Investment opportunities

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Investment opportunities

• Equity markets

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Equity market

• There are two segments in the equity market
• Primary market
• Secondary market

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Primary Market

• Companies issue both equity and debt in the
  primary market
• Governments, central and state, issue only debt
  in the form of dated securities and treasury
  bills in the primary market

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Primary market

• Through the primary market issues, governments
  and companies raise funds for fresh investments
  and repayment of previous loans taken from the
  public
• An issue can be a public issue or private
  placement
• An issue where allotment is made to less than 50
  persons is a private placement.

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How to apply for a public issue?

• Get an application form from a share broker
• Fill up the form and submit it with the amount to
  the collecting centre.
• You can receive the shares either in your demat
  account or you can receive shares in the physical
  form.
• If the application form is incomplete, it will be
  rejected.

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What factors to look for while applying for a
public issue?

• Promoters track record in terms of experience,
  performance, reputation
• Risk factors in the offer document
• Financial forecasts for the business/project
• Issue price in relation to the face value
• Listing details
• The registrar, lead manager, bankers to the issue

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Issue price and face value

• Face value is the value printed on the
  share/debenture certificate
• Different shares/debentures may have different
  face values
• Investors should remember this when they compare
  prices of one share with another

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Issue price and face value

• For example, HCL Technologies had announced it
  price band of Rs 500-580 which was for a face
  value of Rs 5/- per share.
• At the same time Geometric was a Rs 10/- face
  value share priced at Rs 300.
• Two shares of HCL Technologies is equal to one
  share of Geometric in terms of par value
• Therefore, HCL Technologies is worth Rs.
  1000-1600 compared to Geometric which is worth
  Rs.300
• Hence, one should not look at the issue price in
  absolute terms but should try and compare the
  prices on a common scale.

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Public issue pricing

• Till 1992, the price was fixed by the Controller
  of Capital Issues. There was opportunity to make
  handsome profits when the share was listed.
• After SEBI was established in 1992, we have moved
  to free pricing. The price is decided by the
  company now with advice from the merchant bankers.

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Free pricing of a public issue

• Fixed-price The issuer fixes the price well
  before the actual issue. To ensure full
  subscription, they fix slightly lower prices.
• Book-building The price is decided through the
  book-building process. The prices are slightly
  higher than the fixed-price method.

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Book building

• The company appoints a merchant banker as a book
  runner
• The company issues a prospectus that has
  information about issue size, business,
  promoters, etc. but not the price. The price
  range is indicated.
• Period for bidding is indicated
• Bids are collected and the book is closed.
• On the basis of bids received, issue price is
  decided.

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Types of companies coming for public issues

• Unlisted companies (Initial public offering, IPO)
• When the company comes to the market for the
  first time the issue is called Initial Public
  Offering (IPO)
• Listed companies
• Companies that have tapped the market earlier can
  tap the market again

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Unlisted company option 1

• It should have a track record of distributable
  profits for at least 3 out of immediately
  preceding 5 years and
• The pre-issue net worth (i.e. net worth before
  the issue) should be at least Rs 1 crore in 3 out
  of 5 years, with the minimum net worth in the
  immediately preceding 2 years.
• The issue size (includes offer to public, firm
  allotment, promoters contribution through offer
  document) should not exceed 5 times its pre-issue
  net worth as per the last available audited
  accounts

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Unlisted company option 2

• If the 1st option is not satisfied, then the
  other option is the book building process only.
• Book building process is permitted provided 60
  of the issue size is allotted to the Qualified
  Institutional Buyers (QIB). If the company fails
  to allot 60 of the issue size to QIB the entire
  money so received shall be refunded.

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Listed company

• All listed companies can come out with further
  public issue provided the net worth of the
  company after the proposed issue is less than 5
  times the net worth prior to the issue.
• In case the net worth is more than 5 times the
  net worth prior to the issue, the company should
  comply with any of the options as available for
  unlisted companies. 

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SEBI guidelines

• A company making public issue must file a draft
  prospectus with SEBI
• Listing is compulsory
• The company must enter in to an agreement with a
  depository
• Demat/paper option should be given to the
  investors

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Other exemptions
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Exemption from eligibility norms Infrastructure
companies

• If the project has been approved by a public FI
  of IDFC, or ILFS and
• Not less than 5 of the project cost is financed
  by the institutions
• Banks and rights issues from listed companies are
  exempt from the eligibility norms

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Role of the lead merchant banker

• Due diligence of the issue disclosures
• Making underwriting arrangements
• Setting up minimum number of collection centers
• Taking care of allotment, refund and dispatch of
  certificates

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Performance of IPOs

• There is no guarantee that IPO performance will
  always be profitable
• Company IPO price price 9.1.04 change
• Canara Bank 25.00 149.65 498.60
• Union Bank of India 6.00 54.35
  805.83
• I-Flex Solutions Ltd. 525.00 827.70
  57.66
• Punjab National Bank 21.00 275.80 1,213.33
• IQ Infotech Ltd. 6.00 1.50
  -75.00
• Arvind Remedies Ltd. 90.00 3.38
  -96.24
• Balaji Telefilms Ltd. 120.00 112.70
  -6.08
• Pritish Nandy
• Communications Ltd. 145.00 45.65
  -68.52

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Secondary market for equity

• Secondary market is where a person can buy and
  sell securities previously issued by companies
• Stock exchange is the secondary market
• There are 23 stock exchanges in India
• NSE and BSE are the two largest
• A share has to be listed on the stock exchange
  for it to be traded there
• Beside equity, debt and derivatives are also
  traded on a few exchanges

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Jurisdiction of stock exchanges

• All exchanges are now permitted to have
  nation-wide access
• Many have already set up hundreds of trading
  terminals across the country
• A few exchanges can be accessed through internet
  and mobile phone
• There are about 10,000 registered brokers in
  these exchanges

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Conditions for listing on the stock exchange

• At least 10 shares should be with public
• Minimum 20 lakh shares to be offered to the
  public

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Market capitalization

• Market capitalization for a company is
  obtained by multiplying the share price with the
  total number of equity shares issued by the
  company. The leading companies in terms of market
• capitalization are
• Oil Natural Gas Corporation Ltd.
• Reliance Industries Ltd.
• Hindustan Lever Ltd.
• Indian Oil Corporation Ltd.
• Wipro Ltd.
• Infosys Technologies Ltd.
• State Bank of India

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EPS (Earnings per share)

• PAT is the profit after tax for a company in any
  year
• EPS is PAT divided by the number of shares
• If a company made a profit of Rs. 50 cr. and if
  there are 10 cr. shares, then EPS is (50/10Rs.5)

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P/E (price to earnings ratio)

• Let the market price of a share be Rs. 120
• Let the EPS be Rs. 5
• P/E ratio is (120/524)
• In other words, if we know the EPS and the P/E
  multiple, we can guess the price of the share
• High P/E usually means growth share. But
  investors need to develop some experience before
  interpreting P/E

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Price to book value (P/B)

• Price is the price quoted for a share in the
  stock market
• Book value of a share is net worth per share
• Price to book value is the ratio of market price
  to net worth per share
• If we know P/B and the book value, we can
  estimate the market price
• High P/B may mean the company is expected to do
  better in the future compared to its past.

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Index

• An index represents the market or a sector in the
  market. Movements in the index indicates
  movements in the market.
• NIFTY and BSE Sensitive Index represent the
  largest shares
• SP CNX 500 and BSE500 represent the broader
  market
• CNX Midcap 200 represents the medium sized
  companies

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Index movement

• In a strict sense, movement of the index is
  influenced by the movement of the price of shares
  in the index
• Generally index movement indicates the broad
  market sentiment
• However, investors should not automatically
  assume that all shares will move up in a bull run
• Sometimes, a few persons artificially push up
  some small shares during the bull run and
  investors should be careful about such
  manipulations.

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Transacting in the secondary equity market

• First open a demat account
• Approach a broker with SEBI registration and
  track record
• Ensure you are investing in companies that are
  not delisted and not in Z group
• Keep a diversified portfolio
• Review the investments regularly
• Equity investment needs patience
• In the short run equity investment can be risky

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For small investors

• Try to invest small amounts regularly
• Try Systematic Investment Plan (SIP)
• This is called Rupee Cost Averaging method
• This method is superior as it gives you lower
  average purchase cost
• Do not try to trade too actively in the market
  unless you have high risk bearing capacity
• Try to work only in the demat segment

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Demat account Advantages

• No risk of bad deliveries. This eliminates all
  cost and wastage of time associated with follow
  up for rectification. This has reduced by 0.5
• Saving in 0.5 stamp duty.
• No company objections saving your courier
  charges/ notarization/ follow-up.
• No loss in transit/misplacing/mutilation. This
  saves Rs. 500/- for indemnity bond, newspaper
  advertisement etc.
• Bonuses and rights received into your depository
  account as a direct credit, thus eliminating risk
  of loss in transit.

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Demat account Advantages

• Lower interest charge by 0.25 to 1.5 for loans
  taken against demat shares (as compared to the
  interest for loan against physical shares).
• RBI has increased the limit of loans against
  dematerialised securities as collateral to Rs. 2
  mn per borrower as against Rs.1mn per borrower in
  case of loans against physical securities.
• RBI has also reduced the minimum margin to 25
  for loans against dematerialized securities as
  against 50 for loans against physical securities

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Opening a demat account

• Opening a depository account is as simple as
  opening a bank account.
• You can open a depository account with any
  depository participant DP- convenient to you.
• Obtain the account opening form from the DP and
  fill it up.
• Sign the DP-client agreement. It defines the
  rights and duties of the DP and the person
  wishing to open the account.

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Opening a demat account

• Receive client account number (client ID).
• This client id (along with your DP id) gives a
  unique identification in the depository system.
• There is no restriction on the number of
  depository accounts you can open.
• If your existing physical shares are in joint
  names, open the depository account in the same
  order of names.

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Sources of investment information

• Read a reputed financial daily to understand the
  economy and the market
• Watch the business news on television
• Subscribe to the publications of investor
  associations
• Attend the investors meetings of the investor
  associations regularly
• Browse the websites of SEBI, NSE and BSE

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