comparative study of financial instruments
TRANSCRIPT
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INTRODUCTION TO
BROKERAGE INDUSTRY
IN INDIA
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Brokerage firms are the business entities that deal with stock trading. India, with an increasing
capital market and a growing number of investors, has a number of brokerage firms. In Indian
retail brokerage industry, the brokerage firms primarily work as agents for buying and selling of
securities like shares, stocks and other financial instruments and earn commission for each of the
transactions. There are plenty of brokerage firms in India. Let's have a look at the top 10
brokerage firms in India.
Before talking anything about top brokerage firms in India, let's have a glance at the Indian
retail brokerage market, which is going through a wonderful phase with high growth rate. The
total trading volume of the Indian brokerage companies stood at US$ 1239.1 billion in the year
2004, which increased to US$ 1492.1 billion in 2005. It is further expected to reach US$ 6535.7
billion by the year 2015.
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COMPANY
INTRODUCTION
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ASHLAR COMMODITIES PVT LTD
ASHLAR SECURITIES PVT LTD
Registered Office:
A-38, Sector-67, Noida-201301
Phone No: 0120-2484747, 7503323232
Fax No: 07503121155
Email: [email protected]
Corporate Office:
411,Arunachal Bhawan, 19,Barakhamba Road, New Delhi-110001
Phone No: 011-47464746
Fax No: 011-43084662
Head Office:
A-38, Sector-67, Noida-201301
Phone No: 0120-2484747, 7503323232
Fax No: 07503121155
Email: [email protected]
URL: www.ashlarindia.com
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Meerut:
IInd Floor, Abu Lane, Abu Plaza, Meerut Cantt.
Meerut-250002
Phone: +91-01214056788
E-mail: [email protected]
Bundelkhand:
Malakpura Mahoba UP-210427
Contact Person : Vineet Kumar Trivedi
Phone: +91-9415890801
E-mail: [email protected]
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ASHLAR is one of the reputed Stock Broking Houses in India, with a dominant position in retail
broking. We are amongst the best-capitalized firms in the Broking Industry, with an esteemed
presence in the capital of the country, having our Head Office in Noida. We introduce ourselves
as a company with innovative thought process, focus on Equities, professionalism and good
reputation in the Industry.
Profile
ASHLAR group has progressed as one of the foremost executing broker dealer across India.
Here company offer direct market access, refined trading applications and radical expertise to
institutional and individual clients. Company is also specialized in offering custom-made
solutions that is appropriate to each individual investor's needs.
Company‘s area of proficiency includes Commodity Trading, Derivatives, innovative thought
process and most of all focuses on equities.
Company operates from the head office at A-38 Sector -67 Noida -201301. Our office is set with
a prominent spacious location with all the contemporary facilities and utilities for our valued
customers. Besides company‘s branch offices are well-resourced with NSE Trading terminals,
skilled customer support personnel and other infrastructures.
ASHLAR provides advices for Stocks- Cash and F&O traded in NSE & BSE, commodities
including bullions, metals and agro-commodities traded in MCX and NCDEX. We offer prompt
and efficient services, and a long record of success.
ASHLAR is absolutely a leader in the ground of servicing commodities traders. Today company
has emerged as one of the most valued Stock-Broking Companies in India. With its exceptional
retail-focused stock trading business replica, ASHLAR is unswerving in providing ‗Real Value
for Money‘ to all its customers.
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There will be a complete market research on permanent basis and company vitally scrutinizes
each and every market information. Moreover company also have exposed to fairly innovative
sources of data that helps to keep ahead to identify the market trends.
Nowadays the fast growing market demands inclusive front to back office resolution in order to
be competitive. ASHLAR identifies the challenges institutions face, and endeavors to offer the
latest revolutionary solutions to have an impact where it counts, the bottom line.
Company aim in offering perfect execution support to meet our various client needs on a stage of
professionalism and reliability.
Infrastructure
ASHLAR offers universal access to the customers and facilities infrastructure that has VSATs
and Leased Lines which is directly connected to NSE trading hubs.
Company have platform on the trading terminals of NSE and CTCL (Computer-to-
Computer Link Facility) that is operated by NCFM and comes with well-qualified staff.
VPN (Virtual Private Network) facility helps in connecting its branches to the Head
office.
Offices are well-furnished with latest systems, servers and other hardware and software.
You can find the latest Share Broker Accounting package at ASHLAR
There are manifold access solutions to suit your desires, linking directly via backbone or
through extensive reach with extranet partners.
Infrastructural facilities help in retail equity broking, online investment portal and
depository services.
The e-mail facility is offered in all the branch offices that work both on local network as
well as through internet for fast, smooth and effective communication.
A team of skilled chartist is being consistently giving better & better suggestions on
shares and other commodities.
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Visions and Mission
To offer the best value for money to the investors through ground-breaking products
trading/investments policies, state of the art know-how and tailored service.
To have inclusive synchronization between quality-in-process and in the constant
development to deliver outstanding service that will delight our customers
Committed in providing top-notch products and services which surpass the expectations
of our customers.
Strengths
The Biggest Strength of group are the ethical workings & finding the most profitable solution for
everyone .Whether it is day traders, jobbers or short term & long term investors.
We strongly Believe that potential of growth is actually unlimited.
Provided we have innovative ideas, conviction and a professional approach to implement it.
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Products and Services
Commodity Trading
With the world's progressive shift toward a market economy and globalisation, the Commodity
Futures market is playing an increasingly important role in forming prices and hedging risk.
Ashlar is a reputed name in the field of commodity trading. Ashlar is a member of both the
leading commodity exchanges of India, MCX and NCDEX.
Ashlar gives certain benefits to their clients such as: fast and accurate order execution, instant
access to information regarding their account, personalised attention for large and small
investors, and the final decision on when and how to invest is always the client's choice. Ashlar
also equips you with reliable research, based on technical and fundamental study of all major
commodities.
The future for commodity market is bright. It is noteworthy that the Commodity and Equity
markets have been moving in tandem, bucking the global market trend.
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Company is currently facilitates trading of following products:
NCDEX
• Agro Products : Barley, Cashew, Castor Seed, Chana, Chilli, Coffee-Arabica, Coffee-Robusta
Cherry AB, Cotton Seed Oilcake, Crude Palm Oil, Coriander, Expeller Mustard Oil, Groundnut
(in shell), Groundnut Expeller Oil, Guar Gum, Guar Seeds, Gur, Indian Parboiled Rice, Indian
Pusa Basmati Rice, Indian Raw Rice, Indian Traditional Basmati Rice, Indian 28.5 mm Cotton,
Indian 31 mm Cotton, Jeera, Jute Sacking Bags, Masoor Grain Bold, Medium Staple Cotton,
Mentha Oil, Mulberry Green Cocoons, Mulberry Raw Silk, Rapeseed - Mustard Seed, Pepper,
Potato, Raw Jute, Rapeseed - Mustard Seed Oilcake, RBD Palmolein, Refined Soy Oil, Rubber,
Sesame Seeds, Shankar Kapas, Soy Bean, Sugar, Tur, Turmeric, Urad Desi, V -797 Kapas,
Wheat,
• Precious Metals : Gold, Gold (100 gms), Silver, Silver (5kg)
• Base Metals : Electrolytic Copper Cathode, Aluminium Ingot, Nickel Cathode
• Ferrous Metals : Mild Steel Ingots, Sponge Iron
• Energy Products : Brent Crude Oil, Furnace Oil, Light Sweet Crude Oil,
• Polymers : Linear Low Density Polyethylene, Polypropylene
Bullion : Gold, Gold Guinea, Gold HNI, Gold M, i-gold, Silver, Silver
Oil & Oil Seeds : Castor Oil, Castor Seeds, Coconut Cake, Coconut Oil, Cotton Seed, Crude
Palm Oil, Groundnut Oil, Kapasia Khalli, Mustard Oil, Mustard Seed (Jaipur), Mustard Seed
(Sirsa), RBD Palmolein, Refined Soy Oil, Refined Sunflower Oil, Rice Bran DOC,
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Rice Bran Refined Oil, Sesame Seed, Soymeal, Soy Bean, Soy Seeds
Spices : Cardamom, Coriander, Jeera, Pepper, Red Chilli, Turmeric
Metal : Aluminium, Copper, Lead, Nickel, Sponge Iron, Steel Long (Bhavnagar), Steel Long
(Govindgarh), Steel Flat, Tin, Zinc
Fiber : Cotton L Staple, Cotton M Staple, Cotton S Staple, Cotton Yarn, Kapas, Raw Jute
Pulses : Chana, Masur, Yellow Peas
Cereals : Maize
Energy : ATF, Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E. Sour Crude Oil
Plantations : Arecanut Jahaji, Cashew Kernel, Coffee (Robusta), Red Arecanut Raashi, Rubber
Petrochemicals : HDPE, Polypropylene(PP), PVC
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Equity and Derivatives
Ashlar is the member of NSE and BSE in Capital Market & Derivative Segment providing their
clients first class service. Our success in this business is driven by our keen understanding of the
business and ability to provide clients with solutions appropriate to fit their needs. We Ashlar are
the most competitive company in the field of Stock Equities and Derivatives.
Company is a full service brokers that is committed in providing outstanding service while
offering, the investor an array of investment products to meet their needs. Our advisors team
comprises of expert, skilful, determined, energetic and passionate people who have extensive
experience in the field of Capital Market. Our stockbrokers provide the clients the advice and
support they need to manage their investments.
Ashlar help the future investors to trade a broad market by making one trading decision rather
than making many decisions involved with investing in numerous individual stocks . The
overwhelming response of our clients has encouraged us to set new benchmarks in the industry
by providing better quality services.
Ashlar have an on-going relationship with institutional and other clients which includes
identifying clients investment requirements, identifying suitable relevant investment
opportunities, keeping clients informed of company and market developments, maintaining a
constant flow of information to our clients; and transacting buy and sell orders effectively and
professionally.
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Mutual Funds and I.P.O.
Mutual Funds and IPO‘s can be an excellent option if you‘re looking for a diversified investment
portfolio which offers liquidity and transparency. Mutual Funds & IPO‘S are one of the most
suitable investments for the common man as they offers an opportunity to invest in a diversified,
professionally managed basket of securities at a relatively low cost. Recent trends in mutual fund
flows suggest that the Indian investor is regaining his appetite for equities. Use Mutual Funds &
IPO‘S to plan your financial future.
Currently the investor have been risk-averse and therefore park most of their saving in Fixed
Deposits and other saving Accounts, though the yield from such investment avenues is very low.
However, the recent trend has been such that more people have been attracted towards
investment in the Mutual Funds & IPO‘s. Ashlar provides complete transaction support to our
associates and their clients for investments in primary markets through Mutual funds & IPO‘s.
Ashlar offers personalized services for investments (including mutual funds of all types: Equity
funds, Growth and Value Funds, Large- Cap and Small-Cap Funds, Bond Fund , Foreign Stocks
Funds, Money Market Funds, Sector Funds,& Asset Allocation Funds) & IPO‘s.
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Policies and procedures
Anti money laundering policy
The Government of India has serious concerns over money laundering activities which are not
only illegal but anti-national as well. As a market participant it is evident that strict and vigilant
tracking of all transactions of suspicious nature required.
Accordingly the Company has laid down following policy guidelines:
Principal Officer:
Mr. Bharat Bansal is appointed as the Principal Officer. He will be responsible for
implementation of internal controls & procedures for identifying and reporting any suspicious
transaction or activity to the concerned authorities.
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Purpose & Scope:
As a Financial Market Intermediary (which includes a stock-broker, sub-broker) we need to
maintain a record of all the transactions; the nature and value of which has been prescribed in the
Rules under the PMLA. Accordingly all the back office and trading staff is instructed is
instructed to observe the following safeguards:
1. No Cash transactions for trading in securities shall be allowed from any client in the
normal course of business.
2. Maintain a record of all the transactions; the nature and value of which has been
prescribed in the Rules notified under the PMLA. Such transactions include:
1. Cash transactions of the value of more than Rs 10 lakhs or its equivalent in
foreign currency.
2. All series of cash transactions integrally connected to each other which have been
valued below Rs 10 lakhs or its equivalent in foreign currency where such series
of transactions take place within one calendar month.
3. All suspicious transactions whether or not made in cash.
3. Frequent off Market transfers from one BO account to another shall be scrutinized and
asked for. In absence of valid reason case or found suspicious, it shall be brought to the
notice of Principal Officer.
4. Trading beyond ones declared income: The turnover of the clients should be according to
their declared means of income. Any abnormal increase in client‘s turnover shall be
reported to Principal Officer. The Back Office staff should take due care in updating the
clients‘ financial details and shall periodically review the same.
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Policies & Procedures:
Client identification procedure:
The ‗Know your Client‘ (KYC) Policy : -
A) While establishing the intermediary
client relationship No account shall be opened unless all the KYC Norms as prescribed from
time to time by the SEBI / Exchanges are duly complied with, all the information as required to
be filled in the KYC form (including financial information, occupation details and employment
details) is actually filled in and the documentary evidence in support of the same is made
available by the client. Moreover all the supporting documents should be verified with originals
and client should sign the KYC & MCA in presence of our own staff and the client should be
introduced by an existing clients or the known reference.
The information provided by the client should be checked though independent source
namely
Pan No must be verified from Income Tax We Site
Address must be verified by sending Welcome Letter / Qtly Statement of Account, and in
case any document returned undelivered the client should be asked to provide his new
address proof before doing any further transaction.
Company must exercise additional due diligence in case of the Clients of Special Category which
include but not limited to :
Nonresident clients
High net worth clients ( i.e. the clients having net worth exceeding 20 Lakhs and doing
the intraday trading volume of more than 2 Crore and daily delivery volume more than
Rs 20 Lakhs)
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Trust, Charities, NGOs and organizations receiving donations
Companies having close family shareholdings or beneficial ownership
Politically exposed persons (PEP) of foreign origin
Current / Former Head of State, Current or Former Senior High profile politicians and
connected persons (immediate family, Close advisors and companies in which such
individuals have interest or significant influence)
Companies offering foreign exchange offerings
Clients in high risk countries (where existence / effectiveness of money laundering
controls is suspect, where there is unusual banking secrecy, Countries active in narcotics
production, Countries where corruption (as per Transparency International Corruption
Perception Index) is highly prevalent, Countries against which government sanctions are
applied, Countries reputed to be any of the following – Havens / sponsors of international
terrorism, offshore financial centres, tax havens, countries where fraud is highly
prevalent.
Non face to face clients
Clients with dubious reputation as per public information available etc.
Such Other persons who as per our independent judgment may be classified as CSC.
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In case we have reasons to believe that any of our existing / potential customer is a politically
exposed person (PEP) we must exercise due diligence, to ascertain whether the customer is a
politically exposed person (PEP), which would include seeking additional information from
clients and accessing publicly available information etc.
The dealing staff must obtain senior management`s prior approval for establishing
business relationships with Politically Exposed Persons. In case an existing customer is
subsequently found to be, or subsequently becomes a PEP, dealing staff must obtain
senior management`s approval to continue the business relationship.
We must take reasonable measures to verify source of funds of clients identified as PEP. -
The client should be identified by using reliable sources including documents /
information and we should obtain adequate information to satisfactorily establish the
identity of each new client and the purpose of the intended nature of the relationship.
The client should be identified by using reliable sources including documents /
information and we should obtain adequate information to satisfactorily establish the
identity of each new client and the purpose of the intended nature of the relationship.
The information should be adequate enough to satisfy competent authorities (regulatory /
enforcement authorities) in future that due diligence was observed by the intermediary in
compliance with the Guidelines. Each original document should be seen prior to
acceptance of a copy.
Failure by prospective client to provide satisfactory evidence of identity should be noted
and reported to the higher authority.
While accepting a client the underlying objective should be to follow the requirements
enshrined in the PML Act, 2002 SEBI Act, 1992 and Regulations, directives and circulars
issued there under so that we are aware of the clients on whose behalf we are dealing.
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B) While carrying out transactions for the client
RMS department should monitor the trading activity of the client and exercise due
diligence to ensure that the trading activity of the client is not disproportionate to the
financial status and the track record of the client.
Payments department should ensure that payment received form the client is being
received in time and through the bank account the details of which are given by the client
in KYC form and the payment through cash / bearer demand drafts should not be
entertained.
C) Policy for acceptance of clients:
The following safeguards are to be followed while accepting the clients:
o No account is opened in a fictitious / benami name or on an anonymous basis. To
ensure this we must insist the client to fill up all the necessary details in the KYC
form in our presence and obtain all the necessary documentary evidence in
support of the information filled in KYC. We must verify all the documents
submitted in support of information filled in the KYC form with the originals and
in-person verification should be done by our own staff. Moreover new client
should either be introduced by an existing customer or by the senior official of the
company.
o In case we have any doubt that in-complete / fictitious information is submitted
by the client, we must ask for such additional information so as to satisfy
ourselves about the genuineness of the client and the information of the client
before accepting his registration.
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Investors Education
Implementation of AML/CFT measures requires back office and trading staff to demand certain
information from investors which may be of personal nature or which have hitherto never been
called for. Such information can include documents evidencing source of funds/income tax
returns/bank records etc. This can sometimes lead to raising of questions by the customer with
regard to the motive and purpose of collecting such information. There is, therefore, a need for
the back office and trading staff to sensitize their customers about these requirements as the ones
emanating from AML and CFT framework. The back office and trading staff should prepare
specific literature/ pamphlets etc. so as to educate the customer of the objectives of the
AML/CFT programme.
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TRADING LIMITS :
INTRA DAY TRADING LIMITS LIMIT
MULTIPLIER CM
LIMIT
MULTIPLIER F&O
On Total Available Margin 2 Times 2 Times
CARRY FORWARD TRADING
LIMITS
In case daily MTM till 03.00 p.m. is
less than 25 % of Total Available
Margin
2 Times 1 Times
In case daily MTM during the day is
more than 25 % of but less than 75 %
of Total Available Margin till 03.00
p.m.
2 Times of
Deposit less
MTM Loss
1 Times of Deposit
Less MTM Loss
In case daily MTM during the day is
more than 75 % of Total Available
Margin till 03.00 p.m.
1 Times of Balance
Amount
1 Times of Balance
Amount
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3. MARGIN CALLS :
First Margin call will be given as soon as the MTM Loss reaches 50 % of the Total Available
Margin and client will be asked to submit fresh margin or reduce the positions and the client
will be in square off mode until he provides fresh margin or his MTM comes below 40% of Free
Balance.
Second Margin call will be given when MTM Loss exceeds 65% of Available Clear Balance
and if client does not bring in fresh margin or reduces his exposure himself before MTM reaches
80% of clear balance his positions will be squared off without further notice.
For this purpose calls to be made on registered Mobile No / emails sent to registered email
addresses/ fax sent of registered fax no shall be treated as valid delivery of margin calls.
In case of Square off of the positions best efforts to be made to leave open positions to the extent
that could ordinarily be carried forward as per Exchange norms on the available free balance
after setting aside the MTM Loss for the day till 3.00 p.m..
While closing out, the positions with highest margin/highest MTM Loss will be closed off first.
Policy and Procedure as per SEBI circular
1. Refusal of orders for penny / illiquid stock
The stock broker may from time to time limit (quantity/value) refuse orders in one or more
securities due to various reasons including market liquidity, value of security (ies), the order
being for securities which are not in the permitted list of the stock Broker/exchange(s)/SEBI.
Provided further that stock broker may require compulsory settlement/advance payment of
expected settlement value/delivery of securities for settlement prior to acceptance/ placement of
order(s) as well. The client agrees that the losses, if any on account of such refusal or due to
delay caused by such limits, shall be borne exclusively by the client alone. The stock broker may
require reconfirmation of orders, which are larger than that specified by the stock broker‘s risk
management, and is also aware that the stock broker has the discretion to reject the execution of
such orders based on its risk perception.
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2. Applicable brokerage rate
The stock broker is entitled to charge brokerage within limits imposed by exchange which at
present is as under:
a. For Cash Market Segment: The maximum brokerage chargeable in relation to trades effected
in the securities admitted to dealings on the Capital Market segment of the exchange shall be
2.5% of the contract price exclusive of statutory levies. It is hereby further clarified that where
the sale/purchase value of a share is Rs. 10/- or less a maximum brokerage of 25 paise per share
may be collected.
b. For Option contracts: Brokerage for option contracts shall be charged on the premium amount
at which the option contract was bought or sold and not on the strike price of the option contract.
It is hereby clarified that brokerage charged on options contracts shall not exceed 2.5% of the
premium amount or Rs. 100/ - (per lot) whichever is higher.
3. Imposition of penalty / delayed payment charges
The client agrees that any amounts which are overdue from the client towards trading or on
account of any other reason to stock broker will be charged with delayed payment charges at
such rates as may be determined by the stock broker .The client agrees that the stock broker may
impose fines/penalties for any orders/trades/deals/actions of the client which are contrary to this
agreement/rules/regulations/bye laws of the exchange or any other law for the time being in
force, at such rates and in such form as it may deem fit.
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Further where the stock broker has to pay any fine or bear any punishment from any authority in
connection with/as a consequence of/in relation to any of the orders/trades/deals/actions of the
client, the same shall be borne by the client. The client agrees to pay to the stock broker
brokerage, commission, fees, all taxes, duties, levies imposed by any authority including but not
limited to the stock exchanges (including any amount due on account of reassessment/backlogs
etc.), transaction expenses, incidental expenses such as postage, courier etc. as they apply from
time to time to the client‘s account/transactions/services that the client avails from the stock
broker.
De-registering a client
Notwithstanding anything to the contrary stated in the agreement, the stock broker shall
be entitled to terminate the agreement with immediate effect in any of the following
circumstances:
If the action of the Client are prima facie illegal/improper or such as to manipulate the
price of any securities or disturb the normal/proper functioning of the market, either alone
or in conjuction with others.
If there is any commencement of a legal process against the Client under any law in
force;
On the death/lunacy or other disability of the Client;
If a receiver, administrator or liquidator has been appointed or allowed to be appointed of
all or any part of the undertaking of the Client;
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If the Client has voluntarily or compulsorily become the subject of proceedings under any
bankruptcy or insolvency law or being a company, goes into liquidation or has a receiver
appointed in respect of its assets or refers itself to the Board for Industrial and Financial
Reconstruction or under any other law providing protection as a relief undertaking;
If the Client being a partnership firm, has any steps taken by the Client and/or its partners
for dissolution of the partnership;
If the Client have taken or suffered to be taken any action for its reorganization,
liquidation or dissolution;
If the Client has made any material misrepresentation of facts, including (without
limitation) in relation to the security;
If there is reasonable apprehension that the Client is unable to pay its debts or the Client
has admitted its inability to pay its debts, as they become payable;
If the Client suffers any adverse material change in his/her/its/financial position or
defaults in any other agreement with the Stock broker;
If the Client is in breach of any term, condition or covenant of this Agreement;
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Investor Protection NSE
Investors' Services
Investor Rights and Obligations
Investor Rights Investor Obligations
The right to get
The best price
Proof of price/brokerage charged
Your money/shares on time
Shares through auction where delivery
is not received
Square up amount where delivery not
received in auction
Statement of Accounts from trading
member
The obligation to
Sign a proper Member-Constituent
Agreement
Possess a valid contract or
purchase/sale note
Deliver securities with valid documents
and proper signatures
The right for redressal against
Fraudulent price
Unfair brokerage
Delays in receipt of money or shares
Investor unfriendly companies
The obligation to ensure
To make payment on time
To Deliver shares on time
To send securities for transfer to the
company on time
Forwarding all the papers received
from the company under objections to
the broker on time
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`FEES AND BROKERAGE
The Client agrees to pay to Ashlar brokerage, commission, fees, service tax and other taxes and
transaction expenses as they exist from time to time and as they apply to the Client‘s account and
transactions, and the services that he receives from Ashlar.
A schedule of brokerage, fees and commissions, applicable service and other taxes and other
transaction expenses shall be provided by Ashlar to the Client from time to time upon request by
the Client.
USER FEES / OTHER CHARGES: The client agrees that Ashlar may charge user fees for the
use of any other service including but not restricted to the Online Trading service and dial up
services, at a rate mentioned on the web-site or otherwise intimated and as may be modified from
time to time. Ashlar may charge any other relevant charge in the manner intimated on the web-
site or in any other manner from time to time including but not limited to Trade Commissions,
Service Tax, Turnover Charges, Tax Expenses incurred, Stamp Duty, etc.
The client also agrees and authorizes Ashlar, upon receipt of intimation from the designated
depository participant, to debit the trading account of the client towards depository charges
payable by the client to the designated depository participant and make onward payment to the
designated Depository Participant.
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Privacy Policy
This privacy statement is applicable to www.ASHLARINDIA.com. It does not collect personal
information about individuals except when such individuals specifically provide such
information on a voluntary basis. For example, such personal information may be gathered for
registration, the registration process for subscription sites or services and in connection with
content submissions, community postings (e.g., message boards), suggestions, and voting/polling
activities. Personal information on individual users will not be sold or otherwise transferred to
unaffiliated third parties without the approval of the user at the time of collection. At such points
of collection, the user will have the opportunity to indicate whether he or she would like to "opt
out" of receiving promotional and/or marketing information about other products, services and
offerings from www.ASHLARINDIA. comand/or any third parties.
www.ASHLARINDIA.com reserves the right to perform statistical analyses of user behavior and
characteristics in order to measure interest in and use of the various areas of the site and to
inform advertisers of such information as well as the number of users that have been exposed to
or clicked on their advertising banners. www.ASHLARINDIA.com will provide only aggregated
data from these analyses to third parties. Also, users should be aware that
www.ASHLARINDIA.com may sometimes permit third parties to offer subscription and/or
registration-based services through its site.
www.ASHLARINDIA.com is not responsible for any actions or policies of such third parties
and users should check the applicable privacy policy of such party when providing personally
identifiableinformation.
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Users are also being aware that non-personal information and data may be automatically
collected through the standard operation of www.ASHLARINDIA.com's internet servers or
through the use of "cookies." "Cookies" are small text files a web site can use to recognize repeat
users, facilitate the user's ongoing access to and use of the site and allow a site to track usage
behavior and compile aggregate data that will allow content improvements and targeted
advertising. Cookies are not programs that come onto a user's system and damage files.
Generally, cookies work by assigning a unique number to the user that has no meaning outside
the assigning site. Users are also being made aware that www.ASHLARINDIA.com cannot
control the use of cookies or the resulting information by advertisers or third parties hosting data
for www.ASHLARINDIA.com. If a user does not want information collected through the use of
cookies, there is a simple procedure in most browsers that allows the user to deny or accept the
cookie feature; however, users should note that cookies may be necessary to provide the user
with certain features (e.g., customized delivery of information) available from
www.ASHLARINDIA.com.
www.ASHLARINDIA.com reserves the right to change this policy at any time by notifying
users of the existence of a new privacy statement. This statement and the policies outlined herein
are not intended to and do not create any contractual or other legal rights in or on behalf of any
party.
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INDIAN CAPITAL MARKET
(INTRODUCTION AND GROWTH)
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Indian Capital market
INTRODUCTION
Capital markets in India have been a reflection of the country‘s economic growth and
development over the last two decades. Bombay Stock Exchange‘s sensitivity index, the Sensex,
has become the barometer of the Indian market. Several reports have been published by leading
international agencies on the potential scope of the Indian capital markets. India‘s growth story
has important implications for the capital market, which has grown sharply with respect to
several parameters — amounts raised number of stock exchanges and other intermediaries, listed
stocks, market capitalization, trading volumes and turnover, market instruments, investor
population, issuer and intermediary profiles.
The capital market consists primarily of the debt and equity markets. Historically, it contributed
significantly to mobilizing funds to meet public and private companies‘ financing requirements.
The introduction of exchange-traded derivative instruments such as options and futures has
enabled investors to better hedge their positions and reduce risks.
32
SIGNIFICANCE OF CAPITAL MARKET
The capital market and the need for the economy to grow at the projected over 8 per cent per
annum, the managers of the Indian economy have been assiduously promoting the capital market
as an engine of growth to provide an alternative yet efficient means of resource mobilization and
allocation. The capital market acts as a brake on channeling savings to low- yielding enterprises
and impels enterprises to focus on performance. It continuously monitors performance through
movements of share prices in the market and the threats of takeover. This improves efficiency of
resource utilaisation and thereby significantly increases returns on investment. As a result, savers
and investors are not constrained by their individual abilities, but facilitated by the economy‘s
capability to invest and save, which inevitably enhances savings and investment in the economy.
Thus, the capital market converts a given stock of investible resources into a larger flow of goods
and services and augments economic growth.
33
HISTORY OF INDIAN CAPITAL MARKETS
The history of the Indian capital markets and the stock market, in particular can be traced back to
1861 when the American Civil War began. The opening of the Suez Canal during the 1860s led
to a tremendous increase in exports to the United Kingdom and United States. Several companies
were formed during this period and many banks came to the fore to handle the finances relating
to these trades. With many of these registered under the British Companies Act, the Stock
Exchange, Mumbai, came into existence in 1875. It was an unincorporated body of stockbrokers,
which started doing business in the city under a banyan tree. Sir Phiroze Jeejeebhoy was another
who dominated the stock market scene from 1946 to 1980. His word was law and he had a great
deal of influence over both brokers and the government. The BSE building, icon of the Indian
capital markets, is called P.J. Tower in his memory.
The planning process started in India in 1951, with importance being given to the formation of
institutions and markets The Securities Contract Regulation Act 1956 became the parent
regulation after the Indian Contract Act 1872, a basic law to be followed by security markets in
India. To regulate the issue of share prices, the Controller of Capital Issues Act (CCI) was passed
in 1947. The imposition of wealth and expenditure tax in 1957 by Mr. T.T. Krishnamachari, the
then finance minister, led to a huge fall in the markets. The dividend freeze and tax on bonus
issues in 1958-59 also had a negative impact. War with China in 1962 was another memorably
bad year, with the resultant shortages increasing prices all round. This led to a ban on forward
trading in commodity markets in 1966, which was again a very bad period, together with the
introduction of the Gold Control Act in 1963.
The markets have witnessed several golden times too. Retail investors began participating in the
stock markets in a small way with the dilution of the FERA in 1978. The next big boom and
mass participation by retail investors happened in 1980, with the entry of Mr. Dhirubhai Ambani.
Dhirubhai can be said to be the father of modern capital markets. Mr. V.P. Singh‘s fiscal budget
34
in 1984 was path breaking for it started the era of liberalization. The removal of estate duty and
reduction of taxes led to a swell in the new issue market and there was a deluge of companies in
1985. Mr. Manmohan Singh as Finance Minister came with a reform agenda in 1991 and this led
to a resurgence of interest in the capital markets, only to be punctured by the Harshad Mehta
scam in 1992. The mid-1990s saw a rise in leasing company shares, and hundreds of companies,
mainly listed in Gujarat, and got listed in the BSE. There was a meltdown in software stock in
early 2000. Mr. P Chidambaram continued the liberalization and reform process, opening up of
the companies, lifting taxes on long-term gains and introducing short-term turnover tax. The
markets have recovered since then and we have witnessed a sustained rally that has taken the
index over 13000.
Several systemic changes have taken place during the short history of modern capital markets.
The setting up of the Securities and Exchange Board (SEBI) in 1992 was a landmark
development. It got its act together, obtained the requisite powers and became effective in early
2000. This history shows us that retail investors are yet to play a substantial role in the market as
long-term investors. Retail participation in India is very limited considering the overall savings
of households. Investors who hold shares in limited companies and mutual fund units are about
20-30 million. Those who participated in secondary markets are 2-3 million.
Capital markets will change completely if they grow beyond the cities and stock exchange
centers reach the Indian villages. Both SEBI and retail participants should be active in spreading
market wisdom and empowering investors in planning their finances and understanding the
markets.
35
PERFORMANCE OF INDIAN CAPITAL MARKET
The growth in Indian capital markets started in 1991 and has been driven by a number of
regulatory reforms, liberalization, capital control norms and the continuous monitoring by the
regulatory agencies. Market capitalization of companies has increased more than six-fold and
trading value has more than tripled. By 2007, India had catapulted to the sixth position in the
global list of countries in terms of funds raised through Initial Public Offering (IPO). A USAID
report on capital markets in 2007 stated that India was able to achieve this position because of a
developed regulatory environment, modern market infrastructure, steadily increasing market
capitalization and liquidity, the better allocation and mobilization of resources, a rapidly
developing derivatives market, a robust mutual fund industry, and increased issuer transparency.
The country‘s strong economic growth is changing some of India‘s long-term investment
themes. Infrastructure and property development are booming, huge gas and oil finds are making
an impact on the rupee and there has been a significant growth in both the value and volume of
new listings. Just two years ago, the total amount of private equity flows, including venture
capital, was US.2 billion. In 2006 this grew to US.5 billion across 299 deals.
Between 2003 and 2008, nearly 285 companies raised capital, of which nearly 85 companies
raised capital in 2007-08 alone. 2007 was by far the best year for capital markets with the Sensex
breaching the 20,000-point barrier and IPOs accounting for more than Rs. 45,000 crore ( billion)
of capital raised. However, 2008-09 reversed this trend and proved to be a difficult year
throughout the globe. The Sensex shed more than 50%, falling as low as 7,900 points. India‘s
capital markets have clearly undergone a dramatic shift in the last 10 years.
The trends in the global and Indian capital markets have a direct link to the activity levels of
capital market lawyers. Indian law firms, Amarchand & Mangaldas & Suresh A Shroff & Co
(Amarchand), AZB & Partners (AZB), Luthra & Luthra (Luthra) aggressively expanded their
capital markets practices to cater to the upsurge in capital markets. The Indian legal market also
witnessed the birth of specialized capital markets firms. S&R Associates (S&R) was established
in 2005 after the majority of the team from Pathak & Associates (P&A) branched out to set up a
capital markets focused firm. In 2007, Shobhan Thakore, considered by many, including
36
Chambers, as the senior statesman of the Indian capital markets left AZB to set up Talwar
Thakore & Associates.
The Indian capital markets growth story was not restricted to the Indian law firms alone as
foreign law firms beefed up India practice groups by hiring Indian qualified lawyers as partners
and associates and increasingly focused on India related capital markets transactions. UK and US
based firms shuffled their talent across the globe and started their India practices either from
their home jurisdictions or from Singapore and Hong Kong. In 2008-09, however, the capital
markets teams across law firms struggled to keep themselves busy due to the effects of the sub-
prime crisis. The banking crisis and Lehman‘s bankruptcy added to global woes. India was not
far behind in supplying its share of bad news. The chairman of Satyam Computers admitted to
fraud, taking the company to the verge of bankruptcy before the Government intervened. During
this phase, foreign law firms found the time to further analyze their strategies for India. Some
foreign law firms remained undeterred by the falling markets and continued to recruit Indian
talent. For instance, Rahul Guptan, capital markets partner at Amarchand, joined Clifford Chance
and shifted base to Singapore to build the India capital markets practice.
In the recession year of April 2008 – March 2009, only 21 companies were able to raise Rs.
2,271 crore (0 million). However, fiscal year 2010 was a year where markets put the worst
behind them and posted a strong growth. As the confidence in the market grew so did the capital
raising activities. 108 companies filed the draft red herring prospectus (DRHP) with the
Securities Exchange Board of India (SEBI). SEBI‘s Capital Market report of March 2010 states
that of the 108 companies that approached SEBI, 38 companies have successfully raised capital
with 34 companies going public and 4 companies undertaking follow-on public offers (FPO) to
raise approximately Rs. 37,125 crore ($ 8.25 billion). The Qualified Institutional Placement
(QIP) market was also very active with 58 companies raising approximately Rs. 41,133 crore ($
9.14 billion). The first quarter of calendar year 2010 has already resulted in 20 successful IPOs,
with India witnessing the third largest number of IPOs after US and China, based on the findings
in a recent Ernst & Young report.
37
With such an active market, lawyers were kept busy and the capital markets teams were back in
action. Companies were keen to raise capital in some form or another and bankers were keen to
get the deal flow rolling. This desire for activity gave rise to the QIP as a preferred mode of
raising capital. Vandana Shroff, Partner, Amarchand, says ―India‘s growth story is well
documented. Being a capital deficient country, there will continue to be a need to raise large
pools of capital which can be fulfilled by approaching the capital markets in India and
internationally, provided that we do see some length of stability of the international capital
markets‖.
Bar & Bench analyses the legal side of the Indian capital markets practice and provides a set of
rankings of the Indian and foreign law firms which have advised the companies and the
underwriters in the capital raising process. The rankings are based on various factors such as
number and value of transactions. In this report, we also bring to you the insights of leading
individuals including partners at Indian and foreign law firms and in-house counsel who have
experience of working in the capital markets in India.
MARKET CAPITALISATION
Market capitalisation, which indicates size of the capital market, investor confidence and
discounted future earnings of the corporate sector, crossed trillion (BSE stocks, March 28, 2007).
Globally, the capital market is the 14th largest in terms of capitalisation. Market capitalisation
ratio is expected to rise from less than 30 per cent to over 60 per cent, as in most other emerging
markets.
There are diverse players in the Indian market — retail investors, mutual funds and FIIs,
including several sub-categories — pension funds, hedge funds and investment companies.
Protecting the interests of investors is difficult because those of the retail Indian investors,
mutual funds and foreign investors in the market might not always converge.
38
STREAMLINING THE CAPITAL MARKET
The capital market has played a catalytic role in the 9 per cent growth rate the country has
achieved. Unlike other markets preoccupied with increasing the number of listed companies,
India needs to drastically prune the number of listed companies to ensure that only companies
with traded stocks, reasonable volumes and better price discovery remain, while providing other
platforms for smaller companies. Foreign listings on the NSE and the BSE must also be allowed.
SEBI‘s efforts at creating heightened awareness of full disclosure and transparency have
succeeded only partially. This necessitates shifting to National Listing Authority, empowering
investors on the lines of US class action, using information technology and public disclosure
aggressively to improve surveillance, adopting a more aggressive pro-competitive policy,
introducing effective and competitive securities lending system and broad-basing derivative
markets.
Fundamental institutional changes have drastically reduced transaction costs and significantly
improved efficiency, transparency and safety. Policies and procedures relating to fair, efficient
and transparent markets, investor education, and investor protection, reduction of systemic risk
and exposure norms, cumulative margins and rising corporatisation of brokers have also helped.
However, inadequate development of the debt market hampers accurate pricing of current and
future assets, and PFs/pensions are not allowed to invest in equities.
SEBI‘s bill clarified the role of the ‗Department of Company Affairs‘ and acquired the power to
debar directors and trace and attach assets of those companies. SEBI‘s guidelines (effective
March 2000) started Internet-broking on Indian securities to enhance transparency and reduce
infirmities in Indian capital market transactions. The creation of Investor Protection Fund
(October 2001) under Section 205C of the Companies Act ensures the recovery of investments if
and when companies default.
39
The functioning of the stock market in India continues to be fraught with the danger of frauds
and scandals triggered by rigging, cornering of shares and manipulation. Hence, the market must
be insulated from ―crises‖. Since such crises cause systemic damage, prevention and detection of
frauds must rely heavily on market discipline, swift prosecution and effective punishment. With
sustained growth, rising exports, increasing corporate earnings, rising investment rates and
moderate inflation, the capital market is poised for growth.
Growth requires wide distribution of ownership of equity, both by direct participation in capital
market, and indirectly, through financial institutions, such as mutual funds, pension funds and
insurance companies to enhance long-term savings and facilitate long-term financing. This
necessitates an efficient and transparent price discovery process with high disclosure and
regulatory standards with sound liquidity and risk management. Establishment of a single
clearing corporation for money, debt and foreign exchange and provision of demutualization will
widen and deepen capital markets.
A robust insurance sector with higher capital base and more diverse products would generate
long-term funds for investment in debt market and release resources for investment, particularly
for infrastructure.
Globally, markets are governed by competition, convergence and coordination. But
fragmentation exists in India. The convergence with international best practices regarding
clearing and settlement, payment systems and funds transfer, governance, disclosure and
transparency require removal of insider trading, information asymmetry, and inadequate and
delayed information.
40
CONCLUSION
In the ultimate analysis, a vibrant, well-developed capital market is a function of economic
growth and a reflection of the financial system. Growth and sustainability of the market require
careful management of volatility risk and risk of contagion to check sudden withdrawal of highly
speculative, short-term capital. There are also important issues of adroit management of liquidity
risk, clearance and settlement risk, currency risk and disclosure and legal infrastructure.
Leveraging India‘s capital market requires improved corporate governance, reduced market
concentration, availability of the market capitalisation for trading and enhanced role of mutual
funds. Protection of retail investors, a modernised capital market with transparent operations, a
developed corporate debt market, regulatory support and development of Mumbai as an
international financial hub would help deepen the stock market and make them efficient and
stable.
41
FINANCIAL
INSTRUMENTS
42
FINANCIAL INSTRUMENTS
Accounting Standard (AS) 31, Financial Instruments: issued by the Council of the Institute of
Chartered Accountants of India, comes into effect in respect of accounting periods commencing
on or after 1-4-2009 and will be recommendatory in nature for an initial period of two years.
This Accounting Standard will become mandatory2 in respect of accounting periods
commencing on or after 1-4-2011 for all commercial, industrial and business entities except to a
Small and Medium-sized Entity, as defined below:
(i) Whose equity or debt securities are not listed or are not in the process of listing on any stock
exchange, whether in India or outside India;
(ii) Which is not a bank (including co-operative bank), financial institution or any entity carrying
on insurance business;
(iii) Whose turnover (excluding other income) does not exceed rupees fifty crore in the
immediately preceding accounting year;
(iv) Which does not have borrowings (including public deposits) in excess of rupees ten crore at
any time during the immediately preceding accounting year; and
(v) Which is not a holding or subsidiary entity of an entity which is not a small and medium-
sized entity.
For the above purpose, an entity would qualify as a Small and Medium-sized Entity, if the
conditions mentioned therein are satisfied as at the end of the relevant accounting period.
43
1 Attention is specifically drawn to paragraph accounting standards are intended to apply only to
items which are material.
2 This implies that, while discharging their attest function, it will be the duty of the members of
the Institute to examine whether this Accounting Standard is complied with in the presentation of
financial statements covered by their audit. In the event of any deviation from this Accounting
Standard, it will be their duty to make adequate disclosures in their audit reports so that the users
of financial statements may be aware of such deviations.
Where, in respect of an entity there is a statutory requirement for presenting any financial
instrument in a particular manner as liability or equity and/ or for presenting interest, dividend,
losses and gains relating to a financial instrument in a particular manner as income/ expense or
as distribution of profits, the entity should present that instrument and/ or interest, dividend,
losses and gains relating to the instrument in accordance with the requirements of the statute
governing the entity. Untill the relevant statute is amended, the entity presenting that instrument
and/ or interest, dividend, losses and gains relating to the instrument in accordance with the
requirements thereof will be considered to be complying with this Accounting Standard, in view
of paragraph 4.1 of the Preface to the Statements of Accounting Standards which recognises that
where a requirement of an Accounting Standard is different from the applicable law, the law
prevails3.
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The following is the text of the Accounting Standard.
Objective
1. The objective of this Standard is to establish principles for presenting financial instruments as
liabilities or equity and for offsetting financial assets and financial liabilities. It applies to the
classification of financial instruments, from the perspective of the issuer, into financial assets,
financial liabilities and equity instruments; the classification of related interest, dividends, losses
and gains; and the circumstances in which financial assets and financial liabilities should be
offset.
2. The principles in this Standard complement the principles for recognizing and measuring
financial assets and financial liabilities in Accounting Standard (AS) 30, Financial Instruments:
Recognition and Measurement and for disclosing information about them in Accounting
Standard (AS) 32,
3 To illustrate, as per paragraph 35(a) of the Standard, a preference share that provides for
mandatory redemption by the issuer for a fixed or determinable amount at a fixed or
determinable future date, or gives the holder the right to require the issuer to redeem the
instrument at or after a particular date for a fixed or determinable amount, is a financial liability.
However, at present, Schedule VI to the Companies Act, 1956, inter alia, requires that all
preference shares should be disclosed as a part of the ‗Share Capital‘. Untill Schedule VI is
amended, a company classifying the preference shares as share capital will be considered to be
complying with this Accounting Standard even in a case where as per this Standard the
preference shares are to be shown as a liability. In the latter case, as a corollary to this, dividend
on such preference shares treated as a distribution to holders thereof and not as an expense will
also be considered as a compliance with this Accounting Standard. Similarly, in case of a co-
operative entity those requirements of paragraphs 40 to 47 and Appendix B to the Standard
would not apply which are contrary to the law governing such an entity.
45
4A separate Accounting Standard (AS) 32 on Financial Instruments: Disclosures is being
formulated.
Scope
3. This Standard should be applied by all entities to all types of financial instruments
Except:
(a) those interests in subsidiaries, associates and joint ventures that are accounted for in
accordance with AS 21, Consolidated Financial Statements and Accounting for
Investments in Subsidiaries in Separate Financial Statements, AS 23, Accounting for
Investments in Associates, or AS 27, Financial Reporting of Interests in Joint
Ventures. However, in some cases, AS 21, AS 23 or AS 27 permits or requires an
entity to account for an interest in a subsidiary, associate or joint venture using
Accounting Standard (AS) 30,
(b) Financial Instruments: Recognition and Measurement5; in those cases, entities should apply
the disclosure requirements in AS 21, AS 23 or AS 27 in addition to those in this Standard.
Entities should also apply this Standard to all derivatives linked to interests in subsidiaries,
associates or joint ventures.
(c) Employers‘ rights and obligations under employee benefit plans to which AS 15, Employee
Benefits, applies.
(d) Contracts for contingent consideration in a business combination6. This exemption applies
only to the acquirer.
(e) Insurance contracts as defined in the Accounting Standard on Insurance Contracts7.
However, this Standard applies to derivatives that are embedded in insurance contracts if
Accounting Standard (AS) 30,
46
Financial Instruments:
Recognition and Measurement requires the entity to account for them
Separately. Moreover, an issuer should apply this Standard to financial
guarantee contracts if the issuer applies AS 30 in recognising and measuring the contracts, but
should apply the Accounting Standard on Insurance Contracts if the issuer elects, in accordance
with the Accounting Standard on Insurance Contracts, to apply that Standard in recognizing and
measuring them.
5 It may be noted that AS 21, AS 23 and AS 27, at present, make reference to Accounting
Standard (AS) 13, Accounting for Investments, with regard to the accounting for an investment
in a subsidiary, associate and joint venture, respectively. On Accounting Standard (AS) 30,
Financial Instruments: Recognition and Measurement, becoming mandatory, AS 13 would stand
withdrawn except to the extent it relates to accounting for investment properties. In other words,
accounting for investments in a subsidiary, associate and joint venture would no longer
be covered by AS 13. Keeping this in view, with the issuance of the proposed AS 30, Limited
Revisions have been made to AS 21, AS 23 and AS 27 to replace the references to AS 13 with
those to AS 30. Pursuant to these Limited Revisions, the titles of AS 21 and AS 23 are also
modified.
6 ‗Business combination‘ is the bringing together of separate entities or businesses into one
reporting entity.
At present, Accounting Standard (AS) 14, Accounting for Amalgamations, deals with accounting
for contingent consideration in an amalgamation, which is a form of business combination.
47
7. A separate Accounting Standard on Insurance Contracts will specify the requirements relating
to insurance contracts.
(e) financial instruments that are within the scope of the Accounting Standard on Insurance
Contracts8 because they contain a discretionary participation feature. The issuer of these
instruments is exempt from applying to these features paragraphs 32-67 of this Standard
regarding the distinction between financial liabilities and equity instruments. However, these
instruments are subject to all other requirements of this Standard. Furthermore, this Standard
applies to derivatives that are embedded in these instruments (see Accounting Standard (AS) 30,
Financial Instruments: Recognition and Measurement).
(f) financial instruments, contracts and obligations under share-based payment transactions9
except for
(i) contracts within the scope of paragraphs 4-6 of this Standard, to which this Standard applies.
(ii) paragraphs 68, 69 and 70 of this Standard, which should be applied to treasury shares,
purchased, sold, issued or cancelled in connection with employee share option plans, employees
share purchase plans, and all other share-based payment arrangements.
4. This Standard should be applied to those contracts to buy or sell a non-financial item that can
be settled net in cash or another financial instrument, or by exchanging financial instruments, as
if the contracts were financial instruments, with the exception of contracts that were entered into
and continue to be held for the purpose of the receipt or delivery of a nonfinancial item in
accordance with the entity‘s expected purchase, sale or usage requirements.
48
5. There are various ways in which a contract to buy or sell a non-financial item can be settled
net in cash or another financial instrument or by exchanging financial instruments. These
include:
(a) when the terms of the contract permit either party to settle it net in cash or another financial
instrument or by exchanging financial instruments;
(b) when the ability to settle net in cash or another financial instrument, or by exchanging
financial instruments, is not explicit in the terms of the contract, but the entity has a practice of
settling similar contracts net in cash or another financial instrument, or by exchanging financial
instruments (whether with the counterparty, by entering into offsetting contracts or by selling the
contract before its exercise or lapse);
(c) When, for similar contracts, the entity has a practice of taking delivery of the underlying and
selling it within a short period after delivery for the purpose of generating a profit from short-
term fluctuations in price or dealer‘s margin.
9 Employee share based payment, which is one of the share-based payment transactions, is
accounted for as per the Guidance Note on Employee Share-based Payment, issued by the ICAI.
Further, some other pronouncements of the ICAI deal with other share-based payments, e.g., AS
10, Accounting for Fixed Assets.
(c) When the non-financial item that is the subject of the contract is readily convertible to
cash.
49
A contract to which (b) or (c) applies is not entered into for the purpose of the receipt or delivery
of the non-financial item in accordance with the entity‘s expected purchase, sale or usage
requirements, and, accordingly, is within the scope of this Standard. Other contracts to which
paragraph 4 applies are evaluated to determine whether they were entered into and continue to be
held for the purpose of the receipt or delivery of the nonfinancial item in accordance with the
entity‘s expected purchase, sale or usage requirement, and accordingly, whether they are within
the scope of this Standard.
6. A written option to buy or sell a non-financial item that can be settled net in cash or another
financial instrument or by exchanging financial instruments, in accordance with paragraph 5(a)
or (d) is within the scope of this Standard. Such a contract cannot be entered into for the purpose
of the receipt or delivery of the non-financial item in accordance with the entity‘s expected
purchase, sale or usage requirements.
50
Definitions
7. The following terms are used in this Standard with the meanings specified:
7.1 A financial instrument is any contract that gives rise to a financial asset of one entity and a
financial liability or equity instrument of another entity.
7.2 A financial asset is any asset that is:
(a) Cash;
(b) An equity instrument of another entity;
(c) A contractual right:
(i) To receive cash or another financial asset from another entity; or
(ii) To exchange financial assets or financial liabilities with another entity under conditions that
are potentially favorable to the entity; or
(d) A contract that will or may be settled in the entity‘s own equity instruments and is:
(i) a non-derivative for which the entity is or may be obliged to receive a variable number of the
entity‘s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash
or another financial asset for a fixed number of the entity‘s own equity instruments. For this
purpose the entity‘s own equity instruments do not include instruments that are themselves
contracts for the future receipt or delivery of the entity‘s own equity instruments.
7.3 A financial liability is any liability that is:
(a) a contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity
under conditions that are potentially unfavourable to the entity; or
51
(b) a contract that will or may be settled in the entity‘s own equity instruments and is
(i) a non-derivative for which the entity is or may be obliged to deliver a
variable number of the entity‘s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash
or another financial asset for a fixed number of the entity ‘s own equity instruments. For this
purpose the entity‘s own equity instruments do not include instruments that are themselves
contracts for the future receipt or delivery of the entity‘s own equity instruments.
7.4 An equity instrument is any contract that evidences a residual interest in the assets of an
entity after deducting all of its liabilities.
7.5 Fair value is the amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm‘s length transaction.
52
8. The following terms are defined are used in this Standard with the meaning specified in AS
30.
amortized cost of a financial asset or financial liability
-for-sale financial assets
rument
-to-maturity investments
9. In this Standard, ‗contract‘ and ‗contractual‘ refer to an agreement between two or more
parties that has clear economic consequences that the parties have little, if any, discretion to
avoid, usually because the agreement is enforceable by law. Contracts, and thus financial
instruments, may take a variety of forms and need not be in writing.
10. In this Standard, ‗entity‘ includes individuals, partnerships, incorporated bodies, trusts and
government agencies.
53
Financial Assets and Financial Liabilities
11. Currency (cash) is a financial asset because it represents the medium of exchange and is
therefore the basis on which all transactions are measured and recognized in financial statements.
A deposit of cash with a bank or similar financial institution is a financial asset because it
represents the contractual right of the depositor to obtain cash from the institution or to draw a
cheque or similar instrument against the balance in favor of a creditor in payment of a financial
liability.
12. Common examples of financial assets representing a contractual right to receive cash in the
future and corresponding financial liabilities representing a contractual obligation to deliver cash
in the future are:
(a) trade accounts receivable and payable;
(b) bills receivable and payable;
(c) loans receivable and payable;
(d) bonds receivable and payable; and
(e) deposits and advances.
In each case, one party‘s contractual right to receive (or obligation to pay) cash is matched by the
other party‘s corresponding obligation to pay (or right to receive).
54
13. Another type of financial instrument is one for which the economic benefit to be received or
given up is a financial asset other than cash. For example, a promissory note payable in
government bonds gives the holder the contractual right to receive and the issuer the contractual
obligation to deliver government bonds, not cash. The bonds are financial assets because they
represent obligations of the issuing government to pay cash. The promissory note is, therefore, a
financial asset of the promissory note holder and a financial liability of the promissory note
issuer.
14. ‗Perpetual‘ debt instruments normally provide the holder with the contractual right to receive
payments on account of interest at fixed dates extending into the indefinite future, either with no
right to receive a return of principal or a right to a return of principal under terms that make it
very unlikely or very far in the future.
For example, an entity may issue a financial instrument requiring it to make annual payments in
perpetuity equal to a stated interest rate of 8 per cent applied to a stated par or principal amount
of Rs. 1,000. Assuming 8 per cent to be the market rate of interest for the instrument when
issued, the issuer assumes a contractual obligation to make a stream of future interest payments
having a fair value (present value) of Rs. 1,000 on initial recognition. The holder and issuer of
the instrument have a financial asset and a financial liability, respectively.
15. A contractual right or contractual obligation to receive, deliver or exchange financial
instruments is itself a financial instrument. A chain of contractual rights or contractual
obligations meets the definition of a financial instrument if it will ultimately lead to the receipt or
payment of cash or to the acquisition or issue of an equity instrument.
16. The ability to exercise a contractual right or the requirement to satisfy a contractual
obligation may be absolute, or it may be contingent on the occurrence of a future event. For
example, a financial guarantee is a contractual right of the lender to receive cash from the
guarantor, and a corresponding contractual obligation of the guarantor to pay the lender, if the
borrower defaults.
55
The contractual right and obligation exist because of a past transaction or event (assumption of
the guarantee), even though the lender‘s ability to exercise its right and the requirement for the
guarantor to perform under its obligation are both contingent on a future act of default by the
borrower. A contingent right and obligation meet the definition of a financial asset and a
financial liability, even though such assets and liabilities are not always recognized in the
financial statements. Some of the contingents rights and obligations may be insurance contracts
within the scope of the Accounting Standard on Insurance Contracts10.
17. Under AS 19, Leases, a finance lease is regarded as primarily an entitlement of the lessor to
receive, and an obligation of the lessee to pay, a stream of payments that are substantially the
same as blended payments of principal and interest under a loan agreement. The lessor accounts
for its investment in the amount receivable under the lease contract rather than the leased asset
itself.
An operating lease, on the other hand, is regarded as primarily an uncompleted contract
committing the lessor to provide the use of an asset in future periods in exchange for
consideration similar to a fee for a service. The lessor continues to account for the leased asset
itself rather than any amount receivable in the future under the contract.
Accordingly, a finance lease is regarded as a financial instrument and an operating lease is not
regarded as a financial instrument (except as regards individual payments currently due and
payable).
18. Physical assets (such as inventories, property, plant and equipment), leased assets and
intangible assets (such as patents and trademarks) are not financial assets. Control of such
physical and intangible assets creates an opportunity to generate an inflow of cash or another
financial asset, but it does not give rise to a present right to receive cash or another financial
asset.
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19. Assets (such as prepaid expenses) for which the future economic benefit is the receipt of
goods or services, rather than the right to receive cash or another financial asset, are not financial
assets. Similarly, items such as deferred revenue and most warranty obligations are not financial
liabilities because the outflow of economic benefits associated with them is the delivery of goods
and services rather than a contractual obligation to pay cash or another financial asset.
20. Liabilities or assets that are not contractual (such as income taxes that are created as a result
of statutory requirements imposed by governments) are not financial liabilities or financial
assets. Accounting for income taxes is dealt with in AS 22, Accounting for Taxes on Income.
Equity Instruments
21. Examples of equity instruments include non-puttable equity shares, some types of preference
shares and warrants or written call options that allow the holder to subscribe for or purchase a
fixed number of non-puttable equity shares in the issuing entity in exchange for a fixed amount
of cash or another financial asset. An obligation of an entity to issue or purchase a fixed number
of its own equity instruments in exchange for a fixed amount of cash or another financial asset is
an equity instrument of the entity.
However, if such a contract contains an obligation for the entity to pay cash or another financial
asset, it also gives rise to a liability for the present value of the redemption amount. An issuer of
non-puttable equity shares assumes a liability when it formally acts to make a distribution and
becomes legally obligated to the shareholders to do so. This may be the case following the
declaration of a dividend or when the entity is being wound up and any assets remaining after the
satisfaction of liabilities become distributable to shareholders.
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22. A purchased call option or other similar contract acquired by an entity that gives it the right
to reacquire a fixed number of its own equity instruments in exchange for delivering a fixed
amount of cash or another financial asset is not a financial asset of the entity. Instead, any
consideration paid for such a contract is deducted from equity.
Derivative Financial Instruments
23. Financial instruments include primary instruments (such as receivables, payables and equity
instruments) and derivative financial instruments (such as financial options, futures and
forwards, interest rate swaps and currency swaps). Derivative financial instruments meet the
definition of a financial instrument and, accordingly, are within the scope of this Standard.
24. Derivative financial instruments create rights and obligations that have the effect of
transferring between the parties to the instrument one or more of the financial risks inherent in an
underlying primary financial instrument. On inception, derivative financial instruments give one
party a contractual right to exchange financial assets or financial liabilities with another party
under conditions that are potentially favorable, or a contractual obligation to exchange financial
assets or financial liabilities with another party under conditions that are potentially
unfavourable.
However, they generally11 do not result in a transfer of the underlying primary11 This is true of
most, but not all derivatives, e.g. in some cross-currency interest rate swaps principal is
exchanged on inception (and re-exchanged on maturity).
Financial instrument on inception of the contract, nor does such a transfer necessarily take place
on maturity of the contract. Some instruments embody both a right and an obligation to make an
exchange. Because the terms of the exchange are determined on inception of the derivative
instrument, as prices in financial markets change those terms may become either favorable or
unfavourable.
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25. A put or call option to exchange financial assets or financial liabilities (i.e. financial
instruments other than an entity‘s own equity instruments) gives the holder a right to obtain
potential future economic benefits associated with changes in the fair value of the financial
instrument underlying the contract. Conversely, the writer of an option assumes an obligation to
forgo potential future economic benefits or bear potential losses of economic benefits associated
with changes in the fair value of the underlying financial instrument. The contractual right of the
holder and obligation of the writer meet the definition of a financial asset and a financial
liability, respectively. The financial instrument underlying an option contract may be any
financial asset, including shares in other entities and interest-bearing instruments.
An option may require the writer to issue a debt instrument, rather than transfer a financial asset,
but the instrument underlying the option would constitute a financial asset of the holder if the
option were exercised.
The option-holder‘s right to exchange the financial asset under potentially favourable conditions
and the writer‘s obligation to exchange the financial asset under potentially unfavourable
conditions are distinct from the underlying financial asset to be exchanged upon exercise of the
option. The nature of the holder‘s right and of the writer‘s obligation are not affected by the
likelihood that the option will be exercised.
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26. Another example of a derivative financial instrument is a forward contract to be settled in six
months‘ time in which one party (the purchaser) promises to deliver Rs. 1,000,000 cash in
exchange for Rs. 1,000,000 face amount of fixed rate government bonds, and the other party (the
seller) promises to deliver Rs. 1,000,000 face amount of fixed rate government bonds in
exchange for Rs. 1,000,000 cash. During the six months, both parties have a contractual right and
a contractual obligation to exchange financial instruments. If the market price of the government
bonds rises above Rs. 1,000,000, the conditions will be favorable to the purchaser and
unfavorable to the seller; if the market price falls below Rs. 1,000,000, the effect will be the
opposite. The purchaser has a contractual right (a financial asset) similar to the right under a call
option held and a contractual obligation (a financial liability) similar to the obligation under a put
option written; the seller has a contractual right (a financial asset) similar to the right under a put
option held and a contractual obligation (a financial liability) similar to the obligation under a
call option written. As with options, these contractual rights and obligations constitute financial
assets and financial liabilities separate and distinct from the underlying financial instruments (the
bonds and cash to be exchanged). Both parties to a forward contract have an obligation to
perform at the agreed time, whereas performance under an option contract occurs only if and
when the holder of the option chooses to exercise it.
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27. Many other types of derivative instruments embody a right or obligation to make a future
exchange, including interest rate and currency swaps, interest rate caps, collars and floors, loan
commitments12, and letters of credit. An interest rate swap contract may be viewed as a
variation 12 Loan commitment is firm commitment of an entity to provide credit under pre-
specified terms and conditions of a forward contract in which the parties agree to make a series
of future exchanges of cash amounts, one amount calculated with reference to a floating interest
rate and the other with reference to a fixed interest rate.
Futures contracts are another variation of forward contracts, differing primarily in that the
contracts are standardized and traded on an exchange. Contracts to Buy or Sell Non-Financial
Items
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28. Contracts to buy or sell non-financial items do not meet the definition of a financial
instrument because the contractual right of one party to receive a non-financial asset or service
and the corresponding obligation of the other party do not establish a present right or obligation
Of either party to receive, deliver or exchange a financial asset. For example, contracts that
provide for settlement only by the receipt or delivery of a non-financial item (e.g. an option,
futures or forward contract on silver) are not financial instruments. Many commodity contracts
are of this type. Some are standardized in form and traded on organized markets in much the
same fashion as some derivative financial instruments. For example, a commodity futures
contract may be bought and sold readily for cash because it is listed for trading on an exchange
and may change hands many times. However, the parties buying and selling the contract are, in
effect, trading the underlying commodity. The ability to buy or sell a commodity contract for
cash, the ease with which it may be bought or sold and the possibility of negotiating a cash
settlement of the obligation to receive or deliver the commodity do not alter the fundamental
character of the contract in a way that creates a financial instrument. Nevertheless, some
contracts to buy or sell non-financial items that can be settled net or by exchanging financial
instruments, or in which the non-financial item is readily convertible to cash, are within the
scope of the Standard as if they were financial instruments.
29. A contract that involves the receipt or delivery of physical assets does not give rise to a
financial asset of one party and a financial liability of the other party unless any corresponding
payment is deferred past the date on which the physical assets are transferred. Such is the case
with the purchase or sale of goods on trade credit.
30. Some contracts are commodity-linked, but do not involve settlement through the physical
receipt or delivery of a commodity. They specify settlement through cash payments that are
determined according to a formula in the contract, rather than through payment of fixed amounts.
For example, the principal amount of a bond may be calculated by applying the market price of
oil prevailing at the maturity of the bond to a fixed quantity of oil. The principal is indexed by
reference to a commodity price, but is settled only in cash. Such a contract constitutes a financial
instrument.
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31. The definition of a financial instrument also encompasses a contract that gives rise to a non-
financial asset or non-financial liability in addition to a financial asset or financial liability. Such
financial instruments often give one party an option to exchange a financial asset for a
nonfinancial asset. For example, an oil-linked bond may give the holder the right to receive a
stream of fixed periodic interest payments and a fixed amount of cash on maturity, with the
option to exchange the principal amount for a fixed quantity of oil. The desirability of exercising
this option will vary from time to time depending on the fair value of oil relative to the exchange
ratio of cash for oil (the exchange price) inherent in the bond. The intentions of the bondholder
concerning the exercise of the option do not affect the substance of the component assets. The
financial asset of the holder and the financial liability of the issuer make the bond a financial
instrument, regardless of the other types of assets and liabilities also created.
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Liabilities and Equity
32. The issuer of a financial instrument should classify the instrument, or its component parts, on
initial recognition as a financial liability, a financial asset or an equity instrument in accordance
with the substance of the contractual arrangement and the definitions of a financial liability, a
financial asset and an equity instrument.
33. When an issuer applies the definitions in paragraph 7 to determine whether a financial
instrument is an equity instrument rather than a financial liability, the instrument is an equity
instrument if, and only if, both conditions (a) and (b) below are met.
(a) The instrument includes no contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity
under conditions that are potentially unfavourable to the issuer.
(b) If the instrument will or may be settled in the issuer‘s own equity instruments, it is
(i) a non-derivative that includes no contractual obligation for the issuer to
deliver a variable number of its own equity instruments; or
(ii) a derivative that will be settled only by the issuer exchanging a fixed
amount of cash or another financial asset for a fixed number of its own equity instruments. For
this purpose the issuer‘s own equity instruments do not include instruments that are themselves
contracts for the future receipt or delivery of the issuer‘s own equity instruments.
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A contractual obligation, including one arising from a derivative financial instrument that will or
may result in the future receipt or delivery of the issuer‘s own equity instruments, but does not
meet conditions (a) and (b) above, is not an equity instrument. No Contractual Obligation to
Deliver Cash or another Financial Asset.
34. A critical feature in differentiating a financial liability from an equity instrument is the
existence of a contractual obligation of one party to the financial instrument (the issuer) either to
deliver cash or another financial asset to the other party (the holder) or to exchange financial
assets or financial liabilities with the holder under conditions that are potentially unfavorable to
the issuer.
Although the holder of an equity instrument may be entitled to receive a pro rata share of any
dividends or other distributions of equity, the issuer does not have a contractual obligation to
make such distributions because it cannot be required to deliver cash or another financial asset to
another party.
35. The substance of a financial instrument, rather than its legal form, governs its classification
on the entity‘s balance sheet. Substance and legal form are commonly consistent, but not always.
Some financial instruments take the legal form of equity but are liabilities in substance and
others may combine features associated with equity instruments and features associated with
financial liabilities. For example:
(a) a preference share that provides for mandatory redemption by the issuer for a fixed or
determinable amount at a fixed or determinable future date, or gives the holder the right to
require the issuer to redeem the instrument at or after a particular date for a fixed or determinable
amount, is a financial liability.
(b) a financial instrument that gives the holder the right to put it back to the issuer for cash or
another financial asset (a ‗puttable instrument‘) is a financial liability.
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This is so even when the amount of cash or other financial assets is determined on the basis of an
index or other item that has the potential to increase or decrease, or when the legal form of the
puttable instrument gives the holder a right to a residual interest in the assets of an issuer.
The existence of an option for the holder to put the instrument back to the issuer for cash or
another financial asset means that the puttable instrument meets the definition of a financial
liability.
For example, open-ended mutual funds, unit trusts and some co-operative entities may provide
their unit holders or members with a right to redeem their interests in the issuer at any time for
cash equal to their proportionate share of the asset value of the issuer.
However, classification as a financial liability does not preclude the use
of descriptors such as ‗net asset value attributable to unit holders‘ and ‗change in net asset value
attributable to unit holders‘ on the face of the financial statements of an entity that has no equity
capital (such as some mutual funds and unit trusts, see the use of additional disclosure to show
that total members‘ interests comprise items such as reserves that meet the definition of equity
and puttable instruments.
36. If an entity does not have an unconditional right to avoid delivering cash or another financial
asset to settle a contractual obligation, the obligation meets the definition of a financial liability.
For example:
(a) a restriction on the ability of an entity to satisfy a contractual obligation, such as lack of
access to foreign currency or the need to obtain approval for payment from a regulatory
authority, does not negate the entity‘s contractual obligation or the holder‘s contractual right
under the instrument.
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(b) a contractual obligation that is conditional on a counterparty exercising its right to
redeem is a financial liability because the entity does not have the unconditional
right to avoid delivering cash or another financial asset.
37. A financial instrument that does not explicitly establish a contractual obligation to deliver
cash or another financial asset may establish an obligation indirectly through its terms and
conditions. For example:
(a) a financial instrument may contain a non-financial obligation that must be settled if, and only
if, the entity fails to make distributions or to redeem the instrument. If the entity can avoid a
transfer of cash or another financial asset only by settling the non-financial obligation, the
financial instrument is a financial liability.
(b) a financial instrument is a financial liability if it provides that on settlement the entity will
deliver either:
(i) cash or another financial asset; or
(ii) its own shares whose value is determined to exceed substantially the value of the cash or
other financial asset. Although the entity does not have an explicit contractual obligation to
deliver cash or another financial asset, the value of the share settlement alternative is such that
the entity will settle in cash. In any event, the holder has in substance been guaranteed receipt of
an amount that is at least equal to the cash settlement option.
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38. Preference shares may be issued with various rights. In determining whether a preference
share is a financial liability or an equity instrument, an issuer assesses the particular rights
attaching to the share to determine whether it exhibits the fundamental characteristic of a
financial liability. For example, a preference share that provides for redemption on a specific
date or at the option of the holder contains a financial liability because the issuer has an
obligation to transfer financial assets to the holder of the share. The potential inability of an
issuer to satisfy an obligation to redeem a preference share when contractually required to do so,
whether because of a lack of funds, a statutory restriction or insufficient profits or reserves, does
not negate the obligation.
An option of the issuer to redeem the shares for cash does not satisfy the definition of a financial
liability because the issuer does not have a present obligation to transfer financial assets to the
shareholders.
In this case, redemption of the shares is solely at the discretion of the issuer. An obligation may
arise, however, when the issuer of the shares exercises its option, usually by formally notifying
the shareholders of an intention to redeem the shares.
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39. When preference shares are non-redeemable, the appropriate classification is determined by
the other rights that attach to them. Classification is based on an assessment of the substance of
the contractual arrangements and the definitions of a financial liability and an equity instrument.
When distributions to holders of the preference shares, whether cumulative or noncumulative,
are at the discretion of the issuer, the shares are equity instruments. The classification of a
preference share as an equity instrument or a financial liability is not affected by, for example:
(a) a history of making distributions;
(b) an intention to make distributions in the future;
(c) a possible negative impact on the price of equity shares of the issuer if distributions are not
made (because of restrictions on paying dividends on the equity shares if dividends are not paid
on the preference shares);
(d) the amount of the issuer‘s reserves;
(e) an issuer‘s expectation of a profit or loss for a period; or
(f) an ability or inability of the issuer to influence the amount of its profit or loss for the period.
40. The contractual right of the holder of a financial instrument (including members‘ shares in
co-operative entities) to request redemption does not, in itself, require that financial instrument to
be classified as a financial liability. Rather, the entity must consider all of the terms and
conditions of the financial instrument in determining its classification as a financial liability or
equity. Those terms and conditions include relevant laws, regulations and the governing rules or
bye-laws of the entity in effect at the date of classification, but not expected future amendments
to those laws, regulations or bye-laws.
41. Members‘ shares in co-operative entities that would be classified as equity if the members
did not have a right to request redemption are equity if either of the conditions described in
paragraphs 42 and 43 is present. Demand deposits, including current accounts, deposit accounts
and similar contracts that arise when members act as customers are financial liabilities of the
entity.
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42. Members‘ shares are equity if the entity has an unconditional right to refuse redemption of
the members‘ shares.
43. Law, regulation or the governing rules or bye-laws of the entity can impose various types of
prohibitions on the redemption of members‘ shares, e.g., unconditional prohibitions or
prohibitions based on liquidity criteria. If redemption is unconditionally prohibited by law,
regulation or the governing rules or bye-laws of the entity, members‘ shares are equity.
However, provisions in law, regulation or the governing rules or bye-laws of the entity that
prohibit redemption only if conditions — such as liquidity constraints — are met (or are not met)
do not result in members‘ shares being equity.
44. An unconditional prohibition may be absolute, in that all redemptions are prohibited. An
unconditional prohibition may be partial, in that it prohibits redemption of members‘ shares if
redemption would cause the number of members‘ shares or amount of paid-up capital from
members‘ shares to fall below a specified level. Members‘ shares in excess of the prohibition
against redemption are liabilities, unless the entity has the unconditional right to refuse
redemption as described in paragraph 42. In some cases, the number of shares or the amount of
paid-up capital subject to a redemption prohibition may change from time to time. Such a change
in the redemption prohibition leads to a transfer between financial liabilities and equity.
In such a case, the entity should disclose separately the amount, timing and reason for the
transfer.
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45. Equity is the residual interest in the assets after deducting all liabilities. Therefore, at initial
recognition, the entity should measure the equity component in the member‘s shares at the
residual amount after deducting from the total amount of the shares as a whole the value
separately determined for its financial liabilities for redemption. The entity measures its financial
liability for redemption at fair value. In the case of members‘ shares with a redemption feature,
the fair value of the financial liability for redemption is measured at no less than the maximum
amount payable under the redemption provisions of its governing bye-laws or applicable law
discounted from the first date that the amount could be required to be paid (see Example 3 of
Appendix B).
46. As required by paragraph 71, distributions to holders of equity instruments (net of any
income tax benefits) are recognized directly in the revenue reserves and surplus. Interest,
dividends and other returns relating to financial instruments classified as financial liabilities are
expenses, regardless of whether those amounts paid are legally characterized as dividends,
interest or otherwise.
A contract is not an equity instrument solely because it may result in the receipt or delivery of
the entity‘s own equity instruments. An entity may have a contractual right or obligation to
receive or deliver a number of its own shares or other equity instruments that varies so that the
fair value of the entity‘s own equity instruments to be received or delivered equals the amount of
the contractual right or obligation. Such a contractual right or obligation may be for a fixed
amount or an amount that fluctuates in part or in full in response to changes in a variable other
than the market price of the entity‘s own equity instruments (e.g. an interest rate, a commodity
price or a financial instrument price).
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Two examples are (a) a contract to deliver as many of the entity‘s own equity instruments as are
equal in value to Rs.100, and (b) a contract to deliver as many of the entity‘s own equity
instruments as are equal in value to the value of 100 grams of gold. Such a contract is a financial
liability of the entity even though the entity must or can settle it by delivering its own equity
instruments. It is not an equity instrument because the entity uses a variable number of its own
equity instruments as a means to settle the contract. Accordingly, the contract does not evidence
a residual interest in the entity‘s assets after deducting all of its liabilities.
49. A contract that will be settled by the entity (receiving or) delivering a fixed number of its
own equity instruments in exchange for a fixed amount of cash or another financial asset is an
equity instrument. For example, an issued share option that gives the counterparty a right to buy
a fixed number of the entity‘s shares for a fixed price or for a fixed stated principal amount of a
bond is an equity instrument. Changes in the fair value of a contract arising from variations in
market interest rates that do not affect the amount of cash or other financial assets to be paid or
received, or the number of equity instruments to be received or delivered, on settlement of the
contract do not preclude the contract from being an equity instrument. Any consideration
received (such as the premium received for a written option or warrant on the entity‘s own
shares) is added directly to equity in an appropriate account. Any consideration paid (such as the
premium paid for a purchased option) is deducted directly from an appropriate equity account.
Changes in the fair value of an equity instrument are not recognized in the financial statements.
50. A contract that contains an obligation for an entity to purchase its own equity instruments for
cash or another financial asset gives rise to a financial liability for the present value of the
redemption amount (for example, for the present value of the forward repurchase price, option
exercise price or other redemption amount). This is the case even if the contract itself is an equity
instrument.
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One example is an entity‘s obligation under a forward contract to purchase its own equity
instruments for cash. When the financial liability is recognized initially under AS 30, its fair
value (the present value of the redemption amount) is reclassified from equity.
Subsequently, the financial liability is measured in accordance with AS 30. If the contract
expires without delivery, the carrying amount of the financial liability is reclassified to equity.
An entity‘s contractual obligation to purchase its own equity instruments gives rise to a financial
liability for the present value of the redemption amount even if the obligation to purchase is
conditional on the counterparty exercising a right to redeem (eg a written put option that gives
the counterparty the right to sell an entity‘s own equity instruments to the entity for a fixed
price).
51. A contract that will be settled by the entity delivering or receiving a fixed number of its own
equity instruments in exchange for a variable amount of cash or another financial asset is a
financial asset or financial liability. An example is a contract for the entity to deliver 100 of its
own equity instruments in return for an amount of cash calculated to equal the value of 100
grams of gold.
52. The following examples illustrate how to classify different types of contracts on an entity‘s
own equity instruments:
(a) A contract that will be settled by the entity receiving or delivering a fixed number of its
own shares for no future consideration, or exchanging a fixed number of its own shares for a
fixed amount of cash or another financial asset, is an equity instrument. Accordingly, any
consideration received or paid for such a contract is added directly to or deducted directly from
equity.
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One example is an issued share option that gives the counterparty a right to buy a fixed number
of the entity‘s shares for a fixed amount of cash. However, if the contract requires the entity to
purchase (redeem) its own shares for cash or another financial asset at a fixed or determinable
date or on demand, the entity also recognises a financial liability for the present value of the
redemption amount. One example is an entity‘s obligation under a forward contract to repurchase
a fixed number of its own shares for a fixed amount of cash.
(b) An entity‘ s obligation to purchase its own shares for cash gives rise to a financial liability for
the present value of the redemption amount even if the number of shares that the entity is obliged
to repurchase is not fixed or if the obligation is conditional on the counterparty exercising a right
to redeem. One example of a conditional obligation is an issued option that requires the entity to
repurchase its own shares for cash if the counterparty exercises the option.
(c) A contract that will be settled in cash or another financial asset is a financial asset or financial
liability even if the amount of cash or another financial asset that will be received or delivered is
based on changes in the market price of the entity‘s own equity. One example is a net cash-
settled share option.
A contract that will be settled in a variable number of the entity‘s own shares whose value equals
a fixed amount or an amount based on changes in an underlying variable (e.g. a commodity
price) is a financial asset or a financial liability. An example is a written option to buy gold that,
if exercised, is settled net in the entity‘s own instruments by the entity delivering as many of
those instruments as are equal to the value of the option contract. Such a contract is a financial
asset or financial liability even if the underlying variable is the entity‘s own share price rather
than gold.
Similarly, a contract that will be settled in a fixed number of the entity‘s own shares, but the
rights attaching to those shares will be varied so that the settlement value equals a fixed amount
or an amount based on changes in an underlying variable, is a financial asset or a financial
liability. Contingent Settlement Provisions
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53. A financial instrument may require the entity to deliver cash or another financial asset, or
otherwise to settle it in such a way that it would be a financial liability, in the event of the
occurrence or non-occurrence of uncertain future events (or on the outcome of uncertain
circumstances) that are beyond the control of both the issuer and the holder of the instrument,
such as a change in a stock market index, consumer price index, interest rate or taxation
requirements, or the issuer‘s future revenues, net income or debt-to-equity ratio). The issuer of
such an instrument does not have the unconditional right to avoid delivering cash or another
financial asset (or otherwise to settle it in such a way that it would be a financial liability).
Therefore, it is a financial liability of the issuer unless:
(a) The part of the contingent settlement provision that could require settlement in cash or
another financial asset (or otherwise in such a way that it would be a financial liability) is not
genuine; or
(b) The issuer can be required to settle the obligation in cash or another financial asset (or
otherwise to settle it in such a way that it would be a financial liability) only in the event of
liquidation of the issuer.
54. Paragraph 53 requires that if a part of a contingent settlement provision that could require
settlement in cash or another financial asset (or in another way that would result in the
instrument being a financial liability) is not genuine, the settlement provision does not affect the
classification of a financial instrument. Thus, a contract that requires settlement in cash or a
variable number of the entity‘s own shares only on the occurrence of an event that is extremely
rare, highly abnormal and very unlikely to occur is an equity instrument.
Similarly, settlement in a fixed number of an entity‘s own shares may be contractually precluded
in circumstances that are outside the control of the entity, but if these circumstances have no
genuine possibility of occurring, classification as an equity instrument is appropriate.
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Settlement Options
55. When a derivative financial instrument gives one party a choice over how it is settled (e.g.
the issuer or the holder can choose settlement net in cash or by exchanging shares for cash), it is
a financial asset or a financial liability unless all of the settlement alternatives would result in it
being an equity instrument.
56. An example of a derivative financial instrument with a settlement option that is a financial
liability is a share option that the issuer can decide to settle net in cash or by exchanging its own
shares for cash. Similarly, some contracts to buy or sell a non-financial item in exchange for the
entity‘ s own equity instruments are within the scope of this Standard because they can be settled
either by delivery of the non-financial item or net in cash or another financial instrument. Such
contracts are financial assets or financial liabilities and not equity instruments. Treatment in
Consolidated Financial Statements
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57. In consolidated financial statements, an entity presents minority interests - i.e. the interests of
other parties in the equity and income of its subsidiaries in accordance with AS 1 (revised) 13,
Presentation of Financial Statements, and AS 21, Consolidated Financial Statements and
Accounting for Investments in Subsidiaries in Separate Financial Statements14. When
classifying a financial instrument (or a component of it) in consolidated financial statements, an
entity considers all terms and conditions agreed between members of the group and the holders
of the instrument in determining whether the group as a whole has an obligation to deliver cash
or another financial asset in respect of the instrument or to settle it in a manner that results in
liability classification. When a subsidiary in a group issues a financial instrument and a parent or
other group entity agrees additional terms directly with the holders of the instrument (e.g. a
guarantee), the group may not have discretion over distributions or redemption. Although the
subsidiary may appropriately classify the instrument without regard to these additional terms in
its individual financial statements, the effect of other agreements between members of the group
and the holders of the instrument is considered in order to ensure that consolidated financial
statements reflect the contracts and transactions entered into by the group as a whole. To the
extent that there is such an obligation or settlement provision, the instrument (or the component
of it that is subject to the obligation) is classified as a financial liability in consolidated financial
statements.
13 AS 1 is presently under revision.
14 A limited revision has been made to AS 21 with the issuance of the Accounting Standard
(AS) 30, Financial Instruments: Recognition and Measurement. Pursuant to the limited revision,
the title of AS 21 is also modified.
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Compound Financial Instruments
58. The issuer of a non-derivative financial instrument should evaluate the terms of the financial
instrument to determine whether it contains both a liability and an equity component. Such
components should be classified separately as financial liabilities or equity instruments in
accordance with paragraph 32.
59. Paragraph 58 applies only to issuers of non-derivative compound financial instruments.
Paragraph 58 does not deal with compound financial instruments from the perspective of holders.
Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement deals with
the separation of embedded derivatives from the perspective of holders of compound financial
instruments that contain debt and equity features.
60. An entity recognises separately the components of a financial instrument that (a) creates a
financial liability of the entity and (b) grants an option to the holder of the instrument to convert
it into an equity instrument of the entity. For example, a debenture or similar instrument
convertible by the holder into a fixed number of equity shares of the entity is a compound
financial instrument. From the perspective of the entity, such an instrument comprises two
components: a financial liability (a contractual arrangement to deliver cash or another financial
asset) and an equity instrument (a call option granting the holder the right, for a specified period
of time, to convert it into a fixed number of equity shares of the entity). The economic effect of
issuing such an instrument is substantially the same as issuing simultaneously a debt instrument
with an early settlement provision and warrants to purchase equity shares, or issuing a debt
instrument with detachable share purchase warrants. Accordingly, in all cases, the entity presents
the liability and equity components separately on its balance sheet.
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61. Classification of the liability and equity components of a convertible instrument is not
revised as a result of a change in the likelihood that a conversion option will be exercised, even
when exercise of the option may appear to have become economically advantageous to some
holders. Holders may not always act in the way that might be expected because, for example, the
tax consequences resulting from conversion may differ among holders. Furthermore, the
likelihood of conversion will change from time to time. The entity‘s contractual obligation to
make future payments remains outstanding until it is extinguished through conversion, maturity
of the instrument or some other transaction.
62. Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement deals
with the measurement of financial assets and financial liabilities. Equity instruments are
instruments that evidence a residual interest in the assets of an entity after deducting all of its
liabilities. Therefore, when the initial carrying amount of a compound financial instrument is
allocated to its equity and liability components, the equity component is assigned the residual
amount after deducting from the fair value of the instrument as a whole the amount separately
determined for the liability component. The value of any derivative features (such as a call
option) embedded in the compound financial instrument other than the equity component (such
as an equity conversion option) is included in the liability component. The sum of the carrying
amounts assigned to the liability and equity components on initial recognition is always equal to
the fair value that would be ascribed to the instrument as a whole. No gain or loss arises from
initially recognising the components of the instrument separately.
63. A common form of compound financial instrument is a debt instrument with an embedded
conversion option, such as a debenture convertible into equity shares of the issuer, and without
any other embedded derivative features. Paragraph 58 requires the issuer of such a
financial instrument to present the liability component and the equity component separately on
the balance sheet, as follows:
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(a) The issuer‘s obligation to make scheduled payments of interest and principal is a financial
liability that exists as long as the instrument is not converted. Accordingly, the issuer of a
debenture convertible into equity shares first determines the carrying amount of the liability
component by measuring the fair value of a similar liability (including any embedded non-equity
derivative features) that does not have an associated equity component. Thus, on initial
recognition, the fair value of the liability component is the present value of the contractually
determined stream of future cash flows discounted at the rate of interest applied at that time by
the market to instruments of comparable credit status and providing substantially the same cash
flows, on the same terms, but without the conversion option.
(b) The equity instrument is an embedded option to convert the liability into equity of the issuer.
The fair value of the option comprises its time value and its intrinsic value, if any. This option
has value on initial recognition even when it is out of the money. The carrying amount of the
equity instrument represented by such option is determined by deducting the fair value of the
financial liability from the fair value of the compound financial instrument as a whole.
64. On conversion of a convertible instrument at maturity, the entity derecognizes the liability
component and recognizes it as equity. The original equity component remains as equity
(although it may be transferred from one line item within equity to another). There is no gain or
loss on conversion at maturity.
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65. When an entity extinguishes a convertible instrument before maturity through an early
redemption or repurchase in which the original conversion privileges are unchanged, the entity
allocates the consideration paid and any transaction costs for the repurchase or redemption to the
liability and equity components of the instrument at the date of the transaction. The method used
in allocating the consideration paid and transaction costs to the separate components is consistent
with that used in the original allocation to the separate components of the proceeds received by
the entity when the convertible instrument was issued, in accordance with paragraphs 58-63. 66.
Once the allocation of the consideration is made, any resulting gain or loss is treated in
accordance with accounting principles applicable to the related component, as follows:
(a) The amount of gain or loss relating to the liability component is recognized in the statement
of profit and loss; and
(b) The amount of consideration relating to the equity component is adjusted in equity against
the original equity component and the balance, if any, against the reserves and surplus.
67. An entity may amend the terms of a convertible instrument to induce early conversion, for
example by offering a more favorable conversion ratio or paying other additional consideration
in the event of conversion before a specified date. The difference, at the date the terms are
amended, between the fair value of the consideration the holder receives on conversion of the
instrument under the revised terms and the fair value of the consideration the holder would have
received under the original terms is recognized as a loss in the statement of profit and loss.
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Treasury shares
68. If an entity reacquires its own equity instruments, those instruments (‗treasury shares‘)
should be deducted from equity. No gain or loss should be recognized in statement of profit and
loss on the purchase, sale, issue or cancellation of an entity‘s own equity instruments. Such
treasury shares may be acquired and held by the entity or by other members of the consolidated
group. Consideration paid or received should be recognized directly in equity.
69. The amount of treasury shares held is disclosed separately either on the face of them balance
sheet or in the notes, in accordance with AS 115 (Revised), Presentation of Financial Statements.
An entity provides disclosure in accordance with AS 18, Related Party Disclosures, if the entity
reacquires its own equity instruments from related parties.
70. An entity‘s own equity instruments are not recognized as a financial asset regardless of the
reason for which they are reacquired. Paragraph 68 requires an entity that reacquires its own
equity instruments to deduct those equity instruments from equity. However, when an entity
holds its own equity on behalf of others, e.g., a financial institution holding its own equity on
behalf of a client, there is an agency relationship and as a result those holdings are not included
in the entity‘s balance sheet.
Interest, Dividends, Losses and Gains
71. Interest, dividends, losses and gains relating to a financial instrument or a component of
financial instrument that is a financial liability should be recognized as income or expense in the
statement of profit and loss. Distributions to holders of an equity instrument should be debited by
the entity directly to an appropriate equity account, net of any related income tax benefit.
Transaction costs of an equity transaction should be accounted for as a deduction from equity net
of any related income tax benefit.
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72. The classification of a financial instrument as a financial liability or an equity instrument
determines whether interest, dividends, losses and gains relating to that instrument are
recognized as expense or income in the statement of profit and loss or are recognized directly in
15 See footnote 13 the revenue reserves and surplus. Thus, dividend payments on shares wholly
recognized as liabilities are recognized as expenses in the same way as interest on a bond/
debenture. Similarly, gains and losses associated with redemptions or refinancing of financial
liabilities are recognized in the statement of profit and loss, whereas redemptions or refinancing
of equity instruments are recognized as changes in equity. Changes in the fair value of an equity
instrument are not recognized in the financial statements.
73. An entity typically incurs various costs in issuing or acquiring its own equity instruments.
Those costs might include regulatory fees, amounts paid to legal, accounting and other
professional advisers, printing costs and stamp duties. The transaction costs (net of any related
Income tax benefit) of an equity transaction are recognized directly in the appropriate equity
account to the extent they are incremental costs directly attributable to the equity transaction that
otherwise would have been avoided. The costs of an equity transaction that is abandoned are
recognized as an expense.
74. Transaction costs that relate to the issue of a compound financial instrument are allocated to
the liability and equity components of the instrument in proportion to the allocation of proceeds.
Transaction costs that relate jointly to more than one transaction are allocated to those
transactions using a basis of allocation that is rational and consistent with similar transactions.
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75. The amount of transaction costs recognized in the revenue reserves and surplus is disclosed
separately under AS 1 (revised)16. 76. The following example illustrates the application of
paragraph 71 to a compound financial instrument. Assume that a non-cumulative preference
share is mandatorily redeemable for cash in five years, but that dividends are payable at the
discretion of the entity before the redemption date. Such an instrument is a compound financial
instrument, with the liability component being the present value of the redemption amount. The
unwinding of the discount on this component is recognized in statement of profit and loss and
classified as interest expense.
Any dividends paid relate to the equity component and, accordingly, are recognized directly in
the revenue reserves and surplus. A similar treatment would apply if the redemption was not
mandatory but at the option of the holder, or if the share was mandatorily convertible into a
variable number of equity shares calculated to equal a fixed amount or an amount based on
changes in an underlying variable (e.g., commodity). However, if any unpaid dividends are
added to the redemption amount, the entire instrument is a liability. In such a case, any dividends
are classified as interest expense.
77. Dividends classified as an expense are presented in the statement of profit and loss as a
separate item. In addition to the requirements of this Standard, disclosure of interest and
dividends is subject to the requirements of AS 1 (revised) 17 and Accounting Standard (AS) 32,
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Financial Instruments:
Gains and losses related to changes in the carrying amount of a financial liability are recognized
as income or expense in the statement of profit and loss even when they relate to an instrument
that includes a right to the residual interest in the assets of the entity in exchange for cash or
another financial asset (see paragraph 35(b)). Under AS 1 (revised) 19, the entity presents any
gain or loss arising from remeasurement of such an instrument separately on the face of the
statement of profit and loss when it is relevant in explaining the entity‘s performance. Offsetting
a Financial Asset and a Financial Liability
79. A financial asset and a financial liability should be offset and the net amount presented in the
balance sheet when and only when, an entity:
(a) Currently has a legally enforceable right to set off the recognized amounts; and
(b) Intends either to settle on a net basis, or to realise the asset and settle the liability
simultaneously.
In accounting for a transfer of a financial asset that does not qualify for derecognition, the entity
should not offset the transferred asset and the associated liability (see Accounting Standard (AS)
30, Financial Instruments: Recognition and Measurement).
80. This Standard requires the presentation of financial assets and financial liabilities on a net
basis when doing so reflects an entity‘s expected future cash flows from settling two or more
separate financial instruments. When an entity has the right to receive or pay a single net amount
and intends to do so, it has, in effect, only a single financial asset or financial liability. In other
circumstances, financial assets and financial liabilities are presented separately from each other
consistently with their characteristics as resources or obligations of the entity.
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81. Offsetting a recognized financial asset and a recognized financial liability and presenting the
net amount differs from the derecognition of a financial asset or a financial liability.
Although offsetting does not give rise to recognition of a gain or loss, the derecognition of a
financial instrument not only results in the removal of the previously recognized item from the
balance sheet but also may result in recognition of a gain or loss.
82. A right of set-off is a debtor‘s legal right, by contract or otherwise, to settle or otherwise
eliminate all or a portion of an amount due to a creditor by applying against that amount an
amount due from the creditor. In unusual circumstances, a debtor may have a legal right to apply
an amount due from a third party against the amount due to a creditor provided that there is an
agreement between the three parties that clearly establishes the debtor‘s right of set-off. Because
the right of set-off is a legal right, the conditions supporting the right may vary from one legal
jurisdiction to another and the laws applicable to the relationships between the parties need to be
considered.
83. The existence of an enforceable right to set off a financial asset and a financial liability
affects the rights and obligations associated with a financial asset and a financial liability and
may affect an entity‘s exposure to credit and liquidity risk. However, the existence of the right,
by itself, is not a sufficient basis for offsetting. In the absence of an intention to exercise the right
or to settle simultaneously, the amount and timing of an entity‘s future cash flows are not
affected. When an entity intends to exercise the right or to settle simultaneously, presentation of
the asset and liability on a net basis reflects more appropriately the amounts and timing of the
expected future cash flows, as well as the risks to which those cash flows are exposed. An
intention by one or both parties to settle on a net basis without the legal right to do so is not
sufficient to justify offsetting because the rights and obligations associated with the individual
financial asset and financial liability remain unaltered.
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84. An entity‘s intentions with respect to settlement of particular assets and liabilities may be
influenced by its normal business practices, the requirements of the financial markets and other
circumstances that may limit the ability to settle net or to settle simultaneously. When an entity
has a right of set-off, but does not intend to settle net or to realise the asset and settle the liability
simultaneously, the effect of the right on the entity‘s credit risk exposure is disclosed in
accordance with Accounting Standard (AS) 32, Financial Instruments:
85. Simultaneous settlement of two financial instruments may occur through, for example, the
operation of a clearing house in an organised financial market or a face-to-face exchange. In
these circumstances the cash flows are, in effect, equivalent to a single net amount and there is
no exposure to credit or liquidity risk. In other circumstances, an entity may settle two
instruments by receiving and paying separate amounts, becoming exposed to credit risk for the
full amount of the asset or liquidity risk for the full amount of the liability. Such risk exposures
may be significant even though relatively brief. Accordingly, realisation of a financial asset and
settlement of a financial liability are treated as simultaneous only when the transactions occur at
the same moment.
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86. The conditions set out in paragraph 79 are generally not satisfied and offsetting is usually
inappropriate when:
(a) Several different financial instruments are used to emulate the features of a single financial
instrument (a ‗synthetic instrument‘);
(b) Financial assets and financial liabilities arise from financial instruments having the same
primary risk exposure (for example, assets and liabilities within a portfolio of forward contracts
or other derivative instruments) but involve different counterparties;
(c) Financial or other assets are pledged as collateral for non-recourse financial liabilities;
(d) financial assets are set aside in trust by a debtor for the purpose of discharging an obligation
without those assets having been accepted by the creditor in settlement of the obligation (for
example, a sinking fund arrangement); or (e) obligations incurred as a result of events giving rise
to losses are expected to be recovered from a third party by virtue of a claim made under an
insurance contract.
87. To offset a financial asset and a financial liability, an entity must have a currently
enforceable legal right to set off the recognized amounts. An entity may have a conditional right
20 to set off recognized amounts. An entity that undertakes a number of financial instrument
transactions with a single counterparty may enter into a ‗master netting arrangement‘ with that
counterparty. Such an agreement provides for a single net settlement of all financial instruments
covered by the agreement in the event of default on, or termination of, any one contract.
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These arrangements are commonly used by financial institutions to provide protection against
loss in the event of bankruptcy or other circumstances that result in a counterparty being unable
to meet its obligations. A master netting arrangement commonly creates a right of set-off that
becomes enforceable and affects the realisation or settlement of individual financial assets and
financial liabilities only following a specified event of default or in other circumstances not
expected to arise in the normal course of business. A master netting arrangement does not
provide a basis for offsetting unless both of the criteria in paragraph 79 are satisfied. When
financial assets and financial liabilities subject to a master netting arrangement are not offset, the
effect of the arrangement on an entity‘s exposure to credit risk is disclosed in accordance with
Accounting Standard (AS) 32.
88. The Standard does not provide special treatment for so-called ‗synthetic instruments‘, which
are groups of separate financial instruments acquired and held to emulate the characteristics of
another instrument.
For example, a floating rate long-term debt combined with an interest rate swap that involves
receiving floating payments and making fixed payments synthesises a fixed rate long-term debt.
Each of the individual financial instruments that together constitute a ‗synthetic instrument‘
represents a contractual right or obligation with its own terms and conditions and each may be
transferred or settled separately. Each financial instrument is exposed to risks that may differ
from the risks to which other financial instruments are exposed.
Accordingly, when one financial instrument in a ‗synthetic instrument‘ is an asset and another is
a liability, they are not offset and presented on an entity‘s balance sheet on a net basis unless
they meet the criteria for offsetting in paragraph.
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INVESTMENT
(Meaning & Behavior of Investors to the different Investment avenues)
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Definition:-
Investment is putting money into something with the expectation of gain that upon thorough
analysis has a high degree of security of principle, as well as security of return, within an
expected period of time.
Here I was involved in a research done on the perception of the investors towards the investment
avenues available in the market. Investors showed different views whole we asked them to fill
the questionnaire prepaired by our team. The purpose and way of investment of all the investors
were different in one or other way.
First of all let we have a look at the alternatives present in the financial market for the investors
to park their money in.
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Financial Investments Alternatives For An Investor
Equities
Equities are a type of security that represents the ownership in a company. Equities are traded
(bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public
Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term
investment option as the returns on equities over a long time horizon are generally higher than
most other investment avenues. However, along with the possibility of greater returns comes
greater risk.
Mutual funds
A mutual fund allows a group of people to pool their money together and have it professionally
managed, in keeping with a predetermined investment objective. This investment avenue is
popular because of its cost-efficiency, risk-diversification, professional management and sound
regulation. You can invest as little as Rs. 1,000 per month in a mutual fund. There are various
general and thematic mutual funds to choose from and the risk and return possibilities vary
accordingly.
Bonds
Bonds are fixed income instruments which are issued for the purpose of raising capital. Both
private entities, such as companies, financial institutions, and the central or state government and
other government institutions use this instrument as a means of garnering funds. Bonds issued by
the Government carry the lowest level of risk but could deliver fair returns.
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Deposits
Investing in bank or post-office deposits is a very common way of securing surplus funds. These
instruments are at the low end of the risk-return spectrum.
Cash equivalents
These are relatively safe and highly liquid investment options. Treasury bills and money market
funds are cash equivalents.
Non-financial Instruments
Real estate
With the ever-increasing cost of land, real estate has come up as a profitable investment
proposition.
Gold
The 'yellow metal' is a preferred investment option, particularly when markets are volatile.
Today, beyond physical gold, a number of products which derive their value from the price of
gold are available for investment. These include gold futures and gold exchange traded funds.
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Market Research done
On The Investors Perception
Towards the Investment
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SIGNIFICANCE OF THE STUDY
The present financial market is flooded with a lot investment instruments, viz., Shares, Bonds,
Mutual funds, Insurance plans, Fixed Deposits, other money and capital market instruments and
also various options of investment in Real Estate and Commodity Market etc. Sometimes people
refer to these options as "investment vehicles," which is just another way of saying "a way to
invest." Each of these vehicles has its own positives and negatives and ultimate decision of
investment is influenced by the individual investor‘s perception regarding the risk and return of
concerned investment opportunity available in the market.
Further, the investment decisions is full of complexity because of volatility of market conditions,
Inflation rate fluctuations, impact of Global environment, Cash reserve ratio, and Repo rates.
Therefore, it is imperative to analyze these factors while taking an investment decision.
Keeping above in mind, the study has been done to see the perception of investors which
provides understanding to readers about the various factors which should be keep in mind at the
time of investment. The study is useful to company in providing the understanding about the
investors‘ perception to devise the suitable product/marketing strategies, which would helps it in
making their policies or strategies in order to attract them. Further. Financial planner get advent
to make portfolio according to response given by respondents, which belong to different
occupations, having different income level, different age level or which instrument is mostly like
by the investors for investment. The study would further helpful for readers in understanding
about the various investment opportunities available in the market.
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CONCEPTUALIZATION
The money you earn is partly spent and the rest is saved for meeting future expenses. Instead of
keeping the savings idle you may like to use savings in order to get return on it in the future. This
is called Investment. Investment is ‗the act of committing money or capital to an endeavor with
the expectation of obtaining an additional income or profit.‘
There are ample Financial Instruments available in the market for investment; each instrument
has its own features. To invest money in financial instruments is not so easy. It needs depth study
where to invest so that their investment could be safe along with the growth of money. In present
scenario everyone wants to invest his money but having their own different objectives. It may be
growth of capital, tax minimization, retirement planning, to balance out inflation rate, safety etc.
The investors always mess with these objectives which creates confusion of where to invest,
which tendency they have to prefer at the time of investment, which factors which influence their
investment decisions, how to plan their investment portfolio and to whom to prefer for taking
that all decisions.
So that study is based on investor‘s perception regarding their investment. It includes what they
think at the time of investment, what are the various factors they keep in mind at investment or
affects their decisions regarding investment. The investment decision is very typical to take, as it
needs proper planning. So the concept of financial planning has to be taken in this study.
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FOCUS OF THE PROBLEM
The present financial environment provides ample opportunities of investment to the investors.
The decision to invest in right instrument is too complex which can meet their expectations
perfectly. So a study has been done which explain about the perception of respondents what they
exactly see at the time of investment which includes their tendency, preference and factors
through which an investor influenced. The study also focuses on analyzing the investment
patterns of the investment.
OBJECTIVES OF STUDY
The various objectives of the study are
1) To study the various financial opportunities available for investment.
2) To study about the investors perception regarding various investment opportunities available
in the market
3) To analyze the investment patterns of the investment.
4) To examine the investors changing behavior regarding various investment opportunities.
LIMITATIONS OF THE STUDY
1) The study is restricted to Noida
2) The sample size comprised of 100 respondents from different fields and income group, and
their responses are presumed to represent the wealth management market
3) The time period of the study in May-June 2011.
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RESEARCH METHODOLOGY
Nature of Research:
The study is descriptive and analytical in nature. It is descriptive as it describes the existing
financial instruments available in the market. It is analytical as it analyses the perception of the
investors, Universe and Sample Size NCR region have been taken as universe of the study.
Convenient sampling technique is used and a sample of 100 investors has been taken for the
purpose of the study.
Data Collection and Sources
The study is based on both primary and secondary data. Following are the sources of secondary
data:
Research Instruments:
Interview and questionnaire have been used to conduct the study. A structured questionnaire
consisting close-ended questions have been made, which is filled by the trainee during direct
interaction with the respondents. Interviews have been taken of Relationship managers of
different NBFC's and BANKS to seek the investor‘s behavior towards investment.
ANALYSIS PATTERN:
Critical examinations of various investment instruments have been done and a comparison is
made, based on their merits and demerits.
The data collected form questionnaire is edited, tabulated and analyzed. Various graphical
techniques have been used to present the data in more meaningful way.
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INDUSTRY PROFILE:
An investment industry is on the gloomy side. As now a day‘s maximum people are interested in
investment in various instruments.
Behavior of Household Savings in India Household savings in general and savings in the form of
financial assets in particular exhibited remarkable growth since late eighties. The aggregate
household savings as share to GDP, which was only 1.5 per cent during 1970-71, went up to 4.9
per cent in 1980-81. It went up sharply to 14.2 per cent in 1990-91 and further to 19.7 per cent in
1994-95 before coming down marginally to 18.5 per cent in 1998-99. The growth of household
savings during the decade of eighties has been facilitated by a simultaneous increase in physical
as well as financial assets. While household savings in physical assets increased from 3 percent
of GDP in 1980-81 to 7.8 per cent in 1990-91, savings in the form of financial assets increased
from 2 per cent to 6.4 per cent for the corresponding period. Financial savings during first half of
the nineties registered remarkable growth from 6.4 per cent of GDP in1990-91 to 11.9 per cent in
1994-95. However, the share of financial savings to GDP fluctuated since 1995-96.
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The Indian financial sector is on a roll. Driven by a strong investor interest and an expanding
market, the industry is also becoming more vibrant, with new types of products and services
being offered to meet the needs of the booming economy.
The buoyancy in the economy is estimated to lead to a four-fold increase in India's investable
wealth from US$ 250 billion in 2007 to US$ 1 trillion by 2012. Simultaneously, according to a
report by Celent, an international consultancy firm, India's wealth management segment will rise
to an estimated 42 million households by 2012 from about 13million households in 2007.
Clearly, there is huge potential in this segment. Significantly, wealth management revenues are
expected to account for 32-37 per cent of the total full-service financial institutions by 2012. The
market is also expected to undergo a structural transformation with organized players increasing
their market share.
The attractiveness of India in the global financial market is also reflected in the Indian cities -
Mumbai, New Delhi and Bangalore - finding a place of pride in the list of the world's top 75
commercial centers, as per the 2011'Mastercard Worldwide Centers of Commerce Index'.
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ANALYSIS OF INSTRUMENTS
Types of Investments / various instruments
Overview
There are many ways to invest your money. Of course, to decide which investment vehicles are
suitable for you, you need to know their characteristics and why they may be suitable for a
particular investing objective.
• Debt Market
• Public Provident Fund
• Fixed Deposits
• Bonds
• Mutual Funds
• Banks Deposits
• Equity Market
• Initial Public Offer
• Insurance
• Forex
• Cash
• Gold
• Real Estate
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Investment Characteristics and Return of different Financial products
Chart I
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Where you invest your money depends on your risk-taking capacity as well as your return
expectations. You may tend to think that stocks are high risk investment options and may shy
away from it. But there is a way that you can lower the risk involved in stock investing without
lowering your returns. But before you learn this way, it is important to understand your
investment profile.
Chart II
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Along with risk factor there are lot of other factors which affect the investment decisions of
investors and return on investment. We will discuss most of them in the next section
4.5) various factors which affects investment decision
1)
CRR: Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If
RBI decides to increase the percent of this, the available amount with the banks comes down.
RBI is using this method (increase of CRR rate), to drain out the excessive money from the
banks.
How It Affects:
a) From a stock market perspective Rising interest rates have several implications including –
Slowing down the overall growth in the economy; this effectively means that demand for goods
and services, and investment activity, gets adversely impacted.
Apart from the fact that overall growth is impacted, companies take a hit on account of higher
interest costs that they have to bear on their outstanding loans (to the extent their cost of funds is
not locked in)
Since some investors tend to leverage and invest in the stock markets, higher interest rates
increase expectation of returns from the stock markets; this has the impact of lowering current
stock prices
An overall decline in stock prices has a cascading effect as leveraged positions are unwound (on
account of meeting margin requirements), leading to still lower stock prices.
b) From a debt market perspective
If you are contemplating on investing monies in the debt market, you will benefit from higher
interest rates on offer. However, existing investors in debt oriented funds may take a onetime hit;
but at the same time, since overall interest rates are higher, from here on, such funds will yield
higher return
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c) From the perspective of borrower:
As a prospective borrower, you are the worst hit. The cost of money i.e. interest rates will rise
post the CRR hike. You will probably need to settle in for a lower loan amount given the EMI.
If you are an existing borrower, as long as the rate of interest on your loan is fixed, you are
immune to any rise in interest rates. However, if you have a floating rate loan, then expect either
the tenure of the loan or the EMI to jump soon
2) Inflation:
Inflation is defined as an increase in the price of bunch of Goods and services that projects the
Indian economy. An increase in inflation figures occurs when there is an increase in the average
level of prices in Goods and services. Inflation happens when there are less Goods and more
buyers, this will result in increase in the price of Goods, since there is more demand and less
supply of the goods.
How it affects:
The investors have less money to invest if there is increase in prices of goods or increase in
inflation rate. So it restricts investor to invest in order to fulfill other needs.
3)Global factors: If there is any change in global environment then it also affects the investors
decision of investment, as present scenario there is change in crude price which is very high due
to that it affects Indian economy as increase in rates of each product which results in high
inflation rate. Due to that investors have fewer amounts for investment.
Also these factors change the investor‘s mind of investment. Still if they want to invest they look
to that instruments which are constant in prices like gold. If they have handsome amount for
investment then they look for real estate sector. So due to these factors their investment decision
goes affected and it changes their behavior pattern towards investment.
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RESEARCH
AND
INTERPRETATION
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Sample Details
100 people belonging to different fields, who do investment, were asked to fill the questionnaire,
on the basis of which an attempt is made to study the prospects of Financial Planning in the
market. The sample unit consists of those people who are trading in secondary markets, mutual
funds, initial public offer, insurance, debt instruments as they can give the accurate information
about financial planning. A sampling frame has been developed so that everyone in the target
population has an equal chance of being sampled.
Personal Information:
Sex Ratio:
From the total 100 respondents 17 were females and 83 were males.
Chart III
17%
83%
Female
Male
107
Geographical Distribution:
Majority of the respondents were from Noida. The percentage is 72% from Noida, 28% were
from Delhi.
Chart IV
Occupational Structure:
Samples include responses from Businessmen and a good number of service class which
includes Chartered Accountant, Engineer, Banker, CEO, Software Professionals, etc so as to
include their perception and awareness Regarding financial planners. The percentage of
businessman is 40%and servicemen are 60%. Income Levels: Income levels were classified into
3 levels, namely below less than 5 lac, 5-10 lac , more than 10 lac.
72%
28%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Noida Delhi
Series1
108
6.1. What is your objective behind investments?
Investing is a conscious decision to set money aside for a long enough periods in an avenue that
suits your risk profile. The questionnaire asked the respondents to reveal their objective behind
investments, majority of the respondents disclosed growth of capital/ returns as their prime
objective while safety of capital stands secondary. This response reflects the investor willingness
to take calculated risks for growth of their capital.
109
Interpretation:
The research has highlighted that growth of capital is the most important factor which they
consider while investing as evident by the response where in 76% of the respondents voted for
the same. However, it can also be seen that 68% of the investors prefer safety of their capital as
their secondary objective which depicts that investors give greater emphasis to the returns and
willing to adjust with safety of capital. Liquidity is the least important factor as only 15% of the
respondents voted for it which signifies that the financial planner should designed the portfolio
giving more importance to growth and safety of capital as per individual financial goals while
liquidity should have the minimum focus.
In our sample, inflation has only been given 18% of the total sample which reflects that people
are still not giving much consideration to inflation even due to a sharp rise in the inflation rate.
The people who are business man are generally seen RETURNS/ GROWTH + TAX BENEFIT
at the time of investment. The 7.5% of business people keeps liquidity and beating inflation in
mind at the time of investment.
Serviceman generally gives preference to SAFETY and RETIREMENT BENFITS. 21.66%
and25% people who are serviceman also keep in mind the liquidity and beating inflation at the
time of investment. 36.67 people invest to get benefit from tax.
110
6.2) Readers response on whether they plan their investment:
Interpretation
This question is asked to all investors to see whether they plan their investment. The Response
from the surveying people shows that 82% people plan or get planned their portfolio of their
investment in order to invest safely and get good returns. Most of the people prefer to invest
through NBFC‘s as they think are specialized in their work and provide good suggestions.
The 18% people who do not plan just follow the trends of others investors and invest what their
friends, relatives, office mates and their bankers said to them. But they invest by keep in mind
their future, as they invests in insurance, P.P.F to make their future safe or keep retirement
planning in their mind.
Chart V
6.3. What is your practice on saving money?
To determine the saving habits of the investors, the questionnaire enquired the respondent‘s as
about their practice of savings. The greater the inclination of saving the more will be the funds
available for investment.
82%
18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Pllaned investment Follow trend
Series1
111
Interpretation:
Around 48% of the respondents try to save from their income, while only 30% of the
respondents always make an effort to save some part of their income.
Chart VI
Chart VI
48%
52%
Try to Save
Don't try tosave
30%
70%
48%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Always make effort to save
Just try to save Total
Series1
112
No one respondent response that he don‘t believe in savings, which substantiate high Importance
of savings in Indian households. However, it was also observed that majority of the women
respondents had high inclination for savings and try to save the maximum out of their available
income.
6.4) Type of instrument prefers for investment?
On enquiring from the respondents about which instruments they prefer most for their
investment.
Interpretation:
The surveyed people give priority top to Insurance, which is followed by Mutual funds.
The businessmen people generally give preference to EQUITY + MUTUAL FUNDS
+INSURANCE. 55% businessmen also invest in property as they think investment in real estate
creates more growth/profit. As real estate needs huge amount as investment so only those people
whose income level is more than 10 lac invests in real estate. According to the surveyed people
response the Gold is also a safer and growth investment opportunity as its price is rising fastly.
Both service and business people invest in gold.
113
6.5. What do you feel is considered to be the ‗fundamentally safe‘ form of investment?
Interpretation:
On enquiring from the respondent about what are the fundamental secure forms of investments,
35.4% of the respondents feel that investing in property is the safest form of investment followed
by Insurance 29%.
The least secured form of investment as revealed by respondents is investment in equity as
secondary market is subject to huge volatility & uncertainty. It can be seen from the response
that people are more willing to put their money in property or real estate in spite of the economy
experiencing a major climb in the property prices. About 14.4% of the respondents feel that
Bank deposits is also the safe form of investments as it gives assured returns on the sum
invested.
114
Safest Avenues to Invest
Chart VII
35.40%
29%
14.40%
Real Estate
Insurance
Bank deposit
115
6.6. How do you take financial decisions?
An individual‘s decision has a vital role to play in achieving investment objectives and thereby
making investments in a systematic manner. Decisions can make or break investment avenues as
wrong decisions would merely lead to wrong investments resulting in major loss.
Interpretation:
On enquiring from the respondents about how they take their financial decisions, majority of the
respondents take their financial decisions independently which depicts they are not taking any
advisory services from financial experts. There are majority of respondents who feel that they
can handle their portfolio on their own and hence make their own decisions regarding
investments. On analyzing the response 48% of the respondents take their financial decisions
independently while only 6% of the respondents take investment decisions from financial
advisors. This opens up the door for various financial advisors who can target these investors and
can give advisory services.
116
6.7) Reader‘s response if they take Decisions Independently:
To know how they take financial decisions if independently then what they see at time of
investment.
Interpretation:
Analyzing the response of investors every investor keep in mind the future growth of investment
instrument, is that instrument can give the good growth or returns on their invested money.
Generally they make assumption of future growth on the basis of history of instrument and invest
accordingly. 95% investors also keep Risk Factor at time of investment in their mind, as they
want to invest in safer instrument as they said no one wants to lose their money. They also accept
investment in equity is more risky but it adds higher returns. 34% investors doesn‘t want to take
risk of volatility they think of fixed returns by investing in
Fixed deposits also they invests in insurance and P.P.F and gold.
6.8) READERS RESPONSE TOWARDS INSURANCE POLICY
Response from investors discloses that they are wants to invest in insurance so this question is
asked from all investors why they want to invest in insurance.
Interpretation:
34% of the investors Response about investment in insurance discloses that they want
safety/security of their family in terms of money if any mis happening happens to him.
Security is followed by means of saving and saving tax. 28% investors invest in insurance to
save tax and keep it as investment. As they think by investment in insurance they can save
themselves by not paying tax. And after maturity period they will get the handsome amount of
money collectively.
117
6.9. Which all areas should be a part of Financial Planning?
It was an open question which was asked to the respondents and it was observed that out of the
total sample, 26.3% of the respondents wanted real estate to be a part of financial planning which
shows high demand for this product in the Indian market.
Interpretation:
Around 20% of the respondent felt that retirement planning should be a part of financial planning
which depicts that investors are no clear about the concept of financial planning as ‗financial
planning‘ already takes care of retirement, insurance, mutual funds, IPOs, tax planning
whichsome respondents are unaware of as depicted in Figure 6.9 below.
Around 14% of the investors want commodity should also form a part of financial planning as it
is now a booming product in the financial market. There were 10% of the respondents who felt
that age factor should also be a part of financial planning so as to know the right age
for planning.
6.10) Readers response towards preference of Investment:
Reader‘s response about what way they prefer for their investment. Private Banks, NBFC‘s or
through government banks
Interpretation:
78% respondents prefer NBFC‘s for their investment as they think they are specialize in their
work of giving advice, and they knows very well about various investment opportunities
available in market. Respondents who prefer private and public banks are only 22% they think
government bank gives reliable news.
118
But generally they prefer banks if someone is their known to them or if there is any good
relationship, which is made by giving them services at the time of their current and savings
accounts.
6.11) Reader‘s Response towards Tendency they prefer:
Respondent‘s response to wards which tendency they prefer at time of investment shown in fig
6.11
Interpretation:
Respondents‘ response shows 39% people like the tendency high risk high return, as they believe
unless and until we would not take risk how can we earn or get return more. That tendency is
generally prefer by business and servicemen whose income level is more than 10 lac.
The income level of 5 to 10 lac generally prefer moderate risk or low risk to invest in insurance,
mutual fund, gold . The age level also influence the tendency the age level between 18 –30 likes
to take risks but above 45 they prefer low risk low return.
119
6.12) Reader‘s response towards Factors consideration at time of investment:
Respondents‘ response about what factors they considered at the time of investment.
Interpretation:
According to respondents response they keep the CRR, Inflation and Global economy at 53%,
42%and 46%. As inflation rate increases the prices of goods and reduces value of money. Global
economy also affects their investment instruments. So according to them they invest in
their money.
Chart VIII
53%
42%
46%
CRR
Inflation
Global Economy
120
6.13) Investors changing behavior towards various investment instruments:
In present era the behavior of investment is changed as past. Previously, the investor looks for
the safest or very low risk instruments. As there mean to just keep their money along with the
some returns which they thought as the premium what they could not get if they keep it in
homes. So they look for the schemes like fixed deposits, post office schemes, and very nominal
looks towards insurance.
But now there behavior is getting changed. Now they want high returns on their savings which
they can get only if they take high or moderate risk, so now they prefer more investment in
equity, mutual funds, real estate, Forex, insurance etc. which provides more returns in
comparison to fd‘s, and post office schemes.
Reasons for their changing behavior:
1) More awareness: now the investors have more awareness about the benefits of various
instruments like insurance benefits, so investors behavior is changed towards insurance
2) More income level: After globalization the income of the people in India has risen, so they have
more money in their hands. To which they want to invest where they can get good returns and
they are ready to take risk for that.
3) Changing mind set: due to more income level their mind set up is changed as they are ready to
take higher risks in order to get returns. Now they invest their money not only to keep, also they
want good returns from that.
121
CONCLUSION
As it could be seen from the above factors that investors are having low saving potential, growth
of capital acts as a primary objective behind investments, investors taking financial decisions
independently, which depicts that there is a need of financial planners to approach these
investors in a proper manner so as to provide value additions to the saving potential
and portfolio.
RECOMMENDATIONS AND SUGGESTIONS
On studying the peculiarities of the wealth management industry and analyzing the responses of
the investors on their perception, the following points are recommended which a general
financial advisor should consider while approaching the people.
India is seeing as a maturing financial environment. Options to attract savings exist through a
spate of financial products and services that have differing risk/growth and asset accretion
propositions. It is becoming increasingly obvious to people that their money, in real terms, would
fall in value if they were to keep their money in the bank. And hence the keenness to find out the
right Avenue that would help grows their savings or assets.
While this is becoming a universally undeniable desire, the fact is that some people don‘t have
the knowledge and inclination to understand the financial markets and others don‘t have the time
to follow them. This then leads to financial decisions being taken by individuals based on either
relationship hearsay or the sales call of a vendor Unbiased Advisory.
122
Investment Advisory Services are in this business of managing the assets of individuals and
corporations. However, the distinct model of services should enable the advisors to offer
unbiased advice on the entire spectrum of personal finance, keeping the clients interest foremost
while doing so. The investment strategies developed across perpetuity should outline a detailed
financial plan with frequent reviews of investment decisions made to ensure that portfolios are in
line with what was planned. I‘d like to add here that the financial advisory should not only be
unbiased with respect to an asset class but it should also be independent of biases across
manufacturers within an asset class.
Investment in Foreign Markets
A recent pioneering initiative is to facilitate for the clients investment in foreign markets, adding
to the advisory capability that spreads across the widest range of asset classes in the country. One
needs to be cautious while investing and it is now important to hire a financial planner to plan
Your wealth better.
Financial Planning Should Be Encouraged
‗Financial planning‘ is the process of charting out the money course of your life. It‘s like having
a financial roadmap that guides your every step till you pass on the baton to the next generation.
In other words, it is a process in which an individual sets long-term financial goals through
investments, tax planning, asset allocation, risk management, retirement planning and estate
planning. Most of us approach our financial lives like the disorganized traveler who gets to his
destination eventually and perhaps even enjoys the rough ride. We think we have a clear
roadmap in mind, but our financial lives are marked by ad-hoc decisions and capitulation to the
temptations of the flavors of the financial season.
One of the myths regarding financial planning is that only rich individuals and HNIs can
undertake this. This perception exists because most players in the market target these people, as
they are very profitable customers. However, anyone can use financial planning. In fact,
individuals should use effective financial planning to build their wealth over the years
123
Awareness of the Benefits of Planning Early for Retirement
Anyone who will retire needs to plan for it. There is more than one reason to save for retirement.
The all-important reason is the rising cost of living. It‘s called inflation.
If you start planning for retirement early on, you can bridge the gap between what you have in
your hand today and what you would like to have when you retire. If you begin saving for
retirement early on in your life, you can set aside smaller amounts. You can also take on more
risk by investing larger amounts inequities i.e., stocks and equity funds. If you delay saving for
retirement, you will have to invest larger sums of money to save for the same amount; also the
share of equity investments as a portion of your retirement savings will have to be lower. The
older you are when you start, the more risk averse you will have to be. Your retirement portfolio
will actually be a mix of stocks, debt securities, index funds and other money market
instruments. This mix will change as you do, moving increasingly toward low-risk guaranteed
investments as you age. Unless planned well, retirement phase will be a downhill ride. People
should come out of the concept of just keeping their money in banks & should concentrate on
doing financial planning to maximize their returns by taking proper guidance from financial
planner.
124
QUESTIONNARIE
Name of the Investor -
Education
-
Contact No.
-
Q.1 What is the occupation of the investor?
a) Service
b) Business
Q.2 what is the age of the investor?
a) 18-25 years
b) 25-35 years
c) 35-45 years
d) 45-60 years
e) Above 60 years
Q.3 What is the annual income of the investor?
a) Less than 5 lac
b) 5 – 10 lac
c) More than 10 Lac
Q. 4 What is your practice on saving money?
a) I don‘t believe in saving.
b) I‘d like to save, but my expenses & financial commitments do not permit me.
c) I try to save whenever & wherever possible.
d) I always save some percentage of my take-home salary without exception.
e) Others
125
Q.5 What is the annual savings of the investor?
a) 10 % to 20 %
b) 20 % to 30 %
c) 30 % to 40 %
d) More than 40 %
Q.6 Which type of instrument you prefer for your investment?
a) Public Provident Fund
f) Gold
b) Fixed Deposits
g) Real estate
c) Mutual Funds
h) Forex
d) Equity Shares
i) Initial public Offer
e) Post Office Schemes
j) Insurance
k) Government Bonds
l) Bank deposits
m) Others
126
Q.7What is the purpose of the investment?
a) Safety
b) Returns
c) Retirement Planning
d) Tax Benefits
e) Beating Inflation
f) Liquidity
g) Others
Q.8 Where do you prefer for investment?
a) Government banks
b) Private banks
c) NBFC's
d) Public sector
e) Private sector
f) Others
Q.9 How do you take Financial Decisions?
a) Independently
b) Advise from Friends/Relatives
c) Advise from banks
d) NBFC's advisers
e) Financial advisor
f) Others
Q 10 If independently, then what do you see while investing?
a) Risk Factor
b) Fixed returns
c) History of instrument
d) Future growth
e) Trend of other investors
127
Q11. Which Tendenacy do you prefer the most?
a) Low risk, low return
b) Moderate risk, moderate return
c) High risk, high return
Q.12 Which factors do you considered the most at time of investment?
a) Global Economy/prices
b) Inflation rates
c) CRR
d) Repo rate
e) Others
Q. 13 What are your expectations From?
Government
______________________________________________________________________________
__________________________________________________________________
Financial Advisor
______________________________________________________________________________
__________________________________________________________________
Investment Company
128
COMPARATIVE STUDY OF
MUTUAL FUND AND
EQUITY SHARE
129
Mutual fund
Mutual fund is a trust that pools money from a group of investors (sharing common financial
goals) and invest the money thus collected into asset classes that match the stated investment
objectives of the scheme. Since the stated investment objectives of a mutual fund scheme
generally form the basis for an investor's decision to contribute money to the pool, a mutual fund
can not deviate from its stated objectives at any point of time.
Chart IX
130
BROAD MUTUAL FUND TYPES
Chart X
131
Birla Sun Life Dividend Yield Plus
Open-end and Equity: Mid & Small Cap
Risk Grade- Low
Return Grade- Above Average
NAV- Rs.86.80 as on June 20th
Net Assets- Rs.882.5 crore as on June 20th
FUND MANAGER
Nishit Dholakia
Since Jan 2011
132
Fund objectives & Strategy
The scheme aims to generate returns by investing in high dividend paying companies. It would
aim to build a portfolio that provides high dividend yield, substantial capital protection and a
strong possibility of capital protection.
Table I
Composition (%)
Equity 92.14
Debt 0.00
Cash 7.86
133
Birla Sun Life Dividend Yield Plus
Fund Performance Vs S&P CNX Nifty
Chart XI
Fund
S&P CNX Nifty
134
Table II
History 2004 2005 2006 2007 2008 2009
NAV (Rs)
29.09 37.97 41.94 65.79 36.55 69.35
Total Return
(%)
29.06 30.53 10.46 56.86 -44.44 89.74
+/-S&P CNX
Nifty
18.38 -5.81 -29.37 2.10 7.35 13.96
+/-S&P CNX
500
1.20 -5.72 -23,53 -5.64 12.69 1.17
Rank(Fund/
category)
10/15 24/25 34/37 26/41 2/47 36/48
52 Week
high (Rs.)
29.09 37.97 44.81 65.79 68.14 69.42
52 Week low
(Rs.)
17.86 26.12 30.72 38.15 31.92 32.81
Net Asset
(Rs. Cr.)
637.51 732.67 487.79 370.55 188.89 340.33
Expense
Ratio (%)
2.31 2.23 2.18 2.26 2.33 2.39
In the Same way we have all the things for the years 2010 & 2011
2010 90.05 29.85 11.90 15.72 7/62 96.88 66.63 723.20 2.32
2011 86.80 -3.61 4.11 4.21 17/60 90.69 77.60 - 2.15
135
Table III
Company Sector P/E YTD %Assets
ITC FMCG 31.50 14.76 4.50
Glaxo Consumer
Healthcare
FMCG 33.40 7.15 2.92
ONGC Energy 12.40 -14.58 2.89
Tata Consultancy
Services
Technology 30.90 0.55 2.50
Infosys Technologies technology 26.70 -13.56 2.43
HPCL Energy 8.80 0.10 2.10
BPCL Energy 15.50 1.27 2.06
Coromandel
Imternational
Chemicals 14.10 7.60 2.04
Hindustan Unilever FMCG 33.70 6.95 2.03
ACC Construction 17.50 -9.89 2.01
Wyeth Healthcare 18.80 20.55 2.00
NTPC Energy 17.20 -5.33 1.97
Cummins India Engineering 22.50 -12.66 1.97
Castrol India Energy 27.40 21.09 1.95
Kewal Kiran Clothing Textile 19,20 14.46 1.86
Indian overseas bank Financial 8.40 -2.02 1.74
Glaxosmithkline
pharma
Healthcare 47.40 -1.06 1.72
Tata Motors DVR Automobile -24.61 1.72
Chambal fertilizers &
Dhemicals
fertilizers 10.70 -9.89 1.70
136
Table IV
Quarterly Returns (%)
Q1 Q2 Q3 Q4 Year
2011 -5.83 1.12 - - -
2010 5.06 9.59 13.85 -0.96 29.85
2009 -1.83 43.73 25.48 7.17 89.74
2008 -29.70 -12.48 2.47 -11.89 -44.44
2007 -4.77 18.00 8.93 28.15 56.87
Table V
Return Rank S&P CNX SIP
Fund Co. Fund/cat. Nifty Return
Year-to-date -3.61 -6.42 17/60 -7.72 -
3-month 0.78 0.53 29/62 -3.10 28.87
6-month -0.07 -2.97 15/60 -4.13 21.30
1-year 7.39 1.84 15/58 6.87 1.58
2-year 31.57 26.41 15/54 17.80 14.12
3-year 28.94 14.80 3/51 12.38 29.42
5-year 19.93 12.70 3/34 12.97 21.17
7-year 23.57 24.45 6/12 20.68 19.81
10-year - - - - -
Return less than 1-year are absolute and over 1 year are annualized.
137
Table VI
Top 10 Sectors Weights (%)
Fund Nifty
Energy 16.95 17.88
Financial 15.85 26.99
FMCG 12.34 8.47
Chemicals 8.76 -
Services 7.23 -
Technology 6.75 13.80
Healthcare 4.38 3.72
Diversified 4.14 7.09
Automobile 3.67 7.05
Engineering 3.60 2.36
Risk Analysis
Table VII
Volatility Measurement
Standard Deviation 26.37
Sharpe ratio 0.91
Beta 0.81
R-Squared 0.88
Alpha 14.80
138
Standard Deviation
Meet the most popular of the risk measures -- one with a distinct advantage over beta. While beta
compares a fund's returns with a benchmark, standard deviation measures how far a fund's recent
numbers stray from its long-term average. For example, if Fund has a 89.76% average rate of
return and a standard deviation of 26.37%, most of the time, its return will range from 63% to
115%. A large standard deviation supposedly shows a more risky fund than a smaller one. But
here, again, what's problematic is your reference point. The number alone doesn't tell you much.
You have to compare one standard deviation with the others among a fund's peers. But a more
glaring problem is that the standard deviation system rewards consistency above all else. A fund
is considered stable based on the uniformity of its own monthly returns. So if it loses money but
does so very consistently it can have a very low standard deviation -- down 3% each and every
month wins a standard deviation of zero. And likewise, a fund that gains 10% one month and
15% the next would be penalized by a high standard deviation -- a reminder that volatility,
although perhaps a cousin to risk, itself isn't necessarily a bad thing.
We can calculate standard deviation for the fund by using formula
139
Beta
Beta is the sensitivity of an investment's returns as compared to a benchmark. This
benchmark is commonly the S&P 500, but Fund Manager allows you to assign any
investment as the benchmark.
The returns for both the investment and benchmark are calculated. If the comparison
period is 5 years, there are 60 monthly returns for each the investment and the
benchmark. To calculate the beta, these 60 data points are plotted with the
benchmark returns along the X axis, and the investment returns along the Y axis.
The slope of a best-fit line through these data points is the Beta.
140
Alpha
Alpha is a measure of an investment's performance relative to a benchmark, beyond what
would be predicted by beta. This benchmark is commonly the S&P 500, but Fund
Manager allows you to assign any investment as the benchmark.
The monthly excess returns for both the investment and benchmark are calculated.
If the comparison period is 5 years, there are 60 monthly excess returns for each the
investment and the benchmark. To calculate the alpha, these 60 data points are
plotted with the benchmark excess returns along the X axis, and the investment
excess returns along the Y axis. The Y-axis intercept of a best-fit line through these
data points is the Alpha.
where Beta is:
141
Sharpe Ratio
What Does Sharpe Ratio Mean?
A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted
performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that of
the 10-year Treasury bond - from the rate of return for a portfolio and dividing the result by the
standard deviation of the portfolio returns. The Sharpe ratio formula is:
142
R-Squared
R-squared is a statistical tool used to measure the degree of correlation between a portfolio (or
single stock) and the broader market (market index or other stock). Correlation analysis allows
investors to make predictions about the growth or price direction of an asset by looking at how it
correlates with other market variables. Specifically, the number R^2, is used as a metric to
measure how well outcomes can be predicted.
143
Best Performance
YEAR 146.00%
Chart XII
144
QUARTER 61.81%
Chart XIII
145
MONTH 33.42(%)
Chart XIV
146
Worst Performance
Chart XV
Year -45.22%
147
Chart XVI
Quarter -32.56%
Chart XVII
Month -28.85%
148
Investment Information
AMC : Birla Sun Life Asset Management Company Ltd.
Website : www.birlasunlife.com
Registrar : Computer Age Management Services Ltd.
Launch :February 2003
Min. Investment (Rs.) :50000
Min. SIP Investment (Rs.) :1000
Entry Load : Nil
Exit Load : 1% for redemption within 365 days
Value Research Analysis
Strategy
The fund invests in fundamentally sound companies with a dividend yield at least twice the
Sensex yield. Dividend paying companies usually have healthy free cash flows, steady earnings
growth and a strong alance sheet. This results in steady stock returns over the long term while
providing relatively better downside protection in times of market
correction. The strategy of investing in a dividend yield stock at times becomes contrarian, as
undervalued or out-of-favour stocks also offer higher dividend yield.
149
The fund also has the flexibility to invest up to 35 per cent in companies
facing special situations like de-mergers, buy-backs and open offers, which is used very
selectively with a focus on minimising the downside risk.
Our View
This fund has substantial exposure to mid-cap stocks (less than Rs7,000-
crore market cap). But this has not translated into fabulous out performance even in bull runs led
by smaller market cap stocks. But last
year it did put up a good show and had held its ground in 2008. Even in
the current market turbulence, it has fallen less than the average fall of its peers. During periods
of volatility, the fund increases its debt allocation, which was as high as 20 per cent in November
2008.
The Verdict Its downside protection capabilities have proved that the fund gains ground by not
losing it in the first place. One would expect this trait from a dividend yield fund, but its
surprising when one considers the high midand small-cap allocation. The risky bent is balanced
by avoiding aggressive bets and increasing the number of stocks over time.
Historically, the fund has not been a bull-market standout. But over the
long term it proves to be a worthy bet.
Portfolio Insight
The top sectors are Banking, Consumer Non-durables, Software and Pharmaceuticals; sectors
that led the last rally helped the fund participate
in the upswing over the last 18 months.
The fund maintains around 50 per cent exposure to mid caps and about
20 per cent to small caps stocks, making it fairly representative of this category. The low large
cap exposure is limited to a few stocks.
150
True to its valuation-based mandate, this fund manages to contain downsides quite well, when
compared to some of its peers, during market corrections.
On a stock-specific basis, the fund limits exposure to individual stocks
to less than 5 per cent of the portfolio.
Seven fund managers in a short span speaks for itself on fund management with Nishit Dholakia,
the current fund manager taking charge as recently as January 27, 2011.
Now we are going to compare the company‘s‘ performance which has highest asset allocation in
the given mutual fund with S&P CNX NIFTY.
We will try to find out that how much return we will get and how much risk we have to bear if
we hold that particular stock (ITC) in our portfolio.
For the same purpose we have taken the month end data set for the both S&P CNX NIFTY and
ITC equity share. Then we find standard deviation, Beta and Alpha for both. On the basis of
these parameters we can say that how much that particular share is volatile.
151
PERFORMANCE COMPARISION OF ITC
WITH RESPECT TO S&P CNX NIFTY
152
ITC LTD.
Market Cap: 144316Cr
P/E:30.47
Price/Book: 10.29
Div yield (%):5.36
Return On Average Equity (ROAE):28.98
Debt/Equity ratio: 0.01
EPS (TTM):6.12
Current Price: 186.00
153
The ITC Profile
ITC is one of India's foremost private sector companies with a market capitalisation of over US $
33 billion and a turnover of US $ 7 billion. ITC is rated among the World's Best Big Companies,
Asia's 'Fab 50' and the World's Most Reputable Companies by Forbes magazine, among India's
Most Respected Companies by BusinessWorld and among India's Most Valuable Companies by
Business Today. ITC ranks among India's `10 Most Valuable (Company) Brands', in a study
conducted by Brand Finance and published by the Economic Times. ITC also ranks among
Asia's 50 best performing companies compiled by Business Week.
ITC has a diversified presence in Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging,
Agri-Business, Packaged Foods & Confectionery, Information Technology, Branded Apparel,
Personal Care, Stationery, Safety Matches and other FMCG products. While ITC is an
outstanding market leader in its traditional businesses of Cigarettes, Hotels, Paperboards,
Packaging and Agri-Exports, it is rapidly gaining market share even in its nascent businesses of
Packaged Foods & Confectionery, Branded Apparel, Personal Care and Stationery.
As one of India's most valuable and respected corporations, ITC is widely perceived to be
dedicatedly nation-oriented. Chairman Y C Deveshwar calls this source of inspiration "a
commitment beyond the market". In his own words: "ITC believes that its aspiration to create
enduring value for the nation provides the motive force to sustain growing shareholder value.
ITC practices this philosophy by not only driving each of its businesses towards international
competitiveness but by also consciously contributing to enhancing the competitiveness of the
larger value chain of which it is a part."
ITC's diversified status originates from its corporate strategy aimed at creating multiple drivers
of growth anchored on its time-tested core competencies: unmatched distribution reach, superior
brand-building capabilities, effective supply chain management and acknowledged service skills
in hoteliering. Over time, the strategic forays into new businesses are expected to garner a
significant share of these emerging high-growth markets in India.
154
ITC's Agri-Business is one of India's largest exporters of agricultural products. ITC is one of the
country's biggest foreign exchange earners (US $ 3.2 billion in the last decade). The Company's
'e-Choupal' initiative is enabling Indian agriculture significantly enhance its competitiveness by
empowering Indian farmers through the power of the Internet. This transformational strategy,
which has already become the subject matter of a case study at Harvard Business School, is
expected to progressively create for ITC a huge rural distribution infrastructure, significantly
enhancing the Company's marketing reach.
ITC's wholly owned Information Technology subsidiary, ITC Infotech India Ltd, provides IT
services and solutions to leading global customers. ITC Infotech has carved a niche for itself by
addressing customer challenges through innovative IT solutions.
ITC's production facilities and hotels have won numerous national and international awards for
quality, productivity, safety and environment management systems. ITC was the first company
in India to voluntarily seek a corporate governance rating.
ITC employs over 24,000 people at more than 60 locations across India. The Company
continuously endeavors to enhance its wealth generating capabilities in a globalising
environment to consistently reward more than 4,05,000 shareholders, fulfill the aspirations of its
stakeholders and meet societal expectations. This over-arching vision of the company is
expressively captured in its corporate positioning statement: "Enduring Value. For the Nation.
For the Shareholder."
155
Chart XVIII
Board of Directors
C H A I R M A N
Y C Deveshwar
E X E C U T I V E D I R E C T O R S
Nakul Anand P V Dhobale K N Grant
N O N - E X E C U T I V E D I R E C T O R S
A Baijal S Banerjee AV Girija Kumar
S H Khan S B Mathur D K Mehrotra
H G Powell P B Ramanujam Anthony Ruys
Basudeb Sen K Vaidyanath B Vijayaraghavan
156
Chart XIX
The ITC Vision & Mission
Sustain ITC's position as one of
India's most valuable corporations
through world class performance,
creating growing value for the
Indian
economy and the Company‘s
stakeholders
To enhance the wealth
generating
capability of the enterprise in a
globalising environment,
delivering superior and
sustainable
stakeholder value
157
Here we have historical data of ITC LTD. Since April 2007 till June 2011.
Table VII
Prices
Date Open High Low Close Avg
Vol
Adj
Close*
02-Jun-
11 0.335 Dividend
01-Jun-
11 71.89 72.46 68.48 70.77 234,300 70.77
27-
May-
11 0.335 Dividend
02-
May-
11 71.34
74.67
69.36 72.29 232,900 71.95
01-
Apr-11 70.2 71.5 67.46 70.93 228,300 70.27
01-
Mar-11 68.95 70.28 65.09 69.9 171,800 69.25
25-
Feb-11 0.335 Dividend
01-
Feb-11 66.11 68.99 66.11 68.55 213,200 67.91
03-Jan-
11 61.79 67.45 61.76 65.7 241,300 64.76
01-
Dec-10 60.96 62.77 59.77 61.98 163,000 61.09
29-
Nov-10 0.335 Dividend
158
01-
Nov-10 62.96 63.17 59.92 60.55 203,300 59.69
01-
Oct-10 62.18 62.7 60.52 62.61 199,000 61.38
01-
Sep-10 58.58 63.89 58.39 62.25 366,000 61.02
30-
Aug-10 0.335 Dividend
02-
Aug-10 57.65 59.5 55.74 57.96 277,700 56.82
01-Jul-
10 53.16 58.49 51.65 56.74 274,500 55.31
01-Jun-
10 52.4 55.53 50.74 52.91 269,800 51.58
27-
May-
10 0.32 Dividend
03-
May-
10 56.06 56.22 21.8 52.71 438,000 51.38
01-
Apr-10 55.04 56.66 54.35 55.83 272,200 54.09
01-
Mar-10 53.59 56 53.54 55 215,300 53.28
25-
Feb-10 0.32 Dividend
01-
Feb-10 53.94 56.04 50.75 53.38 300,600 51.71
04-Jan-
10 52.7 54.37 51 53.72 381,600 51.74
159
01-
Dec-09 44.59 52.77 44.59 52.09 401,500 50.17
27-
Nov-09 0.32 Dividend
02-
Nov-09 44.73 46.63 44.14 44.47 278,900 42.83
01-
Oct-09 45.32 45.95 42.9 44.42 470,200 42.48
01-
Sep-09 46.45 47.13 44.45 45.45 326,000 43.47
28-
Aug-09 0.32 Dividend
03-
Aug-09 48 48.69 45.89 46.58 259,700 44.55
01-Jul-
09 45.68 48.01 41.9 47.7 333,400 45.31
01-Jun-
09 43.37 46.82 42.88 45.36 764,200 43.09
28-
May-
09 0.305 Dividend
01-
May-
09 43.54 45.53 40.57 42.89 528,700 40.74
01-
Apr-09 42.98 45.79 40.75 43.53 559,000 41.05
02-
Mar-09 36.21 44.26 32.26 43.62 639,800 41.13
26-
Feb-09 0.305 Dividend
160
02-
Feb-09 41.51 45.48 35.53 36.93 553,500 34.82
02-Jan-
09 43.76 46.5 38.52 41.98 547,700 39.27
01-
Dec-08 40.84 43.94 35.24 43.68 479,600 40.86
26-
Nov-08 0.305 Dividend
03-
Nov-08 40.41 47.62 35.89 42 618,800 39.28
01-
Oct-08 52.67 56 32.35 40.58 505,400 37.66
02-
Sep-08 57.05 59.99 49.85 51.77 527,900 48.05
28-
Aug-08 0.305 Dividend
01-
Aug-08 52.1 57.5 49.35 56.01 347,900 51.98
01-Jul-
08 50.71 56.09 50.5 52.12 368,800 48.11
02-Jun-
08 54.51 56.93 50.42 51.11 326,100 47.18
29-
May-
08 0.29 Dividend
01-
May-
08 56 56.99 53.14 54.57 314,200 50.37
01-
Apr-08 52.92 57.13 51.86 55.78 277,300 51.22
161
03-
Mar-08 53.17 54.72 49.16 52.06 423,500 47.8
28-
Feb-08 0.29 Dividend
01-
Feb-08 53.5 58.14 52.83 53.3 511,300 48.94
02-Jan-
08 56.01 56.3 49.87 52.84 694,000 48.26
03-
Dec-07 50.39 57.55 49.7 56.42 478,900 51.53
29-
Nov-07 0.29 Dividend
01-
Nov-07 56.5 58.58 46.24 51.04 504,400 46.62
01-
Oct-07 49.72 57.8 49.72 57.24 297,200 51.98
04-
Sep-07 44.51 51.39 44.22 49.55 323,100 45
29-
Aug-07 0.29 Dividend
01-
Aug-07 41.95 49.84 41.4 44.48 621,400 40.39
02-Jul-
07 40.89 44.89 40.4 42.05 388,200 37.93
01-Jun-
07 43.82 43.88 39.38 40.63 396,800 36.65
30-
May-
07 0.275 Dividend
01- 42.08 46.42 41.73 43.4 309,300 39.15
162
May-
07
12-
Apr-07 42.23 42.99 41.83 42.08 209,800 37.72
163
Table IX
Historical Data For S&P CNX NIFTY
Prices
Date Open High Low Close Avg Vol Adj
Close*
01-Jun-
11 5,561.05 5,604.95 5,195.90 5,471.25 0 5,471.25
02-
May-
11 5,766.90 5,775.25 5,328.70 5,560.15 0 5,560.15
01-
Apr-11 5,835.00 5,944.45 5,693.25 5,749.50 0 5,749.50
01-
Mar-11 5,382.00 5,872.00 5,348.20 5,833.75 0 5,833.75
01-
Feb-11 5,537.30 5,599.25 5,177.70 5,333.25 0 5,333.25
03-Jan-
11 6,177.45 6,181.05 5,416.65 5,505.90 0 5,505.90
01-
Dec-10 5,871.00 6,147.30 5,721.15 6,134.50 0 6,134.50
01-
Nov-10 6,092.30 6,338.50 5,690.35 5,862.70 0 5,862.70
01-
Oct-10 6,030.30 6,284.10 5,937.10 6,017.70 0 6,017.70
01-
Sep-10 5,403.05 6,073.50 5,403.05 6,029.95 0 6,029.95
02- 5,369.55 5,549.80 5,348.90 5,402.40 0 5,402.40
164
Aug-10
01-Jul-
10 5,312.05 5,477.50 5,225.60 5,367.60 0 5,367.60
01-Jun-
10 5,086.25 5,366.75 4,961.05 5,312.50 0 5,312.50
03-
May-
10 5,278.40 5,278.70 4,786.45 5,086.30 0 5,086.30
01-
Apr-10 5,249.20 5,399.65 5,160.90 5,278.00 0 5,278.00
02-
Mar-10 4,935.60 5,329.55 4,935.35 5,249.10 0 5,249.10
11-
Feb-10 4,757.25 4,992.00 4,757.25 4,922.30 0 4,922.30
04-Jan-
10 5,200.90 5,310.85 5,167.10 5,225.65 0 5,225.65
01-
Dec-09 5,039.70 5,221.85 4,943.95 5,201.05 0 5,201.05
03-
Nov-09 4,712.25 5,138.00 4,538.50 5,032.70 0 5,032.70
01-
Oct-09 5,087.20 5,181.95 4,687.50 4,711.70 0 4,711.70
01-
Sep-09 4,662.20 5,087.60 4,576.60 5,083.95 0 5,083.95
03-
Aug-09 4,633.80 4,743.75 4,359.40 4,662.10 0 4,662.10
01-Jul-
09 4,292.30 4,669.75 3,918.75 4,636.45 0 4,636.45
01-Jun-
09 4,450.40 4,693.20 4,143.25 4,291.10 0 4,291.10
165
04-
May-
09 3,478.70 4,509.40 3,478.70 4,448.95 0 4,448.95
01-
Apr-09 3,023.85 3,517.25 2,965.70 3,473.95 0 3,473.95
02-
Mar-09 2,764.60 3,123.35 2,539.45 3,020.95 0 3,020.95
02-
Feb-09 2,872.35 2,969.75 2,677.55 2,763.65 0 2,763.65
01-Jan-
09 2,963.30 3,147.20 2,661.65 2,874.80 0 2,874.80
01-
Dec-08 2,755.15 3,110.45 2,570.70 2,959.15 0 2,959.15
03-
Nov-08 2,885.40 3,240.55 2,502.90 2,755.10 0 2,755.10
01-
Oct-08 3,921.85 4,000.50 2,252.75 2,885.60 0 2,885.60
01-
Sep-08 4,356.10 4,558.00 3,715.05 3,921.20 0 3,921.20
01-
Aug-08 4,331.60 4,649.85 4,201.85 4,360.00 0 4,360.00
01-Jul-
08 4,039.75 4,539.45 3,790.20 4,332.95 0 4,332.95
02-Jun-
08 4,869.25 4,908.80 4,021.70 4,040.55 0 4,040.55
02-
May-
08 5,265.30 5,298.85 4,801.90 4,870.10 0 4,870.10
01-
Apr-08 4,735.65 5,230.75 4,628.75 5,165.90 0 5,165.90
166
03-
Mar-08 5,222.80 5,222.80 4,468.55 4,734.50 0 4,734.50
01-
Feb-08 5,140.60 5,545.20 4,803.60 5,223.50 0 5,223.50
01-Jan-
08 6,136.75 6,357.10 4,448.50 5,137.45 0 5,137.45
03-
Dec-07 5,765.45 6,185.40 5,676.70 6,138.60 0 6,138.60
01-
Nov-07 5,903.80 6,011.95 5,394.35 5,762.75 0 5,762.75
01-
Oct-07 5,021.50 5,976.00 5,000.95 5,900.65 0 5,900.65
03-
Sep-07 4,466.65 5,055.80 4,445.55 5,021.35 0 5,021.35
01-
Aug-07 0 4,532.90 4,002.20 4,464.00 0 4,464.00
02-Jul-
07 0 4,647.95 4,304.00 4,528.85 0 4,528.85
04-Jun-
07 0 4,362.95 4,100.80 4,318.30 0 4,318.30
03-
May-
07 0 4,306.75 3,981.15 4,295.80 0 4,295.80
12-
Apr-07 0 4,217.90 3,811.25 4,087.90 86,576,200 4,087.90
167
Calculations
Table X
Prices
S&P CNX NIFTY ITC
Date Close Close
X Y XY X^2 Y^2
01-Jun-
11 5,471.25 70.77 387200.4 29,934,576.5625 5008.393
02-
May-11
5,560.15
72.29 401943.2 30,915,268.0225 5225.844
01-Apr-
11 5,749.50 70.93 407812 33,056,750.2500 5031.065
01-Mar-
11 5,833.75 69.9 407779.1 34,032,639.0625 4886.01
01-Feb-
11 5,333.25 68.55 365594.3 28,443,555.5625 4699.103
03-Jan-
11 5,505.90 65.7 361737.6 30,314,934.8100 4316.49
01-Dec-
10 6,134.50 61.98 380216.3 37,632,090.2500 3841.52
01-
Nov-10 5,862.70 60.55 354986.5 34,371,251.2900 3666.303
01-Oct-
10 6,017.70 62.61 376768.2 36,212,713.2900 3920.012
01-Sep-
10 6,029.95 62.25 375364.4 36,360,297.0025 3875.063
168
02-
Aug-10 5,402.40 57.96 313123.1 29,185,925.7600 3359.362
01-Jul-
10 5,367.60 56.74 304557.6 28,811,129.7600 3219.428
01-Jun-
10 5,312.50 52.91 281084.4 28,222,656.2500 2799.468
03-
May-10 5,086.30 52.71 268098.9 25,870,447.6900 2778.344
01-Apr-
10 5,278.00 55.83 294670.7 27,857,284.0000 3116.989
02-Mar-
10 5,249.10 55 288700.5 27,553,050.8100 3025
11-Feb-
10 4,922.30 53.38 262752.4 24,229,037.2900 2849.424
04-Jan-
10 5,225.65 53.72 280721.9 27,307,417.9225 2885.838
01-Dec-
09 5,201.05 52.09 270922.7 27,050,921.1025 2713.368
03-
Nov-09 5,032.70 44.47 223804.2 25,328,069.2900 1977.581
01-Oct-
09 4,711.70 44.42 209293.7 22,200,116.8900 1973.136
01-Sep-
09 5,083.95 45.45 231065.5 25,846,547.6025 2065.703
03-
Aug-09 4,662.10 46.58 217160.6 21,735,176.4100 2169.696
01-Jul-
09 4,636.45 47.7 221158.7 21,496,668.6025 2275.29
01-Jun-
09 4,291.10 45.36 194644.3 18,413,539.2100 2057.53
169
04-
May-09 4,448.95 42.89 190815.5 19,793,156.1025 1839.552
01-Apr-
09 3,473.95 43.53 151221 12,068,328.6025 1894.861
02-Mar-
09 3,020.95 43.62 131773.8 9,126,138.9025 1902.704
02-Feb-
09 2,763.65 36.93 102061.6 7,637,761.3225 1363.825
01-Jan-
09 2,874.80 41.98 120684.1 8,264,475.0400 1762.32
01-Dec-
08 2,959.15 43.68 129255.7 8,756,568.7225 1907.942
03-
Nov-08 2,755.10 42 115714.2 7,590,576.0100 1764
01-Oct-
08 2,885.60 40.58 117097.6 8,326,687.3600 1646.736
01-Sep-
08 3,921.20 51.77 203000.5 15,375,809.4400 2680.133
01-
Aug-08 4,360.00 56.01 244203.6 19,009,600.0000 3137.12
01-Jul-
08 4,332.95 52.12 225833.4 18,774,455.7025 2716.494
02-Jun-
08 4,040.55 51.11 206512.5 16,326,044.3025 2612.232
02-
May-08 4,870.10 54.57 265761.4 23,717,874.0100 2977.885
01-Apr-
08 5,165.90 55.78 288153.9 26,686,522.8100 3111.408
03-Mar-
08 4,734.50 52.06 246478.1 22,415,490.2500 2710.244
170
01-Feb-
08 5,223.50 53.3 278412.6 27,284,952.2500 2840.89
01-Jan-
08 5,137.45 52.84 271462.9 26,393,392.5025 2792.066
03-Dec-
07 6,138.60 56.42 346339.8 37,682,409.9600 3183.216
01-
Nov-07 5,762.75 51.04 294130.8 33,209,287.5625 2605.082
01-Oct-
07 5,900.65 57.24 337753.2 34,817,670.4225 3276.418
03-Sep-
07 5,021.35 49.55 248807.9 25,213,955.8225 2455.203
01-
Aug-07 4,464.00 44.48 198558.7 19,927,296.0000 1978.47
02-Jul-
07 4,528.85 42.05 190438.1 20,510,482.3225 1768.203
04-Jun-
07 4,318.30 40.63 175452.5 18,647,714.8900 1650.797
03-
May-07 4,295.80 43.4 186437.7 18,453,897.6400 1883.56
12-Apr-
07 4,087.90 42.08 172018.8 16,710,926.4100 1770.726
171
Findings
Table XI
∑X ∑Y ∑XY ∑X^2 ∑Y^2
SUM 244,448.05 2671.51
1311954
1
1,215,103,539.052
5 143968
X Ῡ
AVERAG
E 4793.09902
52.3825
5 257245.9 23825559.59
2822.90
3
Beta(β)=
N∑XY-
(∑X)(∑Y)/N(∑X^2)-
(∑X)
β= 0.007245176
Alpha(α)= Ῡ-β*X
17.65570485
172
By similar way we can find the other values like R-squared, Sharpe Ratio and other factors on
the basis of which we can compare the risk and return associated with any security and portfolio.
On the basis of these parameters we can compare the different securities and we can take
decision whether to purchase these securities or not.
We now have these calculations for the mutual fund we have taken and the equity share of the
company which has highest asset allocation in the Birla Sun Life Dividend Yield Plus mutual
fund we have taken.
173
Analysis and Conclusions
174
Why Invest In Mutual Funds Rather Than Individual Stocks?
So what would you rather invest in mutual funds or individual stocks? I‘ve tried both and from
my experience, using mutual funds has been far more fruitful for me than individual stocks have
been. Why? It boils down to a few reasons:
I‘m a lousy stock picker.
I don‘t have time to follow and track my investments actively.
I can potentially become an emotional investor if I handle my investments too actively.
Knowing my limitations, I‘ve decided to opt for my core portfolio to be in mutual funds, while
dedicating only a small percentage of my investments to individual stocks and other alternative
investments.
Why Invest In Mutual Funds Rather Than Individual Stocks?
When you‘re new to the stock market, I believe that it‘s best to start with mutual funds to get
your feet wet and to make sure that you‘re able to manage your risks well. You‘ll have to shop
around for a good mutual fund, request a prospectus from each company you look into and
review each fund‘s holdings.
The average investor will gravitate towards buying mutual funds because they want
representation in the stock market while making sure that they are diversified as well. Equity
mutual funds make for great and easy investments since their fund managers are responsible for
choosing the baskets of stocks that comprise the funds. They take away the guesswork for you.
All you have to do now is to review what‘s in each fund and find those funds that are in line with
your investment goals. For instance, are you interested in index funds, foreign equity funds,
small company stock funds or bond funds?
175
If you instead decide to pick stocks, you‘ll be responsible for screening for those that should fit
your portfolio. You‘ll have to make the decision on which stocks meet your criteria, which will
mean that you‘ll need to know how to analyze these stocks and their underlying companies to
find out if they‘re worth buying. You‘ll have to know how to ―read‖ a stock and its
characteristics to find out if it carries good value or has a good chance of doing well going
forward. Not only that, you‘ll have to do it several times over for each stock you include in your
portfolio. You‘ll need to worry about a few things: you‘ll need to make sure that you create a
diversified portfolio of such stocks and that you track the performance of each stock over time.
With mutual funds, fund managers typically do all this work, and this is what makes investing
with funds the convenient choice.
So let‘s summarize a few pros and cons behind mutual funds:
Pros and Cons of Mutual Funds
What are some of the benefits of using mutual funds?
They‘re easy to invest in. You can even set up an automatic savings program where you can
rupee cost average directly into funds every month.
You can buy a diversified basket of stocks with a small amount of money. An Rs.100 can get
you started!
Mutual funds are a practical way to teach children how to invest. Don‘t forget that investing
early gives you a huge advantage on building wealth.
A mutual fund has sufficient liquidity since you can buy and sell it at any time.
Fund managers take care of all the investment legwork for you.
There are mutual funds that have decent track records over the long term.
176
What are some of the disadvantages of mutual funds over other types of stock investments?
You won‘t have the kind of control over your mutual fund that you‘ll have with individual
stocks.
Depending on the type of mutual fund you own, your fund may cost more to own than
holding on to stocks due to annual fund management fees, sales loads, and redemption fees.
Mutual funds get their pricing at the end of the day. When you buy or sell a mutual fund it‘s
usually done at the end of the day when you receive the fund‘s closing price. You won‘t get
to buy and sell funds at real time. Now if you‘re interested in a diversified investment that
behaves more like a stock (but has the attributes of a fund), then try an ETF (or Exchange
Traded Fund).
It is important to review the pros and cons to ensure that a mutual fund is the right investment for
you. Most individuals start out with mutual funds when they invest. However, remember that
there are no guarantees with most investments, so it‘s important to understand your risks, to
weigh them and then to make the right decisions that will allow you to sleep at night.
At last we can conclude that mutual fund has a lot of advantages over the equity share
investment. Here I am going end the report with the advantages of mutual fund in compare to the
equity share.
Having grasped the basic of mutual funds, let us try to understand why you as an investor would
want to invest in them.
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Professional expertise: Investing requires skill. It requires a constant study of the dynamics
of the markets and of the various industries and companies within it. Anybody who has surplus
capital to be parked as investments is an investor, but to be a successful investor, you need to
have someone managing your money professionally.
Just as people who have money but not have the requisite skills to run a company (and hence
must be content as shareholders) hand over the running of the operations to a qualified CEO,
similarly, investors who lack investing skills need to find a qualified fund manager.
Mutual funds help investors by providing them with a qualified fund manager. Increasingly, in
India, fund managers are acquiring global certifications like CFA and MBA which help them be
at the cutting edge of the knowledge in the investing world.
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SUGGESTIONS
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Specially it is suggested to retail or small investors to start their investment with investing in
mutual fund because it has much more advantages for them in comparison to the equity share
investment. Here is the list of advantages which an investor should keep in mind before investing
his/her hard earned money.
Diversification: There is an old saying: Don't put all your eggs in one basket. There is a
mathematical and financial basis to this. If you invest most of your savings in a single security
(typically happens if you have ESOPs (employees stock options) from your company, or one
investment becomes very large in your portfolio due to tremendous gains) or a single type of
security (like real estate or equity become disproportionately large due to large gains in the
same), you are exposed to any risk that attaches to those investments.
In order to reduce this risk, you need to invest in different types of securities such that they do
not move in a similar fashion. Typically, when equity markets perform, debt markets do not yield
good returns. Note the scenario of low yields on debt securities over the last three years while
equities yielded handsome returns. Similarly, you need to invest in real estate, or gold, or
international securities for you to provide the best diversification.
If you want to do this on your own, it will take you immense amounts of money and research to
do this. However, if you buy mutual funds -- and you can buy mutual funds of amounts as low as
Rs 500 a month! -- you can diversify across asset classes at very low cost. Within the various
asset classes also, mutual funds hold hundreds of different securities (a diversified equity mutual
fund, for example, would typically have around hundred different shares).
Low cost of asset management: Since mutual funds collect money from millions of investors,
they achieve economies of scale. The cost of running a mutual fund is divided between a larger
pool of money and hence mutual funds are able to offer you a lower cost alternative of managing
your funds.
Equity funds in India typically charge you around 2.25% of your initial money and around 1.5%
to 2% of your money invested every year as charges. Investing in debt funds costs even less. If
you had to invest smaller sums of money on your own, you would have to invest significantly
more for the professional benefits and diversification.
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Liquidity: Mutual funds are typically very liquid investments. Unless they have a pre-specified
lock-in, your money will be available to you anytime you want. Typically funds take a couple of
days for returning your money to you. Since they are very well integrated with the banking
system, most funds can send money directly to your banking account.
Ease of process: If you have a bank account and a PAN card, you are ready to invest in a mutual
fund: it is as simple as that! You need to fill in the application form, attach your PAN (typically
for transactions of greater than Rs 50,000) and sign your cheque and you investment in a fund is
made.
In the top 8-10 cities, mutual funds have many distributors and collection points, which make it
easy for them to collect and you to send your application to.
Well regulated: India mutual funds are regulated by the Securities and Exchange Board of
India, which helps provide comfort to the investors. SEBI forces transparency on the mutual
funds, which helps the investor make an informed choice. SEBI requires the mutual funds to
disclose their portfolios at least six monthly, which helps you keep track whether the fund is
investing in line with its objectives or not.
However, most mutual funds voluntarily declare their portfolio once every month.
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BIBLIOGRAPHY
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BOOKS:
1. Khan M.Y. and Jain P.K (2001), Financial Management, Tata McGraw Hill.
2. Statistics for Management by Levin and Rubin
3. Pandey I.M. (2003), Financial Management, Tata McGraw Hill.
4. Stephen G. Ryan, Financial instruments and institutions
5. Frank J. Fabozzi, Harry M. Markowitz, Harry Markowitz, The theory and practice of
investment management
6. Gerald Krefetz, The basics of investing
7. David L.Scott, How to manage your investment risks and returns
8. Kathy kristof, investing for beginners
9. Sundar Sankaran, Indian mutual funds
10. Ankit Gala & Jitendra Gala, Guide to Indian Mutual Funds
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WEBSITES
http://finance.yahoo.com
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http://www.mutualfundsindia.com/
http://www.icai.org
www.ashlarindia.com
www.wikipedia.org
www.bseindia.com
www.moneycontrol.com
www.economywatch.com/market/capital-market/indian
business.mapsofindia.com
articles.economictimes.indiatimes.com
http://www.google.co.in/
personalfinance201.com
www.hsbc.co.in
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books.google.com
www.sebi.gov.in
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http://401kmaze.com/category/lesson-10-m…
http://marketlive.in/resources
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