs gold imports are accounted by %ndia.

83 $ I% T3# D+! $'.( O; A.*/9 Endlessly, even if locked up in hidden vaults, gold never loses its glitter. This metal has a store value that surpasses even sovereign investment products. *or a common man it is an asset of last resort at times of adversity. -fter the -sian !arket crisis, jobless people sold gold to feed themselves. 7old thus lived up to its reputation as the asset of the last resort. Today, Southeast -sians are again buying at levels before the crisis, which is a reaffirmation of this distinction. C ( A.*/ B# T! /#/ I( T3# S#).(/ !- M !"#$9 0es, gold is traded like any other commodity in the market. 7old is primarily a monetary asset and partly a commodity. !ore than two thirds of goldBs total accumulated holdings relate to Pvalue for investmentB with central bank reserves, private players and high carat jewelry. .ess than one third of goldBs total accumulated holdings is as a PcommodityB for jewelry in Gestern markets and usage in industry.

46

83 $ I% T3# L'?+'/'$- O; A.*/9 7old market is highly li$uid and gold held by central banks, other major institutions and retail jewelry keep coming back to the market. H.5 I% T3# M !"#$ @ *+# O; A.*/ D#$#!,'(#/, A(/ H.5 D. I K##4 T! )" O; I$9 Economic forces that determine the price of gold are different from, and in many cases opposed to the forces that influence most financial assets. ,ue to large stocks of gold as against its demand, it is argued that the core driver of the real price of gold is stock e$uilibrium rather than flow e$uilibrium. South -frica is the worldBs largest gold producer followed by HS and -ustralia. %ndia is the worldBs largest gold consumer with an annual demand of >AA tons. 7old is valued in %ndia as a savings and investment vehicle and is the second preferred investment after bank deposits. %ndia is the worldBs largest consumer of gold in jewelry as investment. -fter 4/% authori1ed the commercial banks to import gold for sale or loan to jewelers and exporters. -t present, 2; banks are active in the import of gold. This reduced the disparity between international and domestic prices of gold from =6 percent during 23>< to 2332 to >.= percent in 9AA2. The gold hoarding tendency is well ingrained in %ndian society. ,omestic consumption is dictated by monsoon, harvest and marriage season. %ndian jewelry off take is sensitive to price increases and even more so to volatility. %n the cities gold is facing competition from the stock market and a wide range of consumer goods. 83 $ I% T3# M./# .; H.*/'(> A.*/9 Ghen you buy gold in the open market, you can have it in bullion&bar form or in jewelry form. Ghichever form you decide to hold gold, you should always take care to keep your gold holding in bank lockers.
TAX IMPLICATIONS Since there is no income as such from holding gold, there is no liability for income tax. /ut bullion and jewelry are subject to capital gains tax and wealth tax, without any exemptions whatsoever. Ghile determining the value of gold ornaments for the purpose of wealth tax, making charges should be ignored, unless the ornaments are studded with precious stones. The value of gold contained in the ornaments can be reduced by 2=E to 9AE because the dealer invariably deducts 2=E of the ruling rate of standard gold when ornaments are sold in the open market.

MUTUAL FUNDS
!utual funds are investment companies that use the funds from investors to invest in other companies or investment alternatives. They have the advantage of professional management, diversification, convenience and special services such as che$ue writing and telephone account service. %t is generally easy to sell mutual fund shares&units although you run the risk of needing to sell and being forced to take the price offered. !utual funds come in various types, allowing you to choose

47

those funds with objectives, which most closely match your own personal investment objectives. - load mutual fund is one that has sales charge or commission attached. The fee is a percentage of the initial investment. 7enerally, mutual funds sold through brokers are load funds while funds sold directly to the public are no#load or low#load. -s an investor, you need to decide whether you want to take the time to research prospective mutual funds yourself or pay the commission and have a broker who will do that for you. -ll funds have annual management fees attached. !utual *und Schemes may be classified on the /asis of its Structure and its %nvestment +bjective. .et us first discuss the classification by Structure

O4#( - E(/#/ M+$+ * F+(/%

-n open#ended mutual fund is the one whose units can be freely sold and repurchased by the investors. Such funds are not listed on bourses since the -sset !anagement "ompanies '-!"s( provide the facility for buyback of units from unit# holders either at the :-N, or :-N#linked prices. %nstant li$uidity is the HS) of open# ended funds you can invest in or redeem your units at will in a matter of 9#; days. %n the event of volatile markets, open#ended funds are also suitable for investment appreciation in the short#term. This is how they work if you expect the interest rates to fall, you park your money in an open#ended debt fund. Then, when the prices of the underlying securities rise, leading to an appreciation in your fundBs :-N, you make a killing by selling it off. +n the other hand, if you expect the /ombay Stock Exchange Sensitivity %ndex J the Sensex J to gain in the short term, you can pick up the right open#ended e$uity fund whose portfolio has scrips likely to gain from the rally, and sell it off once its :-N goes up. IN@ESTMENT OBBECTI@ES

H.5 S+'$ 6*# A!# O4#(-E(/#/ F+(/% ;.! A( I()!# %# I( M- I(<#%$,#($9 +pen#ended e$uity funds are, indeed, suitable for an increase or appreciation in your investment. -gain, your choice in an e$uity fund can vary, depending on your appetite for risk. Sector specific funds like %nfotech&Technology or )harma funds invest only in companies of that particular sector, and are more risky. -t the same time, if the scrips of a particular sector are doing well, the returns from investing in an sector specific mutual fund may prove to be worth the risk. A!# O4#(-E(/#/ M+$+ * F+(/% S+'$ 6*# F.! R#>+* ! I().,#9 -n open#ended debt fund is best suited for income. ,ebt funds generally give you an option of receiving dividend on a monthly, $uarterly, half#yearly or on annual basis. T. 83 $ E:$#($ D. O4#(-E(/#/ F+(/% P!.$#)$ M# A> '(%$ I(;* $'.(9 +pen# Ended !utual *unds provide a fair amount of protection against inflation. /ut funds with an e$uity portfolio J growth funds J provide better protection than debt funds because e$uities, over the long term, provide the best means of beating inflation. !oreover, long#term capital gains are tax exempted.

48

C ( I B.!!.5 A> '(%$ O4#(-E(/#/ M+$+ * F+(/%9 There are some banks that offer loans against your mutual funds. ,ifferent banks have their own criteria on which they approve the loans.
RISK CONSIDERATIONS

H.5 A%%+!#/ C ( I B# O; A#$$'(> M- F+** I(<#%$,#($ B )"9 0ou cannot be completely sure of getting your full investment back. %t depends on the $uality and the kind of portfolio you invest in. %n fact, in an e$uity fund, there are no guarantees at all since the fund trades in the secondary markets, and a crash there could result in a major part of your investment coming to nothing. @owever, in debt funds, the credit ratings of the constituents of the portfolio are a good indicator to how safe the fund, and, thus, your principal amount are. *or instance, if the portfolio consists of mostly government securities, it is the safest. H.5 A%%+!#/ I% M- I().,#9 %t again depends on the $uality of the portfolio of the mutual fund you invest in. The returns from your fund are related to the market. %n the simplest sense if the stock market or the debt market is performing well you can expect to receive a good return over your investment in the fund. Some funds give you a dividend or growth option. -lso, income is more assured in case of debt funds as compared to e$uity funds. A!# T3#!# A(- R'%"% U('?+# T. I(<#%$'(> I( A( O4#(-E(/#/ F+(/9 Since +pen#Ended !utual *unds invest in scrips in the secondary market, volatility in their portfolio reflects on the returns. -n open#end fund may be subject to inflows at one time or sudden redemptions, which leads to a spurt or a fall in the :-N, thus affecting your returns. -lso, the value of the scrips in the portfolio can fluctuate due to various market forces, thus affecting the returns of the fund. A!# O4#(-E(/#/ M+$+ * F+(/% ! $#/ ;.! $3#'! )!#/'$ ?+ *'$-9 +pen#ended e$uity funds are not credit rated. @owever, the holdings of debt funds are. The portfolio list of debt funds provides the details of all the instruments held by the fund and their respective credit ratings.
BUYINA, SELLINA, AND HOLDINA

H.5 D. I B+- A( O4#(-E(/#/ F+(/9 Hnits of !utual *unds can be purchased through investment service centres of the -sset !anagement "ompany '-!"( or through the distributors. -lso some -!" offer units through :SE /rokers also. The price per unit of a mutual fund is linked to the :et -sset Nalue ':-N( of the fund. 83 $ I% T3# M'(',+, I(<#%$,#($ A(/ T3# R (># O; I(<#%$,#($ F.! O4#(E(/#/ M+$+ * F+(/%9 !inimum investment in an open#ended mutual fund varies between 4s.=AA and 4s.=,AAA. Some open#ended funds charge an entry load, i.e., a sales charge, expressed as a percentage of the :-N, is deducted from the amount invested. -lso, the -!" gives you the option to invest through S%). %n Systematic

49

%nvestment )lan you invest a fixed portion every fixed period to take advantage of the concept of rupee cost averaging where you buy more units when the prices are down and less units when the prices rule high. This reduces your average cost of purchase of the units.

83 $ I% T3# D+! $'.( O; O4#(-E(/#/ M+$+ * F+(/%9 +pen#ended funds, by definition, have no time duration. They can be purchased or redeemed at any time. C ( O4#(-E(/#/ M+$+ * F+(/% B# T! /#/ I( T3# S#).(/ !- M !"#$9 :o, open#ended mutual funds cannot be sold or purchased in the secondary market. They are directly repurchased by the -!". @owever, they can be bought from certain brokers who deal in them. 83 $ I% T3# L'?+'/'$- O; O4#(-E(/#/ M+$+ * F+(/%9 +pen#ended funds provide instant li$uidity as mutual funds redeem units daily, either at :-N, or at :-N plus a small exit load. There is a concept of "ontingent ,eferred Sales "harge where the exit load is charged only if the redemption takes place before a specified time period or above a specified amount. - majority of open#ended mutual funds allow switching among the various funds of the same -!" without any load. 0ou generally get your redemption re$uests processed promptly, and receive the che$ue in ;#5 days. @owever, in case of E$uity .inked Savings Schemes 'E.SS( there is a lock in period of three years. H.5 I% T3# M !"#$ @ *+# O; O4#(-E(/#/ M+$+ * F+(/% D#$#!,'(#/, A(/ H.5 D. I K##4 T! )" O; I$9 -lthough the units of open#ended mutual funds are not traded in the secondary market, their sale and repurchase price is a function of the :-N of the fund. %f the value of the portfolio of the fund rises, so will the :-N and, hence, the market value of the open#ended mutual fund. Thus, the :-N is the most important information an investor must seek. -nd this information is available through newspapers where it is given daily, the -!" themselves, the %nternet, and also through the periodic mails that your -!" is supposed to send you. So you can judge the market value of your investment by tracking the movement of the :-N. 83 $ I% T3# M./# .; H.*/'(> O4#(-E(/#/ M+$+ * F+(/%9 Ghen you subscribe to an open#ended mutual fund, you receive an account statement stating your ownership of the number of units in the mutual fund. Thereafter, you get an account statement for every transaction you make. %n some cases, certificates are also issued. 0our -!" may give you the option of holding the certificates in the physical form, or you can receive these certificates in the demateriali1ed 'demat( form, i.e., the certificates are not physically issued to you8 instead, they are credited to your demat account.
TAX IMPLICATIONS

E?+'$- F+(/ Short Term Tax J 2AE .ong Term Tax J :%.

D#6$ F+(/ Short Term Tax J 2AE .ong Term Tax J 9AE

50

%ncome received from !utual *unds, according to the latest /udget proposals dividends from !utual *unds will not be taxed in the hands of the investor. /efore the new proposals, dividend from debt funds was subject to a 2A per cent dividend distribution tax plus surcharge. ,ividends received from open#ended e$uity funds were completely tax#free.

C 4'$ * > '(% $ :2 The difference between the sale consideration and the cost of ac$uisition of the asset is called capital gain. %f the investor sells his units and earns capital gains he is liable to pay capital gains tax. "apital gains are of two types Short#term and .ong#term capital gains. S3.!$ T#!, C 4'$ * A '(%I %f the units are held for a period of less than one year they will be treated as short#term capital gains and the investor will be taxed depending on the income tax rate applicable to him. L.(> T#!, C 4'$ * A '(%I -ll units held for a period of more than 29 months will be classified as long#term capital assets. The investor has to pay long#term capital gains on the units held by him for period of more than 29 months. %n this case the investor of a debt fund will )ay tax at a flat rate of 2A E 'plus surcharge of the applicable tax rate( on the capital gains without indexation or -vail cost indexation on capital gains and pay 9A E tax 'plus surcharge of the applicable tax rate( whichever is lower.
%ndexation means that the purchase price is marked up by an inflation index resulting in lower capital gains and hence lower tax. %nflation index V %nflation index for the year of transfer ##################################################### %nflation index for the year of ac$uisition

C*.%# J E(/#/ M+$+ * F+(/%

"losed#ended mutual funds have a fixed number of units, and a fixed tenure ';, =, 2A, or 2= years(, after which their units are redeemed or they are made open# ended. These funds have various objectives generating steady income by investing in debt instruments, capital appreciation by investing in e$uities, or both by making an e$ual allocation of the corpus in debt and e$uity instruments. IN@ESTMENT OBBECTI@ES

H.5 S+'$ 6*# !# C*.%#/-E(/#/ F+(/% F.! ( I()!# %# '( M- I(<#%$,#($9 Since units of closed#ended funds rise and fall in the market like any other stock, they are well suited for an increase in your investment. @owever, a mutual fund is more influenced by the value of its own portfolio than any other factor. Hnits of an

51

e$uity fund are more fre$uently traded than a debt fund. -lso, the :-N of an e$uity fund rises and falls at a much faster pace. +n the other hand, an e$uity fund provides healthy appreciation in :-N in the long term.

A!# C*.%#/-E(/#/ M+$+ * F+(/% S+'$ 6*# F.! R#>+* ! I().,#9 "losed#ended debt funds, with their conservative investment approach, are best suited for income. These funds declare dividend annually or semi#annually T. 83 $ E:$#($ D. C*.%#/-E(/#/ F+(/% P!.$#)$ M# A> '(%$ I(;* $'.(9 Gith stocks being better than bonds in providing returns on a long#term basis, an e$uity closed#ended fund is better e$uipped to guard your investment against inflation in the long run. C ( I B.!!.5 A> '(%$ C*.%#/-E(/#/ M+$+ * F+(/%9 :o, if you re$uire li$uidity there is an option of selling these closed#ended mutual fundBs units in the secondary market.
AMC F+(/ S)3#,# P* ( M.!> ( S$ (*#- A!.5$3 F+(/ !organ Stanley %nvestment !anagement )vt. .td. !organ Stanley !utual *und C $#>.!E$uity # ,iversified 7rowth S)3#,# T-4# C*.%#/ E(/#/ NA@ C3 !$ (T3!## Y# !%)

RISK CONSIDERATIONS

H.5 A%%+!#/ C ( I B# O; A#$$'(> M- F+** I(<#%$,#($ B )"9 0ou cannot be completely sure of getting your full investment back. ,epending on their investment objective and underlying portfolio, closed#ended funds can be very volatile or be fairly stable. @ence, your principal is not assured.

52

H.5 A%%+!#/ I% M- I().,#9 %t depends on the portfolio of your closed#ended fund. - portfolio of debt instruments or shares of some blue#chip companies may provide regular dividends. A!# T3#!# (- R'%"% U('?+# $. I(<#%$'(> '( C*.%#/-E(/ F+(/9 The value of a closed#end mutual fund can fluctuate drastically. So, your units can trade at a hefty discount to their :-N, thus depriving you from reali1ing the true value of your units. This is because although closed#ended funds are, generally, listed, there is no li$uidity. %nvestors must buy a fund if its portfolio is good8 units are trading at a good discount, and the stock market is poised to rise. A!# C*.%#/-E(/#/ M+$+ * F+(/% ! $#/ ;.! $3#'! )!#/'$ ?+ *'$-9 "losed#end funds are not rated. @owever, it is important to note that the holdings of a debt fund are generally rated, and this serves as an indicator of the safety of the portfolio.
BUYINA, SELLINA, AND HOLDINA

H.5 D. I B+C*.%#/-E(/#/ F+(/9 "losed#ended funds tap the market with their initial offers. -lternatively, if the funds are listed, the units can also be picked up from the secondary market. 83 $ '% T3# M'(',+, I(<#%$,#($ A(/ T3# R (># O; I(<#%$,#($ ;.! C*.%#/-E(/#/ M+$+ * F+(/%9 !inimum investment in closed#ended mutual funds varies, and normally ranges between 4s.9,AAA and 4s.=,AAA. There is no maximum limit of investment. 83 $ '% T3# D+! $'.( O; C*.%#/-E(/#/ M+$+ * F+(/%9 - closed#end fund is, typically, a five#year fund. @owever, the duration period may vary between ; and 2= years. C ( C*.%#/-E(/#/ M+$+ * F+(/% 6# $! /#/ '( $3# S#).(/ !- M !"#$9 0es, closed#ended funds are listed on the stock exchanges and, thus, can be traded in the secondary market. @owever, the li$uidity of closed#ended funds is poor, and they trade on a hefty discount to their :-N in the secondary market. 83 $ '% T3# L'?+'/'$- .; C*.%#/-E(/#/ M+$+ * F+(/%9 The %ndian stock markets lack depth and, thus, the closed#ended mutual funds are illi$uid where they are listed and trade with a heavy discount to their :-Ns. /esides listing, some mutual funds also offer repurchase options in their closed#ended funds at a :-N# linked price after a certain lock#in period. H.5 '% $3# M !"#$ @ *+# .; C*.%#/-E(/#/ M+$+ * F+(/% D#$#!,'(#/, (/ H.5 /. I K##4 T! )" .; I$9 The market price of a closed#ended fund is a direct function of its :-N. The higher the :-N, the higher the market price and vice#versa. @owever, units of a closed#ended fund always trade at a discount to their :-N. *or instance, if the :-N of a fund is 4s.2;, units may be trading at around 4s.22.

53

@owever, units of assured return funds are an exception. Their unit price on the bourses does not chase the :-N8 it chases the assured return. The :-N is the most important information an investor must seek while investing in a closed#ended mutual fund. -nd this information is available through various newspapers, the -!" themselves, the %nternet, and also through the periodic mails which your -!" is supposed to send to you.

83 $ '% T3# M./# .; H.*/'(> C*.%#/-E(/#/ M+$+ * F+(/%9 Ghen you subscribe to a closed#ended mutual fund, you receive either physical certificates, or the account number if they are held in the demat form.
TAX IMPLICATIONS Ghile dividend paid on closed#ended mutual funds is fully tax exempt, on redemption or sale of units in the secondary market, your reali1ation will attract short#term capital gains tax of 2A per cent. @owever, you can save tax by investing in E$uity#.inked Savings Scheme 'E.SS( under Section >> of the %ncome Tax -ct, 23<2, according to which 9A per cent of the amount invested in E.SS which have a lock#in period of ; years#can be deducted from your tax liability subject to a maximum investment of 4s.2A,AAA per year. -lso available under Section >> are two pension plans Hnit Trust of %ndiaBs 4etirement /enefit Hnit )lan '4/)( and ?othari )ioneerBs )ension )lan.

I($#!< * F+(/%
%nterval funds combine the features of open#ended and close#ended schemes. They are open for sale or redemption during pre#determined intervals at :-N related prices. .et us now classify !utual *und Schemes on the /asis of its %nvestment +bjective

A!.5$3 F+(/%
The aim of growth funds is to provide capital appreciation over the medium to long# term. Such schemes normally invest a majority of their corpus in e$uities. %t has been proven that returns from stocks, have outperformed most other kind of investments held over the long term. 7rowth schemes are ideal for investors having a long#term outlook seeking growth over a period of time.

I().,# F+(/%
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures and 7overnment securities. %ncome *unds are ideal for capital stability and regular income.

54

B * ()#/ F+(/%
The aim of balanced funds is to provide both growth and regular income. Such schemes periodically distribute a part of their earning and invest both in e$uities and fixed income securities in the proportion indicated in their offer documents. %n a rising stock market, the :-N of these schemes may not normally keep pace, or fall e$ually when the market falls. These are ideal for investors looking for a combination of income and moderate growth.

M.(#- M !"#$ F+(/%

The aim of money market funds is to provide easy li$uidity, preservation of capital and moderate income. These schemes generally invest in safer short#term instruments such as treasury bills, certificates of deposit, commercial paper and inter#bank call money. 4eturns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for "orporate and individual investors as a means to park their surplus funds for short periods.

L. / F+(/%
- .oad *und is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Typically entry and exit loads range from 2E to 9E. %t could be worth paying the load, if the fund has a good performance history. The maximum load J as specified by SE/%, entry and exit put together is 6E of the :-N.

N.-L. / F+(/%
- :o#.oad *und is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work. Ge can further classify !utual *und Schemes on the /asis of specialty

I(/+%$!- S4#)';') S)3#,#%

%ndustry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like %nfoTech, *!"7, )harmaceuticals etc.

I(/#: S)3#,#%
%ndex *unds attempt to replicate the performance of a particular index such as the /SE Sensex or the :SE :ifty.

55

S#)$.! * S)3#,#%
Sectoral *unds are those, which invest exclusively in a specified industry or a group of industries or various segments such as P-B 7roup shares or initial public offerings.

E7UITY SHARE
E$uity, also called shares or scrips, is the basic building blocks of a company. companyBs ownership is determined on the basis of its shareholding. Shares are, by far, the most glamorous financial instruments for investment for the simple reason that, over the long term, they offer the highest returns. )redictably, theyBre also the riskiest investment option. The /SE Sensex is the most popular index that tracks the movements of shares of ;A blue#chip companies on a weighted average basis. The rise and fall in the value of the Sensex, measured in points, broadly indicates the price#movement of the value of shares. +f late, technology has played a major role in enhancing the efficiency, safety, and transparency of the markets. The introduction of online trading has made it possible for an investor to trade in e$uities at the click of a mouse.

56

IN@ESTMENT OBBECTI@ES

H.5 S+'$ 6*# A!# S3 !#% F.! A( I()!# %# I( M- I(<#%$,#($9 Shares are meant to be long#term investments. Three golden rules for investment in e$uity J ,iversify, -verage out Q most importantly stay invested. Shares do generate income from dividend as well as capital appreciation and have a strong potential to increase value of investment. /ut shares are risky J share prices are affected by factors beyond anyoneBs control and hence one needs to have an appetite for that kind of risk. A!# S3 !#% S+'$ 6*# F.! R#>+* ! I().,#9 0es, if the company earns good profits and pays dividends regularly, shares are ideal for income purposes. /ut not all good companies regularly pay dividends as they may chose to employ the profits for investments and growth purposes. T. 83 $ E:$#($ D. S3 !#% P!.$#)$ M# A> '(%$ I(;* $'.(9 7enerally, they do provide for some protection although share prices have no relation to inflation. The price may crash or rise far beyond the inflation rate. C ( I B.!!.5 A> '(%$ S3 !#%9 0es, shares being what they are, it depends on the company whose shares you own. ?eeping this in mind, you can pledge them with a bank for raising a loan. The banks have their list of approved shares that they accept as a security. 7enerally, shares of well#known and respectable companies are accepted as security.
RISK CONSIDERATIONS

H.5 A%%+!#/ C ( I B# .; A#$$'(> M- F+** I(<#%$,#($ B )"9 Iero assurance. *orget the original amount invested. 0ou will get your money back only according to the prices dictated by the stock market, which depend purely on the market forces of demand and supply. -lso, in case the company goes in for li$uidation, you will

57

get your money back only after the company has paid off all its liabilities, i.e., if there is any money left with it by then. /ut then, it is the potential appreciation of investment that attracts people to shares.

H.5 A%%+!#/ I% M- I().,#9 :o assurance since there is no compulsion on the company to pay dividends. A!# T3#!# A(- R'%"% U('?+# T. I(<#%$'(> I( S3 !#%9 Hnless it is a well# established company, there is the risk of the promoter running away with your money, or of the company closing down and declaring itself bankrupt. %n that case, you will be left holding worthless pieces of certificates. @owever, the Securities Q Exchange /oard of %ndia 'SE/%( has put in place several regulations to protect the interest of the small investor. Share prices can be affected by just about anything going on in the world. %nvestment decisions depend on the outlook of the investor. %f you believe that the price of a share is going to go up, buy it, and sell if you have the opposite view. A!# S3 !#% ! $#/ ;.! $3#'! )!#/'$ ?+ *'$-9 :o, shares are not rated. +f course, there are plenty of brokers and other sources from where one gets Khot tipsL or advice on what shares to buy and which ones to sell, but it is entirely up to you to decide how much to trust these sources.
BUYINA, SELLINA, AND HOLDINA

H.5 /. I B+- S3 !#%9 Shares can be purchased directly when a company issues them through an %nitial )ublic +ffering '%)+( or from the stock market through a stockbroker. The stockbroker charges a small percentage of your transaction as commission, or brokerage, to execute your orders of purchase or sale. The most popular bourses in %ndia are the /ombay Stock Exchange '/SE( and the :ational Stock Exchange ':SE(. 83 $ !# $3# M'(',+, I(<#%$,#($ (/ $3# R (># .; I(<#%$,#($ ;.! S3 !#%9 The minimum investment in buying shares varies, depending on the price and $uantity of the shares you want to buy. 7enerally, in the primary market, when a company comes out with an %)+, approximately =A#2AA shares at the face value of 4s.2A each are mandatory to be bought. -lso, for physical trading in the secondary market, it is advisable to buy shares in marketable lots of 2A, =A, or 2AA, depending on their price. @owever, with a lot of company opting for the demat route, it is getting increasingly possible to trade even single units of shares. 83 $ '% $3# D+! $'.( .; S3 !#%9 Shares have absolutely no timeframe. They exist as long as the company exists. C ( S3 !#% 6# %.*/ '( T3# S#).(/ !- M !"#$9 +f course, shares can be bought and sold in the secondary market, also called the stock exchange. %n fact, the sole purpose for the existence of the stock markets is trading in shares.

58

83 $ '% $3# L'?+'/'$- .; S3 !#%9 Shares are the most li$uid financial instruments as long as there is a buyer for your shares on the stock exchange. !ost shares belonging to the - 7roup on the /SE are among the most li$uid. @owever, shares of some companies may not witness any trading for many days altogether. %n such a case, you will not be able to sell your shares. So, the li$uidity factor varies to a large extent. H.5 !# $3# M !"#$ @ *+# .; S3 !#% D#$#!,'(#/, (/ H.5 D. I K##4 T! )" .; I$9 The market price of a share is determined by just about anything and everything. +ne investor may feel that the market price is lower than its real value, and another might think exactly the oppositeO This creates imbalance in the forces of demand and supply. So, the $uestion is, what affects the investorsB perceptionU )erformance of the company and the state of the industry and the economy are considered reliable factors. /ut what do you do when %nfosys declares a jump in its profits and the share price plummetsU /esides the returns, it is this unpredictability factor that makes investing in shares all the more exciting. *luctuations in the share#prices make keeping track of them on a regular basis utmost important. -ll national and financial newspapers carry the daily $uotes of all companies listed on the /SE and the :SE, and also at some of the regional stock exchanges. !oreover, with the emergence of online trading, it is now possible to get almost live stock market $uotes at the click of a mouse. 83 $ '% T3# M./# .; H.*/'(> S3 !#%9 Shares can be held in either physical or demateriali1ed 'demat( form. %n the demat form, instead of your holding physical share certificates, they are credited to your demat account with a depository participant. %t is very much like holding cash at a bank. Some shares have come under the compulsory demat holding list, the list for which is available on the SE/% Gebsites www.sebi.com or www.sebi.gov.nic.in. %n fact, holding shares in demat form is much more convenient as it eliminates the issue of bad delivery, and also makes the delivery process $uicker and easy to manage.
TAX IMPLICATIONS Ghile dividend is not taxable at the hands of the investor, capital gains are. Ghen you sell your shares at a profit, it attracts a capital gains tax. 7ains reali1ed within one year of purchase of shares come under the short#term capital gains tax, and are included in gross taxable income. %f the duration is more than one year, it is termed as long#term capital gains tax. The rate is 2A percent for short#term capital gains and nil for long#term capital gains 'long#term capital gains is exempted totally(.

DEBENTURESCBONDS
- /ond is a loan given by the buyer to the issuer of the instrument. "ompanies, financial institutions, or even the government can issue bonds. +ver and above the scheduled interest payments as and when applicable, the holder of a bond is entitled to receive the par value of the instrument at the specified maturity date.

59

/onds can be broadly classified into Tax#Saving /onds 4egular %ncome /onds Tax#Saving /onds offer tax exemption up to a specified amount of investment, examples are a. %"%"% %nfrastructure /onds under Section >> of the %ncome Tax -ct, 23<2 b. 4E" /onds under Section =5E" of the %ncome Tax -ct, 23<2 c. 4/% Tax 4elief /onds 4egular#%ncome /onds, as the name suggests, are meant to provide a stable source of income at regular, pre#determined intervals, examples are a. ,ouble 0our !oney /ond b. Step#Hp %nterest /ond c. 4etirement /ond d. En#cash /ond e. Education /onds f. !oney !ultiplier /onds&,eep ,iscount /ond Similar instruments issued by companies are called debentures. IN@ESTMENT OBBECTI@ES

H.5 S+'$ 6*# A!# B.(/% F.! A( I()!# %# I( M- I(<#%$,#($9 /onds are usually not suitable for an increase in your investment. @owever, in the rare situation where an investor buys bonds at a lower price just before a decline in interest rates, the resultant drop in rates leads to an increase in the price of the bond, thereby facilitating an increase in your investment. This is called capital appreciation. A!# B.(/% S+'$ 6*# F.! R#>+* ! I().,#9 0es, bonds are suitable for regular income purposes. ,epending on the type of bond, an investor may receive interest semi#annually or even monthly, as is the case with monthly income bonds. ,epending on oneBs capacity to bear risk, one can opt for bonds issued by top ranking corporate, or that of companies with lower credit ratings. Hsually, bonds of top#rated corporate provide lower yield as compared to those issued by companies that are lower in the ratings. T. 83 $ E:$#($ D. B.(/% P!.$#)$ M# A> '(%$ I(;* $'.(9 This depends on the rate of inflation. %n times of falling inflation, the real rate of return remains high, but bonds do not offer any protection if prices are rising. This is because they offer a pre#determined rate of interest. C ( I B.!!.5 A> '(%$ A B.(/9 0es, one can borrow against bonds by pledging the same with a bank. @owever, borrowings depend on the credit rating of the

60

instrument. *or instance, it is easier to borrow against government bonds than against bonds issued by a company with a low credit rating.
C!#/'$ R $'(> S-,6.*% @igh 7rades ---%nvestment @ighest Safety @igh Safety -de$uate Safety !oderate Safety %nade$uate Safety @igh 4isk Substantial 4isk %n ,efault (/ 83 $ T3#- M# (

%nvestment 7rades /// Speculative 7rade // / " ,

RISK CONSIDERATIONS

H.5 A%%+!#/ C ( I 6# .; A#$$'(> M- F+** I(<#%$,#($ B )"9 This depends on the nature of the bonds that have been purchased by the investor. /onds may be secured or unsecured. *irstly, always check up the credit rating of the issuing company. :ot only does this give you a working knowledge of the companyBs financial health, it also gives you an idea about the risk considerations of the instrument itself. This knowledge makes for a better understanding of the available choices, and helps you take informed decisions. %n secured instruments, you have a right to the assets of the firm in case of default in payment. The principal depends on the companyBs credit rating and the financial strength. Selling in the secondary market has its own pitfalls. *irst, there is the li$uidity problem, which means that it is a tough job to find a buyer. Second even if you find a buyer, the prices may be at a steep discount to its intrinsic value. Third, you are subject to market forces and, hence, market risk. %f interest rates are running high, bond prices will be down and you may well end up incurring losses. +n the other hand, ,ebentures are always secured. H.5 A%%+!#/ I% M- I().,#9 %nterest payments depend on the health and credit rating of the issuer. Therefore, it is crucial to check the credit rating and financial health of the issuer before loosening up your purse strings. %f you do invest in bonds issued by the top#rated corporate, rest assured that you will receive your payments on time. A!# T3#!# A(- R'%"% U('?+# T. B.(/%9 %n certain cases, the issuer has a call option mentioned in the prospectus. This means that after a certain period, the issuer has the option of redeeming the bonds before their maturity. %n that case, while you will receive your principal and the interest accrued till that date, you might lose out on the interest that would have accrued on your sum in the future

61

had the bond not been redeemed. %nflation and interest rate fluctuation affect buy, hold, and sell decisions in case of /onds. -lways remember that if interest rates go up, bond prices go down and vice#versa.

A!# B.(/% ! $#/ ;.! $3#'! )!#/'$ ?+ *'$-9 0es, bonds are rated by speciali1ed credit rating agencies. "redit rating agencies include "-4E, "4%S%., %"4- and *itch. -n --- rating indicates highest level of safety while , or *, indicates the least. The yield on a bond varies inversely with its credit 'safety( rating. -s mentioned earlier, the safer the instrument, the lower is the rate of interest offered.
BUYINA, SELLINA, AND HOLDINA

H.5 D. I B+- A B.(/9 %nvestors can subscribe to primary issues of "orporate and *inancial %nstitutions '*%s(. %t is common practice for *%s and corporate to raise funds for asset financing or capital expenditure through primary bond issues. Some bonds are also available in the secondary market. 83 $ I% T3# M'(',+, I(<#%$,#($ A(/ T3# R (># O; I(<#%$,#($ ;.! B.(/9 The minimum investment for bonds can either be 4s.=,AAA or 4s.2A,AAA. @owever, this amount varies from issue to issue. There is no prescribed upper limit to your investment J you can invest as little or as much as you desire, depending upon your risk perception. /onds offer a fixed rate of interest. 83 $ I% T3# D+! $'.( O; B.(/%9 The duration of a bond issue usually varies between = and 6 years. C ( B.(/% B# S.*/ I( T3# S#).(/ !- M !"#$9 %f the bond is listed, it can be sold in the secondary debt market. 83 $ I% T3# L'?+'/'$- O; A B.(/9 Selling in the debt market is an obvious option. Some issues also offer what is known as P)ut and "all option.B Hnder the )ut option, the investor has the option to approach the issuing entity after a specified period 'say, three years(, and sell back the bond to the issuer. %n the "all option, the company has the right to recall its debt obligation after a particular time frame. *or instance, a company issues a bond at an interest rate of 29 percent. -fter 9 years, it finds it can raise the same amount at 2A percent. The company can now exercise the "all option and recall its debt obligation provided it has declared so in the offer document. Similarly, an investor can exercise his )ut option if interest rates have moved up and there are better options available in the market. H.5 I% T3# M !"#$ @ *+# O; A B.(/ D#$#!,'(#/9 !arket value of a bond depends on a host of factors such as its yield at maturity, prevailing interest rates, and rating of the issuing entity. )rice of a bond will fall if interest rates rise and vice# versa. - change in the credit rating of the issuer can lead to a change in the market price.

62

83 $ I% T3# M./# .; H.*/'(> B.(/%9 /onds are most commonly held in form of physical certificates. +f late, some bond issues provide the option of holding the instrument in demat form8 interest payment may also be automatically credited to your bank account.
TAX IMPLICATIONS There are specific tax saving bonds in the market that offer various concessions and tax#breaks. Tax#free bonds offer tax relief under Section >> of the %ncome Tax -ct, 23<2. %nterest income from bonds, up to a limit of 4s.29,AAA, is exempt under section >A. of the %ncome tax -ct, plus 4s.;,AAA exclusively for interest from government securities. @owever, if you sell bonds in the secondary market, any capital appreciation is subject to the "apital 7ains Tax.

T :-S <'(> B.(/%

Some bonds have a special provision that allows the investor to save on tax. These are termed as Tax#Saving /onds, and are widely used by individual investors as a tax#saving tool. Examples of such bonds are a. %nfrastructure /onds under Section >> of the %ncome Tax -ct, 23<2 b. "apital 7ains /onds under Section =5E" of the %ncome Tax -ct, 23<2 c. 4/% Savings /onds 'erstwhile, 4/% 4elief /onds(

83 $ A!# RBI S <'(>% B.(/%9 4/% Savings /onds are an instrument that are issued by the 4/%, and currently has two options J one carrying an > percent rate of interest per annum, which is taxable and the other one carries a <.= percent 'tax# free( interest per annum. The interest is compounded half#yearly and there is no maximum limit for investment in these bonds. The maturity period of the > percent 'taxable( bond is six years and that of the <.= percent 'tax#free( bond is five years. Tax %mplications %n case of the <.= per cent 4/% Savings /ond, the interest received is completely exempt from income tax as per the provisions of the %ncome Tax -ct, 23<2. /ut, %n case of the > percent 4/% Savings /ond, the interest will be taxable under the %ncome#Tax -ct, 23<2 as applicable according to the relevant tax status of the bondholder. 4/% Savings /onds are exempt from Gealth Tax. @owever, there is no tax benefit on the amount invested in these bonds 83 $ A!# T : S <'(> C 4'$ * A '(% B.(/%9 %nvestments in bonds issued by the 4ural Electrification "orporation '4E"( are at present eligible for capital gains tax savings. 7ains made out of a capital transfer need to be invested in the above bonds within six months of sale of capital assets in order for the proceeds of such sale to be exempt from capital gains tax.
REC 10EC C 4'$ * A '( T : E:#,4$'.( B.(/
:omenclature *ace Nalue 4E" "apital 7ain Exemption /onds Series J N%4s.2A,AAA&#

63

!ode of %ssue !inimum -pplication !ode of Subscription ,eem date of -llotment "oupon 4ate Q )ayment of %nterest Tap )eriod Tenor 4edemption Transfer !obili1ation *ee 4egistrar :ature of Security Gho can -pply

)rivate )lacement =AA /onds of 4s.2AAAA&# 2AAE on application .ast day of each month in which the subscription money is reali1ed and credited to 4E" account. =.9=E 'payable annually on ;Ath Cune( from the date of reali1ation of che$ue&draft in account of 4E". 2st interest will be payable on ;Ath Cune, 9AA6 ;2st !arch, 9AA6 or subscription of 4s.;=AA cr, whichever is earlier. ; years from the date of allotment -t par, at the end of ; years from the date of allotment. :on#transferable A.2AE plus Services tax 4"!" Shares 4egistry )vt. .td. /#2A=, Sector 9, :+%,-, H.). .egal mortgage creating pari#pasu charge over 4E"Bs immovable property to the satisfaction of the trustee. %ndividuals8 @indu Hndivided *amilies8 )artnership *irms8 %nsurance "ompanies8 "ompanies and "orporate /ody8 )rovident *unds, Superannuation *unds Q 7ratuity *unds8 /anks8 !utual *unds8 *%s8 *%%s8 44/s8 :4%s investing out of :4+ -&c on non#repatriable basis8 "o#operative banks8 +ther eligible categories.

Tax %mplications The main feature of the 4E" /onds is that you can claim "apital 7ains Tax benefits benefit under Section =5E" of the %ncome Tax -ct, 23<2. %f you have reali1ed any long#term capital gains, you can avoid paying tax on it by investing the gains in the 4E" bonds. Such gains have to be invested within < months of reali1ing the same, and the investment has to be locked up for a minimum period of ;#years. @owever, the interest that will accrue on this investment is taxable. 83 $ !# T : S <'(> I(;! %$!+)$+!# B.(/%9 %nfrastructure bonds are available through issues of %"%"% /ank and %,/%, brought out in the name of %"%"% Safety /onds and %,/% *lexi bonds. These provide tax#saving benefits under Section >> of the %ncome Tax -ct, 23<2, up to an investment of 4s.2, AA,AAA, subject to the bonds being held for a minimum period of three years from the date of allotment. *or instance, the tax#saving bond from %"%"% /ank for the month of -ugust 9AA; provides four options
O4$'.(%
Tax /enefit -vailable %ssue )rice '4s.( 4edemption )eriod *ace Nalue %nterest 4ate 'E( p.a.R *re$uency of %nterest payment ICICI B (" T : S <'(>% B.(/ A+>+%$ I II III Sec >> =AAA&# ; years =AAA&# =.6= -nnual Sec >> =AAA&# ; years 5 months <A9=&# ,eep ,iscount /ond :.Sec >> =AAA&# = years =AAA&# =.6= -nnual Sec >> =AAA&# = years 5 months <6=A&# ,eep ,iscount /ond :.-

I@

64

0T! 'E(RWD 'with tax benefits( !inimum -pplication !aximum -pplication R W D

29.A 2 /ond 9A /onds

22.A 2 /ond 9A /onds

3.6 2 /ond 9A /onds

3.2 2 /ond 9A /onds

Subject to T,S as per the then prevailing tax laws 4ounded off to the nearest multiple of A.2 The yield has been calculated assuming that a tax rebate of 2=E is available to the eligible investors and that no surcharge is payable in case of all the options.

Similarly, the %,/% %nfrastructure 'Tax Saving( /ond '%,/% *lexi bonds # 26 %ssue, issued in Canuary 9AA;( offers 5 options vi1. -nnual %nterest '9 +ptions( and "umulative '9 +ptions(. The minimum investment was 4s.=AAA&# only i.e. one bond for all options. The investor has option to receive interest S 6.9=E p.a., payable annually for three years or 6.=AE p.a., payable annually for five years under the -nnual %nterest +ption. Hnder the "umulative +ption, the initial investment of 4s.=AAA&#, becomes 4s.<;3A&# after three years and six months or 4s.65=A&# after five years six months.

Tax %mplications -ccording to Section >> of the %ncome Tax -ct, 23<2, subscription to the Tax Saving /ond would entitle %ndividuals and @H*s to a rebate from %ncome tax as indicated below
A!.%% (R%)F T.$ * I().,# R#6 $#
9AE 2=E :il

A J 2=A,AAA 2=A,AA2 J =AA,AAA =AA,AA2 Q -bove

4ebate under section >> is available on the aggregate of the sums paid or deposited up to 4s.2,AA,AAA&#, including subscription to Tax Saving /onds of the %ssuer "ompany. -n individual would be entitled to an enhanced rate of rebate S ;AE if his income chargeable under the head KsalariesL does not exceed 4s.2,AA,AAA before allowing deduction under section 2< and is not less than 3AE of the gross total income subject to provisions under section >> of the %ncome#tax -ct.

65

INTRODUCTION TO FINANCIAL MARKET-I(CLASS XI)

C3 4$#! 22

P!', !- M !"#$

PRIMARY MARKETS
"ompanies raise funds to finance their projects through various methods. The promoters can bring their own money of borrow from the financial institutions or mobili1e capital by issuing securities. The funds maybe raised through issue of fresh shares at par or premium, preferences shares, debentures or global depository receipts. The main objectives of a capital issue are given below To To To To To promote a new company expand an existing company diversify the production meet the regular working capital re$uirements capitali1e the reserves

Stocks available for the first time are offered through primary market. The issuer may be a new company or an existing company. These issues may be of new type or the security used in the past. %n the primary market the issuer can be considered as a manufacturer. The issuing houses, investment bankers and brokers act as the channel of distribution for the new issues. They take the responsibility of selling the stocks to the public. THE FUNCTION The main service functions of the primary market are origination, under writing and distribution. +rigination deals with the origin of the new issue. The proposal is analy1ed in terms of the nature of the security, the si1e of the issue, timing of the issue and floatation method of the issue. Hnderwriting contract makes the share predictable and removes the element of uncertainty in the subscription 'underwriting is given in the latter part of this chapter(. ,istribution refers to the sale of securities to the investors. This is carried out with the help of the lead managers and brokers to the issue. THE RISE AND FALL OF PRIMARY MARKETS +nly a few years back, any investor worth his salt thought that investing in primary issues was the easiest and simplest way to make money. @e scoffed at other KinferiorL options like mutual funds and bank deposits because they did not double or triple his money in a few months timeO /elieve it or not, primary markets did that precisely J they posted near indecent returns like ;AA to 5AAE just in two months

66

time. Ghen the common investor benchmarked all other investment options against these phenomenal returns, obviously they stood no chance. 4eturns apart, investing in primary issues appeared so simple and Krisk freeLO -ll that was re$uired of investors to partake in the manna was to simply put as large an application as possible because the proportionate allotment rule worked to the favor of big investors 'small investors were supposed to have gone to mutual funds( and pray for a large allotment. +nce they received some shares on the large subscription, they just offloaded their holdings at the listed prices, which were at a hefty premium to the issue price not because of any good fundamentals of the issuing company but simply because demand was far greater than the supply and waited for the next %)+ to make another killing. -s profit booking became so simple, money flowed from all directions, some legal and some not so legal J the markets boomed and promoters, brokers and investors all made merry. KEntrepreneursL of all sorts mushroomed to float companies with fancy projects and launched %)+s with tall promises to give high earnings and dividends. /ut no one bothered to check the prospectuses or the credentials of these promoters because there was enough money to be made by every one or so they thought, until the markets crashed like the proverbial nine pins. Ghat drove the primary markets to these di11y heights only to collapse laterU Those were the early days of liberali1ation and the foreign institutional investors and mutual funds had no clue as to the levels of transparency or corporate governance absent in the %ndian companies. They believed in the picture specially painted for them by the wily promoters, liked it and invested heavily believing in what was right in the Gest would be right in the East as well. They were rudely shaken when the promised projects failed to take off because of rampant diversion of money, plain incompetence and severe change in the economic climate. Then came, the ice winter of stock market gloom, which lasted for probably the longest period in the near history. -s investors lost money and faith in the primary market, they punished all the issuers J %)+ after %)+ failed to get the desired response from the markets J it almost became impossible for any company to raise money from the stock markets. 7enuine companies, which lined up on#going projects for funds to be raised from the market were driven to desperation and borrowed at usurious rates that broke the back of their balance sheets. The high cost of borrowing made debt servicing difficult and defaults occurred even from corporate organi1ations known for their high credit worthiness. The South -sian crisis further made life very difficult for %ndian entrepreneurs as their exports failed to take off and money got locked up in huge inventories. This was the perfect recipe for disaster and doomsayers were busy writing the epitaph on the %ndian economic revival. -s the economy teetered on the verge of collapse, the outlook has changed slowly but surely J software sector came to the rescue of the markets, a few robust companies lifted the market from their lowest depths to the present peaks of unprecedented highs.

67

-nd the /ull 4un began all over again. !arkets are in fren1y with institutional buying and as the index 1oomed to 25=AA levels, the primary market issues were back with a bang. ,o you see any red herrings hereU !any analysts said investors were climbing up the same learning curve all over again. Some of the PcompaniesB that came out with %)+s hardly had the right credentials or performance track record to justify the public offer. /ut the investors starved so long for PgoodB issues were merrily lapping up all of them. @appily so far, they all made money as the scripts listed above their issue prices posted handsome returns in very short term. /ut donBt the happenings appear so disturbingly familiarU %f you were a discerning investor, you would know speculation and serious investing are very different. -s our discursion here deals with the second, we make an attempt to list the factors that an investors should consider as a checklist to guide your primary market investments. FACTORS TO BE CONSIDERED BY THE IN@ESTORS The number of stocks, which has remained inactive, increased steadily over the past few years, irrespective of the overall market levels. )rice rigging, indifferent usage of funds, vanishing companies, lack of transparency, the notion that e$uity is a cheap source of fund and the permitted free pricing of the issuers are leading to the prevailing primary market conditions. %n this context, the investor has to be alert and careful in his investment. @e has to analy1e several factors. They are given below Factors to be considered: )romoterBs "redibility Efficiency of the !anagement )romoterBs past performance with reference to the companies promoted by them earlier. The integrity of the promoters should be found out with en$uiries and from financial maga1ines and newspapers. Their knowledge and experience in the related field. The managing directorBs background and experience in the field. The composition of the /oard of ,irectors is to be studied to find out whether it is broad based and professionals are included. The credibility of the appraising institution or agency. The stake of the appraising agency in the forthcoming issue. 4eliability of the demand and supply projections of the product.

)roject ,etails )roduct

68

 *inancial ,ata

"ompetition faced in the market and the marketing strategy. %f the product is export oriented, the tie#up with the foreign collaborator or agency for the purchase of products. -ccounting policy. 4evaluation of the assets, if any. -nalysis of the data related to capital, reserves, turnover, profit, dividend record and profitability ratio. )ending litigations and their effect on the profitability of the company. ,efault in the payment of dues to the banks and financial institutions. - careful study of the general and specific risk factors should be carried out. - through reading of the auditorBs report is needed especially with reference to significant notes to accounts, $ualifying remarks and changes in the accounting policy. %n the case of letter of offer the investors have to look for the recently audited working result at the end of letter of offer. %nvestor should find out whether all the re$uired statutory clearance has been obtained, if not, what is the current status. The clearances used to have a bearing on the completion of the project. )romptness in replying to the en$uiries of allocation of shares, refund of money, annual reports, dividends and share transfer should be assessed with the help of past record.

.itigation

4isk *actors -uditorBs 4eport

Statutory "learance

%nvestor Service

IN@ESTORS PROTECTION IN THE PRIMARY MARKET To ensure healthy growth of primary market, the investing public should be protected. The term investorBs protection has a wider meaning in the primary market. The principal ingredients of investor protection are )rovision of all the relevant information, )rovision of accurate information and Transparent allotment procedures without any bias.

69

To provide the above#mentioned factors several steps have been taken. They are project appraisal, under writing, clearance of the issue document by the stock exchange and SE/%Bs scrutiny of the issue document.

P!.K#)$ A44! '% *2 This is the first step in the entire process of the project. Technical and economic feasibility of the project is evaluated. %f the project itself is not technically feasible and economically viable, whatever may be the other steps taken to protect the investors are defeated. -ppraisal shows whether the project is meaningful and can be financed. The investorsB protection starts right from the protection of the principal amount of investment. /ased on the appraisal, the project cost is finali1ed. The cost should be neither understand nor overstated. The profitability of the project should be estimated and given. To ensure fair project appraisal, SE/% has made it mandatory for the project appraisal body to participate a certain amount in the forthcoming issue. U(/#!5!'$'(>2 +nce the issue is finali1ed the under writing procedure starts. 4eputed institutions and agencies, providing credibility to the issue normally underwrite the issue. %f the lead managers participate more than = percent of the minimum stipulated amount offered to the public, it would increase the confidence of the public regarding the pricing and sale ability of the issue. D'%)*.%+!#% '( $3# P!.%4#)$+%2 SE/% has issued stringent norms for the disclosure of information in the prospectus. %t is the duty of the lead manager to verify the accuracy of the data provided in the prospectus. The pending litigation should be given clearly. The promotersB credibility in fulfilling the promises of the previous issues 'if any( should be stated. - clear version of the risk factors should be given. -ny adverse development that affects the normal functioning and the profit of the company should be highlighted in the risk factor. C*# ! ()# 6- $3# S$.)" E:)3 (>#2 The issue document has to be cleared by the stock exchange on which the proposed listing is offered. The stock exchanges verify the factors related with the smooth trading of the shares. -ny bottleneck in this area will be eliminated since the transferability is the basic right of the shareholders. Trading of the shares helps the investor to li$uidate his share at anytime. %f the issues were not traded in the secondary market at a good price, they would dampen the spirit of the investor. -ccording to a study conducted by !r. )rithvi @aldea, between -pril 2339 and !arch 233< out of ;,>69 issues, 9,3>6 were traded below the offer price. -s on Canuary 25, 2336 nearly 9A= shares were not traded at all and another 22> companies just proved to be fly by night operators. S'>('(> 6- B. !/ .; D'!#)$.!%2 The /oard of ,irectors should sign the prospectus. - copy is also filed with the office to the 4egistrar of the "ompanies. This along with the other material documents referred to in the prospectus are available for inspection by the members of the public. The minimum amount to be subscribed by the promoters and maintained for a minimum number of years also safeguards the interest of the investors.

70

SEBIG% R.*#2 'a( SE/% scrutini1es the various offer documents from the viewpoint of investorsB protection and full disclosure. %t has the power to delete the unsubstantiated claims and ask for additional information wherever needed. This makes the lead manager to prepare the offer document with due care and diligence8 'b( Ghen the disclosure of the information is complete, wide publicity has to be given in the newspapers8 'c( %n the allotment procedure to make sure of transparency, SE/%Bs nominee is appointed apart from the stock exchange nominee in the allotment committee. %nclusion of valid applications and rejection of invalid applications are checked. The representative of the SE/% see to it that un#due preference is not given to certain group of investors. R#/!#%% * .; I(<#%$.!% A!'#< ()#%2 The ,epartment of "ompany -ffairs has introduced computeri1ed system of processing the complaints to handle it effectively. The companies are re$uested to give feed back regarding the action taken on each complaint within a stipulated time period. %f the companies do not respond and are slow in the process of settlement of complaints, penal action can be taken against the companies under the provisions of the "ompanies -ct. %f the performance of the 4egistrar to the issue is not satisfactory in settling the complaints, SE/% can take appropriate action against such 4egistrar. Several %nvestors -ssociations are also functioning to help the investors complaints redressed promptly.
PRIMARY MARKET TRENDS J O@ER NINETIES The liberali1ation policy adopted by the government in the early nineties resulted in a boom in the secondary market. The boom was not restricted to the secondary market alone, the primary market that till then was working under the "ontroller of "apital %ssue also enjoyed the boom with the repealing of the "ontroller of "apital %ssue -ct. Gith the dawn of an era of free pricing more and more companies accessed the primary market. There was a fall in the amount raised through primary market from !arch 233= with much#publici1ed !.S. shoe episode. This episode put a break on the new issues activity. The collapse of the "4/ capital market was another fatal blow on the primary market. The primary market was dull and insipid in 2336#3>. The number of primary issues, which were >2; in 233<#36 drastically, fell down to <9 issues in 2336#3>. %t is interesting to note that out of every 2AA public issues ;3 was over subscribed in 233=#3< but in 233<#36 it was >. -t the same time 6 out of every 2AA companies in 233<#36 had to return application money to investors for failing to raise minimum stipulated amount in capital issue. The reasons for this sordid state of affairs are given below.

A>>!#%%'<# P!')'(>2 This is the major cause for the sorry state of affairs in the primary market. The near complete freedom given to the issuers and the merchant bankers to fix the premium following the repeal of "apital %ssue -ct resulted in high premium, sharp erosion of post listing prices and very little scope for appreciation. This made the investors to shy away from the market.

71

P..! L'?+'/'$-2 The poor $uality of the primary issues has contributed to a growing inactive list in the stock market. - glance at the profile of the in active scrips as on Cune 2336, provides an interesting insight of the ;<26 scrips that were on the inactive list 'based on trading in the first half of 2336(. %n those shares, 9,3AA were listed prior to 233< and 2,9AA were companies listed prior to 2335. There is no way out for the investors and their fears have resulted in poor response to the primary market. L.5 R#$+!(%2 :on#implementation of projects, delays, changes in the scope and scale of projects to justify the cost and non#attainment of projected earnings have resulted in the fall in listing price. Though large sums were raised in 2339#3< period, capital formation with concomitant earnings has been nowhere near that reflected in the offer documents. )oor returns have drained the investorsB confidence. L.5 @.*+,#2 The scrips that are traded in the market, the number of transactions and the amount traded are so low that an investor wanting to sell the scrip would have difficulty in doing so. !any scrips in the current /2 group show this trend. E).(.,') S*.5 D.5(2 The growth of the 7,) has fallen from 6 per cent in 233=# 3< to mere < per cent in 233<#36. 4ecession faced#by the economy had a direct impact on the secondary and tertiary sector. %t had an indirect effect upon the primary market.
+ne should not jump to the conclusion that there are no takers in primary market. Even today there are takers for good $uality issues. Several new issues by the banks # both private and public sectors have proved to be $uite a success on the stock market in the recent past. Stocks like @,*" /ank, 7lobal Trust /ank, Satyam "omputers, %nfosys etc. are performing well on the stock market. The year 2333 saw renewed entrees in the primary market. The initial public offer from companies of %T sector was received well. The funds mobili1ed through the debt and e$uity route aggregated to 4s.=5,;=9 cr, a rise of around 95 per cent compared 4s.55,22= crores in 233>. MEASURES TAKEN TO RE@I@E THE MARKET - listed company having immediate three years of dividend paying track record only can access the market. %f a manufacturing company did not have such a track record, it could access the public issue market provided the financial institution or a scheduled commercial bank appraised its project and such appraising entities also participated in the project fund. The companies were re$uired to complete the allotment of securities within ;A days of the closure of the issue.

72

%t would be necessary for a corporate body making a public issue to have at least five public shareholders who has been made a net capital offer to the tune of 4s.2 lakh forever. SE/% does not vet offer documents of companies having track record of ; years dividend payment. 4emoval of mandatory re$uirement of 3A per cent subscription clause in cases of offer for sale. 4educing the minimum application si1e for subscribing to a public issue from 4s.=AAA to 4s.9AAA. %n case of no#underwritten public issues, promoters could bring in their own money or procure subscription from elsewhere within <A days of the closure of the issue subject to such disclosures in the offer documents. SE/% lifted the provision of the lock in period for promotersB contribution in case of listed companies with ; years track record of dividend. SE/% has made it mandatory to disclose un#audited results of companies for every $uarter. Timely information would now be available to the public. SE/% has directed different stock exchange to segregate the cash flow statement of all companies that came out with %)+ since 2339#3; and have asked the exchange to have a check over these companies. SE/% abolished the fixed par value concept and, instead companies can fix the par value of the shares. @". Technologies %)+ has a par value of 4s.5 per share, offered at 4s.=>A per share.

PRIMARY MARKET FOR E7UITY J TODAY )rimary market for e$uity, which consists of both the Pinitial public offeringB '%)+( market and the Pseasoned e$uity offeringB 'SE+( markets, experienced considerable activity in 9AA5 and 9AA= 'see Table below(. %n 9AA=, 4s.;A,;9= crore of resources were raised on this market, of which 4s.3,32> crore were made up by == companies which were listed for the first time '%)+s(. The number of %)+s per year has risen steadily from 9AA9 onwards. - level of == %)+s in the year translates to roughly 5 %)+s every month. The mean %)+ si1e, which was elevated in 9AA5, returned to 4s.2>A crore, which is similar to the value prevalent in 9AA;. The primary issuance of debt securities, as per SE/%, fell to a low of around 4s. << crore in 9AA=, which is one facet of the far#reaching difficulties of the debt market. Hnlike e$uity securities, companies redeem debt securities issued at previous dates every year. @ence, a year with a low issuance of fresh debt securities is a year in which the stock of outstanding debt securities drops.
Table: Primary Market
'4s.crores(

C *#(/ ! Y# ! 2002 ,ebt E$uity 5,=53 9,59A 2003 =,9>5 9,>32 2000 9,;>; ;;,56= 2001 << ;A,;9=

73

Total :umber

+f which, %)+s :umber of %)+s !ean %)+ si1e

2,3>2 < ;;A <,36A 9>

2,6A> 29 259 >,26= 5;

29,5A9 9< 566 ;=,>=3 <=

3,32> == 2>A ;A,;32 2A3

Source SE/%

%n addition to resource mobili1ation by the issuance of debt and e$uity securities, one of the most important mechanisms of financing that has been used by %ndian firms is retained earnings, which are also a part of e$uity financing. )rimarily, issues can be classified as a )ublic, 4ights or )referential issues 'also known as private placements(. Ghile public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated further.

INITIAL PUBLIC OFFER (IPO) P !$'#% I(<.*<#/ '( $3# IPO

%n the sixties and seventies, the company and its personnel managed %)+. /ut, at present initial public offering involves a number of agencies. The rules and regulations, the changing scenario of the capital market necessitated the company to seek for the support of many agencies to make the public issue a success. -s a student of financial market management, one should know the number of agencies involved and their respective role in the public issue. The promoters also should have a clear idea about the agencies to coordinate their activities effectively in the public issue. The manager to the issue, registrars to the issue, underwriters, bankers, advertising agencies, financial institutions and government &statutory agencies. MANAAERS TO THE ISSUE .ead managers are appointed by the company to manage the initial public offering campaign. Their main duties are ,rafting of prospectus )reparing the budget of expenses related to the issue Suggesting the appropriate timings of the public issue -ssisting in marketing the public issue successfully -dvising the company in the appointment of registrars to the issue, underwriters, brokers, bankers to the issue, advertising agents etc. ,irecting the various agencies involved in the public issue.

!any agencies are performing the role of lead managers to the issue. The merchant banking division of the financial institutions, subsidiary of commercial banks, foreign

74

banks, private sector banks and private agencies are available to act as lead mangers. Such as S/% "apital !arkets .td., /ank of /aroda, "anara /ank, ,S) *inancial "onsultant .td. %"%"% Securities Q *inance "ompany .td., etc. The company negotiates with prospective mangers to its issue and settles its selection and terms of appointment. Hsually companies appoint lead managers with a successful background. There may be more than one manager to the issue. Some times the banks or financial institutions impose a condition while sanctioning term loan or underwriting assistance to be appointed as one of the lead managers to the issue. The fee payable to the lead managers is negotiable between the company and the lead manager. The fee agreed upon is revealed in the memorandum of the understanding filed along with the offer document. REAISTRAR TO THE ISSUE -fter the appointment of the lead managers to the issue, in consultation with them, the 4egistrar to the issue is appointed. Muotations containing the details of the various functions they would be performing and charges for them are called for selection. -mong them the most suitable one is selected. %t is always ensured that the registrar to the issue has the necessary infrastructure like "omputer, %nternet and telephone. The 4egistrars normally receive the share application from various collection centers. They recommend the basis of allotment in consultation with the 4egional Stock Exchange for approval. They arrange for the dispatching of the share certificates. They hand over the details of the share allocation and other related registers to the company. Hsually registrars to the issue retain the issuer records at least for a period of six months from the last date of dispatch of letters of allotment to enable the investors to approach the registrars for redressal of their complaints. UNDER8RITERS Hnderwriting is a contract by means of which a person gives an assurance to the issuer to the effect that the former would subscribe to the securities offered in the event of non#subscription by the person to whom they were offered. The person who assures is called an underwriter. The underwriters do not buy and sell securities. They stand as back#up supporters and underwriting is done for a commission. Hnderwriting provides an insurance against the possibility of inade$uate subscription. Hnderwriters are divided into two categories *inancial %nstitutions and /anks /rokers and approved investment companies.

Some of the underwriters are financial institutions, commercial banks, merchant bankers, members of the stock exchange, Export and %mport /ank of %ndia etc. The underwriters are exposed to the risk of non#subscription and for such risk exposure they are paid an underwriting commission.

75

/efore appointing an underwriter, the financial strength of the prospective underwriter is considered because he has to undertake and agree to subscribe the non#subscribed portion of the public issue. The other aspects considered are Experience in the primary market )ast underwriting performance and default +utstanding underwriting commitment The network of investor clientele of the underwriter and @is overall reputation.

The company after the closure of subscription list communicates in writing to the underwriter the total number of shares&debentures under subscribed, the number of shares&debentures re$uired to be taken up by the underwriter. The underwriter would take up the agreed portion. %f the underwriter fails to pay, the company is free to allot the shares to others or take up proceeding against the underwriter to claim damages for any loss suffered by the company for his denial. BANKERS TO THE ISSUE /ankers to the issue have the responsibility of collecting the application money along with the application form. The bankers to the issue generally charge commission besides the brokerage, if any. ,epending upon the si1e of the public issue more than one banker to the issue is appointed. Ghen the si1e of the issue is large, ; to 5 banks are appointed as bankers to the issue. The number of collection centers is specified by the central government. The bankers to the issue should have branches in the specified collection centers. %n big or metropolitan cities more than one branch of the various bankers to the issue are designated as collecting branches. /ranches are also designated in the different towns of the state where the project is being set up. %f the collection centers for application money are located nearby people are likely to invest the money in the company shares. AD@ERTISINA AAENTS -dvertising plays a key role in promoting the public issue. @ence, the past track record of the advertising agency is studied carefully. Tentative program of each advertising agency along with the estimated cost are called for. -fter comparing the effectiveness and cost of each program with the other, a suitable advertising agency if selected in consultation with the lead managers to the issue. The advertising agencies take the responsibility of giving publicity to the issue on the suitable media. The media may be newspapers&maga1ines&hoardings&press release or a combination of all. THE FINANCIAL INSTITUTIONS *inancial institutions generally underwrite the issue and lend term loans to the companies. @ence, normally they go through the draft of prospectus, study the proposed program for public issue and approve them. %,/%, %*"% Q %"%"%, .%", 7%" and

76

HT% are the some of the financial institutions that underwrite and give financial assistance. The lead manager sends copy of the draft prospectus to the financial institutions and includes their comments, if any in the revised draft. AO@ERNMENT AND STATUTORY AAENCIES The various regulatory bodies related with the public issue are Securities Exchange /oard of %ndia 4egistrar of companies 4eserve /ank of %ndia 'if the project involves foreign investment( Stock Exchange where the issue is going to be listed %ndustrial licensing authorities )ollution control authorities 'clearance for the project has to be stated in the prospectus(

COLLECTION CENTERS 7enerally there should be at least ;A mandatory collection centers inclusive of the places where stock exchanges are located. %f the issue is not exceeding 4s.2A "r 'excluding premium if any( the mandatory collection centers are the four metropolitan centers vi1. !umbai, ,elhi, ?olkatta and "hennai and at all such centers where stock exchanges are located in the region in which the registered office of the company is situated. The regional divisions of the various stock exchanges and the places of their locations are given in the following table.
R#>'.(
:orthern 4egion

E:)3 (>#
.udhiana Stock Exchange ,elhi Stock Exchange Caipur Stock Exchange H ) Stock Exchange @yderabad Stock Exchange /angalore Stock Exchange !angalore Stock Exchange !adras Stock Exchange "oimbatore Stock Exchange "ochin Stock Exchange "alcutta Stock Exchange 7awahati Stock Exchange !agadh Stock Exchange /hubaneswar Stock Exchange /ombay Stock Exchange :ational Stock Exchange +T"E. Stock Exchange ! ) Stock Exchange )une Stock Exchange Nadodara Stock Exchange -hmedabad Stock Exchange Sauashtra ?utch Stock Exchange

C'$.udhiana ,elhi Caipur ?anpur @yderabad /angalore !anaglore "hennai "oimbatore "ochin ?olkatta 7awahati )atna /hubaneswar !umbai !umbai !umbai %ndore )une Nadodara -hmedabad 4ajkot

Southern 4egion

Eastern 4egion

Gestern 4egion

77

%n addition to the collection branch, authori1ed collection agents may also be appointed. The names and addresses of such agent should be given in the offer documents. The collection agents are permitted to collect such application money in the form of che$ues, draft, and stock#invests and not in the form of cash. The application money so collected should be deposited in the special share application account with the designated scheduled bank either on the same day or latest by the next working day. The application collected by the bankers to the issue at different centers are forwarded to the 4egistrar after reali1ation of the che$ues, within a period of 9 weeks from the date of closure of the public issue. The applications accompanied by stock#invests are sent directly to the 4egistrars to the issue along with the schedules within one week from the date of closure of the issue. The investors, who reside in places other than mandatory and authori1ed centers, can send their application with stock#invests to the 4egistrar to the issue directly by registered post with acknowledgement due card.

P* )#,#($ .; $3# IPO

%nitial public offers are floated through )rospectus8 /ought out deals&offer for sale8 )rivate )lacement8 4ight %ssue and /ook /uilding. OFFER THROUAH PROSPECTUS -ccording to "ompanies '-mendment( -ct 23>=, application forms for shares of a company should be accompanied by a !emorandum 'abridged prospectus(. %n simple terms a prospectus document gives details regarding the company and invites offers for subscription or purchase of any shares or debentures from the public. The draft prospectus has to be sent to the 4egional Stock Exchange where the shares of the company are to be listed and also to all other stock exchanges where the shares are proposed to be listed. The stock exchange scrutini1es the draft prospectus. -fter scrutiny if there is any clarification needed, the stock exchange writes to the company and also suggests modification if any. The prospectus should contain details regarding the statutory provisions for the issue, program of public issue J opening, closing and earliest closing date of the issue, issue to be listed at, highlights and risk factors, capital structure, board of directions, registered office of the company, brokers to the issue, brief description of the issue, cost of the project, projected earnings and other such details. The board, lending financial institutions and the stock exchanges in which they are to be listed should approve the prospectus. )rospectus is distributed among the stock exchanges, brokers and underwriters, collecting branches of the bankers and to the lead managers. Salient Features of the Prospectus: 7eneral :ame and address of the registered office of the company.

78

%nformation

The name's( of the stock exchange's( where applications have been made for permission to deal in and for official $uotations of shares&debentures. +pening, closing and earliest closing dates of the issue. :ame and address of lead managers. :ame and address of Trustees under ,ebenture Trust ,eed 'in case of debenture issue(. 4ating for debenture&preference shares, if any, obtained from "4%S%. or any other recogni1ed rating agency. %ssued, subscribed and paid#up capital. Si1e of the present issue giving separately reservation for preferential allotment to promoters and others. )aid#up capital J 'a( -fter the present issue and 'b( -fter conversion of debentures 'if applicable(. ,etails regarding the promoterBs contribution. -uthority for the issue, terms of payment, procedure and time schedule for allotment, issue of certificate and rights of the instrument holders. @ow to apply J availability of forms, prospectus and mode of payment. Special tax benefits to the company and share holders under the %ncome Tax -ct, if any. +bject of the issue )roject cost !eans of financing 'including promoterBs contribution(. @istory, main objects and present business of the company. Subsidiary 'ies( of the company, if any. )romoters and their background. :ames, addresses and occupation of managing directors and other directors including nominee directors and whole# time directors. .ocation of the project. )lant and machinery, technological process etc. "ollaboration, any performance guarantee or assistance in marketing by the collaborators. %nfrastructure facilities for raw materials and utilities like water, electricity etc. Schedule of implementation of the project and progress so far, giving details of land ac$uisition, civil works, installation of plant and machinery, trail production, consumer production etc. The )roduct J 'a( :ature of the products J "onsumer or

"apital Structure of the "ompany

Terms of the )resent %ssue

)articulars of the %ssue

"ompany, !anagement and )roject

79

%ndustrial and the end users8 'b( -pproach to marketing and proposed marketing set#up8 'c( Export possibilities and export obligations, if any. *uture prospects J expected capacity utili1ation during the first three years from the date of commencement of production and the expected year when the company would be able to earn cash profit and net profit. Stock market data for shares, debentures of the company 'high J low price for each of the last years in consideration(. )articulars regarding the other listed companies under the same management, which have made any capital issues during the last three years. ,etails of the outstanding litigations pertaining to matters likely to affect the operations and finances of the company including disputed tax liabilities of any nature, any other default and criminal prosecution launched against the company. !anagement perception of risk factors like sensitivity to foreign exchange rate fluctuations, difficulty in the availability of raw materials or in marketing of products, cost, time over#run etc.

+utstanding .itigations

4isk *actors

Custification of the issue premium

The justification for price is given, taking into account the following parameters )erformance of the company J reflected by earnings per share and book value of shares for the past five years. *uture projections in terms of E)S and book value of shares in the next three years. Stock market data. :et asset value as per the latest audited balance sheet. %f the projections are not based on the past data, appraisal made by a banker or financial institution should be specifically stated. *inancial performance of the company for last five years should be given from the audited annual accounts in tabular form. /alance sheet date J e$uity capital, reserves 'revaluation reserve, the year of revaluation and its monetary effect on assets( and borrowings. )rofit and loss data J sales, gross profit, net profit, and dividend paid, if any. -ny change in the accounting policy during the last three years and its effect on the profit and reserves of the

*inancial %nformation

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company. Statutory and other information !inimum subscription. ,etails of the fee payable to -dvisers, 4egistrar, !anagers, Trustees of the debenture holders and underwriters. ,etails regarding the previous issues, if any.

BOUAHT OUT DEALS (OFFER FOR SALE) @ere, the promoter places his shares with an investment banker 'bought out dealer or sponsor( who offers it to the public at a later date. %n other works in a bought out deal, an existing company off#loads a part of the promotersB capital to a wholesaler instead of making a public issue. The wholesaler is invariably a merchant banker or some times just a company with surplus cash. %n addition to the main sponsor, there could be individuals and other smaller companies participating in the syndicate. The sponsors hold on to these shares for a period and at an appropriate date they offer the same to the public. The hold on period may be as low as 6A days or more than a year. %n a bought out deal, proving is the essential element to be decided. The bought out dealer decides the price after analy1ing the viability, the gestation period, promotersB background and future projections. - bough out dealer sheds the shares at a premium to the public. There are many advantages for the issuing company

F'!%$*-, a medium or small si1ed company, which is already facing working capital shortage, cannot afford to have long lead#time before the funds could be mobili1ed from the public. /ought out deal helps the promoters to reali1e the funds without any loss of time. S#).(/*-, the cost of raising funds is reduced in bought out deals. *or issuing share to the public the company incurs heavy expenses, which may invariably be as high as 2A percent of the cost of the project, if not more. T3'!/*-, bought out deal helps the entrepreneurs who are not familiar with the capital market but have sound professional knowledge to raise funds. Sponsors of the deal are mostly concerned with the promotersB background and government policies than about the past track record or financial projections. This helps the new entrepreneur to raise ade$uate capital from the market. F.+!$3*-, for a company with no track record of projects, public issues at a premium may pose problems, as SE/% guidelines come in the way. The stipulations can be avoided by a bought out deal. "ompanies sell the shares at a premium to the sponsors and they can off#load the shares to the public at a higher premium. F';$3*-, to the investors bought out deals possess low risk since the sponsors have already held the shares for a certain period and the projects might have been completed or may be in the verge of completion, the investors need not wait for returns

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The major disadvantage of the bought out deals is that the sponsors are able to create a positive image about the shares and sell them at a hefty premium. Single investment banker gives scope for manipulation of the results. %nsider trading and price rigging could be carried out, which can be neither detected nor penali1ed. PRI@ATE PLACEMENT %n this method the issue is placed with a small number of financial institutions, corporate bodies and high net worth individuals. The financial intermediaries purchase the shares and sell them to investors at a later date at a suitable price. The stock is placed with issue house client with the medium of placing letter and other documents which taken together contribute a prospectus, giving the information regarding the issue. The special feature of the private placement is that the issues are negotiated between the issuing company and the purchasing intermediaries. .isted public limited company as well as closely held private limited company can access the public through the private placement method. !ostly in the private placement securities are sold to financial institutions like Hnit Trust of %ndia, mutual funds, insurance companies, and merchant banking subsidiaries of commercial banks and so on. Through private placement e$uity shares, preference shares, cumulative convertible preference shares, debentures and bonds are sold. %n %ndia private placement market is witnessing the introduction of several innovative debt market instruments such as step#down&step#up debentures, li$uid debentures, bonds etc. )rivate placement has several inherent advantages

C.%$ E;;#)$'<#2 )rivate placement is a cost#effective method of raising funds. %n a public issue underwriting, brokerage, printing, mailing and promotion account for > to 2A percent of the issue cost. %n the case of the private placement several statutory and non#statutory expenses are avoided. T',# E;;#)$'<#2 %n the public issue the time re$uired for completing the legal formalities and other formalities takes usually six months or more. /ut in the private placement the re$uirements to be fulfilled are less and hence, the time re$uired to place the issue is less, mostly 9 to ; months. S$!+)$+!# E;;#)$'<#(#%%2 %t can be structured to meet the needs of the entrepreneurs. %t is flexible to suit the entrepreneurs and the financial intermediaries. To make the issue more attractive the corporate can provide discounts to the intermediaries who are buying it. This is not possible with the public issue with stringent rules and regulations. %n the case of debentures the interest ceiling cannot be breached in a public issue. @ere the terms of the issue can be negotiated with purchasing institutions easily since they are few in number. A))#%% E;;#)$'<#2 Through private placement a public limited company listed or unlisted can mobili1e capital. .ike#wise issue of all si1e can be

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accommodated through the private placement either small or big where as in the public issue market, the si1e of the issue cannot fall below a certain minimum si1e. RIAHTS ISSUE -ccording to Sec >2 of the "ompanies -ct 23=<, if a public company wants to increase its subscribed capital by allotment of further shares after two years from the date of its formation or one year from the date of its first allotment, which ever is earlier should offer share at first to the existing share holders in proportion to the shares held by them at the time of offer. The shareholders have no legal binding to accept the offer and they have the right to renounce the offer in favor of any person. Shares of this type are called right shares. 7enerally right shares are offered at an advantageous rate compared with the market rate. -ccording to Section >2, the company has to satisfy certain conditions to issue right shares. 4ight shares must be offered to the e$uity shareholders in the proportion to the capital paid on those shares. - notice should be issued to specify the number of shares issued. The time given to accept the right offer should not be less than 2= days. The notice also should state the right of the shareholders to renounce the offer in favor of others. -fter the expiry of the time given in the notice, the /oard of ,irectors has the right to dispose the unsubscribe shares in such a manner, as they think most beneficial to the company.

BOOK BUILDINA /ook building is a mechanism through which the initial public offerings '%)+S( take place in the H.S. and in %ndia it is gaining importance with every issue. !ost of the recent new issue offered in the market has been through /ook /uilding process. Similar mechanisms are used in the primary market offerings of 7,4s also. %n this process the price determination is based on orders placed and investors have an opportunity to place orders at different prices as practiced in international offerings. The recommendations given by !alegam "ommittee paved way for the introduction of the book building process in the capital market in +ct 233=. /ook building involves firm allotment of the instrument to a syndicate created by the lead managers who sell the issue at an acceptable price to the public. +riginally the potion of book building process was available to companies issuing more than 4s.2AA cr. The restriction on the minimum si1e was removed and SE/% gave impression to adopt the book building method to issue of any si1e. %n the prospectus, the company has to specify the placement portion under book building process. The securities available to the public are separately known as net offer to

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the public. :irma by offering a maximum of 2AA lakh e$uity shares through this process was set to be the first company to adopt the mechanism. -mong the lead managers or the syndicate members of the issue or the merchant bankers as member. The issuer company as a book runner nominates this member and his name is mentioned in the draft prospectus. The book runner has to circulate the copy of the draft prospectus to be filed with SE/% among the institutional buyers who are eligible for firm allotment. The draft prospectus should indicate the price band within which the securities are being offered for subscription. The offers are sent to the book runners. @e maintains a record of names and number of securities offered and the price offered by the institutional buyer within the placement portion and the price for which the order is received to the book runners. The book runner and the issuer company finali1e the price. The issue price for the placement portion and offer to the public should be the same. Hnderwriting agreement is entered into after the fixation of the price. +ne day earlier to the opening of the issue to the public, the book runner collects the application forms along with the application money from the institutional buyers and the underwriters. The book runner and other intermediaries involved in the book building process should maintain records of the book building process. The SE/% has the right to inspect the records.

BOOK BUILDINA THROUAH ONLINE IPO

/ook building as discussed earlier is a process of offering securities in which bids at various prices from investors through syndicate members are collected. /ased on bids, demand for the security is assessed and its price discovered. %n case of normal public issue, investor knows the price in advance and the demand is known at the close of the issue. %n case of public issue through book building, demand can be known at the end of everyday but price is known at the close of issue. -n issuer company proposing to issue capital through book building has two options vi1., 6=E book building route and 2AAE book building route. %n case of 2AAE book building route is adopted, not more than <AE of net offer to public can be allocated to M%/s 'Mualified %nstitutional /uyers(, not less than 2=E of the net offer to the public can be allocated to non#institutional investors applying for more than 2AAA shares and not less than 9=E of the net offer to public can be allocated to retail investors applying for up to 2AAA shares. %n case 6=E of net public offer is made through book building, not more than <AE of the net offer can be allocated to M%/s and not less than 2=E of the net offer can be allocated to non#institutional investors. The balance 9=E of the net offer to public, offered at a price determined through book building, are available to retail individual investors who have either not participated in book building or have not received any allocation in the book built portion. -llotment to retail individual or non#institutional investors is made on the basis of proportional allotment system. %n case of under subscription in any

84

category, the un#subscribed portions are allocated to the bidder in other categories. The book built portion, 2AAE or 6=E, as the case may be, of the net offer to public, are compulsorily underwritten by the syndicate members or book runners. +ther re$uirements for book building include /ids remain open for at least = days. +nly electronic bidding is permitted. /ids are submitted through syndicate members. /ids can be revised. /idding demand is displayed at the end of every day. -llotments are made not later than 2= days from the closure of the issue etc. The 2AAE book building has made the primary issuance process comparatively faster and cost effective and trading can commence from TF2<. The SE/% guidelines for book building provides that the company should be allowed to disclose the floor price, just prior to the opening date, instead of in the 4ed herring prospectus, which may be done by any means like a public advertisement in newspaper etc. *lexibility should be provided to the issuer company by permitting them to indicate a 9AE price band. %ssuer may be given the flexibility to revise the price band during the bidding period and the issuers should be allowed to have a closed book building i.e. the book will not be made public. The mandatory re$uirement of 3AE subscription should not be considered with strictness, but the prospectus should disclose the amount of minimum subscription re$uired and sources for meeting the shortfall. The )rimary !arket -dvisory "ommittee recommended the practice of Pgreen#shoe optionB available in markets abroad which is an Pover allotmentB option granted by the issuer to the underwriter in a public offering. This helps the syndicate member to over allocate the shares to the extent of option available and to conse$uently purchase additional shares from the issuer at the original offering price in order to cover the over#allotments. ON-LINE INITIAL PUBLIC OFFERS (IPO) - company proposing to issue capital to public through on#line system of the stock exchange has to comply with Section == to <>- of the "ompanies -ct, 23=< and SE/% 7uideline, 9AAA. The company is re$uired to enter into an agreement with the stock exchange's(, which have the re$uisite system for on#line offer of securities. The agreement should cover rights, duties, responsibilities and obligations of the company and the stock exchanges inter#se, with provision for a dispute resolution mechanism between the company and the stock exchange. The issuer company appoints a 4egistrar to the %ssue having electronic connectivity with the stock exchanges. The issuer company can apply for listing of its securities at any exchange through which it offers its securities to public through on#line system, apart from the re$uirement of listing on the regional stock exchange. The stock exchange appoints brokers for the purpose of accepting applications and placing orders with the company. The lead manager would co#ordinate all the activities amongst various intermediaries connected in the system.

85

%n addition to the above, the SE/% guidelines also provide details of the contents of the offer document and advertisement, other re$uirements for issues of securities, like those under 4ule 23'9('b( of S"'4( 4ules, 23=6. The guidelines also lay down detailed norms for issue of debt instruments, %ssue of capital by designated financial institutions and preferential&bonus issues. BOOK BUILDINA THROUAH ON-LINE IPO SYSTEM /ook building is basically a process used in %)+ for efficient price discovery, wherein during the period for which the %)+ is open, bids are collected from investors at various prices, which are above or e$ual to the floor price. The offer price is determined after the bid closing date. %n itBs strive to continuously improve %ndian Securities !arket8 :SE offers its infrastructure for conducting online %)+s through book building. %t helps to discover price as well as demand for a security to be issued through a process of bidding by investors. The advantages of this new system are The investor parts with money only after allotment, %t eliminates refunds except in case of direct applications and, %t reduces the time taken for issue process.

The securities get listed within 2= days from the closure of the issue. Though the guidelines for book building were issued in 233=, it is being used for %)+s from 2333. Till Cune 9AA;, 23 issuers have used this route for making %)+ issues. ,uring 9AA9#A;, two issuers used the on#line %)+ system of :SE to issue 62.<< lakh shares.

ELIAIBILITY TO ISSUE SECURITIES

The issues of capital to public by %ndian companies are governed by the ,isclosure and %nvestor )rotection ',%)( 7uidelines of SE/%, which were issued in Cune 2339. SE/% has been issuing clarifications to these guidelines from time to time aiming at streamlining the public issue process. %n order to provide a comprehensive coverage of all ,%) guidelines, SE/% issued a compendium series in Canuary 9AAA, known as SE/% ',%)( 7uidelines, 9AAA. The guidelines provide norms relating to eligibility for companies issuing securities, pricing of issues, listing re$uirements, disclosure norms, lock#in period for promoterBs contribution, contents of offer documents, pre# and post#issue obligations, etc. The guideline applies to all public issues, offers for sale and rights issues by listed and unlisted companies.

E*'>'6'*'$- N.!,%2 -ny company issuing securities through the offer document has to satisfy the following conditions
- company making a public issue of securities has to file a draft prospectus with SE/%, through an eligible merchant banker, at least 92 days prior to the filing of prospectus with the 4egistrar of "ompanies '4o"s(. The filing of offer

86

document is mandatory for a listed company issuing security through a rights issue where the aggregate value of securities, including premium, if any, exceeds 4s.=A lakh. - company cannot make a public issue unless it has made an application for listing of those securities with stock exchanges's(. The company must also have entered into an agreement with the depository for demateriali1ation of its securities and also the company should have given an option to subscribers& shareholders& investors to receive the security certificates or securities in demateriali1ed form with the depository. - company cannot make an issue if the company has been prohibited from accessing the capital market under any order or discretion passed by SE/%. -n unlisted company can make public issue of e$uity shares or any other security convertible into e$uity shares, on fixed price basis or on book building basis, provided 'i( %t has a pre#issue net worth of not less than 4s.2 crore in ; out of the preceding = years and has minimum net worth in immediately preceding two years, 'ii( %t has a track record of distributable profits in terms of section 9A= of the "ompanies -ct, 23=<, for at least ; out of immediately preceding = years, and 'iii(The issue si1e 'offer through offer document F firm allotment F promoters contribution through the offer document( does not exceed five times its pre# issue net worth. 'iv( - listed company is eligible to make a public issue, on fixed price basis or on book building basis, if the issue si1e does not exceed five times its pre#issue net worth. %f the company, listed or unlisted, does not meet the above criteria, then the issue will have to be compulsorily made through book building route. %n such a case, <AE of the issue si1e will have to be allotted to the PMualified %nstitutional /uyersB 'M%/s( failing which the full subscription money shall be refunded. %nfrastructure companies are exempt from the re$uirement of eligibility norms if their project has been appraised by a public financial institution or infrastructure development finance corporation or infrastructure leasing and financing services and not less than =E of the project cost is financed by any of the institutions, jointly or severally, by way of loan and&or subscription to e$uity or a combination of both. /anks and rights issues of listed companies are also exempt from the eligibility norms. *or public and rights issues of debt instruments irrespective of their maturities or conversion period, it is mandatory to obtain credit rating from a registered credit rating agency and to disclose the same in the offer document. %f the credit rating is obtained from more than one credit rating agency, all the credit ratings, including the rejected ones, need to be disclosed. *or a public and rights issue of debt securities with issue si1e greater than or e$ual to 4s.2AA crore, credit rating from two rating agencies is mandatory. %n case of issue of debentures with maturity of more than 2> months, the issuer shall create a

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debenture redemption reserve and appoint a debenture trustee to protect the interest of debenture holders. Thus the $uality of the issue is demonstrated by track record&appraisal by approved financial institutions&credit rating&subscription by M%/s.

PRICINA OF ISSUES
The "ontroller of "apital %ssues -ct governed issue of capital prior to !ay 96, 2339 2356. Hnder the -ct, the premium was fixed as per the valuation guidelines issued. The guidelines provided for fixation of a fair price on the basis of the net asset value per share on the expanded e$uity base taking into account, the fresh capital and the profit earning capacity. The repealing of the "apital %ssue "ontrol -ct resulted in an era of free pricing of securities. %ssuers and merchant bankers fixed the offer prices. )ricing of the public issue has to be carried out according to the guidelines issued by SE/%.

A$ P!#,'+,2 "ompanies are permitted to price their issues at premium in the case of the following
*irst issue of new companies set up by existing companies with the track record. *irst issue of existing private&closely held or other existing unlisted companies with three#year track record of consistent profitability. *irst public issue by exiting private&closely held or other existing unlisted companies without three#year track record but promoted by existing companies with a five#year track record of consistent profitability. Existing private&closely held or other existing unlisted company with three#year track record of consistent profitability, seeking disinvestments by offers to public without issuing fresh capital 'disinvestments(. )ublic issue by existing listed companies with the last three years of dividend paying track record.

A$ P ! @ *+#2 %n certain cases companies are not permitted to fix their issue prices at premium. The prices of the share should be at par. They are for
*irst public issue by existing private, closely held or other existing unlisted companies without three#year track record of consistent profitability and Existing private&closely held and other unlisted companies without three#year track record of consistent profitability seeking disinvestments offer to public without issuing fresh capital 'disinvestments(.

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FIXED @ERSUS BOOK BUILDINA ISSUES

The main difference between offer of shares through book building and offer of shares through normal public issue can be identified on the following parameters

P!')# at which securities will be allotted is not known in case of offer of shares through /ook /uilding while in case of offer of shares through normal public issue, price is known in advance to investor. Hnder /ook /uilding, investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares.
%n case of /ook /uilding, the /#, (/ can be known everyday as the book is being built. /ut in case of the public issue the demand is known at the close of the issue.

!"#$% & '"P(S$)(#* #"%"$P)S + '#s,- ./(0 / '"P(S$)(#* #"%"$P)S +.'#s,

%ndian companies are permitted to raise foreign currency resources through two main sources %ssue of *oreign "urrency "onvertible /onds '*""/s( %ssue of +rdinary e$uity shares through depository receipts, namely, 7lobal ,epository 4eceipts& -merican ,epository 4eceipts to foreign investorBs i.e. institutional investors or investors residing abroad.

- ,epository 4eceipt ',4( is any negotiable instrument in the form of a certificate denominated in HS dollars. The certificate is issued by an overseas depository bank against certain underlying stocks&shares. The shares are deposited by the issuing company with the depository bank. The depository bank in turn tenders ,4s to the investors. - ,4 represents a particular bunch of shares on which the receipt holder has the right to receive dividend, other payments and benefits which company announces from time to time for the shareholders. @owever, it is non#voting e$uity holding. ,4s facilitate cross border trading and settlement, minimi1e transaction cost and broaden the potential base, especially among institutional investors. !ore and more %ndian companies are raising money through -,4s and 7,4s these days. 8HAT ARE ADR% OR ADR%9 -merican ,epositary 4eceipts '-,4s( are securities offered by non#HS companies who want to list on any of the HS exchange. Each -,4 represents a certain number of a company's regular shares. These are deposited in a custodial account in the HS. -,4s allow HS investors to buy shares of these companies without the costs of investing directly in a foreign stock exchange. -,4s are issued by an approved :ew 0ork bank or trust company against the deposit of the original shares. Ghen

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transactions are made, the -,4s change hands, not the certificates. This eliminates the actual transfer of stock certificates between the HS and foreign countries. 7lobal ,epositary 4eceipts '7,4s( are negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on the exchange of another country. This is a financial instrument used by the companies to raise capital in either dollars or Euros. 7,4s are also called European ,epositary 4eceipt. These are mainly traded in European countries and particularly in .ondon. @owever, -,4s and 7,4s make it easier for individuals to invest in foreign companies, due to the widespread availability of price information, lower transaction costs, and timely dividend distributions. 8HY DO COMPANIES AO FOR ADR% OR ADR%9 %ndian companies need capital from time to time to expand their business. %f any foreign investor wants to invest in any %ndian company, they follow two main strategies. Either the foreign investors can buy the shares in %ndian e$uity markets or the %ndian firms can list their shares abroad in order to make these shares available to foreigners. /ut the foreign investors often find it very difficult to invest in %ndia due to poor market design of the e$uity market. @ere, they have to pay hefty transaction costs. This is an obvious motivation for %ndian firms to bypass the incompetent %ndian e$uity market mechanisms and go for the well#functioning overseas e$uity markets. Ghen they issue shares in forms of -,4s or 7,4s, their shares commanded a higher price over their prices on the %ndian bourses. -nother problem faced by the foreign investors is restrictions on e$uity ownership by foreigners. +nly foreign institutional investors can buy shares in %ndia whereas in case of -,4s or 7,4s, anyone can buy this. *%%s face restrictions of ceilings or stakes in %ndian companies. %n contrast, there is no such restriction on 7,4s or -,4s, and hence 7,4s or -,4s generally enjoy a premium. 8HICH INDIAN COMPANIES ARE LISTED ABROAD9 %nfosys Technologies was the first %ndian company to be listed on :-S,-M in 2333. @owever, the first %ndian firm to issue sponsored 7,4 or -,4 was 4eliance industries .imited. /eside, these two companies there are several other %ndian firms are also listed in the overseas bourses. These are Satyam "omputer, Gipro, !T:., NS:., State /ank of %ndia, Tata !otors, ,r 4eddy's .ab, 4anbaxy, .arsen Q Toubro, %T", %"%"% /ank, @indalco, @,*" /ank and /ajaj -uto. 8HAT ARE THE PRICES OF INDIAN ADR% & ADR%9 The -,4 and 7,4 prices of the %ndian companies are much higher compared to the prices on the %ndian bourses. Ghile, %nfosys trades at D69.25 at :-S,-M, it $uotes

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at 4s 9,95= on the /SE. Satyam at D95.9=, Gipro at D92.=A, Tata !otors at D2A.9A, !T:. at D<.;5, ,r 4eddy's .ab at D2<.96, @,*" /ank at D52.35, /ajaj -uto at D9>.25, 4%. at D95.>; and %T" at D;=.;A were all $uoting at a higher price than their %ndian peers. HO8 TO TRADE IN ADR%9 -,4s can be traded either by trading existing -,4s or purchasing the shares in the issuer's home market and having new -,4s created, based upon availability and market conditions. Ghen trading in existing -,4s, the trade is executed on the secondary market on the :ew 0ork Stock Exchange ':0SE( through ,epository Trust "ompany ',T"( without involvement from foreign brokers or custodians. The process of buying new, issued -,4s goes through HS brokers, @elsinki Exchanges and ,T" as well as ,eutsche /ank. 8HAT ARE THE NORMS FOR INDIAN ADR% AND ADR%9 There are no ceilings on investment in -,4s or 7,4s. -n applicant company seeking the government's approval in this regard should have a consistent good track record for a minimum period of ; years. This condition can be relaxed for infrastructure projects such as power generation, telecomm, petroleum exploration and refining, ports, airports and roads. There is no restriction on the number of 7,4s or -,4s to be floated by a company or a group of companies in a financial year. The government has also relaxed the conversion and re#conversion 'i.e. two#way conversion or fungibility( of shares of %ndian companies into depository receipts listed in foreign bourses. The companies have been allowed to invest 2AA per cent of the proceeds of -,4 or 7,4 issues for ac$uisitions of foreign companies and direct investments in joint ventures.

ALLOTMENT OF SHARES
PROHIBITION OF ALLOTMENT UNLESS MINIMUM SUBSCRIPTION RECEI@ED - companyBs offer to the public for subscription of e$uity shares cannot be allotted unless the minimum amount is subscribed for. This minimum amount is decided by the /oard of ,irectors, which according to them must be raised by the issue of share capital in order to provide for the specific objective as mentioned in the prospectus and which has been subscribed by the public for. The amount payable on application on each share cannot be less than five per cent of the nominal amount of the share.

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-ll money received from applicants for issue of shares is kept deposited in a Schedule /ank until the certificate to commence business is obtained by the company. Ghere such certificate has already been obtained, the deposits are kept until the company has received the entire amount payable on applications for shares up to minimum subscription. +n the expiry of 29A days after the issue of the prospectus, if the above conditions are not complied with, all money received from applicants has to be repaid without interest. %ncase money is not repaid within 2;A days after the issue of the prospectus, directors of the company is held responsible to repay that money with interest at the rate of <E per annum from the expiry of the 2;Ath day. The above conditions do not apply to any allotment of shares made subse$uent to the first allotment of share by the company to the public.

PROHIBITION OF ALLOTMENT IN CERTAIN CASES UNLESS STATEMENT IN LIEU OF PROSPECTUS DELI@ERED TO REAISTRAR %f a company having a share capital did not issue a prospectus or has issued a prospectus but has not proceeded to allot any of the shares offered to the public for subscription, cannot allot any of its shares or debentures unless at least ; days before the first allotment of either shares or debentures it has delivered a statement in lieu of prospectus signed by all director in writing to the 4egistrar for registration. This prohibition of allotment does not apply to a private company. %f this statement in lieu of prospectus delivered to the 4egistrar includes any untrue statement, then the person authori1ing the delivery is held responsible and is liable for punishment. This is a punishable offence with imprisonment for a term up to 9 years or with fine which may be up to the extend of =AAAA or with both.

EFFECT OF IRREAULAR ALLOTMENT -n allotment made by a company to an applicant shall be void able at the instance of the applicant J 'a( within two months after the holding of the statutory meeting of the company, and not later or8 'b( in case where the company is not re$uired to hold a statutory meeting or where the allotment is made after the holding of the statutory meeting, within two months after the date of the allotment and not later. %f any director of a company is responsible of willful contravention of any of the provisions of allotment, he is liable to compensate the company and the allottees for any loss incurred thereby. )rovided any such proceedings to recover losses is not commenced after the expiration of two years from the date of the allotment.

APPLICATIONS FOR, AND ALLOTMENT OF, SHARES AND DEBENTURES

92

The applications for allotment of share or debentures of a company, done through a prospectus issue, is not done until the beginning of the = th day after the prospectus is first issued or any time later as specified in the prospectus. The validity of an allotment is not affected by any contravention of the above point, but in the event of any such contravention, every officer of the company is held responsible and subject to a punishment of fine up to the extend of 4s.=AAAA. -n application for shares or debentures of a company made through issue of a prospectus is generally not revocable until after the expiration of the = th day after the opening of the subscription.

ALLOTMENT OF SHARES AND DEBENTURES TO BE DEALT IN ON STOCK EXCHANAE Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before making such issue is re$uired to make an application to one or more recogni1ed stock exchanges for seeking permission to list the shares and debentures such issued on the stock exchanges. Ghere an appeal against the decision of any recogni1ed stock exchange refusing permission for the shares or debentures to be listed on the stock exchange has been preferred, such allotment shall not be void until the dismissal of the appeal. Ghere the permission has not been applied, the company will repay all money received from applicants without interest, and if, any such money is not repaid within > days after the company becomes liable to repay it, the directors are held responsible. *rom the expiry of > th day, they will be jointly liable to repay that money with interest, not less than 5E and not more than 2=E, depending upon the length of the period of delay in making the repayment of such money. -ll money received as aforesaid shall be kept in a separate bank account maintained with a Scheduled /ank, and if default is made in complying with the conditions aforesaid, then every officer of the company is held responsible and this offense is punishable with fine which may extend to =AAAA rupees. !oney standing to the credit of the separate bank account, shall not be utili1ed for any purpose other than the following purposes, namely J 'a( adjustment against allotment of shares, where the shares have been permitted to be listed on the stock exchanges as specified in the prospectus8 or 'b( repayment of money received from applicants, where shares have not been permitted to be listed on the stock exchanges as specified in the prospectus. :o prospectus shall state that application has been made for permission for the shares or debentures offered thereby to be listed on any stock exchange, unless it is recogni1ed stock exchange.

RETURN AS TO ALLOTMENTS Ghenever a company having a share capital makes any allotment of its shares, the company shall, within ;A days thereafter

93

*ile with the 4egistrar a return of the allotments, stating the number and nominal amount of the shares comprised in the allotment, the names, addresses and occupations of the allottees, and the amount, if any, paid or due and payable on each shares. %n the case of shares 'not being bonus shares( allotted as fully or partly paid# up, is produced for inspection and examination of the 4egistrar in the form of a contract constituting the title of the allottee to the allotment together with any contract of sale or services or other consideration in respect of which that allotment was made. This contract is duly stamped and filed with the 4egistrar. %n the case of bonus shares a return stating the number and nominal amount of such shares comprised in the allotment and the names, addresses and occupations of the allottees and a copy of the resolution authori1ing the issue of such shares is filed with the 4egistrar. %n the case of issue of shares at a discount, a copy of the resolution passed by the company authori1ing such issue together with a copy of the order of the Tribunal sanctioning the issue and where the maximum rate of discount exceeds 2AE, a copy of the order of the "entral 7overnment permitting the issue at the higher percentage is filed with the 4egistrar. %f default is made in complying with the conditions aforesaid, every officer of the company is held responsible and this offense is punishable with fine, which may extend to =AAA rupees for every day during which the default continues. :o aforesaid conditions will apply to the issue and allotment of shares by a company, which under the provisions of its articles were forfeited for non# payment of calls.

BASIS OF ALLOTMENT
-ccording to SE/% regulation, the allocation of shares is done under proportionate allotment method. The allotment for each category is inversely proportional to the over subscription ratio. The applications will be categori1ed according to the number of shares applied for. The allocation is done by proportionate basis. %f the allocation to a applicant works out to be more than hundred but is not a multiple of hundred, the number excess of hundred and fifty would be rounded off to the higher multiple of 2AA i.e. 9AA. %f it were 25> then, it would be rounded off to 2AA. %f the shares allocated on a proportionate basis to any category are more than the shares allotted to applications in that category, the balance share allotment shall be first adjusted against any other category where the allotment of shares are not sufficient for proportionate allotment in that category. The balance shares, if any remaining after such adjustment will be added to the category comprising of applicants applying for minimum number of shares. ALLOTMENT METHOD Total number of applicants in the category of 2AAs Total number of shares applied for :umber of times over subscribed V 9AAA V 9,AA,AAA V=

94

)roportionate allotment to that category '9,AA,AAA X 2&=( V 5A,AAA Since the allotment has to be made in marketable lots, 2AA shares will be allotted to 5AA people. ILLUSTRATION Basis of Allocation Reliance Petroleum Limited (Incorporated under the Companies Act, 1956 on October 24, 2005)

I%%+# D#$ '*2 %ssue of 2;=,AA,AA,AAA e$uity shares of 4s.2A each for cash at a price of 4s.<A per e$uity share '%ncluding a share premium of 4s.=A per e$uity share( aggregating to 4s.>2,AAA million including promoter contribution of 3A,AA,AA,AAA e$uity shares of 4s.2A each for cash at a price of 4s.<A per share 'K)romoter "ontributionL( and the net issue to public of 5=,AA,AA,AAA e$uity shares of 4s.2A each 'K:et %ssueL(. The net issue will constitute 2AE of the fully diluted post issue paid up capital of 4eliance )etroleum .imited 'K"ompanyL or K%ssuerL(. The face value per e$uity share is 4s.2A. The issue price per e$uity share is 4s.<A and it is < times of the face value.
The issue was made through the 2AAE /ook /uilding )rocess where at least <AE of the :et %ssue was to be allocated on proportionate basis to Mualified %nstitutional /uyers 'KM%/sL( 'including =E of the M%/ portion that was to specifically be allotted to mutual funds on proportionate basis(. *urther, not less than 2AE of the :et %ssue was available for allocation on proportionate basis to :on#%nstitutional /idders and not less than ;AE of the :et %ssue was available for allocation on proportionate basis to 4etail /idders, subject to valid bids being received at or above the %ssue )rice. The %ssue received 92,A>,963 applications for 9;,A5,36,;;,>95 e$uity shares resulting in =2.99 times subscription. The details of the applications received in the %ssue from Mualified %nstitutional /uyers, :on#%nstitutional and 4etail %ndividual %nvestors categories are as under ' /efore technical rejections(
C $#>.!4etail /idders :on %nstitutional /idders Mualified %nstitutional /idders N.. .; A44*') $'.(% 9A35<=3 2;9A3 522 N.. .; S3 !#% 9A22<=<3;9 9<992;2>39 2>52=35=AAA S+6%)!'4$'. ( 25.3A =>.96 <>.9A

F'( * D#, (/2 The final demand at different bid prices is as under
B'/ P!')# =6 => =3 <A <2 N.. .; S3 !#% ;53;3AA 2A;2>AA 2A6AAA ;5;;52AA 9A9A9AA D $. T.$ * A.A9 A.AA A.AA A.2= A.A2 C+,+* $'<# T.$ * 9;A>696<;AA 9;A>;6>95AA 9;A>96=A<AA 9;A>9<5;<AA 9;A5>;A3=AA C+,+* $'<# D $. T.$ * 2AA.AA 33.3> 33.3> 33.3> 33.>;

95

<9 Q "ut +ff

9;A5<9>3;AA 230L727E30 0

33.>9 100.00

9;A5<9>3;AA

33.>9

The /asis of -llocation was finali1ed in consultation with /ombay Stock Exchange .imited on !ay ;, 9AA<. The "ommittee of ,irectors of the "ompany at its !eeting held at @yderabad on !ay ;, 9AA< has approved the following /asis of -llocation of shares of the %ssue and has allotted the shares to the successful applicants.

A**.) $'.( $. R#$ '* I(<#%$.!%2 The category was subscribed 2;.>A times. The total number of shares allotted in this category is 2;,=A,AA,AAA e$uity shares and the number of allottees is 2956=39. The category#wise details of the /asis of -llocation 'Sample( are as under
C $#>.!N.. .; A44*') $'.(% 65>62 2AA>>6 <69A3 <5;<6 2>3;<> 5=;2A ;5<>< =<95A> =A99 22=A65 ><6; 2A629 ;55< ;55A D $. T.$ * T.$ * N.. .; S3 !#% A44*'#/ 65>62AA 9A2665AA 9A2<96AA 9=65<>AA 35<>5AAA 962><AAA 959>A9AA 55339<5AA 5=23>AA 22=A65AAA 3=5A;AA 29>=55AA 5563>AA 5>2<AAA 5>;AAAAA 335=<2<AA D $. T.$ * A.5A 2.A> 2.A> 2.;> =.A> 2.5< 2.;A 95.25 A.95 <.26 A.=2 A.<3 A.95 A.9< 9.=3 =;.;< N.. .; S3 !#% A**.) $#/ 2AA 2AA 2AA 2AA 2AA 2AA 2AA 2AA 2AA 2AA 2AA 2AA 2AA 2A2 2AA 2A3 22< R $'. T.$ * N.. .; S3 !#% A**.) $#/ =59=AA 25<92AA 25<22AA 2><=6AA <><29AA 23523AA 26;5;AA ;9<A;5AA ;2;3AA >;966AA <>2=AA 32>9AA ;92<AA ;5655A 2355 ;=A3>AA 692A=62<

2AA 9AA ;AA 5AA =AA <AA 6AA >AA 3AA 2AAA 22AA 29AA 2;AA 25AA 2=AA 2<AA

;.>< =.9A ;.56 ;.;9 3.6< 9.;5 2.63 93.AA A.9< =.3; A.5= A.== A.2> A.2> ADDITIONAL ;99AA 2.<< <92<A2 ;9.A=

= <3 2A <3 2= <3 9A <3 9= <3 ;6 29 5A <3 => == 6< 22 25 <6 25 2= *%4! 3 2< *%4! *%4!

A**.) $'.( $. N.( I(%$'$+$'.( * I(<#%$.!%2 The category was subscribed =6.=3 times. The total number of shares allotted in this category is 5=A,AA,AAA e$uity shares and the number of allottees is 6;9>. The category#wise details of the /asis of -llocation 'Sample( are as under
C $#>.!N.. .; A44*') $'.( % 933 62 52< 2;6 266 6 5> =A 5> 2= < < D $. T.$ * ;.52 A.>2 5.6= 2.=< 9.A9 A.A> A.== A.=6 A.== A.26 A.A6 A.A6 T.$ * N.. .; S3 !#% A44*'#/ =A>;AA 296>AA 52<AAAA <>=AAAA 266AAAAA >5AAAA 69AAAAA 2AAAAAAA 95AAAAAA 2=AAAAAA 3AAAAAA 29AAAAAA D $. T.$ * A.A9 A.AA A.2< A.9< A.<> A.A; A.9> A.;3 A.3; A.=> A.;= A.5< N.. .; S3 !#% A**.) $#/ 2AA 2AA 265 ><> 26;< 9A>; 9<A5 ;569 ><>2 26;<9 9<A55 ;569= R $'. T.$ * N.. .; S3 !#% A**.) $#/ 3AAA 95AA 69;>5 22>32< ;A6969 25=>2 295339 26;<AA 52<<>> 9<A5;A 2=<9<5 9A>;=A

26AA 2>AA 2AAAA =AAAA 2AAAAA 29AAAA 2=AAAA 9AAAAA =AAAAA 2AAAAAA 2=AAAAA 9AAAAAA

; 2A 2; *%4! *%4! *%4! *%4! *%4! *%4! *%4! *%4! *%4! *%4!

96

5AAAAAA =AAAAAA 22;AAAAA ;99=>AAA 3;=5AAAA 22293AAAA

< 2 2 9 2 2

A.A6 A.A2 A.A2 A.A9 A.A2 A.A2

95AAAAAA =AAAAAA 22;AAAAA <5=2<AAA 3;=5AAAA 22293AAAA

A.3; A.23 A.55 9.53 ;.<2 5.93

<35=A ><>29 23<23= =<AA66 2<95A>A 23;9955

*%4! *%4! *%4! *%4! *%4! *%4!

52<6AA ><>29 23<23= 229A2=5 2<95A>A 23;9955

A**.) $'.( $. 7IB%2 The category was subscribed <>.9A times. -llocations to M%/s have been done on a proportionate basis. -s per the SE/% guidelines, !utual *unds were initially allotted =E of the $uantum of shares available '2;=,AA,AAA( on proportionate basis and other M%/s and unsatisfied demands of !utual *unds were allotted the remaining available shares '9=<=,AA,AAA( on proportionate basis. The sectoral cap and other limits applicable to the holding of shares in company have been taken into account while allotting shares. !utual *unds were allotted 22.=2E for M%/ segment and other M%/ applicants were allotted >>.53E of the shares for M%/ segment. The total number of allottees is 522.
C $#>.!*%s&/anks !*s *%%s N" %nsurance "ompanies T.$ * N.. .; S3 !#% 2=><2<<< ;2A693A3 92<;<<AAA 26625 <<>2622 270000000

PRI@ATE PLACEMENT
The private placement involves issue of securities, debt or e$uity, to selected subscribers, such as banks, *%s, !*s and high net worth individuals. %t is arranged through a merchant&investment banker, who acts as an agent of the issuer and brings together the issuer and the investor's(. Since these securities are allotted to a few sophisticated and experienced investors, the stringent public disclosure regulations and registration re$uirements are relaxed. The "ompanies -ct, 23=<, states that an offer of securities to more than =A persons is deemed to be public issue. %n sharp contrast to a shrinking public issues market for corporate securities, the last few years have witnessed huge resource mobili1ation through private placement. -ccording to )rime ,atabase estimates, a total of 225 issuers 'institutional and corporate( raised 4s.=,=2,>;> million through ;23 privately placed issues in 9AA5#A=. 26< issues out of ;23 were made by the government sector units, which together mobili1ed >9E of the total. The amount raised through the private placement of debt issues have been on an increasing trend over the past few years '"hart 9.2(.

97

!ostly, debt securities were privately placed. Though, there were some instances of private placements of e$uity shares, there is no comprehensive data coverage of this. The two sources of information regarding private placement market in %ndia are )rime ,atabase and 4/%. The former data set, however, pertains exclusively to debt issues. 4/% data, which is compiled from information gathered from arrangers, covers e$uity private placements also. 4/% estimates the share of e$uity in total private placements as rather insignificant. Some idea, however, can be derived from the e$uity shares issued by :SE#listed companies on private placement basis. - total of 3< companies privately placed e$uities mobili1ing around 4s.=>,3>9 million during 9AA5#A=. +f the ;23 debt private placements, 26< '==E( were from the government&banking sector that together mobili1ed >9E of the total amount mobili1ed. The -ll %ndia *inancial %nstitutions '-%*%s( Q /anks continued to top the list with =3E '4s.;9<,=99 million(, followed by the )rivate Sector Hndertakings with 2>E share '4s.2A2,32A million(. The top P2AB issuers accounted for =;.3E of total private placement during 9AA5#A=.

T 6*#2 I%%+#!-5'%# D'%$!'6+$'.( .; P!'< $# P* )#,#($ .; D#6$

I%%+#! I%%+# A,.+($ (R%. ,(.) 2003-00 2000-01 9=;,A>> 59,A>5 =>,>A3 <=,<59 ;9<,=99 9;,>A> <5,529 ;=,2>< D .; I%%+# A,.+($ 2003200000 01 =9.9< >.<3 29.25 2;.== =3.26 5.;2 22.<6 <.;>

-ll %ndia *inancial %nstitutions&/anks State *inancial %nstitutions )ublic Sector Hndertakings State .evel Hndertakings

98

)rivate Sector T.$ *

<5,<=< 0L0,27H

2A2,32A 111,L3L

2;.;= 100.00

2>.56 100.00

Source )rime ,atabase

Sectoral distribution shows that the banking and financial services continued to dominate the private placement market, raising <5E in 9AA5#A= followed by power sector, which accounted for 2<E during the year.

T 6*#2 S#)$.! * D'%$!'6+$'.( .; R#%.+!)#% M.6'*'=#/ 6- P!'< $# P* )#,#($ '%n per cent(
200300 *inancial Q /anking )ower Gater 4esources Telecommunications +thers T.$ * 6< 26 = 2 2 100 200001 <5 2< 9 9 2A 100

Source )rime ,atabase

The maturity profile of issues in the private placement market ranged between 29 months to 9A5 months during 9AA5#A=. The largest number of placements was for ;< months '>6 placements( and <A months '=6 placements(. - total of 6> offers had a put option, while >; offers had a call option. Hnlike public issues of bonds, it is not mandatory for corporate issuing bonds in the private placement market to obtain and disclose credit rating from an approved credit rating agency. 4ating is, however, re$uired for listing. +f the ;23 debt private placement deals during 9AA5#A=, 936 issues '3;E( went for rating and 99 did not get rated. )rivate placement accounted for <>.5E of total resources mobili1ed by the corporate sector from the primary market. The corresponding share of public issues was a meager 9<.<E.

T 6*#2 R#%.+!)#% R '%#/ 6- C.!4.! $# S#)$.!

Y# ! P+6*') E?+'$I%%+#% D#6$ I%%+#% P+6*') I%%+# % 3 93,5A A <3,66 A 23,93 A 65,A6 P!'< $# P* )#,#($ %F 0 2AA,;=A 2>;,32A ;A3,>;A ;>6,5>A T.$ * (3M0) 1 293,6= A 9=;,<> A ;93,29 A 5<2,== T.$ * R#%.+!)# M.6'*'= $'. ( (2M1)

1 233=#3< 233<#36 2336#3> 233>#33

2 >>,>9A 5<,62A 22,;9A =,A5A

E 92>,=6A ;AA,;3A ;5A,5=A 5<<,=>A

'-mount in 4s. mn.( S3 !# (D) .; P!'< $# S3 !# (D) P* )#,#($ '( .; D#6$ '( T.$ * T.$ * T.$ * R#%.+!)# D#6$ R#%.+!)# M.6'*'= $'. (0C1F100 M.6'*'= $'. ) ( (0CEF100) ( (1CEF100) 7 L H
66.;5 69.=A 35.25 >;.3= 5=.32 <2.99 32.A2 >;.A= =3.;< >5.5= 3<.<6 3>.39

99

2333#AA 9AAA#A2 9AA2#A9 9AA9#A; 9AA;#A5 9AA5#A=

93,6=A 95,63A 2A,>9A 2A,;3A 26>,92 A 925,;9 A

A 5<,3> A 52,;3 A =;,52 A 5<,3; A 5;,95 A 5A,3= A

=56,A2A =95,;;= 5<9,9AA 5>5,9;< 5>5,963 ==2,>;>

A =3;,33 A =<=,69 = =2=,<2 A =;2,2< < =96,=2 3 =39,6> >

<9;,65A =3A,=9A =9<,5;A =52,==< 6A=,693 >A6,2A>

39.A3 39.<> >3.<5 32.2< 32.>A 3;.A3

>6.6A >>.63 >6.>A >3.59 <>.<9 <>.;6

3=.9; 3=.>A 36.35 3>.A> 65.6= 6;.5=

R,ata from 9AAA#A2 onwards include only issues with a tenor and put&call option of 2 year or more, while data for earlier years include all privately placed debt issues irrespective of tenor. Source )rime ,atabase

100