Basics - Part 3

QWhat is debt-equity ratio?

A

Debt-equity ratio is a measure of leverage, indicating proportion of company's total capital contributed by secured and unsecured debt. A high debt-equity ratio, generally 2:1 and above, is not considered favourable for companies. Also, this ratio varies from industry to industry.



Debt-equity ratio = Secured + Unsecured debt

Shareholders Funds


E.g.: As on 31st March 2010, company had secured loan of Rs. 70 crore, unsecured loan of Rs. 30 crore, shareholders funds (equity and reserves) of Rs. 200 crore.



Debt-equity ratio = 70 + 30

200



Debt-equity ratio = 0.5:1

Source: sptulsian.com

QWhat is EPS?

A

EPS or Earnings per share, is the net profit earned by the company divided by the number of outstanding equity shares. If any preference dividend is declared, it is subtracted from the net profit.

Eg: A company earned net profit of Rs. 100 crore for FY10. It has 5 crore outstanding equity shares. No fresh issue of equity shares was made during the year, implying that the weighted average number of equity shares outstanding during the period is 5 crore.

EPS = Net profit earned during the period

Weighted average number of equity shares outstanding during the period

EPS = 100 / 5

EPS = Rs. 20

Source: sptulsian.com

QWhat does ‘pari passu’ mean?

A

Pari passu is a Latin term commonly used in legal documents meaning ‘equal in all respects’ or ‘in the same degree or proportion’.

For example, if issue of new shares is said to rank pari passu with the existing shares, then the rights associated with both the existing as well as the new shares are exactly the same.

Source: sptulsian.com

QWhat is meant by ‘Right of first refusal’?

A

Right of first refusal, abbreviated as ROFR, is the right of a person (investor) or company to purchase something before the offering is made available to others. If an investor /PE fund plans to exit the company, it is obliged to give the promoters or existing shareholders, an opportunity to buy the shares held by the PE before selling the same to a third party.

There are other rights for minority shareholders, such as:

Tag along right - contractual obligation which protects a minority shareholder in case the majority / promoter is selling out. Minority shareholder can compel stake sale of his stake along with the majority / promoter.

Drag along right – contractual right with minority shareholder to force the majority shareholder / promoter to join in the sale of the company. If minority shareholder is selling-out, it can compel majority shareholder / promoter to compulsorily offer their stake as well.

Source: sptulsian.com

QWhat is Commercial Paper?

A

Commercial paper is a money market instrument issued normally for tenure of 90 days. It is a short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually issued by companies with a high credit standing in the form of a promissory note redeemable at par to the holder on maturity and therefore, doesn’t require any guarantee.

Basics - Part 2

QWhat is the difference between ‘Block deal’ and ‘Bulk deal’?

A

Block deal is a trade, with a minimum quantity of 5,00,000 shares or minimum value of Rs. 5 crores, executed through a single transaction, on the special “Block Deal window”.

Bulk deal is a trade, where total quantity bought or sold is more than 0.5% of the number of equity shares of the company.

The orders in a block deal are not shown to the people who trade from normal trade window. Bulk orders, on the other hand, are visible to everyone.

Source: sptulsian.com

QWhat is the pay-in day and pay- out day?

A

Pay in day is the day when the brokers shall make payment or delivery of securities to the exchange. Pay out day is the day when the exchange makes payment or delivery of securities to the broker. Settlement cycle is on T+2 rolling settlement basis w.e.f. April 01, 2003. The exchanges have to ensure that the pay out of funds and securities to the clients is done by the broker within 24 hours of the payout. The Exchanges will have to issue press release immediately after pay out.

QHow is the Retail Investor defined as?

A

‘Retail individual investor’ means an investor who applies or bids for securities of or for a value of not more than Rs.2,00,000.

QWhat is Record Date?

A

Date set by a company on which the investor must own shares, to be eligible for dividend, share split, bonus, rights issue or other capital gains as declared / announced by the company. It is the date established by the company for determining the shareholders who are entitled to receive dividend, bonus or rights shares of the company.

In this case, it is also important to know what an ex-date is. Ex-date is the date on which the seller, and not the buyer, of a stock will be entitled to a recently announced dividend, bonus or other corporate action. The ex-date is usually a business day prior to the record date, since T+2 trading cycle is followed for clearing and settlement of trades in India.

Example:

If record date for dividend is set by a company as 4th March, then those investors, whose names appear on the shareholder list of 4th March, as received by the company form the depository will be entitled to the dividend. Doing a back-calculation, for an investors name to feature in the 4th March shareholder list, he should be holding the shares two days prior to that date i.e. on 2nd March (due to T+2 cycle). Thus, those shareholders holding shares at end of day 2nd March, will be entitled to the dividend. The ex-date, in this case, will be 3rd March, a date on which the buyer will not be entitled to the dividend declared.

Source: sptulsian.com

Basics

QWhat is a Capital Market?

A

Capital market is a market for buying and selling of long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets.

QWhat is a Money Market?

A

Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc.

QWhat does Secondary Market mean?

A

Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market via an IPO and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.

For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions.

QWhat is the difference between the primary market and the secondary market?

A

In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.

QWho is a broker?

A

A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member with the concerned exchange and is registered with SEBI.

QWho is a sub broker?

A

A sub broker is a person who is registered with SEBI as such and is affiliated to a member of a recognized stock exchange.

QWhat does ISIN stand for wrt securities?

A

ISIN stands for International Securities Identification Number (ISIN). It is an international numbering system set up by the International Organization for Standardization (ISO) to number specific securities, such as stocks (equity and preference shares), bonds, options and futures.

ISIN contains 12 characters in total, which comprise of both alphabets and numbers. The first two digits stand for the country code, next nine digits are the unique identification number for the security while the last digit is a check digit to prevent errors.

E.g.: ISIN for State Bank of India (SBI) is INE062A01012.

Source: sptulsian.com

QWhat is free-float?

A

Free-float refers to those shares which are readily available for trading in the stock market. It generally excludes promoters\' holding, government / strategic holding and other locked-in shares, which will not come to the market for trading in the normal course.

E.g.: MMTC has Rs. 5 crore outstanding shares, of which 4.97 crore shares are held by the Government under promoter category. Only the balance 3.34 lakh shares comprise the free float of the company.

Source: sptulsian.com

QWhat are DVR shares?

A

What are DVR shares? 29 May 2012 at 11:00 am DVR or differential voting rights shares are like ordinary equity shares but with differential voting rights. Shares can have higher or lower voting rights as compared to the ordinary equity shares. However, Indian regulations do not permit companies to issue equity shares with higher voting rights. Hence, Indian DVR shares provide for lower voting rights as compared to ordinary equity shares.

Companies issue DVRs for several reasons such as prevention of a hostile takeover, bringing in a passive strategic investor or dilution of voting rights. DVR investors are generally compensated with a higher dividend rate. This makes the DVRs attractive for retail investors who do not want control in the company, but are looking at the long-term growth prospects.

DVR shares are listed on the stock exchanges and are traded in the same manner as ordinary equity shares, but they mostly trade at a discount, sometimes as high as 30%, due to fewer voting rights.

Tata Motors, Gujarat NRE Coke, Pantaloon Retail, Jain Irrigation are some of the Indian companies that have issued DVR shares.

E.g.: Tata Motors’ DVR shares carry voting rights which are one-tenth of the ordinary equity shares. The DVR shareholders are entitled to an additional 5% dividend, over and above the ordinary equity shareholders. Tata Motors DVR are trading at 800 or 36% discount to the ordinary shares, which are at trading at Rs 1,245 (as of 23rd November 2010).

Source: sptulsian.com

QWhat are preferece shares?

A

Preference shares are shares in which the owners of the shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders / debenture holders. In short they get preference over equity shareholders in case of payment of dividends on in case of winding up of the company.