Paraphernalia

Time to Say NO!

2015-01-07T23:00:00.001+05:30

As a guide to run a company, many management gurus or entrepreneur say that the CEO or higher management should have the quality to "SAY NO". Saying NO not to the employees of the organization in the time of their salary hike or to the all the situations. Instead this NO, to take a new project or contract. Reference like this can be found from the books like Making Ideas Happen, by Scott Belsky or The Art of the Start, by Guy Kawasaki

This is of course very much essential because this is the wisest decision when the management feels they don't have sufficient resource or skill to handle the nature of the new project or contract. But if always the answer is NO, in that case the company will never get any contract. So, it is correctly advised by those guru to say NO only when you feel that you don't have sufficient skill set or bandwidth to cater the project or even the nature of the contract.

By saying NO in this situation, helps the organization to save from getting blamed in case of unforeseen failure.

But if you, as a CEO or higher management authority, ever decided with YES to get the contract, you wouldn't have any choice to say NO ever in the entire life cycle of the project. So, to be a successful company, it is very much important to decide with YES or NO.

As a very practical case, if a particular company, grabbed a floating tender eying to make a profit even without considering its skill set, that should not say NO in the rest of the phase of the project and must try to meet all the requirements of client (/s) even in the case of extreme resource or skill set crisis. Otherwise, the corporate may loose all its credibility.

Capital Market Intermediaries

2014-03-28T15:44:00.000+05:30

1. Introduction

Various intermediaries plays important roles in a financial transactions those are happening every day. We will firstly discuss intermediaries with respect to equity only - because equity is considered to be the simplest asset class in capital market world. In a security's life cycle, in each phase from issuing an instrument in Primary Market to buying that instrument in Secondary Market. Though in Secondary Market, for a transaction (combination of buy and sell order) actual security movement occurs between two parties - buyer and seller, in background lot of intermediaries exist and facilitate a smooth movement.

Let us consider two persons Mr. Bagchi and Mr. Sharma who consider them to be good friend of each other and Mr. Bagchi sold his House to Mr. Sharma. So, there exist two possible movements

House Movement: From Mr. Bagchi -> Mr. Sharma
Money Movement: From Mr. Sharma -> Mr. Bagchi

The above mentioned movements are associated with a contract between Mr. Bagchi and Mr. Sharma. In Capital Markets terminology this can be termed as a Trade happened between Mr. Bagchi and Mr. Sharma. Therefore, in a generic way it can be said that, as part of the trade or contract, two parties entered into an agreement where both the parties agreed to pay corresponding security at a pre specified date. The pre-specified date in the agreement is usually termed as Value Date in the contract.

As a most desirable situation, on the Value Date, the Hose Movement and Money Movement will happen. But if due to some reason say Mr. Bagchi is not agreeing to handover the possession of his house to Mr. Sharma. So, it can be inferred from this case that guarantee plays more important role than trust. This incident necessitate a third party to enter into the situation which can play a role of guarantor. In this regard, one or more third party may exists in a simple to most complex financial transaction. In the Capital Market world, these third parties are usually termed as Intermediaries.

In the above case, including the guarantor there may be more intermediaries and those may be categorized as one of the followings:

Bank – Responsible for managing cash movements and maintenance.
Guarantor – Role is already mentioned in the above paragraphs
Agent or Broker – In a case where buying and selling parties are not known to each other instead they entered into an agreement through an agent or broker
Exchange – In case, there exists a central market where more than one broker is dealing among themselves to facilitate transactions of various properties etc.

Intermediaries do exist in every place whether it is a capital market or a wholesale market etc. It should be noted that one single entity can play role of one or more intermediaries simultaneously.

2. Capital Market Intermediaries

The securities market essentially has three categories of participants, namely, the issuers of securities, investors in securities and the intermediaries. While the corporates and government raise resources from the securities market to meet their obligations, it is households that invest their savings in the securities market.

Capital Market Intermediaries are any entity those act as a middleman between two parties in a financial transaction.

Capital Market Intermediaries are also termed as Financial Institutions. Capital markets intermediaries are licensed and regulated under the regulation act of a country. Capital Market Intermediaries can be categorized based on their roles and responsibilities. Financial intermediaries offer a number of benefits to the average consumer including safety, liquidity and economies of scale. Following are some of the intermediaries in a capital market. IT should be noted that there may exist more entity in this regard.

Broker-Dealer or Agent: Act as one or many roles of that of Trading Participant, Settlement Participant, Clearing Participant
Bank: Provides safe-keeping services for cash
Custodian and Depository: Provides safe-keeping services for all kinds of instruments - usually provides services in Dematerialized form
Exchange: Provides a platform facilitate trading services - online, offline, over-the-telephone etc.
Central Counter Party (CCP): Plays the role of counter party of both the parties in a transaction and thus eliminates the risk of non payment of cash or non delivery of security from any of the parties. Usually novate a trade into two trades. So, if there exists one CCP in the above mentioned example in Indtroduction section, original agreement will be broken into two agreement as one between Mr. Bagchi and CCP and the other between CCP and Mr. Sharma
Clearing Participant: Takes the responsibility of transferring the cash and security to the relevant party.
Registrar: Maintains a record of who is holding what. This usually provides service to the security issuer. Issuer, at the time of Corporate Action announcement and entitlement, refers to the relevant Registrar.
Regulatory Body: Though act as one of the intermediaries, usually regulates and controls the operations of other intermediaries. This is usually a government body.
Some more examples are Mutual Fund, Pension Fund etc.

Following table shows regulating authorities of some of the countries:

Sl. No.	Country	Regulating Authority
1	India	Securities and Exchange Board of India (SEBI) Ministry of Corporate Affairs (MCA) Reserve Bank of India (RBI)
2	Singapore	MAS (Monetary Authority of Singapore)
3	United States	Securities & Exchange Commission (SEC) Commodity Futures Trading Commission (CFTC) Federal Reserve System ("Fed") Federal Deposit Insurance Corporation (FDIC) Financial Industry Regulatory Authority (FINRA) Office of the Comptroller of the Currency (OCC) and etc.
4	Australia	Australian Prudential Regulation Authority (APRA) Australian Securities and Investments Commission (ASIC)
5	Hong Kong	Hong Kong Monetary Authority (HKMA) Hong Kong Securities and Futures Commission (SFC)

3. Importance of an Intermediary

Question may be asked whether it is at all necessary to transact through an intermediary.

Yes, It is advisable to conduct transactions through an intermediary. For example, you need to

transact through a trading member of a stock exchange if you intend to buy or sell any security on

stock exchanges. You need to maintain an account with a depository if you intend to hold securities in

demat form. You need to deposit money with a banker to an issue if you are subscribing to public

issues. You get guidance if you are transacting through an intermediary.

In case of India, chose a SEBI registered intermediary, as he is accountable for its activities. The list

of registered intermediaries is available with exchanges, industry associations etc.

Fixed Income - Basics

2014-03-06T11:57:00.001+05:30

1. Fixed Income - Basic Concept

Fixed Income is interchangeably used as Debt or Bond. This is another asset class in securities market. By the term it can be understood that this type of security. In this type of securities there are two parties involved and those are as follows:

Issuer: Who is borrowing money from public or people or another financial institution (s).
Money Lender: Who lends money to the borrower (in this case issuer).

In this type of instrument, Issuer and Money Lender enters into an agreement (Bond) where Issuer agrees to return the principal with some interest to the Money Lender. Though this type of instrument is considered to be a very safe instrument, generally there is no guarantee that the Issuer will return the principal and interest to the Money Lender. In contrast to the Equity instrument, this type of instrument doesn't represent any ownership to the issuing company. This type of instrument generally have an maturity date - by when issuer agrees to return the borrowed principal along with charged interest. The liability (Debt) of the issuing company is only up to the maturity date.

There are various important attributes of a Fixed Income securities. Those will be discussed later in this document. Depending on the various parameters, Fixed Income securities can be further classified in other sub categories, those are listed in the later part of this document.

2. Characteristics of Fixed Income Securities

This section will describe the characteristics of a typical Fixed Income securities. In this context it is important to know the important parameters or attributes of this type of instruments. Following are the important parameters of this type of instruments:

Issuer: The issuing company that issued the particular Fixed Income security.
Maturity Date: It is the day when the issuing company is obliged to pay the maturity amount (the principal or what is mentioned in the fixed income certificate). If things go well, after this day the issuing company's obligation becomes zero (0).
Interest (or Coupon) Rate: In capital market terminology, the interest is also called coupon. Interest Rate is the rate at which the issuing company agrees to pay the interest (or coupon). This may be a fixed one or floating. Details of this will be discussed in later phase.
Interest (or Coupon) Payment Frequency: The frequency at which the issuing company agrees to pay the coupon to the money lender or buyer of the fixed income securities. Examples are Annually, Semi-Annually, Quarterly.
Principal Amount: The value written on the fixed income certificate. This is also called Face Value of a fixed income security. In reality this is the amount the issuer agrees to repay the principal amount to the bond holder or the money lender at the time of maturity.
Issuing Currency: The currency at which the fixed income security has been issued to public. Examples are INR, USD, GBP, JPY etc.
Interest (Coupon) Payment Currency: The currency at which coupons will be paid to the bond holder. Examples are INR, USD, GBP, JPY etc. Issuing Currency may differ from Interest (Coupon) Payment Currency.

One interesting thing to be noted that the name of a bond itself conveys the key features of a debt instrument. E.g., a GS CG2024 10.50% bond refers to a Central Government (CG) bond maturing in the year 2024 and paying a coupon at a rate of 10.50%.

3. Coupon and Discount Instrument

Depending on the nature of a fixed income security that can be termed as a Coupon or Discount type instrument. The basic difference between a Coupon and a Discount instrument is that for the first type of instrument periodic interest is paid to the bond holder while for the later type of instrument no periodic interest is paid to the bond holder but the instrument is issued at a discounted price. A Coupon type of instrument is issued at principal amount and issuer agrees to repay the principal at the time of maturity. Whereas for a Discount type of of instrument, the instrument is issued at a discounted price which is less than the Principal Amount and issuer agrees to repay the Principal Amount at the time of maturity.

More on this section will be discussed during corporate action management section.

4. Examples of Fixed Income Securities

Depending on the business nature of fixed income securities these can be categorized as the following types:

Corporate Bond
Government Bond
US Treasury
Municipal Bond
Collateral Mortgage Obligation
Collateral Mortgage Obligation Group
Agency Bond
Asset Swap Bond
Mortgage Backed Security and etc.

The details of these instruments will be described in later phase.

Equity - Basics

2014-02-20T16:22:00.001+05:30

1. Equity - Basic Concept

Equity is one of the asset class in the context of finance. It is an ownership interest in a business.

Consider an example of two friends having equal ownership towards a firm that is running by themselves. In finance term, it can be re-stated as each of the friends has 50% equity or shares in their company or in another words each of the friends has ownership towards 50% of the total asset of their company.

In reality when company grows and ownership is distributed among many people, valuation is done for total assets of the company and is distributed in units of shares having same denomination.

Let’s take a case of a company CA and its total equity capital (owner's capital) is ₹A, denomination of each unit of share is ₹S – in this case total no of shares for the company CA will be ₹A/₹S.

Now if we consider absolute value:

₹A = 500000

₹S = 10

Total No. of Shares = N =₹A/₹S = 500000/10 = 50000

Now, if owner Owner-1 has 50 shares on the company CA, it can be said that Owner-1 has 50/50000*100% = 0.1% ownership to that company.

2. Important Factors:

An equity instrument has a factor called Face Value.

Now what is face value? - Face Value or simply Face or Par Value of an equity is the value printed on the share certificate and it is decided when the share is first available to sell.

The issue price of one unit of equity or simply one equity can be more or less than the Face Value of it. When an equity is issued at a higher price than its Face Value it is called as the instrument is issued with Premium on the other hand when an equity is issued at a lesser price that its Face Value, it is called as the instrument issued after Discount.

Usually Face Value of an equity remains unchanged unless modified by the managing board of that company. Face Value modification is thus part of a Corporate Action – details will be taken up later.

Face Value is usually used while calculating the Cash Dividend (one of the Corporate Action) benefit for the shareholder of the company.

3. Issue of Shares:

Q. Why a company do needs to offer shares?

Ans. Most companies are usually started privately by their promoters. But sometimes the capital funded by promoters and borrowed from banks may not be sufficient for setting up or running the business for a long term. In this situations, companies invite public to invest on them. There are several ways by which companies can raise money from public. One can by borrowing money from public – which can be termed as issuing Fixed Income or Bond instruments. Another way is by distributing company’s shares or ownership to the public.

Primarily shares issues can be classified as following:

Public
Rights
Preferential

The classification of issues can is illustrated below:

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.

Further Public Offering (IPO): Is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document.

Rights Issue: Is when an already listed company offer rights to buy fresh securities to the existing shareholders as on a record date. Price of stocks offered through rights is usually lower than that of the market price of the particular security. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. More will be discussed in Corporate Action chapter.

Preferential Issue: is an issue of shares or of convertible securities by listed companies to a select group of persons. This issue is neither public nor rights. This is a faster way for a company to raise equity capital.

Capital Market - Introduction

2014-02-16T09:37:00.000+05:30

1. Securities Markets

Capital Markets are financial markets that facilitate buying or selling of equity-backed securities or long-term debt instruments. It is also known as Securities Market. It performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporate) is most efficiently achieved through the securities market. In other words, securities markets provide channels for reallocation of savings to investment and entrepreneurship. Savings are linked to investment by a variety of intermediaries, through a range of financial products, called "Securities". In capital market world, Securities and Instruments are used interchangeably. Securities Markets composed of two types of markets:

Primary Market: Where new stock and bond issues are sold to investors.
Secondary Market: Were trading happens on existing securities.

1.1 Primary Market

This segment of capital market deals with issuing of new securities. Companies, govt. or public sector industries raise their capital need through the Primary Market. The issuing company or group receives cash from investors which is then used to fund operations or expand business. This can be termed as initial sale. After initial sale is completed, further trading is said to conduct on the secondary market.

1.2 Secondary Market

This segment of capital market deals with the already issued securities such as stock, bond, option, future etc. Trading (buying and selling) between investors occurs in the secondary market. It is to be noted that in Primary Market trading happens between issuer and investor whereas in Secondary Market, already listed securities are traded among investors. Example of secondary markets are as follows:

NSE (India)
BSE (India)
NYSE (USA)
AMEX (USA)
ASX (Australia)
SEHK (Hong Kong)
SGX (Singapore) and etc.

2. Financial Securities (Instruments)

Financial Securities or Financial Instruments are tradeable asset of any kind. In Capital Market world, there exists various kinds of financial instruments - it can be either cash, evidence of ownership to the issuing company, a contractual right to receive/deliver cash or an underlying contract of any other financial instrument (s) etc. Based on the nature of securities those can be categorized or classed as follows:

2.1 Shares or Stocks:

This type of instrument represents a form of ownership to the issuing company. By this type of instruments, an issuing company liquidate ownership among the share-holders. This can be further classified as follows:

Equity Shares/Ordinary Shares
Rights Issue/Rights Shares
Bonus Shares
Preference Shares and etc.

2.2 Debt/ Bond/ Fixed Income

It is a negotiable certificate evidencing indebtedness. A debt security is generally issued by govt. agency, municipality or a corporate. A bond investors lends money to the issue and in return the issuer promises to repay the loan amount on a specified maturity date. Usually issuer pays periodic interest to the bond holder (or investor). Depending on the nature of interest repayment this type of instrument can be further classified as follows:

Coupon Bond
Discount or Zero Coupon Bond
Convertible Bond
Treasury Bills

2.3 Derivatives

Derivatives is a product whose value is derived from the value of one or more base security (is) or in other terms underlying. An underlying can be equity, market index, foreign exchange (forex), commodity or any other assets. Initially derivatives are emerged as a purpose of hedging. Depending on the nature of business, there are several types of derivatives products and those are as follows:

Futures
Options (Calls/Puts)
Forwards
Warrants