knowledge center for investors in investing

8/9/2019 Knowledge Center for investors in investing

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Equity / Derivatives

What is an Equity Share?

Total equity capital of a company is divided into equal units of small denominations, each calleda share. For example, in a company the total equity capital of Rs 1,00,00,000 is divided into

10,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company thenis said to have 10,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have voting rights.

What is a Stock Exchange?

It is a common platform where buyers and sellers come together to transact in stocks and shares.It may be a physical entity where brokers trade on a physical trading floor via an "open outcry"

system or a virtual environment.

What are the functions of the Capital Market?

Capital Market enhances capital formation in the economy and comprises of ± a) Primary Market ±The primary market provides the channel for sale of new securities. Primary market providesopportunity to issuers of securities; Government as well as corporates, to raise resources to meet

their requirements of investment and/or discharge some obligation. b) Secondary Market ± Thisis a market where securities are traded after being initially offered to the public in the Primary

Market and/or listed on the Stock Exchange. Majority of trading is done in this market, whichcomprises of equity and debt market.

How does the Stock Exchange function?

The stock exchanges in India, under the overall supervision of the regulatory authority, theSecurities and Exchange Board of India (SEBI), provide a trading platform, where buyers and

sellers can meet to transact in securities. The trading platform provided by NSE & BSE is anelectronic one and there is no need for buyers and sellers to meet at a physical location to trade.

They can trade through the computerized trading screens available with the trading members or the internet based trading facility provided by the trading members.

What is electronic/internet trading?

Electronic trading eliminates the need for physical trading floors. Brokers can trade from their offices, using fully automated screen-based processes. Their workstations are connected to a

Stock Exchange's central computer via satellite using Very Small Aperture Terminus (VSATs).The orders placed by brokers reach the Exchange's central computer and are matched

electronically.

How many Exchanges are there in India?Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the country's two

leading Exchanges. There are 17 other regional Exchanges recognized by SEBI, connected viathe Inter-Connected Stock Exchange (ICSE). The BSE and NSE allow nationwide trading via

their VSAT systems.

What is an Index?



An index is a stock-market indicator created as a statistical measure of the performance of anentire market or segment of a market based on a sample of securities from the market. An index

is thus a means to evaluate the overall performance of a market or of a segment of the market.An index measures aggregate market movements. Apart from being a general market indicator,

indices are used as a benchmark to evaluate individual portfolio performance. An Index

comprises stocks that have large liquidity and market capitalization. Each stock is given aweightage in the Index equivalent to its market capitalization. We have 2 renowned indices viz.(a) BSE Sensitive (BSE Sensex) and (b) S&P Nifty 50 (Nifty)

Which shares can I buy?

You can buy the shares that are listed on any of the recognized Stock Exchanges.

Whom should I contact for my Stock Market related transactions?To be able to buy or sell shares in the stock markets a client would need to be registered with a

stockbroker like standardchartered-wealthmanagers who holds membership in stock exchangesand who is registered with SEBI.

Am I required to sign any agreement with the broker or sub-broker?

Yes, you have to sign the ³Member-Client agreement´ for the purpose of engaging a broker toexecute trades on your behalf from time to time and furnish details relating to yourself to enable

the member to maintain Client Registration Form.

Why does one need a broker?As per SEBI (Securities and Exchange Board of India.) regulations, only registered members can

operate in the stock market. One can trade by executing a deal only through a registered broker of a recognized Stock Exchange or through a SEBI-registered sub-broker.

What is a Member±Client Agreement form?

This form is an agreement entered into between client and broker in the presence of witnesseswherein the client agrees (is desirous) to trade/invest in the securities listed on the concerned

Exchange through the broker after being satisfied of broker¶s capabilities to deal in the same.

How to execute an order?Select a broker of your choice and enter into a broker-client agreement and fill in the client

registration form. Place your order with your broker preferably in writing. Get a tradeconfirmation slip on the day the trade is executed and ask for the contract note at the end of the

trade date.

What is Buying and Selling?There are several types of orders that you can dictate to a broker. The most common type, which

is a regular buy or sell order, is called a market order. Another type of order is a limit order wherein you ask the broker to trade only if the price reaches a specific level. In a stop loss order,

you tell the broker to sell your shares if the price drops to a certain level to prevent significantloss because if it drops to that level it is likely to drop further and your losses are likely to

increase.



What is meant by bullish and bearish trend?When the market goes up it is called a bullish trend and when the market goes down it is called a

bearish trend.

What is taking a position?

When you act upon a stock and buy into it, you are taking a position. A position is an amount of money committed to an investment in anticipation of favorable price movements. There are twokinds of positions : - a) Long positions are what most people do. When you buy long, that means

you are anticipating an upward movement in the price, and that is how you profit. People usually buy stocks at prices expecting to sell them later at higher prices and hence make profits. b) Short

positions are the tricky ones. When you buy short, you are anticipating a fall in the price and thefall is the source of your profits. The shares will be sold and when the price falls they will be

repurchased and given back and the difference is the where the investor profits. Of course, theinvestor who borrowed the shares carries the risk of not having the price move as anticipated, in

which case he may lose money in repurchasing the stocks.

What is a contract note?Contract Note is a confirmation of trades done on a particular day on behalf of the client. It

establishes a legally enforceable relationship between the client and standardchartered-wealthmanagers with respect to the settlement of the trades. The Contract Note would show

settlement number, order number, trade number, time of trade, quantity and price of the trades, brokerage charged, etc and it would be signed by an authorised person of standardchartered-

wealthmanagers. These are made in duplicate and the member and the client both keep a copyeach. A client should receive the contract note within 24 hours of the executed trade.

What are the additional charges other than brokerage that can be levied on

the investor? The trading member can charge: 1. Securities Transaction Tax. 2. Service tax asapplicable. 3. Transaction charges levied by exchange, Stamp duty and other charges directly

attributable to the transaction. Note : The brokerage and service tax is indicated separately in thecontract note.

What is a book-closure/record date?

Book closure and record date help a company determine exactly the shareholders of a companyas on a given date. Book closure refers to the closing of register of the names or investors in the

records of a company. Companies announce book closure dates from time to time. The benefitsof dividends, bonus issues, rights issue accruing to investors whose name appears on the

company's records as on a given date, is known as the record date.

What is the difference between book closure and record date?In case of a record date, the company does not close its register of security holders. Record date

is the cut off date for determining the number of registered members who are eligible for thecorporate benefits. In case of book closure, shares cannot be sold on an Exchange bearing a date

on the transfer deed earlier than the book closure. This does not hold good for the record date.

What is a no-delivery period?Whenever a company announces a book closure or record date, the Exchange sets up a no-



delivery (ND) period for that security. During this period only trading is permitted in thesecurity. However, these trades are settled only after the no-delivery period is over. This is done

to ensure that investor's entitlement for the corporate benefit is clearly determined.

What is an ex-dividend date?

The date on or after which a security begins trading without the dividend (cash or stock) includedin the contract price.

What is an ex-date?The first day of the no-delivery period is the ex-date. If there are any corporate benefits such as

rights, bonus, dividend announced for which book closure/record date is fixed, the buyer of theshares on or after the ex-date will not be eligible for the benefits.

What is Earnings Per Share?

Earnings Per Share (EPS) is the net profit earned per share of the company. It can be obtained bydividing the Profit after Tax (PAT) by the outstanding equity shares of the company. EPS

indicates the profitability of the company in relation to its share capital.

What is a Bonus Issue?While investing in shares the motive is not only capital gains but also a proportionate share of

surplus generated from the operations once all other stakeholders have been paid. But thedistribution of this surplus to shareholders seldom happens. Instead, this is transferred to the

reserves and surplus account. If the reserves and surplus amount becomes large, the companymay transfer some amount from the reserves account to the share capital account by a mere book

entry. This is done by increasing the number of shares outstanding and every shareholder isgiven bonus shares in a ratio called the bonus ratio and such an issue is called bonus issue. If the

bonus ratio is 1:2, it means that for every two shares held, the shareholder is entitled to one extrashare. So if a shareholder holds two shares, post bonus he will hold three. However, one should

note that the price of the share may adjust downwards once it becomes ex-bonus.

What is a Split?A Split is book entry wherein the face value of the share is altered to create a greater number of

shares outstanding without calling for fresh capital or altering the share capital account. For example, if a company announces a two-way split, it means that a share of the face value of Rs

10 is split into two shares of face value of Rs 5 each and a person holding one share now holdstwo shares.

What is a Buy Back?

It is a process by which a company can buy back its shares from shareholders. A company may buy back its shares in various ways: from existing shareholders on a proportionate basis; through

a tender offer from open market; through a book-building process; from the Stock Exchange; or from odd lot holders. A company cannot buy back through negotiated deals on or off the Stock

Exchange, through spot transactions or through any private arrangement.

What is Book Value?Book Value is also called as Net Asset Value per share. It indicates the assets backing per share



of the company. The ratio can be computed as follows: Book Value = (Paid-up Equity Capital +Reserves & Surplus - Fictitious Assets)/ Number of Equity Shares Outstanding Book Value can

be regarded as the liquidation value of the share. In case the company is liquidated immediately,the book value is the amount likely to be available per share (unless all the assets and liabilities

are not stated at their realizable value in the balance sheet),which is often the case.

What is a settlement cycle?Settlement cycle is the accounting period for the securities traded on the exchange.

Settlement Cycle on the BSE The settlement cycle on the BSE is Trade plus two days, or T+2, as per a Sebi directiveimplementing this new cycle from April 1, 2003. Under rolling settlement, trades done on one

day are settled after a certain number of days. So, T+2 will mean that the final settlement of transactions done on the Trade day, will be settled by exchange of money and securities on the

second business day (excluding Saturday, Sundays, Bank and Exchange Trading Holidays). Pay-in and Pay-out for 'A', 'B1', 'B2', µT¶, µS¶, µTS¶, 'C', "F", "G" & 'Z' group of securities Settlement

is done on a T+2 basis. The pay-in/pay-out process will be settled on the T+2 day.

Summary of the Settlement Cycle

Day Activity

T

Trading on BOLT and daily downloading of statements showing details of transactionsand margins at the end of each trading day.

Downloading of provisional securities and funds obligation statements by member-

brokers.

6A/7A* entry by the member-brokers/ confirmation by the custodians.

T+1Confirmation of 6A/7A data by the Custodians upto 11:00 a.m. Downloading of finalsecurities and funds obligation statements by members.

T+2

Pay-in of funds and securities by 11:00 a.m. and pay-out of funds and securities by

1:30 p.m. The member-brokers are required to submit the pay-in instructions for fundsand securities to banks and depositories respectively by 10: 30 a.m.

T+3 Auction on BOLT at 11.00 a.m.

T+4Auction pay-in and pay-out of funds and securities by 12:00 noon and 1:30 p.m.

respectively.

Source : www.bseindia.com

NSE Settlement Cycle

The NSE too follows a rolling settlement cycle of T+2.

The stock exchange sends to NSCCL the details of trades at the end of the trading day. The

clearing corporation determines the total obligations of each member and transfers the data to



clearing members (CM). All the trades done during a particular trading session are clubbedtogether and settled. NSCCL then determines the net obligations of members in terms of

deliveries of securities and funds, and the settlement is completed when the funds and securitiesare paid out.

On the securities pay-in day, members bring in securities to NSCCL whereas on the pay out day,securities are delivered to members. If there is a shortfall in securities, then an auction isconducted to meet it.

This table makes the process clearer :

Activity Day

Trading Rolling Settlement Trading T

ClearingCustodial Confirmation

Delivery Generation

T+1 working days

T+1 working day

Settlement

Securities and Funds pay in

Securities and Funds pay outValuation Debit

T+2 working day

T+2 working dayT+2 working day

Post Settlement

AuctionBad Delivery Reporting

Auction settlementRectified bad delivery pay-in and pay-out

Re-bad delivery reporting and pickupClose out of re-bad delivery and funds pay-in &

pay-out




Source : www.nseindia.com

What is a rolling settlement?

Under rolling settlement all open positions at the end of the day mandatorily result in payment/

delivery µn¶ days later. Currently trades in rolling settlement are settled on T+2 basis where T is

the trade day. For example, a trade executed on Monday is mandatorily settled by Wednesday

(considering two working days from the trade day). The funds and securities pay-in and pay-out

are carried out on T+2 days.

When does one deliver the shares and pay the money to broker?

As a seller, in order to ensure smooth settlement you should deliver the shares to your broker

immediately after getting the contract note for sale but in any case before the pay-in day.

Similarly, as a buyer, one should pay immediately on the receipt of the contract note for purchase

but in any case before the pay-in day.

What is short selling?

Short selling is a legitimate trading strategy. It is a sale of a security that the seller does not own,

or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers



take the risk that they will be able to buy the stock at a more favorable price than the price at

which they "sold short."

What is an auction?

An auction is conducted for those securities that members fail to deliver/short deliver during pay-

in. Three factors primarily give rise to an auction: short deliveries, un-rectified bad deliveries,

un-rectified company objections.

Is there a separate market for auctions?

The buy/sell auction for a capital market security is managed through the auction market. As

opposed to the normal market where trade matching is an on-going process, the trade matching

process for auction starts after the auction period is over.

What happens if the shares are not bought in the auction?

If the shares are not bought at the auction i.e. if the shares are not offered for sale, the Exchangesquares up the transaction as per SEBI guidelines. The transaction is squared up at the highest

price from the relevant trading period till the auction day or at 20 per cent above the last

available Closing price whichever is higher. The pay-in and pay-out of funds for auction square

up is held along with the pay-out for the relevant auction.

What is bad delivery?

SEBI has formulated uniform guidelines for good and bad delivery of documents. Bad delivery

may pertain to a transfer deed being torn, mutilated, overwritten, defaced, or if there are spelling

mistakes in the name of the company or the transfer. Bad delivery exists only when shares are

transferred physically. In "Demat" bad delivery does not exist.

What are company objections?

A list documenting reasons by a company for not transferring a share in the name of an investor

is called company objections. Rejection occurs due to a signature difference, or fake shares, or

forgery, or if there is a court injunction preventing the transfer of the shares.

What should one do with company objections?

The broker must immediately be notified. Company objection cases should be reported within 12

months from the date of issue of the memo for the original quantity of share under objection.

Who has to replace the shares in case of company objections?

The member who has sold the shares first on the Exchange is responsible for replacing the shares

within 21 days of the Exchange being informed. Company objection cases that are not rectified

or replaced are normally auctioned.



How does transfer of physical shares take place?

After a sale, the share certificate along with a proper transfer deed duly stamped and complete in

all respects is sent to the company for transfer in the name of the buyer. Once the transfer is

registered in the share transfer register maintained by the company, the process of transfer is

complete.

What are the rights of the investor?

The right to get - Proof of price/brokerage charged, Money/shares on time, Statement of

Accounts and Contract Note from trading member.

What are the obligations of the investor?

The obligation to - Sign a proper Member-Constituent Agreement Possess a valid contract or

purchase/sale note Deliver securities & make payment on time Provide Margin before trade.

What are the tax implications of investing in Indian equities?Tax rates on investments gains are categorized as long term & short term capital gains. (a) Long

term capital gains Long Term investments that are held for more than 12 months are termed as

long term capital assets. Profit on sale of such assets is termed as long term capital gain (LTCG).

(b) Short term capital gains Shares that are held for less than 12 months are classified as short

term capital assets.



Currency Future

1. What is a Currency future?

Currency futures are standardized foreign exchange contracts traded on NSE to buy or sell onecurrency against another on a specified future date, at a price specified on the purchase or sale

date.

2. Basics of Currency futures

The forex market is where one currency is traded for another.The average daily turnover is inglobal forex and related markets is in trillions of US dollars.The spot exchange rate refers to the

current prevailing exchange rate at which a currency can be bought or sold for another. Forwardexchange rates are those quoted and traded for future delivery of underlying currencies and

payment.

The forward rates are different from spot rates depending on market sentiments and expectedfuture conditions. the pricing of a currency forward contract is determined by the prevailing spot

rate and interest rates differential of the respective countries for a specified date in future.

The forward contracts are customized bilateral agreements between two counterparties agreeingto buy or sell the underlying on a specified rate.

Currency futures are standardized foreign exchange contracts traded on NSE to buy or sell one

currency against another on a specified future date, at a price specified on the purchase or saledate.The exchanges clearing house acts as a central counterparty for all trades and thus,

undertakes the responsibility of performance guarantee.

Currency futures can be bought/sold on the NSE through members of the exchange, after opening a trading account and depositing requite margin amount with the trading member.

3. What is a Currency futures contract?

This is a standardized version of forward contract that is traded on a regulated exchange. It is an

agreement to buy or sell a specified quantity of an underlying currency on a specified date infuture at a specified rate

4. What are the currencies traded on NSECD?

Currenctly, USD-INR is allowed for trading.

5. What are the trading hours?/

Trading is allowed in currency futures from Monday to Friday between 9.00 a.m to 5.00 p.m

6. When will the Currency futures contract expire every month?



The last trading day for a near month futures contract will be two working days prior to the lastworking day (excluding Saturdays) of the month. The settlement price will be RBI mandated

reference rate on the last trading day.

7. Participants of a Currency Futures Market

NSE provides a host of benefits to a wide range of financial market participants, includinghedgers, investors /traders and arbitrageurs.

Hedgers: NSE aims to provide a high liquidity platform for hedging against the effects of

unfavorable fluctuations in the foreign exchange markets.Banks, Importers, Exporters, andCorporates can hedge on NSE at low entry and exit.

Investors/Traders: Anybody interested in taking a view on appreciation/depreciation of exchange

rate in the long and short term can participate in the NSE currency futures.

Arbitrageurs: They get opportunity to trade in the fluctuations of currency in between exchanges.

8. What are the factors that affect the exchange rate of currency?

It is affected by the supply and demand for the country¶s currency in the international foreignexchange markets. Interest rates, Inflation, trade balance and economic & political scenarios in

the country also affect the exchange rate.

9. Why do we need Currency futures?

This is required if our business if its influenced by fluctuations in currency exchange rates.E.g if you are exporting something and the value of the INR has gone up, you earn less in terms of

Rupees that you had anticipated. Currency futures help you hedge against these exchange raterisks.

10. How will it help small retail traders?

The minimum size of the USD/INR futures contract is USD1000 or Rs 49000(approx in

INR).This is well within the reach of most small traders. All transactions on the exchange areanonymous and are executed on a price time priority ensuring that the best price is available to

all categories of participants.

11. What are the risks involved in Currency futures?

Risks in currency futures pertain to movements in the exchange rate. There is no a confirmedformula to determine whether the currency rate will fall or rise. A judgment on this is the domain

of experts with knowledge and understanding of variables that affect currency rates.

12. What are the contract specifications for Currency futures contracts?



Symbol USDINR

Instrument Type FUTCUR

Unit of trading 1 (1 unit denotes 1000 USD)

Underlying The exchange rate in Indian Rupees for a US Dollar

Tick size Rs.0.25 paise or INR 0.0025

Trading hoursMonday to Friday

9:00 a.m. to 5:00 p.m.

Contract trading cycle 12 month trading cycle.

Last trading dayTwo working days prior to the last business day of theexpiry month at 12 noon.

Final settlement day

Last working day (excluding Saturdays) of the expiry

month.The last working day will be the same as that for

Interbank Settlements in Mumbai.Minimum initial margin(exchange

stipulated)1.75% on day 1, 1% thereafter

SettlementDaily settlement : T + 1

Final settlement : T + 2

Mode of settlement Cash settled in Indian Rupees

Daily settlement price (DSP)Calculated on the basis of the last half an hour weighted

average price.

Final settlement price (FSP) RBI reference rate



IPOs

What is an Initial Public Offering?

Initial Public Off ering (IPO) is when an unlisted company makes either a f resh issue of securities or an

off er f or sale of its existing securities or both f or the f irst time to the public. This paves way f or listing

and trading of the issuers securities.

What is a Rights Issue?

Rights Issue (RI) is when a listed company which proposes to issue f resh securities to its existing

shareholders as on a record date. The rights are normally off ered in a particular ratio to the number of

securities held prior to the issue. This route is best suited f or companies who would like to raise capital

without diluting stake of its existing shareholders unless they do not intend to subscribe to their

entitlements.

What is a Preferential Issue?

A pref erential issue is an issue of shares or of convertible securities by listed companies to a select group

of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue.

This is a f aster way f or a company to raise equity capital. The issuer company has to comply with the

Companies Act and the requirements contained in Chapter pertaining to pref erential allotment in SEBI

(DIP) guidelines which inter-alia include pricing, disclosures in notice etc.

What is the difference between an offer document, Red a prospectus and adraft offer doc?

Off er document means Prospectus in case of a public issue or off er f or sale and Letter of Off er in case

of a rights issue, which is f iled Registrar of Companies (ROC) and Stock Exchanges. An off er documentcovers all the relevant inf ormation to help an investor to make his/her investment decision. Draf t Off er

document means the off er document in draf t stage. The draf t off er documents are f iled with SEBI,

atleast 21 days prior to the f iling of the Off er Document with ROC/ SEs. SEBI may specif ies changes, if

any, in the draf t Off er Document and the issuer or the Lead Merchant banker shall carry out such

changes in the draf t off er document bef ore f iling the Off er Document with ROC/ SEs. The Draf t Off er

document is available on the SEBI website f or public comments f or a period of 21 days f rom the f iling of

the Draf t Off er Document with SEBI.

What is a Red Herring Prospectus?

Red Herring Prospectus is a prospectus, which does not have details of either price or number of sharesbeing off ered, or the amount of issue. This means that in case price is not disclosed, the number of

shares and the upper and lower price bands are disclosed. On the other hand, an issuer can state the

issue size and the number of shares are determined later. An RHP f or and FPO can be f iled with the RoC

without the price band and the issuer, in such a case will notif y the f loor price or a price band by way of

an advertisement one day prior to the opening of the issue. In the case of book-built issues, it is a

process of price discovery and the price cannot be determined until the bidding process is completed.



Hence, such details are not shown in the Red Herring prospectus f iled with ROC in terms of the

provisions of the Companies Act. Only on completion of the bidding process, the details of the f inal price

are included in the off er document. The off er document f iled thereaf ter with ROC is called a prospectus.

What is an Abridged Prospectus?

Abridged Prospectus means the memorandum as prescribed in Form 2A under sub-section (3) of section

56 of the Companies Act, 1956. It contains all the salient f eatures of a prospectus. It accompanies the

application f orm of public issues.

What is a Green-shoe Option?

Green Shoe option means an option of allocating shares in excess of the shares included in the public

issue and operating a post-listing price stabilizing mechanism f or a period not exceeding 30 days in

accordance with the provisions of Chapter VIII A of DIP Guidelines, which is granted to a company to be

exercised through a Stabilizing Agent. This is an arrangement wherein the issue would be over allotted

to the extent of a maximum of 15% of the issue size. From an investors perspective, an issue with green

shoe option provides more probability of getting shares and also that post-listing price may show

relatively more stability as compared to market.

Who decides the price of an issue?

Indian primary market ushered in an era of f ree pricing in 1992. Following this, the guidelines have

provided that the issuer in consultation with Merchant Banker shall decide the price. There is no price

f ormula stipulated by SEBI. SEBI does not play any role in price f ixation. The company and merchant

banker are however required to give f ull disclosures of the parameters, which they had considered while

deciding the issue price. There are two types of issues one where company and Lead Manager (LM) f ix a

price (called f ixed price) and other, where the company and LM stipulate a f loor price or a price band

and leave it to market f orces to determine the f inal price (price discovery through book building

process).

What is Fixed Price offer?

An issuer company is allowed to f reely price the issue. The basis of issue price is disclosed in the off er

document where the issuer discloses in detail about the qualitative and quantitative f actors justif ying

the issue price. The Issuer company can mention a price band of 20% (cap in the price band should not

be more than 20% of the f loor price) in the Draf t off er documents f iled with SEBI and actual price can be

determined at a later date bef ore f iling of the f inal off er document with SEBI / ROCs.

What is book building?

Securities and Exchange Board of India (SEBI) guidelines def ine book building as "a process undertaken

by which a demand f or the securities proposed to be issued by a body corporate is elicited and built-up

and the price f or such securities is assessed f or the determination of the quantum of such securities to

be issued by means of a notice, circular, advertisement, document or inf ormation memoranda or off er

document". Book building is basically a process used in Public Issue f or eff icient price discovery. It is a

mechanism where, during the period f or which the Public Issue is open, bids are collected f rom investors



at various prices within a Price Band. The off er price is determined af ter the bid closing date.

What is the main difference between offer of shares through book building and offer of shares

through normal public issue?

Price at which securities will be allotted is not known in case of off er of shares through book building

while in case of off er of shares through normal public issue, price is known in advance to investor. In

case of Book Building, the demand can be known everyday as the book is built. But in case of the public

issue the demand is known at the close of the issue.

What is the number of days for which bid remains open in book building?

Book remains open f or a minimum three days in the book building process.

What is a price band?

The red herring prospectus may contain either the f loor price f or the securities or a price band within

which the investors can bid. The spread between the f loor and the cap of the price band shall not be

more than 20%. In other words, it means that the cap should not be more than 120% of the f loor price.

The price band can have a revision and such a revision in the price band shall be widely disseminated by

inf orming the stock exchanges, by issuing press release and also indicating the change on the relevant

website and the terminals of the syndicate members. In case the price band is revised, the bidding

period shall be extended f or a f urther period of three days, subject to the total bidding period not

exceeding ten days.

What are floor and ceiling prices in book building?

When a company off ers shares to the public through the book building process, it f ixes a price band,

which sets the minimum and maximum price limits at which the bids can be made by the investors f or

acquiring the shares of the company. While the f loor price symbolizes the minimum price at which the

investors can bid f or the shares, ceiling price is the maximum price at which the investor can make bids.

What is 'Cut-Off' price?

The Cut-off option is an option given only to the Retail Individual Bidders indicating their agreement to

bid and purchase at the f inal Issue Price as determined at the end of the Book Building Process.

How is the Retail Investor defined as?

Retail individual investor means an investor who applies or bids f or securities of or f or a value of not

more than Rs.1, 00,000.

How is the Non Institutional Bidder defined as?

If in case your investment exceeds Rs.1, 00,000/- you will need to make an application as Non

Institutional Bidder .

Can a retail investor also bid in a book-built issue?

Yes. He can bid in a book-built issue f or a value not more than Rs.1,00,000. Any bid made in excess of



this will be considered in the HNI category.

Can investor make multiple applications?

No. You can make only one application under one given demat account f or a given IPO .

What is Basis of Allocation/Basis of Allotment?

Af ter the closure of the issue, the bids received are aggregated under diff erent categories i.e., f irm

allotment, Qualif ied Institutional Buyers (Q IBs), Non-Institutional Buyers (NIBs), Retail, etc. The

oversubscription ratios are then calculated f or each of the categories as against the shares reserved f or

each of the categories in the off er document. Within each of these categories, the bids are then

segregated into diff erent buckets based on the number of shares applied f or. The oversubscription ratio

is then applied to the number of shares applied f or and the number of shares to be allotted f or

applicants in each of the buckets is determined. Then, the number of successf ul allottees is determined.

This process is f ollowed in case of proportionate allotment. In case of allotment f or Q IBs, it is subject to

the discretion of the post issue lead manager.

Can I know the number of shares that would be allotted to me?

In case of f ixed price issues, the investor is intimated about the Conf irmatory Allotment Note

(CAN)/Ref und order within 30 days of the closure of the issue. In case of book built issues, the basis of

allotment is f inalized by the Book Running lead Managers within 2 weeks f rom the date of closure of the

issue. The registrar then ensures that the demat credit or ref und as applicable is completed within 15

days of the closure .

How do I know if I am allotted the shares? And by what timeframe will I get a refund if I am not

allotted?

The investor is entitled to receive a Conf irmatory Allotment Note (CAN) in case he has been allotted

shares within 15 days f rom the date of closure of a book Built issue. The registrar has to ensure that the

demat credit or ref und as applicable is completed within 15 days of the closure of the book built issue.

How long will it take after the issue for the shares to get listed?

The listing on the stock exchanges is done within 7 days f rom the f inalization of the issue. Ideally, it

would be around 3 weeks af ter the closure of the book built issue. In case of f ixed price issue, it would

be around 37 days af ter closure of the issue.



Mutual Funds

What is an Asset Management Company?

A f irm that invests the pooled f unds of retail investors in securities in line with the stated investment

objectives. For a f ee, the investment company provides more diversif ication, liquidity, and prof essional

management service than is normally available to individual investors.

What is a Mutual Fund?

Mutual Fund is a investment company that pools money f rom shareholders and invests in a variety of

securities, such as stocks, bonds and money market instruments. In Simple Words, Mutual f und is a

mechanism f or pooling the resources by issuing units to the investors and investing f unds in securities in

accordance with objectives as disclosed in off er document.

What is NAV?

The Term Net Asset Value (NAV) is used by AMCs to measure net assets. It is calculated by subtracting

liabilities f rom the value of a f und's securities and other items of value and dividing this by the number

of outstanding units. Net asset value is popularly used in newspaper mutual f und tables to designate the

price per unit f or the f und. Calculating NAVs - Calculating mutual f und net asset values is easy. Simply

take the current market value of the f und's net assets (securities held by the f und minus any liabilities)

and divide by the number of units outstanding. So if a f und had net assets of Rs.50 lakh and there are

one lakh units of the f und, then the price per share (or NAV) is Rs.50.00.

How often is the NAV declared?

The NAV of a scheme has to be declared at least once a week. However many Mutual Fund declare NAVf or their schemes on a daily basis. As per SEBI Regulations, the NAV of a scheme shall be calculated and

published at least in two daily newspapers at intervals not exceeding one week. However, NAV of a

close-ended scheme targeted to a specif ic segment or any monthly income scheme (which are not

mandatory required to be listed on a stock exchange) may be published at monthly or quarterly

intervals.

What are the benefits of investing in Mutual Funds?

The advantages of investing in a Mutual Fund are:

1. Prof essional Management: You avail of the services of experienced and skilled prof essionals who are

backed by a dedicated investment research team, which analyses the perf ormance and prospects of

companies and selects suitable investments to achieve the objectives of the scheme.

2. Diversif ication: Mutual Funds invest in a number of companies across a broad cross-section of

industries and sectors. This diversif ication reduces the risk because seldom do all stocks decline at the



same time and in the same proportion. You achieve this diversif ication through a Mutual Fund with f ar

less money than you can do on your own.

3. Convenient Administration: Investing in a Mutual Fund reduces paperwork and helps you avoid many

problems such as bad deliveries, delayed payments and unnecessary f ollow up with brokers and

companies. Mutual Funds save your time and make investing easy and convenient.

4. Return Potential: Over a medium to long-term, Mutual Funds have the potential to provide a higher

return as they invest in a diversif ied basket of selected securities.

5. Low Costs: Mutual Funds are a relatively less expensive way to invest compared to directly investing

in the capital markets because the benef its of scale in brokerage, custodial and other f ees translate into

lower costs f or investors.

6. Liquidity: In open-ended schemes, you can get your money back promptly at net asset value related

prices f rom the Mutual Fund itself . With close-ended schemes, you can sell your units on a stock

exchange at the prevailing market price or avail of the f acility of direct repurchase at NAV related prices

which some close-ended and interval schemes off er you periodically.

7. Transparency: You get regular inf ormation on the value of your investment in addition to disclosure

on the specif ic investments made by your scheme, the proportion invested in each class of assets and

the f und manager's investment strategy and outlook.

8. Flexibility: Through f eatures such as regular investment plans, regular withdrawal plans and dividend

reinvestment plans, you can systematically invest or withdraw f unds according to your needs and

convenience.

9. Choice of Schemes: Mutual Funds off er a f amily of schemes to suit your varying needs over a lif etime.

10. Well Regulated: All Mutual Funds are registered with SEBI and they f unction within the provisions of

strict regulations designed to protect the interests of 'investors. The operations of Mutual Funds are

regularly monitored by SEBI.

Are there any risks involved in investing in Mutual Funds?

All investments whether in shares, debentures or deposits involve risk: share value may go down

depending upon the perf ormance of the company, the industry, state of capital markets and the

economy; generally, however, longer the term, lesser the risk; companies may def ault in payment of

interest/ principal on their debentures/bonds/ deposits; the rate of interest on an investment may f all

short of the rate of inf lation reducing the purchasing power. While risk cannot be eliminated, skillf ul

management can minimise risk. Mutual Funds help to reduce risk through diversif ication and

prof essional management. The experience and expertise of Mutual Fund managers in selecting

f undamentally sound securities and timing their purchases and sales help them to build a diversif ied



portf olio that minimises risk and maximises returns.

TYPES OF MUTUAL FUNDS - On the basis of Objective

Equity Funds/ Growth Funds

Funds that invest in equity shares are called equity f unds. They carry the principal objective of capital

appreciation of the investment over the medium to long-term. The returns in such f unds are volatile

since they are directly linked to the stock markets. They are best suited f or investors who are seeking

capital appreciation. There are diff erent types of equity f unds such as Diversif ied f unds, Sector specif ic

f unds and Index based f unds.

Diversif ied f unds

These f unds invest in companies spread across sectors. These f unds are generally meant f or risk-taking

investors who are not bullish about any particular sector.

Sector f unds

These f unds invest primarily in equity shares of companies in a particular business sector or industry.

These f unds are targeted at investors who are extremely bullish about a particular sector.

Index f unds

These f unds invest in the same pattern as popular market indices like S&P 500 and BSE Index. The value

of the index f und varies in proportion to the benchmark index.

Tax Saving Funds

These f unds off er tax benef its to investors under the Income Tax Act. Opportunities provided under this

scheme are in the f orm of tax rebates U/s 88 as well saving in Capital Gains U/s 54EA and 54EB. They are

best suited f or investors seeking tax concessions.

Debt / Income Funds

These Funds invest predominantly in high-rated f ixed-income-bearing instruments like bonds,

debentures, government securities, commercial paper and other money market instruments. They are

best suited f or the medium to long-term investors who are averse to risk and seek capital preservation.

They provide regular income and saf ety to the investor.

Liquid Funds / Money Market Funds

These f unds invest in highly liquid money market instruments. The period of investment could be as

short as a day. They provide easy liquidity. They have emerged as an alternative f or savings and short-

term f ixed deposit accounts with comparatively higher returns. These f unds are ideal f or Corporates,

institutional investors and business houses who invest their f unds f or very short periods.

Gilt Funds

These f unds invest in Central and State Government securities. Since they are Government backed



bonds they give a secured return and also ensure saf ety of the principal amount. They are best suited

f or the medium to long-term investors who are averse to risk.

Balanced Funds

These f unds invest both in equity shares and f ixed-income-bearing instruments (debt) in some

proportion. They provide a steady return and reduce the volatility of the f und while providing some

upside f or capital appreciation. They are ideal f or medium- to long-term investors willing to take

moderate risks.

Hedge Funds

These f unds adopt highly speculative trading strategies. They hedge risks in order to increase the value

of the portf olio.

TYPES OF MUTUAL FUNDS - On the basis of Flexibility

Open-ended Funds

These f unds do not have a f ixed date of redemption. Generally they are open f or subscription and

redemption throughout the year. Their prices are l inked to the daily net asset value (NAV). From the

investors' perspective, they are much more liquid than closed-ended f unds. Investors are permitted to

join or withdraw f rom the f und af ter an initial lock-in period.

Close-ended Funds

These f unds are open initially f or entry during the Initial Public Off ering (IPO) and thereaf ter closed f or

entry as well as exit. These f unds have a f ixed date of redemption. One of the characteristics of the

close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as

maturity nears. These f unds are open f or subscription only once and can be redeemed only on the f ixed

date of redemption. The units of these f unds are listed (with certain exceptions), are tradable and the

subscribers to the f und would be able to exit f rom the f und at any time through the secondary market.

Interval f unds

These f unds combine the f eatures of both openended and close-ended f unds wherein the f und is close-

ended f or the f irst couple of years and open-ended thereaf ter. Some f unds allow f resh subscriptions and

redemption at f ixed times every year (say every six months) in order to reduce the administrative

aspects of daily entry or exit, yet providing reasonable liquidity.

TYPES OF MUTUAL FUNDS - On the basis of geographic location Domestic f unds

These f unds mobilise the savings of nationals within the country.

Off shore Funds

These f unds f acilitate cross border f und f low. They invest in securities of f oreign companies. They attract

f oreign capital f or investment.



What are the different plans that Mutual Funds offer?

Growth Plan and Dividend Plan

A growth plan is a plan under a scheme wherein the returns f rom investments are reinvested and very

f ew income distributions, if any, are made. The investor thus only realises capital appreciation on the

investment. This plan appeals to investors in the high income bracket. Under the dividend plan, income

is distributed f rom time to time. This plan is ideal to those investors requiring regular income.

Dividend Reinvestment Plan

Dividend plans of schemes carry an additional option f or reinvestment of income distribution. This is

ref erred to as the dividend reinvestment plan. Under this plan, dividends declared by a f und are

reinvested on behalf of the investor, thus increasing the number of units held by the investors.

Automatic Investment Plan

Under the Automatic Investment Plan (AIP) also called Systematic Investment Plan (SIP), the investor is

given the option f or investing in a specif ied f requency of months in a specif ied scheme of the Mutual

Fund f or a constant sum of investment. AIP allows the investors to plan their savings through a

structured regular monthly savings program.

Automatic Withdrawal Plan

Under the Automatic Withdrawal Plan (AWP) also called Systematic Withdrawal Plan (SWP), a f acility is

provided to the investor to withdraw a pre-determined amount f rom his f und at a pre-determined

interval.

What is Entry/Exit Load?

A Load is a charge, which the AMC may collect on entry and/or exit f rom a f und. A load is levied to cover

the up-f ront cost incurred by the AMC f or selling the f und. It also covers one time processing costs.

Some f unds do not charge any entry or exit load. These f unds are ref erred to as No Load Fund.

Funds usually charge an entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25%

and 2.00%. For eg. Let us assume an investor invests Rs. 10,000/- and the current NAV is Rs.13/-. If the

entry load levied is 1.00%, the price at which the investor invests is Rs.13.13 per unit. The investor

receives 10000/13.13 = 761.6146 units. (Note that units are allotted to an investor based on the amount

invested and not on the basis of no. of units purchased). Let us now assume that the same investor

decides to redeem his 761.6146 units. Let us also assume that the NAV is Rs 15/- and the exit load is

0.50%. Theref ore the redemption price per unit works out to Rs. 14.925. The investor theref ore receives

761.6146 x 14.925 = Rs.11367.10.

What is Sales/Purchase price?

Sales/Purchase price is the price paid to purchase a unit of the f und. If the f und has no entry load, then

the sales price is the same as the NAV. If the f und levies an entry load, then the sales price would be



higher than the NAV to the extent of the entry load levied.

What is redemption price?

Redemption price is the price received on selling units of open-ended scheme. If the f und does not levy

an exit load, the redemption price will be same as the NAV. The redemption price will be lower than the

NAV in case the f und levies an exit load.

What is repurchase price?

Repurchase price is the price at which a close-ended scheme repurchases its units. Repurchase can

either be at NAV or can have an exit load.

What is a Switch?

Some Mutual Funds provide the investor with an option to shif t his investment f rom one scheme to

another within that f und. For this option the f und may levy a switching f ee. Switching allows the

Investor to alter the allocation of their investment among the schemes in order to meet their changed

investment needs, risk prof iles or changing circumstances during their lif etime.

What is Shut-Out Period?

Af ter the closure of the Initial Off er Period, on an ongoing basis, the Trustee reserves a right to declare

Shut-Out period not exceeding 5 days at the end of each month/quarter/half -year, as the case may be,

f or the investors opting f or payment of dividend under the respective Dividends Plans. The declaration

of the Shut-Out period is envisaged to f acilitate the AMC/the Registrar to determine the Units of the

unitholders eligible f or receipt of dividend under the various Dividend Options. Further, the Shut-Out

period will also help in expeditious processing and dispatch of dividend warrants.

During the Shut-Out period investors may make purchases into the Scheme but the Purchase Price f or

subscription of units will be calculated using the NAV as at the end of the f irst Business Day in the

f ollowing month/quarter/half -year as the case may be, depending on the Dividend Plan chosen by the

investor. Theref ore, if investments are made during the Shut Out period, Units to the credit of the

Unitholders account will be created only on the f irst Business Day of the f ollowing month/ quarter/half

year, as the case may be, depending on the dividend plan chosen by the investor. The Shut-Out period

applies to new investors in the Scheme as well as to Unitholders making additional purchases of Units

into an existing f olio. The Trustee reserves the right to change the Shut-Out period and prescribe new

Shut- Out period, f rom time to time.

What are the factors that influence the performance of Mutual Funds?

The perf ormances of Mutual f unds are inf luenced by the perf ormance of the stock market as well as the

economy as a whole. Equity Funds are inf luenced to a large extent by the stock market. The stock

market in turn is inf luenced by the perf ormance of the companies as well as the economy as a whole.

The perf ormance of the sector f unds depends to a large extent on the companies within that sector.

Bond-f unds are inf luenced by interest rates and credit quality. As interest rates rise, bond prices f all, and

vice versa. Similarly, bond f unds with higher credit ratings are less inf luenced by changes in the



economy.

Who are the issuers of Mutual funds in India?

Unit Trust of India(UTI) was the f irst mutual f und which began operations in 1964. Other issuers of

Mutual f unds are Public sector banks like SBI, Institutions like HDFC & ICICI, Foreign Institutions like

Fidelity, ABN Amro, Deutsche and Private f inancial companies like DSP Merrill Lynch, Sundaram, Kotak

Mahindra, Cholamandalam etc.

As a new investor how do I invest in Mutual Funds?

1.Identif y your investment needs : Your f inancial goals will vary, based on your age, lif estyle, f inancial

independence, f amily commitments, level of income and expenses among many other f actors.

Theref ore, the f irst step is to assess your needs.

2.Choose the right Mutual Fund : Once you have a clear strategy in mind, you now have to choose which

Mutual Fund and scheme you want to invest in.The off er document of the scheme tells you its

objectives and provides supplementary details like the track record of other schemes managed by the

same Fund Manager. Some f actors to evaluate bef ore choosing a particular Mutual Fund are:

the track record of perf ormance over the last f ew years in relation to the appropriate yardstick and

similar f unds in the same category. how well the Mutual Fund is organised to provide eff icient, prompt

and personalised service. degree of transparency as ref lected in f requency and quality of their

communications.

3.Select the ideal mix of Schemes : Investing in just one Mutual Fund scheme may not meet all your

investment needs. You may consider investing in a combination of schemes to achieve your specif ic

goals.

4.Invest regularly : For most of US,the approach that works best is to invest a f ixed amount at specif ic

intervals, say every month. By investing a f ixed sum each month, you buy f ewer units when the price is

higher and more units when the price is low, thus bringing down your average cost per unit. This is

called rupee cost averaging and is a disciplined investment strategy f ollowed by investors all over the

world. With many open-ended schemes off ering systematic investment plans, this regular investing

habit is made easy f or you.

5.Keep your taxes in mind : As per the current tax laws, Dividend/Income Distribution made by mutual

f unds is exempt f rom Income Tax in the hands of investor. Further, there are other benef its available f or

investment in Mutual Funds under the provisions of the prevailing tax laws. You may theref ore consult

your tax advisor or Chartered Accountant f or specif ic advice to achieve maximum tax eff iciency by

investing in Mutual Funds.

6.Start early : It is desirable to start investing early and stick to a regular investment plan. If you start



now, you will make more than if you wait and invest later. The power of compounding lets you earn

income on income and your money multiplies at a compounded rate of return.

7. The f inal step : All you need to do now is to get in touch with a Mutual Fund or your agent/broker and

start investing. Reap the rewards in the years to come. Mutual Funds are suitable f or every kind of

investor-whether starting a career or retiring, conservative or risk taking, growth oriented or income

seeking.

What are the rights that are available to a Mutual Fund holder?

As a unitholder in a Mutual Fund scheme coming under the SEBI (Mutual Funds) Regulations, you are

entitled to: 1. Receive unit certif icates or statements of accounts conf irming your title within 30 days

f rom the date of closure of the subscription under open-end schemes or within 6 weeks f rom the date

your request f or a unit certif icate is received by the Mutual Fund

2. Receive inf ormation about the investment policies, investment objectives, f inancial position and

general aff airs of the scheme;

3. Receive dividend within 30 days of their declaration and receive the redemption or repurchase

proceeds within 10 days f rom the date of redemption or repurchase

4. Vote in accordance with the Regulations to:

a. change the Asset ManagementCompany; b. wind up the schemes.

5. To receive communication f rom the Trustee about change in the f undamental attributes of any

scheme or any other changes which would modif y the scheme and aff ect the interest of the unitholders

and to have option to exit at prevailing Net Asset Value without any exit load in such cases.

It is very often said that Mutual Funds have performed badly. Please explain?

The perf ormance of Mutual Funds is evaluated on the basis of absolute increase or decrease in its Net

Asset Value (NAV). However a f unds perf ormance should be evaluated on the basis of a comparison

with the relevant indices and alternative instruments. The NAV varies f rom f und to f und. Theref ore this

argument is not entirely true. However some f unds have perf ormed poorly with their NAV quoting well

below their original NFO price.

What is forward and historical pricing?

Forward pricing is the price arrived at af ter the closing hours of a Working day, which the Investor is not

aware of . Historical pricing is a price which an Investor knows bef ore transacting, typically transactions

allowed on the basis of the previous days NAV.

How are monies transferred in the event of Unit holders death ?

The f ollowing procedure needs to be adopted in case of transmission and in the absence of any



nomination:-

A. In case of Joint-holding and demise of the First holder :-

§ Original / Attested ( in original ) Death Certif icate

§ Letter f rom any of the other holders requesting the change in the ownership of holding

§ Units are transf erred to the joint-holders name

B. In case of Joint-holding and demise of the joint-holder :-


§ Letter f rom First / Joint-holder requesting us to change according to the Mode of holding

§ Deletion of deceased persons name

C. In case of Single Holding :-


§ Request letter f or Transmission of Units to the legal heir.

§ List of legal heirs of the deceased person, if more than one.

§ No objection letter f rom other legal heirs, in f avour of the named legal heir in the request.

§ Letter of Indemnity f rom all legal heirs Notarized Aff idavit by the Successor(s), if required.

What is an Account Statement?

An Account Statement is a non-transf erable document that serves as a record of transactions between

the f und and the investor. It contains details of the investor, the units allotted or redeemed and the date

of transaction. The Account Statement is issued every time any transaction takes place.

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