Thursday, July 23, 2009
Semi-Government Securities
The semi-government securities are issued by semi-government bodies such as Port Trust, Improvement Trust, and Municipalities. They include port trust bonds, improvement trust bonds and municipal bonds.
Bearer Bonds
Bearer bonds vest the ownership with the person who is having mere possession of it. The transfer of such securities can be made by mere delivery. If it is lost, the owner loses all his rights or title to it.
Public Sector Undertaking Bonds
The pubic sector undertaking bonds are debt instruments issued by various public sector units such as Indian Railway Finance Corporation. Nuclear Power Corporation of India, Coal India Ltd. And, Power Finance Corporation. These bonds have seven-year maturity and are normally secured against fixed or floating charge on fixed assets, book debts or other current assets.
Public Sector Undertaking Bonds
The pubic sector undertaking bonds are debt instruments issued by various public sector units such as Indian Railway Finance Corporation. Nuclear Power Corporation of India, Coal India Ltd. And, Power Finance Corporation. These bonds have seven-year maturity and are normally secured against fixed or floating charge on fixed assets, book debts or other current assets.
Stock Certificates or Inscribed Stock
The stock, where the name of the stock holder is inscribed or recorded in the register kept by the public Dept Office, is called inscribed stock. The stock certificate issued to the holder or the stock shows that he has been registered as the owner of a certain amount of government stock. The title of these stocks cannot be transferred by mere endorsement. A transfer deed will have to be executed for the purpose of transferring it. It is to be executed in a form available in the Public Debt Office. It does not involve any stamp duty. When the transfer deed is executed, the transferee’s name is substituted in the place of the transferor in the books of the Public Debt Office. The ownership of the securities is transferred only when the transfer is effected in the register maintained by the Public Debt Office. A stock certificate is, thus, completely secured against loss by fire, theft, and so on. The interest payments are done through interest warrants issued by the Public Debt Office.
Promissory Notes
The government promissory notes are negotiable securities issued by the Central or State Governments. These contain promise by the President of India, or the Governor of the State, for the payment of principal and interest. These are negotiable instruments payable to the order of specified persons and transferable by endorsement and delivery.
Promissory Notes
The government promissory notes are negotiable securities issued by the Central or State Governments. These contain promise by the President of India, or the Governor of the State, for the payment of principal and interest. These are negotiable instruments payable to the order of specified persons and transferable by endorsement and delivery.
Government Securities
The government securities are classified into Central Government securities, State Government securities, the securities guaranteed by the Central Government for all India financial institutions such as IDBI, ICICI and IFCI; the securities guaranteed by State Governments for such state institutions as State Electricity Boards and housing boards; and the treasury bills issued by the Reserve Bank of India.
The government securities are held mainly in three forms, namely:
1. Stock certificates or Inscribed stock
2. Promissory notes
3. Bearer bonds
The government securities are issued in denominations of Rs. 100. The interest is payable half- yearly. These securities can again be classified on the basis of their duration as; long-dated, medium-dated and short-dated. The long-dated securities have maturities exceeding 10 years, the medium-dated securities have between 5 and 10 years and the short-dated securities mature within 5 years.
The government securities are held mainly in three forms, namely:
1. Stock certificates or Inscribed stock
2. Promissory notes
3. Bearer bonds
The government securities are issued in denominations of Rs. 100. The interest is payable half- yearly. These securities can again be classified on the basis of their duration as; long-dated, medium-dated and short-dated. The long-dated securities have maturities exceeding 10 years, the medium-dated securities have between 5 and 10 years and the short-dated securities mature within 5 years.
GILT-EDGED SECURITIES
Gilt-edged securities are thus referred to, because the repayment of principal and interest is totally secured by a first charge on the nation’s purse. These securities are broadly classified into government and semi-government securities.
Classification
Debentures may be classified on the basis of conversion, security, repayment of capital and transfer, which are briefly explained below.
Conversion. On the basis of debentures are classified into convertible and non-convertible debentures. The convertible debentures give the holder an option to convert them into equity shares during a specified period at a particular rate whereas the non-convertible debentures cannot be converted into equity shares.
Security. On the basis of security, debentures are classified as unsecured or naked and secured. When the debentures are issued without any charge on the assets of the company it is called unsecured or naked debentures. When a charge is made on the assets of the company, it is called secured debentures. The charge may be either floating or fixed. When the charge is floating, a company is free to deal with the assets forming the subject-matter of the charge until the said charge gets fixed. A company can even mortgage such property in priority of the floating charge. Then, the claims of debenture holders come after the preferential creditors but before the unsecured creditors.
Under fixed charge, a specific asset or group of assets or property is pledged as security.
Repayment. On the basis or repayment of capital, debentures many be classified as redeemable and irredeemable. Redeemable debentures provide for the payment of the capital on a specified date or on demand. In the case of irredeemable debentures, the company does not fix any date for the repayment of capital. The holders of such security cannot demand repayment of the capital amount so long as the company is a going concern.
Transfer. Debentures of companies are transferable. On the basis, debentures are classified as bearer debentures and registered debentures. Bearer debentures are transferable by mere delivery whereas a registered debenture can be transferred only by registering the transfer with company.
Conversion. On the basis of debentures are classified into convertible and non-convertible debentures. The convertible debentures give the holder an option to convert them into equity shares during a specified period at a particular rate whereas the non-convertible debentures cannot be converted into equity shares.
Security. On the basis of security, debentures are classified as unsecured or naked and secured. When the debentures are issued without any charge on the assets of the company it is called unsecured or naked debentures. When a charge is made on the assets of the company, it is called secured debentures. The charge may be either floating or fixed. When the charge is floating, a company is free to deal with the assets forming the subject-matter of the charge until the said charge gets fixed. A company can even mortgage such property in priority of the floating charge. Then, the claims of debenture holders come after the preferential creditors but before the unsecured creditors.
Under fixed charge, a specific asset or group of assets or property is pledged as security.
Repayment. On the basis or repayment of capital, debentures many be classified as redeemable and irredeemable. Redeemable debentures provide for the payment of the capital on a specified date or on demand. In the case of irredeemable debentures, the company does not fix any date for the repayment of capital. The holders of such security cannot demand repayment of the capital amount so long as the company is a going concern.
Transfer. Debentures of companies are transferable. On the basis, debentures are classified as bearer debentures and registered debentures. Bearer debentures are transferable by mere delivery whereas a registered debenture can be transferred only by registering the transfer with company.
Features
A fixed rate of interest is paid on debentures. The maximum interest payable on these debentures was 14% till recently. But now it has been relaxed.
2. The interest gained on them is fully taxable.
3. Redeemable at a premium
4. Secured by a charge on immovable properties-present and future.
5. Traded on the stock exchanges.
2. The interest gained on them is fully taxable.
3. Redeemable at a premium
4. Secured by a charge on immovable properties-present and future.
5. Traded on the stock exchanges.
Creditorship Securities -Debentures
Debentures are another kind of security traded in the capital market. A debentures is an acknowledgement of a debt by a company, usually issued under a common seal, and unsecured or secured by a fixed or floating charge on the assets of the company. The terms and conditions under which they are issued are endorsed on the back of the security.
Deferred Shares
In India deferred shares were issued prior to 1956. The Companies Act, 1956 prohibited public limited companies to have these shares. Deferred shares are those shares in which the right to share in the profits of the company is deferred, i.e. postponed till all other shareholders receive their normal dividends.
The companies Act, 1956 now permits only tow kings of shares to be issued, namely equity share capital or ordinary shares and preference shares.
The companies Act, 1956 now permits only tow kings of shares to be issued, namely equity share capital or ordinary shares and preference shares.
Disadvantages
1. Protection is not automatically provided by no-par stock.
2. The management in the absence of standard value may split up the price received into two parts. i.e. nominal amount may be credited to the stated paid-up capital and the remainder credited to capital surplus which may later on be utilized in distributing the dividends.
3. The existence of a sizable surplus may lead the Board of Directors to think that the surplus is the result of accumulated earnings and is available for distribution as dividends. But, in reality, it may be the sale proceeds of no-par stock.
4. The flexibility of setting up the capital account may be responsible for the undue payment for the promoters’ services and for goodwill.
5. The declaration of no-par stock dividend may divide the capital amount into a large number of shares
2. The management in the absence of standard value may split up the price received into two parts. i.e. nominal amount may be credited to the stated paid-up capital and the remainder credited to capital surplus which may later on be utilized in distributing the dividends.
3. The existence of a sizable surplus may lead the Board of Directors to think that the surplus is the result of accumulated earnings and is available for distribution as dividends. But, in reality, it may be the sale proceeds of no-par stock.
4. The flexibility of setting up the capital account may be responsible for the undue payment for the promoters’ services and for goodwill.
5. The declaration of no-par stock dividend may divide the capital amount into a large number of shares
Advantages
The advocates of o-par stock put forward the following advantages:
1. No-par stock is a truthful representation of ownership. Regardless of the par value assigned to a share or stock, it represents fractional ownership in the corporation. The buyer of no-par shares acquires only a proportionate share in the assets and earning power of a corporation.
2. The holders of no-par value shares have no liability beyond the initial payment and later on such shares may be sold at any price.
3. Selling price may be adjusted to prevailing market quotations.
4. The number of shares may be increased easily
5. There is no manipulation of accounts.
6. In the case of no-par stock, the process of capital reduction can be carried out painlessly.
1. No-par stock is a truthful representation of ownership. Regardless of the par value assigned to a share or stock, it represents fractional ownership in the corporation. The buyer of no-par shares acquires only a proportionate share in the assets and earning power of a corporation.
2. The holders of no-par value shares have no liability beyond the initial payment and later on such shares may be sold at any price.
3. Selling price may be adjusted to prevailing market quotations.
4. The number of shares may be increased easily
5. There is no manipulation of accounts.
6. In the case of no-par stock, the process of capital reduction can be carried out painlessly.
Advantages
The advocates of o-par stock put forward the following advantages:
1. No-par stock is a truthful representation of ownership. Regardless of the par value assigned to a share or stock, it represents fractional ownership in the corporation. The buyer of no-par shares acquires only a proportionate share in the assets and earning power of a corporation.
2. The holders of no-par value shares have no liability beyond the initial payment and later on such shares may be sold at any price.
3. Selling price may be adjusted to prevailing market quotations.
4. The number of shares may be increased easily
5. There is no manipulation of accounts.
6. In the case of no-par stock, the process of capital reduction can be carried out painlessly.
1. No-par stock is a truthful representation of ownership. Regardless of the par value assigned to a share or stock, it represents fractional ownership in the corporation. The buyer of no-par shares acquires only a proportionate share in the assets and earning power of a corporation.
2. The holders of no-par value shares have no liability beyond the initial payment and later on such shares may be sold at any price.
3. Selling price may be adjusted to prevailing market quotations.
4. The number of shares may be increased easily
5. There is no manipulation of accounts.
6. In the case of no-par stock, the process of capital reduction can be carried out painlessly.
No-par Stock
In various states of USA, many corporations have been formed with stock without par value. In the case of no par stock, the aggregate ownership is divided into shares. The dividend on these shares are paid at the rate of so many cents or dollars per share instead of paying a percentage on the par value of the share. The first no-par law was passed in New York in 1912 and other states followed it. No-par values shares have also been issued in Canada.
The principal reason for the authorization of no-par shares was the desire to remove restrictions upon the selling price of newly issued shares. Par values shares cannot be sold below the par value without subjecting the buyer to liability for the deficiency. But no-par value stock can be sold at any price, except where the statutes prescribe a minimum price.
The principal reason for the authorization of no-par shares was the desire to remove restrictions upon the selling price of newly issued shares. Par values shares cannot be sold below the par value without subjecting the buyer to liability for the deficiency. But no-par value stock can be sold at any price, except where the statutes prescribe a minimum price.
Limitations.
Though the preference shares have some privileges over the equity shares, they have certain limitations. They are:
1. The preference shareholders have to sacrifice their voting rights for the determination of corporate policies. They are merely regarded as capital contributors like debenture holders.
2. The preference shareholders are not allowed to participate in the excess profits of the company.
3. The preference shares can be redeemed at the option of the company
1. The preference shareholders have to sacrifice their voting rights for the determination of corporate policies. They are merely regarded as capital contributors like debenture holders.
2. The preference shareholders are not allowed to participate in the excess profits of the company.
3. The preference shares can be redeemed at the option of the company
Features.
he important features of preference shares are:
1. Fixed return. The preference shareholders get the first preference to share the profits of a company. Their income is fixed, as a fixed rate of dividend is paid on preference shares.
2. Return of capital. The preference shareholders have a preferential right to get back their capital at the time of winding up of the company.
3. Fixed dividend. As per terms of issue and as per Articles of Association, they shall have a fixed rate of dividend. Hence, they are called fixed income securities.
4. Non-participation in prosperity. The preference shareholders cannot participate in the surplus profits of the company, unless they are participating in preference shares.
5. Non-participation in management. The preference shareholders do not have voting right and, hence, they do not participate in the management of the company.
1. Fixed return. The preference shareholders get the first preference to share the profits of a company. Their income is fixed, as a fixed rate of dividend is paid on preference shares.
2. Return of capital. The preference shareholders have a preferential right to get back their capital at the time of winding up of the company.
3. Fixed dividend. As per terms of issue and as per Articles of Association, they shall have a fixed rate of dividend. Hence, they are called fixed income securities.
4. Non-participation in prosperity. The preference shareholders cannot participate in the surplus profits of the company, unless they are participating in preference shares.
5. Non-participation in management. The preference shareholders do not have voting right and, hence, they do not participate in the management of the company.
Cumulative and non-cumulative preference shares
If there are no profits in one year and the arrears of dividends are to be carried forward and paid out of the profits of subsequent years, the preferences shares are said to be cumulative. But if the unpaid dividend lapses, the shares are said to be non-cumulative. Unless otherwise stated in the Articles, all preference shares are presumed to be cumulative.
Redeemable and irredeemable preference shares. When the preference shares are redeemable or can be exchanged for money or goods at the end of the stipulated period, it is known as redeemable preference shares. Under Section 8 of the Companies Act, a company has the power to issue redeemable preference shares. But there must be an authority to issue redeemable preference shares in the articles of the company. The option of redemption lies with the company, i.e. the company may choose to pay back the holders of such shares. The act of paying back is called redemption.
There are a few conditions for redemption:
1. The shares which are to be redeemed should be fully paid up.
2. Shares shall be redeemed only out of profits or by making a fresh issue of equity shares.
3. If any premium is payable on redemption, the amount must have been provided for out of the profits of the company or out of the company’s share premium account.
4. Where redemption is made out of profits, a sum equivalent to the amount paid on redemption shall be transferred to a reserve fund called the Capital Redemption Reserve Account.
Irredeemable shares are non-refundable to the shareholders during the life time of the company. But the amendment of the Companies Act in 1988 has abolished the category of irredeemable preference shares. No company shall issue preference shares redeemable after the expiry of a period of 10 years from the date of issue.
Convertible and non-convertibles preference shares. Convertible preference shares are those which can be converted into equity shares within a stipulated period of time. The terms of issue may provide such a right to preference shares. These shares may be given an option after five years to convert into ordinary shares at a certain conversion rate.
The preference shares which are not convertible into equity shares are called non- convertible preference shares.
Participating and non-participating preferences shares. Inspite of having a fixed rate of dividend, the participating preference shareholders share in the surplus of the company. They have tow dividends. One is fixed by the articles and the other would be fluctuating according to the size of surplus profits left after paying a certain dividend on ordinary shares.
Non-participating preference shares are nothing but ordinary preference shares which carry only the fixed rate of dividend.
Redeemable and irredeemable preference shares. When the preference shares are redeemable or can be exchanged for money or goods at the end of the stipulated period, it is known as redeemable preference shares. Under Section 8 of the Companies Act, a company has the power to issue redeemable preference shares. But there must be an authority to issue redeemable preference shares in the articles of the company. The option of redemption lies with the company, i.e. the company may choose to pay back the holders of such shares. The act of paying back is called redemption.
There are a few conditions for redemption:
1. The shares which are to be redeemed should be fully paid up.
2. Shares shall be redeemed only out of profits or by making a fresh issue of equity shares.
3. If any premium is payable on redemption, the amount must have been provided for out of the profits of the company or out of the company’s share premium account.
4. Where redemption is made out of profits, a sum equivalent to the amount paid on redemption shall be transferred to a reserve fund called the Capital Redemption Reserve Account.
Irredeemable shares are non-refundable to the shareholders during the life time of the company. But the amendment of the Companies Act in 1988 has abolished the category of irredeemable preference shares. No company shall issue preference shares redeemable after the expiry of a period of 10 years from the date of issue.
Convertible and non-convertibles preference shares. Convertible preference shares are those which can be converted into equity shares within a stipulated period of time. The terms of issue may provide such a right to preference shares. These shares may be given an option after five years to convert into ordinary shares at a certain conversion rate.
The preference shares which are not convertible into equity shares are called non- convertible preference shares.
Participating and non-participating preferences shares. Inspite of having a fixed rate of dividend, the participating preference shareholders share in the surplus of the company. They have tow dividends. One is fixed by the articles and the other would be fluctuating according to the size of surplus profits left after paying a certain dividend on ordinary shares.
Non-participating preference shares are nothing but ordinary preference shares which carry only the fixed rate of dividend.
Preference Shares
Preference share represents a particular portion of the share capital which has been endowed with certain preferences and limitations. It represents a hybrid security that partakes some characteristics of equity shares and some attributes of debentures. Section 85 of the Indian Companies Act defines preference share capital as that part of share capital of a company which fulfils the following requirements:
1. During the continuance of the company, it must be assured of preferential dividend. The preferential dividend may consist of a fixed amount payable to preference shareholders before anything is paid to the ordinary shareholders, or the amount payable as preferential dividend may be calculated at a fixed rate.
2. On winding up of the company, it may carry a preferential right to be paid, i.e., the amount paid upon preference shares must be paid back before anything is paid to the ordinary shareholders. This preference, unless there is an agreement to the contrary, exists only upto the amount paid up or deemed to have been paid up on the shares.
Classification. Preference shares can be classified as:
• Cumulative and Non-cumulative
• Redeemable and Irredeemable
• Convertible and Non-convertible
• Participating and Non-participating
These are now briefly explained.
1. During the continuance of the company, it must be assured of preferential dividend. The preferential dividend may consist of a fixed amount payable to preference shareholders before anything is paid to the ordinary shareholders, or the amount payable as preferential dividend may be calculated at a fixed rate.
2. On winding up of the company, it may carry a preferential right to be paid, i.e., the amount paid upon preference shares must be paid back before anything is paid to the ordinary shareholders. This preference, unless there is an agreement to the contrary, exists only upto the amount paid up or deemed to have been paid up on the shares.
Classification. Preference shares can be classified as:
• Cumulative and Non-cumulative
• Redeemable and Irredeemable
• Convertible and Non-convertible
• Participating and Non-participating
These are now briefly explained.
Classification of equity shares in the stock market
In the stock market, equity shares are classified into the following categories:
1. Bluechip shares. These are shares of large, well-established and financially sound companies, e.g. Reliance, Larson & Toubro, Asian paints, and Infosys, which have an impressive record of earnings and dividend payments. Such shares yield a low-to-moderate current yield and moderate-to-high capital gains yield. Moreover, the price fluctuations also will be moderate.
2. Growth shares. These are shares of those companies which have a secured position in the market and enjoy an above average rate of growth and profitability. Growth shares generally provide a very low current yield and a very high capital gain yield. Very often growth shares are also bluechip shares.
3. Income share. The shares of companies that have fairly stable operations with relatively limited growth opportunities are income shares. Such shares provide a very high current yield and a very low capital gains yield. Such shares are fairly stable in the market. E.g. shares of power supply companies and tea companies.
4. Defensive shares. These are shares of companies that are relatively unaffected by the ups and downs in general business conditions. Generally, such shares provide moderate current yield and moderate capital gain yield. The price of these shares is relatively stable, e.g. shares of food and beverage companies.
5. Speculative shares. Those shares which tend to fluctuate mainly because of speculative trading in them are speculative shares.
1. Bluechip shares. These are shares of large, well-established and financially sound companies, e.g. Reliance, Larson & Toubro, Asian paints, and Infosys, which have an impressive record of earnings and dividend payments. Such shares yield a low-to-moderate current yield and moderate-to-high capital gains yield. Moreover, the price fluctuations also will be moderate.
2. Growth shares. These are shares of those companies which have a secured position in the market and enjoy an above average rate of growth and profitability. Growth shares generally provide a very low current yield and a very high capital gain yield. Very often growth shares are also bluechip shares.
3. Income share. The shares of companies that have fairly stable operations with relatively limited growth opportunities are income shares. Such shares provide a very high current yield and a very low capital gains yield. Such shares are fairly stable in the market. E.g. shares of power supply companies and tea companies.
4. Defensive shares. These are shares of companies that are relatively unaffected by the ups and downs in general business conditions. Generally, such shares provide moderate current yield and moderate capital gain yield. The price of these shares is relatively stable, e.g. shares of food and beverage companies.
5. Speculative shares. Those shares which tend to fluctuate mainly because of speculative trading in them are speculative shares.
Disadvantages to the Investors
Some of the disadvantages in investing funds inequity shares form the point of view of investors are:
1. The market value of equity shares are most stable. The frequent fluctuations in prices will lead to psychological stress for the investor
2. Investing in equity shares is risky as the expectation of earning profits involves uncertainty.
3. The investor has to reside in a place where a stock exchange is located in order to find a broker and to deal with the shares at the right time and at the right price.
4. Over subscription of new issues of good companies reduces the hopes for an investor to get allotment of shares.
1. The market value of equity shares are most stable. The frequent fluctuations in prices will lead to psychological stress for the investor
2. Investing in equity shares is risky as the expectation of earning profits involves uncertainty.
3. The investor has to reside in a place where a stock exchange is located in order to find a broker and to deal with the shares at the right time and at the right price.
4. Over subscription of new issues of good companies reduces the hopes for an investor to get allotment of shares.
Limitations.
It is true that the equity capital is a reliable source of finance to a company. But it suffers from certain drawbacks, they are:
1. If the company raises all its capital through equity shares, it will not get the benefit of trading on equity. So, the rate of dividend to the equity shareholders will be reduced.
2. Too much dependence on equity shareholders spreads the effective control over a large number of them. It adversely affects the promoters of the company, who lose the chance of retaining effective control over the affairs of the company.
3. Excessive use of equity shares for raising capital may result in overcapitalization, which cannot be cured as they cannot be paid back until the liquidation of the company.
4. Every additional issue of shares first to the existing shareholders under the provisions of the Companies Act leads to concentration of economic power.
5. Equity shares are not attractive to continuous and conservative investors who expect a stable, regular and sufficient income on their investment.
1. If the company raises all its capital through equity shares, it will not get the benefit of trading on equity. So, the rate of dividend to the equity shareholders will be reduced.
2. Too much dependence on equity shareholders spreads the effective control over a large number of them. It adversely affects the promoters of the company, who lose the chance of retaining effective control over the affairs of the company.
3. Excessive use of equity shares for raising capital may result in overcapitalization, which cannot be cured as they cannot be paid back until the liquidation of the company.
4. Every additional issue of shares first to the existing shareholders under the provisions of the Companies Act leads to concentration of economic power.
5. Equity shares are not attractive to continuous and conservative investors who expect a stable, regular and sufficient income on their investment.
Advantages to the investors
. From the investor’s point of view, the equity shares offer the following advantages:
1. Most of the profit-making companies pay dividend regularly.
2. An investor can expect bonus-shares form high profit-making companies.
3. They get a right on a pro-rata basis when the company issues new shares. It is issued to the existing shareholders at a price lower than the market price.
4. If a good share is picked up, the market value of investment will appreciate over a period of time.
5. An equity shareholder is one of the owners of the company.
6. Equity shares have liquidity and marketability as these are listed and quoted on stock exchanges.
7. Equity shares of listed companies can be pledged as security to raise loans from banks and other financial institutions.
1. Most of the profit-making companies pay dividend regularly.
2. An investor can expect bonus-shares form high profit-making companies.
3. They get a right on a pro-rata basis when the company issues new shares. It is issued to the existing shareholders at a price lower than the market price.
4. If a good share is picked up, the market value of investment will appreciate over a period of time.
5. An equity shareholder is one of the owners of the company.
6. Equity shares have liquidity and marketability as these are listed and quoted on stock exchanges.
7. Equity shares of listed companies can be pledged as security to raise loans from banks and other financial institutions.
Merits.
As far as the company is concerned, equity shares are considered superior to any other form of capital. From the point of view of a company, the equity share offers the following advantages:
1. They provides permanent capital. The amount invested in equity shares need not be repaid during the life-time of the company.
2. They so not create any charge on the assets of the company. So, the company gets the freedom to issue other forms of securities by utilizing its fixed assets.
3. They do not create any fixed charge against the income of the company. Therefore, the company does not have any obligation to pay fixed dividend to the shareholders.
4. They serve as a base for further borrowings because greater the amount of equity capita greater the scope for raising further debt.
1. They provides permanent capital. The amount invested in equity shares need not be repaid during the life-time of the company.
2. They so not create any charge on the assets of the company. So, the company gets the freedom to issue other forms of securities by utilizing its fixed assets.
3. They do not create any fixed charge against the income of the company. Therefore, the company does not have any obligation to pay fixed dividend to the shareholders.
4. They serve as a base for further borrowings because greater the amount of equity capita greater the scope for raising further debt.
Right of equity shareholders.
Equity shareholders are the owners of the company and, as owners, they enjoy certain rights. They are:
1. Right to income. They share the profits of the company after meeting its all other fixed obligations.
2. Right to control. The shareholders have the right to elect the board of directors and thereby get some control over the management of the company.
3. Pre-emptive right. The existing shareholders are given the right to maintain their proportional ownership by purchasing additional equity shares issued by the company. When new issues are made, the existing shareholders are to be given a preferential right to buy the new issue in proportion to their holding. This is known as right shares. These shares are issued to the existing shareholders at a price lower than the price at which it is issued to the public.
4. Rights against ultra vires acts of the company. The equity shareholders are exposed to the risks mentioned in the Memorandum and Articles of Association of the company. Any act done by the company, which is not mentioned in the Memorandum and Articles, are ultra vires. Therefore, the acts of ultra vires are a breach of agreement between the company and the shareholders. The equity shareholders have the right to take legal steps against the company to prevent it from engaging in such actions.
5. Right to have knowledge of corporate affairs. The equity shareholders have the right to know about the affairs of the company at least once a year. The shareholders can present all their grievances at the annual general meeting of the company.
6. Right to transfer shares. The shareholders have the right to transfer equity shares to anyone they like. If dissatisfied, they can convert their shares into cash in the stock market.
7. Miscellaneous rights. The equity shareholders have the right to participate in exceptional profits in proportion to their respective holdings. Moreover, at the time of liquidation of the company, they have a right to get proportionate share in the net assets available for distribution.
1. Right to income. They share the profits of the company after meeting its all other fixed obligations.
2. Right to control. The shareholders have the right to elect the board of directors and thereby get some control over the management of the company.
3. Pre-emptive right. The existing shareholders are given the right to maintain their proportional ownership by purchasing additional equity shares issued by the company. When new issues are made, the existing shareholders are to be given a preferential right to buy the new issue in proportion to their holding. This is known as right shares. These shares are issued to the existing shareholders at a price lower than the price at which it is issued to the public.
4. Rights against ultra vires acts of the company. The equity shareholders are exposed to the risks mentioned in the Memorandum and Articles of Association of the company. Any act done by the company, which is not mentioned in the Memorandum and Articles, are ultra vires. Therefore, the acts of ultra vires are a breach of agreement between the company and the shareholders. The equity shareholders have the right to take legal steps against the company to prevent it from engaging in such actions.
5. Right to have knowledge of corporate affairs. The equity shareholders have the right to know about the affairs of the company at least once a year. The shareholders can present all their grievances at the annual general meeting of the company.
6. Right to transfer shares. The shareholders have the right to transfer equity shares to anyone they like. If dissatisfied, they can convert their shares into cash in the stock market.
7. Miscellaneous rights. The equity shareholders have the right to participate in exceptional profits in proportion to their respective holdings. Moreover, at the time of liquidation of the company, they have a right to get proportionate share in the net assets available for distribution.
Features
The main features of equity shares are:
1. Risk capital. As the equity shareholders are the owners of the company, they have an unlimited interest in the company’s profits. In fact, they provide the risk or venture capital. The value of their holdings increases or decrease with the prosperity or adversity of the company.
2. Fluctuating dividend. The equity shareholders will not get a stable divided from the company. They are eligible to share the profits of the company only after meeting all other obligations of the company. Therefore, the rate of dividend will change year after year. They can share the profits only if anything is left after paying the debenture holders and the preference shareholders. If there is no profits, no dividend will be paid. But, if there is greater profits after paying all fixed charges, the equity shareholders can divide the balance among themselves.
3. Fluctuating market value. The market value of shares changes frequently depending on the profits of the company. If the company makes more profits and pays more dividend, the market price of shares will increase, whereas if the dividend paying capacity of the company decreases, the market value of shares will come down. So, the market value of equity shares does not remain constant.
4. Growth prospects. The equity shares have a very good prospect for capital growth. When a company has an expansion programme within a short period, there will be a sudden increase in the value of shares.
5. Voting right. The equity shareholders have a statutory right to vote in the general meeting of the company.
1. Risk capital. As the equity shareholders are the owners of the company, they have an unlimited interest in the company’s profits. In fact, they provide the risk or venture capital. The value of their holdings increases or decrease with the prosperity or adversity of the company.
2. Fluctuating dividend. The equity shareholders will not get a stable divided from the company. They are eligible to share the profits of the company only after meeting all other obligations of the company. Therefore, the rate of dividend will change year after year. They can share the profits only if anything is left after paying the debenture holders and the preference shareholders. If there is no profits, no dividend will be paid. But, if there is greater profits after paying all fixed charges, the equity shareholders can divide the balance among themselves.
3. Fluctuating market value. The market value of shares changes frequently depending on the profits of the company. If the company makes more profits and pays more dividend, the market price of shares will increase, whereas if the dividend paying capacity of the company decreases, the market value of shares will come down. So, the market value of equity shares does not remain constant.
4. Growth prospects. The equity shares have a very good prospect for capital growth. When a company has an expansion programme within a short period, there will be a sudden increase in the value of shares.
5. Voting right. The equity shareholders have a statutory right to vote in the general meeting of the company.
Different values of equity shares
1. Par Value. It is the value of the share stated in the Memorandum of Association and the share certificate. The shares may be issued at different denominations. But the most common denominations are Rs. 10 and Rs. 100
2. Issue price. It is the price at which the shares are issued to the public. The issue price and the par value will be the same for a new company. But in the case of an existing company which has reserves and increased earning capacity, the issue price may be higher than the par value. When the shares are issued above par value, the difference between the issue price and the par value is termed as share premium.
3. Book Value. It is the ratio of reserves and surplus to the paid-up capital. When the reserves and surplus increase, the book value of equity share also will increase.
4. Market value. It is the price at which it is bought and sold in the security market. In the case of a company which has listed its shares in the market, it is easy to find out the market value of its equity share as it is quoted in the market quotation.
2. Issue price. It is the price at which the shares are issued to the public. The issue price and the par value will be the same for a new company. But in the case of an existing company which has reserves and increased earning capacity, the issue price may be higher than the par value. When the shares are issued above par value, the difference between the issue price and the par value is termed as share premium.
3. Book Value. It is the ratio of reserves and surplus to the paid-up capital. When the reserves and surplus increase, the book value of equity share also will increase.
4. Market value. It is the price at which it is bought and sold in the security market. In the case of a company which has listed its shares in the market, it is easy to find out the market value of its equity share as it is quoted in the market quotation.
Ownership Securities
Ownership securities mainly include: (i) equity shares, (ii) preference shares, and (iii) no-par stock.
Ordinary Shares or Equity Shares
The equity shares may be regarded as the foundation of the financial structure of a company. They occupy a primary position. They represent the ownership capital of a company. The equity shareholders collectively own the company and enjoy all rewards and risks associated with such ownership. They do not have any preferential rights regarding either the payment of dividend or the repayment of capital at the time of company’s liquidation.
Ordinary Shares or Equity Shares
The equity shares may be regarded as the foundation of the financial structure of a company. They occupy a primary position. They represent the ownership capital of a company. The equity shareholders collectively own the company and enjoy all rewards and risks associated with such ownership. They do not have any preferential rights regarding either the payment of dividend or the repayment of capital at the time of company’s liquidation.
INDUSTRIAL SECURITIES
Industrial securities are those securities which are issued by public companies. These are the most popular securities in the capital market. These can be either (i) ownership securities or (ii) creditorship securities (debentures).
Capital Market Instruments
Capital market deals with various types of securities. The commonly traded securities of the capital market can be classified (Figure 6.1) as:
• Industrial securities
• Gilt-edged securities
• Industrial securities
• Gilt-edged securities
SOURCES OF SUPPLY AND DEMAND OF FUNDS
Capital market consists of lenders and borrowers. The supply of funds comes from the lenders and the demand for funds comes from the investors. The supply of long-term funds comes form the investing public from their savings. These savings may accrue from the following sources:
• Household savings
• Foreign capital
• Corporate savings
• Institutional investors
• The government.
The demand for capital comes from the industrial sector and predominantly from the manufacturing group. In India, there are tow distinct sector of the industry, the public sector and the private sector. The demand of the private sector is fully met by the capital market, while that of the public sector by the state exchequer. The government also depends, to a certain extent, on the capital market to fulfill its demand for capital.
• Household savings
• Foreign capital
• Corporate savings
• Institutional investors
• The government.
The demand for capital comes from the industrial sector and predominantly from the manufacturing group. In India, there are tow distinct sector of the industry, the public sector and the private sector. The demand of the private sector is fully met by the capital market, while that of the public sector by the state exchequer. The government also depends, to a certain extent, on the capital market to fulfill its demand for capital.
GROWTH OF THE INDIAN CAPITAL MARKET
The capital market in India may be broadly classified into organised and unorganized markets. The organised capital market consists of the corporate enterprises, government and semi-government institutions requiring funds for various development activities, and the investors, namely, individual investors, corporate and institutional investors such as banks, investment trusts, life insurance companies, finance corporations, government and international financing agencies supplying funds to various industrial undertakings. The unorganized sector consists of the indigenous bankers in urban areas and the moneylenders in rural areas. There is no close contact between its different constituents. Usually, this section of the capital market finances consumption rather than production, and the interest rate charged by them is exorbitant.
In India, even the organised sector of the capital market was ill-developed till recently, to which the following reasons can be attributed:
1. Agriculture is the main occupation in India. But it failed to contribute anything to the flotation of securities.
2. Foreign business enterprises dominated the industrial development in India. They mainly depended on the London Capital Market rather than on Indian market. It hampered the growth of the securities market.
3. The managing agency system prevailed in India in the past has acted as both promoting and marketing agencies and the Indian capital market had been characterized by an absence of special institutions to float new issues.
4. The total number of securities trades in stock exchanges was not very large. Of the total number of securities, the government securities accounted for nearly half the volume. Ordinary shares were the predominant type of security traded in the stock exchange. Debentures and preferences shares had only limited place.
5. The investment habits of the individuals and the restrictions imposed on the investment patterns of the various financial institutions also affected the capital market. The institutional investors preferred to invest in government and semi-government securities.
Till recently, the Indian capital market had all the characteristics of an undeveloped capital market. The absence of professional promoters, investment or issue houses, underwriting agencies, and financial intermediaries had prevented the free flow of savings to industrial investment. However, since the Independence in 1947, a trend towards an organised growth has been seen.
Some of the important development that have taken place in the capital market after the Independence, which removed the basis deficiencies of the Indian capital market, are:
1. Some legislative measures have been taken by the Government to protect the interests of the investors. Some of the important measures are the passing of the Capital Issues (Control) Act, 1947, the Indian Companies Act, 1956, the Securities Contract (Regulation) Act, 1956, and the Monopolies and Restrictive Trade Practices Act, 1970.
2. The attitude of the people also has changed. Now they are ready to invest their savings in corporate securities. Many industrial concerns succeeded in the industrial issues. The shares of some newly started companies were issued even at a premium This encouraged the investors to take up new issues.
3. In recent years, underwriting activity in India has made satisfactory progress. Apart from some financial institutions such as ICICI, IFCI, LIC, UTI and IDBI, various stock brokers and banks also have shown interest in underwriting business.
4. Commercial banks influenced the growth of capital market indirectly by granting loans against shares and debentures. They also participated in underwriting either singly or in association with other banks and institutions.
5. After the Independence, the necessity of large-scale industrial development led to the establishment of a number of special finance and development corporations. The Industrial Finance Corporation of India (IFCI) was the first one to be thus, established in 1948. After it, SFCs, ICICI and IDBI were instituted. Now India has adequate special financial institutions to provide medium and long-term finance to industry.
6. Other factors such as the integration of organised and unorganized sectors of capital market, the money and the capital markets, growth of joint stock form of business, the expanding role of the Reserve Bank of India in the rural credit, the establishment of various finance corporations, the extension of banking into the interior, the diversification of banking functions and the government’s assistance to industry have all been contributing to the growth of capital market in India.
7. The establishment of UTI and IDBI are the two important steps taken in the direction of strengthening the capital market.
8. The market for industrial securities also has increased to a great extent as the number of shareholders in India has increased considerably.
In India, even the organised sector of the capital market was ill-developed till recently, to which the following reasons can be attributed:
1. Agriculture is the main occupation in India. But it failed to contribute anything to the flotation of securities.
2. Foreign business enterprises dominated the industrial development in India. They mainly depended on the London Capital Market rather than on Indian market. It hampered the growth of the securities market.
3. The managing agency system prevailed in India in the past has acted as both promoting and marketing agencies and the Indian capital market had been characterized by an absence of special institutions to float new issues.
4. The total number of securities trades in stock exchanges was not very large. Of the total number of securities, the government securities accounted for nearly half the volume. Ordinary shares were the predominant type of security traded in the stock exchange. Debentures and preferences shares had only limited place.
5. The investment habits of the individuals and the restrictions imposed on the investment patterns of the various financial institutions also affected the capital market. The institutional investors preferred to invest in government and semi-government securities.
Till recently, the Indian capital market had all the characteristics of an undeveloped capital market. The absence of professional promoters, investment or issue houses, underwriting agencies, and financial intermediaries had prevented the free flow of savings to industrial investment. However, since the Independence in 1947, a trend towards an organised growth has been seen.
Some of the important development that have taken place in the capital market after the Independence, which removed the basis deficiencies of the Indian capital market, are:
1. Some legislative measures have been taken by the Government to protect the interests of the investors. Some of the important measures are the passing of the Capital Issues (Control) Act, 1947, the Indian Companies Act, 1956, the Securities Contract (Regulation) Act, 1956, and the Monopolies and Restrictive Trade Practices Act, 1970.
2. The attitude of the people also has changed. Now they are ready to invest their savings in corporate securities. Many industrial concerns succeeded in the industrial issues. The shares of some newly started companies were issued even at a premium This encouraged the investors to take up new issues.
3. In recent years, underwriting activity in India has made satisfactory progress. Apart from some financial institutions such as ICICI, IFCI, LIC, UTI and IDBI, various stock brokers and banks also have shown interest in underwriting business.
4. Commercial banks influenced the growth of capital market indirectly by granting loans against shares and debentures. They also participated in underwriting either singly or in association with other banks and institutions.
5. After the Independence, the necessity of large-scale industrial development led to the establishment of a number of special finance and development corporations. The Industrial Finance Corporation of India (IFCI) was the first one to be thus, established in 1948. After it, SFCs, ICICI and IDBI were instituted. Now India has adequate special financial institutions to provide medium and long-term finance to industry.
6. Other factors such as the integration of organised and unorganized sectors of capital market, the money and the capital markets, growth of joint stock form of business, the expanding role of the Reserve Bank of India in the rural credit, the establishment of various finance corporations, the extension of banking into the interior, the diversification of banking functions and the government’s assistance to industry have all been contributing to the growth of capital market in India.
7. The establishment of UTI and IDBI are the two important steps taken in the direction of strengthening the capital market.
8. The market for industrial securities also has increased to a great extent as the number of shareholders in India has increased considerably.
Importance and Functions
The industrial development of any country depends on an organised, well developed and efficient capital market. Though the major determinant of savings is national income, the provision of certain incentives for investment can enhance total savings out of a given level of the national income. The capital market provides such incentives by creating a variety of financial assets and by ensuring their liquidity and marketability. It can help increase the propensity to save.
In the process of growth, the capacity of certain class of people and institutions to save increases. They have varied asset preferences, which also change form time to time. The needs of entrepreneurs who actually use the savings for productive purposes are also varied. The capital market satisfies the tastes of savers and the needs of investors through its financial instruments and institutions.
In the process of growth, the capacity of certain class of people and institutions to save increases. They have varied asset preferences, which also change form time to time. The needs of entrepreneurs who actually use the savings for productive purposes are also varied. The capital market satisfies the tastes of savers and the needs of investors through its financial instruments and institutions.
CAPITAL MARKET AND MONEY MARKET
A capital market is distinguished from a money market in many ways. The most important distinction is that the former deals with long-term capital and the latter with short-term capital. Since there are, also certain institutions which deal in both short-term and long-term capitals, there is a certain amount of overlapping between transactions in these capitals.
Usually, a money market consists of people who borrow and lend money for periods not exceeding one year, whereas a capital market constitutes people who borrow and lend money for periods exceeding one year and they, mostly, buy and sell corporate securities. A country’s money market is hence often referred to as its market for short-term funds and the capital market as the market for long-term funds. In fact, these two markets are inter-dependent. A relative rise in the rate of interest in the money market may increase he demand in the capital market, and vice versa.
Usually, a money market consists of people who borrow and lend money for periods not exceeding one year, whereas a capital market constitutes people who borrow and lend money for periods exceeding one year and they, mostly, buy and sell corporate securities. A country’s money market is hence often referred to as its market for short-term funds and the capital market as the market for long-term funds. In fact, these two markets are inter-dependent. A relative rise in the rate of interest in the money market may increase he demand in the capital market, and vice versa.
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