Security Analysis: An Introduction

Course Handout
 What is this course about?

Part 1
• Investment-Philosophy
• Role of financial markets and Indian Investment Environment
• Investment Instruments
• Method of security Issue, Market development, Regulation
• Collective Investment Schemes i.e. Mutual Funds, AIFs, etc

Part 2
• Fixed Income Securities i.e. Bond Types and Pricing
• Term Structure of Interest rates
• Portfolio Management of Fixed Income securities
Part 3
Fundamental Analysis
• Economic, Industry and company Analysis
• Correcting expenses misclassification, Accounting earnings Vs
True earnings
• Valuation methods i.e. DCF, Comparables, etc.
• Estimation of risk parameters, cashflows, growth rate, etc.
• Measuring equity value
 History of the Discipline

• Benjamin Graham (teacher of Warren Buffett) is credited with

starting the discipline of security Analysis.

• Wrote the book titled “Security Analysis” in 1934.

• “Margin of Safety” the most important principle.

• Transformation of discipline
Investment Vs Speculation
 Investment Vs Speculation

Sacrificing something now for the prospect of gaining something later.

"An investment operation is one which, upon thorough analysis promises safety of
principal and an adequate return.
Operations not meeting these requirements are speculative."

Graham & Dodd

Speculation: The activity of forecasting the psychology of the market.

John Maynard Keynes

 Any thing wrong with Speculation?
Guns don’t kill people, people kill people.

Anonymous

"Outright speculation is neither illegal, immoral, nor (for most people) fattening to the
pocketbook . . . There is intelligent speculation as there is intelligent investing.
But there are many ways in which speculation may be unintelligent. Of these the
foremost are:
(1) speculating when you think you are investing;
(2) speculating seriously instead of as a pastime, when you lack proper knowledge and
skill for it; and
(3) risking more money in speculation than you can afford to lose. . .

Intelligent Investor
 Investment Environment

In this session we cover the following:

• Role of Financial Markets

• Investment Process
• Saving and Financing statistics for Indian Market
• Trends in the Investment field
 Financial Markets

• Place for buying and selling financial assets.

• Provide financing source
• Provide Investment avenue

Why can’t this function be administered by Government or

banks or Financial Institutions?
 What would happen in the absence of markets?

• One institution makes the decision about funding or not funding

and the related variables without taking into consideration the
views of the participants (buyers or sellers).

• For example if only banks or Government are the only suppliers of

capital, then a small few officials would decide whether to provide
financing or not and also the rate of financing. This may or may-not
consider all the factors. There may be favoritism or personal biases
as well.

• As against the above if a company raises money through a bond

market, the participants can make the individual decision of
funding, as well as the amount and the interest rate. This way it is
not based on decision of a few officials like bank or Government.
Financial Market Role 1
Assume the following:

• A listed oil & Gas company has found a major oil reserve.

• A top official of a listed company has been caught bribing Govt

officials.

• In both cases the information will be quickly reflected in prices

through increased buy/ sell orders.

• When the investment decision has to be made by wide variety of

participants then the demand or the supply would be based on the
information available by all the market participants.

• In the absence of markets the above information may or may not

be considered if decision is being made by few.

• Thus the market is playing the role of “information aggregation”.

Financial Market Role 2
Consider the following

• A 25-year old is earning Rs.2 lakh and consuming just Rs.50,000. He

wants to purchase a house after 5 years.

• A 45-year old also earns more than he spends but want money for
post-retirement years i.e. after 20 years.

• By investing in different instruments for different maturities the

above participants may decide to buy or sell assets based on their
requirement.

• Thus the market plays a role of “storing value and helping to

transfer consumption to future”.
Financial Market Role 3
• A 20-year old wants to multiply her money fast and is willing to
take higher risk. She invests in a bio-technology company working
on wonder drug

• A 60-year old wants to play safe and is fine with lower return. She
invests in a utility company.

• The market participants can choose to invest based on their

different risk appetite. The market performs the role of “risk
allocator”.

• As against this if everyone (in the absence of markets) is investing

is a bank deposit or pension scheme of government, they are not
able to choose the investment in line with their risk-return
requirement.
Financial Market Role 4
• You think that Real estate business has great future but do not want to
start a real estate company. What can you do?

• You can buy the shares , that represent the business. Each share represent
some fraction of the value. Ownership of the share brings the right but no
legal responsibility.

• In the absence of market it is not feasible to raise capital from large pool
of investors. The market in this role helps to separate “ownership from
management”

• However this benefit brings with itself the issue of agency cost, wherein
the incentives of owners are not aligned with those of the management.

• A CEO of company would like to run a bigger company rather than a very
profitable company. He may go for acquisitions which may not make
economic sense but gives him more clout. This behavior is unlike the
owner who would be more interested in the company being more
profitable rather than being big.
 Financial Markets and the Economy

• Information Role: Capital flows to companies with best

prospects

• Consumption Timing: Use securities to store wealth

and transfer consumption to the future

• Allocation of Risk: Investors can select securities

consistent with their tastes for risk

• Separation of Ownership and Management: With

stability comes agency problems
 Attempt the Quiz titled “Role of Markets” in the
Socrative.

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 Players in Financial Markets

• Firms

• Households

• Government

• Financial Intermediaries
• Banks
• Investment Banks
 Commercial Banking Vs Investment Banking

Investment Banking Commercial Banking

• Underwrite new stock
and bond issues • Take deposits and make
• Sell newly issued loans
securities to public in the
primary market
• Investors trade previously
issued securities among
themselves in the
secondary markets
 Investment Process

• Asset allocation
– Choice among broad asset classes
• Security selection
– Choice of which securities to hold within asset class
– Security analysis to value securities and determine
investment attractiveness
Saving and Financing Statistics
 Real Assets Versus Financial Assets

• Real Assets
– Determine the productive capacity and net income of
the economy
– Examples: Land, buildings, machines, knowledge used
to produce goods and services

• Financial Assets
– Claims on real assets
– Fixed Income, Equity, derivatives
 Real Asset Vs Financial Asset: Saving of Indian Household

USA households have close to 70% savings in financial assets

80%

70% 67% 65%

62%
60% 58% 57% 56%

50%
40% 41% 42% Financial
40% 37%
31% 33% Physical
30% Valuables
20%

10%
2% 2% 1% 2% 2% 2%
0%
2012 2013 2014 2015 2016 2017

Source: RBI Annual Report 2017-18

 Any comments?

This is for a year number. So total currency with public this year is reduced from that of last
year. The Net number gives the increase/decrease in savings in the form of currency. On
account of demonetization the currency holdings reduced and so this no. is negative.
 Financial Savings of Indian Household

Source: RBI Bulletein June 2020

 (in Rs. Bn)
What “Financial Market” are you talking about?

Source: RBI Annual Report 2018-19

 Capital Markets India: Primary

Source: RBI Annual Report 2018-19

Source: RBI Annual Report 2018-19
 Trends in Investments

• Globalization

• Securitization

• Financial engineering

• Digital Security
 Globalization of Financial Markets

• Companies raising capital across borders i.e. equity being issued

by Indian companies in foreign markets.

• Nifty Index being traded in Singapore Stock Exchange.

• Foreign Portfolio Investments account for 20% of the MCAP of

India.

• Global stock indexes like Morgan Stanley Capital International

(MSCI) have allocated weightages to many Indian stocks.
 Securitization

• Pooling existing loans and creating a security out of it with a face

value and Interest rate.

• Selling this security to investors and earning a fee income.

• Used by banks/financial companies when opportunities for

lending are much more than the capital available.

• Investors attracted to these securities since they provide higher

returns than existing products.
 Financial Engineering

• Creation of new financial products to meet investor and issuer

needs.

• Prinicipal protection plan: A product where the investor is

unlikely to lose the principal while at the same time have a
possibility of uncapped gains.

• Zero coupon bond or convertible securities

 Digital Security

• is a representation of financial asset i.e. equity, bond, derivative

where investment contracts are recorded and verified in a block-
chain network.

• Helps in achieving transactional efficiency and also obviate the

need for clearing and settlement. Reduces compliance costs.

• Improves liquidity of illiquid investments, say a venture capital

investment.
 Attempt the Quiz titled “Investment Environment” in Socrative.

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 Rise of Systemic Risk

• Systemic Risk: a potential breakdown of the financial

system in which problems in one market spill over and
disrupt others.
– One default may set off a chain of further defaults
– Waves of selling may occur in a downward spiral as
asset prices drop
– Potential contagion from institution to institution, and
from market to market
 Broad Take-home

• Markets play an important role in an economy but they are

ruthless both for the companies (Jet airways, DHFL, IL & FS, other
NBFC’s) as well as investors.

• Financial Market includes all kinds of participants, rational as well

as emotional (more emotional) who are acting on information and
influencing the value of companies.

• A systematic approach should be adopted to invest and fund

through financial markets.

• Markets are not full proof. If things are not done right they can
take the economy down.

• Be careful of financial intermediaries, they are not Santa Klaus.

Asset Classes and Financial Instruments
Goals for the session:

• Understand the different types of asset classes.

• Understand instruments available for investment under debt

asset class.

• Understand the instruments available for investment under

equity asset class.

• Computation of Stock Index

 Asset Classes
• The category of assets that are available for investments. They
have been grouped into asset classes on account of their
homogenous characteristics in terms of risks, liquidity, returns
and investment horizon.

Categories of Assets
• Money market instruments
• Capital market instruments
– Bonds
– Equity Securities
– Derivative Securities
• Real Estate
• Commodities
 The Money Market

• Subsector of the fixed-income market: Securities are

short-term, liquid, low risk, and often have large
denominations

• Money market mutual funds allow individuals to access

the money market.
 Money Market Securities

• Treasury bills: Short-term government debt

– Discounted Instrument
– Issued by RBI
• Certificates of Deposit: Time deposit with a bank
• Commercial Paper: Short-term, unsecured debt of a company
• Repos and Reverses: Short-term loan backed by government
securities.
• Triparty Repo (Started w.e.f. Nov-2018)
 Attempt the Quiz titled “Money Market” in Socrative.

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Treasury Bills:
Short-term government debt i.e. 14 days, 91 days, 182-days
and 364 days
• Issued at discount to Face Value.
• Unsecured
• Tradable
• Minimum denomination is Rs.25,000.

Commercial Paper (CP):

Short term unsecured debt for companies
• Issued at discount to face value.
• Tradable Instrument (if you buy a CP you are a lender
and if you sell a CP you are a borrower)
• Instruments to be rated at least “P2” for being issued.
• Minimum denominations (as per RBI) of Rs.5 lakhs in
India
• Maturity can range from 7 days upto 1year
Certificate of Deposit:

Short term unsecured debt for banks and financial institutions.

• Usually issued at discount to face value.

• Tradable Instrument
• Minimum denominations (as per RBI) of Rs.5 lakhs in India
• Maturity can range from 7 days upto 1year
• can be issued to individuals, corporations, companies
(including banks and PDs), trusts, funds, associations, etc
Repos :
Secured or collateralized borrowing.

• Repos stands for repurchase of securities.

• Any entity entering into a repo transaction with another

promises to repurchase the securities that it is selling
today at a fixed price after sometime.

• The fixed price is today’s price plus the applicable interest

for the period of the borrowing.

• The borrowing is secured since the borrower deposits the

securities with the lender for the period of the borrowing
and at the time of payment purchases it.
Triparty repo (started in India from Nov-2018):

• Under a repo transaction the borrower sells the securities today

i.e. takes the money today from the seller and promises to
repurchase the securities after a period of time i.e. return the
money to the same seller.

• In a triparty repo the lender is allowed to sell the securities

further i.e. borrow money from someone else before the repo
period is over. Thus triparty repo is a tradable repo.

• Apart from the borrower and the lender there is a third party
involved that is responsible for keeping the securities as
collateral. Usually this counterparty is the member of the
exchange (Clearing corporation) in which the trading occurs. At
the end of repo period the borrower of securities repurchases
the security from however is the lender.
Investment Instruments: Debt
 Investment Instruments: Debt

Traditional New
• Fixed Deposits • National Pension Scheme
(NPS)
• Traditional Insurance
• Fixed Maturity Plans
• National Saving (FMPs)
Certificate (NSCs)
• Bonds (Including deep
• Public Provident Fund discount bonds),
(PPF)
• Inflation index Bonds
• Corporate Deposits (IIBs)
• Securitized Debt
 NSC PPF

5years 15years

7.6% (revised every 3months) Benchmarked to 10-year G-Sec

Interest income is re-invested and is not Re-invested and not paid annually.
paid annually.

Pre-mature withdrawal not usually allowed Single withdrawal allowed at the end of
7th year. Limited to 50% of the balance.

Deduction to the extent of Rs.1.5 lakhs Deduction to the extent of Rs.1.5 lakhs
under section 80C. under section 80C.

Interest income is taxable Interest not taxable

 National Pension Scheme….
• Under Pension Fund Regulatory Development Authority (PFRDA)
• Anyone between the age of 18-60 years.
• Available to all Indian citizen from 1st Jan, 2009

Tier-I Tier-II

• Non-withdrawable pension • Voluntary Saving facility

Account.
• Minimum amount per
contribution of Rs.500
• Minimum amount per year-
Rs.6000
• Active tier-I account is a Pre-
requisite
• Free to withdraw whenever
subscriber wishes
• Minimum contribution per year
Rs.250.
• Minimum account balance of
Rs.2000
 ….National Pension Scheme…

Asset Allocation

• Investor can choose from a portfolio of equity, corporate bonds

and G-Sec.
• Under Active choice option, exposure to equity restricted to 50%
of total contribution.
• Auto-choice option where the allocation is determined according
to age of the subscriber.
 …National Pension Scheme
Withdrawals
Before 60 years: Only 20% will be given out as lump-sum rest 80%
has to be compulsorily used to buy an annuity.

Between 60 and up to 70: only 60% will be given out as lump-sum

rest 40% has to be compulsorily used to buy an annuity

On attaining 70 years of age the entire amount will be transferred as

lump-sum.

Death: Nominee will receive 100% of pension wealth as lump-sum

Upto 40% of Withdrawal are exempt from tax and balance amount
invested in annuity is tax free. Pension received out of annuity is
taxable.
Source: Value Research
NSC PPF Pension
Maturity

5years 15years Above 70 years of age

Rate of Interest

7.6% (revised every 3months) Benchmarked to 10-year G-Sec Market determined (investment in upto a
max 50% equity, g-sec and corporate bonds)

Interest income is re-invested and is not Re-invested and not paid annually. Nothing is paid before 60 years
paid annually.

Withdrawal

Pre-mature withdrawal not usually allowed Single withdrawal allowed at the end of 7th
year. Limited to 50% of the balance. Withdrawal only in case of death.

Tax Benefits
Deduction to the extent of Rs.1.5 lakhs
under section 80C.
Interest income is taxable
Deduction to the extent of Rs.1.5 lakhs under
section 80C.
No tax on Interest income
Maximum upto Rs2 lakhs per year.
40% withdrawal exempt from tax. Balance to
be invested in annuity. The pension received
out of annuity is taxable.
 Fixed Maturity Plans

• Debt Instrument.

• Withdrawal not allowed before maturity (can be sold on stock

exchange)

• Indexation benefit for more than the holding period (more than
3 years in this case)

• After tax-Interest more than traditional fixed deposits

Source: SBI Mutual Fund
Source: SBI Mutual Fund
 Inflation Indexed Bonds

• Debt Instrument

• Issued for the first time in 2013

• Coupon rate represents the real rate of return

• CPI used for determining the inflation.

• The principal amount is increased by CPI rate

• The coupon is paid on the increased principal

• On redemption, adjusted principal or Face Value, whichever is

higher, is paid.
 Example 1 (For illustration purpose)
Inflation Principal
Real Inflation Coupon
Year Period Index Ratio adjusted Repaymen
Coupon Index Payments
principal t
I II III IV Vti=(IVti/IVt0) VI=(FV*V) VII=(VI*III) VIII
0 28-May-13 1.50% 100 1.00 100.0
1 28-May-14 1.50% 106 1.06 106.0 1.59
2 28-May-15 1.50% 111.8 1.12 111.8 1.68
3 28-May-16 1.50% 117.4 1.17 117.4 1.76
4 28-May-17 1.50% 123.3 1.23 123.3 1.85
5 28-May-18 1.50% 128.2 1.28 128.2 1.92
6 28-May-19 1.50% 135 1.35 135.0 2.03
7 28-May-20 1.50% 138.5 1.39 138.5 2.08
8 28-May-21 1.50% 142.8 1.43 142.8 2.14
9 28-May-22 1.50% 150.3 1.50 150.3 2.25
10 28-May-23 1.50% 160.2 1.60 160.2 2.40 160.2

Source: RBI
 Securitization..
Involves:
• pooling of financial assets and
• the issuance of securities that are repaid from the cash flows
generated by these assets.
• Helps NBFC’s and banks to avoid asset-liability mismatch (Loan i.e.
assets are long term and deposits i.e liabilities are short term).

Common assets for securitization include:

• credit cards, mortgages, auto and consumer loans, student loans,
corporate debt, export receivable, and offshore remittances.

Instrument issued to an investor by:

• Any issuer who is a special purpose distinct entity possessing any
debt or receivable.
 ..Securitization

Securitization in India happens in either of the following ways:

• Direct Assignment (DA): The loan is sold by NBFC to Bank.

Forms 75% of the market in 2019.

• Pass Through Certificate: Invest in securities backed by pool

of loans. These are largely vehicle or micro-finance loans.

• Total market at Rs. 2.6 lakh crore.

• Lack of standardization, stamp duty, registration and

documentation leading to more of DA rather than PTCs.
Different players in the process

Source: Working Paper No. 776, IIM Calcutta

 Issuing Securitized Debt to Public

A special purpose distinct entity desirous of making an offer of

securitized debt instruments to the public:

• shall make an application for listing to one or more recognized

stock exchanges.

• All the credit ratings obtained to be disclosed .

• Trading allowed in listed securitized debt as per SEBI rules.

• Not taken off in India

 Attempt the Quiz titled “Debt Instruments” in Socrative.

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In nature of equity and derivatives

• Equity (Domestic and foreign)

• Differential Voting Share
• GDRs/ADRs/IDRs
• P-notes
• Structured Products
• Derivatives (Domestic and foreign)
 Equity
 Debt
 Currency
 Commodity
 Equity

• Common Equity
• Proportional Voting rights

• Differential Voting Share (DVR’s)

• The voting rights are not proportional to the no. of shares.
• Tata Motors has issued a DVR which has 1/10th the voting
right but which gets 5% more dividend than ordinary equity.
• The share was issued at a discount of 10% to the price of
ordinary Tata Motors share.
• On 28th June-2019 SEBI allowed technology companies to
issue shares with Superior Voting Rights (SRs)India.
• Till now in India currently only DVR shares with inferior voting
rights (IRs) were permitted by SEBI.
Global Depository Receipts (GDR)/American (ADR)/Indian (IDR )

• Security issued by a bank or depository in a foreign country

(say England) against underlying shares in the country of
domicile of the company (say India)
• Similar security in US is called ADR and in India is called IDR
• For example Axis bank’s (Indian company) GDR listed at
London Stock Exchange
• One certificate may represent more than one share. For
example each Axis Bank GDR represents 6 underlying shares
of Axis bank
• May trade at a premium to the underlying stock value.
• GDR holders have right over the dividend declared by the
company
• Depository holding the shares votes on behalf of the holders
 Participatory-Notes

• Used when a non-resident/foreign investor wishes to make

investments in the Indian stock markets.

• The investments are made in the shares listed in India.

• Using P-Notes, one need not register with the SEBI and it, thus,
facilitates maintaining anonymity.

• P-Notes thus enable interested investors or hedge funds that are

not registered with the SEBI to invest in the Indian securities.
 P-notes_Mechanism

• When investors express their intent to invest in a particular Indian

stock, an investment bank/ institution with an FII status may issue
a P-Note to them.

• The said bank/financial institution would subsequently purchase

that Indian stock under its own name, and issue it to the
investors in nature of a P-Note.

• All dividends and capital gains accrued and earned on such stock
go back to the investors, after reduction of the mutually agreed
brokerage to the bank.
 Use of P-Note

• Regular investors who believe that Indian returns are more

attractive compared to developed markets.

• Those who illegally mint money, and want it invested back into
India.

• Comprises companies and high net-worth individuals who plan

to take over an Indian entity by secretively investing in them.

• Investors who simply find this route very simple and

uncomplicated to follow.
 Notional
Notional Notional
Notional value of
value of value of
value of Notional ODIs on
ODIs on Notional Notional AUC of ODIs on
ODIs on value of Equity &
Equity & value of value of FPIs / Equity,
Month Equity, ODIs on Debt
Debt ODIs on ODIs on deemed Debt &
Debt & Derivativ excluding
excluding Equity * Debt * FPIs # Derivativ
Derivativ es * Derivativ
Derivativ es as % of
es * es as % of
es * B
B

Jan-17 175,088 119,309 108,576 10,733 55,779 2,456,716 7.1 4.9

Feb-17 170,191 115,413 103,712 11,700 54,778 2,563,431 6.6 4.5

Jan-18 119,556 116,472 84,278 32,194 3,084 3,381,677 3.5 3.4

Feb-18 106,760 105,137 77,090 28,046 1,623 3,241,324 3.3 3.2

Jan - 19 75,693 74,866 54,297 20,569 827 30,90,508 2.4 2.4

Feb - 19 73,428 73,319 54,523 18,133 108 30,89,602 2.4 2.4
Mar - 19 78,110 77,287 56,288 20,999 119 33,42,680 2.3 2.3
Apr- 19 81,220 80,362 58,820 21,542 123 33,55,045 2.4 2.4
May-19 82,619 82,426 61,574 19,681 193 34,17,679 2.4 2.4

• In July-2017, SEBI banned the use of P-notes for Investment in

Derivative Instruments. (except for hedging)
Source: SEBI Asset Under Custody (AUC), Offshore Derivative Instruments (ODI), Amount in Rs. Cr.
Under FPI Regulation 5 the following three categories of FPIs have
been created on the basis of associated risks –

(a) Category I includes foreign investors related with the

government such as central banks, government agencies, sovereign
wealth funds;

(b) Category II includes regulated entities like banks, assets

management companies, investment managers etc. and broad-
based funds, which may be regulated such as mutual funds,
investment trusts etc. or non-regulated; and

(c) Category III includes investors, which are not covered under
categories I and II. (corporate bodies, trusts, family office, charities,
endowment fund, etc)
 Derivatives
Futures

• A contract to buy /sell an underlying in future at a price fixed

today.

• Since it is a contract the buyer/ seller has the right as well as

obligation to honour the contract.

• Example: A enters into a futures contract with B, to buy Infosys

stock at Rs. 2500 on 26th July, 2020.

• On 26th July , whatever be the price on infosys stock in the

market, B has to sell infosys stock to A at Rs.2500.
• If case Price>2500, B incurs a loss
• If Price<2500, A incurs a loss.
Options

• An contract, which gives an option to buy/sell an underlying in

future at a price fixed today.

• Here the buyer/seller has the right but not the obligation.

• A call option gives the right to buy, while a put option gives the
right to sell.

• Example: If A buys a call option on Infosys stock at Rs 2500 it

means that A has agreed to buy Infosys stock from B on 26th July,
2020 at a price of Rs.2500.

• On 26th July if Price<2500, A can choose not to buy (has no

obligation).
• However if the Price>2500, A has the right to buy at Rs.2500.
 Structured Products

• Use of financial engineering to create investments which give

returns and safety not possible with traditional instruments.

• Involves a mix of equity, bond and derivative products.

• Simplest is the principal protected plan, which offers safety of

principal and opportunity to earn higher return.
Stock Indexes
 Index Calculation

• Market capitalization weighted method

• Free float weighted method

80
 Price weighted index
Company Price time 0 Price time 1
A 351.55 340.50
B 329.10 350.30
C 274.60 280.40
D 1335.25 1428.75
E 539.25 570.25
Total 2829.75 2970.20

Index = (2970.20 / 2829.75) * 1000

= 1049.56

81
 Market Capitalisation

• The total number of ordinary shares issued by a

company as on date, multiplied by the market
price of the share.

• Indication of how the market values the company

• Base Date – Nov3, 1995

• Base value 1000 pts,
• Base capital Rs 2.06 trillion
82
 Market Cap. weighted method

Index = Current market cap. x Base value.

Base market cap.

• Current Market Capitalisation = Sum of (Present

Issue size * Current Market Price) of all companies in the
index.

• Base Market Capitalisation = Sum of (Issue size *

Market Price) as on Base date.

83
 Market cap weighted index
Company Mcap (Rs. Mill.) Weight
A 1000 27.02%
B 1200 32.43%
C 1500 40.54%

Total 3700 100%

Base Market cap : Rs. 2000 million

Base Value : 1000

84
 Market cap weighted index
Index = (Current mkt cap./Base mkt cap.) * Base value

Index = (3700 / 2000 ) * 1000

Index Value = 1850

As the current market cap changes due to change in price of

stocks the index value would change

85
 Free Float index
• A free float index takes into account only the
non-promoter shares in the market
• Some indices also avoid government holding
• Criteria for free float not universal
• Many indices have recently moved to free float,
such as Nifty 50, S&P 500, Dow Jones, FTSE 100
etc.

86
 NIFTY – Free float method
• Following categories excluded:
– Government holding in the capacity of strategic
investor
– Shares held by promoters through ADR/GDRs.
– Strategic stakes by corporate bodies
– Investments under FDI category
– Equity held by associate/group companies (cross-
holdings)
87
 Effect of corporate action
Company Mcap (Rs. Mill.) Weight
A 1000 25.00%
B 1500 37.50%
C 1500 37.50%

Total 4000 100%

Base Market cap : Rs. 2000 million

Base Value : 1000

88
 Effect of corporate action
Index = (Current mkt cap./Base mkt cap.) * Base value

Index = (4000 / x ) * 1000

Index = 1850

New Base cap = Rs. 2163 mill.

Subsequent index calculations will take place taking

into account the new Base cap.

89
Issuance and Trading of Securities
 Security Issuance : Primary Market

• Issue Classification
• Entry requirements
• Offer Document
• Pricing
• Investor categories
• ASBA
 Classification of Issues: Equity Market

Rights Issue/ Private

Public Offer Placement
Bonus Issue

1) IPO (Initial Preferential

Public Offer) QIPs
Issue
2) FPO
(Further
Public Offer)

92
 Public Issue

• When an issue / offer of securities is made to new investors for becoming part
of shareholders’ family of the issuer it is called a public issue.

• Public issue can be further classified into Initial public offer (IPO) and Further
public offer (FPO).

93
 Initial Public Offering

• New offer of shares which was previously unlisted.

• Generally done by offering those shares to the public, which were held by the
promoters or the private investors.

• When Promoter held the shares, their stake holding comes down post IPO.

• If new shares are issued, the shares, which are with the promoters, stay with
them.

• In both cases the share of the promoters in the total capital comes down.

• Direct Listing phenomenon for example Spotify Inc

94
 Further public offer (FPO) or Follow on offer:

• When an already listed company makes either a fresh issue of securities

to the public or an offer for sale to the public, it is called a FPO.

95
 Rights Issue

• Existing shareholders have rights to buy new shares issued by the company.

• Shares offered are proportion to existing ownership i.e. if you own 1% of the
shares of the company you have right to subscribe to 1% of the total shares
offered.

• You do not have obligation to purchase.

• Price is usually less than the current trading price.

• Post rights price is usually less than the pre-rights price.

96
 Bonus Issue

• Existing shareholders get more shares in proportion to already held shares

• 2:1 bonus means that a shareholder gets two more shares for every one share
held.

• Leads to decrease in market price. For example in the above case the if the old
price was Rs.90, after bonus price is around Rs.30.

• Market understands it as a means to reward shareholders.

 Private Placement

• Issue of securities to a select group of persons

• Not exceeding 200 (modified from 49 before)
• Can be bonds, shares or Convertible securities

• Is of two types

– Preferential Allotment
– Qualified Institutions Placement (QIP)

99
 Preferential allotment

• Issue of securities to a select group of persons, usually the promoters

• Issue price determined as volume weighted average of weekly highs and lows
for last 26 weeks or 2 weeks whichever is higher.

• Changed to 12 weeks during the COVID crisis.

• Can be shares or Convertible securities

• Issuer need to comply w.r.t disclosures in notice, lock in etc.,

100
 Qualified Institutional Placement (QIBs)

• Issue of securities to QIBs i.e institutional investors like mutual funds,

Insurance companies, etc

• Started from 2006 to provide flexibility to companies to raise Finance by having

minimal regulatory requirements.

• 2QIBs if the issue is less than 250 cr and at least 5 if issue size is greater than
250cr.

• Single investor can-not receive more than 50% of the issue

101
 Preferential Offer Vs QIPs

• Preferential allotment have a lock-in period of one-year for the promoters

whereas QIPs don’t have any lock-in period.

• Regulatory norms in case of fund raising through QIP is minimal in

comparison to preferential allotment.

• Pricing of preferential allotment is done by taking the average of six

months or two weeks whichever is higher, whereas in the case of a QIP,
the pricing can-not be less than the average of the weekly high and low of
the closing prices last two weeks.
 Entry Requirements for Issuer

SEBI has laid down entry norms for entities making a

public issue/ offer.

1. Entry Norm I (commonly known as “Profitability Route”)

2. Entry Norm II (Commonly known as “QIB Route”)

 Entry Norm I (commonly known as “Profitability Route”)

The Issuer Company shall meet the following requirements:

 Net Tangible Assets (TA-Intangible assets) of at least Rs. 3 crores in each of

the preceding three full years of which not more than 50% are held in
monetary assets.
 Minimum of Rs.15cr as average pre-tax operating profit in at least three of
last 5 years
 Net worth of at least Rs. 1 crore in each of the preceding three full years.
 If the company has changed its name within the last one year, at least 50%
revenue for the preceding 1 year should be from the activity suggested by
the new name.
 The issue size does not exceed 5 times the pre‐ issue net worth as per the
audited balance sheet of the last financial year
 Entry Norm II (Commonly known as “QIB Route”)

 Issue shall be through book building route, with at least 75% to

be mandatory allotted to the Qualified Institutional Buyers
(QIBs).
Other Mandatory Requirements for Unlisted company going for
Public Issue

 The promoters shall contribute not less than 20% of the post
issue capital which should be locked in for a period of 3 years.
“Lock‐in” indicates a freeze on the shares.

 The remaining pre issue capital should also be locked in for a

period of 1 year from the date of listing.

 This provision ensures that promoters of the company have

some minimum stake in the company for a minimum period
after the issue or after the project for which funds have been
raised from the public is commenced.
 Innovator’s Growth Platform (IGP)

• Platform introduced for capital raising by SMEs as well as

technology startups.
• Pre-issue holding restriction
• No minimum holding prescribed for any category of Investor in
the public offer.
• Lock in for a period of 6-months
• Minimum application size to be Rs.2 lakhs and its multiple.
• Company can migrate to regular category after 1-year subject to
meeting the eligibility requirement.
• Minimum number of allottees to be 50.
• Minimum net offer to be at least 25%
• Concept of promoter replaced with founder.
 IGP (pre-issue holding restriction)

25% of the pre-issued capital of the Eligible Startups for at least

two years should have been held by the following:
• Qualified Institutional Buyers
• Family trust with net-worth of more than five hundred crore
rupees;
• Category III Foreign Portfolio Investor
• A pooled investment fund with minimum assets under
management of USD 150 million and registered with a financial
sector regulator in the jurisdictions where it is resident.
• Accredited Investors (AIs) for the purpose of IGP, to include:
• Any individual with total gross income of INR 50 lakhs
annually and who has minimum liquid net worth of INR 5
crores or
• Any body corporate with net worth of INR 25 crores
 Offer Document

Contains all relevant information about :

– The Company
– Promoters
– Projects
– Financial Details
– Objects Of Raising The Money
– Terms Of The Issue Etc.

• Used for inviting subscription to the issue.

• Called “Prospectus” in case of a public issue.
• Called “Red Herring Prospectus” in case of Book built issue
110
• Offer for sale or “Letter of Offer” in case of a rights issue.
 Pricing

Fixed Price Issue:

• Issuer decides the price and mentions in the offer
document.

Book built Issue:

• Issue price is discovered
• Prospective investors bid at various price levels

111
 How Book Building works?
• A floor price or price band within which the bids can move is
disclosed at least two working days before opening of the
issue in case of an IPO and at least one day before opening
of the issue in case of an FPO.
• The investors bid for the shares quoting the price and the
quantity that they would like to bid at.
• After the bidding process is complete, the ‘cutoff’ price is
arrived at based on the demand of securities.
• The basis of Allotment is then finalized and
allotment/refund is undertaken. The final prospectus with
all the details including the final issue price and the issue
size is filed with ROC, thus completing the issue process.

• Only the retail investors have the option of bidding at

‘cutoff’.

112
 Fixed Price Issue Vs. Book Building Issue
Difference Fixed Price Issue Book Building Issue

Offer Price Price of offer and A 20 % price band is offered

allotment is known in for bidding and the final price
advance to the is determined by the issuer
investors only after closure of the
bidding.
Demand Known after the closure Known on a real time basis
of the Issue during bidding process
Payment 100% advance to be 10% advance for QIBs,
made while applying 100%advance for other

Categories
Reservations 50% of the shares Not more than 50% of the
reserved for retail shares are reserved for QIBs,
investors and the not less than 35% for retail
balance for higher investors(RII’s) and not less
amount applications than 15% for Non-Institutional
investors

113
 Categories of Investors

Investors are broadly classified under following

categories :-

(i) Retail individual Investor (RIIs)

(ii) Non-Institutional Investors (NIIs)
(iii) Qualified Institutional Buyers (QIBs)

“Retail individual investor” means an investor who

applies or bids for securities for a value of not
more than Rs. 2,00,000.

114
 Green Shoe Option
Green shoe Option :

• Issue of shares in excess of the issue size, by a maximum of 15%.

• More probability of getting shares for investors.

• More stable listing price.

115
 Public Issue of Debentures

 Draft offer document to be filed with SEBI.

 Credit rating of not less than investment grade should be

obtained from not less than two registered credit rating
agencies and disclosed in the offer document.

 All credit ratings obtained during the three years preceding the
public or rights issue of debt instruments in respect of listed
security are also to be disclosed;

 Appointment of debenture trustee.

 Duties of Debenture Trustee
 Call for periodical reports from the body corporate, i.e., issuer of
debentures.

 Enforce security in the interest of the debenture holders.

 Ensure on a continuous basis that the property charged to the

debenture is available and adequate at all times .

 Exercise due diligence to ensure compliance by the body corporate with

the provisions of the Companies Act, the listing agreement of the stock
exchange or the trust deed.

 To take appropriate measures for protecting the interest of the

debenture holders as soon as any breach of the trust deed or law comes
to his notice.
 To ascertain that the debentures have been converted or redeemed in
accordance with the provisions and conditions
 Attempt the Quiz titled “Primary Markets” in Socrative.

How?

1. Go to www.b.socrative.com
2. Click on “Login” (top right)
3. Click on “Student Login”
4. Room Name: SAIMT
5. Student Name: Enter your enrolment id followed by first name
How securities are traded?
 Secondary Market

• Order Types
• Market Structure i.e. Order Driven or Quote Driven
• Market Mechanism i.e. Call or continuous
• Market Transparency
• Circuit Filters
• Algorithmic Trading
• Block and Bulk Deals
• SLBM: Short Sales
• Margin Buying
 Order Types

• Limit Order:
• Specify the price and no. of securities to buy/sell.

• Market Order:
• Specify only the no. of securities to buy/sell. Executed at the price available
in the market

• Stop loss Order:

• Initiated with the intention to limit the loss.
• If a day trader bought Reliance, for example, at Rs.1800 and can-not bear
a loss of more than 10% (should sell when it reaches Rs.1620)
• Suppose the price has reduced and share is trading at Rs.1680.
• To minimize the loss the trader would enter a stop loss order at Rs.1620.
• If the price in the market touches Rs.1620 this becomes a market order and
would be executed at the next best price available.
 Market Structures

Order Driven: All orders (buy/sell) submitted are displayed in the order
book. The order get executed on price-time priority basis. Example is
India

Quote Driven: Specialist provide bid/ask quotes to the investor. Order

matching is done based on specialist and investor agreeing on the price.
Example is forex market, G-Sec market.

Hybrid: is both order as well as quote driven. Broker can choose to get
the order executed through the automated system or by a specialist.
Example is NYSE.
 Market Mechanism

Call:

Refers to a mechanism wherein buy and sell orders on all the selected
stocks (in this case, Sensex and Nifty constituents) are collected over a
fixed period of time and then processed in the auction.

The price at which the highest number of orders is executed is chosen.

Used for determination of market opening price in India.

Continuous:

Open limit order book collects and displays the buy and sell orders. The
orders are executed based on price-time priority.
 Market Transparency

Pre Trade Transparency

• Extent of Limit Order Book Disclosure

• Liquidity provider Identity
• Hidden Orders

Post Trade Transparency

• Delayed trade publication

 Circuit Breakers
• Mechanism to stop trading subject to certain rise/fall in a particular security
• Price band of 2% / 5% / 10% or 20% on other scrips
• No Price Band on scrips available in derivatives segment or scrips included in
indices on which derivative products are available.
• Index circuit breaker at 10%,15% and 20%.
• Does it cause market volatility or curb it?

126
 Algorithmic Trading

• Use of computer algorithms to automatically make certain trading decisions,

submit orders, and manage those orders after submission.

• Accounts for about 60%-70% of the U.S. trading volume . For India it is around
35% to 40%.

• Proprietary trading desks are mainly engaged in high frequency trading.

• Some exchanges allow high frequency traders to co-locate their servers next to
the exchanges’ servers so that orders can be quickly executed with minimum
latency.

• On 20th April, 2012 Infosys futures crashed by 20% and quickly recovered, and
Nifty futures crashed by 6.7% from 5350 to 5000 and recovered to 5200.
 Securities Lending Borrowing Mechanism

• Automated screen based trading platform with online

matching of trades based on price- time priority.

• Tenure of lending and borrowing available upto a period of 12

months.

• A facility for placing early recall request for the securities lent
is provided to the lender.

• A facility for the borrower to make an early repayment of

securities and further relend them

• Securities traded in F&O segment are eligible for lending &

borrowing under the scheme. The list has been expanded to
include more securities.
 Bulk Trading

• Disclosure for all transactions in a scrip where total quantity of

shares bought/sold is more than 0.5% of the number of equity
shares of the company.

• Bulk deal can be transacted by the normal trading window provided

by brokers throughout the trading hours in a day. Bulk deals are
market driven and take place throughout the trading day

• The stock broker, who facilitates the trade, is required to reveal to

the stock exchange about the bulk deals on a daily basis.

129
 Block Deals

• Usually block deal happens when two parties agree to buy or sell securities at
an agreed price between themselves and inform the stock exchange.
• The orders in a block deal are not shown to the people who trade from normal
trade window.
• Trade for which the quantity traded is 5 lakh shares or above or the value of
the trade is Rs. 5 crore qualifies as a Block Trade.
• This window is open for only 35 minutes in the morning trading hours.

130
 Attempt the Quiz titled “Secondary Markets” in Socrative.

How?

1. Go to www.b.socrative.com
2. Click on “Login” (top right)
3. Click on “Student Login”
4. Room Name: SAIMT
5. Enter your enrolment id followed by first name
 Margin Buying

• Margin refers to % of own money that needs to be invested

• Remaining money is borrowed from broker
• The shares serve as a collateral and are in broker’s account
• Broker sets a maintenance margin, if the margin falls below it, the
broker will issue a margin call.
• Margin call requires the investor to add new cash or securities to
the margin account.
• In case of loss, the shares are sold to recover the loan and
remaining is paid to the investor.

Own Money
M arg in 
Total value of stock
An Investor buys 100 shares of RIL on margin. The current stock price
is Rs.1000 and the initial margin is 50% while the maintenance
margin is 40%. Answer the following:

• If the price of RIL drops by 10%. What is the percentage loss?

What is the new margin position?
• At what price would the investor get a margin call?
%Loss=10,000/50,000=20%
Margin=40,000/90,000=44.44%

Solve for “P”

100 * P  50000
 40%
100 * P
P  833.3
 Short Sale

• What if you expect price of a share to go down? How can you

profit from it?

You could do the following:

• Borrow stock and sell it.
• Purchase the stock, once the price has gone down and return it to
the stock lender.
• In case the stock has given any dividend during the period of
borrowing, it also has to be paid back to the lender.
• Margin money also needs to be deposited with the broker to
cover the risk of increase in stock price.
An Investor instructs his broker to short 100 shares of RIL. The
current stock price is Rs.1000 and the initial margin is 50% while the
maintenance margin is 40%. Answer the following:

• If the price of RIL drops by 10%. What is the percentage gain?

What is the new margin position?
• If the price of RIL increases by 10%. What is the percentage loss?
What is the new margin position?
• At what price would the investor get a margin call?
Gain 20%
Margin 66.67%

Loss 20%
Margin 36.36%

150,000  100 * P
 40%
100 P
P  1071.43
 Securities Lending Borrowing Mechanism

• Automated screen based trading platform with online

matching of trades based on price- time priority.

• Tenure of lending and borrowing available upto a period of 12

months.

• A facility for placing early recall request for the securities lent
is provided to the lender.

• A facility for the borrower to make an early repayment of

securities and further relend them

• Securities traded in F&O segment are eligible for lending &

borrowing under the scheme. The list has been expanded to
include more securities.
Mutual Funds and other Collective Investment
Schemes
 Collective Investment Schemes

Involves:

• Pooling of money from investors

• To earn returns better than the benchmark Indexes.

Helps in:

• Professional Management:
• Diversification and Divisibility:
• Lower transaction costs:
• Record keeping and administration
 Reached here from where? History..

• Pooling of funds is an age old idea and India has had finance companies running
these schemes (very little to no regulation in the early years).

• Most were in nature of Ponzi schemes (using money received from investors to
pay returns to earlier investors).
• Paid high commission to sales agents
• Promised extraordinary high returns
• From one decade to next it came in various forms i.e. timber plantations,
healthcare products marketing, export house, holiday homes, multi-level
marketing companies, halal investment, etc

• Target daily wage earners but even experts have been duped.
 Infamous Ponzi schemes in India

• Saradha Group (2013): collected money from daily wage earners and other
households promising them high returns. Invested in lot of visible areas like media,
Bengali film industry, acquired defunct motorcycle company, cement company, gifted
ambulances to government and motorcycle to police forces, hired celebrities for
marketing its brand. Scam size about Rs. 3000 cr

• Speak Asia (2013): Invest Rs.11,000 to earn Rs.52,000 per annum by filling survey
forms every week. Additional commissions if one enrolls more investors. Scam size
close to Rs.2200 cr

• I-Monetary Advisory (I-MA, 2019): Investors offered returns between 36% to 64%.
Targeted muslims. Investments said to be made as per Islamic principles. Scam size
Rs.4000 cr

• City Limousine (2002): Promised to pay investors Rs.4000 per month for 5 years on
one time investment of Rs.97,000. Invest money to buy cars to run as taxis.
 Collective Investment Schemes

Pooling can be done through the following structures in India

• Mutual Funds: Invest in market based instruments i.e. money market, debt and equity.

• Real Estate Investment Trust (REITs): Invest in rent earning properties.

• Infrastructure Investment Trusts (InvITs): Toll earning infrastructure projects.

• Alternate Investment Funds (AIFs): Alternate assets like venture capital, private equity
and hedge funds
Basic Structure
 Structure
A Mutual Fund is formed as a trust consisting of the following:

• Sponsor Company
• Trustees
• Asset Management Company
• Custodian
• Registrar & Transfer Agent (RTA)
 The Sponsor Company

• A public or a Pvt Limited Company

• Having a sound track record
• Sponsor or any of its directors should not be guilty of fraud
• Should contribute at least 40% of the net-worth of the AMC
 Trustees

• Responsible for safeguarding the interests of the unit holders

of the Mutual Fund
• Two-third of the trustees should be independent (not
associated with the sponsor in any manner whatsoever)
• Should not be the officers or employees of the AMC
• Ensure the fundamental attributes of any of the schemes of the
mutual fund are changed with the written consent of the unit
holders.
 The Asset Management Company
• Appointed by the sponsor or trustees to manage the assets of the
Mutual Fund.
• Takes investment decisions
• Maintain proper accounting and information system for pricing the
units and arriving at NAV
• Directors of AMC should have relevant professional experience in
finance and financial services.
• Should at all times maintain a net-worth of 10cr.
• At least 50% of the directors should be independent
• Can invest in its scheme if full disclosure is made in the offer. No
fees can be charged on that particular investment.
 Custodian

• Responsible for handling securities of the Mutual fund.

• Receipt and delivery of securities, holding of securities
• Exercise the rights of equity shareholders, collection of
dividends and rights.
 Registrar & Transfer Agent

• Responsible for communication between the unit holders

and fund.

• Receive all the requests related to purchase and

redemption of units, distribution of dividend to the unit
holders.
 How?

• Come out with New Public offer (NPO), under which units are issued to
interested investors and money collect.

• Each units value is Rs.10 also termed as its Net Asset Value.

• Issue marketed through:

• Banks
• Independent Financial Advisors (IDAs)
• National Distributors
• Direct purchase
 Net Asset Value (NAV)

• Is equal to total assets of the scheme less the liabilities divided by total no. of units.

• Assuming no. of units =100cr, Net Asset Value (2019) = (22391+3.3+192.3-83.7)/100=

Rs. 225.03
 Schemes-Structure
Open Ended
• Unit holders can buy or sell the units back to the issuing mutual
fund anytime during the existence of the scheme at the prevailing
NAV.
Close Ended
• Units are available for subscription only during the specified period
at the time of launch of scheme.
• Can-not be bought or sold to the mutual fund before a fixed
period. (About 3 to 7 years)
• However they can be traded in the secondary market with the
scheme being listed at the stock exchange.
• Are required to list on the exchange within 6 months of the closure
of the subscription .
Closed End Funds may trade at discount on account of liquidity issues
Interval Funds

• These essentially are closed end funds , but become open

ended at pre specified intervals by opening for sale and
repurchase for specified periods.

• The AMC makes the scheme open periodically for sale and
repurchase of units from its unit- holders, generally every one,
three, six, or twelve months, as disclosed in the fund’s offer
document.
 Costs borne by Investors

Total Expense Ratio (TER) charged as a % of Asset under Management (AUM). It

includes the following:

 Administration

 Distribution &

 Management

• For Direct plans the TER is less than regular plans since it excludes the
distribution cost.

• TER is charged on daily basis as a % of AUM.

• Exit load: Some funds charge on redemption of units.

 Fees and Expenses

Average Weekly Net Percentage Limit

Assets Equity Scheme Debt Scheme
First Rs. 100 Crore 2.50% 2.25%
Next Rs. 300 Crore 2.25% 2.00%
Next Rs. 300 Crore 2.00% 1.75%
On the Balance 1.75% 1.50%
Assets
 Scheme Objective

Income: Invest in debt instruments

Growth: Invest mainly in equity

Balanced: Invest in a mix of debt and equity.

 Exchange Traded Funds

• Mutual fund schemes or index funds that are listed and traded
on exchange like stocks.

• Can be brought and sold continually throughout the day.

• Example like NiftyBeEs, which is derived from securities

comprising the Nifty Index. It is 1/10th of the index value.

• Taxation like a share

• Can be used to indulge in arbitrage between cash and futures

market
 Exchange traded funds: Taking over the markets

Source: Financial Times

(https://www.ft.com/content/a54e75d4-b7f9-11e6-ba85-95d1533d9a62
)
Unit Linked Insurance Plan (ULIP)

• Traditional insurance products (endowment or money

back policy) offered a assured returns on investment.
• With the lowering of interest rates endowment plans are
no longer so attractive an investment option.
• In a unit linked insurance plan a part of premium goes to
pay for insurance while the other part is invested.
• The premiums allocated to investment enables one to
purchase units from the Insurance company at the
prevailing rates.
• Purchase units are invested according to the investment
pattern committed in various fund types
 REITs

• A REIT is a trust that mainly owns, and in most cases, operates income-
producing real estate such as apartments, shopping centers, offices,
hotels and warehouses.

• Some REITs also engage in financing real estate.

• The units of many REITs are traded on major stock exchanges.

 REITS in India
• To be set up as a trust and have parties like trustee, sponsor and
manager.

• Not less than 80% of the assets should be invested in completed

and revenue-generating properties.

• The rest 20% can be invested in under-construction properties or

other securities as specified.

• REITs will have to invest in at least two projects. Not more than
60% value of assets will be in one project.

• At least 90% of the distributable cash flow must be distributed

and at least twice a year.
 REITS in India

• MINIMUM SUBSCRIPTION: Rs 50,000 (primary market)

• REIT, through a valuer, will undertake full valuation on a yearly

basis and update the same on a half-yearly basis and declare
NAV within 15 days from the date of such valuation/updation.

• Sponsors must hold 25% of the units for first three years and
15% thereafter to ensure their commitment

• Consolidated borrowings not to exceed 49% of total assets.

Borrowings beyond 25% of the assets requires approval from
unit holders.
 Infrastructure Investment Trust
• Designed to Invest in Infrastructure Projects

• Formed as a trust, with sponsor, Investment Manager and Project

Manager.

• Borrowing not to exceed 49% of the total assets.

• Two category: Trust which invest either less than or more than
10% in under construction infrastructure projects.
 Investing less than 10%
• Regulations more or less similar to REITS

• Underlying assets of the trust should be more than 500 cr and

public issue to be more than 250 cr

• Sponsor to hold 25% of the units for 3 years after public issue

• Minimum subscription of Rs.1 lakhs.(reduced from Rs.10 lakhs in

Apr-2019)

• Minimum 25% float and at least 20 investors

 Investing more than 10%
• Funds can be raised only through Private placement from QIBs
and corporates.

• Minimum investment and trading lot of Rs. 1cr.

• For PPP projects, at least 50% of the construction should be

completed

• For non-PPP projects all required approvals should have been

received

• Mandatory listing
 Alternate Investment Funds

SEBI classifies funds in the following categories:

1. Category I AIF: Include funds with positive spillover effect on the

economy for which certain incentives or concessions might be
considered. They include:
• Venture Capital Fund
• SME Fund
• Social Venture Fund
• Infrastructure Fund
• Angel Funds (Minimum Investment of Rs. 25 lakhs to Rs.5cr)

These funds need to be close ended and should not engage in

leverage.
2. Category II AIF: Include funds for which no incentives or
concessions might be considered. They include:
• Private Equity Fund
• Debt Funds
• Fund of Funds

These funds should also be close ended and should not engage in
leverage.
3. Category III AIF: Include hedge funds that trade with a view to
make short term returns.

• They can employ diverse or complex trading strategy and may

employ leverage.

• Can be both open or close ended.

• Will be regulated through issue of prudential requirements.

• Currently SEBI allows a leverage of 2 times the capital