When a trading right is acquired, and a share is allotted to a member of an stock exchange by virtue of which he acquires a membership privilege against the extinguishment of the previous right of membership, no transfer of assets effectively takes place and neither of the acquisitions should therefore be deemed to be a transfer within the meaning of the word in the Income Tax Act. However, at the point of sale of any of these two rights, capital gains tax would be attracted. Since the above processes are necessary to implement a policy announced by the Government, and in the larger interests of the securities market in India as well as in the interests of investors, it would be necessary to ensure that both the processes described above are tax neutral and no additional tax liability is attached either to the stock exchange or to a member of Continue reading
Investment Management
Dematerialization and Rematerialization in Commodity Markets
The Indian commodity futures market has grown exponentially in the recent times. With the increase in trade volume at the Commodity Exchanges; the need to have a vibrant and efficient settlement system was felt. This led to the concept of dematerialization of warehouse receipts. Demat of warehouse receipt eliminates the difficulties arising out of the use of physical warehouse receipts. Dematerialization refers to the process of conversion of the physical paper (i.e. share certificates, warehouse receipts, etc.) into the electronic balances. In this process the physical paper is destroyed and electronic balance is credited in the demat account owner of the physical document. The concept of demat has been in vogue in the securities market from the year 1996 with the setting up of the first depository i.e. National Securities Depository Limited (NSDL) to remove the difficulties arising out of the use of physical (paper) certificates for settlement of trades Continue reading
Equity Investment Analysis
Equity Valuation The security analyst when faced with the problem of a buy or sell decision must first evaluate the past performance of the security, and then coupled with his personal experience predict the future performance of the security and the relative market position. The amount of data available to him far exceeds his potential and therefore he has to base his predictions on several basic attributes and modify the results in the light of intuitive beliefs. While the process may be successful, its intuitive segments make the evaluation of errors and improvements of this technique very difficult, if not impossible. Equity valuation is difficult in comparison to valuation of bonds and preference shares. This is because benefits are generally constant and reasonably certain. Equity on the other hand involves uncertainty. It is the size of the return and the degree of fluctuations, which in togetherness determine the values of Continue reading
Industry Analysis and Investment Decision
An investor must examine the industry in which a company operates because this can have a tremendous effect on its results, and even its existence. A company’s management may be superior, its balance sheet strong and its reputation enviable. However, the company may not have diversified and the industry within which it operates may be in a depression. This can result in a tremendous decline in revenues and even threaten the viability of the company. The first step in industry analysis is to determine the cycle it is in, or the stage of maturity of the industry. All industries evolve through the following stages: The Entrepreneurial or Nascent Stage: At the first stage, the industry is new and it can take some time for it to properly establish itself. In the early days, it may actually make losses. At this time there may also not be many companies in the Continue reading
Mutual Fund NAV Calculation
The net asset value is the market value of the assets of the scheme deducting its liabilities. Simply put, the NAV is what investors are required to pay to buy or sell one share of the mutual fund. Keep in mind any additional fees are not included in this amount. In accounting terms, NAV is also known as the book value of the mutual fund. The net asset value per mutual fund unit on any business day is computed as follows: NAV = (Market value of the fund’s investments + Receivables + Accrued income -Liabilities -Accrued expenses)/Number of units outstanding Rules Governing the Mutual Fund NAV Calculation Accrued Income and Expenses: The correct accrual of all incomes and expenses is a requirement for computing NAV. In practical terms these are just estimates. For example, the investment manager’s fees has to be accrued everyday for computing NAV but the fee is Continue reading
Execution of Forward Contracts in Foreign Exchange Markets
A customer under forward exchange contract knows in advance the time and amount of foreign exchange to be delivered and the customer is bound by this agreement. There should not be any variation and on the due date of the forward contract the customer will either deliver or take delivery of the fixed sum of foreign exchange agreed upon. But, in practice, quite often the delivery under a forward contract may take place before or after the due date, or delivery of foreign exchange may not take place at all. The bank generally agrees to these variations provided the customer agrees to bear the loss, if any, that the bank may have to sustain on account of the variation. Though the delivery or take delivery of a fixed sum of foreign exchange under a forward contract has to take place at the agreed time, quite often this does not happen Continue reading