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FAQs on Capital Market - Part 2 Research Team | Posted On Tuesday, April 14,2009, 06:33 PM

FAQs on Capital Market - Part 2



1. Whose shares can I pledge?

For most of the banks, borrower can pledge his own shares or those belonging to any of the following: his spouse, children (above 18 years of age), parents, brother(s)/sister(s),in Laws, Grandparents, Grandchildren (above 18 years of age) .

2. What usually are the criteria for availing loans against shares?
The shares should be on the permitted list of the bank which would be revised periodically. The shares should be fully paid up, Scrips in the name of corporate, minors, Firms, HUF, and NRIs will not be entitled for finance under this scheme. Individuals cannot pledge scrips of companies of which they themselves are directors/Promoters, all shares should be in their marketable lots only.          
3. What is the interest rate I have to pay?
It depends upon the schemes section which contains the interest rates charged by various Banks. Usually, Interest is calculated on a daily basis and charged only for the sum and time during which borrower can utilize the funds.
The interest rates charged by the banks differ with the scrip, whether it's physical or demat .For most of the banks, interest rate range varies from 15% to 18.5% so, borrower will also be charged an additional 2 % interest p.a. on the sum by which their outstanding exceed the limit and for the period it is in excess.  
4. Do I get any special privileges as Loans against Shares customer?
Yes! As Loans against Shares customer, several banks give a host of value added services. These include, Concessional rates on depository account, Concessional rates on various Loan Products, Free access to 24 hour ATM facility, Free Access to 24 hour Bank by Phone facility Borrower can lodge or withdraw his shares, 6 days a week, Borrower get all dividend, bonus and rights issues even while the shares are with the bank, he can choose from one of the largest list of securities, he should pay interest only on the amount utilized.
5. What are the documents that are required?
Usually, the following documents are required. 
  •  For shares in demat form,

  • Transaction request form. The lender will sell shares in case default using this form.

  • Photocopy of dividend warrants of shares and units to be pledged. 

  •  Covering letter from the company received by the shareholder at the time of transfer.
 For shares in physical form
  • Share certificates
  • Signed and valid transfer deeds (not more than a month old).
  • Photocopies of dividend warrants of shares and units to be pledged.
  • Allotment letter for rights or bonus shares from the company, or broker contract note specifying share certificate and distinctive numbers.
  • Covering letter from the company received by the shareholder at the time of transfer
6. Tell me with so many banks offering this scheme which one should I go for?
Cost of loan: This is one of the most important if not the most important thing to choose when one goes for "Loan against Shares". Remember the charge of the loan does not include only the interest I have to pay but the processing, documentation charges and administrative fees. Go through the schemes carefully and decide the one which offers the lowest total financing cost.
Periodicity of margin review and time to meet the shortfall: This is the second most important point to keep in mind when one needs to avail of this facility. The frequency of review could differ from daily to monthly. And the time to make up the shortfall could differ from a week to a month. Select the banker whose periodicity of margin review is lower and who offers more time to meet the loss.
Relationship with lender: If borrowers existing bank branch grants a loan against equity, it might be possible to get a discount in the interest rate or a lower processing fee, on account of the existing relationship. All other things being equal (which they seldom are), it may be worthwhile to consider this option if the total financing price and loan amount meet borrowers requirements.
Time taken to process the application: Various lenders, process the loan very quickly; others take longer. Compare lenders on how much time they take to sanction loan, if that is an important consider that loan.
Add-on facilities: What are the extra benefits   will get from the lender? Do they include ATM card, credit card, anywhere   banking, phone banking, 24-hour banking and cash pick-up facility? Some also propose portfolio advisory services. But remember that these services could come at a price, if a particular loan comes with these add-ons; go for it only if the total financing charge of the loan is the same. So, borrower should consider whether he is willing to pay for the loan.
7. What is SENSEX?
The SENSEX, short form of the BSE-Sensitive Index, is a "Market Capitalization-Weighted" index of 30 stocks representing a model of large, well-established and financially sound companies. It is the oldest index in India and has acquired an exclusive place in the collective consciousness of investors. The index is broadly used to evaluate the performance of the Indian stock markets. SENSEX is considered to be the pulse of the Indian stock markets as it represents the basic universe of listed stocks at The Stock Exchange, Mumbai. Further, as the oldest index of the Indian Stock market, it provides time sequence data over a fairly long period of time.
8. What are the objectives of SENSEX?
The SENSEX is the benchmark index of the Indian Capital Markets with broad acceptance among individual investors, institutional investors, foreign investors and fund managers. The objectives of the index are:
•   To measure market movements
Given its long history and its broad acceptance, no other index matches the SENSEX in reflecting market movements and sentiments. SENSEX is broadly used to describe the mood in the Indian Stock markets.
•   Benchmark for funds performance
The inclusion of blue chip companies and the broad and balanced industry representation in the SENSEX makes it the ideal benchmark for fund managers to compare the performance of their funds.
•   For index based derivative products
Institutional investors, money managers and small investors every one refer to the SENSEX for their specific purposes, the SENSEX is in cause the proxy for the Indian stock markets, the country's first derivative product that is Index-Futures was launched on SENSEX.
 9. What are the criteria for selection and review of scrips for the SENSEX?
A. Quantitative Criteria:
a. Market Capitalization:
The scrip should figure in the top 100 companies scheduled by market capitalization. Also market capitalization of all scrip should be more than 0.5 % of the total market capitalization of the Index i.e. the minimum weight should be 0.5 %. Since the SENSEX is a market capitalization weighted index, this is one of the main criteria for scrip selection. (Market Capitalization would be averaged for last six months)
b. Liquidity:
      i.        Trading Frequency: The scrip should have been traded on all and each trading day for the last one year. Exceptions can be made for tremendous reasons like scrip suspension etc.
     ii.        Number of Trades: The scrip should be amongst the top 150 companies listed by average number of trades per day for the last one year. (iii) Value of Shares Traded: The scrip should be among the top 150 companies listed by average value of shares traded for each day for the last one year.
c. Continuity:
When the composition of the index is changed, the continuity of historical sequence of index values is re-established by correlating the value of the revised index to the old index (index before revision). The back calculation over the last one-year time is carried out and correlation of the revised index to the old index should not be less than 0.98. This ensures that the historical stability of the index is maintained.
d. Industry Representation:
Scrip selection would take into account a balanced representation of the listed companies in the universe of BSE, the index companies must be leaders in their industry group.
e. Listed History:
The scrip should have a listing history of minimum one year on BSE.
B. Qualitative Criteria:
Track Record: In the view of the Index Committee, the company should have an acceptable track record.
10. What is the beta of SENSEX scrips?
Beta measures the sensitivity of a scrip movement in relation to movement in the benchmark index i.e. SENSEX. A Beta of one means that for each change of 1% in index, the scrip moves by 1%. Statistically Beta is defined as: Covariance (SENSEX, Stock)/ Variance(SENSEX), Covariance and variance are calculated from the Daily Returns data of the SENSEX and SENSEX scrips.
11. How is SENSEX calculated?
SENSEX is calculated using a "Market Capitalization-Weighted" method. As per this method, the level of index at any point of time reflects the total 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). An index of a set of collective variables (such as price and number of shares) is generally referred as a 'Composite Index' by statisticians. A single indexed number is used to represent the outcome of this calculation in order to make the value easier to work with and track over time, it is easier to graph a chart based on indexed values than one based on actual values.
The base period of SENSEX is 1978-79; the real total market value of the stocks in the Index during the base period has been set equal to an indexed value of 100. This is frequently indicated by the notation 1978-79=100. The formula used to estimate the Index is fairly straightforward. But, the estimation of the adjustments to the Index (commonly called Index maintenance) is more complex.
The estimation of SENSEX involves dividing the total 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 cost of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index maintenance adjustments, during market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to estimate SENSEX every 15 seconds and disseminated in real time.
 12. How is the closing Index calculated?
The closing SENSEX is computed taking the weighted average of every trade on SENSEX constituents in the last 15 minutes of trading session. If a SENSEX constituent has not traded in the last 15 minutes, the last traded value is taken for computation of the Index closure. If a SENSEX component has not traded at all in a day, then its last day's closing price is taken for calculation of Index closure. The use of Index Closure Algorithm stops any intentional manipulation of the closing index value.
13. How is the routine maintenance of SENSEX carried out?
One of the significant aspects of maintaining continuity with the past is to update the base year average. The base year cost adjustment ensures that additional issue of capital and other corporate declaration like bonus etc. do not destroy the value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in the Index should not per se influence the index values.
The Index Cell of the Exchange does the day-to-day continuation of the index within the broad index policy framework set by the Index Committee. The Index Cell takes extraordinary care to ensure that SENSEX and the other entire BSE index preserve their benchmark properties by striking a delicate balance between high turnover in Index scrips and its representative character. The Index Committee of the Exchange has specialist from different field of finance related to the capital markets, they include Academicians, Fund-managers from leading Mutual Funds, Finance - Journalists, Market Participants, Independent Governing Board members, and Exchange administration.
14. How are adjustments for Bonus, Rights and newly issued Capital carried out in SENSEX?
The arithmetic estimation involved in calculating SENSEX is simple, but problem take place when one of the component stocks pays a bonus or issues rights shares. If no adjustments were made, a discontinuity would take place between the current value of the index and its previous value. The Index Cell of the Exchange periodically adjusts the base value to take care of such corporate declaration.
Adjustments for Rights Issues:
When a company, included in the compilation of the index, issues right shares, the market capitalization of that company is improved by the number of extra shares issued based on the theoretical (ex-right) price, an offsetting or proportionate adjustment is then made to the Base Market Capitalization.
Adjustments for Bonus Issue:
When a company, included in the compilation of the index, issues bonus shares, the market capitalization of that company does not go through any change. So, there is no change in the Base Market Capitalization, only the 'number of shares' in the formula is updated.
Other Issues: Base Market Capitalization Adjustment is necessary when new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of shares, corporate restructuring etc.
Base Market Capitalization Adjustment: The method for adjusting the Base Market Capitalization is as follows: New Base Market Capitalization = Old Base Market Capitalization X (New Market Capitalization/Old Market Capitalization)
 15. With what frequency is SENSEX calculation done?
During market hours, prices of the index scrips, at which trades are executed, are automatically used by the trading computer to compute the SENSEX every 15 seconds and continuously updated on all trading workstations connected to the BSE trading computer in actual time.
16. Whom should I contact for my Stock Market related transactions?
Borrower can contact a broker or a sub broker registered with SEBI for carrying out your transactions pertaining to the capital market.
17. Who is a broker?
A broker is a member of a recognized stock exchange, who is allowed to do trades on the screen-based trading system of different stock exchanges; he is enrolled as a member with the concerned exchange and is registered with SEBI.
18. Who is a sub broker?
A sub broker is a person who is registered with SEBI as such and is affiliated to a member of a accepted stock exchange
19. How do I know if the broker or sub broker is registered?
Borrower can confirm it by verifying the registration certificate issued by SEBI. A broker's registration number starts with the letters "INB" and that of a sub broker with the letters “INS". For the brokers of derivatives section, the registration number starts with the letters “INF”. There is no sub-broker in the derivatives section.
20. Am I required to sign any agreement with the broker or sub-broker?
Yes, for the purpose of engaging a broker to execute trades on behalf borrower from time to time and furnish details relating to himself for enabling the broker to maintain client registration form he has to sign the “Member - Client agreement” if he is dealing directly with a broker. In case he is dealing through a sub-broker then he has to sign a”Broker - Sub broker - Client Tripartite Agreement”. Model Tripartite Agreement among Broker-Sub broker and Clients is applicable only for the cash segment. The Model Agreement has to be executed on the non-judicial stamp paper. The Agreement includes clauses defining the rights and responsibility of Client vis-à-vis broker/ sub broker. The documents prescribed are model formats, the stock exchanges/stock broker may incorporate any extra clauses in these documents provided these are not in conflict with any of the clauses in the model document, as also the Rules, Regulations, Articles, Byelaws, circulars, directives and guidelines.
21. What is Member –Client Agreement Form?
This type is an agreement entered between client and broker in the presence of witness where the client agrees (is desirous) to trade/invest in the securities listed on the concerned Exchange through the broker after being satisfied of brokers capabilities to deal in securities. The member, on the other hand agrees to be satisfied by the legitimacy and financial soundness of the client and making client aware of his (broker’s) liability for the business to be conducted.
22. What kind of details do I have to provide in Client Registration form?
The brokers have to maintain a record of their clients, for which you have to fill client registration form. In case of individual client registration, borrower have to broadly provide following information:
  • Permanent Account Number (PAN), which has been made mandatory for all the investors participating in the securities market.    

  • Name, date of birth, photograph, address, educational qualifications, occupation, residential status(Resident Indian/ NRI/others)

  • Bank and depository account detail.

  • If investor is registered with any other broker, then the name of broker and concerned Stock exchange and Client Code Number.  

For proof of address (any one of the following):
  • Passport
  • Voter ID
  • Driving license
  • Bank Passbook
  • Rent Agreement
  • Ration Card
  • Flat Maintenance Bill
  • Telephone Bill
  • Electricity Bill
  • nsurance Policy
Each client has to use one registration form, in case of joint names /family members, a different form has to be submitted for each person.
In case of Corporate Client, following information has to be provided: 
  • Name, address of the Company/Firm

  • Date of incorporation and date of commencement of business.

  • Registration number(with ROC, SEBI or any government authority)

  • Details of PAN

  • Details of Promoters/Partners/Key managerial Personnel of the Company/Firm in specified format. 

  •  Bank and Depository Account Details

  • Copies of the balance sheet for the last 2 financial years (copies of annual balance sheet to be submitted every year)

  • Copy of latest share holding pattern including list of all those holding more than 5% in the share capital of the company, duly certified by the Company Secretary / Whole time Director/MD. (copy of updated shareholding pattern to be submitted every year)

  • Copies of the Memorandum and Articles of Association in case of a company / body corporate, partnership deed in case of a partnership firm

  • Copy of the Resolution of board of directors' approving participation in equity / derivatives / debt trading and naming authorized persons for dealing in securities.

  • Photographs of Partners/Whole time directors, individual promoters holding 5% or more, either directly or indirectly, in the shareholding of the company and of persons authorized to deal in securities.

  • If registered with any other broker, then the name of broker and concerned Stock exchange and Client Code Number.

23. What is a risk disclosure document?
In order to explain the investors in the markets of the various risks involved in trading in the stock market, the members of the exchange have been necessary to sign a risk disclosure document with their clients, informing them of the various risks like risk of volatility, risks of lower liquidity, risks of higher spreads, risks of new announcements, risks of rumours etc
 24. What are the charges that can be levied on the investor by a stock broker?
The trading member can charge:
1. Brokerage charged by member broker.
2. Penalties arising on particular default on behalf of client (investor)
3. Service tax as stipulated.
4. Securities Transaction Tax (STT) as applicable.
The brokerage, service tax and STT are indicated separately in the contract note.


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