O.FOREIGN EXCHANGE

What is Forex Trading ?
For­eign Exchange is usu­ally termed as Forex. Foreign exchange is the buying and the selling of foreign exchange in pairs of currencies. For example you may buy US dollars and sell Euros or you buy UK Pounds Sterling and sell Japanese Yen. Currencies are bought and sold because governments and companies need foreign exchange for their purchase of and payments for various commodities and services.

Forex / Currency Trad­ing is trad­ing in cur­ren­cies of var­i­ous coun­tries in order to make prof­its. Cur­ren­cies are always traded in pairs mean­ing you can trade in two cur­ren­cies at a time.

You buy one cur­rency and sell another cur­rency. The most traded cur­rency pairs are USD / JPY, GBP / USD AND EURO / USD. The first cur­rency of the pair is called as the base cur­rency.

Buy­ing GBP / USD means you are buy­ing GBP and sell­ing USD. Sim­i­larly sell­ing EURO / USD means you are sell­ing EURO and buy­ing USD.

How to trade in currency / foreign exchange ?

Big money can be made through trad­ing in forex. The rea­son being the mar­gin money require­ment is only 5% of the total trade.

For exam­ple – If you have Rs 1000 in your account, you can take posi­tions on Rs 20,000 (1000*100/5). This means a per­son can take a very large posi­tion in the mar­ket with a small amount.

Let’s under­stand this con­cept by an exam­ple – If one wants to trade in pound and have a cap­i­tal of Rs 75000.

If 1 pound = Rs 75
Lot size is 1000
Total expo­sure = 75000*100 / 5 = Rs 14, 80,000
Case 1 – If the rupee depre­ci­ates by Rs 1, 1 Pound = Rs 76
Trader incur a loss of Rs 1000*10 = Rs 10,000
Case 1 – If the rupee appre­ci­ates by Rs 1, 1 Pound = Rs 74
Trader incur a profit of Rs 1000*10 = Rs 10,000

With rise or fall in cur­rency one can either make money or lose money. Traders should always note there is huge poten­tial of money to be made and the risk is quite high as well.

Investment in cur­rency futures is based on the risk appetite. Ide­ally a small investor should not have expo­sure to this form of instruments.

Forex Trad­ing in India !
At present, deriv­a­tive prod­ucts (futures & options) are avail­able only in four major cur­ren­cies – Dol­lar, Euro, Pound and Yen. These are offered by National Stock Exchange and Multi– Com­mod­ity Stock exchanges.

When someone mentions Foreign Exchange (Forex) market, the usual image that immediately comes to mind is a person waiting behind a counter while a clerk just behind the parting glass counts and changes your local currency into US Dollars.

At some point either when traveling or making an overseas purchase, most people would have in some way participated in the FX market. However, it is more than currency conversion. Increasingly many are now turning to the FX market for the purposes of speculation or dealing at prices formerly only available to financial institutions.

So what is Foregn Exchange all about ?
As defined in The Economist's Guide to Financial Markets, foreign exchange, more popularly referred to as "forex" is a worldwide decentralized over-the-counter financial market for the trading of currencies, wherein financial centers around the globe serves as anchors of trading between a wide range of different types of buyers and sellers 24 hours a day, five days a week.

According to The Economist, foreign exchange market is arguably the world's largest market place. It has an average daily turnover of US$1.9 trillion, with some other sources such as go Market’s Introduction to Foreign Exchange estimating the market to have an average daily turnover in excess of US $ 4 trillion. The Bank for International Settlements says that average daily turnover in global foreign exchange markets is estimated at $3.98 trillion as of April 2010, which is a growth of more or less 20% over the $3.21 trillion daily volume in the same month back in 2007. Bottom-line is foreign exchange has a huge turnover.

One of the prime advantages to trading foreign exchange is the sheer volume of geographically dispersed market participants. This in turn creates liquidity which cannot be matched by any regulated exchange-traded product or instrument.

According to a Wikipedia entry, this liquidity unique to foreign exchange markets along with other characteristics is the reason why it has been referred as the closest ideal of perfect competition.

Now that you know what Foreign Exchange market is all about, you might ask:

How do you trade in Forex ?
In theory the buying and selling of currencies is extremely simple. A trader can buy low, sell high and vice- versa. However, in practice learning the basics is essential before putting your hard earned cash on the line.

This type of trade is thought to constitute about 5% of all currency transactions, with the remaining 95% currency transactions being undertaken for speculation and trade. Companies will also buy and sell foreign currency in order to hedge against exchange rate risks, and to protect their financial investments. The exchange rates in foreign exchange markets also vary continuously and on daily basis, so need to be tracked to make optimal exchange decisions.

Approximately 85% of the trading is done in only US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. This is because they are the most liquid of foreign currencies (i.e. they can be easily bought and sold.) In fact the US Dollar is the most recognizable foreign currency even in countries like Afghanistan, Iraq and Vietnam. Other currencies may not be as liquid, possibly due to exchange controls or political instability, or may be prone to inflation. Then there are others which are pegged to another major currency (usually the US Dollar) and which will therefore track exactly the fortunes of the currency they are pegged to.

The currency trading market is a true 24 hour market with trading being passed from East to West through the trading day. The market opens first in the financial centers of Sydney, moving to Tokyo, London and New York in that sequence through the day.

Investors and speculators can then easily respond to the ever-changing situations and can buy and sell currencies simultaneously if they so wish. In fact many operate in two or more currency markets using arbitrage to gain profits (buying in one market and selling in another market or vice versa to take advantage of the prices and book profits).

There are again various factors which affect the currency markets, and whole areas of scientific analysis have been developed to study the effect of these, such as Technical Analysis and Fundamental Analysis. Both of these tools are used for analyzing a variety of markets such as equity markets, stock markets, mutual funds markets etc.

Technical Analysis refers to reading, summarizing and analyzing data based on the data that is generated by the market. Fundamental Analysis refers to the factors which influence the overall market economy, and in turn how these affect the currency trading markets.

Of course there are other economic and non economic factors which can suddenly affect the trading of the Forex markets such as the 9/11 tragedy, currency devaluations and larger trades placed by national banks, hedge funds etc. Currency markets can therefore be extremely volatile and unpredictable and can also move very fast. This, coupled with the fact that investors typically trade currencies on a highly leveraged basis means that currency trading has the potential for high returns but also for large losses.

Disclaimer
Forex Trading is a very high risk / high reward finan­cial instrument. Trad­ing in For­eign Exchange should be traded only with risk cap­i­tal. Do remem­ber no assured prof­its in forex trading.

From the above and much more..,nothing can give profitable gains when compared to Stocks. Above mentioned each and everyone has their own advantages and Disadvantages.

But, Investing in stocks can enhance number of people’s lives. Right from the Fund Manager, maintaining several millions, to the newly entering investor , everyone’s dream is to make profitable gains. Some succeed and many others fail?

What makes the difference? Is it a chance ( Luck ) or knowledge based one?
As said by Richard Templar, in his Book “ THE RULES OF WEALTH “ the most common fact about money is, It doesn’t differentiates people regarding, Your complexion, Your community, Your sub-caste, Your religion, What your parents were doing etc… and all those things.

It also never minds what you are thinking about yourself. Every day like a Blackboard it starts its Day. Likewise how others are having their own rights to earn, the same kind of opportunities are also left to you. The only Blocking fact is you, and your views about money.

Money doesn’t minds who is handling it, their qualities, their Wishes, they belong to which team etc It has no eyes, no ears, no sentiments A mere dead fine paper with no feelings It has been created, to be used by us, Spent by us, to invest, to struggle, to work for it, etc.

Many rich personalities hold certain rules in earning money. But the common character between them is nothing.

As far as human lives are concerned the need for money had created a rapid change in them. Right from Prime minister to peon and Minister to menial it is common to everyone.

MONEY SAVING !
Generally people of Japan, China, and India largely hold the tendency of saving money routinely. Many proverbs are found regarding Savings. Suppose one is able to control their expenses within their Earnings, they may be able to save money.

As told by a Old proverb 1 Rupee saved is equivalent to 1 Rupees earned Still now i can’t understand its meaning. Can you? We everyone are Earning. Many of us doing Business, some engaged in service oriented works, doing jobs, some exerted to self employment etc, suit to their needs , potential and likes If an attractive income gains are there , sufficient to maintain their family needs, then they may be able to save money.

Some may have deficit in Earning. They may not be able to maintain their needs.

IS SAVING ALONE SUFFICIENT ?
Saving money is a good habit! But is it alone sufficient? No, proper returns must also be obtained To achieve proper returns, smart investments may be made. As to how we are doing our job, our investments also need proper growth depending upon the time limit, and the type of Investment.

IS THE GROWTH ASSURED ?
Many people deposit money in Banks, for secured growth in certain years Some in lands as real Estates, Agricultural lands as fixed assets, few people in Ornaments like Gold, Silver, etc suit to their mentality and urgent needs

# According to a journal, in 1992, an ounce of silver costing 4.73 dollars, the least value occurred ever before Warren Buffet, purchased a huge quantity of Silver after a slight increase, and sold at 10 dollars, by the end of 2006, and gained 100 % pure profit.

Similar instances may be found then and there…!

Why to Invest in Stocks ?
Stocks are but one of many possible ways to invest your hard-earned money. Why choose stocks instead of other options, such as bonds, rare coins, or antique sports cars, Etc?

Quite simply, the reason that savvy investors invest in stocks is that they have historically provided the highest potential returns.

And over the long term, no other type of investment tends to perform better.

WHY TO INVEST IN STOCK MARKET ?
#   We can Invest as we Desire.
#   Only Investment in India with no Encumbrance.
#   Nobody can Encroach.
#   Secured.
#   Requires only less money, unlike buying property and Mortgages etc
#   Requires minimal time to trade or to purchase for Long term
     investments
#   No Capital gains tax ( If holding more than 12 months )
#   More possibilities to gain profits from the Stock market, apart from other sources
#   Easy liquidity, can be en-cashed quickly.

N.OPTIONS

WHAT IS OPTIONS IN STOCK MARKET ? 
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.

STILL CONFUSED?
The idea behind an option is present in many everyday situations. Say, for example, that you discover a house that you'd love to purchase.
Unfortunately, you won't have the cash to buy it for another three months. You talk to the owner and negotiate a deal that gives you an option to buy the house in three months for a price of Rs.20,00,000. The owner agrees, but for this option, you pay a price of Rs.5,000.Now, consider two theoretical situations that might arise: 

1. It's discovered that the house is actually the true birthplace of Elvis! As a result, the market value of the house skyrockets to $1 million. Because the owner sold you the option, he is obligated to sell you the house for $200,000. In the end, you stand to make a profit of $797,000 ($1 million - $200,000 - $3,000). 

2. While touring the house, you discover not only that the walls are chock-full of asbestos, but also that the ghost of Henry VII haunts the master bedroom; furthermore, a family of super-intelligent rats have built a fortress in the basement. Though you originally thought you had found the house of your dreams, you now consider it worthless. On the upside, because you bought an option, you are under no obligation to go through with the sale. Of course, you still lose the $3,000 price of the option.

This example demonstrates two very important points ! 

First, when you buy an option, you have a right but not an obligation to do something. You can always let the expiration date go by, at which point the option becomes worthless. If this happens, you lose 100% of your investment, which is the money you used to pay for the option. 

Second, an option is merely a contract that deals with an underlying asset. For this reason, options are called derivatives, which means an option derives its value from something else. In our example, the house is the underlying asset. Most of the time, the underlying asset is a stock or an index. 

Calls and Puts
The two types of options are calls and puts:

A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires.

FXCM -Online Currency Trading Free $50,000 Practice Account
A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.

Participants in the Options Market
There are four types of participants in options markets depending on the position they take: 
1. Buyers of calls

2. Sellers of calls
3. Buyers of puts
4. Sellers of puts

People who buy options are called holders and those who sell options are called writers; furthermore, buyers are said to have long positions, and sellers are said to have short positions.

Here is the important distinction between buyers and sellers:
-Call holders and put holders (buyers) are not obligated to buy or sell. They have the choice to exercise their rights if they choose.
-Call writers and put writers (sellers), however, are obligated to buy or sell. This means that a seller may be required to make good on a promise to buy or sell.

Don't worry if this seems confusing - it is. For this reason we are going to look at options from the point of view of the buyer. Selling options is more complicated and can be even riskier. At this point, it is sufficient to understand that there are two sides of an options contract.

The Lingo 
To trade options, you'll have to know the terminology associated with the options market.

The price at which an underlying stock can be purchased or sold is called the strike price. This is the price a stock price must go above (for calls) or go below (for puts) before a position can be exercised for a profit. All of this must occur before the expiration date.

An option that is traded on a national options exchange such as the Chicago Board Options Exchange (CBOE) is known as a listed option. These have fixed strike prices and expiration dates. Each listed option represents 100 shares of company stock (known as a contract).

For call options, the option is said to be in-the-money if the share price is above the strike price. A put option is in-the-money when the share price is below the strike price. The amount by which an option is in-the-money is referred to as intrinsic value.

The total cost (the price) of an option is called the premium. This price is determined by factors including the stock price, strike price, time remaining until expiration (time value) and volatility. Because of all these factors, determining the premium of an option is complicated and beyond the scope of this tutorial 

There are two main types of options:
#  American options can be exercised at any time between the date of purchase and the
    expiration date. The example about Cory's Tequila Co. is an example of the use of an
    American option. Most exchange-traded options are of this type.

#  European options are different from American options in that they can only be 
    exercised at the end of their lives.

The distinction between American and European options has nothing to do with geographic location.

Long-Term Options 
So far we've only discussed options in a short-term context. There are also options with holding times of one, two or multiple years, which may be more appealing for long-term investors.

These options are called long-term equity anticipation securities (LEAPS). By providing opportunities to control and manage risk or even to speculate, LEAPS are virtually identical to regular options. LEAPS, however, provide these opportunities for much longer periods of time. Although they are not available on all stocks, LEAPS are available on most widely held issues. 

Exotic Options 
The simple calls and puts we've discussed are sometimes referred to as plain vanilla options. Even though the subject of options can be difficult to understand at first, these plain vanilla options are as easy as it gets!

Because of the versatility of options, there are many types and variations of options. Non-standard options are called exotic options, which are either variations on the payoff profiles of the plain vanilla options or are wholly different products with "option-ality" embedded in them. (To learn more, see Becoming Fluent In Options And Futures and What's the difference between a regular option and an exotic option?) 

There are two main reasons why an investor would use options: to speculate and to hedge.

Speculation 
You can think of speculation as betting on the movement of a security. The advantage of options is that you aren't limited to making a profit only when the market goes up. Because of the versatility of options, you can also make money when the market goes down or even sideways.

Speculation is the territory in which the big money is made - and lost. The use of options in this manner is the reason options have the reputation of being risky. This is because when you buy an option, you have to be correct in determining not only the direction of the stock's movement, but also the magnitude and the timing of this movement. To succeed, you must correctly predict whether a stock will go up or down, and you have to be right about how much the price will change as well as the time frame it will take for all this to happen. And don't forget commissions! The combinations of these factors means the odds are stacked against you. 

So why do people speculate with options if the odds are so skewed? Aside from versatility, it's all about using leverage. When you are controlling 100 shares with one contract, it doesn't take much of a price movement to generate substantial profits.

Hedging 
The other function of options is hedging. Think of this as an insurance policy. Just as you insure your house or car, options can be used to insure your investments against a downturn. Critics of options say that if you are so unsure of your stock pick that you need a hedge, you shouldn't make the investment. On the other hand, there is no doubt that hedging strategies can be useful, especially for large institutions. Even the individual investor can benefit. Imagine that you wanted to take advantage of technology stocks and their upside, but say you also wanted to limit any losses. By using options, you would be able to restrict your downside while enjoying the full upside in a cost-effective way. (For more on this, see Married Puts: A Protective Relationship and A Beginner's Guide To Hedging.)

A Word on Stock Options 
Although employee stock options aren't available to everyone, this type of option could, in a way, be classified as a third reason for using options. Many companies use stock options as a way to attract and to keep talented employees, especially management. They are similar to regular stock options in that the holder has the right but not the obligation to purchase company stock. The contract, however, is between the holder and the company, whereas a normal option is a contract between two parties that are completely unrelated to the company. (To learn more, see The "True" Cost Of Stock Options.)

M.FUTURES

An auction market in which participants buy and sell commodity / future contracts for delivery on a specified future date. Trading is carried on through open yelling ( loud outcry ) and hand signals in a trading pit.
Volume in the futures market usually increases when the stock market outlook is uncertain.

WHAT IS FUTURES TRADING ?
Futures Trading is a form of investment which involves speculating on the price of a commodity going up or down in the future.

WHAT IS A COMMODITY ?
Most commodities you see and use every day of your life:
#   the corn in your morning cereal which you have for breakfast,
#   the lumber that makes your breakfast-table and chairs
#   the gold on your watch and jewellery,
#   the cotton that makes your clothes,
#   the steel which makes your motor car and the crude oil which runs it and takes you to
     work,
#   the wheat that makes the bread in your lunchtime sandwiches
#   the beef and potatoes you eat for lunch,
#   the currency you use to buy all these things...

... All these commodities (and dozens more) are traded between hundreds-of-thousands of investors, every day, all over the world. They are all trying to make a profit by buying a commodity at a low price and selling at a higher price.

Futures trading is mainly speculative 'paper' investing, i.e. it is rare for the investors to actually hold the physical commodity, just a piece of paper known as a futures contract.

WHAT IS A FUTURES CONTRACT ?
To the uninitiated, the term contract can be a little off-putting but it is mainly used because, like a contract, a futures investment has an expiration date. You don't have to hold the contract until it expires. You can cancel it anytime you like. In fact, many short-term traders only hold their contracts for a few hours - or even minutes!

The expiration dates vary between commodities, and you have to choose which contract fits your market objective.

For example, today is June 30th and you think Gold will rise in price until mid-August. The Gold contracts available are February, April, June, August, October and December. As it is the end of June and this contract has already expired, you would probably choose the August or October Gold contract.

The nearer (to expiration) contracts are usually more liquid, i.e. there are more traders trading them. Therefore, prices are more true and less likely to jump from one extreme to the other. But if you thought the price of gold would rise until September, you would choose a further-out contract (October in this case) - a September contract doesn't exist.

Neither is their a limit on the number of contracts you can trade (within reason - there must be enough buyers or sellers to trade with you.) Many larger traders/investment companies/banks, etc. may trade thousands of contracts at a time!

All futures contracts are standardized in that they all hold a specified amount and quality of a commodity. For example, a Gold futures contract (GC) holds 100 troy ounces of 24 carat gold; and a Crude Oil futures contract holds 1000 barrels of crude oil of a certain quality.

A SHORT HISTORY OF FUTURES TRADING
Before Futures Trading came about, any producer of a commodity (e.g. a farmer growing wheat or corn) found himself at the mercy of a dealer when it came to selling his product. The system needed to be legalised in order that a specified amount and quality of product could be traded between producers and dealers at a specified date.

Contracts were drawn up between the two parties specifying a certain amount and quality of a commodity that would be delivered in a particular month...

...Futures trading had begun!

In 1878, a central dealing facility was opened in Chicago, USA where farmers and dealers could deal in ‘spot’ grain, i.e., immediately deliver their wheat crop for a cash settlement. Futures trading evolved as farmers and dealers committed to buying and selling future exchanges of the commodity. For example, a dealer would agree to buy 5,000 bushels of a specified quality of wheat from the farmer in June the following year, for a specified price. The farmer knew how much he would be paid in advance, and the dealer knew his costs.

Until twenty years ago, futures markets consisted of only a few farm products, but now they have been joined by a huge number of tradable ‘commodities’.

As well as metals like gold, silver and platinum;
livestock like pork bellies and cattle;
energies like crude oil and natural gas;
foodstuffs like coffee and orange juice;
and industrials like lumber and cotton,
modern futures markets include a wide range of interest-rate instruments,
currencies, stocks and other indices such as the Dow Jones, Nasdaq and S&P 500.

WHO TRADES FUTURES ?
It didn't take long for businessmen to realize the lucrative investment opportunities available in these markets. They didn't have to buy or sell the actual commodity (wheat or corn, etc.), just the paper-contract that held the commodity. As long as they exited the contract before the delivery date, the investment would be purely a paper one. This was the start of futures trading speculation and investment, and today, around 97% of futures trading is done by speculators.

There are two main types of Futures trader: 'hedgers' and 'speculators'.

A hedger is a producer of the commodity (e.g. a farmer, an oil company, a mining company) who trades a futures contract to protect himself from future price changes in his product.

For example, if a farmer thinks the price of wheat is going to fall by harvest time, he cancel a futures contract in wheat. (You can enter a trade by selling a futures contract first, and then exit the trade later by buying it.) That way, if the cash price of wheat does fall by harvest time, costing the farmer money, he will make back the cash-loss by profiting on the short-sale of the futures contract. He ‘sold’ at a high price and exited the contract by ‘buying’ at a lower price a few months later, therefore making a profit on the futures trade.

Other hedgers of futures contracts include banks, insurance companies and pension fund companies who use futures to hedge against any fluctuations in the cash price of their products at future dates.

Speculators include independent floor traders and private investors. Usually, they don’t have any connection with the cash commodity and simply try to (a) make a profit buying a futures contract they expect to rise in price or (b) sell a futures contract they expect tofall in price.

In other words, they invest in futures in the same way they might invest in stocks and shares - by buying at a low price and selling at a higher price.

THE ADVANTAGES OF TRADING FUTURES
Trading futures contracts have several advantages over other investments:

1. Futures are highly leveraged investments. To ‘own’ a futures contract an investor only has to put up a small fraction of the value of the contract (usually around 10%) as ‘margin’. In other words, the investor can trade a much larger amount of the commodity than if he bought it outright, so if he has predicted the market movement correctly, his profits will be multiplied (ten-fold on a 10% deposit). This is an excellent return compared to buying a physical commodity like gold bars, coins or mining stocks.

The margin required to hold a futures contract is not a down payment but a form of security bond. If the market goes against the trader's position, he may lose some, all, or possibly more than the margin he has put up. But if the market goes with the trader's position, he makes a profit and he gets his margin back.

For example, say you believe gold in undervalued and you think prices will rise. You have $3000 to invest - enough to purchase:
#   10 ounces of gold (at $300/ounce),
#   or 100 shares in a mining company (priced at $30 each),
#   or enough margin to cover 2 futures contracts. (Each Gold futures contract holds 100 ounces of gold, which is effectively what you 'own' and are speculating with. One-hundred ounces multiplied by three-hundred dollars equals a value of $30,000 per contract. You have enough to cover two contracts and therefore speculate with $60,000 of gold!)

Two months later, gold has rocketed 20%. Your 10 ounces of gold and your company shares would now be worth $3600 - a $600 profit; 20% of $3000. But your futures contracts are now worth a staggering $72,000 - 20% up on $60,000.

Instead of a measly $600 profit, you've made a massive $12,000 profit!

2. Speculating with futures contracts is basically a paper investment. You don’t have to literally store 3 tons of gold in your garden shed, 15,000 litres of orange juice in your driveway, or have 500 live hogs running around your back garden!

The actual commodity being traded in the contract is only exchanged on the rare occasions when delivery of the contract takes place (i.e. between producers and dealers – the 'hedgers' mentioned earlier on). In the case of a speculator (such as yourself), a futures trade is purely a paper transaction and the term 'contract' is only used mainly because of the expiration date being similar to a ‘contract’.

3. An investor can make money more quickly on a futures trade. Firstly, because he is trading with around ten-times as much of the commodity secured with his margin, and secondly, because futures markets tend to move more quickly than cash markets. (Similarly, an investor can lose money more quickly if his judgment is incorrect, although losses can be minimized with Stop-Loss Orders. My trading method specializes in placing stop-loss orders to maximum effect.)

4. Futures trading markets are usually fairer than other markets (like stocks and shares) because it is harder to get ‘inside information’. The open out-cry trading pits -- lots of men in yellow jackets waving their hands in the air shouting "Buy! Buy!" or "Sell! Sell!" -- offers a very public, efficient market place. Also, any official market reports are released at the end of a trading session so everyone has a chance to take them into account before trading begins again the following day.

5. Most futures markets are very liquid, i.e. there are huge amounts of contracts traded every day. This ensures that market orders can be placed very quickly as there are always buyers and sellers of a commodity. For this reason, it is unusual for prices to suddenly jump to a completely different level, especially on the nearer contracts (those which will expire in the next few weeks or months).

6. Commission charges are small compared to other investments and are paid after the position has ended.

Commissions vary widely depending on the level of service given by the broker. Online trading commissions can be as low as $5 per side. Full service brokers who can advise on positions can be around $40-$50 per trade. Managed trading commissions, where a broker controls entering and exiting positions at his discretion, can be up to $200 per trade.

L.MUTUAL FUNDS

We would have indented to buy an essential material (a long desire) for our Family. So that we may be saving money routinely. While approaching the shop for the desired material, we ought to buy, its cost may have been raised substantially. If we would have invested our money in a Mutual fund scheme which produces a growth rather than the Price hike we may be able to purchase the desired material.  

Today beating the Inflation stock market investment growth stands first. But it needs an in-depth knowledge, sufficient money, sufficient time, etc. But many of us were not availed with those credentials.  

At this stage equivalent to stock market, or even more growth can be obtained from mutual fund scheme only.  

WHAT IS A MUTUAL FUND ? 
A mutual fund is a type of professionally-managed collective investment scheme / investment trust that pools ( a small expanse of still water) money collected from several lakhs of investors, having a common financial goal to purchase securities, being split and invested in several splendid schemes, the gains procured need be shared and offered for the investors is called Mutual Fund. The main aim is to share the gain mutually.  

They can also be termed as investment vehicles that invest the collected money in various
cap­i­tal mar­ket instru­ments like many different types of stocks, deben­tures and other 
secu­ri­ties,bonds or a combination of the above.

While there is no legal definition of mutual fund, the term is most commonly applied only to those collective investment schemes that are regulated, available to the general public and open-ended in nature. Hedge funds are not considered as a type of mutual fund.

Basic ter­mi­nol­ogy of a Mutual Fund :-

NAV – NET ASSET VALUE

Net Asset Value is the mar­ket value of the assets of the scheme minus its lia­bil­i­ties. It is the net asset value of the scheme divided by the num­ber of units outstanding.

While N.F.O ( New Fund Offer ) units value will be Rs.10 /-. Being this value, after the performance of the scheme may increase or decrease. That value may be called as N.A.V.( Net Asset Value ).

Apart from investing in N.F.O, previously functioning Mutual funds can also be invested. While doing so the invested amount, the ( moment ) present N.A.V will be divided and Units Allotted.   

REDEMPTION PRICE

It is the price at which open-ended schemes repur­chase their units and close-ended schemes redeem their units on maturity.

Mutual Funds are sim­i­lar to invest­ing in the stock mar­ket. Mutual Fund com­pa­nies invest in the stock mar­ket on behalf on will­ing investors. Although Mutual Funds are sub­ject to mar­ket risks, the returns are weighty

Mutual funds are classified by their principal investments. The four largest categories of funds are

(i)      money market funds,

(ii)      bond or fixed income funds,

(iii)     stock or equity funds and

(iv)     hybrid funds.

Funds may also be categorized as index or actively-managed.

Investors in a mutual fund pay the fund’s expenses. There is controversy about the level of these expenses. A single mutual fund may give investors a choice of different combinations of expenses by offering several different types of share classes.

No matter what type of investor you are, there is bound to be a mutual fund that fits your style. The point of investing in mutual funds is that they can be less risky than investing in single stocks or bonds and are easier to invest in.

It's important to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, the higher the risk of loss. Although some funds are less risky than others, all funds have some level of risk - it's never possible to diversify away all risk. This is a fact for all investments.

The income earned through these invest­ments is shared with all the investors. It is con­sid­ered as the most suit­able invest­ment for the com­mon man as it offers both diver­sity and liq­uid­ity at a lower cost along with pro­fes­sional management.

Many Excellent Fund Managers are present to effectively Diagnose and invest in Stocks, Debt instruments, money market etc depending upon the nature of scheme. For the past five years except in 2008 “ Equity Diversified Plan ” has produced a rapid growth beating the sensex.   

MUTUAL FUNDS OUTSIDE U.S :                                                                                                 

The term mutual fund is less widely used outside of the United States. For collective 
investment schemes outside of the United States, see articles on specific types of funds including open-ended investment companies, SICAV’s ( an open-ended collective investment scheme common in Western Europe ), unitized insurance funds, unit trusts and Undertakings for Collective Investment in Transferable Securities.

In the United States, mutual funds must be registered with the Securities and Exchange Commission, overseen by a board of directors or board of trustees and managed by a registered investment advisor. They are not taxed on their income if they comply with certain requirements.

Mutual funds have both advantages and disadvantages when compared to direct investing in individual securities. They have a long history in the United States. Today they play an important role in household finances.

WHEN MUTUAL FUND WAS FIRST INTRODUCED IN INDIA ?

The first Mutual Fund company named U.T.I was formed according to the Parliament Act in 1963. Next year in 1964, the first plan was introduced. In 1987, due to the entering of Pubic sector banks in this sector, Mutual Fund sector has started its next step. 

MUTUAL FUND SCHEMES PRESENT IN INDIA ! ( AS ON 10.04.2011)

OPEN-ENDED FUND           712, 

CLOSED ENDED FUND      302,

INTERVAL FUND                  37,

Totaling to 1,051 mutual funds are available in India. According to the last count there are more than 10,000 mutual funds in North America! That means there are more mutual funds than stocks.

ARRIVAL OF SEBI

For the Regulations of Mutual funds sector, Organization SEBI was formed in 1993. Only in this year, Private as well as Foreign Institutions were allowed to enter Mutual funds sector. So, that private based Mutual fund Organization “Kothari Pioneer” was Established. Next year Foreign Organization “Morgan Stanley”, by issuing its first fund entered India’s Mutual fund sector. By SEBI’s Rules and Regulations coming into practice in 1996, investors were secured. Due to those small investors, increased considerably. 

ENTRY CHARGES CANCELLATION

Due to the crash of the Stock Market in 2008, created a benefit for the investors those directly invested in Mutual funds, instead of, by Agents. After that for Equity based funds also Entry charges were cancelled.

Due to the above reasons investors were mostly benefited. For secured deposit “An Excellent Mode” may be mutual fund largely felt by the investors, driving to a growth route. 

KYC ( KNOW YOUR CUSTOMER )

The Investors of Mutual fund must fill up the KYC, new Application form. It may be available from the Internet and Downloaded. After duly filling up the form PAN Card and Ration  Card Xerox copies, must be given to the Mutual fund Branch or some other financial services, where investments are made. After that, can be invested in funds.

Inclusive with PAN Card, Mutual funds branch or else by contacting Mutual fund  agents, investments can be started. Investment amount must be given as Cheque / D.D only.       

EVEN RS.100 / - IS ENOUGH

Even common people to start with Mutual fund Rs. 100 / - is allotted as Initial Investment Amount by several Mutual funds Organizations.

ALLOTMENT OF UNITS

Any fund Organizations for the first time introducing a plan may be called as N.F.O.  ( New Fund Offer ) Generally to invest in N.F.O’s, the minimum amount may be Rs. 5000 / -. Before 2009, July to invest in Mutual funds Entry charges were collected, being approximately 2 %. It means for Rs.5000 / - valuing of 2 % equals to Rs.100 / - will be subtracted from the Investment amount to a total of Rs. 4900 / -, for which Units may be allotted. 

After the cancellation of entry charges, now for the complete amount units are allotted. Here unit is Rs.10 / - face value. Only for this value dividend may be given.  

INVESTMENT EVIDENCE

The Evidence for purchased Units in your name, Accounts statements will be sent through E-Mail or by post.

CERTIFICATE FOR AGENTS 

For their products to be disclosed to the general public mutual fund companies appointed agents. So, that in 2003, for the agents “AMFII” certificates were made compulsory. Up to that period, people with more money was allowed, were changed as even Rs.50 / - or Rs. 100 / - are enough to enter, by ICICI Prudential, and Reliance Mutual fund Organizations.  

QUALITY RATING

For, valuing the Mutual funds standard (quality ) and to give research reports, Credit rating Organizations and Websites are present. They perform their actions for 2 years functioning Mutual funds, and after Analysis produce Credit ratings.  

ICRA, CRISIL and Value research Online Organizations are important among them.    

ADVAN­TAGES OF MUTUAL FUNDS BRIEFLY ARE AS FOLLOWS :

Pro­fes­sional Management

Diver­si­fi­ca­tion

Return Poten­tial

Low Costs

Liq­uid­ity

Trans­parency

Flex­i­bil­ity

Well reg­u­lated 

TYPES OF MUTUAL FUNDS SCHEMES IN INDIA 

Wide variety of Mutual Fund Schemes exists to cater to the needs such as

(i)      financial position,

(ii)      risk tolerance and

(iii)     return expectations etc.

Thus mutual funds has Variety of flavors, being a collection of many stocks, and investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.  

Overview of existing schemes existed in mutual fund category: BY STRUCTURE

1. CLOSED - ENDED SCHEMES:

These schemes have a pre-specified maturity period. One can invest directly in the scheme at the time of the initial issue. Depending on the structure of the scheme there are two exit options available to an investor after the initial offer period closes. Investors can transact (buy or sell) the units of the scheme on the stock exchanges where they are listed.

The market price at the stock exchanges could vary from the net asset value (NAV) of the scheme on account of demand and supply situation, expectations of unit holder and other market factors. Alternatively some closed-ended schemes provide an additional option of selling the units directly to the Mutual Fund through periodic repurchase at the schemes NAV; however one cannot buy units and can only sell units during the liquidity window. SEBI Regulations ensure that at least one of the two exit routes is provided to the investor.

    

During the maturity date only, cash can be collected. In-between period exit load of 0.5 to 3 % charges had to be paid. Only during N.F.O. Investment can be executed.

2. OPEN - ENDED SCHEMES:

An open-end fund is one that is available for subscription throughout the year common to everyone. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity. In this scheme at any time the investors can enter, and can encash their units at their willing time. Most peoples favorite is this type of plan only. 

The most common type, the open-end mutual fund, must be willing to buy back its shares from its investors at the end of every business day. Exchange-traded funds are open-end funds or unit investment trusts which are traded in an exchange. Open-end funds are most common, but exchange-traded funds have been gaining in popularity.

3. INTERVAL SCHEMES:

Interval Schemes are that scheme, which combines the features of open-ended and closed-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

The risk return trade-off indicates that if investor is willing to take higher risk then correspondingly he can expect higher returns and vise versa if he pertains to lower risk instruments, which would be satisfied by lower returns.  For example, if an investors opt for bank FD, which provide moderate return with minimal risk. But as he moves ahead to invest in capital protected funds and the profit-bonds that give out more return which is slightly higher as compared to the bank deposits but the risk involved also increases in the same proportion.

Thus investors choose mutual funds as their primary means of investing, as Mutual funds provide professional management, diversification, convenience and liquidity. That doesn’t mean mutual fund investments are risk free. This is because the money that is pooled in are not invested only in debts funds which are less riskier but are also invested in the stock markets which involves a higher risk but can be expected higher returns. Hedge fund involves a very high risk since it is mostly traded in the derivatives market which is considered very volatile.

Overview of existing schemes existed in mutual fund category: BY NATURE

Based on invest­ment objec­tive, there are 3 types of Mutual Fund schemes are –

a)  Growth Schemes,

b)  Balanced Schemes and

c)  Income Schemes.

a)  Growth Schemes: 

These are also known as equity schemes. Growth schemes invest in stocks where the com­pany itself and the indus­try in which it oper­ates are thought to have good long-term growth potential. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.

b)  Balanced Schemes: 

Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in a com­bi­na­tion of both stocks and bonds and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).

c)  Income Schemes: 

Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as government bonds and corporate debentures. Capital appreciation in such schemes may be limited. It offers investors a reg­u­lar income usu­ally paid out in the form of monthly dividends.

K.DEBENTURES

MEANING AND DEFINITIONS

Meaning :

The word debenture is derived from the Latin word, `Debere' which means 'to owe something to someone'. Debenture is an acknowledgement of debt issued by a company under its common seal. It also means that debenture is a proof of loan taken by the company on certain terms and conditions.

Definitions :

(a)     According to Section 82 of the Companies Act-'Debenture to any member of the company is a movable property, transferable in the manner provided by the Articles of Associations'.

(b)     According to Oxford Dictionary `Debenture is a certificate issued by a company acknowledging that it has borrowed money on which interest is being paid.'

 

INTRODUCTION

Company can issue debentures to raise loan capital. It is the method of raising borrowed capital. A person purchasing a debenture is called as debenture holder of the company. He is creditor of the company. He is entitled to get interest at a fixed rate. Debentures can be issued at any time by all companies may be public or private. The power to issue debentures rests with the Board of Directors vide Section 292 of the Companies Act. Debentures may be issued at par, at a premium or at a discount.

Debentures refers to a certificate issued by a person or corporation with the purpose of acknowledging or creating a debt. Debentures are generally unsecured by assets and are interest bearing securities.

WHAT IS A DEBENTURE ?

A Debenture means a document / debt security / certificate of loan or a loan bond evidencing, containing an acknowledgement of indebtedness issued by a company  ( called the Issuer ) under the companies seal and giving an undertaking which provides for the payment of a principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating charge on the companies property or undertaking and which acknowledges a loan to the companies property which offers to pay interest in lieu of the money borrowed for a certain period at a fixed rate and at the intervals as stated in the debenture.

A debenture is defined as a certificate of agreement of loans which is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of interest rates) and the principal amount whenever the debenture matures.

A type of debt instrument that is not secured by physical asset or collateral.  Debentures are backed only by the general creditworthiness and reputation of the issuer. 

Although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital.

In finance, a debenture is a long-term debt instrument used by governments and large companies to obtain funds. It is defined as "any form of borrowing that commits a firm to pay interest and repay capital. In practice, these are applied to long term loans that are secured on a firm's assets. Where securities are offered, loan stocks or bonds are termed 'debentures' in the UK or 'mortgage bonds' in the US.

The advantage of debentures to the issuer is they leave specific assets burden free, and thereby leave them open for subsequent financing. Debentures are generally freely transferable by the debenture holder. Debenture holders have no voting rights and the interest given to them is a charge against profit.
 

In essence it represents a loan taken by the issuer who pays an agreed rate of interest during the lifetime of the instrument and repays the principal normally, unless otherwise agreed, on maturity. 

These are long-term debt instruments issued by private sector companies. These are issued in denominations as low as Rs 1000 and have maturities ranging between one and ten years. Long maturity debentures are rarely issued, as investors are not comfortable with such maturities

Debentures enable investors to reap the dual benefits of adequate security and good returns. Unlike other fixed income instruments such as Fixed Deposits, Bank Deposits they can be transferred from one party to another by using transfer from. Debentures are normally issued in physical form. However, Corporates / PSU’s have started issuing debentures in Demat form. Generally, debentures are less liquid as compared to PSU bonds and their liquidity is inversely proportional to the residual maturity. Debentures can be secured or unsecured. 

In corporate finance, the term is used for a medium-to-long-term debt instrument  used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note.

Senior debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories.

Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.

Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company's general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company's financial statements.

DEBENTURES EXAMPLE:

For example, most Debentures are essentially unsecured bonds issued by corporations relying on the credit worthiness of the issuer for their distribution, although a Debenture in the United Kingdom is usually a secured debt. The interest income that holders of Debentures receive is generally derived from a company’s corporate profits. Some Debentures feature a convertibility option, whereby the Debenture can be converted into shares of the corporation’s common stock. These securities are known as convertible Debentures. Because of the convertibility feature of these securities, they typically carry lower interest rates than Debentures without the convertibility feature. In the case that the corporation goes into bankruptcy, the Debenture holders get treated as general creditors.

WHAT ARE THE DIFFERENT TYPES OF DEBENTURES?

Debentures are divided into different categories on the basis of:

(1)  Convertibility of the instrument

(2)  Security 

(3)  Types of nature.

Debentures can be classified on the basis of convertibility into:

a)  Non Convertible Debentures (NCD):

These instruments retain the debt character and can not be converted in to equity shares

b)  Partly Convertible Debentures (PCD):

A part of these instruments are converted into Equity shares in the future at notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at the time of subscription.

c)  Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer's notice. The ratio of conversion is decided by the issuer. Upon conversion the investors enjoy the same status as ordinary shareholders of the company.

d)  Optionally Convertible Debentures (OCD): The investor has the option to either convert these debentures into shares at price decided by the issuer/agreed upon at the time of issue.

WHAT IS THE PROCEDURE FOR THE ISSUE OF DEBENTURES IN INDIA?

The relevant sections of the companies act 1956 dealing with the procedure for the issue of debentures are 56(3), 60, 64, 67, 70-74,108-13,117-23,128-29,133-34,143,152-54,292 and 293.

Debentures are issued in accordance with the provisions of the articles, usually by a resolution of the board of directors. Debentures may be issued  

at par,  

at a premium, or  

at a discount  

if permitted by the articles of the company. Debentures unlike shares may be issued at a discount without any restriction. The reason is that they do not form part of the capital of the company. Particulars of any commission, discount or allowance paid either directly or indirectly to any person for his subscribing or procuring subscription for debentures of the company must be filed with the registrar.

Debentures may be redeemable at par or at premium but their redemption at a discount is not permitted.

Section 117 provides that no company shall, after the commencement of the act issue debentures carrying voting rights at any meeting of the company.

The legal provisions as to prospectus, allotment, issue of certificates etc. applicable to shares also apply to debentures, but the condition of minimum subscription is not applicable to the issue of debentures.

Register and index of debenture-holders:

Every company shall maintain a register of its debenture-holders and enter therein the following particulars:

i) The name, address and occupation of each debenture holder.

ii) The debentures held by each holder with their distinctive numbers, amount paid or considered as paid on them.

iii) The date on which each person was entered in the register as a debenture-holder.

iv) The date on which any person ceased to be a debenture holder.

Every company having more than fifty debenture-holders will maintain index of debenture-holder unless it is maintained in the form of an index. Any alteration in the register shall be entered in the index within fourteen days.

Debenture trust deed:

Where secured debentures are issued by a company, it is usual to execute a trust deed conveying property to the trustees in trust for debentures-holders. Security is enforced or action is taken thereafter by the trustees instead of individual debenture-holders. The trust deed contains provisions about the respective right of the company and the debenture-holders.

The following are the advantages of having a trust deed.

1. In case of a default by the company, the trustees are there to take the necessary steps instead of leaving to the initiative of individual debenture-holders.

2. The trustees will have a legal mortgage of the property and will also hold the title deeds. So the persons who lend subsequently, cannot gain priority over the debenture-holders.

3. The debenture-holders can through the trustee sell the property charged, and thus, realize the security without the aid of the court.

4. The trustees are empowered to see that the property is kept insured and properly maintained.

5. The trustees are authorized to appoint a receiver out of the court or to enter into the possession of the property any carry on the business of the company in case of urgency.

Section 118 of the act requires every company to give to every debenture-holder or any member of the company a copy of any trust deed in respect of debentures. Such a copy shall be given within seven days from the date of request on payment of the specified fees. The trust deed shall be open for inspection by any member or debenture-holder on payment of fees as if it were the register of members.

Trustees for debenture-holders must exercise care and caution in exercising the powers which the trust deed confers on them otherwise they would be guilty of breach of trust. Any provision contended in a trust deed exempting a trustee from liability for breach of trust or negligence would be void. Section 119 nullifies clauses whereby the trustee is exempted from or indemnified against a liability for breach of trust. However, a release given after the liability has arisen and a provision in a trust deed for giving such a release by a majority of not less than three-fourths in value of the debenture-holders present and voting in person or by proxy at a meeting for this purpose, is not void

STATUTORY PROVISIONS RELATED TO ISSUE OF DEBENTURES

The legal provisions regarding the issue of debentures are as under :

i)       Issue by public as well as by private companies : A Public company can issue debentures only after obtaining a certificate to commence a business. On the other hand, a private company can issue debentures immediately after incorporation.

ii)      Power to issue under Section 292 (1) : The board of directors has the power to issue debentures, such right can be exercised by passing a resolution in the board meeting.

iii)     Terms of issue and redemption : Debentures can be issued at par, at premium or even at a discount. Similarly debentures can be redeemed at par or at premium but debenture cannot be redeemed at a discount.

iv)     Mode of issue : Debentures can be issued publicly by issuing a prospectus or. privately through private placements.

v)      Voting right : According to the Companies Act, a company cannot issue debentures carrying voting right.

vi)     Security against debentures : Now Companies can issue only secured debentures. Companies (Amendment) Act, 2000 prohibits issue of insecured debentures.

vii)    Permission of SEBI : If the issue exceeds 1 crore, permission from SEBI has to be obtained.

viii)   Register of debentures : Company must maintain a separate register of debenture holders. It must contain a) names, b) addresses c) occupation of debenture holders d) number of debentures allotted e) their distinctive numbers and f) the amount of debentures, etc.

CONDITIONS FOR VALID ISSUE OF DEBENTURES

The Company must follow the conditions which are specified in the Companies Act which are as follows -

1)       A copy of `prospectus' must be filed with the Registrar by a public company when the debentures are to be issued to the general public.

          But when company issues debentures privately a `statement in lieu of prospectus' is to be filed with the Registrar of Companies.

2)       The amount which the company receives from applicants for debentures should be deposited in a schedule bank.

3)       Allotment of debentures may be made by the Board of Directors.

         

4)       Decision of allotment of debentures must be communicated to the applicant by sending a letter of allotment.

5)       The total work of allotment must be completed within 120 days from the date of issue of prospectus.

6)       `Debenture Certificate' must be delivered to the holder within 3 months of allotment.

7)       Allotment must be absolute and unconditional and as per terms noted in the application form.

PROCEDURE RELATING TO ISSUE OF DEBENTURES

A company secretary is mainly related with entire process of issue of debenture. He has to complete all statutory formalities in proper order. The procedure of issuing debentures is as follows :

Procedure of Issue of Debentures

Board Resolution



Resolution by share holders



Consent of SEBI



Approval of Stock Exchange



Credit Rating



Trust Deed



Issue of Prospectus



Receiving Applications and Alloting Debentures



Issue of Debenture Certificate



Register and Index of Debenture holders

1.       Board Resolution : The Board of Directors is required to pass a resolution in the Board meeting. The resolution should clearly specify number of debentures to be issued, face value of debentures, rate of interest payable, terms of redemption, etc.     

2.       Resolution by share holders : If the issue of debentures exceeds the aggregate of paid up capital and free reserves, such resolution in the general meeting is required to be passed.

3.       Consent of SEBI : Permission of SEBI is compulsory in case the issue of debentures exceeds Rs. 1 crore or more.

4.       Approval of stock exchange : Approval of stock exchange is required to be taken before prospectus is issued to the public.

5.       Credit Rating : As per the SERI guidelines of 2000, the company has to get its debenture rated by two recognized credit rating agencies such as CRISIL, CARE. It should be disclosed in the prospectus.

6.       Trust Deed : The trust deed has to be executed between the company and the trustees. Trustees are those who can give guarantee of protecting interest of debenture holders and can redress the grievances of debenture holders, if any.

7.       Issue of prospectus : Before issuing prospectus to the general public it has to be filed with the Registrar. The prospectus is an advertisement for the issue of debentures.

8.       Receiving applications and Alloting debentures : The company must make the arrangement to receive applications along with application money through company's banker and debentures are to be allotted to the applicants by passing a suitable resolution in the board meeting.

9.       Issue of debenture certificate : Debenture certificates are prepared by the secretary. They are signed by at least two directors and issued to the investors within three months of date of allotment. The debentures are credited to demat account if debentures are in dematerialized form.

10.     Register and Index of Debenture Holders :-After the allotment of debentures is made, all details about of debenture holders are entered in the Register of Debenture holders. In case the number of debenture holders exceeds 50, the company is required to maintain Index of debenture holders.

Obtain application form of `Issue of Debentures' and practice to fill it.

On basis of Security, debentures are classified into:

a)  Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer company. So if the issuer fails on payment of either the principal or interest amount, his assets can be sold to repay the liability to the investors

b)  Unsecured Debentures: These instrument are unsecured in the sense that if the issuer defaults on payment of the interest or principal amount, the investor has to be along with other unsecured creditors of the company.

On basis of types of nature, debentures are classified into:

REDEEMABLE DEBENTURES :

Redeemable debentures are those securities which are to be repaid within a stipulated period / maturity period. For instance, X co issued 9% 7 years $ 1000 Debentures. This issue of debentures has coupon rate of 9% per year and redeemable period of 7 years. The amount raised by issuing these debentures are to be repaid within 7 years from now.

IRREDEEMABLE DEBENTURES :

Irredeemable debentures are those debentures issuing by which the company has no obligations to pay back the value of the debenture on some fixed date or time and has the full authority to choose any time to pay back the debt until the company is a going entity and does not default in it’s interest payments. So we take into account only the sale value (SV) while evaluating the cost of irredeemable debentures.

CONVERTIBLE DEBENTURES :
If an option is given to convert debentures into equity shares at the stated rate of exchange after a specified period, they are called convertible debentures. Convertible Debentures have become very popular in India. On conversion the holders cease to be lenders and become owners.

Debentures are usually issued in a series with a pari passu (at the same rate) clause which entitles them to be discharged ratably though issued at different times. New series of debentures cannot rank pari passu with the old series unless the old series provides so.

New debt instruments issued by public limited companies are participating debentures, convertible debentures with options, third party convertible debentures convertible debentures redeemable at premiums, debt equity swaps and zero coupon convertible notes.

ZERO COUPON BONDS :                                                                                    

A zero-coupon bond (also called a discount bond or deep discount bond) is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity. It does not make periodic interest payments, or have so-called "coupons," hence the term zero-coupon bond. When the bond reaches maturity, its investor receives its par (or face) value.

Examples of zero-coupon bonds include                                                                          

U.S. Treasury bills,                                                                                                       

U.S. savings bonds,                                                                                                   

Long-term zero-coupon bonds, and any type of coupon bond that has been stripped of its coupons.

In contrast, an investor who has a regular bond receives income from coupon payments, which are usually made semi-annually. The investor also receives the principal or face value of the investment when the bond matures.

Some zero coupon bonds are inflation indexed, so the amount of money that will be paid to the bond holder is calculated to have a set amount of purchasing power rather than a set amount of money, but the majority of zero coupon bonds pay a set amount of money known as the face value of the bond.

Zero coupon bonds may be long or short term investments. Long-term zero coupon maturity dates typically start at ten to fifteen years. The bonds can be held until maturity or sold on secondary bond markets. Short-term zero coupon bonds generally have maturities of less than one year and are called bills. The U.S. Treasury bill market is the most active and liquid debt market in the world.

SECURED OR MORTGAGED DEBENTURES

Secured or mortgaged debentures carry either a fixed charge on the particular asset of the company or floating charge on all the assets of the company. Unsecured debentures, on the other hand, have no such charge on the assets of the company. They are also known as simple or naked debentures.

Re-issue of redeemed debentures: 

Debentures which have been redeemed may be re-issued by a company. Section 121 authorizes the companies to keep alive and re-issue debentures which have been first redeemed by the company unless the articles provide otherwise or the company has shown an intention to cancel the debenture. Such re-issue may be of the same redeemed debentures or new debentures in place of the redeemed ones. On such re-issue the debenture-holders will get the same rights and priorities as any debenture-holder will get the same rights and priorities as any debenture-holder had before the redemption. Thus, the date of redemption of re-issue debentures cannot be later than that of the original debentures.

Re-issued debentures are treated as new debentures are treated as new debentures for the purposes of stamp duty. The company’s balance sheet must give particulars of any redeemed debentures which the company has power to issue.

A contract to subscribe for debentures can be specifically enforced.

Transfer and transmission of debentures:

Bearer debentures are transferable by simple delivery. Registered debentures are transferred in the same manner in which the shares of a company are transferred. A duly filled in and properly stamped instrument of transfer to get her with the certificate relating to debentures or with the letter of allotment must be delivered to the company either by the transferor or by the transferee. Company may, if so authorized by the articles, refuse to register the transfer. If transfer is refused notice of refusal must be given to the transferor and the transferee within two months from the date on which the instrument of transfer was delivered to the company. An appeal lies to the central government within two months from the date of the receipt of notice of refusal.

The legal representative of a deceased debenture-holder may transfer the debentures by executing an instrument of transfer. 

REDEMPTION OF DEBENTURES

As the debenture capital is borrowed capital, it has to be paid back. The repayment of debenture amount to debenture holder is called as redemption of debentures. Every company is required to create a `Debenture Redemption Reserve' for the purpose of redemption of debentures.

Provisions regarding redemption of debentures .

1)      To create Debenture Redemption Reserve (DRR) : According to Section 117C of the Companies Act, the company is required to create DRR out of its profit every year until such debentures are redeemed. At least 50% amount of debentures issued should be redeemed from DRR. Remaining amount should be raised by issue of new equity shares or debentures.

2)      Default in Repayment : In case the default in repayment is made by the company, the debenture holders can file a complaint with `Company Law Board'. The Company Law Board can direct the company to repay the principal amount of debenture with interest.

          Unsecured debenture holders can file a suit in the court for repayment. Secured debenture holders can approach debenture trustees. The trustees can sell off the assets of the company and repay the amount or appoint a court receiver.

3)      Penalty for Default : The person responsible for disobeying the order of Company Law Board, shall be fined more than Rs. 500/- per day of default, till default continues.

Procedure for redemption of debentures :

1)        Board Meeting : Board meeting is held to pass a resolution to redeem the debentures.

2)        Intimation about Redemption to debenture holders : Secretary has to send letter to debenture holders specifying the details of redemption. He also informs them to surrender debenture certificates.

3)        Refund : A secretary informs the banker to make the repayment to debenture holders.

4)        Change in Register of Debenture holders : Once the process of redemption is completed, the changes are made in the Register of Debenture holders.

5)        Changes in the Register of Charges : The charges which were created on company's asset in favour of debenture holders are cancelled and accordingly the changes are made.

6)        Intimation to Registrar of Companies : Company Secretary informs the Registrar about the details of redemption of debentures.

Methods of Redemption of Debentures :

Redemption of Debentures is possible by different methods.

1)      Redemption after fixed period : A notice is given by the company to the debenture holder about redemption due. Debenture holders require to approach to company's banker to get the form of repayment. The debenture holders require to fill up the prescribed printed form and deposit the same along with debenture certificate in the company's office. On receiving these documents, banks shall make payments to the concerned debenture holders.

2)      Redemption by Annual Instalments : In this method, company makes an arrangement to pay the interest, plus principal amount of debentures in annual instalment. Two coupons are attached to debentures. One coupon is for getting refund of annual instalment of principal amount and another one is for receiving payment of annual interest. Such coupons are to be signed and required to be deposited with the company's banker. Accordingly refund is made by the bank on behalf of the company.

3)      Redemption by Draw Method : Company adopts lottery method for redemption. Debentures are divided in different lots, and each lot is taken in draw system. And that lot drawn is paid back after giving them intimiation regarding the payment. In this way all lots are refunded in order of draws.

4)      Redemption by own purchase method : In this method, company purchases its own debentures from open market at a certain price. After purchasing it such debentures are cancelled. By this way debentures are gradually redeemed.

5)      Redemption by fresh issue method : In this method old debentures are redeemed by issue of fresh debentures. The debenture holders get new debentures in place of old debentures.

FEATURES OF DEBENTURES:

1. Investors who invest in the debentures of the company are not the owners of the company. They are the creditors of the company or in other words, the company borrows the money from them.

2. Funds raised by the company by way of debentures are required to be repaid during the life time of the company at the time stipulated by the company. As such, debenture is not a source of permanent capital. It can be considered as a long term source.

3. In practical circumstances, debentures are generally secured i.e. the company offers some of the assets as security to the investors in debentures.

4. Return paid by the company is in the form of interest. Rate of interest is predetermined, but the same can be freely decided by the company. The interest on debenture is payable even if the company does not earn the profits.

5. In financial terms, debentures prove to be a cheap source of funds from the companies point of view.

DISADVANTAGES OF DEBENTURES:

a) By issuing the debentures, the company accepts the risk of two types. These are payment of the interest at a fixed rate, irrespective of the non-availability of profits and repayment of principal amount at the pre-decided time.

If earnings of the company are not stable or if the demand for the products of the company is highly elastic, debentures prove to be a very risky proposition for the company. Any adverse change in the earnings or demand may prove to be fatal for the company.

b) Debentures are usually a secured source for raising the long term requirement of funds and usually the security offered to the investors is the fixed assets of the company.

A company which requires less investment in fixed assets, such as a trading company, may find debentures as a wrong source for raising the long term requirement of funds as it does not have sufficient fixed assets to offer as security.

FROM THE INVESTORS POINT OF VIEW :

#   Debentures do not carry any voting rights and hence its holders do not have any controlling        power over the management of the company.

#   Debenture holders are merely creditors and not the owners of the company.

#   Interest on debentures is fully taxable while shareholders may avoid tax by way of stock              dividend in place of cash dividend.

#   The prices of debentures in the market fluctuate with the changes in the interest rates.

#   Uncertainly about redemption also restricts certain investors from investing in such              

     securities

CONVERSION OF DEBENTURES INTO SHARES

Section 81 (3) of the Companies Act permits the issue of convertible debentures. It enables issue of shares to debenture holders in exchange of the amount due to them, where the terms of issue of debentures provide for such an exchange and such terms are approved both by the special resolution of the general meeting and by the Central Government.

Joint Stock Companies can issue either non-convertible or convertible debentures. Convertible debentures are further classified as

A.       Fully convertible debentures (FCD)

B.       Partly convertible debentures (PCD)

          FCD: Fully convertible debentures are those which can be fully converted into equity shares after a specific period of time. The debenture holder becomes the member of the company on conversion of debentures. He becomes eligible for the shares and other rights of the shareholders. If conversion is made after 18 months but before 36 months of allotment, conversion is optional on the part of debenture holder.

PCD: Partly convertible debentures are those where part of debentures are converted into equity shares and remaining part continues to be debentures. On conversion of partly convertible debentures the debenture holder becomes a member of company and continues to remain as creditor till non-convertible portion is redeemed on maturity.

PROVISIONS FOR CONVERSION OF DEBENTURES INTO SHARES

Prospectus / Letter of Offer : Prospectus of a company must contain time of conversion, rate of conversion and premium amount, if any.

Letter of Option : Letter of Option has to be issued to debenture holder giving details of option of conversion, conversion price, etc.

Filing of copy : A copy of letter of option has to be filed with the SEBI before issuing to the debenture holder.

Rate of conversion : The rate of conversion is usually fixed at the time of issue. In case premium price is not fixed at the time of issue and if amount of convertible debenture exceeds, T 50% Lacs, the debenture holder should be given option of compulsory redemption.

Rejection of conversion offer : In case debenture holder wishes to opt for redemption in place of conversion then it has to be paid within one month from the date of, option and the price must not be less than face value.

PROCEDURE FOR CONVERSION OF DEBENTURE INTO SHARE

Board Resolution : Resolution for conversion is passed in the board meeting. and is also approved by share holders and debenture holders. A Special resolution is passed to that effect. A copy of this resolution is to be filed with the Registrar of companies within 30 days of passing.

Letter of Option : A letter of option is sent to debenture holder and one copy of the same is filed with SEBI.

Allotment of shares : Once the debentures are converted into equity shares a letter of conversion is sent and debenture holders are requested to return debenture certificates.

Change in Register of Charges : Once the shares are allotted, company has to cancel the charges against asset, which were created at the time of issue of debentures, for which changes are required to be made in the Register of Charges.

Entry in Register of Members : Company is required to maintain a Register of Members in which the details about the share holders viz names, address, date of allotment, serial numbers of shares are entered.

Filing of Return of allotment : A Return of Allotment is filed with the Registrar of Companies within 30 days of allotment.