DVR (Differential Voting Rights)

Here we are going to discuss something new concept of equity shares in India ie. DVR (Differential Voting Rights). DVR are equity shares with differential voting rights and dividend benefits. A new concept for the investor community in India, DVR’s has features different from normal equity holding.
Shares issued under differential voting rights are likely to be available at a differential price, than the ordinary shares, as they carry a unique voting or dividend benefit i.e. a company can have shares where the voting right is 1 for every 10 shares and may have superior dividend pay outs say 5% over the normal dividend payout.

�� DVR’s allow investors to earn better return/higher dividends in lieu of surrendering their voting rights.

�� It allows a company to raise money without diluting voting rights and thus helps the promoters to defend against probable hostile takeovers.

The Companies Act permits a company to issue DVR shares, when among other conditions; the company has distributable profits and has not defaulted in filing annual accounts and returns for atleast 3 financial years. The issue of such shares cannot exceed 25% of the total issued share capital of the company. In the anomaly to above SEBI vide its circular dated July 21, 2009, in its direction to the exchanges, has asked them to amend the listing agreement, restricting
companies to issue DVR’s.

Example:
Tata Motors DVR
Tata Motors was the first company to issue shares with DVR’s in India. It had come out with rights issue of Rs. 4,147 crores to repay part of the short term bridge loan availed by its subsidiary for financing the acquisition of Jaguar-Land Rover from ford. These DVR shares carry 1/10th of voting right of ordinary shares ( i.e. DVR shares to have only one voting right for every 10 shares held) and entitle the shareholder of 5 percentage higher dividend as compared to ordinary shares. The DVR issue was done by the company at a price of Rs. 305 about 10% less than the issue price of ordinary rights at Rs.340. Trading in DVR commenced on November 5, 2008 on both the exchanges.

Gold as an Investment Option

The love for gold in India is legendary. Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or safe haven against any economic, political, social, or currency-based crises. Apart from bank FDs. Even today very few populations in India understand equity market as a investment place. People still believe gold as a safe investment.

Historically, gold has proven to be a sound investment when it comes to fighting inflation–higher inflation leads to higher gold prices. Besides investment in gold has always played a significant role in religion, rituals and human sentiments, making it an indispensable investment option. This is truer for Asian investing than any other investing community around the world. Foreign investors, bankers and central banks of different countries use gold as a hedge against a declining dollar. During geopolitical and financial market instability, gold has proven to be a safe investment haven. Moreover, gold has generated phenomenal returns as an investment option in the past three years.

Here we will try to focus on some aspect of investment in gold. Its very difficult to time the market i.e. equity, real estate, or gold market. So we will not go to the discussion that is it the right time to invest in the market at the level of Rs 16000 per 10g or $955 per ounce. Its totally depend on individuals need of investments.

History of gold prices in Indian Rupee.

Currently, the fundamentals of gold as a commodity are good as there is a huge mismatch in demand and supply. From the supply side, gold mining has been stable for the last five years at 2,500 tonnes a year. New mines that are being developed are serving to replace current production, rather than cause any significant expansion in the global supply. The long lead times in gold production, with new mines often taking up to 10 years to come on stream, means mining output is relatively inelastic and unable to react quickly to a change in price outlook.

Here are some details of the returns comparison of gold and US dow jone index in US $.

Factors affecting demand in gold
(a) The volatility in the equity markets worldwide,
(b) US / Global recession,
(c) Inflationary pressures due to high oil, commodities & food prices
(d) Weakening dollar
(E) Dipping supply

Gold, with its traditionally negative co-relation with other asset classes such as stocks, fixed income securities and commodities, has made it a popular investment for portfolio diversification. An individual can invest in gold through various routes. The most conventional route is to possess it in physical form. However, this kind of investment is not only risky but also requires high carrying cost.

1- Physical form
The most conventional route is to possess it in physical form.You can buy it from any trader of gold in the physical form like biscuit, coin or bricks. This kind of investment is not only risky but also requires high carrying cost.

2- ETF (Exchange Traded Fund)
Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion (0.995 purity). The investor's holding will be denoted in units, which will be listed on a stock exchange. These are passively managed funds and are designed to provide returns in tandem with movements of physical gold in the spot market. In the last one year, almost all Gold ETFs have generated similar returns to gold bullion index.

3- Gold Bonds or certificates.
Issued by various central and commercial banks. These bonds generally carry interest rates and a lock-in period varying from three years to seven years. On maturity, depositors can take the delivery of gold or amount equivalent depending on their options.

On the basis of above data and information we can conclude that gold is a good investment option but investment at the current level is bit doubtful.

World Financial Market Meltdown: A look

It’s very difficult to find out the real culprit of the whole mess-up in financial market but we can surely conclude that it’s because of loose financial policies and slapdash risk management towards the financial product. Somewhere in the race of competition we have forgotten the basic rule of financial system that every product have equal probability of profit and loss (RISK). I would like to discuss some example which I found could be the some of the rational behind this financial meltdown.

OTC Product (Over the counter)

These are the products which are traded over the counter. That means there is no defined market available for them. These products are not available for the every one, it is custom design product. If there is not a proper market for the product then how one can track the product performance and risk associated with it. In every country issuer of the product has to pay some margin on the product to the exchange to safeguard the products performance from any type of the risk. But this is also not possible for these products.

Excess loan

Here banks should have taken proper track records or ratings of customers and considered the sufficient capability of the customer before passing any loan toward them. And central bank should collect adequate margin from the banks for the advances. But in this competitive world it was not possible for the bank also to loose their customer so they ignored all basic requirements for the loan and advances.

Japan’s interest rates

One and half year back interest rate of bank of Japan (BOJ) was around 0% and Japanese Yen was trading at around 120Yen per $, which allowed the investors from different country borrow in Yen at very minimal interest rate and lend it in some other country’s currency at very high interest rate. This was pure arbitrage for the investors. But now conditions are not in the favour of those investors. Now interest rate of BOJ is 0.5% and Yen is trading below 100Yen per $ which force those investor for reverse carry trade.

How right is Rights Issue?

Any company can raise money form public by three different ways
1-Initial Public Offer (raising first time from market)
2-Following Public Offer (Not the first time)
3-Rights Issue

Right Issue: in this case companies want to give rights to existing shareholder to buy the share. Here only existing shareholders are eligible for the right issue. Company can offer 1:3 or 2:5 or any number of shares. 1:3 means 1 share for every 3 share.
The company will make an announcement that it is offering the rights issue to all shareholders (those who own the shares of the company) on a particular date. This date is called the record date.
After the rights announcement but before the record date, the shares are known as cum-rights। Even if you do not currently own the shares but if you buy them at that time, you will get the rights issue. On the record date, they become ex-rights. If you buy them after this day, you do not get the rights issue.

Example:
For instance, XYZ offered its shareholders three rights shares for every share held by them. On February 1, 2008, the rights issue was offered at Rs 60 per share. The cum rights price of the shares (shares offered for sale with the associated rights) was Rs 500. If you bought these, the rights issue would have been applicable for you. The ex-rights price adjusted to Rs 170 [(500 + 60x3)/4=170 ]. These shares are offered for sale without the rights.

Q: Why should shareholder opt for rights issue?
A: Because they get additional share at discount rate।

Q: Should always opt for rights issue?
A: we should first see why company need these money, if it is for a sound business plan that will eventually increase the profits and share price, then it is a good bet.

Margin Calls

Margin means leverage. That means you can buy more with less amount of money. Here broker pay the excess amount and charge interest on that excess amount. For this purpose client has to open a margin account with brokers. And initial client has to keep some amount with broker called initial margin and he can take the exposure double the initial margin. This initial margin is depending on the broker-client relationship.
There are tree types of margin client has to pay to broker
1- Initial margin
2- Maintenance margin
3- Call margin

Let’s take an example and understand all the above jargons
A client Mr. Amit Kumar kept Rs. 100000 in his margin account as initial margin. Next day he can buy future worth Rs 200000. Because the can take expose double the initial margin. Third day market crashed and the value of position become Rs. 150000 and the amount in your account become Rs 50000 (i.e. 150000-100000) and now suppose the maintenance margin is 25% that mean he should have minimum 25% of Rs 150000 in his margin account (i.e. Rs 37500) that mean he wont get any margin call. But suppose the maintenance margin is 35%, that is Rs 52500, now here the client will get a margin call of Rs 2500 (i.e. 52500-50000).
Now there is two ways to deal this situation either Client fulfil the maintenance margin condition or broker square off the position and increase the margin in the account.
Advantage and disadvantages
1- One can take more exposure than the investments
2- Margin trading is extremely risky.

P-Notes

Participatory Notes (P-notes) are instruments (same is bill of exchange or loan) issued by registered FII's to overseas investors who wish to invest in the Indian stock markets without registering themselves with SEBI, and they charge interest on it. More than 50 per cent of all FII inflows into the domestic markets are estimated to be through P-Notes.

Why P-notes?
Investing through P-Notes is very simple and hence very popular among overseas investors. P-Notes are issued to the real investors on the basis of stocks purchased by the FII. The registered FII takes care of all transactions, which appear as proprietary trades in its books. Investors need not worry about regulatory filings or currency conversions and costs are also much lower than a direct entry by registering with SEBI.

Why do FII issue it?
Registered FII's also make money by allowing unregistered investors to invest through P-Notes since it is risk-free.

Problem with P-notes?
Difficult to distinguish between good money and bad money because SEBI don’t keep track of investment or invertors through P-note.

Solution to this problem?
There is no right solution to this problem, but SEBI can reduce this problem by providing easy FII licence to more and more investor.

Dollar v/s Rupee

Dollar has fallen down from its Rs.41.05 level to Rs. 39.75 against Rupee. But it is not the only case with dollar and rupee, dollar is weakened against every currency. What went wrong with dollar, why people are not interested in dollar any more? What went wrong with the demand of the dollar? Why people from various country are not bullish on world biggest country’s currency. This is called as game of demand and supply. Here people are afraid about the recession of the US economy. Economists and investors from various countries are estimating the 8th recession in the US. US have just faced the one of the biggest crash in Sub-prime market. Various mortgage back funds got smashed. Many of them declare their bankruptcy and remaining are searching for acquirer. To save them government of US played very smart and only available option with them they have cut the FED interest rate. And this is not the final cut they are also planning to repeat this step in day coming. There are mainly two reasons for depreciation of dollar with reduction in interest rate. First: Any currency value is directly proportional to the interest rate of that country because investors don’t want to invest their money for the lower risk free return (risk free rate get reduced with reduction in interest rate). Second reduction in interest rate may lead to inflationary issue, and inflation is indirectly proportional to the currency. In both the above case investors start selling their investment in the dollar, which leads to reduction in the value of the Dollar. That’s the reason Rupee is appreciating and the Dollar is depreciating against every currency.

Fig: Value of Dollar per Rupee