Stock split vs Reverse stock split and Bonus shares

 

Stock split vs Reverse stock split and Bonus shares

Stock Split

Meaning of Stock split

A stock split (or a Traditional stock split or a Forward stock split) is a corporate action in which a company divides its existing shares into multiple shares based on the face value of the share. Basically, companies choose to split their shares so they can lower the trading price of their stock to a range deemed comfortable by most investors and increase the liquidity of the shares (to boost the stock's liquidity). The total value of your shares would remain consistent compared to pre-split amounts, because the split does not add any real value. When a stock split is implemented, the price of shares adjusts automatically in the markets. A company's board of directors makes the decision to split the stock into any number of ways. For example, a stock split may be 2-for-1, 3-for-1, 5-for-1, 10-for-1, 100-for-1, etc. A 3-for-1 stock split means that for every one share held by an investor, there will now be three. In other words, the number of outstanding shares in the market will triple. No impact will be on taxes by stock split.

 

Reasons for a Stock Split

 Increase Liquidity

Often, the share price of a company may be too high for investors to buy and any further rise in prices can discourage them from participating. By reducing value of a stock through split, the shares are made accessible to all. The higher number of shares outstanding can result in greater liquidity for the stock, which facilitates trading and may narrow the bid-ask spread. Increasing the liquidity of a stock makes trading in the stock easier for buyers and sellers.

Increase Stockholder Base

With stock split, the number of outstanding shares of a company increases and it gives opportunity to more investors to purchase shares. This helps increase the stockholder base for a company.

Perception of Future Growth

Companies going for stock splits are perceived to be growing entities. It is a general perception among investors that if a company goes for stock split it has plans for growth, and this belief creates a positive image of the company in the market.

What happens if I own shares that undergo a stock split?

When a stock splits, it credits shareholders of record with additional shares, which are reduced in price in a comparable manner. For instance, in a typical 2:1 stock split, if you owned 100 shares that were trading at $50 just before the split, you would then own 200 shares at $25 each. Your broker would handle this automatically, so there is nothing you need to do.

Are stock splits good or bad?

Stock splits are generally done when the stock price of a company has risen so high that it might become an impediment to new investors. Therefore, a split is often the result of growth or the prospects of future growth and is a positive signal. Moreover, the price of a stock that has just split may see an uptick as new investors seek the relatively better-priced shares.

Does the stock split make the company valuable?

No, splits are neutral actions. The split increases the number of shares outstanding, but its overall value does not change. Therefore, the price of the shares will adjust downward to reflect the company's actual market capitalization. If a company pays dividends, new dividends will be adjusted in kind. Splits are also non-dilutive, meaning that shareholders will retain the same voting rights they had prior to the split.

 

Reverse stock split

A company that issues a reverse stock split decreases the number of its outstanding shares and increases the share price. Like a forward stock split, the market value of the company after a reverse stock split would remain the same. A company that takes this corporate action (Reverse stock split) might do so if its share price had decreased to a level at which it runs the risk of being delisted from an exchange for not meeting the minimum price required to be listed. A reverse stock split consolidates your shares in a way that results in a higher per-share price that can keep you trading on a public and accessible exchange. Stock split ensures that more people can access the shares and keeps existing shares liquid. While a reverse stock split is often thought of as a red flag for investors, in the long run, it can help a company survive and recover from a rough patch.

In the end, a stock split or even a reverse stock split doesn’t have a huge practical impact on a company’s current investors. A stock split’s biggest impact is on investors who might be watching a particular stock and hoping to purchase a full share for a lower price. For those investors, a stock split can provide a powerful motivator to get off the side lines.

Issue of Bonus shares

A bonus share is a free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already owns. While the issue of bonus shares increases the total number of shares issued and owned, it does not increase the value of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant. An issue of bonus shares is referred to as a bonus issue. When a bonus share is issued, it brings down the EPS (earnings per share) of the company since there are more shares now (the additional shares having no consideration) with the same paid-up capital. Generally, a company is exempted from paying taxes on bonus shares. On the other hand, where a company intends to declare dividends to its shareholders, it has to first pay dividend distribution tax (DDT) which is levied on the company’s earnings. From the investor’s perspective, he/she does not have to pay tax up to a certain limit. Thus, we see that a company is better off issuing bonus shares rather than declaring dividends. Dividend is only paid out of the profits made by the company in a given year. However, the declaration of dividends is contingent upon the decision of the Board of Directors. So basically, dividend is paid out of profits. On the other hand, a company may issue bonus shares even when it is not making profits or is running at a loss. Bonus shares can be issued both ways either out of the current year profits or from the reserves of past years.

Bonus shares and stock splits look deceptively similar insofar as both of them result in an increase in the number of shares, no cash flow is involved and the shares are made more affordable by bringing the market value of each share within an affordable range. However, the main difference between them could be seen in terms of face value and their availability. Bonus shares are only available to the existing shareholders while in case of stock split, the new shares are available to both the existing shareholder as well to any potential investor. Regarding face value of a share, when a bonus share is issued, the face value of the share remains the same while in case of a stock-split, the face value of the share is changed.

Let us consider the example of Mahindra & Mahindra Limited. In the year 2017, it announced bonus shares at the ratio of 1:1 i.e. for every one share that a shareholder held, he/she would get another share without consideration. As on 26th December 2017 Mahindra & Mahindra was trading at ₹ 1,555.90. The very next day, the value of share went down to ₹ 777.95. This explains that when a company issues bonus shares, the value of the share in the market reduces as per the ratio. This is referred to as a dilution in equity. A bonus issue is a signal that the company is in a position to service its larger equity. What it means is that the management would not have given these shares if it was not confident of being able to increase its profits and distribute dividends on all these shares in the future. A bonus issue is taken as a sign of the good health of the company.

After the exercise of issuing bonus shares, the number of shares, obviously increase in the market. Consequently, the EPS reduces. So now when there are more shares in the market, it becomes liquid thereby making it easy to buy and sell. A company thus issues bonus shares also with the intent of encouraging more participation in dealing with shares. Where due to issuance of bonus the supply of shares in the market goes up, the demand of the same accordingly adjusts. The hidden benefit that is accrued to the company is that no sooner does it announce bonus shares than a bulk of investors tries to purchase them.

The balance sheet is not particularly affected because of bonus shares. Bonus shares are issued by converting the reserves of the company into share capital. It is nothing but capitalization of the reserves of the company. Bonus shares involve capitalizing the reserves and relocating the figures from ‘Reserves/Surplus’ column to the ‘Share Capital’ column. No effect is thus observed on the total net worth of a company since there’s no cash outflow.

Example

A company, ABC Co. had a total of 50,000 shares currently issued with a market price of $150 per share.

The company announced a bonus shares issue of 1 bonus share for every 5 shares owned. This means the company issued a total of 10,000 additional shares (50,000 x 1 / 5).

To calculate the share price after bonus issue of ABC Co., the total value of the shares before the bonus issue must be determined. The value of the shares before the bonus issue was $7,500,000 (50,000 x $150).

After the bonus issue, the number of shares of the company increased from 50,000 to 60,000.

To calculate the share price after the bonus issue, the total value of shares before the bonus issue must be divided on the new number of shares. Therefore, the share price after the bonus issue will be $125 ($7,500,000 / 60,000 shares).

This can also be summarized in the table below:

 

People often confuse bonus shares with stock split. Distribution of bonus shares only changes its issued share capital whereas stock split splits the company's authorized share capital.

A bonus issue is considered as an alternative by many companies to dividends. In dividends, a company gives out extra money to shareholders from its net profits, in a bonus issue the shareholders are given extra shares. It increases the share capital of the company and makes it attractive for investors. It is also a great method to increase retail participation. Bonus issue expands a company’s equity base and makes it more liquid.

 

To Sum Up

Both, stock split and bonus issue multiply the number of shares and bring down the market value however it is only stock split that has an impact on the face value. This is a key difference between bonus issue and stock split. Bonus issues indicates that the company has generated extra reserves that it can transfer to its share capital. Stock split is an initiative to make expensive shares available for a larger shareholder audience.

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Recovery and Care After Delivery

 

The Latest Covid-19 Recommendations for New Moms and Babies

            Coronavirus does not stop pregnancy. Pandemic or not, babies are being born, and each new birth represents hope for humanity. The first 60 minutes of life is known as the “golden hour.” This period immediately after delivery contributes to infant temperature regulation, reduces stress for mom and baby, improves mother-baby bonding, and increases breastfeeding success. To preserve the sanctity of the golden hour, labor and delivery units needed to answer this important pandemic question: “Can we keep mom and baby together safely?” Answer is YES. Current data suggest that approximately 2% to 5% of infants born to women with Covid-19 have tested positive in the first 24 to 96 hours after birth.

SARS-CoV-2 is a respiratory virus primarily passed via droplets. An infected mother can pass the infection to her baby and precautions must be maintained to protect the new-borns. Mothers with Covid-19 can safely room in with their new-born with precautions to prevent the transmission of respiratory droplets. Separating infants from the mother did not reduce the risk of new-born infection. Data from the registry shows no published cases of an infant dying during the initial birth hospitalization as a direct result of SARS-CoV-2 infection. What that means in practice is that a Covid-19-positive mom will not be separated from her child unless she or the baby is acutely ill requiring specialized treatment.

Social distancing, face covers, and hand hygiene remain our greatest weapons against transmitting this respiratory virus. Mothers are asked to maintain a six-feet separation when not providing hands-on care. When handling the baby, moms should wash their hands and done a face mask. Non-infected birth partners or family members should also wear a mask and practice diligent handwashing when caring for babies.

Breastfeeding is strongly encouraged. SARS-CoV-2 has been detected in breast milk, but no definitive studies have been done to date to determine if the active infectious virus is secreted in breast milk. We also do not yet know if protective antibodies are secreted in breast milk. The recommendation is for Covid-positive mothers to breastfeed after performing hand hygiene and while wearing a face mask to reduce the transmission of respiratory droplets.

If a mother is too sick to care for her infant, it may be appropriate to temporarily separate mother and new-born. If mom requires medical care at a level that inhibits her ability to care for her infant, the baby will be taken care of by the medical team and the patient’s family.

 

Recovery and Care After Delivery

You need to take good care of yourself to rebuild your strength. You will need plenty of rest, good nutrition, and help during the first few weeks.

1. Get plenty of rest

Get as much sleep as possible to cope with tiredness and fatigue. Every new parent soon learns that babies have different time clocks than adults. A typical new-born wakes up about every 3 hours and needs to be fed, changed, and comforted. To make sure you are getting enough rest, sleep when your baby sleeps. This may be only a few minutes of rest several times a day, but these minutes can add up. Especially if this is your first baby, you and your partner can become overwhelmed by exhaustion. You may not get a solid 8 hours of sleep for several months. Have your baby's bed near yours for feedings at night. In the first few weeks, you need to let someone else take care of all responsibilities other than feeding your baby and taking care of yourself. It’s nice to have visits from friends and family, but don’t feel that you need to entertain guests. Feel free to excuse yourself for a nap or to feed your baby. Get outside for a few minutes each day. You can start walking and doing postpartum exercises, as advised by your healthcare provider.

2. Seek help

Don’t hesitate to accept help from family and friends during the postpartum period, as well as after this period. Your body needs to heal, and practical help around the home can help you get much-needed rest. Friends or family can prepare meals, run errands, or help care for other children in the home.

3. Nutrition

Your body has undergone many changes during pregnancy and birth. You need time to recover. In addition to rest, you need to eat a healthy diet to help you do that. The weight gained in pregnancy helps build stores for your recovery and for breastfeeding. After delivery, you need to eat a healthy and balanced diet so you can be active and able to care for your baby. Most lactation experts recommend that you eat when you are hungry. But many mothers may be so tired or busy that food gets forgotten. So it is important to plan simple, healthy meals that include choices from all of the recommended groups are divided into 5 food group categories, such as :-

(a) Grains. Foods that are made from wheat, rice, oats, cornmeal, barley, or another cereal grain are grain products. Examples include whole wheat, brown rice, and oatmeal.

(b) Vegetables. Vary your vegetables. Choose a variety of vegetables, including dark green, red, and orange vegetables, legumes (peas and beans), and starchy vegetables.

(c) Fruits. Any fruit or 100% fruit juice counts as part of the fruit group. Fruits may be fresh, canned, frozen, or dried, and may be whole, cut-up, or pureed.

(d) Dairy. Milk products and many foods made from milk are considered part of this food group. Focus on fat-free or low-fat products, as well as those that are high in calcium.

(e) Protein. Go lean on protein. Choose low-fat or lean meat and poultry. Vary your protein routine. Choose more fish, nuts, seeds, peas, and beans.

Oils are not a food group, but some oils such as nut oils have important nutrients. Include these in your diet. Other oils such as animal fats are solid. Don't include these in your diet.

4. Exercise

Your doctor will let you know when it’s OK to exercise. The activity should not be strenuous. You should include exercise and everyday physical activity in your dietary plan. Try taking a walk near your house. The change of scenery is refreshing and can increase your energy level.

5. Stay Hydrated

Drink a lot of fluids to beat exhaustion. It is also important to drink lots of water to avoid constipation. Consume food rich in fibre and balance it by drinking lots of water.

Most mothers want to lose their pregnancy weight, but extreme dieting and rapid weight loss can harm you and your baby if you are breastfeeding. It can take several months for you to lose the weight you gained during pregnancy. You can reach this goal by cutting out high-fat snacks. Focus on a diet with plenty of fresh vegetables and fruits, balanced with proteins and carbohydrates. Exercise also helps burn calories and tone muscles and limbs.

Along with balanced meals, you should drink more fluids if you are breastfeeding. You may find that you become very thirsty while the baby is nursing. Water and milk are good choices. Try keeping a pitcher of water and even some healthy snacks beside your bed or breastfeeding chair.

Talk with your healthcare provider or a registered dietitian if you want to learn more about postpartum nutrition. Certified lactation consultants can also help with advice about nutrition while breastfeeding.

Also, follow the link to know more : https://parenting.firstcry.com/articles/precautions-after-delivery-that-you-should-know/

 

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Federal Reserve signals and Indian markets

 

            The Dow Jones Industrial index in the US fell 0.77% and treasury yields rose on Wednesday after the Federal Reserve indicated that there could be two rate hikes by 2023. In India, the benchmark Sensex fell marginally and the rupee lost over 1% against the dollar on Thursday. If the Fed changed its position in line with the progress in economic recovery and the inflation situation in the US, in India too there have been growing concerns on inflation.

The wholesale price index-based (WPI) inflation scaled a record high of 12.94% in May, pushed by higher fuel and commodity prices, and a low base effect. It also translated into retail inflation of 6.30% in May — a six-month high that breached the inflation target of 4 ± 2% set by the Reserve Bank of India. While it remains to be seen how the RBI responds, market participants feel that if inflation comes alongside a rebound in the economy, it should not be a big concern for investors.

What did the Federal Reserve say?

While maintaining they would continue with an accommodative monetary policy and bond buying programme to support the economy, generate employment and achieve inflation of around 2%, Fed officials also discussed the rate hike and an eventual reduction, or tapering, of the central bank’s bond buying programme.

In a deviation from what it said in March, the Fed signalled that there could be at least two rate hikes by 2023 as economic activity indicators have strengthened and inflation has firmed up. Some members were also in favour of raising rates at least once in 2022. In March, the Fed signalled that they would hold the rates near zero through 2023.

In its statement on Wednesday, the Fed said it “is committed to using its full range of tools to support the U.S. economy in this challenging time… Progress on vaccinations has reduced the spread of Covid-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.”

How did the markets react?

A hike in interest rates in the US has a bearing on the debt and equity markets, not just in the US but also in emerging economies such as India that have witnessed record foreign portfolio investments (FPI) over the last one year.

After the Fed’s signalling, the Dow Jones Industrial fell 265 points and the treasury yield rose from 1.498% on Tuesday to 1.569% on Wednesday. In India, the benchmark Sensex fell 461 points or 0.87% during the day before recovering to close at 52,323 on Thursday, a decline of 0.34%. The rupee lost 75 paisa or 1% against the dollar on Thursday to close at 74.08.

What could be the impact of an early hike in interest rates?

The Fed’s indication of a hike in interest rates earlier than expected resulted in a rise in bond yields and strengthening of the dollar. At the same time, it impacts currencies and stock markets in emerging economies.

News of a hike in interest rate in the US leads not only to an outflow of funds from equities into US treasury bonds, but also to an outflow of funds from emerging economies to the US. Experts say a rise in yields leads to a situation where they start competing with equities, and this impacts market movement. The rupee is also expected to come under pressure as the dollar strengthens.

But many feel that if the economic rebound is strong in the US and India, the impact of the interest rate hike in the US and some inflation may not be a big concern.

If the Fed’s stand in March provided relief and stability to the market as it gave them nearly two years’ time, the change in stance is expected to leave the markets a little watchful.

After June witnessed FPI inflows of Rs 14,500 crore into Indian capital markets, it remains to be seen if there is a slowdown in the pace of inflow over the coming weeks and months.

What are domestic inflation concerns?

Wholesale inflation has been rising for five months, and is expected to rise further as the impact of high crude prices and surging commodity prices feed in.

For a large number of commodities, their global prices are now getting reflected in their domestic prices. For instance, petrol, diesel and LPG witnessed inflation of 62.3%, 66.3% and 60.9%, respectively, in May 2021. The food inflation component for retail inflation rose significantly higher to 5.01% in May from 1.96% the preceding month. Some of the items that pushed retail inflation were fuel, which recorded inflation of 11.6% (the highest since March 2021), transport and communication at 12.6%, edible oil at 30.8% and pulses at 9.3%.

Is it expected to remain elevated, and what can the RBI do?

Rising global crude oil and commodity prices are expected to push up WPI inflation further in the coming months. With most developed countries opting for monetary stimulus measures, global commodity prices are rising amid expectations of a global economic recovery. In India, an ebbing of the second wave of the pandemic and increasing vaccination numbers have led to expectations of a recovery in demand, and higher raw material prices.

This would cause retail inflation to rise as well, putting the central bank on a tightrope walk in balancing the growth-inflation dynamics. While RBI is unlikely to change its accommodative stance or the policy rate anytime soon, it remains to be seen how it responds to developments around the world on interest rates. Meanwhile, as there is no further scope for a rate cut by RBI, all eyes are on the government for fiscal policy action to spur growth.

Should investors be concerned?

If global liquidity flow has boosted Indian markets over the last one year, experts say the rise in interest rates in the US and tapering of the monthly bond buying programme (currently $120 billion/month) may impact stock market movement. These factors, and rising inflation in the domestic market, will be key for equity market movement alongside the economic recovery and growth.

The recovery level of the Indian economy at the time RBI hikes rates rate — which may still be some time away — will be critical. The timing and pace of the US interest are hiked and tapering of the bond buying programme, too, will be critical for equity markets in India, which may witness an outflow of funds following the announcement.

If the Fed’s hawkish tone didn’t go well with the equity investors across the globe, the impact on Indian stock markets was not too pronounced. Pankaj Pandey, head of research at ICICIdirect.com, said that while interest rates will be raised in future, he doesn’t expect a knee-jerk reaction. “While inflation is going up, the underlying (factor) that is driving it is the economic rebound both in the US and in India. While the US will give advance warning before raising rates and tapering of the bond purchase programme, even in India RBI is looking to ignore inflation for some period of time. I do not see it as a big negative for the market if the economy is doing well,” said Pandey.

Source : www.indianexpress.com

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New TDS Rules From July 1, 2021

 

            The Finance Act of 2021 introduced some significant modifications to TDS standards such as purchases of goods, and higher TDS rates for non-filers of ITR. From July 1, 2021 new TDS norms for purchases of goods and higher TDS rates for non-filers of ITR will come into force. Section 194Q, which was recently added, is concerned with the tax deduction at source on the payment of a predefined amount for the acquisition of goods. The regulations of Section 194P shall not apply to a transaction on which tax is deductible under any provision of this Act and tax is collectable under the provisions of Section 206C, except in the case of a transaction defined under sub-section (1H) of Section 206C.

Sections 206AB and 206CCA make specific provisions for non-filers of income tax returns to subtract tax at source. With the insertion of new section 194Q for deduction of tax at source on payment of a certain sum for the purchase of goods, the Income Tax Department has stated on its website that "Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier, deduct an amount equal to 0.1 per cent of such sum exceeding fifty lakh rupees as income-tax."

For the considerations of this subsection, "buyer" implies an individual whose overall sales, net receipts or turnover from the business undertaken by him surpass ten crore rupees in the fiscal year immediately preceding the fiscal year in which the acquisition of goods is conducted. Where any amount referred to in sub-section (1) is credited to any account in the cashbook of the individual accountable to pay such income, either named as "suspense account" or by any other name, such credit of income shall be considered to be the credit of such income to the account of the payee, and the clauses of this section shall pertain accordingly, according to the Income Tax Department.

The other TDS provision applies to individuals who have not submitted ITRs in the two years before the year of TDS deduction. In such circumstances, the deductor of income should subtract tax at twice the appropriate rates for the applicable transactions or at 5%, whichever is higher. Taxpayers should also remember that the new deadline for linking Aadhaar to PAN is June 30. If it is not done on or before the deadline, the PAN will be considered inoperative, and the individual will be subject to penalties under the ITA for not quoting PAN, as well as higher TDS at a rate of 20%.

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Fixed income: Relative calm amidst new RBI measures

 

            The fixed income market remained calm with a stable profile for the most part of the last month. The accommodative policy of the RBI has been instrumental in keeping the yields stable to lower. Yet another reason is the interbank liquidity which has been on an average upwards of Rs 5 lakh crore. The G-SAP 1 announced in the last monetary policy has already touched down on the turf with two tranches being introduced already.

This has definitely helped soften the rates a bit, though the quantum is quite small compared to the size of the primary issues coming up week after week. The recent announcement by the RBI enhancing the financing support for specific segments like healthcare and small enterprises further reaffirms the fact that the central bank will not be averse to taking actions that are in the interest of the economy and that too in a timely manner. This is significant as the support is going to reach the beneficiaries through the banking system and the non-banking finance companies, with a time horizon of three years.

In the RBI’s assessment there are uncertainties caused by the second wave of the pandemic, and these uncertainties, depending upon how prolonged the second wave would be, may affect the macro variables adversely. These developments rule out any change in the RBI policy in the near future.

Many of the GDP estimates have cut growth by 1.50 percent to 2 percent, and this would certainly be a factor that will affect the trajectory of policy rates. Coming to the issue of primary government debt, while the current secondary market purchases are barely sufficient to cover the entire issues it may be possible that the future secondary market purchases may be of a higher order.

In that case, the yields at the long end of the curve may enjoy some support for a longer period of time. The normalization process from the RBI, and the upward movement in yields would depend on a number of factors – the extent of the likely impact of the second wave of the pandemic on demand and production, the impact on economic growth and the revival of the same, improvements in the global economic scenario. Inflation levels look challenging as it is hovering around the 5.50 percent level, very close to expectations.

The high commodity prices, the higher oil prices, the weaker Rupee have all contributed to the higher price level. This may not get altered much, as the transmission is through the exchange rate. Also, the crop of grains from the last season is aplenty and this may have a favourable impact on food grain prices. One thing that may not get impacted favourably is the prices of pulses and protein rich foods, which have a longer crop cycle. If the second wave of the pandemic starts affecting the demand conditions, we may see some moderation in general price level, but it will be rather transitory.

In fixed income, it is still the short end of the curve that is preferred. Even those who are invested into the short end may gradually move into the very short end over the next two or three months, to avoid any loss of value due to a gradual rise in rates, owing to normalization of liquidity and economic conditions, most likely over the next three to four months.

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Central Government Employees can pick NPS or OPS for benefits on death during service

 

            Under rule 10 of CCS (Implementation of NPS) Rules, 2021, Central Government Employees covered under National Pension System have now been given the option to choose benefits either from the old pension scheme or accumulated pension corpus under NPS in the event of their death during service. However, the family of the deceased Government employee cannot exercise this option. If the Central Government Employee fails to furnish his option, a default option of benefit under the old pension scheme for the first 15 years of service is available. Thereafter, the default option would be the benefits under NPS. Currently, the default option of the old pension scheme is in vogue till March 2024 in accordance with these rules even if Government Employee has completed 15 years of service. CCS (Implementation of NPS) Rules, 2021 were notified through a Gazette notification dated 30th March 2021.

Rule 10 of the CCS (Implementation of NPS) Rules, 2021

Rule 10 of the CCS (Implementation of NPS) Rules, 2021 says, “Every Government servant covered under the National Pension System shall, at the time of joining Government service, exercise an option in Form 1 for availing benefits under the National Pension System or under the Central Civil Service (Pension) Rules, 1972 or the Central Civil Service (Extraordinary Pension) Rules, 1939 in the event of his death or boarding out on account of disablement or retirement on invalidation.” According to this rule, Government servants, who are already in Government service and are covered by the National Pension System, shall also exercise such option as soon as possible Form 2.

In an Office Memorandum (O.M.) dated 9th June 2021, the Directorate General of Health Services (DGHS), said employees who are already in Government Service and are covered by the NPS, also need to furnish the details of family in Form 2 to the Head of Office along with Form 1 for record and onward submission to Central Record Keeping Agency. The DGHS had asked all officials to furnish their options to the Head of Office through their respective Establishment Division by 11th June.

Benefits on in-service death of Central Government Employees covered under NPS

Family pension under CCS(Pension) Rules, 1972 as per option exercised by Government servant or default option or in case, Government servant has opted for benefits under NPS, family would get benefits from his accumulated pension wealth under NPS.

• Death Gratuity

• Leave Encashment

• Benefits from CGEGIS

• CGHS facilities

Salary to Central Government Employees is paid as per recommendations of the 7th Pay Commission.

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Why do institutional investor holdings in a company matter?

 

            Among the many indicators that retail investors consider when putting their money in a company is the percentage of shares held by institutional investors, such as insurance companies, pension funds, mutual funds endowment trusts and banks. One of the thumb rules of stock market investment is that the higher the stake held by institutional investors in a company, the better the corporate governance standards. And it is not just institutional investors’ moves that retail investors track closely; they also see investments by reputed high net worth individuals as a vote of confidence in the company’s fundamentals and the management’s abilities.

Here are some of the commonly asked questions related to institutional investor shareholdings:

Why do retail investors track stakes held by institutional investors in a company?

Institutional investors are considered to be the ‘smart money’ in the market because they are seen to bet their money on a company only after having done the necessary research and analysis. Because they have deep pockets, institutional investors are in a position to spend money on research before picking up a sizeable stake in the company. So, most retail investors look at institutional stakes in this way: “Well, if the big boys are staking a lot of money on it, they must know what they are getting into.” Also, institutional investors usually take a long-term view on a stock. So, their presence is viewed as validation of the long-term prospects of the company.

Is every investment decision by fund houses carefully researched?

Safe to say that a vast majority of the investment decisions are. After all, the fund managers are answerable to their managements, as well as to their investors. But there are instances when fund managers pick up stakes not based on the fundamentals of the company, but because they have an arrangement with the promoter or the market operator who is pumping up the stock.

Whose presence carries more weight—foreign investors or domestic mutual funds?

Usually, it the foreign investors (known in market parlance as foreign portfolio investors or FPIs) who are seen as having deeper pockets and more staying power. But the track record of the FPI matters. Many times the so-called FPI is nothing but an investment vehicle registered in a tax haven and used for routing the promoters’ unaccounted money abroad back into India. There are instances of even reputed foreign fund houses creating investment vehicles for market operators and promoters. So, it may seem like a foreign fund is investing in the company, but the money could well be domestic.

How does one figure out if there is genuine FPI interest in a company?

If there are multiple FPIs holding stakes in a company, and it happens to be a mix of reputed funds and little-known funds, it usually indicates a genuine interest in a company. But if there are only little-known foreign funds holding a sizeable stake, it does look suspicious.

Is high institutional investor holding in a company a good thing?

If the majority of those investors have a good track record and reputation, it is a good thing. But remember, a very high percentage of institutional holdings can be a double-edged sword. When institutional investors hold a sizeable chunk of a company’s shares, the stock is said to be ‘over-owned’ in market parlance. If something goes wrong with the company, or the stock market as a whole, too many fund managers will rush for the exit at the same time. That could cause aggravate the fall in stock price.

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5 benefits of PF account

 

            Provident Fund, other than being a long-term savings scheme gives several additional benefits to the subscribers. Here are 5 benefits of EPF funds that every salaried person must know.

1. Employees’ Deposit Linked Insurance Scheme (EDLI)

A PF subscriber can avail benefits of free insurance up to Rs 7 lakh in case of death during the service period under EDLI scheme. In May, the insurance benefits under the EDLI scheme were enhanced and liberalized. Amount of maximum insurance benefit has been increased from Rs 6 lakh to Rs 7 lakh.

2. Pension Scheme for EPF account holder

An EPF Account holder is also entitled to lifelong pension scheme under Pension Scheme 1995 (EPS). As regards Employees’ Pension Scheme (EPS), 1995, a minimum pension of Rs. 1,000/- per month has been prescribed with effect from 01.09.2014 for the pensioners under Employees’ Pension Scheme (EPS), 1995.

3. Income Tax exemption

This savings scheme offers tax exemption under Section 80C of the Income Tax Act to an EPF Account holder. 

4. Partial Fund Withdrawals

EPFO allows for Partial Fund Withdrawals in certain cases such as medical emergency, home loan repayment, construction or purchase of new house, renovation of house, wedding of children or self.

5. Loan against PF

An EPF member can also avail loan in the wake of a financial emergency with a 1% rate of interest. However, the short term must be repaid within 36 months of loan disbursal.

The provisional payroll data of EPFO published in May showed that that EPFO has added around 11.22 lakh net subscribers in the month of March 2021. Despite Covid-19 pandemic, cumulative net payroll addition for FY 2021 is almost at par with last year, with 77.08 lakh net additions to subscriber’s base.

Quarterly analysis of payroll for the FY 2020-21 indicates that net subscriber’s addition improved consistently from 2nd quarter after taking hit in the 1st quarter due to crisis of Covid19 pandemic. Maximum improvement of 33.64 lakh net subscribers was observed during the 4th quarter (Jan-March 2021) with a growth of 37.44% as compared to the third quarter (Oct-Dec 2020).

Source : www.zeenews.india.com

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Forward rates (Forward premium and Forward discount)

 

Forward rate

‘Forward rate’ is the price paid for hedging by buying dollars in the forward market. Forward transactions take place at a premium or discount to the spot rate. Forward premium is when the forward (or expected future) exchange rate is higher than the spot (or present) exchange rate. It is an indication by the market that the current domestic exchange rate is going to increase against the other (foreign) currency. This circumstance can be confusing because an increasing exchange rate means the currency is depreciating in value. A forward premium is frequently measured as the difference between the current spot rate and the forward rate, so it is reasonable to assume that the future spot rate will be equal to the current futures rate. On the contrary, Forward discount is when the forward exchange rate is lower than the spot exchange rate. Forward premium or Forward discount is normally expressed as annualized percentage of the difference.

When the exchange rate is quoted as D/F, (where ‘D’ i.e., price currency of the domestic currency and ‘F’ i.e. the base currency of the foreign currency) and the forward exchange rate is higher than the spot rate, it means that the foreign currency is trading at a forward premium. It shows that the foreign currency has appreciated because it will take more units of the domestic currency to buy one unit of the foreign currency. An appreciation for foreign currency is the depreciation for domestic currency. Hence, when the foreign currency trades at a forward premium, the domestic currency trades at a forward discount and vice versa.

For example, assume that we are in India market and the INR/USD spot exchange rate is 73.45 and 3-month (or 90 days) forward exchange rate is 73.62. This means that right now it takes 73.45 Indian rupees to buy 1 U.S Dollar and at 3 months maturity, it will take 73.62 Indian rupees to buy 1 U.S dollar, i.e. 0.17 Indian rupees more per 1 U.S Dollar. It shows that the foreign currency i.e. the U.S Dollar is trading at a forward premium because it takes more Indian rupees to buy U.S Dollar in future. The INR is trading at forward discount because 1 Indian rupee is worth less in future.

 

Formula:-

We can use the following formula to know the percentage forward premium or Forward discount for the foreign currency.

Forward premium / discount = [(Forward exchange rate – Spot exchange rate) / Spot exchange rate]

When the result (Forward exchange rate – Spot exchange rate) is positive, it is a forward premium and when the result is negative, it is the forward discount.

Using the example above, we can find out the forward premium / discount as below :-

Forward premium / discount = [(73.62 – 73.45) / 73.45]

                                                     = + 0.17 / 73.45

                                                     = + 0.0023145 or - 0.23%

Therefore, in this case, as it is a positive result, Forward premium for USD is 0.23% for 90 days. If we want to say annual rate of forward premium, then [0.23 x (360/90)] it is 0.92%. Because we get a positive figure, the foreign currency (i.e. USD) trades at a forward premium.

Let’s convert the above to indirect quote i.e., to USD/INR i.e. foreign currency in numerator and domestic currency in denominator. Then, the spot exchange rate works out to 0.013615 (=1/73.45) and 0.013583 (=1/73.62). By just looking at the figures, we can conclude that U.S Dollar trades at a forward premium because it takes less USD (0.013583 is less than 0.013615) to buy INR in 3 month (90 days).

When the indirect quote is used i.e. when the price is expressed in foreign currency terms, the formula for forward premium or discount is different as follows :-

Forward premium / discount = [{(1/Forward exchange rate) – (1/Spot exchange rate)} / (1/Spot exchange rate)]

When the result {(1/Forward exchange rate) – (1/Spot exchange rate)} is negative, it is a forward premium and when the result is positive, it is the forward discount.

Using the example above, we can find out the forward premium / discount as below :-

Forward premium / discount = [(0.013583 – 0.013615) / 0.013615]

                                                     = - 0.000032 / 0.013615

                                                     = - 0.0023503 or - 0.235%

Therefore, in this case, as it is a negative result, Forward premium against INR is 0.236% for 90 days. If we want to say annual rate of forward premium, then [0.235 x (360/90)] it is 0.94%.

 

Forward Rate calculation when interest rates involved

The outright forward transactions are over-the-counter transactions undertaken by dealers. In India, it is generally the banks that transact in forward markets. The maturity date agreed upon by the parties generally varies from months to a year or two. But maturities beyond that tend to have wider bid-ask spreads, in other words, tend to be more expensive, so are rare. The forward rate could be in premium or discount, based on the interest rate differential in case of currencies which are fully convertible and in case of partially convertible currencies, they are determined purely on the basis of demand and supply.

For example, in India, the USD/INR forward rate for six months could be in premium or at a discount over the spot rate, based on how liquid the dollar is. Typically, a forward premium reflects possible changes arising from differences in the interest rate between the two currencies of the two countries involved. The basics of calculating a forward rate require both the current spot price of the currency pair and the interest rates in the two countries. To calculate the forward rate in domestic country terms, multiply the spot rate by the ratio of interest rates and adjust for the time until expiration. So, the forward rate is equal to the spot rate x (1 + domestic interest rate) / (1 + foreign interest rate). If the result will come in positive, then, there is forward premium for the domestic country and forward discount for the foreign country. Similarly, the result will come in negative, then there is forward discount for domestic country and forward premium for foreign country.

For example, assume the current U.S. dollar-to-euro exchange rate (USD / EUR) is $1.1365. The domestic interest rate, or the U.S. rate is 5%, and the foreign interest rate is 4.75%. Then,

Forward rate = [Spot rate x {(1 + domestic interest rate) / (1 + foreign interest rate)}]

                        = $1.1365 x (1.05 / 1.0475)

                        = $1.1365 x 1.0023866348

                        = $1.1392

Therefore, in this case, it reflects a forward premium in domestic country terms as the result in positive.

Currency futures

Exchange-traded currency forward transactions are known as currency futures. Before April 2007, only banks were allowed to trade in currency forwards market through over-the-counter deals. But it was not a structured market, in the sense that it was not traded on an RBI-recognised exchange platform. But in 2007, RBI and Sebi allowed trading of currency futures on the National Stock Exchange. The objective of opening trading in currency futures on the exchanges was to deepen the futures market by allowing the small retail investors to take a view and hedge their foreign exchange risks. The regulatory authorities in India are on their way to allow trading in currency options on exchanges as well, though it is already available as a product.

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RBI delivers a booster dose in policy review

 

            As the RBI’s monetary policy committee (MPC) met on Friday, it was generally expected that it would not signal any interest rate change. The reason is that the economy needs the support of low interest rates and it will not cut as inflation may be a concern. To put it in perspective, since the start of the pandemic, the RBI has taken a host of measures to support the weak economy. It has cut interest rates, increased the liquidity available with banks, bought government bonds from the market to support the huge government borrowing and made available certain targeted loans to certain sectors through banks. What more can it possibly do? Well, in continuation of the curative doses delivered earlier, it delivered a booster dose, as follows:-

(1) “The MPC decided to continue with the accommodative stance as long as necessary to revive and sustain growth on a durable basis." This means it will keep interest rates low as long as required and it is not time-bound when it will change its stance from accommodative (very low interest rates) to neutral.

(2) “On-tap liquidity window for contact-intensive sectors" i.e. to the window allowed earlier on 5 May for covid-related healthcare infrastructure and services, it has added a separate window for ₹15,000 crore, which banks can avail at the repo rate (currently 4%) and lend to hotels, restaurants, travel agents, etc.

(3) It announced a resolution framework on 5 May that loans up to ₹25 crore granted to MSMEs (micro, small and medium enterprises) and individuals may be restructured, referred to as resolution framework 2. In this review, the threshold was increased to ₹50 crore i.e. a wider segment of loans have been allowed to be restructured, if required, in view of pandemic-related issues.

Apart from the measures mentioned above, there are certain measures for the bond market:

(4) There is a government bond purchase programme known as G-SAP 1.0, under which the RBI is purchasing ₹1 trillion from banks in the June quarter to support the bond market, so that interest rates do not move up in spite of the heavy government borrowing. Now, it has announced G-SAP 2.0 for ₹1.2 trillion for the September quarter.

(5) Banks issuing certificates of deposit (CDs) have been allowed to buy back their CDs prior to maturity: liquidity being in surplus, banks may not require the money raised earlier through CDs, hence they may require this flexibility.

In the context of your investments, it is more or less neutral for equities; there is a small positive for banks and NBFCs as the ambit for loan restructuring has been expanded. For the bond market, it is positive for keeping interest rates low through the G-SAP. This is just one step short of a G-Sec buyback calendar, as the RBI is committing an amount per quarter.

Net-net, what is the takeaway? One, the accommodative stance not being time-bound, we can be rest assured that interest rates will remain benign for some time at least. For all the noise about inflation globally and in India, at least for the next few months, inflation will remain within manageable proportions. There is a positive base effect, which means last year at the same time, inflation was high, hence this year it will be that much lower on a relative basis. Crop production has been good and a normal monsoon has been predicted. In these trying times, when growth is a challenge, the RBI is justified in “looking through" inflation and keeping interest rates low. In this review, for FY22, the MPC has projected CPI inflation at 5.1%, which we can very much live with.

The big issue now is GDP growth. This year, we have a positive base effect, since growth in FY21 was -7.3%. Hence, as per the data that will be declared in due course, GDP growth will look good. However, in view of the second wave, all the agencies are revising their projections for FY22 downward. The projections are still in high single digit as the second wave is waning and lockdown has not been nationwide. The RBI has revised its GDP growth forecast for FY22 down by 1%, from 10.5% earlier to 9.5%. Not a big impact on growth from the perspective of the RBI’s projections.

Source : www.livemint.com

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