Equity Research & Portfolio Management

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Note: 1. Any three questions attempt from Assignment A or B2. Case study All questions are compulsary 3. All questions are compulsary from Assignment C

1 . A ) Sweet equity is the best form of reward for those who contribute to the growth of the companies discussSweat equity shares are shares issued by a listed company to itsemployees and directors in accordance with the Companies Act, 1956and SEBI Regulations

Issue of sweat equity by a listed company

A company whose equity shares are listed on a recognised stockexchange may issue sweat promoter equity shares, to its employeesand directors in accordance with the Companies Act, 1956 and SEBI Regulations. In case of issue of sweat equity shares to promoters,approval by a simple majority of the shareholders in a general meeting is required. The promoters to whom such sweat equity shares are to be issued cannot participate in such a meeting.

The price of sweat equity shares cannot be less than the maximum value of the average of the weekly high and low of the closing prices of the related equity shares during the six months preceding the relevant date; or during the two weeks preceding the relevant.

The amount of sweat equity shares issued will be treated as part ofmanagerial remuneration if the shares are issued to any director ormanager for non-cash consideration, which does not take the formof an asset that can be shown in the balance sheet of the company.

Sweat equity shares have a lock-in period of three years from thedate of allotment. The sweat equity issued by a listed company will be eligible for listing only if such issues are in accordance with SEBI regulations

1 b)Why do investor add real estate in their portfolio?Real estate

Buying property is an equally strenuous investment decision. Realestate investment generally offers easy entry and good hedge againstinflation. But, during deflationary and recessionary periods, the valueof such investments may decline. Real estate investments areclassified as direct or indirect. In a direct investment, the investorholds legal little to the property. Direct real estate investments include single-family dwellings, duplexes, apartments, land and commercial property.

In case of indirect investment, investors appoint a trusteeto hold legal title on behalf of all the investors in the group.The more affluent investors are likely to be interested in the followingtypes of real estate: agricultural land, semi-urban land, andtime-share in a holiday resort. The most important asset for individualinvestors generally is a residential house or flat because the capitalappreciation of residential property is, in general, high. Moreover,loans are available from various quarters for buying/constructing aresidential property. Interest on loans taken for buying/constructinga residential house is tax-deductible within certain limits. Besides,ownership of a residential property provides psychological satisfaction.

However, real estate may have the disadvantages of illiquidity,declining values, lack of diversification, lack of tax shelter, a longdepreciation period and management problems.

Reasons for investing in real estate are given below:High capital appreciation compared to gold or silver particularlyin the urban area.Availability of loans for the construction of houses. The 1999-2000 budget provides huge incentives to the middle class toavail of housing loans. Scheduled banks now have to disburse3 per cent of their incremental deposits in housing finance.Tax rebate is given to the interest paid on the housing loan.Further Rs. 75,000 tax rebate on a loan upto Rs. 5 lakhs whichis availed of after April 1999. if an investor invests in a housefor about Rs. 6-7 lakh, he provides a seed capital of about Rs.1-2 lakh. The Rs. 5 lakh loan, which draws an interest rate of15 percent, will work out to be less than 9.6 per cent becauseof the Rs. 75,000 exempted from tax annually. In assessingthe wealth tax, the value of the residential home is estimatedat its historical cost and not on its present market value.

The possession of a house gives an investor a psychologicallysecure feeling and a standing among his friends and relatives.

With real estate being a part of thecapital allocationdecisions of both institution and retail investors, there has been increasing development in real estate funds. Due to the capital intensity of real estate investing, its requirement for active management and the rise in global real estate opportunities, institutions are gradually moving to real estatefunds of fundsto allow for appropriate asset management.

The same is true for retail investors, who now have a much larger selection of real estate mutual funds, allowing for efficient capital allocation and diversification. Like any other investment sector, real estate has its benefits and its disadvantages. However, real estate should be considered for most investment portfolios, and real estate investment trusts (REITs) and real estate mutual funds may be the best methods tofill that allocation.1. C) What are the step taken by sebi to protect investors in primary marketInvestors protection in the primary market

The investing public should be protected to ensure healthy growthof primary market. The term investors protection has a wider meaningin the primary market. The principal ingredients of investor protectionare- (a) Provision of all the relevant information; (b) Provision ofaccurate information; and (c) Transparent allotment procedureswithout any bias.To provide the above mentioned factors several steps have been taken.They are project appraisal, under-writing, clearance of the issuedocument by the stock exchange and SEBIs scrutiny of the issuedocument.

1. Project appraisal is the first step in the entire process of theproject. Technical and economic feasibility of the project isevaluated. If the project itself is not technically feasible andeconomically viable, whatever may be the other steps taken toprotect the investors are defeated. Appraisal shows whetherthe project is meaningful and can be financed. The investorsprotection starts right from the protection of the principalamount of investment. Based on the appraisal, the project costis finalised. The cost should be neither understated noroverstated. The profitability of the project should be estimatedand given. To ensure fair project appraisal, SEBI has made itmandatory for the project appraisal body to participate a certainamount in the forthcoming issue.


Once the issue is finalised the underwriting procedure starts.Reputed institutions and agencies, providing credibility to theissue normally underwrite the issue. If the lead managersparticipate more than five per cent of the minimum stipulatedamount offered to the public, it would increase the confidenceof the public regarding the pricing and saleability of the issue.

3 .Disclosures in the Prospectus

SEBI has issued stringent norms for the disclosure ofinformation in the prospectus. It is the duty of the leadmanager to verify the accuracy of the data provided in theprospectus. The pending litigation should be given clearly.The promoters credibility in fulfilling the promises of theprevious issues (if any) should be stated. A clear version of therisk factors should be given. Any adverse development thataffects the normal functioning and the profit of the companyshould be highlighted in the risk factor.

4 .Clearance by the Stock Exchange

The issue document has to be cleared by the stock exchangeon which the proposed listing is offered. The stock exchangesverify the factors related with the smooth trading of the shares.Any bottleneck in this area will be eliminated since thetransferability is the basic right of the shareholders. Tradingof the shares helps the investor to liquidate his share at anytime. If the issues are not traded in the secondary market at agood price, they would dampen the spirit of the investor.

5. Signing by Board of Directors

The Board of Directors should sign the prospectus. A copy isalso filed with the office to the Registrar of the Companies.This along with the other material documents referred to inthe prospectus are available for inspection by the members ofthe public. The minimum amount to be subscribed by thepromoters and maintained for a minimum number of yearsalso safeguard the interest of the investors.

6. SEBIs Role

SEBI scrutinises the various offer documents from the viewpoint of investors protection and full disclosure. It has thepower to delete the unsubstantiated claims and ask foradditional information wherever needed. This makes the leadmanagers to prepare the offer document with due care anddiligence. When the disclosure of the information is complete,wide publicity has to be given in the newspapers. In theallotment procedure to make sure of transparency, SEBIsnominee is appointed apart from the stock exchange nomineein the allotment committee. Inclusion of valid applications andrejection of invalid applications are checked. The representativeof the SEBIs see to it that undue preference is not given tocertain group of investors.

7. For redressal of investors grievances, The Department of Company Affairs has introduced computerised system ofprocessing the complaints to handle it effectively. Thecompanies are requested to give feed back regarding the actiontaken on each complaint within a stipulated time period. If thecompanies do not respond and are slow in the process ofsettlement of complaints, penal action can be taken againstthe companies under the provisions of the Companies Act. Ifthe performance of the Registrar to the issue is not satisfactoryin settling the complaints, SEBI can take appropriate actionagainst such Registrar. Several Investors Associations are alsofun