Investment

scenario
Rishi Manrai
Assistant Professor (Finance)
Amity Business School
Gurgaon
 The Dilemma of Mr. Raju
Mr. Raju is very happy. He is being selected on a
senior position in a new organization with a hefty
increase in pay package and he is going to a city
which is far better (and expensive) than his current
dwelling place.
As soon as he reaches home his family greets him. At
dinner his mother asks him, “so what are you going to
do about the Home”. He asks “what about home, we
will be living in a rented place”.
 The Dilemma of Mr. Raju
His mother asks again “so you are telling me that
whatever extra has came from this new job, you are going
to squander on rent, leaving your old mother alone in
this house”.
Raju was in shock, he was only thinking of going to other
place and simply neglecting the most basic requirement.
Mr. Raju’s Salary in his current organization was the
main reason of switch, he was barely able to save
something for his two children. His salary was just
fulfilling his current consumption requirement. He has
been working for 10 years and he hardly has Rs 50,000 in
savings.
 The Dilemma of Mr. Raju
He is living in his family home, but now at other
place he has to rent a home which will somewhat dry
up the extra that he will get from his new job.
He is currently 33 years of age. He holds two
insurance policies and some Term deposits as the
only savings.
 The Dilemma of Mr. Raju
So he decides to approach Mr. A, his neighbour who is
financial advisor.
He asked him to plan his financial matters in a way
that would build wealth to:
Let him save for some luxuries like an annual holiday.
Compensate for the increase in the cost of living.
Savings for the old age.
Future needs like higher education for his children.
But his most important priority is to own a house of his
own on this new place.
 Concept of Investment
‘Sacrificing something now for prospect of gaining something
later’

Three dimensions to investment

• Time
• Today’s sacrifice
• Prospective gain in the form of Increased wealth

Buying shares, buying mutual fund units, deposits in post office,

investment in land or building are all examples of investment
Investment Decision Process
Laying down of Investment Objective in terms of expected risk and return

Specification of Investment Constraints

Identification of assets and determining the asset mix – Security Analysis

Formulation of investment/ portfolio strategy – active or passive

Selection of securities – portfolio construction

Portfolio execution

Portfolio review and performance evaluation

 Investment Goals

Near – • High emotional priority such as

buying a new car or a high end

term
phone or even a PS4.
• To be achieved in very less time only
• Investment vehicles – Cash or fixed
High income instruments with matching
maturity dates with goal dates
Priority • Generally a lower level of risk is
preferred due to high emotional
Goals importance of goal
 Investment Goals
Long – • Indication of need of financial
Term High independence in future
• A diversified approach is used in earlier
Priority years with an aggressive approach in
last 5 to 10 years (before retirement)
Goals

Low • Investment in speculative kinds of

priority investments just for fun or trial
Goals
 Investment Objectives
• For individuals who want to
maximize wealth
• Who are not satisfied with
conventional saving & investment
Entrepreneurial approach
or Money • Putting spare money in stocks of
Making Goals company where they are working
and leaving it until the chances of
losing the built – up
• Takes long time in building a
portfolio
General Investment Objectives
Safety of the principle

Liquidity of the holdings

Rate of current or long term returns

Growth/ capital appreciation

Insulating the effect of inflation

 Investment Constraints
Knowledge About the • Traditional Investment mindset, lack
Investment Avenues of awareness

• The amount of money available with

Liquidity
a person to invest

Age and stage of life • The current age of investor and his
cycle family position

Need of regular • Affects the type of investment

income

Marketability • Can be liquidated easily or not

 Investment Constraints
Time horizon • Long – term or short – term

Risk Tolerance • Depends on level of wealth

Legal and • Mainly applicable to

Regulatory Issues institutional investors

• Given investment may be used

Tax Liability as tax saver or not
Investment Classification
Investments

Financial Real
Investments Investments

Non –
Variable Security
Fixed Income Security
Income Form
Form
 Investment Classification
According to Andrew Beattie
Ownership Investment
 Stocks/ Mutual Funds
 Business
 Real Estate (Not Residential House)
 Precious Objects\ Antiques

Lending Investment
 Term Deposits, SB Accounts
 Bonds/ Long Term Debt Securities

Cash Equivalents
 Money Market Funds
 Investment Classification
According to AS – 13
Current Investment
Long – tem Investment
According to Markowitz (1991)
Individual Investment
Institutional Investment
Types of Instruments
Equity
Debt
Derivatives
 Security Forms of Financial Investment

Security Certificate : A document evidencing the liability of issuer

• Outlines the rights of the investor & sets the conditions of exercising of the right
• Securities evidence those liabilities which are negotiable
• The main impetus in these investments came after various liberalization policies of
Government

Different type of securities are

• Gilt – Edged Securities
• Corporate debentures
• Preference shares
• Equity shares
Gilt – Edged Securities
Debt securities issued by Govt. & semi –
Govt. bodies

Acknowledgement of debt taken by

issuing body

Represents the public borrowings of

issuer
Gilt – Edged Securities

• Issued by RBI on behalf of Central Govt.

• No explicit coupon payment
• Sold at a discount & redeemed at par
Treasury • From 1 – 4 – 1996, T – Bills are being sold
by RBI by auction & not by PDO of RBI

Bills (T • Weekly auction for 91 days T – bill &

fortnightly auction for 364 days T – bill

– bills)
• Safest & most liquid securities
• Due to rediscounting RBI is left with
nearly 80% of outstanding T – Bills
• Lesser public interest due to low returns
 Gilt – Edged Securities
• Maturity period >1 year, fixed rate of
interest
• Interest is payable semi – annually
Central by coupons
• Can be in form of either promissory
Govt. notes or stock certificate
Dated • PPF or RPF can hold these in form
of Stock certificate only
Securities • Higher coupon rate than T – Bills
• Many PFIs & commercial banks
have to invest in these securities
 Gilt – Edged Securities
• Promissory notes issued by
institutions & corporations set
Semi – – up by Govt.
• The issue, interest payment &
Govt. transfer are handled by
Dated commercial banks for a fee
• The gilt – edged securities
Securities market is dominated by
institutional investors
 Corporate Debentures
Promissory notes issued by joint stock companies
mainly in private sector

Debenture Trust Deed

• Appointment of banks, insurance companies, firm of attorneys
as debenture trustee who looks after interest of debenture holder
by seeing that company follows the terms of indenture
• Indenture : A legal document describing relationship between
debenture holder & company
 Corporate Debentures
• Less liquid, more risky than gilt – edged
securities
Special • Can contain call or put option
• Success of issue depend on reputation of
Features issuing corporation, market condition
• Mandatory for company to pay interest

• Registered & Bearer

Types of • Convertible, Non – convertible & Partly
Convertible
Debentures • Fixed and Floating charge
Other Securities
Preference Shares
Fixed rate of dividend paid before equity shares
Cumulative and non cumulative
Redeemable and irredeemable
Convertible
Equity Shares
Sweat Equity/ ESOPs
Non – voting Shares carrying higher rates of
dividend
Right Shares
Bonus Shares
 Other Securities
PSU Bonds

Debt securities
Payment of coupon on bond’s face value
 Fixed or Floating Rate bonds
Puttable and Callable Bonds
Zero Coupon Bonds
Financial Markets
Consists of
Borrower
Lender
Instruments
Intermediaries
Two parts of market
Money Market
Capital Market
Real Investment
Land & House property

Bullion

Precious Stones

Art Objects/ Antiques

 Are All Investments Speculative?

Genuine Speculative
investments Investments
• Carefully thought out • Based on rumors, hot
decisions tips & hunches
• Involves calculated • Risk – return
risks inconsistency
• Risk – Return • Intention of short –
consistency term profit & less risk
• Genuine investor – averse
Risk averse, long –
term perspective
Are Investment & Gambling The Same?
Gambling
• ‘An act of betting on an uncertain outcome’
• The outcome is largely a matter of luck with no rational
economic reason for it
• Gamblers : Risk – lovers, can take unlimited risk for
expected reward

Aggressive investors – Rely most upon their

speculative & gambling instincts than
conservative investors
 INDIAN STOCK MARKET

SEBI(Apex Body)
BSE
NSE
 Genesis of SEBI
Inadequate , ill-coordinated & Fragmented existing
regulatory frame-work

 Multiple regulatory bodies results confusion and

provides scope for unethical approach among market
participant

The risk for investor protection

 SEBI
SEBI formed with all functional autonomy under the SEBI Act,
1992

The central Govt. is empowered to supersede the SEBI in public

interest or if on account of grave emergency

The SEBI is a body of six members comprising

 The chairman
 two members from amongst the officials of the ministries of the
central government dealing with law and finance
 two professional members having knowledge of and expertise in
securities market and one from RBI
Operational Departments of SEBI

 The Primary Market Policy , Intermediaries , Self-Regulatory

Organisations (SROs) Investor Grievance and Guidance Department
 The Issue Management and Intermediaries Department
 The Secondary Market Policy , Operations & Exchange
Administration , News Investment Products and Insider Trading
Department
 The Secondary Market Exchange Administration , Inspection and
Non-member Intermediaries Department
 Legal Department
 Investigation Department
 Institutional Investment , M&A , Research & Publication &
International relation Department
 Objective of SEBI
 Protecting the interests of investors in securities,

 Promoting the development of, and

 Regulating, the securities market and for matters

connected therewith or incidental thereto

 Self Regulation & regulation by exception

Corporate Governance and SEBI
Three kinds of disciplines on the corporate:
 Self Discipline
 Market Discipline
 Regulatory Discipline

Governance and Value Creation:

(i) The strength of stakeholder relationships
(ii) Wealth created is evenly distributed across all classes of
stakeholders
(iii) Management quality
(iv) Stability of future wealth creation
35
 contd.

Focus areas of SEBI

 Ensuring timely disclosure of relevant information

 Providing an efficient and effective market system

 Demonstrating reliable and effective enforcement

 Enabling the highest standards of governance

 Submission of quarterly compliance reports through Electronic

Data Information Filing and Retrieval (EDIFAR)
36
IPO and Investment Bank – Few Terms
Initial Public Offering (IPO) is when an unlisted company makes either a fresh
issue of securities or an offer for sale of its existing securities or both for the
first time to the public. This paves way for listing and trading of the issuer’s
securities.

Further public offering (FPO) is when an already listed company makes a

fresh issue of securities to the fresh set of investors.

Rights Issue (RI) is when a listed company which proposes to issue fresh
securities to its existing shareholders as on a record date. The rights are
normally offered in a particular ratio to the number of securities held prior to
the issue.

Private placement is an issue of shares or of convertible securities by a

company to a select group of persons under Section 81 of the Companies Act,
1956 which is neither a rights issue nor a public issue. This is a faster way for a
company to raise equity capital.
 Price Discovery through Book
Building
Book Building is basically a process used in
Initial Public Offer (IPO) which helps to
determine price and demand discovery.

It is a process used for marketing a public offer

of equity shares of a company. It is a process
where, during the period for which the book for
the IPO is open, bids are collected from investors
at various prices, which are above or equal to the
floor price.

The offer/issue price is then determined after the

last date of IPO based on certain evaluation
criteria.
Thank you very much