Thursday, June 22, 2017

SEBI Prohibition Acts of Insider Trading

The malpractice of ’insider trading’ affects the innocent investors. 

In simple terms ‘Insider Trading’ means selling or buying in securities on the basis of price sensitive unpublished information of a listed corporate which if published could lead to a fall or rise in the prices of shares of the corporate.

To tackle the problem of insider trading, SEBI issued the SEBI (Insider Trading) Regulations 1992. These regulations were further made stringent through amendments in 2015 and they were notified as the SEBI (Prohibition of Insider Trading) Regulations 2015.

The important definitions used in the regulations are:

(i) Dealing in securities means an act of subscribing, buying, selling or agreeing to subscribe, buy, sell or deal in any securities by any person either as principal or agent.

(ii) Insider means any person who, is or was connected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access to unpublished price sensitive information in respect of securities of a company, or who has received or has had access to such unpublished price sensitive information.

(iii) A connected person means any person who:

(a) is a director, as defined in the Companies Act, 2013 of a company, or is deemed to be a director of that company by virtue of that Act, or

(b) occupies the position as an officer or an employee of the company or holds a position involving a professional or business relationship between himself and the company whether temporary or permanent and who may reasonably be expected to have an access to unpublished price sensitive information in relation to that company.

(iv) A person is deemed to be a connected person if such person:

(a) is a company under the same management or group or any subsidiary company thereof within the meaning of of the Companies Act, 2013 or sub-clause (g) of section 2 of the Monopolies and Restrictive Trade Practices Act, 1969 as the case may be; or

(b) is an intermediary as specified in section 12 of SEBI Act, 1992, Investment company, Trustee Company, Asset Management Company or an employee or director thereof or an official of a stock exchange or of clearing house or corporation;

(c) is a merchant banker, share transfer agent, registrar to an issue, debenture trustee, broker, portfolio manager, investment advisor, sub-broker, investment company or an employee thereof, or, is a member of the board of trustees of a mutual fund or a member of the board of directors of the asset management company of a mutual fund or is an employee thereof who have a fiduciary relationship with the company;

(d) is a member of the board of directors, or an employee, of a public financial institution as defined in the Companies Act, 2013;

(e) is an official or an employee of a self regulatory organisation recognised or authorised by the Board of a regulatory body;

(f) is a relative of any of the aforementioned persons;

(g) is a banker of the company.

(h) relative of the connected person.

(v) Price sensitive information means any information which is related directly or indirectly to a company and which if published is likely to materially affect the price of securities of a company. It includes only such information which if published is likely to materially affect the price of securities of a company. The following is deemed to be price sensitive information:

(a) periodical financial results of the company;
(b) intended declaration of dividends (both interim and final);
(c) issue of securities or buy-back of securities;
(d) any major expansion plans or execution of new projects;
(e) amalgamation, mergers or takeovers;
(f) disposal of the whole or substantial part of the undertaking;
(g) significant changes in policies, plans or operations of the company.

(vi) Unpublished information means information which is not published by the company or its agents and is not specific in nature. However, speculative reports in print or electronic media are not considered as published information.

A) Prohibition on Dealing, Communicating or Counseling

Under this regulation, no insider should:

(a) either on his own behalf or on behalf of any other person, deal in securities of a company listed on any stock exchange when in possession of any unpublished price sensitive information;

(b) communicate, counsel or procure, directly or indirectly, any unpublished price sensitive information to any person who while in possession of such unpublished price sensitive information should not deal in securities. This is however, not applicable to any communication required in the ordinary course of business or profession or employment or under any law.

The regulations require that no company should deal in the securities of another company or associate of that other company while in possession of any unpublished price sensitive information.

B) Investigation
If SEBI suspects any person of having violated the provisions of insider regulation, it may make inquiries with such person or with the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisation in the securities market to form a prima facie opinion as to whether there is any violation of insider regulations.

Image result for sebi regulations on insider tradingWhere SEBI forms a prima facie opinion that it is necessary to investigate and inspect the books of accounts, either documents and records of an insider or the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisation in the securities market, it may appoint an investigating authority for the purpose.

The investigating authority has to submit its report to SEBI, after completion of investigations in accordance with the provisions of the regulations.

After considering the report, SEBI is required to communicate its findings to the suspected person and seek a reply from such person. Such suspected person is required to reply to the findings within 21 days to SEBI. After receipt of the reply, SEBI may take such measures to safeguard and protect the interest of investors, securities market and for due compliance with the insider trading regulations.

SEBI also has powers to appoint an auditor to investigate into the books of accounts or the affairs of the insider or the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisation in the securities market.

C) Disclosures and Internal Procedure for Prevention of Insider Trading
All listed companies and organisations associated with securities markets such as intermediaries, asset management company, trustees of mutual funds, self regulatory organisations recognised by SEBI, recognised stock exchanges, clearing house or corporations, public financial institutions and professional firms such as auditors, accountancy firms, law firms, analysts, consultants, etc., assisting or advising listed companies, are required to frame a code of internal procedures and conduct as per the prescribed format provided in SEBI (Prohibition of Insider Trading) Regulations without diluting it any manner and ensure compliance of the same.

The regulations require certain disclosures to be made by directors, officers and substantial shareholders in listed companies. These are:

(i) Initial Disclosure:
(a) Any person who holds more than 5% shares or voting rights in any listed company should disclose to the company in prescribed form, the number of shares or voting rights held by such person, on becoming such holder, within 2 working days of:
(i) the receipt of intimation of allotment of shares; or
(ii)
the acquisition of shares or voting rights, as the case may be.
(b) Any person who is a director or officer of a listed company should disclose to the company in prescribed form, the number of shares or voting rights held by such person, within 2 working days of becoming a director or officer of the company.

(ii) Continual Disclosure

(a) Any person who holds more than 5% shares or voting rights in any listed company should disclose to the company in prescribed form the number of shares or voting rights held and change in shareholding or voting rights, even if such change results in shareholding falling below 5%, if there has been change in such holdings from the last disclosure and such change exceeds 2% of total shareholding or voting rights in the company.

(b) Any person who is a director or officer of a listed company, should disclose to the company in prescribed form, the total number of shares or voting rights held and change in shareholding or voting rights, if there has been a change in such holdings from the last disclosure made and the change exceeds Rs. 5 lakh in value or 25,000 shares or 1% of total shareholding or voting rights, whichever is lower. The disclosure mentioned above should be made within 2 working days of:
(i) the receipt of intimation of allotment of shares, or
(ii) the acquisition or sale of shares or voting rights, as the case may be.
(iii) Disclosure by Company to Stock Exchanges

Every listed company, within two days of receipt, should disclose to all stock exchanges on which the company is listed, the information relating to continual and initial disclosure given above. The disclosures required under this regulation may also be made through electronic filing in accordance with the system devised by the stock exchanges. Further, the SEBI Act, which inter-alia, prescribes the penalty for insider trading (Section 15G), was amended in 2002 to increase the penalty for insider trading to Rs 25 crore or three times the amount of profits made out of insider trading, whichever is higher.

SEBI Regulations to Stock Brokers

One of the main functions of SEBI is to register and regulate the functioning of various types of intermediaries and persons associated with securities market in a manner as to ensure smooth functioning of the markets and protection of interests of the investors. 

These intermediaries, as detailed in the SEBI Act are: stock-brokers, sub- broker, share transfer agents, bankers to an issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies, asset management companies, clearing members of a clearing corporation, trading member of a derivative segment of a stock exchange, collective investment schemes, venture capital funds, mutual funds, and any other intermediary associated with the securities market.

SEBI had issued regulations governing the registration and regulatory framework for each of these intermediaries. However, given the fact that many requirements and obligations of most intermediaries are common, SEBI consolidated these requirements and issued the SEBI (Intermediaries) Regulations, 2008. These regulations were notified on May 26, 2009.

These regulations apply to all the intermediaries mentioned above, except foreign institutional investors, foreign venture capital investors, mutual funds, collective investment schemes and venture capital funds.
                              Image result for sebi regulations intermediaries act
The salient features of the Regulations are as under:

(a) The SEBI Regulations put in place a comprehensive regulation which is applicable to all intermediaries. The common requirements such as grant of registration, general obligations, common code of conduct, common procedure for action in case of default and miscellaneous provisions are applicable for all intermediaries.

(b) An applicant can file application in the prescribed format along with additional information as required under the relevant regulations along with the requisite fees. The existing intermediaries may, within the prescribed time, file the disclosure in the specified form. The disclosures are required to be made public by uploading the information on the website specified by SEBI. The information of commercial confidence and private information furnished to SEBI shall be treated confidential. In the event intermediary wishes to operate in a capacity as an intermediary in a new category, such person may only file the additional shortened forms disclosing the specific requirements of the new category as per the relevant regulations.

(c) The Fit and Proper criteria have been modified to make it principle based. The common code of conduct has been specified at one place.

(d) The registration granted to intermediaries has been made permanent unless surrendered by the intermediary or suspended or cancelled in accordance with these regulations.

(e) Procedure for action in case of default and manner of suspension or cancellation of certificate has been simplified to shorten the time usually faced by the parties without compromising with the right of reasonable opportunity to be heard. Surrender of certificate has been enabled without going through lengthy procedures.

(f) While common requirements will be governed by the new regulations, the intermediaries specific requirements will continue to be as per the relevant regulations applicable to individual intermediaries. The relevant regulations will be amended to provide for the specific requirements.

Saturday, June 17, 2017

Fundamental Valuation Concepts of Time

Time Value of Money
Money has time value. A rupee is less valuable in the future than it is today. Time value of money could be studied under the following heads:

(a) Future value of a single cash flow
(b) Future value of an annuity
(c) Present value of a single cash flow
(d) Present value of an annuity

Related image
a) Future Value of a Single Cash Flow

For a given present value (PV) of money, future value of money (FV) after a period ‘t’ for which compounding is done at an interest rate of ‘r’, is given by the equation
FV = PV (1+r)t

This assumes that compounding is done at discrete intervals. However, in case of continuous compounding, the future value is determined using the formula
FV = PV * ert

where the compounding factor is calculated by taking natural logarithm (log to base). e=2.71828

Example 1: Calculate the value 5 years hence of a deposit of Rs.1,000 made today if the interest rate is 10%.

Solution: By discrete compounding
FV = 1,000 * (1+0.10)5 = 1,000* (1.1)5 = 1,000* 1.61051 = Rs.1,610.51
By continuous compounding:
FV = 1,000 * e(0.10 * 5) = 1,000* 1.648721 = Rs.1,648.72



Example 2: Find the value of Rs. 50,000 deposited for a period of 3 years at the end of the period when the interest is 10% and continuous compounding is done.

Solution: Future Value = 50,000* e^(0.01*10*3) = Rs. 67,493.00
The future value (FV) of the present sum (PV) after a period ‘t’ for which compounding is done ‘m’ times a year at an interest rate of ‘r’, is given by the equation
FV = PV (1+(r/m))^mt

Example 3: How much does a deposit of Rs. 5,000 grow to at the end of 3 years, if the nominal rate of interest is 10% and compounding is done quarterly?

Solution: Future value = 5,000* ((1 + 0.10/4)^(4*3)) = Rs. 6,724.45

b) Future Value of an Annuity
The future value (FV) of a uniform cash flow (CF) made at the end of each period till the time of maturity ‘t’ for which compounding is done at the rate ‘r’ is given by
FV = CF*(1+r)t-1 + CF*(1+r)t-2 + ... + CF*(1+r)1+CF
= CF [{(1+r)t - 1} / r]

Example 4: Suppose, you deposit Rs. 1,000 annually in a bank for 5 years and your deposits earn a compound interest rate of 10 per cent, what will be value of this series of deposits (an annuity) at the end of 5 years? Assume that each deposit occurs at the end of the year.

Solution: Future value of this annuity is:
= Rs.1000*(1.10)4 + Rs.1000*(1.10)3 + Rs.1000*(1.10)2 + Rs.1000*(1.10) + Rs.1000
= Rs.1000*(1.4641) + Rs.1000*(1.3310)+Rs.1000*(1.2100) + Rs.1000*(1.10) + Rs.1000
= Rs. 6,105.00

In case of continuous compounding, the future value of annuity is determined using the formula FV = CF * (ert -1)/r

c) Present Value of a Single Cash Flow
Present value of (PV) of the future sum (FV) to be received after a period ‘t’ for which discounting is done at an interest rate of ‘r’, is given by the equation

In case of discrete discounting: PV = FV / (1+r)t

Example 5: What is the present value of Rs.1,000 payable 3 years hence, if the interest rate is 12 % p.a.

Solution: PV = 1000 / (1.12)3 i.e. = Rs.711.78

In case of continuous discounting: PV = FV * e-rt

Example 6: What is the present value of Rs. 50,000 receivable after 3 years at a discount rate of 10% under continuous discounting?

Solution: Present Value = 50,000/(exp^(0.01*10*3)) = Rs. 37,041.00

d) Present Value of an Annuity
The present value of annuity is the sum of the present values of all the cash inflows/outflows. Present value of an annuity (in case of discrete discounting)

PV = FV [{(1+r)t - 1 }/ {r * (1+r)t}]

Present value of an annuity (in case of continuous discounting) PVa = FVa * (1-e-rt)/r

Monday, June 05, 2017

Four Kinds of Investors

What are your attitude in saving little amount of money from income? Your individuality keeps you away from gaining more wealth.

Investors in our society are classified into 4 sectors:

A) Aggressive: These are gamblers who are always driven by the dreams of  earning higher returns. The higher the risk, the greater is the adrenalin rush for the aggressive personality. Not too good at taking advice, they take responsibility for their actions. These can manage their own portfolios and take risks beyond their capacity. They invest in high-risk instruments and try to time the market to maximise gains. They overexpose themselves in equities even when the goals are short-term. These investors are so confident about the prospects that they do not diversify to mitigate the risk which could affect their goals. To minimise the risk, they need to set realistic and achievable goals. 

Виды инвестиций
B) Passive: Safety is main priority to these people. These are careful to fault and rarely take any risks. These investors consider all options but end up putting their money in debt products like fixed deposits, provident fund, traditional life insurance schemes, etc as comfortable with low risks and predictable returns. They lack the confidence to take a decision even after understanding the pros and cons of other assets. Often money stays in bank account or in long-term assets. These cannot create significant wealth as inflation eats into their returns and the power compounding does not work for them.

C) Procrastinator: These are lazy investors. These possess enough knowledge and money in the bank  but postpone investing decisions in search of the best price. For these, it's best time to start immediately. These need frequent motivation to work upon their savings. 

D) Ignorant: These investors are forever waiting for others to tell them what to do because they know next to nothing about the market and are not willing to put in the effort to educate themselves. They fall for convincing lectures called Financial Advisors. No knowledge on markets, their portfolio depends on the objectivity and trustworthiness of the adviser. They are shaken when loss hits them. Hence end up financial road map of their friends instead of investing as per their own goals. These need to have financial literacy. Avoid tips from friends and colleagues, better to take help of financial planner.