Investment Valuation in India

Investment in Unlisted Equity Shares With a view to bringing about uniformity in calculation of NAVs of mutual funds schemes, the following guidelines are being issued for valuation of unlisted equity shares in consultation with Association of Mutual Funds in India (AMFI). The guidelines also prescribe exercise of due diligence while making such investments and review of their performance so as to protect the interests of investors. Methodology for Valuation Unlisted equity shares of a company shall be valued "in good faith" on the basis of the valuation principles laid down below: Based on the latest available audited balance sheet, net worth shall be calculated as lower of (i) and (ii) below: (i) Net worth per share = [share capital plus free reserves (excluding revaluation reserves) minus Miscellaneous expenditure not written off or deferred revenue expenditure, intangible assets and accumulated losses] divided by Number of Paid up Shares. (ii) After taking into account th...

IT major Satyam Computers, after being in the news for all the bad reasons has reported a major scam which left the country shocked. The major developments: Satyam Chairman B Ramalinga Raju resigns as Chairman and issues a letter stating that he has been involved in major misrepresentations of accounts. The balance sheet carries as of September 30, 2008 a) Inflated (non-existent) cash and bank balance of Rs 5,040 crore (as against Rs 5361 crore reflected in the books) b) An accured interest of Rs 376 crore which is non-existent c) An understated liability of Rs 1,230 crore on account of funds arranged by Raju d) An over stated debtor position of Rs 490 crore (as against Rs 2651 reflected in the books. For 2Q 08, “reported revenue of Rs 2,700 crore and an operating margin of Rs 649 crore (24 per cent of revenues) as against the actual revenues of Rs 2,112 crore and an actual operating margin of Rs 61 crore (3 per cent of revenue)”. “In the last two years a net amount of Rs 1,230 crore w...

SEBI has made rules for valuation of securities by Mutual Funds. Lets look at the valuation Equity Securities for now. Mutual funds shall categorise the securities according to the following norms 1. TRADED SECURITIES : When a security (other than Government Securities) is not traded on any stock exchange on a particular valuation day, the value at which it was traded on the selected stock exchange or any other stock exchange, as the case may be, on the earliest previous day may be used provided such date is not more than thirty days prior to valuation date. 2. THINLY TRADED SECURITIES : (i) Thinly Traded Equity/Equity Related Securities : When trading in an equity/equity related security (such as convertible debentures, equity warrants, etc.) in a month is less than Rs. 5 lacs or the total volume is less than 50,000 shares, it shall be considered as a thinly traded security and valued accordingly. Where a stock exchange identifies the "thinly traded" securities by applyi...

What is meant by Takeovers & Substantial acquisition of shares? When an “acquirer” takes over the control of the “target company”, it is termed as takeover. When an acquirer acquires “substantial quantity of shares or voting rights” of the Target Company, it results into substantial acquisition of shares. The term “Substantial” which is used in this context has been clarified subsequently. What is a Target Company? A Target Company is a company whose shares are listed on any stock exchange and whose shares or voting rights are acquired/being acquired or whose control is taken over/being taken over by an acquirer. Who is an Acquirer? An acquirer means any individual/company/any other legal entity which intends to acquire or acquires substantial quantity of shares or voting rights of target company or acquires or agrees to acquire control over the target company. It includes persons acting in concert (PAC) with the acquirer. What is meant by the term “Persons Acting in Concert (PACs)...

(PORTFOLIO MANAGERS) Who is a Portfolio Manager? Any person who pursuant to a contract or arrangement with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or the funds of the client, as the case may be is a portfolio manager. What is the difference between a discretionary portfolio manager and a non- discretionary portfolio manager? The discretionary portfolio manager individually and independently manages the funds of each client in accordance with the needs of the client in a manner which does not partake character of a Mutual Fund, whereas the non-discretionary portfolio manager manages the funds in accordance with the directions of the client. What is the procedure of obtaining registration as a portfolio manager from SEBI? An applicant for registration or renewal of registration as a portfolio manager is required to pay a non-refundable appli...

Understanding Financial Markets What are the various types of financial markets? The financial markets can broadly be divided into money and capital market. Money Market : Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. Capital Market : Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets. What is meant by the Secondary Market? Secondary Market refers to a market where securities are traded after being initia...