Stock split corporate action

In this corporate action the number of shares outstanding is increased by splitting the face value. For example, if a company has 100 crore (1 billion) outstanding shares of Rs10 and announced a face split from Rs 10 to Rs2 per share. One share of face value Rs10 will become 5 shares of Rs2 face value. A person holding 1000 shares of the company will have 5000 shares after the stock split. The price also comes down proportionately on Ex-date i.e. in the above example the price will be 1/5th of the price before the split. The reason is Earnings Per Share (EPS) comes down as the Total profit remains same but number of shares are increased.

Companies split the stock when the price is too high for small investors to buy the shares. As the price comes down proportionately the liquidity increases in the counter as the small investors will start trading at the affordable price. Because of this reason the share price will move up after the split (i.e. the price will be little more than 1/5th of the price before the split in the above example). Read more

October 18, 2008 | Filed Under Stocks | Leave a Comment

Bonus issue truths revealed

Companies give bonus shares to the existing share holders by converting their reserves and surplus into shares. In a 2:1 bonus issue a share holder gets 2 free shares for every one share he holds (Don’t get confused. It’s correct). The additional shares come at free of cost but the price gets reduced proportionately.

For example, if you hold 100 shares of company XYZ whose market value is Rs 3000 per share and assume company XYZ has announced 2:1 bonus issue. On ex-date the price of XYZ comes around Rs1000 (It will be slightly greater than Rs 1000 usually. This price is called ex-bonus or post bonus price) and the additional 200 shares or bonus shares get credited to your account after few days. This is because the total number of outstanding shares increased 3 times but the earnings of the company is same. So the new EPS (Earnings Per Share) will be 1/3 rd of previous EPS and share price comes down proportionately.

One can observe that the total equity base of a company doesn’t get much affected with the bonus issue (Market price per share comes down and number of shares goes up keeping the product i.e. Market Capitalization same). In the above example the price may go over Rs 1000 because the liquidity increases because of lower price.

Companies announce bonus shares to Read more

October 12, 2008 | Filed Under Stocks | Leave a Comment

What is Rights issue ?

Rights issue is a method used by companies to raise funds by issuing additional stocks to the existing share holders of the company. Share holders may or may not exercise their right of acquiring new shares issued by the company. Companies fix up a price for rights issue, usually less than the market price to make sure entire issue will be subscribed. The share holders can apply for more number of shares than they are entitled to. If some of the share holders don’t exercise their right the shareholders who have applied for additional shares are allotted the same.

It’s important for a shareholder to know the reason behind the rights issue i.e. whether the company is raising funds to acquire another company or to expand the existing business or to meet the obligations of the existing business.

Usually the share price comes down proportionately. This is because the company’s equity base goes up with the additional shares and hence the EPS (Earnings Per Share, Total Net Profit / No of shares outstanding; As the denominator increases keeping numerator at the same value the ratio comes down) comes down. Considering the same market conditions, to maintain the same P/E ratio before and after the issue, price comes down. Read more

October 12, 2008 | Filed Under Stocks | 3 Comments

What is SLR (Statutory Liquidity Ratio) ?

SLR is Statutory Liquidity Ratio. It’s the percentage of Demand and Time Maturities that banks need to have in any or combination of the following forms:

i) Cash
ii) Gold valued at a price not exceeding the current market price,
iii) Unencumbered approved securities (G Secs or Gilts come under this) valued at a price as specified by the RBI from time to time.

The maximum limit of SLR is 40% and minimum limit of SLR is 24%. It’s 24% now. This restriction is imposed by RBI on banks to make funds available to customers on demand as soon as possible. Gold and G Secs (or Gilts) are included along with cash because they are highly liquid and safe assets. Read more

October 11, 2008 | Filed Under Bonds | 3 Comments

What is CRR (Cash Reserve Ratio) ?

CRR is Cash Reserve Ratio. It refers to keeping a portion of net demand and time liabilities (NDTL) of banks with the central banks (In India it’s Reserve Bank of India, RBI). Central bank fixes this percentage of NDTL. Central bank can change this percentage as a monetary measure to control the availability of funds in the economy i.e. to inject liquidity or to suck liquidity. RBI doesn’t pay any interest on such funds held with it.

The following are the demand liabilities of banks. Banks should pay these liabilities on demand which may come at any time.

All liabilities which are payable on demand; they include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, Demand Drafts (DDs),unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand.

Time Liabilities are those which are payable otherwise than on demand; they include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, deposits held as securities for advances which are not payable on demand and Gold Deposits.

When a central bank increases CRR, the banks need to reduce the outflow of money by reducing the loans to customers and keep additional amount with the central bank. This usually sucks liquidity in the markets. Let’s examine one by one Read more

October 11, 2008 | Filed Under Bonds | Leave a Comment

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