COST OF CAPITAL:
Cost of equity share capital is that part of cost of capital which is payable to equityshareholder. Every shareholder gets shares for getting return on it. So, for company point of view, it will be cost and company must earn more than cost of equity capital in order to leave unaffected the market value of its shares.
We can calculate cost of equity capital with following ways:
1. Dividend yield method or Dividend Price ratio method
According to dividend yield method or dividend price ratio method, “Cost of equity capital is minimum rate which will be equal to the present value of future dividend per share with current price of a share.
Cost of equity =
Dividend per equity share/ Market price or net proceed of per share
Ke = DPS/ MPPS or NPPS
A company issues 1000 shares of Rs. 100 each at a premium of 10%. The company has been paying 20% dividend to equity shareholders for the past five years and expects to maintain the same in the future also. Compute the cost of equity capital. Will it make any difference if the market price of equity share is Rs. 160?
Solution:
Ke= DPS/MPPS or NPPS
= 20/110 X 100
= 18.18%
If the market price of equity share is Rs. 160.
=20/160 X 100 = 12.5%
At increasing of market price, value of cost of equity capital will decrease.
2. Dividend yield plus growth in dividend method
Dividend yield plus growth in dividend method is based on the assumption that company is growing and its shares market value is also increasing. In that situation, shareholders want more than simple dividend, so company can provide some more profit according to growth. So, we will add it in previous calculated cost of equity capital.
Cost of Equity Capital = DPS/ MPPS or NPPS + Rate of growth in dividends
Ke = DPS/ MPPS or NPPS + G%
A company plans to issue 1000 new equity shares of Rs. 100 each at par. The floatation costs are expected to be 5% of the share price. The company pays a dividend of Rs. 10 per share initially and the growth in dividends is expected to be 5%. Compute the cost of new issue of equity shares.
= 10/100-5 + 5% = 15.53%
If the current market price of equity share is Rs. 150, calculate the cost of existing equity share capital.
=10/150 +5% = 11.67%
3. Earning yield method
According to this method, cost of equity capital is minimum rate which we have to earn on market price of a share. Its formula is
Ke = Earning per share / Net proceed or Market price per share
Ke = EPS/ MPPS or NPPS
A firm is considering an expenditure of Rs. 60 lakhs for expanding its operations. The relevant information is as follows:
Number of existing equity shares = 10 Lakhs
Market value of existing share= Rs. 60
Net Earning = Rs. 90 Lakh
Compute the cost of existing equity share capital and of new equity capital assuming that new shares will be issued at a price of Rs. 52 per share and the costs of new issue will be Rs. 2 per share.
Earning per share = earning / total number of shares = 90/10
= Rs. 9
Ke = 9/60 X 100
Ke = 15%
Cost of new equity capital
Ke = 9/52-2 X 100 = 18%
4. Realised yield method
One of major limitation of dividend yield method or earning yield method that both methods are based on estimation of future dividend or earning. There are large numbers of factors which are uncontrollable and uncertain. And if any financial risk will happen, we can not use it in future planning or we also can not take any decision related to estimation of return on investment. So, realised yield method is best method for calculating the cost of equity share capital.
This method is based on actual earning earned on all amount of investment. After this, we try to know, how much money is financed from equity share capital and reserve amount of past profits and after this we calculate cost of equity share capital.
Ke = Actual earning per Share / Market price per share X 100
COST OF PREF SHARE CAPITAL:
Cost of preference share capital is that part of cost of capital in which we calculate the amount which is payable to preference shareholders in the form of dividend with fixed rate. Even, dividend to preference shareholder is on the desire of board of directors ofcompany and preference shareholder can not pressurize for paying dividend but it doesn’t mean that calculation of cost of pref. share capital is not necessary because, if we don’t pay the dividend to pref. shareholders, it will affect on capability to receive funds from this source.
Cost of pref. share capital’s formula is given below.
Cost of Pref. Share capital (Kp) = amount of preference dividend/ Preference share capital
Kp = D/P
If we have obtained this preference share capital after some adjustments like premium or discount or pay some cost of floatation, at that time, it is our duty to deduct discount andcost of floatation or add premium in par value of pref. share capital.
In adjustment case cost of pref. share capital will change and we can calculate it with following way:-
Kp = D/ NP
D = Annual pref. dividend,
NP = Net proceed = Par value of Pref. share capital – discount – cost of floatation
Or NP = Par value of pref. share capital + Premium
There will no adjustment of tax rates because, dividend on pref. share capital is payable on net profit after tax adjustment, so need not to do adjustment of tax for comparing it with cost of debt or cost of equity share capital .
Some, time we issue redeemable preference shares whose amount is payable after some time.
At the time of maturity, we need to calculate cost of pref. share capital with following formula
D = Annual dividend
MV = Maturity value of pref. shares
NP = Net proceeds of pref. shares
N= number of years
This formula is little different from cost of non redeemable pref. share capital because, we have to add, the benefit which we have given to pref. share capital at the time of maturity.
Suppose, we have to pay Rs. 10, 00,000 but at the time of issue of pref. share, we had paid Rs. 2 per issue of pref. share. So, net proceed is Rs. 9,80,000 but if this amount is payable after 10 years at 10% premium, this will also benefit to pref. share capital and total cost of pref. share capital will increase. Rate of dividend is 10%.
Cost of pref. share capital
= D + (MV – NP )/n / ½(MV +NP) X 100
= 100,000 + ( 10,50,000- 9,80,000 )/ ½ ( 10,50,000 + 9,80,000) x 100
= 100,000 + 7,000/ 10, 15,000 X 100
= 10.54%
If we compare it with simple cost of pref. share capital with following way
Kp = D/P X 100 = 100000 / 10, 00,000 X 100 = 10% it is same as dividend rate but Kpr is more than Kp. So, Kpr will give you correct result.
WEIGHTED AV COST OF CAPITAL:
Weighted average cost of capital is the average cost of different sources of finance. For calculating weighted average cost of capital, we can use following steps:-
Ist Step
Calculate proportion % of different source of finance in capital structure. It will be W.
2nd Step
Calculate cost of equity capital, cost of debt and cost of retain earning and it will be X.
3rd Step
Calculate the product of W and X by multiply W with X.
4th Step
Calculate the total of product W and X and it will be ∑WX
5th Step
Calculate the total of W and it will be ∑W
6th Step
Calculate the WACC by dividing ∑WX with ∑W
COST OF RETAINED EARNING:
When a company earns profit, it does not distribute its all profit. Some of profit is retained in the form of reserve. This profit is used for development of company and other productive works. It means retained money is used for more earning of business. So, it will have cost like the cost of equity share capital.
If we have to define it, we can say, it is just minimum rate of return which company should earn on same reserve. Somebody can say that there is no need to calculate cost of retained earning because this cost is not payable in the form of dividend. But in reality, if we think that company is using shareholder fund because all earned profit should be payable as dividend but company is not paying full amount, so shareholders are deserve for getting return on reserved amount.
This is just opportunity cost of the amount which is not given as dividend to shareholders. We can calculate cost of retained earning with following formula. The formula will be same as calculating the cost of equity share capital.
Cost of retained earning =
Expected dividend / Net proceed of retained earning + Growth rate
Or
Expected dividend/ N.P. X ( 1- tax rate ) ( 1- cost of new investment)
SOURCES OF FINANCE:
In management accounting, source of finance provides the power to company to buy fixed and current assets and pay loans. In other words, without source of finance, it may be difficult for company to operate the business. For starting and surviving the business, we need fixed and current capital and source of finance can give us these capitals, with fixed capital, we buy fixed assets and with current capital or working capital, we pay debt and buy current assets. Sources of finance may be depend on the financial requirement. Short term financial requirement can be fulfilled from bank credit and customer’s credit and long term financial requirement can be fulfilled from shares and debentures. Company can also use internal sources and external sources.
Following are the main sources of finance: -
Equity
In finance, equity means owner’s claim in business. It can say also the capital of owner. Its other name is owner’s equity. Owner in small business may be individual and can do business with his family members. At that time, his invested money in business will be his equity but if he has gotten secured loan from outside, then total equity will divide into two parts one is owner’s equity and other is creditor’s equity. Due to his business has unlimited liability, so his own equity can be used for payment of secured loan in case of insolvency.
The definition of equity will change in case of purchasing of other company’s shares. After purchasing other company’s share, company’s equity will be the total amount of equity share capital. It is also called shareholder’s equity. Large numbers of businessmen are using equity for succeeding in company type business.
They make company just getting fund in the form of share capital, after getting fund, they operate business, and then if they need money they take only loan not share capital. That technique is called trading on equity. One more thing, I have reminded that owner’s claim will be junior claim but liability of shareholder will be limited.
Debt
Bond
Credits
Advances
Bank Finance
Bank finance means amount of debt which is given by banks. It is different from banking financing. Bank finance is just part of bank financing. Bank financing includes all activities of bank which a bank activates to sell financial products at high rate of interest. If we see bank finance from the eye of customer, then that customer is the expert in bank finance who gets money from bank at minimum rate of interest. Bank finance is the source of finance of company and it is the duty of accounts manager to get skill for helping company in these financial works.
Public Deposits
Retained Earning
Mutual fund
Hedge Fund
Venture Capital
Cost of equity share capital is that part of cost of capital which is payable to equityshareholder. Every shareholder gets shares for getting return on it. So, for company point of view, it will be cost and company must earn more than cost of equity capital in order to leave unaffected the market value of its shares.
We can calculate cost of equity capital with following ways:
1. Dividend yield method or Dividend Price ratio method
According to dividend yield method or dividend price ratio method, “Cost of equity capital is minimum rate which will be equal to the present value of future dividend per share with current price of a share.
Cost of equity =
Dividend per equity share/ Market price or net proceed of per share
Ke = DPS/ MPPS or NPPS
A company issues 1000 shares of Rs. 100 each at a premium of 10%. The company has been paying 20% dividend to equity shareholders for the past five years and expects to maintain the same in the future also. Compute the cost of equity capital. Will it make any difference if the market price of equity share is Rs. 160?
Solution:
Ke= DPS/MPPS or NPPS
= 20/110 X 100
= 18.18%
If the market price of equity share is Rs. 160.
=20/160 X 100 = 12.5%
At increasing of market price, value of cost of equity capital will decrease.
2. Dividend yield plus growth in dividend method
Dividend yield plus growth in dividend method is based on the assumption that company is growing and its shares market value is also increasing. In that situation, shareholders want more than simple dividend, so company can provide some more profit according to growth. So, we will add it in previous calculated cost of equity capital.
Cost of Equity Capital = DPS/ MPPS or NPPS + Rate of growth in dividends
Ke = DPS/ MPPS or NPPS + G%
A company plans to issue 1000 new equity shares of Rs. 100 each at par. The floatation costs are expected to be 5% of the share price. The company pays a dividend of Rs. 10 per share initially and the growth in dividends is expected to be 5%. Compute the cost of new issue of equity shares.
= 10/100-5 + 5% = 15.53%
If the current market price of equity share is Rs. 150, calculate the cost of existing equity share capital.
=10/150 +5% = 11.67%
3. Earning yield method
According to this method, cost of equity capital is minimum rate which we have to earn on market price of a share. Its formula is
Ke = Earning per share / Net proceed or Market price per share
Ke = EPS/ MPPS or NPPS
A firm is considering an expenditure of Rs. 60 lakhs for expanding its operations. The relevant information is as follows:
Number of existing equity shares = 10 Lakhs
Market value of existing share= Rs. 60
Net Earning = Rs. 90 Lakh
Compute the cost of existing equity share capital and of new equity capital assuming that new shares will be issued at a price of Rs. 52 per share and the costs of new issue will be Rs. 2 per share.
Earning per share = earning / total number of shares = 90/10
= Rs. 9
Ke = 9/60 X 100
Ke = 15%
Cost of new equity capital
Ke = 9/52-2 X 100 = 18%
4. Realised yield method
One of major limitation of dividend yield method or earning yield method that both methods are based on estimation of future dividend or earning. There are large numbers of factors which are uncontrollable and uncertain. And if any financial risk will happen, we can not use it in future planning or we also can not take any decision related to estimation of return on investment. So, realised yield method is best method for calculating the cost of equity share capital.
This method is based on actual earning earned on all amount of investment. After this, we try to know, how much money is financed from equity share capital and reserve amount of past profits and after this we calculate cost of equity share capital.
Ke = Actual earning per Share / Market price per share X 100
COST OF PREF SHARE CAPITAL:
Cost of preference share capital is that part of cost of capital in which we calculate the amount which is payable to preference shareholders in the form of dividend with fixed rate. Even, dividend to preference shareholder is on the desire of board of directors ofcompany and preference shareholder can not pressurize for paying dividend but it doesn’t mean that calculation of cost of pref. share capital is not necessary because, if we don’t pay the dividend to pref. shareholders, it will affect on capability to receive funds from this source.
Cost of pref. share capital’s formula is given below.
Cost of Pref. Share capital (Kp) = amount of preference dividend/ Preference share capital
Kp = D/P
If we have obtained this preference share capital after some adjustments like premium or discount or pay some cost of floatation, at that time, it is our duty to deduct discount andcost of floatation or add premium in par value of pref. share capital.
In adjustment case cost of pref. share capital will change and we can calculate it with following way:-
Kp = D/ NP
D = Annual pref. dividend,
NP = Net proceed = Par value of Pref. share capital – discount – cost of floatation
Or NP = Par value of pref. share capital + Premium
There will no adjustment of tax rates because, dividend on pref. share capital is payable on net profit after tax adjustment, so need not to do adjustment of tax for comparing it with cost of debt or cost of equity share capital .
Some, time we issue redeemable preference shares whose amount is payable after some time.
At the time of maturity, we need to calculate cost of pref. share capital with following formula
Cost of redeemable pref. share capital =
D = Annual dividend
MV = Maturity value of pref. shares
NP = Net proceeds of pref. shares
N= number of years
This formula is little different from cost of non redeemable pref. share capital because, we have to add, the benefit which we have given to pref. share capital at the time of maturity.
Suppose, we have to pay Rs. 10, 00,000 but at the time of issue of pref. share, we had paid Rs. 2 per issue of pref. share. So, net proceed is Rs. 9,80,000 but if this amount is payable after 10 years at 10% premium, this will also benefit to pref. share capital and total cost of pref. share capital will increase. Rate of dividend is 10%.
Cost of pref. share capital
= D + (MV – NP )/n / ½(MV +NP) X 100
= 100,000 + ( 10,50,000- 9,80,000 )/ ½ ( 10,50,000 + 9,80,000) x 100
= 100,000 + 7,000/ 10, 15,000 X 100
= 10.54%
If we compare it with simple cost of pref. share capital with following way
Kp = D/P X 100 = 100000 / 10, 00,000 X 100 = 10% it is same as dividend rate but Kpr is more than Kp. So, Kpr will give you correct result.
WEIGHTED AV COST OF CAPITAL:
Weighted average cost of capital is the average cost of different sources of finance. For calculating weighted average cost of capital, we can use following steps:-
Ist Step
Calculate proportion % of different source of finance in capital structure. It will be W.
2nd Step
Calculate cost of equity capital, cost of debt and cost of retain earning and it will be X.
3rd Step
Calculate the product of W and X by multiply W with X.
4th Step
Calculate the total of product W and X and it will be ∑WX
5th Step
Calculate the total of W and it will be ∑W
6th Step
Calculate the WACC by dividing ∑WX with ∑W
COST OF RETAINED EARNING:
When a company earns profit, it does not distribute its all profit. Some of profit is retained in the form of reserve. This profit is used for development of company and other productive works. It means retained money is used for more earning of business. So, it will have cost like the cost of equity share capital.
If we have to define it, we can say, it is just minimum rate of return which company should earn on same reserve. Somebody can say that there is no need to calculate cost of retained earning because this cost is not payable in the form of dividend. But in reality, if we think that company is using shareholder fund because all earned profit should be payable as dividend but company is not paying full amount, so shareholders are deserve for getting return on reserved amount.
This is just opportunity cost of the amount which is not given as dividend to shareholders. We can calculate cost of retained earning with following formula. The formula will be same as calculating the cost of equity share capital.
Cost of retained earning =
Expected dividend / Net proceed of retained earning + Growth rate
Or
Expected dividend/ N.P. X ( 1- tax rate ) ( 1- cost of new investment)
SOURCES OF FINANCE:
In management accounting, source of finance provides the power to company to buy fixed and current assets and pay loans. In other words, without source of finance, it may be difficult for company to operate the business. For starting and surviving the business, we need fixed and current capital and source of finance can give us these capitals, with fixed capital, we buy fixed assets and with current capital or working capital, we pay debt and buy current assets. Sources of finance may be depend on the financial requirement. Short term financial requirement can be fulfilled from bank credit and customer’s credit and long term financial requirement can be fulfilled from shares and debentures. Company can also use internal sources and external sources.
Following are the main sources of finance: -
Equity
In finance, equity means owner’s claim in business. It can say also the capital of owner. Its other name is owner’s equity. Owner in small business may be individual and can do business with his family members. At that time, his invested money in business will be his equity but if he has gotten secured loan from outside, then total equity will divide into two parts one is owner’s equity and other is creditor’s equity. Due to his business has unlimited liability, so his own equity can be used for payment of secured loan in case of insolvency.
The definition of equity will change in case of purchasing of other company’s shares. After purchasing other company’s share, company’s equity will be the total amount of equity share capital. It is also called shareholder’s equity. Large numbers of businessmen are using equity for succeeding in company type business.
They make company just getting fund in the form of share capital, after getting fund, they operate business, and then if they need money they take only loan not share capital. That technique is called trading on equity. One more thing, I have reminded that owner’s claim will be junior claim but liability of shareholder will be limited.
Debt
Debt is the finance term and it is very important in business . Because , every businessman needs money but his own sources of money are limited . So , for fulfilling the money in business for purchasing plants and machinery and other equipments , it is very necessary for businessman for getting Debt.
Simple definition of Debt
Debt is the liability of business . It is shown in the liability side of business . It includes loan , outstanding expenses and advance incomes . But basically , taking money or borrowing money on credit creates Debt . The persons who provides debt are creditors or money lenders . They gets interest on his given debt .
Explanation of Debt
After developing the technique of Trading on Equity , large Corporate are taking more and more debt and take benefit of difference between dividend rate and interest rate . Debt may be secured and unsecured . If any person gives debt on the basis on some security , then , it is called secured debt . In case of secured debt , creditors has power to sell the asset which is under security , if borrower does not pay his debt . Unsecured debt is that type of debt which is given without any security and if borrower becomes bankrupt , creditor can not get his amount by selling security . So , it is more risky than secured debt. So , creditor charges high rate on this type of debt .
We can also divide debt into consumer and productive category . If any body takes loan for consumption or purchasing any consumable product . Then this debt is called consumer debt . Credit card debt in USA is most famous type of consumer debt . College boys , small salaried person takes these debt in the form of personal loan .
( visionvictory has given many Options for people who are in credit card debt . see Video here )
Productive debt is the debt which is taken for fulfilling production projects . Enterprises takes this debt for buying business plant and machinery which will be benefited for increasing production .
Bond
Definition of Bond
Bond is that financial product of company which is issued for getting loan. Government and semi-government bodies issue bonds. Its other name is debenture when it is issued by private company.
When company issues bonds, at that time company writes a certificate and accepts that it will repay the mention amount of loan after fixed time with fixed rate of interest.
The following things must be clear, if you or your company is issuing bonds.
1. Amount of Principle
You should tell bonds holder or investor, what amount you are taking. Investor should sure that amount will not demanded more than given principle amount.
2. Issue Price
Sometime, it may possible that company can issue bonds at discount. Then, at maturity, investor will have the right to receive only issue price not principle amount.
3. Maturity Date
It is the date when companies repay or redeem the loan to investor. It may possible that loan is taken for short period or long period. In short term loan, bonds amount will repay with in one year and in long term loan, bonds amount will repay more than 5 years.
4. Coupon
Almost all the bonds are bearer and interest coupons are attached with it. After one year or six months, interest is payable to that person who holds these bonds on coupon date.
Kinds of Bonds
We can classify bonds or debenture with following way.
Ist Kind of bonds
Fixed rate bonds
If bonds are issued with fixed rate of interest, then these bonds are called fixed rate bonds. For example Mr. James takes bonds of $ 5000 and he gets the interest coupon with fixed rate of interest at the time of purchasing of bonds, then these types of bonds will be fixed rate bonds.
2nd Kind of bonds
Floating rate bonds
If interest is not fixed and it is changeable according to the condition of financial market, then these bonds are called floating rate bonds.
Credits
In finance, credit means to get money as debt. It also means to gets current asset or fixed asset without pay its price immediately. A person or company who gets money will be responsible to repay its principle amount with interest after certain time. In case, if he purchases goods on credit, then there is no need to pay interest on the credit amount. Bonds are issued if company gets credit from public, then company is also responsible to pay interest.
In credit, a party who gets loan will be debtor of other part and other party will become creditor for the first party who gets cash. If debtor does not pay the amount of credit then it becomes bad debts which is the loss of loan providing party. It is very necessary to maintain provision for doubtful debts for creating reserve for purchasing stock or paying other expenses if we will receive fund from debtors for given credit in reality.
Advances
Advances or advance is generally identified for advance payments. If a company wants to acquire goods or assets or any services from other party, then sometime it can give some money to that party before purchasing and delivery of goods and services. This payment is called advance. This is the asset of company. If advance is given partly, then company will pay balance cash after actual delivery of goods. If advance is given for expenses, then accountant shows prepaid expenses or advance expenses as current asset in balance sheet of company.
In the field of property dealing, an advance against purchased property is a payment made by the purchaser to the seller at the time of contract (usually immediately upon contract) and promise to pay balance fund after certain period of time. For example, Ram the owner of Shanti house may vend his house to Sham for Rs. 90, 00,000 and get Rs. 9, 00,000 against that house at the time of contract. Rs. 9,00,000 is advance. This also a special form of loan but there is no interest on such advance payments.
Bank Finance
Bank finance means amount of debt which is given by banks. It is different from banking financing. Bank finance is just part of bank financing. Bank financing includes all activities of bank which a bank activates to sell financial products at high rate of interest. If we see bank finance from the eye of customer, then that customer is the expert in bank finance who gets money from bank at minimum rate of interest. Bank finance is the source of finance of company and it is the duty of accounts manager to get skill for helping company in these financial works.
Public Deposits
Definition of Public Deposits
Public deposit is the source of fund for private and non-banking companies. It means to accept fund from public in the form of deposit. The interest on these deposits is more than interest which is given by banks and post offices.
This is the risky investment but investor can earn high return on public deposits. From June 1980, public companies of India also started to accept public deposits. More than Rs. 5000 crore has been invested by Indian Investors in public deposits.
Government Regulation on Public Deposits
Company law 1956’s section 58- A provides the power to central govt. to make rules and regulation for controlling public deposits. Government of India has made Companies (acceptance of deposits) Rules 1975. From time to time, these rules are amended.
Following are the main features of these rules
1. Ceiling on Deposits
A company can accepts public deposits up to following level
a) Company can accept public deposits up to the 25% of the total of payable capital and free reserves.
b) Company can accepts public deposits from existing shareholders or debenture holders up to 10% of total of payable capital and free reserves.
2. Maturity of Deposits
Company has to accept deposits from public minimum for 6 months and maximum for 3years.
3. Form and Particulars of Advertisement
Company must publish its advertisement in English news paper and in local language newspaper.
4. Form of Application for Deposits
Public deposits must be accepted on given application by depositor.
5. Register of Deposits
Like register of shareholder and debenture holder, company should record all persons’ name, address, deposit cash, date, maturity date, and rate of interest in register of deposits.
6. Interest on Deposits
Company can fix rate of interest on deposits money according to regulations of RBI.
Retained Earning
Retained earning is that part of net profit of company which has not been issued in the form of dividend. Before providing dividend, board of directors looks the financial environment and also sees future uncertainties. After this, they reserve their net profit in the form of retained earning according to the given situation.
It is just like fund for development of business but it can be used for the purpose of distribution of dividend in future. It is shown in the liability side of the balance sheet of company under owner’s equity head.
For example
A company has earned 103 million dollar and distribute only 30 million dollar balance amount of net profit will be 73 million dollar will be shown as retained earning.
Mutual fund
Definition of Mutual Fund
Mutual fund is that fund which is created by professional investors. Money of this fund is collected from public. Then, this money is invested in share market, bond market or money market. These professional investors are very expert in dealing in shares and bonds. Almost all banks have mutual fund and public can buy or sell the shares of mutual fund like any other shares of companies. A mutual fund gives return on given investment, but it is not given under fixed rate like interest income on debentures or loan.
To invest in mutual fund is more useful for small individual investors who do not understand the stock market analysis and they earn higher earning than deposit their money in fixed deposit schemes. Its history is connected with USA mutual funds and in India; this system of investment was started by UTI. But after passing of time, large number of banks and private professional investors made mutual funds. These days more than 22 mutual funds which are provided by companies in India.Following video will be useful for understanding mutual fund.
Hedge Fund
Definition of Hedge Funds
Hedge Funds are that funds which are created by investment managers or professional investors to reduce the risk of small and medium investors. These investors invest some amount of his investment in hedge funds instead of direct investment in share or bonds. With this, return on investment will also increase. Investor chooses and decides hedge fund investment. Subscription amount is paid to the custodian. Custodian confirms receipt of payment to fund administrator. Fund administrator instructs issue of share to investor. Fund administrator issues reports on hedge fund performance. Investment manager instructs custodian to move funds to prime broker for investment in market. During the process the prime broker and custodian are in direct contact with fund administrator.Hedge funds used to occupy a dark, undisturbed corner of the financial world, but over the last year theyve been thrown under the spotlight. Still, many people dont know exactly what hedge funds are, or what hedging actually means. Senior Editor Paddy Hirsch explains.hedge funds in india
List of hedge funds operating in India :-
- Indea Capital Pte Ltd.
- India Capital Fund.
- India Deep Value Fund
- Absolute India Fund (AIF)
- Naissance Jaipur (India) Fund
- Avatar Investment Management
- Passport India Fund
- HFG India Continuum Fund
- Monsoon Capital Equity Value Fund
- Karma Capital Management, LLC
- Vasishta South Asia Fund Limited
- Atyant Capital
- Atlantis India Opportunities Fund
{* see also the list of mutual funds companies in India }
Hedge funds vs mutual funds
Hedge funds and mutual funds are both useful to increase ROI with minimum risk of losing principle amount in investment. But, there are many differences between hedge funds and mutual funds.
* Mutual Funds are highly regulated, restricting the use of short selling and derivatives
* Hedge Funds, on the other hand, are unregulated and therefore unrestricted.
* Mutual Funds generally remunerate management based on a percent of assets under management.
* Hedge Funds always remunerate managers with performance-related incentive fees as well as a fixed fee.
* The future performance of Mutual Funds is dependent on the direction of the equity markets.
* The future performance of many Hedge Fund strategies tends to be highly predictable and not dependent on the direction of the equity markets. Link
Venture Capital
Venture capital fund is special type of private capital. It is that type of private capital in which two and more person associates and provide capital. Venture capital can not be increased by issuing of shares in stock exchange. But in venture capital more money is received from friend, reference of investors and relatives. It is different from partnership capital because, association in venture is not life long and this capital is used in technology project, bio – technology and life science projects.
Any firm gets venture capital, if it provides high return on investment, have good project of business. Venture capitalization is most popular in USA.
Structure of venture capital fund
1st of all two of more partners join in limited partnership that is called joint venture .
2nd they invest money in the form of venture capital fund.
3rd They also get money from friends, relatives and reference of investors.
4th They also get profit from project and divide amoung all partners or investors .
SEBI:
Security exchange board established in 1992 by passing the ordinance in the parliament of India. India’s first law relating to control over security was Control Security issue act 1947 but, it was not fulfilling the desires of Govt . and investors.
For securing the interests of Investors, SEBI has established by Central Govt. In India, now it is vital authority to makes all rules and regulations relating to capital market. Main aim and objectives of SEBI is to protect the money of investors from frauds in stock markets. A new investors can easily cheated by expert brokers, So, SEBI knows this point and it has made very strict rules for ceasing such cheating , frauds and malpractices .
SEBI never accepts any dodgy transaction which is done by any party in stock exchanges in India. SEBI is the board which is operated by one chairperson and other members which are appointed from following way.
For securing the interests of Investors, SEBI has established by Central Govt. In India, now it is vital authority to makes all rules and regulations relating to capital market. Main aim and objectives of SEBI is to protect the money of investors from frauds in stock markets. A new investors can easily cheated by expert brokers, So, SEBI knows this point and it has made very strict rules for ceasing such cheating , frauds and malpractices .
SEBI never accepts any dodgy transaction which is done by any party in stock exchanges in India. SEBI is the board which is operated by one chairperson and other members which are appointed from following way.
- One member is selected from the officers of ministry of finance.
- One member is selected from the officers of ministry of law.
- One member is selected from the office of RBI.
- Other two members are selected by central Govt.
Powers of SEBI
- To make rules and regulation for controlling the stock exchanges in India.
- To educate brokers and investors.
- To do amendments in the rules and regulations of stock exchanges in India.
- To encourage investors of foreign to investment in India.
- To safeguard the interests of investors.
- To development the stock and share market in India.
- To stop all fraud and malpractices in stock exchanges.
- To reduce the fluctuations in the market prices of shares.
- To create good relationships among the large numbers of brokers, finance agents and financers.
- To provide license to brokers for activities in stock exchanges in India.
SEBI is regulator to control Indian capital market. Since its establishment in 1992, it is doing hard work for protecting the interests of Indian investors. SEBI gets education from past cheating with naive investors of India. Now, SEBI is more strict with those who commit frauds in capital market.
The role of security exchange board of India (SEBI) in regulating Indian capital market is very important because government of India can only open or take decision to open new stock exchange in India after getting advice from SEBI.
If SEBI thinks that it will be against its rules and regulations, SEBI can ban on any stock exchange to trade in shares and stocks.
Now, we explain role of SEBI in regulating Indian Capital Market more deeply with following points:
1. Power to make rules for controlling stock exchange :
SEBI has power to make new rules for controlling stock exchange in India. For example, SEBI fixed the time of trading 9 AM and 5 PM in stock market.
2. To provide license to dealers and brokers :
SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that any financial product is of capital nature, then SEBI can also control to that product and its dealers. One of main example is ULIPs case. SEBI said, " It is just like mutual funds and all banks and financial and insurance companies who want to issue it, must take permission from SEBI."
3. To Stop fraud in Capital Market :
SEBI has many powers for stopping fraud in capital market.
It can ban on the trading of those brokers who are involved in fraudulent and unfair trade practices relating to stock market.
It can impose the penalties on capital market intermediaries if they involve in insider trading.
4. To Control the Merge, Acquisition and Takeover the companies :
Many big companies in India want to create monopoly in capital market. So, these companies buy all other companies or deal of merging. SEBI sees whether this merge or acquisition is for development of business or to harm capital market.
5. To audit the performance of stock market :
SEBI uses his powers to audit the performance of different Indian stock exchange for bringing transparency in the working of stock exchanges.
6. To make new rules on carry - forward transactions :
Share trading transactions carry forward can not exceed 25% of broker's total transactions.
90 day limit for carry forward.
7. To create relationship with ICAI :
ICAI is the authority for making new auditors of companies. SEBI creates good relationship with ICAI for bringing more transparency in the auditing work of company accounts because audited financial statements are mirror to see the real face of company and after this investors can decide to invest or not to invest. Moreover, investors of India can easily trust on audited financial reports. After Satyam Scam, SEBI is investigating with ICAI, whether CAs are doing their duty by ethical way or not.
8. Introduction of derivative contracts on Volatility Index :
For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to introduce derivative contracts on Volatility Index, subject to the condition that;
a. The underlying Volatility Index has a track record of at least one year.
b. The Exchange has in place the appropriate risk management framework for such derivative contracts.
2. Before introduction of such contracts, the Stock Exchanges shall submit the following:
i. Contract specifications
ii. Position and Exercise Limits
iii. Margins
iv. The economic purpose it is intended to serve
v. Likely contribution to market development
vi. The safeguards and the risk protection mechanism adopted by the exchange to ensure market integrity, protection of investors and smooth and orderly trading.
vii. The infrastructure of the exchange and the surveillance system to effectively monitor trading in such contracts, and
viii. Details of settlement procedures & systems
ix. Details of back testing of the margin calculation for a period of one year considering a call and a put option on the underlying with a delta of 0.25 & -0.25 respectively and actual value of the underlying. Link
9. To Require report of Portfolio Management Activities :
SEBI has also power to require report of portfolio management to check the capital market performance. Recently, SEBI sent the letter to all Registered Portfolio Managers of India for demanding report.
10. To educate the investors :
Time to time, SEBI arranges scheduled workshops to educate the investors. On 22 may 2010 SEBI imposed workshop. If you are investor, you can get education through SEBI leaders by getting update information on this page.
Simple Meaning of Insider Trading
To purchase and sale of shares of companies without providing any personal information.
Explanation of Insider Trading
Sometime the employees, directors, officers, other managers and lawmakers are involve company's share trading activities which is illegal in some countries like India because it decreases the trust of company in shareholders and investors. In USA, no one can hide the information for trading the stocks of companies from public because it will increase the cost of capital. Employees knows the company's shares' face value and they are interested to buy at discount. So, it may also decrease the market value of shares. Sometime, it may be reason of financial disaster.
A CEO company sometime inform and provide the confidential information of company to his relatives or indicate to buy before increasing its price with any public disclosure. All these things are included in insider trading.
Insider Trading in India
In India for stopping Insider trading, SEBI has strict rules regarding insider trading. SEBI says in clear words in his PDF notification
" No insider shall—
(i) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange 17[when in possession of] any unpublished price sensitive information.
SEBI also have right to punish illegal insider traders by penalizing and other legal actions.
6.0 Penalty for contravention of code of conduct.
6.1 Any employee/officer/director who trades in securities or communicates any information for trading in securities in contravention of the code of conduct may be penalised and appropriate action may be taken by the company.
6.2 Employees/officers/directors of the company who violate the code of conduct shall also be subject to disciplinary action by the company, which may include wage freeze, suspension, 53[ineligible] for future participation in employee stock option 54[plans], etc.
6.3 The action by the company shall not preclude SEBI from taking any action in case of
violation of SEBI (Prohibition of Insider Trading) Regulations, 1992.
New Decision of SEBI Against Indian Inside Trader
You had read yesterday news in which SEBI had decided to penalise of Rs 1 cr for insider trading on Adlabs founder.
Adlabs Founder found Inside Trader
Business Line Newspaper Covered it with following way
The Securities and Exchange Board of India has found Adlabs founder, Mr Manmohan Shetty, guilty of insider trading and slapped a fine of Rs 1 crore on him.
According to SEBI, Mr Shetty had violated the 24-hour embargo on directors, officers or designated employees of a company from undertaking any transactions when important corporate announcements are made. The regulator observed that Mr Shetty had sold 10 lakh shares of his company through his broker Gupta equities Pvt Ltd on BSE in two tranches. The first tranche of 7.5 lakh shares was sold between 10.11 and 10.13 a.m. The second tranche of 2.5 lakh shares was sold just after 3.15 p.m. the same day. The sale of these shares was reported to the Bombay Stock Exchange under bulk deal. The analysis of the order log on April 24, 2006 and the demat statement of Mr Shetty confirmed the transaction.
P NOTES:
Any investor who wants to invest his money must register with SEBI . But if any investor who invests his money with the instruments without registering with SEBI .
That instrument is called participatory notes or we can simply say PN or P- Notes in Finance . Security exchange board of India has given this facility only to foreign institutional investors (FIIs) to invest in Indian companies with participatory notes . Trading in Shares with participatory notes is so easy for foreign investors because they can easy hide their identity by using P-Notes . It is like contract or agreement notes which can easily transferred or delivered or endorsed under any agreement of sale of shares . So , it is not possible who has invested money in Indian capital market .
Invested money may be black money or money earned from drugs under P-Notes system . So , this is the top debated issue whether it should be banned from Indian capital market or not . SEBI is view on this issue is not very transparent or clear but hope , in future PN instrument will be banned from Indian capital market .
How to invest money with participatory notes
First of all foreign investors deposit the amount of investment in US or foreign institutional investors account and after this FIIs buys shares on their proprietary account . Thus foreign investors becomes the owner of shares without any identity disclosing .
DIVIDEND POLICY:
When we revise dividend policy in management accounting, it may be feasible that many things, you can consider and many questions may come up in your mind. Some of these questions answer, already available, so read first about dividend, types of dividend and cost of equity share capital. Now, we study different things in dividend policy through the help of content sites.
Q: - What is Dividend Policy?
Investopedia says, "The policy a company uses to decide how much it will pay out to shareholders in dividends."
Q: - What are the main determinants of dividend policy theories?
Articlesbase says," Dividend policy has 4 theories.
First theory is Residual Theory of dividend policy
The essence of the residual theory of dividend policy is that the firm will only pay dividends from residual earnings, that is, from earnings left over after all suitable (positive NPV) investment opportunities have been financed.
Second theory is Dividend Irrelevancy Theory
Dividend irrelevancy theory asserts that a firm’s dividend policy has no effect on its market value or its cost of capital. The theory of dividend irrelevancy was perhaps most elegantly argued by its chief proponents, Modigliani and Miller (usually referred to as M&M) in their seminar paper in 1961.
Third theory is the Bird-In-The-Hand Theory
Under this theory, Shareholders consider dividend payments to be more certain that future capital gains – thus a “bird in the hand is worth more than two in the bush.
Fourth theory is Dividend Signaling Theory
In practice, change in a firm’s dividend policy can be observed to have an effect on its share price – an increase in dividend producing an increasing in share price and a reduction in dividends producing a decrease in share price.
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