Industrial securities are of three type’s viz. ordinary shares, preference shares and debentures or bonds.
a) Ordinary shares: ordinary shares are ownership securities which have certain advantages in favour of the issuing companies and investors, depending on their attitude to risk-taking. Investment in this financial instrument is permanent but not illiquid. Investors can turn their shareholdings into cash fairly quickly due to the existence of a fairly active secondary market. As the investor bears a high risk, he can participate in the earnings and wealth of the company without limit. Ordinary shares are expected to be a hedge against inflation. It is advantages to the company because divided payments on ordinary share are not mandatory and there is no need to refinance the capital raised through the issue of ordinary shares. The face value of ordinary shares in India varies from Rs. 1 to Rs. 100 but most common and popular denomination of share is Rs. 10.
b) Preference shares: it is an ownership security like an ordinary share but it carries a fixed rate of return like a debenture. The holders of preference shares are entitled to income after the claims of creditors of the company have been met, but before ordinary shareholders receive any income. There are different types of preference shares in the market.
- Cumulative and Non-cumulative
- Convertible and Non-convertible
- Redeemable and Non-redeemable
- Participating and Non-participating
In case of cumulative preference shares if dividend is skipped in any period, it has to be paid subsequently. Convertible preference shares can be converted into ordinary shares in terms and conditions fixed at the time of issue of such shares. A redeemable preference shares matures at a fixed period of time and for all practical purposes it is regarded as a debt security like a debenture. Participating preference shareholders can earn a higher divided than the fixed one if the company makes good profits.
Most of the preference shares in India are fixed rate dividend shares with cumulative rights. Both redeemable and non-redeemable shares are in vogue in India, but many redeemable shares are so, only at the discretion of the companies. Over a period of time, there has been a trend towards increasing the proportion of redeemable preference shares to total preference shares. The maturity period of redeemable preference shares is usually between 12 to 15 years. The practice of issuing preference shares with participation and conversion rights in not common. Preference shareholders have voting rights only on those issues which vitally affect the rights attached to their shares. The denomination of preference shares is between Rs.1 to Rs. 1000, but the most common and popular one is Rs. 100. Preference shares offer a perfect certainty of income and they are less risky. Apart from uncertainty of return, marketability and liquidity, preference shares are low in practice because the market for them is narrow and less active. However, new companies still play a relatively greater role than in case of old companies.
c) Debentures or bonds: debenture or bond is a creditor ship security with a fixed rate of return, fixed maturity period, perfect income certainty and low capital uncertainty. Debentures are secured only by the general credit-worthiness of the company. There are different kinds of debentures:
(i) Registered, (ii) bearer, (iii) redeemable, (iv) perpetual, (v) convertible, (vi) right, (vii) non-convertible, (viii) partly convertible
Almost all the debentures which are listed on Indian Stock Exchanges are mortgage registered debentures. Their face value varies from Rs. 5 to Rs. 5,000, but the most common denomination is Rs. 100. The maturity period is up to 12 years and the coupon rate is subject to the ceiling fixed by the government. The most common maturity period of debentures in India is 7 years and the ceiling rate is being fixed for these debentures only.
The government approved in January 1989, a new instrument called Partly Convertible Debenture. It has a shorter period of 5 years and the issuing company provides buy-back facility relating to the residual non-convertible portion at the option of the investor.
The public financial institutions have been issuing capital gain bonds or debentures. IDBI, SIDBI, ICICI, NHB, HUDCO are some of the examples of institutions which issued these bonds. They carry the interest rate fixed by RBI and are available through out the year at a number of outlets. They are meant for investment of capital gains for the purpose of exemption from capital gains tax to the extent of 100 percent. Interest tax Act up to a certain ceiling. The bond market has also witnessed the issue of NRI bonds. These are US dollar denominated bank instruments in the form of promissory notes offered by the SBI to NRIs. They serve the purpose of remitting to India dollar denominated funds of the NRI.
0 Comments