Capital Markets & Market Instruments in India

Capital Markets in India

Bombay stock exchange has the dubious recognition of being largest exchange in terms of number of companies listed (around 5000)

SME platform on stock exchanges - may be a drop in ocean for investors appetite - but a big ray of hope for enterprenuers

Six SMEs launch IPOs despite weak market trends
NEW DELHI: Despite sluggish market conditions, as many as six small and medium sized companies have launched their initial public offers (IPOs) worth Rs 70 crore, on the BSE's SME platform in the past one month.

However, big companies continue to find it difficult to raise capital via IPOs and the last IPO by a major company was that of Just Dial in May, through which the internet firm mopped-up about Rs 900 crore.

According to an analysis, six companies that launched their initial share sale programme in the past one month are - Money Masters Leasing & Finance Ltd, Alacrity Securities Ltd, GCM Commodity & Derivatives Ltd, Silverpoint Infratech Ltd, VKJ Infradevelopers Ltd and Kushal Tradelink Ltd.

These IPOs, in the range of Rs 2 crore to Rs 28 crore, were launched on the BSE SME (small and medium enterprises) platform. Moreover, a host of other companies have filed their draft documents and planning to launch their offerings in the coming weeks.

Broking firms Alacrity Securities and GCM Commodity & Derivatives raised Rs 9 crore and Rs 7 crore, respectively through IPOs and Money Master Leasing, a non-banking financial company, garnered Rs 2 crore via this route.

Besides, infrastructure firms VKJ Infradevelopers and Silverpoint Infratech have launched issues worth about Rs 12 crore each, while paper products firm Kushal Tradelink is planning to rake in around Rs 28 crore from initial share-sale, which would be open till August 21.

Market experts said unlike large issues, most of the SME IPOs get fully subscribed because of their small-size. Another reason for successful subscription could be that these issues are only for informed investors.

Besides, at least eight entities have filed draft documents with the capital market regulator Sebi in the past two months for IPOs and Follow-On Public Offers (FPOs) for raising a total estimated amount of at least Rs 1,700 crore.

However, the market experts are still unsure about a revival in the primary market and waiting for the share sale programmes to materialise.

The broader market Sensex plunged 232 points or 1.2 per cent in the month of July amid weakness in rupee.

SME Exchange - A Platform for Institutional investors already up and running. Now SEBI proposes Startup Exchange for Institutional as well as High Net worth Individuals
SME Exchange

SEBI has allowed SMEs to list their specified securities on the new Institutional Trading Platform ("ITP") of a recognised stock exchange without an IPO in 2013.Pursuant to the listing on the ITP, fund raising by SMEs allowed through private placement or rights issue.

SEBI Takeover Code not applicable to direct and indirect acquisition of shares or voting rights in, or control over, a company listed on the ITP.

As a welcome development for the Indian small and medium enterprises ("SME"), the Indian securities regulator, Securities and Exchange Board of India ("SEBI"), recently allowed listing of SMEs without any requirement of an initial public offering ("IPO"). SEBI has notified a new set of regulations called the SEBI (Listing of Specified Securities on Institutional Trading Platform) Regulations, 2013 ("ITP Regulations") as a new Chapter to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ("ICDR Regulations").


Chapter XB of the ICDR Regulations provides for issuance of specified securities by SMEs on SME exchange. Broadly, an SME was required to make an IPO without having to file the draft offer document with SEBI. Although, criteria's which were otherwise applicable for listing of companies on the SME exchange, like minimum net worth, profitability and tangible assets, etc., were waived, onerous conditions such as requirement for promoters to dilute 25% of their stake, compulsory market making for three years and underwriting 100% of the issue, with the merchant banker himself underwrit ing directly up to 15% of issue size still remain. These factors, in addition to the additional qualifications that were introduced by the BSE and NSE, s ignificantly discouraged the issuers from going public on the SME exchange, especially considering the cost of issuance, minimum track record requirements, profitability requirements, etc.
Taking a cue from 2013 budget speech where the Hon'ble Finance Minister of India announced that a new set of regulations shall be framed for allowing listing of start-ups and SMEs without undertaking an IPO, SEBI, in its Board Meeting held on June 25, 2013, approved the said listing on the ITP without an IPO. In the said meeting, SEBI noted that the ITP Regulations are aimed to provide an easier exit option for informed investors, provide better visibility, wide investor base and greater fund raising capabilities to start-ups and SMEs.


SME is defined under the ITP Regulations to mean a public company, including start-up company that complies with all the eligibility conditions specified in the ITP Regulations. Such SMEs may list on the ITP without having to comply with the requirements for listing of securities on a recognized stock exchange under sub-rule (7) of rule 19 from clause (b) of sub-rule (2) of rule 19 of the Securities Contract (Regulation) Rules, 1957 ("SCRR"). Hence, listing of specified securities can be achieved without an IPO and the expenses associated with it.
Following are some of the key facets of the ITP Regulations:
Eligibility criteria: For SME to be eligible to list its specified securities on the ITP, the following requirements should be satisfied:
  • Existence criteria: The SME should have atleast one full year's audited financial statements for the immediately preceding financial year and should not have completed a period of more than ten years since incorporation;
  • Past conduct criteria: The promoters, directors or group company of the SME and the SME itself should not be in the list of wilful defaulters of Reserve Bank of India ("RBI") as maintained by Credit Information Bureau. No winding up petition against the SME should have been admitted by a competent court. The group companies or subsidiaries of the SME and the SME itself should not have been referred to the Board for Industrial and Financial Reconstruction within a period of five years prior to the date of application. Also, no regulatory action shall have been taken agai nst the SME, its promoter or director, by SEBI, RBI, Insurance Regulatory and Development Authority or Ministry of Corporate Affairs within a period of five years prior to the date of application;
  • Financial criteria: The revenue of the SME should not exceed INR 1,000,000,000 (Rupees One Billion Only) in any of the previous financial years and the paid-up capital of the SME should not exceed INR 250,000,000 (Rupees Two Hundred Fifty Million Only) in any of the previous financial years; and
  • Past funding criteria: SME is required to meet any one of the following criteria – (i) atleast one alternative investment fund, venture capital fund or other category of investors/lenders approved by SEBI should have invested a minimum amount of INR 5,000,000 (Rupees Five Million Only) in its equity shares; (ii) atleast one angel investor who is a member of an association or group of angel investors should have invested a minimum amount of INR 5,000,000 (Rupee s Five Million Only) in its equit y shares; (iii) the SME should have received finance from a scheduled bank for its project financing or working capital requirements and a period of three years should have passed from the date of such financing and the funds so received have been fully utilized; (iv) a registered merchant banker should have exercised due diligence and has invested not less than INR 5,000,000 (Rupees Five Million Only) in its equity shares which shall be locked in for a period of three years from the date of listing; (v) a qualified institutional buyer should have invested not less than INR 5,000,000 (Rupees Five Million Only) in its equity shares which shall be locked in for a period of three years from the date of listing; or (vi) a specialized international multilateral agency or domestic agency or a public financial institution as defined under section 4A of the Companies Act, 1956 must have invested in its equity capital.
Information document: Along wi th the application to a recognise d stock exchange, the eligible SME proposing to list on the ITP shall also be required to file an information document containing certain specific disclosures relating to, inter alia, description of business, specified financial information, risk factors, assets and properties, ownership of beneficial owners, details of directors, executive officers, promoters and legal proceedings.
Restriction on further issue of securities: Listing of specified securities on the ITP cannot be accompanied by any issue of securities to the public in any manner. Further, the SME cannot undertake an IPO while its specified securities are listed on the ITP.
Capital raise by an SME listed on ITP: The SME listed on ITP may raise capital through private placement or rights issue without an option for renunciation of rights. Before raising money through private placement, amongst other stipulated conditions, SME should procure an in-principle approval from the recognised stock exchange and also a shareholders approval by special resolution and subsequently the allotment of securities has to be completed within two months of obtaining such approval. Such an in-principle approval from the recognised stock exchange is also required prior to a rights issue.
Lock-in of promoters stake: At least 20% of the post listing capital is required to be held by the promoters of the SME which shall be locked-in for a period of three years from the date of listing on the ITP.
Ticket size: The minimum trading lot on the ITP has been set at INR 1,000,000 (Rupees One Million Only).
Exit from the ITP: SME listed on the ITP may exit from it if: (i) its shareholders approve such exit through a special resolution with 90% of total votes and the majority of non-promoter votes in favour of such proposal; (ii) the recognised stock exchange where its shares are listed approves such exit.
Further, an SME listed on the ITP shall exit from it if: (i) the specified securities have been listed on ITP for a period of ten years; (ii) the SME has paid-up capital of more than INR 250,000,000 (Rupees Two Hundred Fifty Million Only); (iii) the SME has revenue of more than INR 3,000,000,000 (Rupees Three Billion Only) as per the last audited financial statement; or (iv) the SME has market capitalization of more than INR 5,000,000,000 (Rupees Five Billion Only). However, the stock exchange may grant 18 months' time to the SME to delist from the platform on occurrence of the events specified in this paragraph.
Non-applicability of the Takeover Code and the Delisting Regulations: The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ("Takeover Code") has been amended to the effect that the Takeover Code shall not apply to direct and indirect acquisition of shares or voting rights in, or control over, a company listed on the ITP of a recognised stock exchange. Similarly, the SEBI (Delisting of Equity Shares) Regulations, 2009 ("Delisting Regulations") has also been amended to the effect that the Delisting Regulations shall not apply to securities listed on the ITP of a recognised stock exchange.


The ITP Regulations should go a long way in providing the necessary stimulus in the growth of SMEs which in turn will help in variety of facets in addition to fostering of innovation. The new platform should aid SMEs in getting access to capital as well as wider visibility. As the mode of exiting from the platform is also relatively simplified, the migration to the main exchange would possibly be much smoother for a company whose specified securities are listed on the ITP of a recognised stock exchange.
As SEBI had indicated in the Board Meeting of June 25, 2013, the ITP Regulations are framed with the intention of allowing easier exit options for the informed investors who risk their capital to support SMEs. Among other things, specifically the conditions specified in 1(d) of this Hotline will enable a number of angel investors and venture capitalists to explore the avenue of getting their eligible portfolio companies listed on this new platform and thereby seek an easy and efficient exit. Further, non-applicability of certain onerous conditions, as in case of listing under Chapter XB of the ICDR Regulations or with respect to listing on the main exchange, will encourage a number of start-ups and SMEs to explore the option of getting their specified securities listed on the ITP. This platform is certainly likely to see some action in the near future due to certain encouraging aspects such as no restriction from raising further capital by private placemen t or rights issue, non-applicabil ity of Takeover Code and Delisting Regulations to the SME whose specified securities are listed on ITP, etc.

 Startup Platform

SEBI released a discussion paper on a new framework for such companies on 30th March 2015has proposed a separate platform to benefit companies, especially in the technology and e-commerce space, to raise capital and list in the home market without much difficulty. As the regulatory safeguards will be lenient compared to listing on the main bourse, Sebi has strived to discourage from investing in such companies.

“The start-up platform will mainly be for institutional investors and other investors will need to have a minimum investment ticket size of Rs 10 lakh. Those investing less than that will not be permitted,” said Sebi chairman U K Sinha. He was speaking on the sidelines of the Confederation of Indian Industry’s (CII’s) sixth capital market summit.

The move on a million-rupee ticket size will help keep the high-risk investment out of the hands of smaller, unsophisticated players, say experts.

“The high ticket size will ensure that high net worth and institutional investors, who understand such companies, will be able to invest. It will be too big a risk for an investor wanting to invest just Rs 50,000,” says Sanjay Israni, partner, Rajani, Singhania & Partners.

“Such businesses are generally funded by sophisticated investors. A high ticket size will help keep it out of reach of the small investor who may not necessarily be as well informed,” says  Gautam Gupte, director, Ambit Corporate Finance.

The discussion paper also says that trading in the company would only be allowed with a minimum lot of Rs 5 lakh.

The discussion paper mentions that as much as 75 per cent of the allotment would be to institutional shareholders, with the remainder to non-institutional investors. No single institution would be allowed to hold more than 5 per cent, and every issue would have at least 500 investors. Companies must remain listed for at least a year, after which they would have the option of migrating to the main board.

“New-age companies having innovative business models and belonging to the knowledge-based technology sector, where no person (individually or collectively with persons acting in concert) holds 25 per cent or more of the pre-issue share capital, may be considered as professionally managed companies and access capital through the said institutional platform,” said the Sebi paper.

The lock-in would be for all pre-shareholders, for a period of six months. The main board requires a three-year lock-in for promoter shares.

Companies need not go into details of how the money would be put to use, and can merely say ‘general corporate purposes’ under the required disclosures.

Institutional investors will include non-bank finance companies, family offices and alternative investment funds, according to the Sebi paper.

Disclosures would also require to be made on creditors, about group companies and pending litigation. The move to have a separate platform for trading of such companies, different from the main board for the regular listed companies, is likely to have an impact on liquidity, according to experts.  

“The only negative aspect of this start-up framework is that they will be listed separately and will not be part of the main exchange. You won't see much trading in them till the time they come to the main board… Exempting promoters from the three-year post-IPO lock-in is important. These are high growth companies and are in regular need of investments. The lock-in exemption will also help promoters monetise,” said Israni.

Capital Market Education from School level itself

Market regulator Sebi has made a pitch for inclusion of additional financial concepts related to capital markets in school syllabus. The Securities and Exchange Board of India said it has followed up with Central Board of Secondary Education (CBSE) and HRD Ministry on the proposal and has been informed that it would be given due consideration.

"Follow ups with CBSE and Ministry of HRD have been done and as informed by the Ministry, the inclusion of additional financial concepts and a different approach of introducing such concepts shall be duly considered when the process of revising the syllabus and textbooks will be done in 2014-15," Sebi said.

As part of its efforts to spread financial awareness, Sebi has been inviting students from schools, colleges and professional institutes interested in learning about the market regulator and its role since February 2011. It has conducted 139 such visits so far. The participants belonged to different parts of the country such as Amritsar, Pondicherry, Goa, Bareilly and were pursuing different courses, including management, commerce, banking, law, arts and science. It is proposed to increase the number of such visits with new areas of catchment in terms of institutions even at the regional and local offices," Sebi said.
 For spreading financial literacy among more students, Sebi said the process of initiating 'National Financial Literacy Assessment Test (NFLAT) has been started and will be completed by August. The test is part of Sebi's 'National Strategy for Financial Education' drafting, which was initiated in 2011-12 and has now been finalised. "Additional resources will be deployed to make more efforts for organising such events (like the test) in future and involve larger section of society," Sebi said.


For the premier Bombay Stock Exchange that pioneered the stock broking activity in India, 128 years of experience seems to be a proud milestone. A lot has changed since 1875 when 318 persons became members of what today is called The Stock Exchange, Mumbai by paying a princely amount of Re 1.

Since then, the country's capital markets have passed through both good and bad periods. The journey in the 20th century has not been an easy one. Till the decade of eighties, there was no scale to measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market.

Sens*x is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, Sens*x is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies.

The base year of Sens*x is 1978-79 and the base value is 100. The index is widely reported in both domestic and international markets through print as well as electronic media.

The Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology. (See below: Explanation with an example)

Due to is wide acceptance amongst the Indian investors; Sens*x is regarded to be the pulse of the Indian stock market. As the oldest index in the country, it provides the time series data over a fairly long period of time (From 1979 onwards). Small wonder, the Sens*x has over the years become one of the most prominent brands in the country. 

The growth of equity markets in India has been phenomenal in the decade gone by. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. The Sens*x captured all these events in the most judicial manner. One can identify the booms and busts of the Indian stock market through Sens*x.

Sens*x Calculation Methodology 

Sens*x is calculated using the "Free-float Market Capitalization" methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization. 

The base period of Sens*x is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of Sens*x involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor.

The Divisor is the only link to the original base period value of the Sens*x. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate Sens*x every 15 seconds and disseminated in real time. 


BSE also calculates a dollar-linked version of Sens*x and historical values of this index are available since its inception. 

Understanding Free-float Methodology 

Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalisation of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market. 

It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market. 

In India, BSE pioneered the concept of Free-float by launching BSE TECk in July 2001 and Bankex in June 2003. While BSE TECk Index is a TMT benchmark, Bankex is positioned as a benchmark for the banking sector stocks. Sens*x becomes the third index in India to be based on the globally accepted Free-float Methodology.

Example (provided by reader Munish Oberoi):

Suppose the Index consists of only 2 stocks: Stock A and Stock B.

Suppose company A has 1,000 shares in total, of which 200 are held by the promoters, so that only 800 shares are available for trading to the general public. These 800 shares are the so-called 'free-floating' shares.

Similarly, company B has 2,000 shares in total, of which 1,000 are held by the promoters and the rest 1,000 are free-floating.

Now suppose the current market price of stock A is Rs 120. Thus, the 'total' market capitalisation of company A is Rs 120,000 (1,000 x 120), but its free-float market capitalisation is Rs 96,000 (800 x 120).

Similarly, suppose the current market price of stock B is Rs 200. The total market capitalisation of company B will thus be Rs 400,000 (2,000 x 200), but its free-float market cap is only Rs 200,000 (1,000 x 200).

So as of today the market capitalisation of the index (i.e. stocks A and B) is Rs 520,000 (Rs 120,000 + Rs 400,000); while the free-float market capitalisation of the index is Rs 296,000. (Rs 96,000 + Rs 200,000).

The year 1978-79 is considered the base year of the index with a value set to 100. What this means is that suppose at that time the market capitalisation of the stocks that comprised the index then was, say, 60,000 (remember at that time there may have been some other stocks in the index, not A and B, but that does not matter), then we assume that an index market cap of 60,000 is equal to an index-value of 100.

Thus the value of the index today is = 296,000 x 100/60,000 = 493.33

This is how the Sens*x is calculated.

The factor 100/60000 is called index divisor.

The 30 Sensex stocks are:

ACC, Ambuja Cements, Bajaj Auto , BHEL, Bharti Airtel , Cipla, DLF, Grasim Industries, HDFC, HDFC Bank, Hindalco Industries, Hindustan Lever, ICICI Bank, Infosys, ITC, Larsen & Toubro, Mahindra & Mahindra, Maruti Udyog, NTPC, ONGC, Ranbaxy Laboratories, Reliance Communications, Reliance Energy, Reliance Industries, Satyam Computer Services, State Bank of India, Tata Consultancy Services, Tata Motors, Tata Steel, and Wipro.

Understanding Capital Market Instruments - Mutual Funds, Derivatives

Basics of Mutual fund and How to Select a Mutual Fund

How to Select a Mutual Fund?

Mutual funds offer the most convenient way of investing in equity, debt and money markets. The increased participation of Indian investors bears testimony to the fact that there is a widespread realisation of the same. Also over the years, the Indian mutual fund industry has grown manifolds, not only in terms of size but also in terms of offerings. While on one hand that is good; the increased number of offerings has also given rise to a state of dilemma in the mind of investors. They often get confused when it comes to selecting the right fund from the plethora of funds available. And even worse, many investors think that 'any' mutual fund can help them achieve their desired goals.

 The fact is, not all funds are the same. There are various aspects within a fund that an investor must carefully consider before short-listing it for making investments. In this article we highlight some of those aspects.

 Performance: The past performance of a fund is important in analysing a mutual fund. However, one must remember that simply because a fund has performed well in the past does not mean that it will perform well in the future as well. It simply indicates the fund's ability to clock returns across market conditions. And if the fund has a well-established track record, the likelihood of it performing well in the future is higher than a fund which has not performed well.

The following factors should be considered while evaluating a fund's performance:

1) Comparisons: A fund's performance in isolation does not indicate anything. Hence, it becomes crucial to compare the fund with its benchmark index and its peers, so as to deduce a meaningful inference. Again, one must be careful while selecting the peers for comparison. For instance, it doesn't make sense comparing the performance of a midcap fund to that of a largecap.

Don't compare apples with oranges'

2) Time period: It's pertinent for investors to have a long term (atleast 3-5 years) horizon if they wish to invest in equity oriented funds. Hence, it becomes important for them to evaluate the long term performance of the funds. This does not imply that the short term performance be ignored. Performance over the short term should also be evaluated; however, the focus should be more on the long term performance. Besides, it is equally important to evaluate how a fund has performed over different market cycles (especially during the downturn). During a rally it is easy for a fund to deliver above-average returns; but the true measure of its performance is when it posts superior returns than its benchmark and peers during the downturn.

 Choose a fund like you choose a wife - one that will stand by you in sickness and in health

 3) Returns: Returns are obviously one of the important parameters that one must look at while evaluating a fund. But remember, although it is one of the most important, it is not the only parameter. Many investors simply invest in a fund because it has given higher returns. In our opinion, such an approach for making investments is flawed. In addition to the returns, investors must also look at the risk parameters, which in-turn explain how much risk the fund has taken to clock higher returns.

 4) Risk: Risk is normally measured by Standard Deviation. It signifies the degree of risk the fund has exposed its investors to. Higher the Standard Deviation, higher the risk taken by the fund to clock returns. From an investor's perspective, evaluating a fund on risk parameters is important because it will help them to check whether the fund's risk profile is in line with their risk profile or not. For example, if two funds have delivered similar returns, then a prudent investor will invest in the fund which has taken less risk.

 5) Risk-adjusted return: This is normally measured by Sharpe Ratio. It signifies how much return a fund has delivered vis-à-vis the risk taken. Higher the Sharpe Ratio, better is the fund's performance. From an investor's perspective it is important because they should choose a fund which has delivered higher risk-adjusted returns. Infact, this ratio tells us whether the high returns of a fund are attributed to good investment decisions, or to higher risk..

 6) Portfolio Concentration: Funds that have a high concentration in particular stocks or sectors tend to be very risky and volatile. Hence, investors should invest in these funds only if they have a high risk appetite. Ideally, a well diversified fund should hold no more than 40% of its assets in its top 10 stock holdings.
 Make sure your fund does not put all its eggs in one basket
 Invest in funds with a low turnover rate

Fund Management: The performance of a mutual fund scheme is largely linked to the Fund Manager and his team. Hence, it's important that the team managing the fund should have considerable experience in dealing with market ups and downs. Also, investors should avoid fund's that owe their performance to a 'star' fund manager. Even if the fund manager is present today, he might quit tomorrow, and then the fund will be unable to deliver its 'star' performance without its 'star' fund manager. Therefore, the focus should be on the fund houses which are strong in their systems and processes.

Fund house should be process-driven and not 'star' fund-manager driven

Costs: If two funds are similar in most contexts, it might not be worth buying the high cost fund if it is only marginally better than the other. Simply put, there is no reason for an AMC to incur higher costs, other than its desire to have higher margins.
The two main costs incurred are:

1) Expense Ratio: Annual expenses involved in running the mutual fund include administrative costs, management salary, overheads etc. Expense Ratio is the percentage of assets that go towards these expenses. Every time the fund manager churns his portfolio, he pays a brokerage fee, which is ultimately borne by investors in the form of an Expense Ratio. Therefore, higher churning not only leads to higher risk but also higher cost for the investor.

2) Exit Load: Due to SEBI's recent ban on entry loads, investors now have only exit loads to worry about. An exit load is charged to investors when they sell units of a mutual fund within a particular tenure; most funds charge if the units are sold before a year. As exit load is a fraction of the NAV, it eats into your investment.

The Basics of Mutual Funds

Each mutual fund has a specific stated objective

The fund’s objective is laid out in the fund's prospectus, which is the legal document that contains information about the fund, its history, its officers and its performance.
Some popular objectives of a mutual fund are –

Fund Objective
What the fund will invest in
Equity (Growth)
Only in stocks
Debt (Income)
Only in fixed-income securities
Money Market (including Gilt)
In short-term money market instruments (including government securities)
Partly in stocks and partly in fixed-income securities,
in order to maintain a 'balance' in returns and risk

Managed by an Asset Management Company (AMC)

         The company that puts together a mutual fund is called an AMC. An AMC may have several mutual fund schemes with similar or varied investment objectives.
         The AMC hires a professional money manager, who buys and sells securities in line with the fund's stated objective.

All AMCs Regulated by SEBI, Funds governed by Board of Directors

         The Securities and Exchange Board of India (SEBI) mutual fund regulations require that the fund’s objectives are clearly spelt out in the prospectus.
         In addition, every mutual fund has a board of directors that is supposed to represent the shareholders' interests, rather than the AMC’s.

Net Asset Value or NAV
NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day.

How is NAV calculated?
The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the fund’s NAV.

Expense Ratio
AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management.
A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.

Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds.

Open- and Close-Ended Funds

1) Open-ended Funds
At any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.

2) Close-Ended Funds
Redemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).

Important documents
Two key documents that highlight the fund's strategy and performance are 1) the prospectus (legal document) and the 
shareholder reports (normally quarterly).

Benefits of Investing Through Mutual Funds

Professional Money Management
Fund managers are responsible for implementing a consistent investment strategy that reflects the goals of the fund. Fund managers monitor market and economic trends and analyze securities in order to make informed investment decisions.

Diversification is one of the best ways to reduce risk. Mutual funds offer investors an opportunity to diversify across assets depending on their investment needs.

Investors can sell their mutual fund units on any business day and receive the current market value on their investments within a short time period (normally three- to five-days).

AffordabilityThe minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes).

Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.
Mutual funds also provide you with detailed reports and statements that make record-keeping simple.

Flexibility and VarietyYou can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest growth or those that take big risks in the search for returns. You can even buy balanced funds, or those that combine stocks and bonds in the samefund.

Tax Benefits on Investment in Mutual Funds
1) 100% Income Tax exemption on all Mutual Fund dividends

2) Equity Funds - Short term capital gains is taxed at 15%. 
Long term capital gains is not applicable.
Debt Funds - Short term capital gains is taxed as per the slab rates applicable to you. Long term 
capital gains tax to be lower of -
10% on the capital gains without factoring indexation benefit and
20% on the capital gains after factoring indexation benefit.

3) Open-end funds with equity exposure of more than 65% (Revised from 50% to 65% in Budget 2006) are exempt from the payment of dividend tax for a period of 3 years from 1999-2000.

Note: Equity Funds are those where the investible funds are invested in equity shares in domestic companies to the extent of more than 65% of the total proceeds of such funds.

Active Portfolio Managment vs Passive : Quant fund

Lotus Mutual Fund has brought the concept of Quant Fund into India which is managed based on a computerised formula rather than by fund manager

Understanding Derivatives

'By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it - a process that has undoubtedly improved national productivity growth and standards of living.' -- Alan Greenspan, Chairman, Board of Governors of the US Federal Reserve System.

Understanding Derivatives

The primary objectives of any investor are to maximise returns and minimise risks. Derivatives are contracts that originated from the need to minimise risk.

The word 'derivative' originates from mathematics and refers to a variable, which has been derived from another variable. Derivatives are so called because they have no value of their own. They derive their value from the value of some other asset, which is known as the underlying.

For example, a derivative of the shares of Infosys (underlying), will derive its value from the share price (value) of Infosys. Similarly, a derivative contract on soybean depends on the price of soybean.

Derivatives are specialised contracts which signify an agreement or an option to buy or sell the underlying asset of the derivate up to a certain time in the future at a prearranged price, the exercise price.

The contract also has a fixed expiry period mostly in the range of 3 to 12 months from the date of commencement of the contract. The value of the contract depends on the expiry period and also on the price of the underlying asset.

For example, a farmer fears that the price of soybean (underlying), when his crop is ready for delivery will be lower than his cost of production.

Let's say the cost of production is Rs 8,000 per ton. In order to overcome this uncertainty in the selling price of his crop, he enters into a contract (derivative) with a merchant, who agrees to buy the crop at a certain price (exercise price), when the crop is ready in three months time (expiry period).

In this case, say the merchant agrees to buy the crop at Rs 9,000 per ton. Now, the value of this derivative contract will increase as the price of soybean decreases and vice-a-versa.

If the selling price of soybean goes down to Rs 7,000 per ton, the derivative contract will be more valuable for the farmer, and if the price of soybean goes down to Rs 6,000, the contract becomes even more valuable.

This is because the farmer can sell the soybean he has produced at Rs .9000 per tonne even though the market price is much less. Thus, the value of the derivative is dependent on the value of the underlying.

If the underlying asset of the derivative contract is coffee, wheat, pepper, cotton, gold, silver, precious stone or for that matter even weather, then the derivative is known as a commodity derivative.

If the underlying is a financial asset like debt instruments, currency, share price index, equity shares, etc, the derivative is known as a financial derivative.

Derivative contracts can be standardized and traded on the stock exchange. Such derivatives are called exchange-traded derivatives. Or they can be customised as per the needs of the user by negotiating with the other party involved.

Such derivatives are called over-the-counter (OTC) derivatives. Continuing with the example of the farmer above, if he thinks that the total production from his land will be around 150 quintals, he can either go to a food merchant and enter into a derivatives contract to sell 150 quintals of soybean in three months time at Rs 9,000 per ton. Or the farmer can go to a commodities exchange, like the National Commodity and Derivatives Exchange Limited, and buy a standard contract on soybean.

The standard contract on soybean has a size of 100 quintals. So the farmer will be left with 50 quintals of soybean uncovered for price fluctuations.

However, exchange traded derivatives have some advantages like low transaction costs and no risk of default by the other party, which may exceed the cost associated with leaving a part of the production uncovered.

Some of the most basic forms of Derivatives are Futures, Forwards and Options.

Futures and Forwards

As the name suggests, futures are derivative contracts that give the holder the opportunity to buy or sell the underlying at a pre-specified price some time in the future.

They come in standardized form with fixed expiry time, contract size and price. Forwards are similar contracts but customisable in terms of contract size, expiry date and price, as per the needs of the user.


Option contracts give the holder the option to buy or sell the underlying at a pre-specified price some time in the future. An option to buy the underlying is known as a Call Option.

On the other hand, an option to sell the underlying at a specified price in the future is known as Put Option.

In the case of an option contract, the buyer of the contract is not obligated to exercise the option contract. Options can be traded on the stock exchange or on the OTC market.

History of derivatives

The history of derivatives is surprisingly longer than what most people think. Some texts even find the existence of the characteristics of derivative contracts in incidents of Mahabharata. Traces of derivative contracts can even be found in incidents that date back to the ages before Jesus Christ.

However, the advent of modern day derivative contracts is attributed to the need for farmers to protect themselves from any decline in the price of their crops due to delayed monsoon, or overproduction.

The first 'futures' contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. These were evidently standardised contracts, which made them much like today's futures.

The Chicago Board of Trade (CBOT), the largest derivative exchange in the world, was established in 1848 where forward contracts on various commodities were standardised around 1865. From then on, futures contracts have remained more or less in the same form, as we know them today.

Derivatives have had a long presence in India. The commodity derivative market has been functioning in India since the nineteenth century with organized trading in cotton through the establishment of Cotton Trade Association in 1875. Since then contracts on various other commodities have been introduced as well.

Exchange traded financial derivatives were introduced in India in June 2000 at the two major stock exchanges, NSE and BSE. There are various contracts currently traded on these exchanges.

National Commodity & Derivatives Exchange Limited (NCDEX) started its operations in December 2003, to provide a platform for commodities trading.

The derivatives market in India has grown exponentially, especially at NSE. Stock Futures are the most highly traded contracts on NSE accounting for around 55% of the total turnover of derivatives at NSE, as on April 13, 2005.

Risk Management Tools

Derivatives are powerful risk management tools. To illustrate, lets take the example of an investor who holds the stocks of Infosys, which are currently trading at Rs 2,096.

Infosys options are traded on the National Stock Exchange of India, which gives the owner the right to buy (call) shares of Infosys at Rs 2,220 each (exercise price), expiring on 30th June 2005. Now if the share price of Infosys remains less than or equal to Rs 2,200, the contract would be worthless for the owner and he would lose the money he paid to buy the option, known as premium.

However, the premium is the maximum amount that the owner of the contract can lose. Hence he has limited his loss. On the other hand, if the share price of Infosys goes above Rs 2,220, the owner of the call option can exercise the contract, buy the share at Rs 2,220 and make profits by selling the share at the market price of Infosys.

The upward gain can be unlimited. Say the share price of Infosys zooms to Rs .3,000 by June 2005, the owner of the call option can buy the shares at Rs 2,220, the exercise price of the option, and then sell it in the market for Rs 3,000.

Making a profit of Rs 780 less the premium that has been paid. If the premium paid to buy the call option is say Rs 10, the profit would be Rs 770.

Looking Forward

Derivatives are an innovation that has redefined the financial services industry and it has assumed a very significant place in the capital markets.

However, trading in derivatives is complicated and risky. The derivatives have been blamed for the loss of fortunes at many times in history. We will look at derivatives as a vehicle of investment available to investors, risks and returns associated with them, in our next article.

Alternative Investments : Real estate, Private Debentures, Arbitrage Products

On 10 October 2013, the Securities and Exchange Board of India (Sebi) issued a consultation paper on draft Real Estate Investment Trusts (REITs) Regulations, 2013. Once it has received feedback from the public, the regulator will come out with the final regulations on REITs. Thus, it appears that after a long wait REITs may finally start operating in India soon.
What is a REIT?
A REIT is a pooled investment entity, just like a mutual fund. After registering with Sebi, REITs will launch initial offers that investors will subscribe to. While mutual funds invest their corpus in equity, debt and money markets, REITs will invest primarily in real estate, and that too mostly in completed, revenue-generating real estate. The rental received from these properties will be distributed among investors as dividend.
The advantages
Lower entry barrier: Real estate is a bigticket investment. With the advent of REITs, investors will be able to gain exposure to real estate with a smaller amount. Sebi's consultation paper speaks of a minimum unit size of Rs 1 lakh and minimum subscription size of Rs 2 lakh. Thus, deep-pocketed investors will be able to take exposure to real estate via REITs, thereby diversifying their portfolios beyond the asset classes available currently (equity, debt, money market, and commodities).
In the future, the investment limit could be lowered further. Says Anshuman Magazine, chairman & MD, CB Richard Ellis South Asia: "REITs will enable retail money to be channelised into India's realty sector through a regulated network."
Lower risk: Since REITs will invest primarily in built-up property, the investor will not have to bear development risk, as happens when you invest in under-construction properties.

Greater transparency: REITs will provide an above-board source of funding to the realty sector, which currently depends heavily on black money. Limiting the use of black money will go a long way towards making the sector more transparent and consumer friendly.

Easy liquidity: As envisaged by Sebi, the units issued by REITs will be listed on stock exchanges. Whenever an investor wants to exit, he will be able to sell his units on the exchange.

Diversification: The minimum asset size that a REIT will be required to have is Rs 1,000 crore. Having such a large corpus will allow REITs to diversify across locations and types of real estate, such as offices, warehouses, and shopping malls. Such diversification will reduce risk. It is impossible for an individual investor to achieve diversification in his small portfolio.

Professional management: As in mutual funds, REITs too will have managers who will manage the realty portfolio and try to earn higher returns for investors.

Asset allocation strategy: At present, it is impossible for retail investors to apply the asset allocation strategy to real estate. The essence of asset allocation is that you invest in a variety of asset classes. Such diversification lowers risk and ensures that some part of your portfolio does well under all market conditions.

Asset allocation requires rebalancing, which means that every six months or so, you sell a part of the asset class that has outperformed and buy more of the asset class that has under-performed. At present it is impossible to apply the asset allocation strategy to real estate. Suppose you buy a second house for investment. Since the ticket size is large, in case of most investors the house comes to occupy an overwhelmingly large portion of their investment portfolio.

If the price of the house appreciates, you cannot sell a part of it to bring the asset allocation back to its original level. "With REITs, investors will be able to apply the asset allocation strategy to real estate," says Vishal Dhawan, Founder, Plan Ahead Wealth Advisors.

Introduction of Real Estate Fund in India

20th July 2013 :MUMBAI: The Securities & Exchange Board of India may amend the dormant guidelines governing real estate investment trusts to lure international investors into investing in them as various arms of the government scramble to defend the sliding rupee.

A new set of rules may soon be announced by the regulator which would make it easy for wealthy Indians and international investors to buy into these trusts that provide regular income like bonds or bank deposits, said two people familiar with the development.

The new format for the so called REIT will keep away retail investors as such investments with liberal guidelines may not be appropriate for those with less risk appetite.

"We are working on a new set of guidelines that will be attractive to FIIs," said a person at the market regulator who did not want to be identified. But it will be out of bounds for retail investors since the relaxed guidelines will be a risky proposition for them, he said.

Indian regulators are looking to re-draft the Real Estate Investment Trust, or REIT, guidelines to draw foreign investment to shore up the rupee. The initial guidelines announced in 2006 were so onerous that not a single trust was founded. One of the conditions was that the trusts have to declare the net asset value on a daily basis, a requirement quite impossible in the real estate market where similar properties do not trade on a daily basis.

REITs are a pool of funds raised by issuing a tradable security like a share or a debenture. The value of a REIT is dependent on the rental income from the properties that are owned by the REIT as a whole. This is one way of real estate investment for higher yields for small investors who cannot spend crores of rupees buying property.

The Indian currency is among the worst performers among emerging markets as foreign investors pulled out more than $6 billion amid fears that the Federal Reserve chairman Ben Bernanke will end the $85 billion monthly bond purchases that helped global stocks rally. 

Excotic Investing - structured products, real estate investment products, privately placed debentures and derivative arbitrage products

With persistently high inflation for some time now, many investors are being lured into investing in exotic high-yield investments and fixed arbitrage products that promise higher real returns. This past year, several such instruments, wrapped as structured products, real estate investment products, privately placed debentures and derivative arbitrage products, have been increasingly sold to investors with a promise of safety and higher returns.

It was these prospects of higher returns that made Nandkishore Bedekar, 45, invest a sizeable chunk of his savings in two capital-protected structured products two years ago. When he bought these products, he thought he would cash out of the product within a short time and pocket returns of around 13 per cent per annum. To his dismay, Nandkishore found out he couldn't exit his investments mid-way and his entire structure would not work. On the contrary, he could be hit with expenses as high as 30 per cent of his investments.
This is a scenario playing out across different products, and most investors are not aware of the possible conflict the products have with their financial needs. Says Amarendra Phatak, head private wealth management, Ambit Capital: "Structured products come with a lock-in period and have differing pay-offs. If you don't understand the structure thoroughly, you should not get into these products. Exotic products imply higher risk."

According to wealth management firms, alternative investments such as structured products constitute about 12 per cent of investors' assets, while real estate investments are about 11 per cent. Investors don't take enough time to understand these products. Phatak also cautions that many a time, these products have a structure that is, say, in place for 24 months but the final pay-out happens only after 27 months. Investors are also not aware of the returns on these products. If a structured product has a return of 27 per cent, experts say one should look at the per annum returns of the product, not the total returns. Says Phatak: "The per-annum returns work out to just 11-12 per cent here and this does not compare well with other investments in the market."  The risk is too high in this market. Explains Phatak: "The opportunity lost in terms of the higher risk is too high. There are many less risky products that offer almost similar yields."

Among the structures on offer are 
equity-linked debentures that offer 100 per cent Nifty participation; others offer a capped Nifty participation where the returns are capped, or a knockout participation where the returns are reduced if the underlying index crosses a pre-specified level. An issuer's rating also needs to be examined. A lower rated issuer could give higher returns but investors often tend to overlook it. All these structures work only if certain market conditions are fulfilled with varying degree of payouts to the investor. Says Shankar Raman, head investment products and advisory, Centrum Wealth: "People often don't look at the conditions under which these structures will or will not perform. Most investors don't pay much attention to detail. In these products, the devil is in the detail."

The best way to avoid a wrong investment is to look with scepticism at the returns if someone tries to sell you a high-yield product. Know also whether it forms a strategic fit with your portfolio, and avoid such products if the structure is too complex and does not have an easy exit option, say experts. Investors have to be extra careful on which financial institution is issuing such structured products, and its credit rating. Says Phatak: "One has to see the strength of the underwriter and all the terms and conditions on exit and other exemptions."

Investors are not only stuck sometimes with exotic structures but also with real estate investments. In the latter, investors are not aware of the inner workings of how the returns are calculated and what projects or annuities from real estate these funds are invested in. In the past few years, private real estate investment either through advances to builders or through private placements have been gaining currency. Typically, large investors park their money in a slew of projects through REITs (real estate investment trusts). Sebi recently released a draft paper on these. The products have been sold to high net worth individuals in the past.

In real estate investments, people don't know how much debt a real estate company has on its books, as no developer provides such numbers, say experts. For instance, real estate companies might borrow against a collateral of land but many times this is illiquid or embroiled in legal disputes. Some real estate investments promise returns of over 24 per cent but the transparency of such investments is far lower than other investment vehicles such as a mutual fund. Investors often do not know what the underlying projects are or when such projects will get executed, or how long they will have to stay invested. Says Sharma: "Real estate investments are better done through institutions that have a lot of experience in this sector and where their teams can assess the ground situation of different projects and evaluate their market value."

Other products that investors are being lured heavily into are high-yield non-convertible debentures that sometimes promise returns of around 18 per cent yearly. These are debentures typically issued by real estate companies that need working capital. Experts warn that such companies might have exhausted their credit line with banks and financial institutions. Investors should be wary of such issuers and look at the credentials closely, especially the credit rating of such paper. Alternative assets are also often handled by relationship managers that change very often and may not be able to resolve any problems that crop up. Experts advise that investors must look at the tried and tested alternatives of equity and debt before alternative structures. Says Sharma: "Only if you understand a product, can you evaluate if it's to your advantage."

  Clifford Alvares  |  Mumbai  

1. What is the full form of CRA?

 The full form of CRA is Credit Rating Agency.

  2. What is a credit rating agency?

 A credit rating agency is an entity which assesses the ability and willingness of the issuer company for timely payment of interest and principal on a debt instrument.

 3.   How is a rating denoted?

 Rating is denoted by a simple alphanumeric symbol, for e.g. AA+, A-, etc.

  4.  Whether the issuer company is rated or the instrument?

 The rating is assigned to a security or an instrument.

 5.   What does credit rating convey?

Credit rating is an assessment of the probability of default on payment of interest and principal on a debt instrument.  It is not a recommendation to buy, sell or hold a debt instrument. Rating only provides an additional input to the investor and the investor is required to make his own independent and objective analysis before arriving at an investment decision.

6. How is credit rating done?

Ratings are based on a comprehensive evaluation of the strengths and weaknesses of the company fundamentals including financials along with an in-depth study of the industry as well as macro-economic, regulatory and political environment.

7. What do the various rating symbols mean?

Each rating symbol is an alphanumeric representation of the probability of degree of repayment risk associated with debt instruments.

8.      Are rating symbols the same across all types of debt instruments?

No. Rating symbols may vary depending on the type of debt instrument, as for example long term or short term.

9. What do the “+” and “-”sign indicate in a rating?

Plus and minus symbols are used to indicate finer distinctions within a rating category. The minus symbol associated with ratings has no negative connotations. In fact, ratings in a higher rating category such as ‘AA-‘ are stronger than ratings in a lower rating category such as ‘A+‘.

10. What are investment and speculative grade ratings?

An investment grade rating signifies the rating agency’s belief that the rated instrument is likely to meet its payment obligations. In the Indian context, debt instruments rated 'BBB' and above are classified as investment grade ratings. Instruments that are rated ‘BB‘ and below are classified as speculative grade category ratings in which case the ability to meet the payment obligations is considered to be “speculative”. Instruments rated in the speculative grade are considered to carry materially higher risk and a higher probability of default compared to instruments rated in the investment grade.

11.     Who pays for the credit rating?

 In India, the issuer company pays for the credit rating.

12.     Who regulates rating agencies?

Credit rating agencies are regulated by SEBI. The SEBI (Credit Rating Agencies) Regulations, 1999 govern the credit rating agencies and provide for eligibility criteria for registration of credit rating agencies, monitoring and review of ratings, requirements for a proper rating process, avoidance of conflict of interest and inspection of rating agencies by SEBI, amongst other things.

13. Does SEBI have a role in the rating exercise?

No. SEBI does not play any role in the assessment made by the rating agency. The rating is intended to be an independent, unbiased and professional opinion of the rating agency.

14.  Is rating a one time exercise?

No. To protect the interest of investors, SEBI has mandated that every credit rating agency shall, during the lifetime of the securities rated by it, continuously monitor the rating of such securities and carry out periodic reviews of all published ratings.
15. Why do ratings change?

Rating is an opinion based on information available at a point in time with the rating agency and expectations made on the basis of such information by the agency. However, information can change significantly over time causing the rated instruments performance to deviate from the earlier expectations thereby affecting the future repayment abilities and thus, requiring the rating to be altered.

 16.  What does a rating downgrade indicate?

Rating is monitored throughout the life of the instrument. A downgrade in the rating indicates that the risk of default of the instrument is higher than what was earlier predicted.

 17. What kind of responsibility or accountability will attach to a rating agency if an investor, who makes his investment decision on the basis of its rating, incurs a loss on the investment?

A credit rating is a professional opinion given after studying all available information at a particular point of time. Nevertheless, such opinions may prove wrong in the context of subsequent events. There is no contract between an investor and a rating agency and the investor is free to accept or reject the opinion of the agency.

18. Do agencies rating small and medium enterprises, mutual funds, banks, non-banking financial institutions, insurance providers, infrastructure entities, etc. also fall under the regulatory purview of SEBI?

No, SEBI regulates only the agencies which are engaged in the business of rating securities offered by way of public or rights issue.

 19. From where can the credit ratings of instruments be obtained?

Credit ratings assigned by the credit rating agencies to various instruments are made available by the agencies through press releases and on their respective websites. The same are also available in the prospectus or the offer document of the issuer company and in media advertisements.

 20. What are the common factors that are taken into account while awarding the credit rating?

Each credit rating agency may have its own set of criteria and different weight age for each component for assigning the ratings. Some of the common factors that may be taken into consideration for credit rating are issuer company’s operational efficiency, level of technological development, financials, competence and effectiveness of management, past record of debt servicing, etc.

 21.  How can an investor know if a credit rating agency has changed its rating?

The credit rating agencies are required to continuously monitor the ratings assigned by them to a particular instrument. In case of any changes in the ratings so assigned, the agencies are required to disclose the same through press releases and on their respective websites.

22.   What are the measures taken by SEBI in strengthening credit rating?

SEBI has, from time to time, taken several steps to strength the process of credit rating. SEBI directives require the credit rating agencies to be transparent and disclose to the public the information which may have a material bearing on the ratings, any sources of conflicts of interest while undertaking the rating exercise, rating methodology, rationale of the ratings, etc.

 23.  Why there are not common symbols for credit ratings of all agencies?

The credit rating agencies do not have common symbols because they use different rating methodologies and have different factors bearing different weightage.

24.  Which are the rating agencies registered with SEBI?

Name of the rating agency
Credit Analysis & Research Ltd. (CARE)
4th Floor, Godrej Coliseum
Somaiya Hospital Road
Off Eastern Express Highway
Sion (East)
1105, Kailash Building, 11th Floor
26, Kasturba Gandhi Marg
New Delhi-110 001
121-122 Andheri Kurla Road
Andheri (East)
Fitch Ratings India Pvt.Ltd.
Apeejay House, 6th Floor
3, Dinshaw Vachha Road
Brickwork Ratings India Pvt.Ltd.
#39/2,Sagar Complex,2nd Floor
Bannerghatta Road
Near Diary Circle

24-Feb-2014 ICRA soars 20% on Moody's open offer to buy 26.5% more
Moody’s Investor Services has offered to buy 26.5 percent more in Indian rating firm ICRA, where it currently holds 28.5 percent.
Shares of rating agency ICRA  surged 20 percent to Rs 1913, following international rating agency Moody's offer to acquire an additional 26.5 percent in the company at Rs 2000 a share. Trading in the shares was frozen as there were no sellers.

Moody's already holds 28.5 percent in ICRA, and its open offer is subject to getting at least 21.5 percent through the tender process. If it does not get the desired quantum, it will not accept any of the shares submitted in the offer.

Moody's offer announced over the weekend was at a 25 percent premium to Friday's closing price. That gap has now narrowed down considerably. If ICRA's market price tops Rs 2000, Moody's offer may not find any takers at all since shareholders can get a better price by selling in the open market.

ICRA provides offshore rating services to Moody’s. Moody’s contributes 15 percent of ICRA’s revenues.

ICRA is the third-largest rating company in the country by revenues.

It may be recalled that Standard & Poor’s made a similar offer for CRISIL in August 2013, and raised its stake in CRISIL to 62.7 percent.

Edelweiss believes there is a strong structural opportunity in the domestic credit rating space, and has a buy rating on ICRA.