W hat is Buyback of Shares?

A buy back can be seen as a m et hod for com pany t o invest in it self by buying
shar es fr om ot her inv est or s in t he m ar k et . Buy back s r educe t he num ber of
shar es out st anding in t he m ar ket . Buy back is done by t he com pany w it h
t he pur pose t o im pr ov e t he liquidit y in it s shar es and enhance t he
shar eholder s’ w ealt h. Under t he SEBI ( Buy Back of Secur it ies) Regulat ion,
1998, a com pany is perm it t ed t o buy back it s share from :

a) Exist ing shar eholder s on a pr opor t ionat e basis t hr ough t he offer

docum ent .

b) Open m ar k et t hr ough st ock ex changes using book building pr ocess.

c) Shar eholder s holding odd lot shar es.

The com pany has t o disclose t he pr e and post - buy back holding of t he
pr om ot er s. To ensur e com plet ion of t he buy back pr ocess speedily , t he
r egulat ions hav e st ipulat ed t im e lim it for each st ep. For ex am ple, in t he
cases of pur chases t hr ough st ock ex changes, an offer for buy back should
not r em ain open for m or e t han 30 day s. The v er ificat ion of shar es r eceiv ed
in buy back has t o be com plet ed w it hin 15 day s of t he closur e of t he offer .
The pay m ent s for accept ed secur it ies has t o be m ade w it hin 7 day s of t he
com plet ion of v er ificat ion and bought back shar es hav e t o be ex t inguished
w it hin 7 day s of t he dat e of t he pay m ent .

8 .2 I ndex

W hat is t he N ift y index?

S&P CNX Nift y ( Nift y ) , is a scient ifically dev eloped, 50 st ock index , r eflect ing
accur at ely t he m ar k et m ov em ent of t he I ndian m ar k et s. I t com pr ises of
som e of t he lar gest and m ost liquid st ock s t r aded on t he NSE. I t is
m aint ained by I ndia I ndex Ser v ices & Pr oduct s Lt d. ( I I SL) , w hich is a j oint
v ent ur e bet w een NSE and CRI SI L. The index has been co- branded by
St andard & Poor’s ( S&P) . Nift y is t he barom et er of t he I ndian m arket s.

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8 .3 Cle a r in g & Se t t le m e n t a n d Re dr e ssa l

W ha t is a Clearing Corporat ion?

A Clear ing Cor por at ion is a par t of an ex change or a separ at e ent it y and
per for m s t hr ee funct ions, nam ely , it clear s and set t les all t r ansact ions, i. e.
com plet es t he pr ocess of r eceiv ing and deliv er ing shar es/ funds t o t he buy ers
and seller s in t he m ar k et , it pr ov ides financial guar ant ee for all t r ansact ions
ex ecut ed on t he ex change and pr ov ides r isk m anagem ent funct ions.
Nat ional Secur it ies Clear ing Cor por at ion ( NSCCL) , a 1 0 0 % subsidiar y of
NSE, per for m s t he r ole of a Clear ing Cor por at ion for t r ansact ions ex ecut ed
on t he NSE.

W hat is Rolling Set t lem ent ?

Under r olling set t lem ent all open posit ions at t he end of t he day m andat or ily
r esult in paym ent / deliver y ‘n’ days lat er . Cur r ent ly t r ades in r olling
set t lem ent ar e set t led on T+ 2 basis w her e T is t he t r ade day. For exam ple,
a t r ade ex ecut ed on Monday is m andat or ily set t led by Wednesday
( consider ing t w o w or k ing day s fr om t he t r ade day ) . The funds and secur it ies
pay - in and pay- out ar e car r ied out on T+ 2 days.

W hat is Pay- in and Pa y- out ?

Pay - in day is t he day w hen t he secur it ies sold ar e deliv er ed t o t he ex change

by t he seller s and funds for t he secur it ies pur chased ar e m ade av ailable t o
t he ex change by t he buy er s.

Pay - out day is t he day t he secur it ies pur chased ar e deliver ed t o t he buy er s
and t he funds for t he secur it ies sold ar e giv en t o t he seller s by t he
exchange.

At pr esent t he pay- in and pay- out happens on t he 2nd w or k ing day aft er t he
t r ade is ex ecut ed on t he st ock ex change.

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W hat is an Auction?

On account of non- deliv er y of secur it ies by t he t r ading m em ber on t he pay -

in day , t he secur it ies ar e put up for auct ion by t he Ex change. This ensur es
t hat t he buy ing t r ading m em ber r eceiv es t he secur it ies. The Ex change
pur chases t he r equisit e quant it y in auct ion m ar k et and giv es t hem t o t he
buying t rading m em ber.

W hat is a Book- closure/ Record dat e?

Book closur e and r ecor d dat e help a com pany det er m ine ex act ly t he
shar eholder s of a com pany as on a given dat e. Book closur e r efer s t o t he
closing of t he r egist er of t he nam es of invest ors in t he r ecor ds of a
com pany . Com panies announce book closur e dat es fr om t im e t o t im e. The
benefit s of dividends, bonus issues, r ight s issue accr ue t o invest or s w hose
nam e appear s on t he com pany 's r ecor ds as on a giv en dat e w hich is k now n
a s t h e recor d dat e and is declar ed in adv ance by t he com pany so t hat
buy er s hav e enough t im e t o buy t he shar es, get t hem r egist er ed in t he
book s of t he com pany and becom e ent it led for t he benefit s such as bonus,
r ight s, dividends et c. Wit h t he deposit or ies now in place, t he buy er s need
not send shar es phy sically t o t he com panies for r egist r at ion. This is t ak en
car e by t he deposit or y since t hey hav e t he r ecor ds of inv est or holdings as
on a par t icular dat e elect r onically w it h t hem .

W hat is a No- delivery period?

Whenev er a com pany announces a book closur e or r ecor d dat e, t he

ex change set s up a no- deliv er y per iod for t hat secur it y . Dur ing t his per iod
only t r ading is per m it t ed in t he secur it y . How ev er , t hese t r ades ar e set t led
only aft er t he no- delivery period is over . This is done t o ensur e t hat
inv est or 's ent it lem ent for t he cor por at e benefit is clear ly det er m ined.

W hat is an Ex- dividend dat e?

The dat e on or aft er w hich a secur it y begins t r ading w it hout t he div idend
included in t he price, i.e. buyers of t he share s w ill no longer be ent it led for
t he div idend w hich has been declar ed r ecent ly by t he com pany , in case t hey
buy on or aft er t he ex- div idend dat e.

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W hat is an Ex- da t e ?

The fir st day of t he no- deliv er y per iod is t he ex- dat e. I f t her e is any
cor por at e benefit s such as r ight s, bonus, div idend announced for w hich book
closur e/ r ecor d dat e is fix ed, t he buy er of t he shar es on or aft er t he ex- dat e
w ill not be eligible for t he benefit s.

W hat recourses are available t o invest or/ client for redressing

his grievance s?

You can lodge com plaint w it h t he I nv est or Gr iev ances Cell ( I GC) of t h e
Ex change against br ok er s on cer t ain t r ade disput es or non- r eceipt of
pay m ent / secur it ies. I GC t ak es up com plaint s in r espect of t r ades ex ecut ed
on t he NSE, t hr ough t he NSE t r ading m em ber or SEBI r egist er ed sub- broker
of a NSE t r ading m em ber and t r ades per t aining t o com panies t r aded on
NSE.

W hat is Arbit rat ion?

Ar bit r at ion is an alt er nat iv e disput e r esolut ion m echanism pr ov ided by a

st ock ex change for r esolv ing disput es bet w een t he t r ading m em ber s and
t heir client s in r espect of t r ades done on t he exchange. I f no am icable
set t lem ent could be r eached t hr ough t he nor m al gr iev ance r edr essal
m echanism of t he st ock ex change, t hen y ou can m ak e applicat ion for
r efer ence t o Ar bit r at ion under t he Bye- Law s of t he concer ned St ock
exchange.

W hat is an I nvest or Prot ect ion Fund?

I nvest or Pr ot ect ion Fund ( I PF) is m aint ained by NSE t o m ake good invest or
claim s, w hich m ay arise out of non- set t lem ent of obligat ions by t he t r ading
m em ber , w ho has been declar ed a default er , in r espect of t r ades ex ecut ed
on t he Ex change. The I PF is ut ilised t o set t le claim s of such inv est or s w her e
t he t r ading m em ber t hr ough w hom t he inv est or has dealt has been declar ed
a defau lt er . Pay m en t s ou t of t h e I PF m ay in clu de claim s ar ising of non
pay m ent / non r eceipt of secur it ies by t he inv est or fr om t he t r ading m em ber
w ho has been declar ed a default er . The m ax im um am ount of claim pay able
fr om t he I PF t o t he invest or ( w her e t he t r ading m em ber t hr ough w hom t he
invest or has dealt is declared a default er) is Rs. 10 lakh.

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9. CON CEPTS & M OD ES OF AN ALYSI S

W hat is Sim ple I nt erest ?

Sim ple I n t e r e st : Sim ple I nt er est is t he int er est paid only on t he pr incipal
am ount bor r ow ed. No int er est is paid on t he int er est accr ued dur ing t he
t er m of t he loan.

Ther e ar e t hr ee com ponent s t o calculat e sim ple int er est : pr incipal, int er est
rat e and t im e.

For m u la f or ca lcu la t in g sim p le in t e r e st :

I = Prt
Where,
I = int erest
P = pr incipal
r = int erest rat e ( per year)
t = t im e ( in year s or fr act ion of a year )

Exam ple:
Mr. X borrow ed Rs. 10,000 from t he bank t o purchase a household it em . He
agr eed t o r epay t he am ount in 8 m ont hs, plus sim ple int er est at an int er est
r at e of 10% per annum ( year ) .

I f he repays t he full am ount of Rs. 10,000 in eight m ont hs, t he int er est
would be:
P = Rs. 10,000 r = 0.10 ( 10% per y ear ) t = 8/ 12 ( t his denot es fr act ion of a
year)

Apply ing t he abov e for m ula, int er est w ould be:

I = Rs. 10,000* ( 0.10) * ( 8/ 12) = Rs. 667.

This is t he Sim ple I nt er est on t he Rs. 10,000 loan t aken by Mr. X for 8
m ont hs.

I f he r epay s t he am ount of Rs. 10,000 in fift een m ont hs, t he only change is
w it h t im e.

Therefore, his int erest w ould be:

I = Rs. 10,000* ( 0.10) * ( 15/ 12) = Rs. 1,250

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W hat is Com pound I nt erest ?

Com p ou n d I n t e r e st : Com pound int er e st m eans t hat , t he int er est w ill

include int er est calculat ed on int er est . The int er est accr ued on a pr incipal
am ount is added back t o t he pr incipal sum , and t he w hole am ount is t hen
t r eat ed as new pr incipal, for t he calculat ion of t he int er est for t he nex t
period.

For exam ple, if an am ount of Rs. 5,000 is invest ed for t w o year s and t he
int er est r at e is 10% , com pounded y ear ly :

• At t he end of t he fir st y ear t he int er est w ould be ( Rs. 5,000 * 0.10)

or Rs. 500.

• I n t he second y ear t he int er est r at e of 10% w ill applied not only t o

Rs. 5,000 but also t o t he Rs. 500 int er est of t he fir st y ear . Thus, in
t he second year t he int erest w ould be ( 0.10 * Rs. 5,500) or Rs. 550.

For any loan or bor r ow ing unless sim ple int er est is st at ed, one should
alw ay s assum e int er est is com pounded. When com pound int er est is used w e
m ust alw ay s k now how oft en t he int er est r at e is calculat ed each y ear .
Gener ally t he int er est r at e is quot ed annually . E.g. 10% per annum .

Com pound int er est m ay inv olv e calculat ions for m or e t han once a year, each
using a new pr incipal, i.e. ( int er est + pr incipal) . The fir st t er m w e m ust
under st and in dealing w it h com pound int er est is conv er sion per iod.
Conv er sion per iod r efer s t o how oft en t he int er est is calculat ed ov er t he
t erm of t he loan or invest m ent . I t m ust be det erm ined for each year or
fr act ion of a year .

E. g. : I f t he int er est r at e is com pounded sem iannually , t hen t he num ber of

conv er sion per iods per y ear w ould be t w o. I f t he loan or deposit w as for fiv e
year s, t hen t he num ber of conver sion per iods w ould be t en.

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For m u la f or ca lcu la t in g Com p ou n d I n t e r e st :

n
C = P ( 1+ i)

Where
C = am ount
P = pr incipal
i = I nt erest rat e per conversion period
n = t ot al num ber of conver sion per iods

Ex a m p le :

Mr . X invest ed Rs. 10,000 for five year s at an int er est r at e of 7. 5%

com pounded quar t er ly

P = Rs. 10,000
i = 0.075 / 4, or 0.01875
n = 4 * 5, or 20, conversion periods over t he five years

Ther efor e, t he am ount , C, is:

C = Rs. 10,000( 1 + 0.01875) ^ 20
= Rs 10,000 x 1.449948
= Rs 14,499.48

So at t he end of fiv e y ear s Mr . X w ould ear n Rs. 4,499.48 ( Rs.14,499.48 –

Rs.10,000) as int er est . This is also called as Com pounding.

Com pounding play s a v er y im por t ant r ole in inv est m ent since ear ning a
sim ple int er est and ear ning an int er est on int er est m ak es t he amount
r eceiv ed at t he end of t he per iod for t he t w o cases significant ly differ ent .

I f Mr . X had invest ed t his am ount for five year s at t he sam e int er est r at e
offer ing t he sim ple int er est opt ion, t hen t he am ount t hat he w ould ear n is
calculat ed by applying t he follow ing for m ula:

S = P ( 1 + rt) ,
P= 10,000
r = 0.075
t = 5

Thus, S = Rs. 10,000[ 1+ 0.075( 5) ]

= Rs. 13,750

Here, t he sim ple int erest earned is Rs. 3,750.

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A com par ison of t he int er est am ount s calculat ed under bot h t he m et hod
indicat es t hat Mr . X w ould hav e ear ned Rs. 749.48 ( Rs.4,499.48 – Rs.
3,750) or near ly 20% m or e under t he com pound int er est m et hod t han
under t he sim ple int erest m et hod.

Sim ply put , com pounding r efer s t o t he r e - inv est m ent of incom e at t he sam e
r at e of r et u r n t o con st an t ly gr ow t he pr incipal am ount , y ear aft er y ear .
Should one car e t oo m uch w het her t he r at e of r et ur n is 5% or 15% ? The
fact is t hat w it h com pounding, t he higher t he r at e of r et ur n, m or e is t he
incom e w hich k eeps get t ing added back t o t he pr incipal r egular ly gene r at ing
higher rat es of ret urn year aft er year.

The t able below show s y ou how a single inv est m ent of Rs 10,000 w ill gr ow
at v ar ious r at es of r et ur n w it h com pounding. 5% is w hat y ou m ight get by
leaving your m oney in a savings bank account , 10% is t ypically t he r at e of
r et ur n y ou could ex pect fr om a one- y ear com pany fix ed deposit , 15% - 20%
or m ore is w hat you m ight get if you prudent ly invest in m ut ual funds or
equit y shares.

Th e I m p a ct of Pow e r of Com p ou n d in g :

The im pact of t he pow er of com pounding w it h differ ent r at es of r et ur n and

differ ent t im e per iods:

At en d of Year 5% 10% 15% 20%

1 Rs 10500 Rs 11000 Rs 11500 Rs 12000
5 Rs 12800 Rs 16100 Rs 20100 Rs 24900
10 Rs 16300 Rs 25900 Rs 40500 Rs 61900
15 Rs 20800 Rs 41800 Rs 81400 Rs 154100
25 Rs 33900 Rs 1, 08300 Rs 3, 29200 Rs 9, 54, 000

W hat is m eant by t he Tim e Value of Money?

Money has t im e v alue. The idea behind t im e v alue of m oney is t hat a r upee
now is w ort h m ore t han rupee in t he fut ure . The r elat ionship bet w een v alue
of a r upee t oday and value of a r upee in fut ur e is k now n as ‘Tim e Value of
Mon ey ’. A r upee r eceiv ed now can ear n int er est in fut ur e. An am ount
inv est ed t oday has m or e v alue t han t he sam e am ount inv est ed at a lat er
dat e because it can ut ilize t he pow er of com pounding. Com pounding is t he
pr ocess by w hich int er est is ear ned on int er est . When a pr incipal am ount is
inv est ed, int er est is ear ned on t he pr incipal dur ing t he fir st per iod or y ear .
I n t he second per iod or y ear , int er est is ear ned on t he or iginal pr incipal plus

65
t he int ere st ear ned in t he fir st per iod. Ov er t im e, t his r einv est m ent pr ocess
can help an am ount t o gr ow significant ly.

Let us t ake an exam ple :

Suppose y ou ar e giv en t w o opt ions:

( A) Receive Rs. 10,000 now OR

(B) Receive Rs.10,000 aft er t hr ee y ear s.

Which of t he opt ions w ould you choose?

Rat ionally, y ou w ould choose t o r eceiv e t he Rs. 10,000 now inst ead of
w ait ing for t hr ee y ear s t o get t he sam e am ount . So, t h e t im e v alu e of
m oney dem onst r at es t hat , all t hings being equal, it is bet t er t o hav e m oney
now rat her t han lat er.

Back t o our ex am ple: by r eceiv ing Rs.10,000 t oday , y ou ar e poised t o

incr ease t he fut ur e v alue of y our m oney by inv est ing and gaining int er est
ov er a per iod of t im e. For opt ion B, y ou don't hav e t im e on y our side, and
t he pay m ent r eceiv ed in t hr ee y ear s w ould be y our fut ur e v alue. To
illust r at e, w e hav e pr ov ided a t im eline:

Present Value Future Value

0 1 2 3 Years

Option A: Rs. 10,000 Rs. 10,000 + Interest

Option B: Rs. 10,000 - Interest Rs. 10,000

I f y ou ar e choosing opt ion A, y our fut ur e v alue w ill be Rs. 10,000 plus any
int er est acquir ed ov er t he t hr ee y ear s. The fut ur e v alue for opt ion B, on t he
ot her hand, w ould only be Rs. 10,000. This clear ly illust r at es t hat v alue of
m oney r eceiv ed t oday is w or t h m or e t han t he sam e am ount r eceiv ed in
fut ur e since t he am ount c an be inv est ed t oday and gener at e r et ur ns.

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Let us t ak e an anot her exam ple:

I f y ou choose opt ion A and inv est t he t ot al am ount at a sim ple annual r at e
of 5% , t he fut ur e v alue of y our inv est m ent at t he end of t he fir st y ear is Rs.
10,500, w hich is calculat ed by m ult iplying t he pr incipal am ount of Rs.
10,000 by t he in t er est r at e of 5% and t hen adding t he int er est gained t o t he
pr incipal am ount .

Thus, Fut ure value of inv est m ent at end of fir st y ear :

= ( ( Rs. 10,000 X ( 5/ 100) ) + Rs. 10,000

= ( Rs.10,000 x 0.050) + Rs. 10,000

= Rs.10,500

You can also calculat e t he t ot al am ount of a one- y ear inv est m ent w it h a
sim ple m odificat ion of t he abov e equat ion:

Or iginal equat ion: ( Rs.10,000 x 0.050) + Rs.10,000 = Rs.10,500

Modified form ula: Rs.10,000 x [ ( 1 x 0. 050) + 1] = Rs.10,500

Final equat ion: Rs. 10,000 x ( 0.050 + 1) = Rs. 10,500

Which can also be w r it t en as:

S = P ( r+ 1)

Where,
S = am ount received at t he end of perio d
P = pr incipal am ount
r = int erest rat e ( per year)

This for m ula denot es t he fut ur e v alue ( S) of an am ount inv est ed ( P) at a

sim ple int erest of ( r) for a period of 1 year.

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How is t im e value of m oney com put ed?

The t im e value of m oney m ay be com put ed in t he follow ing cir cum st ances:

1. Fut ur e v alue of a single cash flow

2. Fut ur e v alue of an annuit y
3. Pr esent v alue of a single cash flow
4. Pr esent v alue of an annuit y

( 1) Fu t u r e V a lu e o f a Sin g le Ca sh Flo w

For a giv en pr esent v alue ( PV) of m oney , fut ur e v alue of m oney ( FV) aft er a
per iod ‘t ’ for w hich com pounding is done at an int er est r at e of ‘r ’, is given
by t he equat ion

FV = PV ( 1+ r) t

This assum es t hat com pounding is done at discr et e int er v als. How ev er , in
case of cont inuous com pounding, t he fut ur e value is det er m ined using t he
form ula

FV = PV * e r t

Wher e ‘e’ is a m at hem at ical funct ion called ‘ex ponent ial’ t he v alue of
ex ponent ial ( e) = 2.7183. The com pounding fact or is calculat ed by t ak ing
nat ur al logar it hm ( log t o t he base of 2.7183) .

Exa m p l e 1: Calculat e t he value of a deposit of Rs.2,000 m ade t oday, 3

year s hence if t he int er est r at e is 10% .

By discr et e com pounding:

FV = 2,000 * ( 1+ 0.10) 3 = 2,000 * ( 1.1) 3 = 2,000 * 1.331 = Rs. 2,662

By cont inuous com pounding:

FV = 2,000 * e (0.10 * 3) = 2,000 * 1.349862 = Rs.2699.72

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