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Investment opportunities


Companies issue both equity and debt in the primary market ... issue net worth (i.e. net worth before the issue) should be at least Rs 1 crore ... – PowerPoint PPT presentation

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Title: Investment opportunities

Investment opportunities
  • Equity markets

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

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

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

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

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

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

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

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

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

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

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

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

Unlisted company option 2
  • If the 1st option is not satisfied, then the
    other option is the book building process only.
  • Book building process is permitted provided 60
    of the issue size is allotted to the Qualified
    Institutional Buyers (QIB). If the company fails
    to allot 60 of the issue size to QIB the entire
    money so received shall be refunded.

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

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

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

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

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

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

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

Conditions for listing on the stock exchange
  • At least 10 shares should be with public
  • Minimum 20 lakh shares to be offered to the

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you
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