Established on April 12, 1992, The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the interests of investors in securities (b) promoting the development of the securities market and (c) regulating the securities market. Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. In particular, it has powers for:
The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares, it is the original cost of the stock shown on the certificate; for bonds, it is the amount paid to the holder at maturity. Also known as par value or simply par. For an equity share, the face value is usually a very small amount (Rs. 2, 5, 10) and does not have much bearing on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. For a debt security, face value is the amount repaid to the investor when the bond matures (usually, Government securities and corporate bonds have a face value of Rs. 100). The price at which the security trades depends on the fluctuations in the interest rates in the economy.
The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted tohave nationwide trading since inception. NSE (www.nseindia.com) was incorporated as a national stock exchange.
The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI – www.sebi.gov.in), provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. They can trade through the computerized trading screens available with the NSE trading members or the internet based trading facility provided by the trading members of NSE.
BSE Ltd. (www.bseindia.com), is the first ever stock exchange in Asia established in 1875 and the first in India to be granted permanent recognition under the Securities Contract Regulation Act, 1956..
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A stock split is a corporate action which splits the existing shares of a particular face value into smaller denominations so that the number of shares increase, however, the market capitalization or the value of shares held by the investors post split remains the same as that before the split.
For example - If a company has issued 1,00,00,000 shares with a face value of Rs. 10 and the current market price being Rs. 100, a 2-for-1 stock split would reduce the face value of the shares to 5 and increase the number of the company’s outstanding shares to 2,00,00,000, (1,00,00,000*(10/5)). Consequently, the share price would also halve to Rs. 50 so that the market capitalization or the value shares held by an investor remains unchanged. It is the same thing as exchanging a Rs. 100 note for two Rs. 50 notes; thevalue remains the same.
Let us see the impact of this on the share holder: - Let\'s say company XYZ is trading at Rs. 40 and has 100 million shares issued, which gives it a market capitalization of Rs. 4000 million (Rs. 40 x 100 million shares). An investor holds 400 shares of the company valued at Rs. 16,000. The company then decides to implement a 4-for-1 stock split (i.e. a shareholder holding 1 share, will now hold 4 shares). For each share shareholderscurrently own, they receive three additional shares. The investor will, therefore, hold 1600 shares. But, this does not impact the value of the shares held by the investor since post split, the price of the stock is also split by 25% (1/4th), from Rs. 40 to Rs.10, therefore, the investor continues to hold Rs. 16,000 worth of shares. Notice that the market capitalization stays the same - it has increased the amount of stocks outstanding to 400 million while simultaneously reducing the stock price by 25% to Rs. 10 for a capitalization of Rs. 4000 million. The true value of the company hasn\'t changed.
An easy way to determine the new stock price is to divide the previous stock price by the split ratio. In the case of our example, divide Rs. 40 by 4 and we get the new trading price of Rs. 10. If a stock were to split 3-for-2, we\'d do the same thing: 40/(3/2) = 40/1.5 = Rs. 26.60.
Simple Interest: Simple Interest is the interest paid only on the principal amount borrowed. No interest is paid on the interest accrued during theterm of the loan. There are three components to calculate simple interest: principal, interest rate and time.
Formula for calculating simple interest:
I = PRT
I = interest
P = principal
r = interest rate (per year)
t = time (in years or fraction of a year)
Mr. Amar borrowed Rs. 10,000 from the bank to purchase a household item. He agreed to repay the amount in 8 months, plus simple interest at an interest rate of 10% per annum (year).
If he repays the full amount of Rs. 10,000 in eight months, the interest would be: P = Rs. 10,000 r = 0.10 (10% per year) t = 8/12 (this denotes fraction of a year)
Applying the above formula, interest would be: I = Rs. 10,000*(0.10)*(8/12) = Rs. 667.
This is the Simple Interest on the Rs. 10,000 loan taken by Mr. Amar for 8 months. If he repays the amount of Rs. 10,000 in fifteen months, the only change is with time. Therefore, his interest would be: I = Rs. 10,000*(0.10)*(15/12) = Rs. 1,250
Till the decade of the 1980s, there was no scale to measure the ups and downs of the Indian stock market. The Stock Exchange, Mumbai (BSE) then came out with a stock index called the Sensex – or Sensitive Index.
The Sensex was first compiled in 1986. It is a basket of 30 stocks comprising a sample of large, liquid and representative companies. The Sensex became the barometer of the Indian stock market. The base year of the Sensex is 1978-79 and the base value is 100.
Interestingly the Sensex is not only scientifically designed but also based on globally accepted construction and review methodology.
The index is widely reported in both domestic and international markets through print as well as international media. So how is it calculated?
The oldest stock market index in the country is calculated using the ‘Free-Float Market Capitalization’ methodology. Market capitalization of a company is determined by multiplying the prevailing price per share with the number of shares issued by the company
E.g. Company A has issued 1 lac shares having market price of Rs. 750/- per share. Therefore, market capitalization of Company A is 100,000 shares X Rs. 750/- per share = Rs. 75,000,000
This market capitalization is further multiplied by free float factor to determine free-float market capitalization.
What is Free-Float market capitalization?
It is defined as that proportion of total shares issued by the company that are readily available for trading in the market. It excludes promoters’ holding, government holding, and other locked-in shares that do not come to the market for trading.
E.g. Suppose Company B has 1000 shares in total; out of which 200 are held by promoters. Now only 800 shares are available for trading, to the general public. These 800 shares are called ‘Free-Floating’ shares.
Sensex Calculation Methodology -
Assume that the Index consists of only 2 stocks, STOCK A and STOCK B. COMPANY A has 800 free-floating shares while COMPANY B has only 1000 free-floating shares.
Market price of STOCK A is Rs. 120/- per share. Hence its free-float market cap is Rs. 96000/- (800 shares X Rs. 120 per share). Similarly, market price of STOCK B is Rs. 200/- per share and its free-float market cap is Rs. 2,00,000/- (1000 shares X Rs. 200 per share)
Thus the free-float market capitalization of the index (comprising of STOCK A and STOCK B in this case) is Rs. 296,000/- (Rs. 96,000 + Rs. 2,00,000)
Now, the year 1978-79 is considered the base year of the index with a base value set to 100, as explained earlier. Suppose, at that time, the market cap of the stocks in the index was Rs. 60,000. Then, we logically presume that an index market cap of Rs. 60,000 is equal to an index value of 100.
Thus, the value of the index today is:- Rs. 296,000 X 100/60,000 = 493.33
Hope you have now understood how Sensex is calculated. (Source: Tata Mutual Fund)
For the last many years, the term ‘ sweat equity’ has been in the news. In the recently concluded IPL3, this term acquired immense news coverage. But what does it mean? How is it arrived at?
According to the Companies Act, sweat equity are equity shares that a company issues to an individual in consideration of his/her services, knowhow or any other value addition that the company has benefited from. . In other words, it is the equity given to a company's executives to reflect the value the executives have added and will continue to add to the company.
For instance, if a person works for creating patents for a company, then the company can issue equity (shares) to him, instead of paying cash. It could be issued for many other things too such as the person providing technical know-how, brand rights or similar value additions to the company.
All the limitations, restrictions and provisions relating to equity shares are applicable to such sweat equity shares. These equity shares can be issued free of monetary consideration or at a concession to their prevailing value.
A company may issue sweat equity shares if the following conditions are fulfilled:
(a) The issue of sweat equity shares is authorized by a special resolution passed by the company
(b) The resolution specifies the number of shares, current market price, monetary consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued
(c) Not less than one year has, at the date of the issue, elapsed since the date on which the company was entitled to commence business
(d) The sweat equity shares of a company whose equity shares are listed on a recognized stock exchange are issued in accordance with the regulations made by the Securities and Exchange Board of India (SEBI) in this behalf.
Are “sweat equity” the same as “stock options”?
Not exactly! They are similar to the extent that both are means of providing non-cash incentive or compensation to individuals. However, sweat equity, as widely understood, are real shares allotted to individuals upfront.
Stock option, on the other hand, is merely a right given to an individual to acquire shares of the company at a future date at a pre-agreed price.
Aware of the inherent differences between the two, SEBI has issued separate guidelines for sweat equity and stock options. Also, the Companies Act allows an unlisted company to issue up to 15 per cent, or worth up to Rs 5 Crore, in a year under sweat equity allotment.
If the allotment is more than 15 per cent in a year, then it is not treated as sweat equity, unless the central government approval is taken.
In a broader sense, sweat equity can be issued to anyone who has rendered services to the company. Sweat equity can be issued to an employee, consultant or a vendor. That is the reason start-up companies use sweat equity as currency to pay for services that they cannot pay for in “hard” cash.
However, in India, as per SEBI regulations, sweat equity shares can be issued only to employees or directors.
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