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GMR Airports Infrastructure Case Study
There is an organization that has airports, energy, transportation, and urban infrastructure all under one roof. We are talking about GMR Group, a company that has undertaken world-class projects both domestically and Internationally.

Let’s explore GMR Airports Infrastructure Limited’s rigorous and committed path while scrutinizing its finances, SWOT analysis, vision, and many other aspects.

GMR Airports Overview

GMR is an Indian multinational conglomerate headquartered in New Delhi. It comprises several companies, including GMR Infrastructure, GMR Energy, GMR Enterprises, and GMR Airports. The Group has implemented several infrastructure projects in India and is the only Indian airport developer to own and develop airports outside India.

GMR Airports History

GMR Airports Infrastructure Ltd. was established in Andhra Pradesh on May 10, 1996, as Varalakshmi Vasavi Power Projects Limited. They later rebranded themselves as GMR Infrastructure Limited on July 24, 2000.

GMR Airports Infra develops, constructs, maintains, and manages highways and airports. The company entered the airport business in the early 2000s and is currently among the top five airport developers in the world. It oversees multiple airports, including Delhi International Airport, Hyderabad International Airport, and Manohar International Airport in Goa.

Business Model of GMR Airports

GMR Airports Infrastructure operates on a focussed business model, which revolves heavily around the airline industry. The company generates 26% of its revenue from aeronautical services. This comprises airlines’ fees for landing, taking off, and using airport facilities. The majority of revenue, 57%, is generated from non-aeronautical services. These services include retail and concession leasing within airport terminals, parking fees, ground transportation services, and advertising. Additionally, 16% of the revenue comes from other operating income.

Read Also: Gillette India Case Study

GMR Airports Financial Highlights

Balance Sheet

Particulars March 31, 2024 March 31, 2023
Non-current assets 40,642.22 35,233.37
Current assets 8,041.84 8,878.06
Non-current liabilities 41,990.79 34,063.85
Current liabilities 7,561.93 9,078.73
(In INR crores)

The graph indicates a consistent growth in non-current liabilities and assets. This showcases a consistent financial position of the company.

Income Statement

Particulars March 31, 2024 March 31, 2023
Revenue from Operations 8,755 6,674
Total Expenses 5,789 4,968
Operating Profit 2,966 1,745
Profit before tax -635 -726

The income statement reveals a growing revenue base that led to an increase in operating profit. However, the organization still faces a loss. This could indicate towards the company’s inability to pull through a profit.

Cash Flow Statement

Particulars March 31, 2024 March 31, 2023
Cash Flow from Operating Activities 3,880.10 2,199.23
Cash Flow from Investing Activities -5,788.40 -2,322.35
Cash Flow from Financing Activities 466.54 1,731.25
(In INR crores)

The graph showcases a growing CFO, which indicates that the company operations are stable. A decrease in CFI is also visible, which shows the company’s heaving outflows in investments.

GMR Airports SWOT Analysis

Strengths
- GMR Airports Infrastructure Limited operates in diverse industries like energy, transportation, and urban infrastructure. This diversity offers chances for success in several industries while reducing the risks of reliance on a single one.
- The company has achieved global recognition due its large-scale projects in India. This recognition has proved to bring in many projects across the globe.
- A solid balance sheet reflects the company’s ability to take on even more projects.
Weaknesses
- As seen from the negative net income in the income statement, GMR Infra has been losing money lately. Potential difficulties in controlling costs and producing long-term profitability are highlighted by this trend.
- Its large non-current liabilities indicate heavy reliance on debt finance to fund its operations and expansion plans. High debt levels may impact creditworthiness and raise financial risk.
Opportunities
- With the need for infrastructure and aviation expanding, GMR Airports Infra Limited might investigate growth prospects in new markets.
- By taking advantage of the global demand for modern airport facilities, GMR Airports can increase its chances of winning contracts for these projects and solidify its place as an industry leader.
Threats
- The airport infrastructure industry is highly competitive, with established players and new entrants. Intense competition can exert pressure on pricing, margins, and project acquisition.
- Due to the recent rapid technological advancement, continuous investment in new technologies is necessary; however, this can be risky and financially taxing if not handled carefully.
- Airport infrastructure companies, especially those with global operations, may face operational challenges due to recent geopolitical tensions, trade disputes, and regulatory changes about immigration and security measures.
Read Also: Waaree Energies Case Study

Conclusion

GMR Airports Infrastructure Limited is a prime example of a dynamic, multifunctional company that works in various industries, such as energy, transportation, urban infrastructure, and airports. Its unique business strategy and robust global presence establish it as a prominent participant in the infrastructure sector.

However, to stay competitive, GMR Airports Infrastructure Limited must constantly invest in new technologies, which presents difficulties given its high debt load and recent financial setbacks. The company’s sustained growth depends on its ability to navigate fierce competition and manage regulatory dependencies.

Frequently Asked Questions (FAQs)
1. In the infrastructure sector, what sets GMR Airports Infrastructure Limited apart?
  GMR Airports Infrastructure Limited is notable for its cutting-edge methods of managing airports and building infrastructure. The Company guarantees excellent service and efficiency by fusing cutting-edge technology and sustainable practices, which positions it as a global leader in the sector.
2. Where is GMR Airports Infrastructure Limited’s headquarters?
  GMR Airports Infrastructure Limited’s headquarters are situated in New Delhi, India.
3. Which airports are some of GMR Airports Infrastructure Limited’s flagships?
  The Company manages some of India’s most renowned airports, including Hyderabad International Airport and Delhi International Airport. Its oversight of operations at Kualanamu International Airport in Indonesia and Mactan Cebu International Airport in the Philippines demonstrates its worldwide reach.
4. Is GMR Airports Infrastructure Limited publicly listed?
  GMR Airports Infrastructure is listed on BSE and NSE.
5. What does GMR Airports Infrastructure Limited do?
  GMR Airports Infrastructure Limited develops and manages airports. It is part of the larger GMR Group, which also works in energy, transportation, and urban infrastructure.

June 10, 2024

What is the NIFTY EV & New Age Automotive Index?

There has been a huge increase in the number of Electric vehicles on Indian streets recently. Now, India has its first NIFTY EV and New Age Automotive Index in the stock market!

Today’s blog will explain the purpose of this groundbreaking index and how it benefits investors and the EV industry.

What is the NIFTY EV

The EV Index, also called the NIFTY EV & New Age Automotive Index, is a stock market index introduced in India on May 30, 2024. This is a first-of-its-kind index in India. It monitors the performance of companies involved in the electric vehicle industry or developing new automotive vehicles and related technologies.

The introduction of the NIFTY EV Index is regarded as a favourable development for the EV sector in India. The industry is now expected to see a surge in investor interest, which will undoubtedly significantly boost EV companies.

The base date for the NIFTY EV & Automobile Index is April 2, 2018, with a base value set at 1000. The index will be updated twice a year and adjusted

Reasons for the New Index

There exist multiple rationales for the introduction of a new index tailored specifically to the EV sector. Some of the reasons are listed below.

Benchmarking: The index can be utilized for various purposes, including benchmarking fund portfolios, launching index funds, ETFs and other structured products.
Track Performance: The NIFTY EV & New Age Automotive index is designed to monitor the performance of companies operating in the EV and new age automotive sector. This sector includes hybrid vehicles, hydrogen fuel-based vehicles, and green-hybrid vehicles.
Increased Interest of Investors: The introduction of a new EV index can elevate investor awareness and stimulate increased capital inflows into the EV sector in India. This will benefit both the established EV companies and startups seeking funding for research and development.

Key Points to Note

Stocks that are part of or soon to be part of the Nifty 500 index at the time of review can be included in the index.
Stocks in the Nifty 500 can be included in the index if they are involved in the production and supply of electric or new-age automotive vehicles, batteries, components, raw materials, and technology.
The overall weight of the stocks belonging to Group A (Manufacturing of 2W/3W/4W/PV/CV Electric and New Age automotive vehicles) shall be capped at 40%.
The weight of each stock belonging to Group A shall be capped at 8%. All other stocks are capped at 4%.

Sector Representation & Current Components

The sector representation in the new index is as follows:

Sector	Weight
Automobile and Auto Components	72.13
Information Technology	11.31
Chemicals	10.63
Capital Goods	6.39
Oil, Gas & Consumable Fuels	3.37
Consumer Services	0.18

The top constituents by weightage are as follows.

Company’s Name	Weight (%)
Bajaj Auto Ltd	7.08
Tata Motors Ltd.	6.49
Mahindra & Mahindra Ltd.	5.83
Maruti Suzuki India Ltd.	5.28
Exide Industries Ltd.	4.78
Bosch Ltd.	4.56
Samvardhana Motherson International Ltd.	4.45
Eicher Motors Ltd.	4.42
CG Power and Industrial Solutions Ltd.	4.30
Himadri Speciality Chemical Ltd.	4.28

Market outlook of EV Sector

Industry experts hold both a bullish and bearish outlook for the EV sector. A concise explanation of both viewpoints is provided below:

Bullish Outlook

Morgan Stanley predicts a 32% growth rate by 2030 for the Indian EV market.

According to Morgan Stanley, India’s increasing demand for cars could account for half of the global car demand in the next two decades. New buyers can skip traditional cars and go straight to modern technology. This means that car manufacturers who are focusing on the future of the automotive industry will likely pursue opportunities for growth in India.
McKinsey estimates that electric vehicles could make up 30% of new car sales in India by 2030.

As per McKinsey, consumers are increasingly showing interest in electric cars. Many people are considering buying electric vehicles for their next car. They prefer full-battery electric vehicles over plug-in hybrid electric vehicles.

The company’s research on electric two-wheelers found that 86% of consumers would consider buying an EV, while only 69% would consider a Combustion Engine vehicle.

Bearish Outlook

Citigroup has raised concerns regarding the consistency of government policies and the development of charging infrastructure.
Credit Suisse focuses on the importance of cost competitiveness in EVs compared to traditional vehicles.
JP Morgan has raised the issue of battery technology advancements and the scalability of sustainable raw materials to meet the growing demand for electric vehicles. This highlights the complex landscape the EV industry must navigate to achieve widespread adoption.

Conclusion

The introduction of the EV index represents a noteworthy milestone for the electric vehicle sector in India. This index has the potential to fuel sustainable growth by providing a clear benchmark and attracting new investments. This index is just the start of an exciting journey towards a cleaner and more sustainable future. However, it is important to consider consulting a financial advisor to determine whether EV-focused investments are compatible with your portfolio objectives.

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Frequently Asked Questions (FAQs)

What sectors are included in the EV index?
The index includes the following sectors – Automobile and Auto Components, Information Technology, Chemicals, Capital Goods, Oil, Gas & Consumable Fuels, and Consumer Services.
How is the New EV index beneficial for investors?
Investors can use this index to benchmark their EV investments and gain exposure to the sector through index funds or ETFs.
Is this the first EV Index globally?
There are EV indices in other countries, but this is the first of its kind in India.
How often will the index be reviewed?
The index constituents will be reviewed every six months and rebalanced quarterly.
Is it a good time to invest in EVs?
The EV market is promising and evolving, but consult your financial advisor before making any investment decisions.

June 7, 2024

Swing Trading vs Day Trading: Which Strategy Is Right For You?

A million-dollar question: which trading strategy is right for you: Swing Trading or Day Trading? Let’s find out the answer.

What is Day Trading?

The Day trading involves buying and selling of financial instruments like stocks, bonds, futures, commodities, and currencies to generate profit from the short price movement within a single trading day. Many positions can be entered, which can last from several minutes to a few hours during the single trading day.

Traders essentially close the position before the day ends to avoid risk exposure. As the activity of buying and selling takes place within a single day, traders make fast decisions on market direction and usually exit once the trade goes against their view.

Anyone can perform day trading, but it requires lots of time and effort to monitor positions and some technical setup and knowledge to decide when to exit the market. A day trader wants to keep the risk minimum by not carrying it overnight. This is one of the major reasons for holding positions only until the end of the day because they are not subjected to overnight changes.

There are multiple techniques which traders deploy in Day Trading. Some day trading techniques include:

Scalping: It Involves buying and selling a stock multiple times in a day to make small profits from small price movements. The time period for holding a trade could be a couple of seconds to minutes.
Range trading: It Involves buying when an asset’s price is in a particular range, it could be near the low end of the price range and selling when it’s near the high end of price range.
Algo Trading or High-frequency trading (HFT): It uses a computer-based system to automatically track price changes and execute trades. It is also called Algo trading.
Momentum trading: It means entering into a position of buying and selling on the basis of recent primary trends and exiting as soon as it shows signs of reversal. Momentum traders tend and volatility.

What is Swing Trading?

It involves buying and selling a financial instruments such as stocks, bonds, currencies, and commodities in an attempt to exploit short to mid-term price movements in a security using a favorable risk-reward ratio. The time period for holding a trade could be several days to weeks.

Swing trading is often considered better for beginners compared to scalp trading or day trading. It requires fewer orders compared to scalp trading, hence lower trading costs. Also, it doesn’t require continuous monitoring. Though the minimum return is not guaranteed in this, Swing traders still have the potential to make a similar profit as of a scalper with less trading activity and less risk.

Swing traders use many technical analysis signals to enter and exit a trade, such as Fibonacci retracement, Channel trading, MACD, RSI Crossover, divergences, and moving averages. Moreover, they also use Fundamental triggers like Quarterly results, management insights, inflation, interest rate scenarios, etc.

What is the difference between Day Trading Vs Swing Trading

Day Trading	Swing Trading
There is a low margin requirement for the Day trading as traders close the position on the same day.	The requirement of margin is high compared to day trading.
The higher leverage is made available for Intraday trading.	The lower leverage is available for swing traders as it involves holding a position for days.
Day traders are known as full-time traders as more time is required to execute and monitor the trades.	Swing traders are known as part time traders as less time is required to monitor the trades.
They make multiple trades and keep on exiting with small profits and losses.	Swing traders analyze trends and choose securities that will perform better in future to earn profits.

Quick Summarization

Swing trading requires less involvement than day trading as it requires less monitoring.
Swing trade positions are subject to overnight market risks, as swing trading often involves at least an overnight hold, whereas day traders close out positions before the market closes.
Day traders have more access to margin or leverage as compared to Swing traders. Hence in day trading, because of leverage, traders risk magnifies but the good thing is if market goes against their view, they have time to instantly cut the position.
Swing traders may incorporate both technical and fundamental analysis, whereas a day trader is more likely to focus on using technical analysis.

Conclusion

In summation, there are no right or wrong answers to which trading strategy is right for you. It depends upon your skills, style, preference, and availability of time.

Most of the people think trading is different from their actual mentality. Technical analysis, which is one of the tools used to gauge market direction, is nothing but a tool for judging mass psychology. The more the traders anticipate that the market is still undervalued or a certain sector or stock is available at a good valuation, the more they will buy, and the market will start taking support and eventually bounce. In similar way, the more the traders perceive that the market is overvalued or certain group of stocks or sectors are expensive, the more they will start exiting their position or start shorting.

If traders could think they can analyze the market better, and are able to take risks to bet on market direction, then it is suggested that they go for Swing Trading. There are pros and cons of both the trading styles, so after taking them into consideration and as per one’s risk appetite, one can choose their respective trading style, Swing or Day Trading.

Frequently Asked Questions (FAQs)

What is Day Trading?
Day trading is the activity of buying and selling financial instruments like stocks, bonds, futures, or commodities to generate profit from the price movement within a single trading day.
What is Swing Trading?
Swing trading is the activity of buying and selling financial instruments like stocks, bonds, futures, or commodities to generate profit from the price movement where traders keep the position open for a few days to a few weeks.
Do Swing Traders make multiple trades?
No, it is Day traders who make multiple trades and keep on exiting with small profits and losses.
Which trading Strategy is less risky?
Day trading is less risky than the Swing Trading as a trader can close the position on the same day, and there are no overnight uncertainty risks.
What is the major difference between Day Trading and Swing Trading?
There are various differences in Day trading and Swing trading such as difference of risks, time period, costs, size of profits and losses, etc.

June 7, 2024

Bluestar Case Study: Products, Financials, and SWOT Analysis

The summer season is quickly approaching, and to cool off, you might be sitting in a corner with a drink from the refrigerator or have turned on the air conditioner. There’s a high probability that one of these two products at your home was manufactured by Bluestar.

In this blog, we shall explore the Bluestar Company, a leader in the Indian Air Conditioner space.

Blue Star Overview

Mohan T. Advani established the Bluestar company in 1943. Headquartered in Mumbai, the company is a leader in the category of Heating, Ventilation, Air conditioning and Commercial Refrigeration (HVAC&R). They manufacture commercial freezers, air conditioners, mechanical and electric plumbing, and firefighting solutions.

In 1960, the company opened its first manufacturing plant in Thane, Mumbai. Later, in 1970, the business took over as HP’s exclusive distributor in India. The company still works with several foreign companies, including Worthington and Mitsubishi. Their manufacturing plants are located in Ahmedabad, Wada, Himachal Pradesh, and Dadra.

Product Portfolio

Bluestar Company Limited offers its customers a wide range of products as mentioned below.

Air conditioner – The company offers a wide range of air conditioners for residential and commercial purposes.
Water purifiers – The company produces different varieties of Water purifiers, such as mineral, RO, UV etc.
Air Purifiers – The business is engaged in the production of air purifiers, catering to the increase in consumer demand for them.
Air coolers – The company also produces coolers in order to cater to the surge in consumer demand in the summer season.
Refrigerator – The company manufactures refrigerators of different ranges such as deep freezers, water coolers, etc.
Electro-Mechanical Projects – The company acts as a single point of contact for the design, execution, and maintenance of electrical, plumbing, and firefighting systems to be installed in a building.

Distribution Channel

The business uses a variety of distribution channels to reach customers all around the nation. Bluestar has partnered with numerous national and international retailers, electronics chains, and specialty shops in the retail space. In addition, they oversee a vast network of sales representatives who deal directly with consumers to offer them customized sales and support services. Additionally, the business has a website and also sells its products online through a network of distribution channels, reaching customers all over the country to take advantage of e-commerce platforms.

Market Details

Current Market Price	INR 1386
Book Value	INR 127
52 Week High	INR 1514
52 Week High Date	02-May-2024
52 Week Low	692.5
52 Week Low Date	23-May-2023
Face Value of Share	INR 2
PE Ratio	68.9
Market Capitalization	28529 Crores

(As of 10^th May 2024)

Financial Highlights

Balance Sheet

Particulars	31^st March 2024	31^st March 2023	31^st March 2022
Non-Current Asset	1578.22	1148.45	829.21
Current Asset	5040.03	4250.61	3483.43
Total Asset	6618.25	5399.06	4312.64
Equity	2612.63	1333.84	1020.54
Long Term Liability	126.01	281.47	322.90
Current Liability	3879.61	3783.75	2969.20

(In Crores)

According to the above chart, we can say that the company’s long-term liabilities have declined over time, while its current liabilities and total assets have increased on a YoY basis.

Income Statement

Particulars	31^st March 2024	31^st March 2023	31^st March 2022
Revenue from operations	9685.36	7977.32	6064.08
Total Income	9732.78	8008.19	6099.80
Total Expenses	9176.11	7624.02	5849.99
Profit before tax	556.67	555.17	249.81
Profit after tax	414.31	400.69	168

(In Crores)

The above chart concludes that the company’s total income has shown a growth of 21% on a YoY basis whereas their profit after tax has increased by just 3.5% in FY 2024 when compared with FY 2023.

Cash Flow Statement

Particulars	31^st March 2024	31^st March 2023	31^st March 2022
Net Cash flow from operating activities	289.22	247.38	87.40
Cash flow from investing activities	(624.62)	(181.66)	(69.01)
Cash flow from financing activities	364.83	(91.08)	(82.37)

(In Crores)

Based on the chart above, we can conclude that although the company has reported negative cash flow from investment activities for the previous three years in a row, it has demonstrated positive cash flow from financing activities in FY 2024 after publishing negative figures in FY 2022 and 2023.

KPIs

Particulars	31^st March 2024	31^st March 2023	31^st March 2022
Operating Profit Margin (%)	6.34	5.5	4.89
Net Profit Margin (%)	4.27	5.01	2.76
Return on Capital Employed (%)	22.44	27.16	22.04
Inventory Turnover	4.33	3.89	3.36
Current Ratio	1.3	1.12	1.17
Return on Net Worth (%)	15.87	30.09	16.48
Debt to Equity Ratio	0.06	0.43	0.47

The business’s operating profit margin has slightly improved, but its net profit margin has declined when compared to FY 2023. The management of the company may be concerned about this decline in return on net worth.

SWOT Analysis

Strengths

The company diversifies its risk by offering a wide range of products, such as MEP solutions, commercial refrigerators, and air conditioners.
In addition to the metro areas, Bluestar’s extensive distribution network also reaches tier 1, tier 2, and tier 3 cities. It’s also present throughout the world.
The corporation consistently innovates its product by devoting a sizeable amount of its revenue to research and development.
The company has four manufacturing units, allowing it to produce its products efficiently.

Weaknesses

Since the Indian market accounts for a sizable amount of the company’s revenue, any disruption in demand in the Indian economy would have a substantial effect on that revenue.
Since the company sources its essential components from several different regions, any disruption in the supply chain will affect its output.
The company’s return on net worth and return on capital employed has decreased in FY 2024 as compared to FY 2023.

Opportunities

Increasing disposable income and urbanization will create a growth opportunity for the company.
The company can achieve new heights through strategic partnerships or acquisitions which allows them to access new technologies and better diversification of products.
The company needs to promote eco-friendly solutions related to air conditions and refrigeration in order to navigate growing environmental concerns.

Threats

The company faces tough competition from domestic and international players. Non-competence with them will lead to a fall in market share and profitability.
If the government implements changes related to environmental standards, trade policies can negatively impact the company’s profitability.

Conclusion

Bluestar constantly invests in product innovation and client pleasure to achieve new levels of success. The company’s operating profit margins have also improved, as seen by the financial reports that show an increase in margin over the last three years. However, there are risks that are connected to the company. Therefore, an individual must research and consult with an investment professional before making any investment decisions.

Frequently Asked Questions (FAQs)

Is Bluestar an Indian company?
Bluestar is India’s leading Heating, Ventilation, Air conditioning, and Commercial Refrigeration (HVAC&R) Company, with its headquarters in Mumbai.
Who is the head of Bluestar?
Mr. Vir S. Advani heads Bluestar as the Chairman and Managing Director.
Is Bluestar a profit-making company?
Bluestar is a profitable corporation, as seen by its net profit reports for the financial years 2024 and 2023, which came in at 414.31 and 400.69 crore, respectively.
Does Bluestar operate in the international market?
In addition to having operations in India, the company also conducts business internationally via joint ventures in several nations, such as the Middle East and SAARC countries.
What products does Bluestar manufacture?
Bluestar manufactures Air conditioners, Refrigerators, Air coolers, Air Purifiers, and Water purifiers.

June 7, 2024

What is a Bonus Issue? Meaning, Process, Key Dates, and Impact Explained

Companies have multiple ways to reward their shareholders and manage their capital structure. One such method is through a bonus issue, a term that often leaves investors interested.

This blog delves deeper into what a bonus issue is, its purpose, and its implications for shareholders.

Meaning Of Bonus Issue

A bonus issue is a corporate action where a company issues additional shares to its existing shareholders free of cost, based on the number of shares they already hold. Essentially, it is a way for a company to distribute accumulated profits or reserves without paying out cash.

How Does a Bonus Issue Work?

When a company decides to issue bonus shares, it converts part of its reserves into equity capital. For instance, if a company declares a bonus issue of 1:2, it means that for every two shares a shareholder owns, they will receive one additional share for free. This does not change the overall value of the investment but increases the number of shares held by the investor.

Purpose of Bonus Issues

Rewarding Shareholders: One of the primary reasons for issuing bonus shares is to reward shareholders without parting with cash. By providing them with additional shares, companies aim to acknowledge the loyalty and trust of their investors.
Improving Stock Liquidity: A bonus issue can improve the liquidity of a company’s shares. By increasing the number of shares in circulation, trading activity is expected to rise, which can increase the liquidity of the stock.
Making Shares Affordable: If the share price of a share is high, issuing bonus shares can reduce the price per share, making it more affordable for small-scale investors. This action thus attracts a wider base of shareholders.
Signaling Strong Financial Health: A bonus issue often signals that a company is confident about its future prospects and has reserves. This can boost investor confidence and enhance the company’s reputation in the market.

Read Also: What is Options Trading?

Process of Issuing Bonus Shares

The process of issuing bonus shares involves several steps and requires compliance with regulatory guidelines set by the Securities and Exchange Board of India (SEBI).

Board Approval: The process begins with the company’s board of directors passing a resolution to issue bonus shares. This resolution determines the ratio of the bonus issue and the record date, which is the date on which shareholders eligible to receive the bonus shares are determined.
Shareholder Approval: Following board approval, the proposal must be approved by the shareholders in a general meeting. This step ensures that the interests of all shareholders are considered and that they have a say in the decision.
Regulatory Filings: Then, the company files the necessary documents with SEBI and the stock exchanges. The documents include providing details of the bonus issue and ensuring compliance with all regulatory requirements.
Distribution of Bonus Shares: Once all approvals are received, the company distributes the bonus shares to eligible shareholders. The shares are credited to the shareholders’ demat accounts, and they are informed about the credit through their respective depository participants.

Implications for Shareholders

No Financial Gain: One important aspect of a bonus issue is that it does not provide any direct financial gain to shareholders. Even though they receive additional shares, the overall value of their holdings remains the same because the market adjusts the share price downward to reflect the increased number of shares.
Tax Implications: In India, bonus shares are not taxable at the time of issue. However, when the shareholder sells these shares, capital gains tax is applicable like any other security sale.
No Change in Shareholding: Though a bonus issue results in an increased number of shares, the shareholding pattern remains consistent because every shareholder receives the bonus share.

Key Dates

Announcement Date – It is the date on which the Board announces the Bonus issue. It is also known as the Declaration Date.

Record Date – It is the date on which a company that is going to give bonus shares decides the eligible shareholders to receive the bonus shares.

Ex-Date – This is the date by which you need to purchase the shares to be eligible to receive the bonus shares. Generally, it is two days prior to the record date as settlement takes two days in most of the markets.

Impact on the Stock Market

Share Price Adjustment: Following a bonus issue, the share price adjusts to reflect the increased number of shares in circulation. For example, if a company issues bonus shares in a 1:1 ratio, the share price is likely to halve because the number of shares has doubled.
Market Perception: A bonus issue is often perceived positively by the market as it indicates the company’s robust financial health. It can lead to increased investor interest and potentially drive up the share price in the long run, despite the initial adjustment.
Liquidity and Trading Volume: The increased number of shares can lead to higher trading volumes, enhancing liquidity. This can make the stock more attractive to both retail and institutional investors, contributing to a more dynamic market environment.

Indian Case Studies of Bonus Issues

Reliance Industries Limited (RIL):

Reliance Industries Limited is one of the most renowned companies in India. In 2017, RIL announced a bonus issue in the ratio of 1:1. This move was well-received by the market players, leading to a surge in trading volumes and positive investor sentiment.

Tata Consultancy Services (TCS):

TCS is one of the biggest tech companies in India. In 2018, Tata Consultancy Services (TCS) declared a bonus issue at a 1:1 ratio. This was the result of one of the company’s efforts to reward its shareholders and increase the affordability of its shares. The bonus issue was perceived positively and contributed to a boost in the company’s market capitalization.

How can I track Bonus Issues?

Generally, listed companies publish all the corporate announcements at stock exchanges first, i.e., NSE and BSE in India. However, it will be cumbersome for you to monitor updates from each company individually.

To simplify this process, we’ve created a dedicated corporate action page where you can effortlessly track all the latest corporate announcements, including but not limited to dividends, rights, splits, and bonus issues.

You can access the corporate actions page to get the detailed list.

But that’s not all. In addition to our corporate actions page, we recently launched our new WhatsApp service. Now, you can effortlessly stay informed about all corporate actions, including dividends, bonuses, splits, and more, delivered straight to your phone every morning by 9 A.M. for just INR 11!

Conclusion

Bonus issues are a significant corporate action that reflects a company’s confidence in its financial health and future prospects. However, for shareholders, there is no immediate financial gain. But the long-term benefits of this action can be substantial if the company continues to perform well.

Bonus issues also enhance stock liquidity and make shares more affordable. However, it is crucial for investors to understand the implications of bonus issues and consider them while making an investment decision.

Frequently Asked Questions (FAQs)

Why do companies issue bonus shares?
Companies issue bonus shares to reward shareholders, improve stock liquidity, and make shares more affordable. It’s a way to convert accumulated reserves into equity capital while maintaining investor confidence.
How does a bonus issue affect the share price?
After a bonus issue, the share price adjusts downward to reflect the increased number of shares in circulation. For instance, if a company issues bonus shares in a 1:1 ratio, the share price is likely to halve as the number of shares has doubled, keeping the overall value of the market capitalization the same.
Are bonus shares taxable in India?
Bonus shares are not taxable at the time of issue. However, when shareholders sell these shares, capital gains tax is applicable.
How does a bonus issue impact a company’s reserves?
A bonus issue reduces a company’s reserves as a part of the reserves is converted into equity capital. This process does not affect the company’s cash balance but modifies the structure of its equity and reserves on the balance sheet.
Can a bonus issue improve a company’s market perception?
A bonus issue can signal that a company is financially strong. This can enhance investor confidence and increase market interest in the stock.

June 7, 2024

Synthetic Futures – Definition, Risk, Advantages, Example

Did you know that you can create a payoff similar to a futures contract using call and put options? We are talking about Synthetic Futures, one of the least discussed topics in options trading. Let’s have a deep dive into it.

What are the Synthetic Futures?

A synthetic future contract is a financial instrument that replicates the payoff of a traditional futures contract using other financial instruments such as options, swaps, or contracts for difference (CFDs). However, traders generally use options to create synthetic futures.

In synthetic futures option version, we use options (call and put options) to replicate the payoff of a futures contract. For example, an investor buys a call option and sells a put option of same expiration date for a long synthetic future. And for a synthetic short future, the positions are reversed.

The purpose of doing this is to replicate the payoff of the futures contract (without owning a physical asset) and or to bypass/reduce the limitations/risks associated with trading actual futures contracts.

Risks associated with Synthetic Futures

Liquidity Risk: Traders can face difficulty in executing and exiting synthetic future trades because of limited liquidity available, particularly in stock-specific contracts. Further, a higher bid-ask spread can reduce the profits.
Regulatory Restrictions: The use of synthetic futures contracts may be subject to regulatory compliance and restrictions in certain jurisdictions. Investors should be aware of the applicable laws and regulations governing these contracts in their respective countries.
Counterparty Risk: If you’re trading in Over the counter (OTM) markets, synthetic futures may involve counterparty risk, there is a risk of default or non-performance by any of the involved parties. It is crucial for investors to assess the creditworthiness and reliability of the counterparties before entering into synthetic positions.

Benefits of Synthetic Futures

Lower Margin Requirements: One of the key advantages of synthetic futures contracts is that they often require lower margins compared to traditional future contracts.
Flexibility and Customization: Synthetic future contracts enable investors to speculate on the various asset classes, including commodities, currencies, indices, and even individual stocks. Also, it allows traders to do certain adjustments using call and put options which is absent in future contracts.
Cost Efficient: The ability to make adjustments in the underlying asset helps in saving a lot of money.
Potential for Enhanced Returns: Due to the lower capital requirements and the ability to leverage derivative instruments, synthetic futures contracts offer the potential for enhanced returns.

Example

Consider that Berger paints is trading at INR 500. And a trader purchases a call option of ATM strike price, i.e., 500 strike for INR 50. This call option gives the trader the right, but not the obligation, to buy Berger Paints stock.

Simultaneously, the trader sells a put option of 500 (ATM strike) for INR 30, with the same expiration date.

By doing this, the trader has effectively created a synthetic long futures contract on Berger Paints stock by combining these two options. Thus, he or she can profit from the price increase if the stock price rises above INR 500.

Based on the below formula, the net outflow of synthetic futures will be calculated as follows:

Net Cash Outflow = Call option – Put option = 50-30 = 20

Keep a note that we are buying the ATM Call Option and simultaneously selling the ATM Put Option. Further, the call and put options belong to the same underlying and same expiry. Synthetic Long mimics the payoff of the long futures contract. In case of short synthetic futures, we buy ATM Put Option and sell ATM Call Option of the same underlying and same expiry.

Let us consider a few expiry scenarios:

Berger Paints stock expires at 400 (Below ATM)
- At 400, the 500 CE will expire worthless, hence we will lose call premium paid that is INR 50 but PE will have an intrinsic value of Max (Strike – Spot, 0), i.e., Max (500-400, 0) or 100 as we are short on this put option, we will lose the money from the premium, 30 – 100 = (70)
- Total payoff from the long Call and short Put position would be, -50 – 70 = (120). Here, we made a loss of INR 120.

Stock expires at 500 (At ATM )
- If the market expires exactly at 500, then both the options will expire worthless. Hence, we will lose the premium paid for the call option option = 50. But we will be able to retain the premium for the PE option = 30.
- The net payoff from both the positions will be, 30-50 = (20). Here, we made a loss of INR 20.

Stock expires at 600 (Above ATM)
- At 600, the 500 long CE would have an intrinsic value of 100, we would make, [Intrinsic value – Premium Paid] = 100 – 50 = +50. The 500 short PE would expire worthless; hence we get to retain the premium of INR 30.
- Total payoff would be = +50 + 30 = INR 80

We can conclude that the strategy makes money when the market moves higher and loses money when the market goes down, similar to futures. However, this does not necessarily mean that the payoff is similar to that of futures. To establish that the synthetic long payoff behaves similar to the futures, there should be a payoff symmetry around the breakeven point that is called linearity and then only it will behave like futures.

Conclusion

Synthetic futures contracts have gained popularity in the financial markets as they provide investors with a unique tool to gain exposure to the underlying assets without actually owning them. These contracts are designed to replicate the price movement and characteristics of traditional futures contracts.

By replicating the characteristics of an actual Futures contract, Synthetic futures give flexibility, risk management and increased trading opportunities. However, it is essential to understand the risks involved and have a good understanding of options strategies with proper knowledge and skill.

FAQs

What is a Synthetic Futures?
A Synthetic Future is a financial instrument that mimics a futures contract’s characteristics and potential returns without having its limitations.
Can I create Synthetic Futures apart from Options?
Yes, it can be created using other financial instruments as well, like Swaps and CFDs.
What are the advantages of Synthetic Futures?
It provides alternative trading strategies and effective risk management tools.
What is one of the limitations of Synthetic Futures?
One of the limitations of Synthetic futures is the limited availability of certain synthetic instruments because of low volumes in call and put options.
Is Counterparty Risk involved in Synthetic Futures?
Counterparty risk is the risk of loss from a default of the counterparty. In case of OTC markets, it is a primary risk in synthetic futures and are subject to creditworthiness of the counterparty.

June 7, 2024

What is a Dividend? Meaning, Key Dates, and Types Explained

We know that one should invest a portion of their income in the securities market. But did you know that there’s a way to earn money while being invested?

Today, we’re going to walk you through a unique way to earn passively. We’ll cover what a dividend is, the most important dates you’ll need to know as an investor and the types of dividends that a company can pay.

Meaning Of Dividend

In simple terms, a dividend is a payment by a corporation to its shareholders, which is commonly realized through the company’s profits. When a company earns a profit, it can choose to either reinvest the money back into the business (retained earnings) or distribute a portion of it to shareholders in the form of a dividend. Dividends are a way for companies to reward shareholders for their investment and provide a steady stream of income.

Therefore, dividends are seen as a sign of a company’s financial health and stability. Companies that consistently pay dividends, especially those that increase their dividend payout ratios over time, are often viewed as financially sound and stable. This can make dividend-paying stocks particularly attractive to income-focused investors, such as retirees, who rely on the steady income that dividends provide.

Dividend Key Dates

To fully understand the dividend process, it’s important to know the key dates involved:

Declaration Date

It is the date when the board of directors of the company declares the dividend to be paid out. It usually states how much money is to be given out and dates set for the record date and payment date. The declaration date is the first signal to investors that a dividend will be paid.

Ex-Dividend Date

This is the cutoff date established by the stock exchange. If you purchase a stock on or after this date, you will not be eligible to receive the declared dividend. For one to qualify to be paid the dividend, the person should own the share before the ex-dividend date.

Record Date

This is the date when the company reviews its records to determine which shareholders are eligible to receive the dividend. The record date is usually one business day after the ex-dividend date. It’s the official date on which you must be on the company’s books as a shareholder to receive the dividend.

Payment Date

This is the date when the dividend is actually paid out to shareholders. In other words, it is the date when money is released and transferred to shareholders in their brokerage accounts.

Read Also: What is Dividend Yield?

Example of Dividends

Let’s say Company XYZ declares a dividend on January 1st of $2 per share:

– Declaration Date: January 1st, when the company announces it will pay a dividend of $2 per share.

– Ex-Dividend Date: January 15th. To be eligible for the dividend, you need to purchase the stock by January 14th.

– Record Date: January 16th, when the company checks its records to see who is eligible.

– Payment Date: January 31st, when eligible shareholders receive their dividends.

If you own 100 shares, you will receive a total of $200 in dividends (100 shares * $2 per share) on January 31st.

Calculate Dividend Yield – Dividend Yield Calculator

Types of Dividends

Companies can issue several types of dividends, each with its own characteristics and implications for shareholders:

Cash Dividends

This is the most common type and pays the holder in cash, either to their brokerage account or with a physical check. This is the form of the dividend that most people think about and refer to when they use the term dividend.

Stock Dividends

Instead of cash, shareholders receive additional shares of the company’s stock. In other words, this exercise allows more share ownership without giving out cash. Stock dividends are popular because they allow the holder’s interest in the business to widen without the holder spending money to earn new share rights. Thus, the company can safeguard its cash while satisfying the shareholders.

Property Dividends

These dividends are paid out in the form of assets other than cash, such as products or physical assets owned by the company. Property dividends are rare and can include items like real estate, inventory, or other physical assets.

Special Dividends

These are one-time payments that a company issues, usually when it has accumulated substantial profits or has excess cash reserves. Special dividends are not recurring and are often larger than regular dividends, reflecting a particularly strong performance period for the company.

Preferred Dividends

These dividends are paid to holders of preferred stock and are typically fixed amounts paid on a regular schedule, often quarterly. Preferred dividends have priority over common dividends, meaning they are paid out first. Thus making preferred shares a more predictable income source.

Read Also: How to invest in dividend stocks?

How can I track Dividends?

You can access the corporate actions page to get the detailed list.

Conclusion

Understanding dividends and their associated dates is essential for any investor seeking to benefit from this form of income. By keeping track of declarations, ex-dividends, records, and payment dates, investors can ensure they are positioned to receive dividends.

Hence, whether you’re an amateur investor or a seasoned pro, dividends can play a valuable role in building a growing portfolio. However, you must perform your analysis before investing in any stock.

Frequently Asked Questions (FAQs)

What are Dividends?
Dividends are the distribution of the company’s earnings to the shareholders.
Is it mandatory for companies to continue paying dividends?
No, a company can stop paying regular dividends if its financial situation does not allow it to part ways with cash. However, most companies continue paying dividends once they have started.
Why Are Dividends Important to Investors?
Dividends provide a regular income stream, which is particularly important for income-focused investors such as retirees. Dividends also act as a sign of a company’s financial health.
Would I receive a dividend if I purchased the share after the ex-dividend date?
No, the ex-dividend date determines who qualifies to receive the dividend. If you purchased the stock on or after the ex-dividend date, you will not be eligible for the declared dividend.
How are dividends taxed?
Dividends are not taxed upto INR 5000 in India. Any dividend income you receive beyond this limit will be taxed according to the applicable tax rates.

June 6, 2024

XIRR Vs CAGR: Investment Return Metrics

We all know that we should choose securities that generate the highest return. But have you wondered which return should we consider while evaluating securities?

This blog will delve deeper into two of the most popular methods to evaluate returns.

What is CAGR?

CAGR stands for the Compounded Annual Growth Rate. It measures an investment’s annual growth rate over time and is often used to measure and compare investments’ past performance or to project their expected future returns. It calculates the constant average growth rate over a period of time for a long-term investment.

The compound annual growth rate isn’t a true rate of return. It describes the growth rate at which an investment has grown, assuming that the growth rate is the same every year and that the profits are reinvested at the end of each year. In reality, this kind of performance is unlikely because the growth rate depends upon multiple outside market factors. However, the CAGR can be used to smooth returns so that they may be more easily understood compared to alternative methods.

Mathematical formula

CAGR = (EV / BV)^(1 / N) – 1

where: EV = Ending value, BV = Beginning value, and N = Number of years

Calculation

Divide the value of an investment at the end of the period by its value at the beginning of that period.
Raise the result to an exponent of one divided by the number of years.
Subtract one from the subsequent result.
Multiply by 100 to convert the answer into a percentage.

CAGR Limitations

It smooths the growth rate, so it does not give a true picture as it ignores volatility and implies that the growth during that time was steady.
It doesn’t account for the inflow and outflow of the funds from the portfolio over the period of time.
It ignores volatility and is hence not useful in forecasting growth rates during unstable times.
It is not relevant for early growth ventures as they are naturally volatile.

Can CAGR be improved?

The major limitation of CAGR is that it calculates a smoothed rate of return over time, ignoring volatility. To improve these limitations, investors can use a risk-adjusted CAGR. A simple method for calculating a risk-adjusted CAGR is to multiply the CAGR by one minus the investment’s standard deviation [standard deviation measures total risk, which is the sum of systematic (market-specific) and unsystematic risk (investment-specific)].

If the standard deviation is zero, the risk-adjusted CAGR is unaffected. If the standard deviation is larger, the risk-adjusted CAGR will be lower.

What is XIRR?

XIRR, or Extended Internal Rate of Return, is a method to calculate the annualized return on investment with irregular Cash flows. It considers all cash inflows and outflows, along with the dates on which they occur, to calculate the annual rate of return. XIRR considers the timing and amount of each cash flow, making it a more accurate method for investments with irregular cash flows. It is more flexible than CAGR as different time horizons and different cash flows can be easily accounted for here.

XIRR calculation is tricky, but any financial XIRR calculator or spreadsheet can do this instantly. XIRR solves for the rate of return that makes the NPV (Net Present Value) of all cash flows equal to zero.

What is the difference between CAGR & XIRR

CAGR	XIRR
Simple rate of return based on Beginning and Ending Value.	More complicated and takes into account both investment outlay and cash flows.
Suitable for calculating returns of one-time investment.	Suitable for calculating returns of investments with irregular cash flows.
Doesn’t consider the timing of cash flows.	Consider the timing of cash flows.
Computes the average annual growth rate.	Computes the Internal Rate of Return (IRR).
Simple to calculate but less accurate.	More complex to calculate but more accurate.

Suitable Metric to Calculate Mutual Fund Returns

If you invest a lump sum amount without a regular series of investments, then one can use the CAGR as the timing of the investment, and periodic cash flows won’t be an issue. But when you choose to invest through SIPs, regular outlays/payments on a particular date, then using CAGR is not an appropriate way to calculate the return, as it ignores the timing of investments and considers only the first and last values. So, in such cases, one can use XIRR to calculate the actual return for your SIP investments.

Therefore, if it’s an open-ended fund with irregular cash flows (in the form of SIPs), then XIRR is the preferred method. If it is a close-ended fund where the fund has a constant growth rate and accepts lump sum cash outlays only, then CAGR is the preferred method.

Conclusion

Both methods are used to calculate returns, and both have pros and cons. Therefore, according to the time horizon and cash inflow/outflow plan, one should decide which method to use.

Absolute return is best for short-term investments, but CAGR is best for longer-term investments with fixed cash outlays. However, XIRR is the most useful in cases of multiple cash flows (SIPs) as it considers the timing of each cash flow while calculating an annualized return.

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5	Tata Steel vs. JSW Steel

Frequently Asked Questions (FAQs)

What is CAGR?
Compound Annual Growth Rate, or CAGR, is the annual growth of your investments over a specific period of time. In other words, it measures how much you have earned on your investments per year during a given interval.
What is XIRR?
XIRR, or Extended Internal Rate of Return, is the annualized return on investment while considering irregular cash flows.
Which calculation method is better, CAGR or XIRR?
XIRR is better than CAGR as it is more flexible and can calculate the returns on investments with multiple cash flows at different times, while CAGR can only calculate the returns for a single cash inflow and outflow.
Which method should one use to calculate mutual fund returns?
The answer depends on the type of investment. For lump sum investments, CAGR is a good enough measure of returns. However, for investments with irregular cash flows, such as SIPs, XIRR is a better measure of returns.
Can CAGR be negative?
Yes. A negative CAGR indicates losses over time rather than gains.

June 5, 2024

What are Stock Splits? Meaning, Reason, Types, and Impact Explained

Stock split is a unique corporate action in which the shareholder’s shares get divided into multiple shares. While the overall value of the shares remains the same, the shares increase in number.

But what exactly is a stock split, and why does it matter to investors in India? This blog will answer all your questions regarding stock split.

Stock Splits Meaning

A stock split is when a company divides its existing shares into multiple shares. However, the total market value of the company doesn’t change, even though the number of shares increases.

You can imagine cutting a piece of pie into smaller portions — while the number of pieces increases, the total amount of pie remains the same. This move is generally done to make individual shares more affordable and attract a wider range of investors who were unable to enter due to the high price point.

Reason for Stock Splits

Companies make use of stock splits to make their shares more appealing and accessible to investors. When a company’s share price shoots up drastically, it can discourage small scale investors from buying. Therefore, by splitting the stock, companies lower the price per share, making it more affordable and thus increasing liquidity.

For example, imagine a company’s share price has increased to ₹10,000. Many retail investors might find it too expensive to invest. However, if the company announces a 10-for-1 stock split, each share’s price would drop to ₹1,000, making it more attainable for a larger audience.

Types of Stock Splits

There are broadly two types of stock splits. They are explained below:

Forward Stock Split – This is the most common type of split, where the number of shares increases and the price per share decreases. For instance, in a 2-for-1 split, each existing share splits into two, doubling the number of shares and cutting the price per share in half.
Reverse Stock Split – This type is relatively less common, it involves reducing the number of shares, which in turn increases the price per share. For example, in a 1-for-5 reverse split, five shares are consolidated into one, making the price of each share five times higher.

Psychological Impact of Stock Split

Stock splits can have a significant psychological impact on investors. When a company announces a stock split, it creates a perception of growth and confidence in the company’s future. This perception is largely based on the idea that the company seeks the trust of retail investors.

This positive sentiment can drive up demand for the stock, sometimes leading to an increase in the stock price post-split, even though the overall market value of the company remains unchanged.

Calculations of a Stock Split

Let’s break down the calculation with an example. Suppose you own 100 shares of a company, XYZ Limited, with each share priced at ₹500. Your total investment is ₹50,000 (100 shares x ₹500).

XYZ Limited then announces a 2-for-1 stock split. After the split, you will own 200 shares, but the price per share will be halved to ₹250. Thus, your total investment remains the same at ₹50,000 (200 shares x ₹250).

Similarly, if XYZ Limited opted for a 3-for-1 stock split, you would end up with 300 shares priced at approximately ₹166.67 each, maintaining the total value of your investment.

The market value of the company remains the same after the stock split, thus reducing the value of each share.

Pros and Cons of Stock Splits

Pros

Increased Liquidity – More shares at a lower price can increase trading volume and liquidity.
Enhanced Affordability – Lower-priced shares are more accessible to small investors, widening the shareholder base.
Positive Market Perception – A stock split can signal that the company is performing well and expects future growth.

Cons

No Fundamental Change – A stock split doesn’t change the company’s fundamentals. It’s more of a cosmetic change without affecting the company’s market capitalization or intrinsic value.
Possible Volatility – Post-split, stocks can experience higher volatility as new investors start investing. This increase in demand can make the stock appear more valuable than it actually is.

How can I track Stock Splits?

You can access the corporate actions page to get the detailed list.

Conclusion

Stock splits play a crucial role in making shares more accessible and enhancing market liquidity. Although they don’t alter a company’s fundamental value, they can significantly influence investor perception and market dynamics.

Understanding stock splits is extremely important for investors, as it equips them with the knowledge to navigate the market more effectively.

Frequently Asked Questions (FAQs)

Is it mandatory for the listed companies to declare a stock split or reverse stock split once the share price reaches a certain point?
No, it is entirely optional for companies. For example, MRF Ltd. has never done a stock split, and its shares are currently among the most expensive shares to purchase in the Indian share market.
What is the key difference between Forward Stock Split and Reverse Stock Split?
The key difference between the two is that a forward stock split increases the number of outstanding shares, and a reverse stock split decreases the number of outstanding shares. The total market value of the organization remains the same in both cases.
Is there any impact on liquidity by stock split?
Yes, the liquidity of the stock is increased after a stock split as it increases the number of outstanding shares of the company and decreases the price per share, making it affordable to potential investors.
Who announces the stock split?
The company’s Board of Directors have the authority to announce a stock split.
Is there any impact of a stock split on the company’s fundamentals?
No, there is no impact of a stock split on the company’s fundamentals.

June 3, 2024

What is Right Issue of Shares: Meaning, Examples, Features

Have you ever asked yourself how some firms get additional capital without going to the banks and/or financial backers? This brings us to the rights issue — a powerful technique that enables organizations to give current shareholders a chance to purchase more of the same stock at a lesser price.

This blog will dig deeper into the world of capital structure and explain how rights issues work, its advantages, and drawbacks.

Meaning of Right Issue of Shares

A rights issue is a process through which businesses offer existing shareholders an opportunity to buy more shares at a lower price in their efforts to source capital in the market. This approach enables companies to look for capital for expansion, to redeem debts, or for any other purposes without causing major changes in the percentage ownership of the shareholders.

Features Of Right Issue of Shares

Companies exercise a rights issue when they need cash flow for various objectives. The process may allow the company to raise money without incurring underwriting fees. However, few rights may be underwritten if the company wants to secure the amount of capital raised.
These rights are usually distributed as dividends, and the number of additional shares the shareholders can purchase is generally proportional to their existing shareholding. The holder may entirely or partially exercise rights.
A rights issue gives privileged treatment to existing shareholders, who are given the right to buy shares at a lower price on or before a particular day.
Existing shareholders also have the advantage of the right to trade with other concerned market participants until the new shares can be purchased. The rights are sold in a similar way as average equity shares.
Existing shareholders can also disregard the rights; however, their existing shareholding will be diluted post-issue of additional shares if they do not purchase additional shares

Example of Right Issue of Shares

Suppose an investor owns 100 shares of XYZ Ltd., trading at INR 20 per share. The company set forth a rights issue in the ratio of 2 for 5, i.e., all investors holding 5 shares will be eligible to buy 2 more new shares. The company declared a discounted price, say, INR 15 per share. That means, for every 5 shares (at INR 20 each) held by a pre-existing shareholder, the company will offer 2 new shares at a discounted price of INR 15.

Investor’s Portfolio Value (before rights issue) = 100 shares x INR 20 = INR 2,000
Number of additional shares to be received = (100 x 2/5) = 40
Amount paid to buy rights shares = 40 shares x INR 15 = INR 600
Total no. of shares after exercising rights issue = 100 + 40 = 140
Increased value of the portfolio after exercising rights issue = 140 Shares x 20 = INR 2,800

Key Dates of Right Issue of Shares

Announcement Date – It is the date on which the Board announces the Rights Issue. It is also known as the Declaration Date.

Record Date – It is the date on which a company that has offered Rights issue decides the eligible shareholders to receive the right to buy additional shares.

Ex-Rights Date – This is the date before which you need to purchase the shares to be eligible to receive the right. Generally, it is two days prior to the record date as settlement takes two days in most of the markets, which means shares purchased today will be credited to your demat account after T+2 days (Trading day + 2 days). As of December 2023, we have a T+1 settlement in India, so the Ex-Right Date is one day before the record date.

How can I track Rights Issues?

You can access the corporate actions page to get the detailed list.

Conclusion

Rights issue is one way a listed company can raise capital without incurring high costs by offering to purchase new shares to existing shareholders at a fixed price. This process is entirely voluntary and does not require the existing shareholders to participate.

Although this corporate action garners a lot of attention from shareholders due to its enticing features, it is extremely important to perform your analysis before participating in the issue.

Frequently Asked Questions (FAQs)

How is the price of the rights issue determined?
The price of the rights issue is determined by the company based on multiple factors like current market conditions, the company’s financial position, and the discount offered to shareholders.
What are the risks of investing in a rights issue?
The issue in itself does not have any major risk outside of the risk of oversubscription, where shareholders may not be able to acquire their desired number of additional shares. However, there exists a possibility of the company not performing well financially, leading to a decline in share value.
What happens if a shareholder doesn’t participate in a rights issue?
If a shareholder chooses not to participate in a rights issue, their ownership in the company will be diluted as other shareholders will purchase additional shares. However, they can still retain their existing shares.
How are shareholders notified about a rights issue?
Shareholders are notified about a rights issue through official announcements by the company, which include information on the issue size, subscription price, and the timeline.
Why do companies choose to raise money through rights issues?
Companies choose the option of rights issues in order to raise additional capital for various purposes such as funding expansion projects, reducing debt, or strengthening their financial position.

June 3, 2024

Particulars	March 31, 2024	March 31, 2023
Non-current assets	40,642.22	35,233.37
Current assets	8,041.84	8,878.06
Non-current liabilities	41,990.79	34,063.85
Current liabilities	7,561.93	9,078.73

Particulars	March 31, 2024	March 31, 2023
Revenue from Operations	8,755	6,674
Total Expenses	5,789	4,968
Operating Profit	2,966	1,745
Profit before tax	-635	-726

Blog

GMR Airports Overview

GMR Airports History

Business Model of GMR Airports

GMR Airports Financial Highlights

Balance Sheet

Income Statement

Cash Flow Statement

GMR Airports SWOT Analysis

Strengths

Weaknesses

Opportunities

Threats

Conclusion

Frequently Asked Questions (FAQs)

In the infrastructure sector, what sets GMR Airports Infrastructure Limited apart?

Where is GMR Airports Infrastructure Limited’s headquarters?

Which airports are some of GMR Airports Infrastructure Limited’s flagships?

Is GMR Airports Infrastructure Limited publicly listed?

What does GMR Airports Infrastructure Limited do?

What is the NIFTY EV

Reasons for the New Index

Key Points to Note

Sector Representation & Current Components

Market outlook of EV Sector

Bullish Outlook

Bearish Outlook

Conclusion

Frequently Asked Questions (FAQs)

What sectors are included in the EV index?

How is the New EV index beneficial for investors?

Is this the first EV Index globally?

How often will the index be reviewed?

Is it a good time to invest in EVs?

What is Day Trading?

What is Swing Trading?

What is the difference between Day Trading Vs Swing Trading

Quick Summarization

Conclusion

Frequently Asked Questions (FAQs)

What is Day Trading?

What is Swing Trading?

Do Swing Traders make multiple trades?

Which trading Strategy is less risky?

What is the major difference between Day Trading and Swing Trading?

Blue Star Overview

Product Portfolio

Distribution Channel

Market Details

Financial Highlights

Balance Sheet

Income Statement

Cash Flow Statement

KPIs

SWOT Analysis

Strengths

Weaknesses

Opportunities

Threats

Conclusion

Frequently Asked Questions (FAQs)

Is Bluestar an Indian company?

Who is the head of Bluestar?

Is Bluestar a profit-making company?

Does Bluestar operate in the international market?

What products does Bluestar manufacture?

Meaning Of Bonus Issue

How Does a Bonus Issue Work?

Purpose of Bonus Issues

Process of Issuing Bonus Shares

Implications for Shareholders

Key Dates

Impact on the Stock Market

Indian Case Studies of Bonus Issues

How can I track Bonus Issues?

Conclusion

Frequently Asked Questions (FAQs)

Why do companies issue bonus shares?

How does a bonus issue affect the share price?

Are bonus shares taxable in India?