A PROJECT REPORT ON

“Interpretation and Analysis of Share

& Stock Market in India with a Special
Reference of Apollo Sindhoori”

CHAPTER 1

Introduction
 INTRODUCTION

The basic requirement to start a new business is –7-m-man, machine material,

market, method, management and money. But the most important factor is money
because with the help of money, we can arrange the other six factors. So the basic
need starts with money and to arrange it, every new unit has to undergo a process
of project financing.

Project financing is a process of arranging money from its suppliers

i.e. mainly from bankers. We have to show to show our plans, future prospects
and our need of finance. But only absolute values does not help us so much we
have to show comparative data and this comparison is best presented with the
help of ratio. Before financing any projects the banker’s looks into the crux of the
project that is key ratios of the project.

Financial statement analysis is important to board, managers,

payers, lenders, and others who make the judgment of financial health of the
organization. One widely accepted method of assessing financial statement is
ratios analysis, which uses data from the balance sheet and income statement to
produce values that had easily interpreted financial meaning. Most of the
organization and companies routinely evaluate their financial condition by
calculating various ratios and comparing the values to those for previous periods,
looking for differences that could indicate a meaningful change in financial
condition. Similarly banks before financing any project also calculating various
ratios and comparing the values to those, looking for differences that could
indicate weaknesses or opportunity for improvement.
Ratios analysis can be used to compare the risk and return relationship of
firms.
 Ratio analysis is widely used tool of financial analysis. It is
defined as the systematic use of ratios to interpret the financial statement so that
the strengths and weaknesses of a firm as well as its historical performances and
current financial condition can be determined.

Introduction of Apollo Sindhoori

Apollo Sindhoori a professionally managed Financial Service organization,
belonging to the Apollo Hospitals Group. We have a corporate membership of
National Stock Exchange of India Limited [NSE] and The Bombay Stock
Exchange Limited [BSE]. We are registered as Depository Participant with both
NSDL and CDSL.

The Company was incorporated on

4.7.1995 at Chennai in Tamil Nadu. The certificate to commence business was
obtained on 16.8.1995. The company is registered with SEBI under Section 12 of
the SEBI Act, 1992 for carrying on the business of stock broking. RBI has
exempted the company from the provisions of S.45-IA of RBI Act and hence the
company has not been registered as an NBFC with RBI.

Company offers the following services:

• Trading facility in Equity segment on and Derivative segment on NSE &

BSE through a single screen. All the branches are connected by VSat to a
central server at Chennai and orders are placed through the CTCL.
• Trading facility in commodity segment, including bullion, oils, gaur seed
etc. through our subsidiary, Apollo Sindhoori Commodities Trading
Limited
• Depository Participant [DP] services of NSDL and CDSL at major
locations
• Online bidding for IPO
• Distribution of Mutual Funds

The company has span India presence with over 700 offices across the county and
a clientele of over 140000 happy customers

Company are technologically advanced due to

ongoing investment in technology, which is a key element in expanding our
product and service offerings, enhancing our delivery systems, providing fast and
consistent client service, reducing processing costs, and facilitating our ability to
handle significant increases in client activity. Our Company has an in-house
technology team of 25 people comprising technical expert in each area. The in-
house technology team has been responsible for efficient operations of our back
office systems.

Company having Strong Sales and Marketing

Teams .The marketing force is divided into various teams with specific area of
operation viz. corporate clients and retail clients. The marketing team at Mumbai
Specializes in Institutional clients. Specific teams also handle High Net worth
Clients. This segmentation of marketing teams help in targeting various segments
at the same time Our marketing is focused towards both virgin clients, i.e., clients
who are not already trading and are not much aware of opportunities in the stock
market and clients who are already in the stock market and enrolled themselves
with other stockbrokers.

OBJECTIVE:-

The objective of the code is to ensure that the

Board of Directors and the Senior Management Personnel maintain the standards
of conduct required of them and comply with legal requirements. The Company
appoints the Company Secretary as a compliance officer for the purpose of the
code, who will be available to directors and senior management to solve there
queries and to help them comply with the code.

DEFINITION:-
“The Company” or “Company” means Apollo
Sindhoori Capital Investments Limited “Board of Directors” or “the Board”
means the Board of Directors of Apollo Sindhoori Capital Investments Limited
“Officers” shall mean Senior Management Personnel i.e., one level below the
Board of Directors.
“Relatives” mean relatives as defined in Section 6 of
the Companies Act,1956“Associates” shall include any person or entity, whose
relation or association with the Director or Senior Management Personnel is such
so as to influence the objective decision making by them.

APPLICABILITY:-
 The code is applicable to all the Directors and
Senior Management Personnel of the Company.

COMPLIANCE WITH LEGISLATION:-

Directors and Officers of the Company are

required to comply with all applicable laws, rules and regulations, both in letter
and in spirit. In order to assist the Company in promoting lawful and ethical
behavior, they must report any possible violation of law, rules, regulation or code
of conduct to the Company Secretary.

CONFLICT OF INTEREST:-

A situation of “conflict of interest” arises

wherein any Director’s or Officer’s interest, whether directly or indirectly,
through his relatives or associates, is or appears to be in conflict with the interest
of the company. Conflicts can arise in many situations, set forth, are some of the
common circumstances that may lead to a conflict of interest, actual or potential –
Where any Directors simultaneously serves as a Director / Senior Managerial
Person / consultant or owns interest or stake in any person or entity which is a
competitor / customer / business associate of the Company; Where the Directors
and Officer himself or through his relatives or associates, enters or proposes to
enter into any arrangement, collaboration, venture, agreement or transaction with
the company;
Under such circumstances, following conduct is expected of the officers As far as
possible, dealings involving conflict of interest should be Avoided.
If such dealings are unavoidable, the Directors should
disclose to the Board and the officers should disclose to the Executive Director:

(1) the existence and nature of the actual or potential conflict of interest and
(2) all facts known to him/her regarding the transaction that may be
material to a judgment about whether to proceed with the transaction.

CORPORATE OPPORTUNITIES:-
 Directors and Officers shall not exploit for
their own personal gain opportunities that are discovered through the use of
corporate property, information or position unless the opportunity is disclosed
fully in writing to the Company’s Board of Directors and the Board of Directors
decline to pursue such opportunity.
 CHAPTER 2

Overview on
Indian Securities
Market
Introduction:-
Securities markets provide a channel for
allocation of savings to those who have a productive need for them. As a result,
the savers and investors are not constrained by their individual abilities, but by the
economy’s abilities to invest and save respectively, which inevitably enhances
savings and investment in the economy.

Market Segments:-

The securities market has two interdependent and

inseparable segments: the primary and the secondary market. The primary market
provides the channel for creation of new securities through issuance of financial
instruments by public companies as well as Governments and Government
agencies and bodies whereas the secondary market helps the holders of these
financial instruments to sale for exiting from the investment. The price signals,
which subsume all information about the issuer and his business including
associated risk, generated in the secondary market, help the primary market in
allocation of funds.

The primary market issuance is done either through public

issues or private placement. A public issue does not limit any entity in investing
while in private placement, the issuance is done to select people. In terms of the
Companies Act, 1956, an issue becomes public if it results in allotment to more
than 50 persons. This means an issue resulting in allotment to less than 50 persons
is private placement. There are two major types of issuers who issue securities.
The corporate entities issue mainly debt and equity instruments (shares,
debentures, etc.), while the governments (central and state governments) issue
debt securities (dated securities, treasury bills).

The secondary market enables participants who

hold securities to adjust their holdings in response to changes in their assessment
of risk and return. They also sell securities for cash to meet their liquidity needs.
The exchanges do not provide facility for spot trades in a strict sense. Closest to
spot market is the cash market in exchanges where settlement takes place after
some time. Trades taking place over a trading cycle (one day under rolling
settlement) are settled together after a certain time. All the 23 stock exchanges in
the country provide facilities for trading of corporate securities. Trades executed
on NSE only are cleared and settled by a clearing corporation which provides
innovation and settlement guarantee. Nearly 100% of the trades in capital market
segment are settled through demat delivery.

NSE also provides a formal trading platform for

trading of a wide range of debt securities including government securities in both
retail and wholesale mode. NSE 183 also provides trading in derivatives of
equities, interest rate as well indices. In derivatives market (F&O market segment
of NSE), standardized contracts are traded for future settlement. These futures can
be on a basket of securities like an index or an individual security. In case of
options, securities are traded for conditional future delivery. There are two types
of options – a put option permits the owner to sell a security to the writer of
options at a predetermined price while a call option permits the owner to purchase
a security from the writer of the option at a predetermined price. These options
can also be on individual stocks or basket of stocks like index. Two exchanges,
namely NSE and the Stock Exchange, Mumbai (BSE) provide trading of
derivatives of securities. Today the market participants have the flexibility of
choosing from a basket of products like:

• Equities
• Bonds issued by both Government and Companies
• Futures on benchmark indices as well as stocks
• Options on benchmark indices as well as stocks
• Futures on interest rate products like Notional 91-day T-Bills, 10
year notional zero coupon bond and 6% notional 10 year bond.

The past decade in many ways has been

remarkable for securities market in India. It has grown exponentially as measured
in terms of amount raised from the market, number of stock exchanges and other
intermediaries, the number of listed stocks, market capitalization, trading volumes
and turnover on stock exchanges, and investor population. Along with this
growth, the profiles of the investors, issuers and intermediaries have changed
significantly. The market has witnessed several institutional changes resulting in
drastic reduction in transaction costs and significant improvements in efficiency,
transparency, liquidity and safety. In a short span of time, Indian derivatives
market has got a place in list of top global exchanges. In single stock futures
category, the Futures Industry Association (FIA) placed NSE in second position
in the year 2000.

Reforms in the securities market, particularly the

establishment and empowerment of SEBI, market determined allocation of
resources, screen based nation-wide trading, dematerialization and electronic
transfer of securities, rolling settlement and ban on deferral products,
sophisticated risk management and derivatives trading, have greatly improved the
regulatory framework and efficiency of trading and settlement. Indian market is
now comparable to many developed markets in terms of a number of qualitative
parameters.

Products and Participants:-

Financial markets facilitate the reallocation of savings

from savers to entrepreneurs. Savings are linked to investments by a variety of
intermediaries through a range of complex financial products called “securities”
which is defined in the Securities 184 Contracts (Regulation) Act, 1956 to include
shares, bonds, scrip’s, stocks or other marketable securities of like nature in or of
any incorporate company or body corporate, government securities, derivatives of
securities, units of collective investment scheme, interest and rights in securities,
security receipt or any other instruments so declared by the central government.

Dependence on Securities Market:-

Three main sets of entities depend on securities market.

While the corporate and governments raise resources from the securities market to
meet their obligations, the households invest their savings in the securities.

Corporate Sector:-

The 1990s witnessed emergence of the securities market as

a major source of finance for trade and industry. A growing number of companies
are accessing the securities market rather than depending on loans from FIs/banks.
The corporate sector is increasingly depending on external sources for meeting its
funding requirements. There appears to be growing preference for direct financing
(equity and debt) to indirect financing (bank loan) within the external sources.

According to CMIE data, the share of capital market

based instruments in resources raised externally increased to 53% in 1993-94, but
declined thereafter to 33% by 1999-00 and further to 21% in 2001-02. In the
sector-wise shareholding pattern of companies listed on NSE, it is observed that
on an average the promoters hold more than 55% of total shares. Though the non-
promoter holding is about 44%, Indian public held only 17% and the public float
(holding by FIIs, MFs, Indian public) is at best 25%. There is not much difference
in the shareholding pattern of companies in different sectors. Strangely, 3% of
shares in companies in media and entertainment sector are held by private
corporate bodies though the requirement of public offer was relaxed to 10% for
them. The promoter holding is not strikingly high in respect of companies in the
IT and telecom sectors where similar relaxation was granted.

Governments:-

Along with increase in fiscal deficits of the

governments, the dependence on market borrowings to finance fiscal deficits has
increased over the years. During the year 1990-91, the state governments and the
central government financed nearly 14% and 18% respectively of their fiscal
deficit by market borrowing. In percentage terms, dependence of the state
governments on market borrowing did not increase much during the decade 1991-
2001. In case of central government, it increased to 77.6% by 2002-03.

Households:-

According to RBI data, household sector

accounted for 82.4% of gross domestic savings during 2001-02. They invested
38% of financial savings in deposits, 33% in insurance/provident funds, 11% on
small savings, and 8% in securities, including government securities and units of
mutual funds during 2001- 02. Thus the fixed income bearing instruments are the
most preferred assets of the household sector. Their share in total financial
savings of the household sectorWitnessed an increasing trend in the recent past
and is estimated at 82.4% in 2001-02. In contrast, the share of financial savings of
the household sector in securities(Shares, debentures, public sector bonds and
units of UTI and other mutual fundsand government securities) is estimated to
have gone down from 22.9% in 1991-92to 4.3% in 2000-01, this increased to 8%
in 2001-02.

Though there was a major shift in the saving

pattern of the household sector from physical assets to financial assets and within
financial assets, from bank deposits to securities, the trend got reversed in the
recent past due to high real interest rates, prolonged subdued conditions in the
secondary market, lack of confidence by the issuers in the success of issue process
as well as of investors in the credibility of the issuers and the systems and poor
performance of mutual funds. The portfolio of household sector remains heavily
weighted in favor of physical assets and fixed income bearing instruments.
 Chapter 3

Market index
Introduction:-
To understand the use and functioning of the
index derivatives markets, it is necessary to understand the underlying index. In
the following section, we take a look at index related issues. Traditionally,
indexes have been used as information sources. By looking at an index, we know
how the market is faring. In recent years, indexes have come to the forefront
owing to direct application in finance in the form of index funds and index
derivatives. Index derivatives allow people to cheaply alter their risk exposure to
an index and to implement forecast about index movement. Hedging using index
derivatives has become a central part of risk management in the modern economy.

Understanding the Index Number:-

An index is a number which measure the change in a set

of values over a period of time. A stock index represents the change in value of a
set of stock which constitute the index. More specifically, a stock index number is
the current relatives value of a weighted average of the prices of a pre-defined
group of equities. It is a relatives values because it is expressed relatives to the
weighted average of price at some arbitrarily chosen starting date or base period.
The starting value or base of the index is usually set to 1000 on the start date of
November 3, 1995.

A good stock market index is one which captures the

behavior of the overall equity market. It should represent the market, it should be
well diversified and yet highly liquid. Movements of the index should represent
the returns obtained by “typical” portfolios in the country.
 1. A market index is very important for its use.

2. As a barometer for market behavior. As a benchmark portfolio

performance.

3. As an underlying in derivative instrument like index future, and

4. In passive fund management by index funds.

Market capitalization weighted index calculation :-

In the example below we can see that each stock affects the index
value in proportion to the market value of all the outstanding share. In the present
example, the base index = 1000 and the index value works out to be 1002.60

Index = 7330566.20 * 1000 = 1002.62

7311383.40

The S&P CNX Nifty:-

What makes a good stock market index for use in an
index futures and index options market? Several issues play a role in terms of the
choice of index. We will discuss how the S&P CNX Nifty addresses of these
issues.
Diversification:-
As mentioned earlier, a stock market index should be
well-diversified, thus ensuring that hedgers or speculation are not vulnerable to
individual-company or industry risk.

Liquidity of the index:-

The index should be easy to trade on the cash market.
This is party related to the choice of stocks in the index. High liquidity of index
component implies that the information in the index is less noisy.

Operational issues:-
The index should be professionally maintained, with
a steady evolution of securities in the index to keep pace with change in the
economy. The calculation involved in the index should be accurate and reliable.
When a stock trades at multiple venues, index computation should be done using
prices from the most liquid market.

Exchange Traded funds:-

Exchange Traded Funds (EFTS) are innovative
product, which first came into existence in the USA in 1993. They have gained
prominent over the last few years with over $300 billion invested as of end 2001
in about 360 EFTs globally. About 60% of trading volume on the American Stock
Exchange is from EFTs. Among the popular ones are SPDRs based on the S&P
500 Index. QQQs(cubes) based on the Nasdaq- 100 Index, iSHARE based on
MSCI Indices and TRAHK(Tracks) based on the Hang Seng Index.

The first EFT in India, “Nifty BeEs”(Nifty Benchmark

Traded Scheme) based on S&P CNX Nifty, was launched in December 2001 by
Benchmark Mutual Fund. It is bought and sold like any other stock on NSE and
has all characteristics of an index fund.

The movement of the S&P CNX NIFTY, the most widely

used indicator of the market, is presented in Chart 5.1. In the very first year of
liberalization, i.e. 1991-92,it recorded a growth of 267%, followed by sharp
decline of 47% in the next year ascertain irregularities in securities transactions
were noticed.

The market picked up next year thanks to increased inflow

of foreign funds, and increased investor interest. Thereafter the market remained
subdued. The index recorded a decline of 3.47% during 1998-99 under the
pressure of economic sanctions following detonation of nuclear device,
continuing woes of East Asian financial markets, volatility of Indian currency and
worries about financial health of UTI’s US-64 scheme. The Union Budget of
1999 brought cheers to the market. The market moved on a roller coaster ride, but
a distinct rising trend emerged due to all-round positive perception about strength
of the Government and also its commitment towards second generation reforms,
improved macro-economic parameters and better corporate results. The S&P
CNX Nifty firmed up during 1999-2000 by 42% which was nearly four times the
average return offered on bank deposits. The trend got reversed during 2000-01,
which witnessed large sell-offs in new economy stocks in global markets and
deceleration in the growth of the domestic economy.

This brought down Nifty from a high of 1636.95 in

April 2000 to a low of 1108.20 in October 2000. The market looked up in
November-January in anticipation of a good budget. However it did not last long
as the market received shocking news about imminent payment crisis on certain
exchanges, large scale manipulations in stock prices and revelation of large scale
corruption in the procurement of defense equipments.

The Nifty closed at 1148.20 at the end of March 2001

recording a fall of about 25% during 2000-01. The trend precipitated further with
introduction of rolling settlement and withdrawal of deferral products in July
2002, suspension of repurchase facility under UTI’s US-64 scheme, terrorist
attack on world Trade Centre in September 2002, etc. which caused a further
decline in S&P CNX Nifty by 1.6% during 2001-02. The Nifty closed at 978.2 at
the end of March 2003.
CHAPTER 4

Regulatory
Framework
 The trading of derivatives is governed by the provisions
contained in the SC(R)A, the SEBI Act, the rules and regulations framed there
under and the rules and bye – laws of stock exchange. The requirement to become
a member and an authorized dealer of the F&O segment and the position limit as
they apply to various participant.

Regulation for derivatives trading:-

SEBI set up a 24-member committee
under Chairmanship of Dr. L .C .Gupta to develop the appropriate regulatory
framework for derivatives trading in India. On May 11, 1998 SEBI accepted the
recommendation of the committee and approved the phased introduction of
derivatives trading in India beginning with stock index futures.

1. Any exchange fulfilling the eligibility criteria as prescribe in the LC Gupta

committee report can apply to SEBI for grant of recognition under section
4 of the SC(R)A, 1956 to start trading derivatives.
2. The Exchange should have minimum 50 members.
3. The members of an existing segment of the exchange would not
automatically become the members of derivatives segment.
4. The clearing and settlement of derivatives trades would be through a SEBI
approved clearing corporation/house.
5. The minimum contract value shall not be less than Rs.2 Lakhs. Exchange
have to submit details of the futures contract they propose to introduce.
6. The initial margin requirement, exposure limit linked to capital adequacy
and margin demands related to the risk of loss on the position will be
prescribe by SEBI from time to time.
7. The trading members are requirement to have qualified approved users
and sales persons who have passed a certified program me approved by
SEBI.
Forms of collaterals acceptable at NSCCL:-
Members and dealer authorized dealer have to
fulfill certain requirement and provide collateral deposits to become members of
the F&O segment. All collateral deposits are segregated into cash component and
non-cash component. Non-cash component mean all other forms of collateral
deposit like deposit of approved demat securities.

Demat A/C:-
1. Compulsory for share trading.
2. Without Demat A/c no person can sell or buy any share.
3. If any persons having physical share and wasn’t to sell them
then he must be open a Demat A/c and Dematerlised. The
physical share in electrical form.
4. Document :-
a) Pan card
b) Address proof
c) Bank A/c with cheque.
d) Identify proof
 CHAPTER 5

Types of Markets
Primary Market:-

1. Corporate Securities:-

The Disclosure and Investor Protection (DIP)

guidelines prescribe a substantial body of requirements for issuers/intermediaries,
the broad intention being to ensure that all concerned observe high standards of
integrity and fair dealing, comply with all the requirements with due skill,
diligence and care, and disclose the truth, whole truth and nothing but truth. The
guidelines aim to secure fuller disclosure of relevant information about the issuer
and the nature of the securities to be issued so that investors can take informed
decisions. For example, issuers are required to disclose any material ‘risk factors’
and give justification for pricing in their prospectus. An unlisted company can
access the market up to 5 times its pre-issue net worth only if it has track record
of distributable profits and net worth of Rs. 1 crore in 3 out of last five years.

A listed company can access up to 5 times of its

pre-issue net worth. In case a company does not have track record or wishes to
raise beyond 5 times of its pre-issue net worth, it can access the market only
through book building with minimum offer of 60% to qualified institutional
buyers. Infrastructure companies are exempt from the requirement of eligibility
norms if their project has been appraised by a public financial institution and not
less than 5% of the project cost is financed by any of the institutions, jointly or
severally, by way of loan and/or subscription to equity. The debt instruments of
maturities more than 18 months require credit rating.

If the issue size exceeds Rs. 100 crore, two ratings

from different agencies are required. Thus the quality of the issue is demonstrated
by track record/appraisal by approved financial institutions/credit
rating/subscription by QIBs. The lead merchant banker discharges most of the
pre-issue and post-issue obligations. He satisfies himself about all aspects of
offering and adequacy of disclosures in the offer document. He issues a due
diligence certificate stating that he has examined the prospectus, he finds it in
order and that it brings out all the facts and does not contain anything wrong or
misleading.
 2. Government Securities:-

The government securities market has witnessed

significant transformation in the 1990s. With giving up of the responsibility of
allocating resources from securities market, government stopped expropriating
seignior age and started borrowing at near - market rates. Government securities
are now sold at market related coupon rates through a system of auctions instead
of earlier practice of issue of securities at very low rates just to reduce the cost of
borrowing of the government. Major reforms initiated in the primary market for
government securities include auction system (uniform price and multiple price
method) for primary issuance of T-bills and central government dated securities, a
system of primary dealers and non-competitive bids to widen investor base and
promote retail participation, issuance of securities across maturities to develop a
yield curve from short to long end and provide benchmarks for rest of the debt
market, innovative instruments like, zero coupon bonds, floating rate bonds,
bonds with embedded derivatives, availability of full range ( 91-day and 382-day)
of T-bills, etc.

Secondary Market:-

(a) Corporate Securities:-

The stock exchanges are the exclusive

centers for trading of securities. Though the area of operation/jurisdiction of an
exchange is specified at the time of its recognition, they have been allowed
recently to set up trading terminals anywhere in the country. The three newly set
up exchanges (OTCEI, NSE and ICSE) were permitted since their inception to
have nation wide
trading. The trading platforms of a few exchanges are now accessible from many
locations. Further, with extensive use of information technology, the trading
platforms of a few exchanges are also accessible from anywhere through the
Internet and mobile devices. This made a huge difference in a geographically vast
country like India.
 (b)Exchange Management:-

Most of the stock exchanges in the country are

organized as “mutual’s” which was considered beneficial in terms of tax benefits
and matters of compliance. The trading members, who provide brokering
services, also own, control and manage the exchanges. This is not an effective
model for self-regulatory organizations as the regulatory and public interest of the
exchange conflicts with private interests. Efforts are on to demutualise the
exchanges whereby ownership, management and trading membership would be
segregated from one another. Two exchanges viz. OTCEI and NSE are
demutualised from inception, where ownership, management and trading are in
the hands of three different sets of people. This model eliminates conflict of
interest and helps the exchange to pursue market efficiency and investor interest
aggressively.

(c)Membership:-

The trading platform of an exchange is accessible only

to brokers. The broker enters into trades in exchanges either on his own account
or on behalf of clients. No stock broker or sub-broker is allowed to buy, sell or
deal in securities, unless he or she holds a certificate of registration granted by
SEBI. A broker/sub-broker complies with the code of conduct prescribed by
SEBI.Over time, a number of brokers - proprietor firms and partnership firms –
have converted themselves into corporate. The standards for admission of
members stress on factors, such as corporate structure, capital adequacy, track
record, education, experience, etc. and reflect a conscious endeavor to ensure
quality broking services.

(D)Listing:-

A company seeking listing satisfies the exchange that at

least 10% of the securities, subject to a minimum of 20 lakh securities, were
offered to public for subscription, and the size of the net offer to the public (i.e.
the offer price multiplied by the number of securities offered to the public,
excluding reservations, firm allotment and promoters’ contribution) was not less
than Rs.100 crore, and the issue is made only through book building method with
allocation of 60% of the issue size to the qualified institutional buyers. In the
alternative, it is required to offer at least 25% of the securities to public. The
company is also required to maintain the minimum level of non-promoter holding
on a continuous basis. In order to provide an opportunity to investors to
invest/trade in the securities of local companies, it is mandatory for the
companies, wishing to list their securities, to list on the regional stock exchange
nearest to their registered office. If they so wish, they can seek listing on other
exchanges as well. Monopoly of the exchanges within their allocated area,
regional aspirations of the people and mandatory listing on the regional stock
exchange resulted in multiplicity of exchanges.

(e) Trading Mechanism:-

The exchanges provide an on-line fully-automated

screen based trading system (SBTS) where a member can punch into the compute
quantities of securities and the prices at which he likes to transact and the
transaction is executed as soon as it finds a matching order from a counter party.
SBTS electronically matches orders on a strict price/time priority and hence cuts
down on time, cost and risk of error, as well as on fraud resulting in improved
operational efficiency. It allows faster incorporation of price sensitive information
into prevailing prices, thus increasing the informational efficiency of markets. It
enables market participants to see the full market on real-time, making the market
transparent. It allows a large number of participants, irrespective of their
geographical locations, to trade with one another simultaneously, improving the
depth and liquidity of the market. It provides full anonymity by accepting orders,
big or small, from members without revealing their identity, thus providing equal
access to everybody. It also provides a perfect audit trail, which helps to resolve
disputes by logging in the trade execution process in entirety.

(f) Trading Rules:-

Regulations have been framed to prevent insider trading

as well as unfair trade practices. The acquisitions and takeovers are permitted in a
well-defined and orderly manner. The companies are permitted to buy back their
securities to improve liquidity and enhance the shareholders’ wealth.

(g) Price Bands:-

Stock market volatility is generally a cause of concern for

both policy makers as well as investors. To curb excessive volatility, SEBI has
prescribed a system of price bands. The price bands or circuit breakers bring
about a coordinated trading halt in all equity and equity derivatives markets
nation-wide. An index-based market-wide circuit breaker system at three stages of
the index movement either way at 10%, 15% and 20% has been prescribed. The
movement of either S&P CNX Nifty or Sensex, whichever is breached earlier,
triggers the breakers. As an additional measure of safety, individual scrip-wise
price bands of 20% either way have been imposed for all securities except those
available for stock options.

(h) Demat Trading:-

The Depositories Act, 1996 was passed to proved for the

establishment of depositories in securities with the objective of ensuring free
transferability of securities with speed, accuracy and security by (a) making
securities of public limited companies freely transferable subject to certain
exceptions; (b) dematerializing the securities in the depository mode; and (c)
providing for maintenance of ownership records in a book entry form. In order to
streamline both the stages of settlement process, the Act envisages transfer of
ownership of securities electronically by book entry without making the securities
move from person to person. Two depositories, viz. NSDL and CDSL, have come
up to provide instantaneous electronic transfer of securities.
 Chapter 6

Legal Framework
Legal Framework:-
This section deals with legislative and
regulatory provisions relevant from the viewpoint of a trading member. The four
main legislations governing the securities market are:(a) the Securities Contracts
(Regulation) Act, 1956, which provides for regulation of transactions in securities
through control over stock exchanges; (b) the Companies Act, 1956, which sets
out the code of conduct for the corporate sector in relation to issue, allotment and
transfer of securities, and disclosures to be made in public issues; (c) the SEBI
Act, 1992 which establishes SEBI to protect investors and develop and regulate
securities market; and (d) the Depositories Act, 1996 which provides for
electronic maintenance and transfer of ownership of dematerialized securities.

Legislations:-

Capital Issues (Control) Act, 1947:-

The Act had its origin during the war in 1943

when the objective was to channel resources to support the war effort. It was
retained with some modifications as a means of controlling the raising of capital
by companies and to ensure that national resources were channeled into proper
lines, i.e., for desirable purposes to serve goals and priorities of the government,
and to protect the interests of investors. Under the Act, any firm wishing to issue
securities had to obtain approval from the Central Government, which also
determined the amount, type and price of the issue. As a part of the liberalization
process, the Act was repealed in 1992 paving way for market determined
allocation of resources.

Securities Contracts (Regulation) Act, 1956:-

It provides for direct and indirect control of

virtually all aspects of securities trading and the running of stock exchanges and
aims to prevent undesirable transactions in securities. It gives Central
Government regulatory jurisdiction over (a) stock exchanges through a process of
recognition and continued supervision, (b) contracts in securities, and (c) listing
of securities on stock exchanges. As a condition of recognition, a stock exchange
complies with conditions prescribed by Central Government. Organized trading
activity in securities takes place on a specified recognized stock exchange. The
stock exchanges determine their own listing regulations which have to conform to
the minimum listing criteria set out in the Rules.

SEBI Act, 1992:-

The SEBI Act, 1992 was enacted to empower

SEBI with statutory powers for (a) protecting the interests of investors in
securities, (b) promoting the development of the securities market, and (c)
regulating the securities market. Its regulatory jurisdiction extends over corporate
in the issuance of capital and transfer of securities, in addition to all
intermediaries and persons associated with securities market. It can conduct
enquiries, audits and inspection of all concerned and adjudicate offences under the
Act. It has powers to register and regulate all market intermediaries and also to
penalize them in case of violations of the provisions of the Act, Rules and
Regulations made there under. SEBI has full autonomy and authority to regulate
and develop an orderly securities market.

Depositories Act, 1996:-

The Depositories Act, 1996 provides for the

establishment of depositories in securities with the objective of ensuring free
transferability of securities with speed, accuracy and security by (a) making
securities of public limited companies freely transferable subject to certain
exceptions; (b) dematerializing the securities in the depository mode; and (c)
providing for maintenance of ownership records in a book entry form. In order to
streamline the settlement process, the Act envisages transfer of ownership of
securities electronically by book entry without making the securities move from
person to person. The Act has made the securities of all public limited companies
freely transferable, restricting the company’s right to use discretion in effecting
the transfer of securities, and the transfer deed and other procedural requirements
under the Companies Act have been dispensed with.
Companies Act, 1956:-

It deals with issue, allotment and transfer of securities

and various aspects relating to company management. It provides for standard of
disclosure in public issues of capital, particularly in the fields of company
management and projects, information about other listed companies under the
same management, and management perception of risk factors. It also regulates
underwriting, the use of premium and discounts on issues, rights and bonus
issues, payment of interest and dividends, supply of annual report and other
information.

Rules and Regulations:-

The Government has framed rules under the SC(R)A, SEBI

Act and the Depositories Act. SEBI has framed regulations under the SEBI Act
and the Depositories Act for registration and regulation of all market
intermediaries, for prevention of unfair trade practices, insider trading, etc. Under
these Acts, government and SEBI issue notifications, guidelines, and circulars,
which need to be complied with by market participants. The self-regulatory
organizations (SROs) like stock exchanges have also laid down their rules of
game.

Regulators:-

The regulators ensure that the market participants behave in a desired

manner so that the securities market continue to be a major source of finance for
corporate and government and the interest of investors are protected. The
responsibility for regulating the securities market is shared by Department of
Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank
of India (RBI), Securities and Exchange Board of India (SEBI) and Securities
Appellate Tribunal.
Chapter 7

Derivatives
Derivatives Market:-

Trading in derivatives of securities commenced in

June 2000 with the enactment of enabling legislation in early 2000. Derivatives
are formally defined to include: (a) a security derived from a debt instrument,
share, loan whether secured or unsecured, risk instrument or contract for
differences or any other form of security, and (b) a contract which derives its
value from the prices, or index of prices, or underlying securities. Derivatives are
legal and valid only if such contracts are traded on a recognized stock exchange,
thus precluding OTC derivatives.

Derivatives trading commenced in India in June

2000 after SEBI granted the approval to this effect in May 2000. SEBI permitted
the derivative segment of two stock exchanges, i.e. NSE and BSE, and their
clearing house/corporation to commence trading and settlement in approved
derivative contracts. To begin with, SEBI approved trading in index futures
contracts based on S&P CNX Nifty Index and BSE-30 (Sensex) Index. This was
followed by approval for trading in options based on these two indices and
options on individual securities. The trading in index options commenced in June
2001 and trading in options on individual securities would commence in July
2001 while trading in futures of individual stocks started from November 2001. In
June 2003, SEBI/RBI approved the trading on interest rate derivative instruments.

The total exchange traded derivatives

witnessed a volume of Rs.4,423,333 million during 2002-03 as against Rs.
1,038,480 million during the preceding year. While NSE accounted for about
99.5% of total turnover, BSE accounted for less than 1%in 2002-03. The market
witnessed higher volumes from June 2001 with The trading in index futures
commenced in June 2000, index options in June 2001, stock options in July 2001
and stock futures in November 2001.

Trading in interest rate derivatives

commenced June 2003. Interest Rate Futures Contracts are contracts based on the
list of underlying as may be specified by the Exchange and approved by SEBI
from time to time. Interest rate futures contracts are available on Notional T-
bills , Notional 10 year zero coupon bond and Notional 10 year coupon bearing
bond stipulated by the Securities & Exchange Board of India (SEBI).
Regulatory Framework:-

The four main legislations governing the

securities market are: (a) the SEBI Act, 1992 which establishes SEBI to protect
investors and develop and regulate securities market; (b) the Companies Act,
1956, which sets out the code of conduct for the corporate sector in relation to
issue, allotment and transfer of securities, and disclosures to be made in public
issues; (c) the Securities Contracts (Regulation) Act, 1956, which provides for
regulation of transactions in securities through control over stock exchanges; and
(d) the Depositories Act, 1996 which provides for electronic maintenance and
transfer of ownership of demat securities. Government has framed rules under the
SCRA, SEBI Act and the Depositories Act.

SEBI has framed regulations under the SEBI Act

and the Depositories Act for registration and regulation of all market
intermediaries, and for prevention of unfair trade practices, insider trading, etc.
Under these Acts, Government and SEBI issue notifications, guidelines, and
circulars which need to be complied with by market participants. The SROs like
stock exchanges have also laid down their rules of game. The responsibility for
regulating the securities market is shared by Department of Economic Affairs
(DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI)
and SEBI. The activities of these agencies are co-ordinate by the High Level
Committee on Capital Markets. Most of the powers under the SCRA are
exercisable by DEA while a few others by SEBI. The powers of the DEA under
the SCRA are also con-currently exercised by SEBI.

The powers in respect of the contracts for sale and

purchase of securities, gold related securities, money market securities and
securities derived from these securities and ready forward contracts in debt
securities are exercised concurrently by RBI. The SEBI Act and the Depositories
Act are mostly administered by SEBI. The rules and regulations under the
securities laws are administered by SEBI. The powers under the Companies Act
relating to issue and transfer of securities and non-payment of dividend are
administered by SEBI in case of listed public companies and public companies
proposing to get their securities listed. The SROs ensure compliance with their
own rules as well as with the rules.
 Chapter 8

Equity Research
Equity Research:-

For the purpose of equity research, numerous

data sources like annual reports of companies, stock exchange publications, CMIE
publications, RBI Economic Statistics, financial magazines, brochures, brokerage
research publications, information from various credit rating agencies, are used
apart from on-line data sources. The prominent on-line data sources are:
Bloomberg, Reuters, Bridge Indian Quotation Systems Pvt. Ltd., Asian CERC
Information Technology Ltd.,etc.

NSE provides a lot of data useful for research. It

produces one CD for each month of the operations of NSE. Each CD is identified
by the name of the starting directory in yy/yy/mm format. The CD has following
directories: (a) Bhav Copy: Summary information about each security for each
day. (b) Index: Information about stock market indexes. (c) Snapshots: Snapshots
of the limit order book at many time points in a day, and (d) Trades: A database of
every single trade that takes place.

1) Bhav Copy Database:-

The bhav copy database contains a directory

structure where the date is represented as yy/yy/mm/dd. This gives one file for
each trading day. The lines in this file have 11 fields per line, delimited by the
pipe “|” character. This provides details like Open Price, High Price, Low Price,
Closing Price, Last Traded Price, Traded Quantity, Value of shares traded,
Number of trades and Corporate Action flags for each security for everyday.

2) Index Database:-

The Index directory contains databases connected

with stock market indices. Both end-of-day and intra-day information is available.
This also provides index movement from second to second. The intra-day files
show a fresh calculation of the market index every time a trade takes place in a
given second, so multiple records are found for the same second. Three indices
are covered: S&P CNX Nifty, CNX Nifty Junior and S&P CNX Defty. These are
found in directories called Nifty, Junior and Defty. S&P CNX Nifty is the main
stock market index in India; it is composed of the top fifty highly liquid stocks in
India which make up roughly half of the market capitalization of India. CNX
Nifty Junior is the second tire of 50 less liquid stock, accounting for around 10%
of market capitalization of India.

S&P CNX Nifty and CNX Nifty Junior are always

disjoint sets: there is never any common index member. Defty is the same as
Nifty, expressed in dollar terms.

3) Order Book Snapshots Database:-

NSE is a limit order book market, also

known to economists as the ‘Open electronic limit order book market' (OELOB)
or to practitioners as a market based on ‘electronic order matching’. The order
book snapshots are stored in a directory and have names hhmmss.gz to convey the
time the snapshots were taken. These files are databases with one record per line
and each record pertains to one limit order. The files are sorted by price. The main
fields per record are Order ID number, Symbol, Series, Quantity, Price, Time
stamp, Buy/Sell, Day flags, Quantity flags, Price flags, Book type, Minimum Fill
Quantity, Quantity Disclosed and Date of GTD.

4 )Trades Database:-

Trades database is about every trade that take place in

the exchange. This information is kept in a distinct file. The main fields available
are Trade ID number, Symbol, Series, Timestamp, Price and Quantity traded.
 Chapter 9

Ratio Analysis
RATIO ANALYSIS IS DONE FOR THE FOLLOWING
PURPOSE:

To measure financial solvency:

Ratios are useful tools in the hands of management and

others concerned to evaluate the firms performance over a period of time by
comparing the present ratio with the past ones. They point out firm’s liquidity
position to meet its short-term obligation and long-term solvency.

To measure general efficiency:

Ratios enable the mass of accounting data to be

summarized and simplified. They act as an index of the efficiency of the firm. As
such they serves an instrument of management control.

To forecast and planning:

Ratio analysis is an invaluable aid to management in

the discharged of its basic function planning, forecasting, control etc. The ratio
that are derived after analyzing and scrutinizing the past result, help the
management to prepare budgets to formulate policies and prepare the future plan
of action etc.

To facilitate decision – making:

It throws light on the degree of efficiency of the

management and utilization of the assets and that is why it is called surveyor of
efficiency. They help management in decision –making.

To take corrective action:

Ratio analysis provides inter-firm comparison. They

highlight the factors associated with successful and un successful firms. If
comparison shows an unfavorable variance, corrective action can be initiated.
Thus it helps the management to take corrective action.

To make Inter-firm comparison:

It is an instrument for diagnosis of financial of an

enterprise. It facilitates the management to know whether the firm’s financial
position is improving or deteriorating by setting a trend with the help of ratios.

Ratio analysis

Ratio analysis is widely used tool of financial analysis. It

can be used to compare the risk and return relationship of firms of different sizes.
It is defined as the systematic use of ratio to interpret the financial statement so
that the strengths and weakens of a firm as well as its historical performance and
current performance and current financial condition can be determined.

The term ratio refers to the numerical or quantitative

relationship between two items/ variables. Ratio reveals the relationship in more
meaningful way so as to enable equity investors, management and credit
decisions.

Ratio may be expressed in the following three ways:

i) Percentage, A special type of rate expressing the relationship in
hundred, e.g. gross profit is 25% of sales.
ii) Proportion, the simple dilution of one number by another, e.g. current
assets to current liability ratio is 2:1.
iii) Rate, the ratio between two numerical facts over a period of time, e.g.
stock turnover is three times in a year.

The technique of ratio analysis is the most important tool of financial

analysis. As a quantitative tool, it enables the analyst to draw conclusions or
answers to questions such as: Are the net profit adequate? How does it stand in
relation to capital? Is the firm solvent? Can the firm meet its current obligations
and so on?

Advantages of Ratio Analysis: -

i) The detailed idea of the working of a concern is found out. The

efficiency or otherwise of a concern becomes evident when analysis is
based or accounting ratio.
 ii) Comparison can be made on the basis of ratio. For example,
comparison can be made between one firm and another in the same
industry or for one firm over a number of years to measure
profitability. If some weak spots are thus pointed out, then to correct
the situation.

iii) Accounting ratios reveal the financial position of the company. This
offers a big help to banks, insurance companies and other financial
institution in making lending and investment decision.
iv) If accounting ratio is prepared for a number of years, then a trend is
established. This establishment of trend helps in preparation of plans
for the future. For example, expenses as percentage of sales can easily
be forecast on the basis of sales and expenses figures of the last years.

v) Weaknesses in financial structure on account of incorrect policies in

past or present are revealed through accounting ratios.

Comparison can also be made between one department of a firm and department
of the same firm to find to find out the performance of the various departments in
the firm. The manager of the firms is definitely interested in such comparison
because he wants to know how the various departments in the company are
functioning. Whenever any change in organization is of great help to him.

STEP IN RATIO ANALYSIS

i) Select the information relevant to the decision under consideration

from the statements and calculates appropriate ratios.

ii) Compare the calculated ratios with the ratios of the same firm relating
to past or with the industry ratios. This step facilitates in assessing
success or failure of the firm.
 iii) Conclusions are drawn after comparison in the shape of report or
recommended course of action.

Classification of ratios
The use of ratio analysis is not confined to financial manager only. There
are different parties interested in the ratio analysis for knowing the financial
position of a firm for different purposes. Thus, ratios can be groped on the basis
of some or the other common feature. Calculation of different ratios has been
discussed by classifying them into different categories. Specific ratios may be
calculated to analyze and study different aspects of the performance of a firm.
Broadly speaking, the operations and financial position of a firm can be described
by studying its profitability, its long term and short-term liquidity position and its
operational activities. Therefore, the ratios can be studied by classifying into the
following groups:
i) The Liquidity Ratios
ii) The Leverage Ratios
iii) The Activity Ratios
iv) The Profitability Ratios

A. LIQUIDITY RATIO: -

The liquidity refers to the maintenance of cash, bank

balance and those assets, which are easily convertible into, cash in order to meet
its current obligation and when these become due. So, the Liquidity Ratios study
the firm’s short-term solvency and its ability to pay off the liabilities. It should be
intuitive to observe that a firm, no matter how profitable it is, can not continue to
exist unless it is able to meet its obligation as they arise.
The Liquidity Ratio provides a quick measure of liquidity of the firm by
establishing a relationship between its current assets and its current liabilities. If a
firm does not have sufficient liquidity, it may not be in a position to meet its
commitment and thereby may loose its worthiness.

1. Current Ratio:-

Current ratio may be defined as the relationship between the

current assets and current liabilities. It is a measure of general liquidity and is
most widely used to make the analysis of a short-term financial position of a firm.
It is calculated by dividing the total current assets by total current liabilities.

Current Ratio = Current assets

Current liabilities

The current assets of a firm, as already stated, represent those

assets, which can be, in ordinary course of business, converted into cash within a
short period of time, normally not exceeding one year and include cash and bank
balance, marketable securities, inventory of raw material, semi-finished and
finished goods, debtors, bills received prepaid expenses. The liabilities defined as
liabilities which are short-term obligation to be met, as originally contemplated,
within a year consist of trade creditors, bills payable, bank credit, provision fir
taxation dividends payable and outstanding expenses.

Current ratio represents a margin of safety for liabilities. The

higher the current ratio, the greater is the margin available and less is the chance
of firm’s failure to meet into commitments in time. Although there is no hard and
fast rule, conventionally, a current ratio of 2:1 (Current assets twice current
liabilities) is considered satisfactory. Now a day’s current ratio of 1.5:1 is also
considered satisfactory during project appraisal.

2. Quick or Acid test or Liquid Ratio:

Quick or Acid test or Liquid ratio has established the relation between
quick/liquid current liabilities. The term quick assets refer to current assets, which
can be converted into cash immediately or at a short notice without diminution of
value. This ratio is more rigorous test of liquidity than the current ratio. It is
calculated by dividing the quick assets by the current liabilities.
Liquid assets include cash and bank balance, short-term marketable
securities, debtors and bills receivable. Prepaid expenses by their very nature are
not available to pay off current debt. They merely reduce the amount of cash
required in one period because of payment in prior period.

The quick ratio is calculated as:

Quick /Acid test/ Liquid Ratio = Quick or liquid assets

Current liabilities
Sometimes a variation in above formula is also suggested. Instead of
total current liabilities only those current liabilities are taken in the denominator,
which are payable within a period of year. So the amount of bank overdraft,
which is by nature, current liabilities, but which is generally a permanent way of
financing and is not subjected to be called on demand. In such a case quick assets
are found out by is dividing quick/liquid assets by quick liabilities (Quick
liabilities/ liquid liabilities = Current liabilities- Bank overdraft).
 Quick /Liquid / Acid test Ratio = Quick liquid assets
Quick /Liquid liabilities
As a rule of thumb or as a convention quick ratio of 1:1 is considered to be
satisfactory because this means that equal to the quick liabilities and there does
not seem to be a possibility of default in payment by the firm.

3. Absolute Liquid Ratio:

This ratio considers only the absolute liquidity available

with the firm. The each and the bank balance are no doubt, the most liquid assets
and the marketable securities are also considered as highly liquid assets. Although
receivables, debtors and bills receivable are generally more liquid than
inventories, yet there may be doubts regarding their realization into cash
immediately or in time. In order to have an idea of immediate liquidity, therefore,
the cash + bank + marketable securities are compared with the current liabilities.
The absolute Liquidity Ratio is calculated as follows.

Absolute Liquid ratio = Absolute Liquid assets

Current Liability

Absolute liquid ratio of magnitude up to 1:2 may be satisfactory and a

firm need not maintain too much of Absolute Liquid assets.

B. Leverage Ratio or Long Term Solvency Ratio: -

The long term lenders/creditors would judge the soundness of a firm on the
basis of the long- term financial strength measured in terms of it’s ability to pay
the interest regularly as well as repay the installment of the principle on due dates
or in one jump sum at the time of maturity. The leverage or capital structure ratio
can be defined as financial ratio, which throws light on the long- term solvency of
a firm as a reflected in its ability to assure the long-term lenders with regard to
(1). Periodic payment of interest during the period of loan and (2). Repayment of
principle on maturity or in predetermined installments at due dates.
The long – term creditors, like debenture holders, financial institutions etc.
are concerned with the firm’s long-term financial strength. To judge the long-term
financial position of the fir, financial leverage, or capital ratios are calculated.
These ratios indicate mix of funds provided by owners and lenders.
As a general rule, there should be an appropriate mix of debt and owner’s
equity in firm’s assets.

1. Debt Equity Ratio:

This ratio is calculated to measure the relative claims of

outsiders and the owners (i.e. shareholders) against the firm’s assets. This ratio
indicated the relationship between the outsider’s funds and the shareholder’s
funds.
The outsider’s fund includes all liabilities to outsiders, whether long-term or
short-term or whether in the forms of debentures bonds, mortgaged or bills. The
shareholder’s funds consist of equity share capital, preference share capital,
capital reserves, revenue reserves accumulated profits and surpluses like sinking
fund etc.
Debt Equity Ratio = Long Term Debts
Shareholder’s Equity
The normally acceptable dept-equity ratio is 2:1. However the analyst should
see that the ratio is such that the creditors feels secure about their funds and the
owner also use the outsider’s funds to the possible extent.

2. Interest Coverage Ratio:

 An Interest coverage Ratio of 2:1 is considered reasonably by
financial institutions. The overall interest coverage ratios are higher than the
standard norm, which indicate that the firm is conservative in using debt. This
shows that the firm can easily meet its interest burden even if profit before interest
and tax suffer a considerable decline.

Interest Coverage Ratio = Earning Before Interest and Tax

Interest

3. Dividend Coverage Ratio:

This ratio has shown good performance. However in last year

i.e. FY 06 it is has decrease to Rs.3.34/- due to decrease in net profit. The ratio
reveals that the quantum of dividend paid out of the EPS, which throws light on
the liberal dividend policy of the company.

Dividend Coverage Ratio = Earning After Tax

Preference Dividend

4. Financial Leverage:

This ratio was higher in FY 02 i.e. 1.93 but it goes on decreasing

up to FY 06. This indicates a low interest outflow and consequently lower
borrowings.

Financial Leverage = Earning Before Interest and Tax

Earning After Tax

5. Proprietary Ratio or Equity Ratio:

 This ratio establishes the relation between shareholder’s funds
to total assets of the firm. This is an important ratio for determining long term-
solvency of a firm. The components of this ratio are Shareholder’s Funds or
Proprietor’s Funds and Total Assets. It is calculated by dividing shareholders
funds by the total assets. The ratio can be calculated as under:
Proprietary Ratio or Equity Ratio = Shareholder’s Funds
Total Assets
The acceptable norm of the ratio is 1:3. The ratio shows the general
strength of the company. It is very important to creditors as it helps them to find
out the proportion of shareholders’ funds in the total assets used in the business.

C. Activity Ratio: -

Funds are invested in various assets in business to make sales and

earn profits. The efficiency with which assets are managed directly affects the
volume of sales. The better the management of assets, the larger is the amount of
sales and the profit.
Activity Ratios measure how efficiently the assets are employed by the
firm. These ratio indicate the speed with which assets are being converted or
turned over into sales the efficiency with which the assets are converted into sales.
Activity ratios, thus, involved a relation between sales and various assets and
presume that there exists an appropriate balance between sales and various assets.
The efficiency of a firm depends, to a large extent, on the efficiency with which
its assets are managed and utilized. Activity ratios are concerned with measuring
the efficiency in asset management.

1. Fixed Assets Turnover Ratio:

This ratio is also known as the investment turnover ratio. It based on
relationship between the cost of goods sold and the assets/investments of a firm
ending up on the different concepts of assets employed.
 Fixed Assets Turnover Ratio = Cost of good sold
Average Fixed Assets

This ratio measures the efficiency of a firm in managing and utilizing its
assets.
The higher the turnover ratio, the more efficient is the management and
utilization of the assets while low turnover ratio indicative of under utilization of
available and presence of idle capacity.

D. Profitability Ratio: -

The primary objective of a business undertaking is to earn profit.

Profit earning is considered essential for the survival of the business. A business
needs profits not only its existence but also for expansion and diversification. The
investors want an adequate return on their investments, worker want higher
wages, creditors want higher security for their interest and loan and so on.
A business enterprise can discharge its obligation only through earning
profit. Profits are, thus, a useful measure of overall efficiency of business. The
profitability of the firm can be measured by its profitability ratios. In other words,
the profitability ratios are designed to provide answers to question such as (i) Is
the profit earned by the firm adequate. (ii) What rate of return does it represent?
And so on.
Profitability ratios are calculated to analyze the financial results of business
operations. Profitability ratio can be determined on the basis of either sales or
investment.

General profitability Ratio:

1. Operating Profit Ratio:

 The operating profit refers to the operating of the firm i.e. the profit
generated by the operation the firm and hence is calculated before considering any
financial charges, non operating income/loss and tax liability etc. the operating is
also termed as Earning before Interest and Taxes (EBIT). The operating profit
ratio may be calculated as follow:

Operating Profit Ratio = Operating Profit x 100

Net Sales

The operating Profit Ratio shows the percentage of pure profit earned 1 rupee
of sales made.
The Operating Profit Ratio will be less than Gross Profit Ratio as the indirect
expenses such as general and administrative expenses, selling expenses and
depreciation charge etc. are deducted from the Gross Profit to arrive at the
operating profit i.e. (EBIT). Thus the Operating Profit Ratio measures the
efficiency with which the firm not only manufactures/purchases the goods but
also sales the goods.

2. Net Profit Ratio:

This ratio establishes a relationship between net profit (after tax) and
sales, and indicates the efficiency of the management in manufacturing, selling,
administrative and other activities.
This ratio is the overall measure of firm’s profitability and is
calculated as:

Net Profit Ratio = Net Profit After Tax x 100

Net Sales

The two basic elements of the ratio are net profit and sales. The net profits
are obtained after deducting income tax and, generally, non-operating incomes
and expenses are excluded from the net profit for calculating this ratio. Thus
income such as interest o n investment outside the business, profit on sale of fixed
assets, etc. are excluded. The ratio is very useful as if the profit is not sufficient
the firm shall not able to achieve a very satisfactory return on its investment. This
ratio indicates the firm’s capacity to face adverse economic condition such as
price competition, low demand etc.

3. Operating Expenses Ratio:

Expenses Ratio indicates the relationship of various

expenses to net sales. The Expenses Ratio is the measure of cost control. The
operating ratio reveals the average total variations in expenses. But some of the
expenses may be increasing while some may be falling. Hence Expenses Ratio is
calculates by dividing some item of expenses or group of expenses with the net
sales to analyze the cause of variation of the Expenses Ratio.

Operating Expenses Ratio = Operating Expenses x 100

Net Sales

The ratio can be calculated for each individual ratio of expenses or group of
items of a particular type of expense like cost of sales ratio, administrative
expenses ratio, selling expenses ratio, material consumed ratio, etc.
While interpreting the ratio, it must be remembered that for a fixed expense
like rent, the ratio will fall if the sales increase and for a variable expense, the
ratio in proportion to shall remain nearly the same.

3. Return on assets:
 Here the profitability ratio is measured in terms of the relationship
between net profits and assets. The ROA may also be called profit to asset ratio.
The concept of net profits may be (I) net profits after tax, (ii) net profits after
taxes plus interest minus tax savings.

Return On Assets = Net profit after taxes x 100

Total assets

5. Return On Total Shareholder’s Equity:

This ratio is one of the most important ratios used for measuring the overall
efficiency of the firm. This ratio reveals how well the resources of a firm are
being used. It is the relationship between net profit (after interest and tax) and the
proprietor’s funds.

Return on Total Shareholder’s Equity = Net Profit After Tax x100

Total Capital Employed

This ratio is generally calculated as percentage by multiplying the above with

100. The two components of this ratio are net profit and shareholders’ funds.
Shareholders’ funds include equity share capital, preference share capital, free
reserves such as share premium, revenue reserves, capital reserve, retained
earnings and surplus, less accumulated losses (if any). Net profits are visualized
from the viewpoint of owners, i.e., shareholders. Thus, Net profits are arrived at
after deducting interest on long-term borrowing and tax, because and tax, because
those will be the only profits available for shareholders.

6. Return On Capital Employed:

 The profitability of the firm can also be analyzed from the
point of view of the total funds employed in the firm. The term capital employed
refers to the total long – term sources of funds. It means that capital employed
comprises of shareholders funds plus long- term depts. Alternatively, it can be
defined as fixed assets plus net working capital.

Return On Capital Employed = Net Profit x 100

Total capital employed

This ratio shows how efficiently the long- term funds of owners and lenders
are being used.

7. Earning Per Share:

Earnings per share measures the profit available to the equity

shareholders on a per share basis, that is, the amount that they can get on every
share held. It is calculated by dividing the profits available to the equity
shareholders by the number of the outstanding shares. The profits available to the
ordinary shareholders are represented by net profits after taxes and preference
dividend.

Earning Per Share = Net Profit After Tax – Preference Dividend

Number of equity share

The earning per share is good measure of profitability and when compared
with earning per share of similar other companies, it gives a view of the
comparative earnings or earning power of a firm. Earning per share calculated for
a number of years indicates whether or not earning power of the company has
increased.
8. Dividend Per Share:

Sometimes the equity shareholders may not be interested in the

EPS but in the return which they are actually receiving from the firm in the form
of dividends. The amount of profits distributed to shareholders per share is known
as DPS. Generally, companies declare dividends in term of percentage of paid up
capital and may be calculated as follows:
Dividend Per Share = Dividend Paid To Ordinary Shareholders
Number of Equity Share

9. Dividend Pay-out Ratio:

The dividend payout ratio is the ratio between the DPS and the EPS of the
firm i.e. it refers to the proportion of the EPS which has been distributed by the
company as dividends. It may be noted that the DPS and the DP ratio both
depends upon the statutory provisions relating to compulsory appropriations of
profits. It is calculated as follows:

Dividend Pay-out Ratio = Dividend Per Equity Share

Earnings Per Share
Chapter 10
 Project Appraisal

PREOJECT APPRAISAL:-

The appraisal of the project covers the marketing, technical,

financial, and managerial aspects. Financial institutions appraise a project from
these angles based on that, a decision is taken whether the project will be accepted
or not.

(A) Market Appraisal:-

The importance of the potential market and the need to develop a

suitable marketing strategy cannot be over-emphasized. Hence efforts are made4
to (i) examine the reasonableness of the demand projection, (ii) asses the
adequacy of the marketing infrastructure in terms of promotional effort,
distribution network, transport facilities and so on, (iii) judge the knowledge,
experience and competence of he key marketing personnel.
(B) Technical Appraisal:-

In this the financial institutions focuses mainly on product mix, capacity,

engineering know- how and technical collaboration, location and site, break-even
point etc.

(C) Financial Appraisal:-

This is done to assess the-

(i) Reasonable of the estimate of cost of capital, (ii) Reasonableness of the
estimate of the working results, (iii) Adequacy of rate of return and so on.

(D) Managerial Appraisal:-

In this prior experience of the promoters, the

process achieved in organizing various aspects of the project and the skill with
which the project is presented is judge. Also assessment of creditability of the
project plan is done in managerial appraisal.
CHAPTER 11

Research
 Methodology

RESEARCH METHODOLOGY:-
Research in common parlance refers to a search for
knowledge. Research can also be defined as a scientific and system search for
pertinent information on specific topic. We can also say research as an art of
scientific investigation. According to Clifford Woody research companies
redefining problem, formulating hypothesis or suggested solutions; collecting,
organizing and evaluating data; making deductions and reaching conclusions; and
at last carefully testing the conclusions to determine whether they fit the
formulating hypothesis.

Types of Research

1. Descriptive vs. Analytical:

Descriptive research includes surveys

and fact – finding enquiries of different kinds. The major purpose of
 descriptive research is description of the state of affairs, as it exists at
present. In analytical research, the researcher has to use facts or
information already available, and analyze these to make a critical
evaluation of the material.

2. Applied vs. Fundamental:

Applied research aims at finding a

solution for an immediate problem facing a society or an industrial/
business organization, whereas a fundamental research is mainly
concerned with generalization and with the formulation of a theory.

3. Quantitative vs. Qualitative:

Quantitative research
is based on the measurement of quality or amount. It is applicable to
phenomena that can be expressed in terms of quality. Qualitative research
is especially important in the behavioral sciences where the aim is to
discover the underlying motives of human behavior.

4. Conceptual vs. Empirical:

Conceptual research is related to
some abstract ideas. It is generally used philosophers and thinkers to
develop new concepts or to interpret existing ones. Empirical research
relies on experience or observation alone often without due regard for
system and theory. It is a data based research, coming up with
 conclusions, which are capable of being verified, by observation or
experiment.

5. Some other type of research:

There may be other type of research
such as one time research or longitudinal research from the viewpoint of time.
Laboratory research or simulation research, historical research, exploratory
researches are some of the other type of research.

DATA COLLECTION

The primary as well as secondary source of

data collection has been used in this project. The data has been
collected by the discussion with the renowned Manager on
successfully established project of a company.
ANALYSIS AND INTERPRETATION

After the collection of data, Analysis and

interpretation has been done. The study topic is related to ratio analysis so
ignoring all the other aspects of project appraisal; the stress is only given on
ratios. Different books have been referred to get the theoretical help for analyzing
and interpreting the ratio.
1) During the year 2005 the profit percentage was 6.22 compare to
the year 2007 an increase in the profit by 3.30 i.e. 9.52.
2) We find that the Debt Equity ratio has risen. It seems that the
long-term debts have risen, which have ultimately affected the long-term debt
equity ratio.
3) During the data analysis we find that the Share capital of a
company in the year 2005 was 4.77, increased up to 5.54 in the year 2007.
Reserve & Surplus is high in the year 2007 as compared to 2005.
4) Liquidity position of the company appears to be slightly increased.
The current ratio has increased in the year 2007. It was 1.56 in the year 2007
whereas it was 0.51 in the year 2005..
5) The fixed assets turnover ratio has decreased in year 2007 i.e. it
was 2.31 in the year 2007 whereas it was 2.76 in the year 2005. It can
reasonably be concluded that the company would not encounter any serious
difficulty in paying the short-term obligation as & when due for payment.
6) Employee cost was more in the year 2007 i.e. 13.54 as compared
to the year 2005 which was 3.58.
7) Secured loan was high in year 2007 where the company borrowed
loan for a long-term basis. In the year 2007 company sold there fixed assets so
the depreciation of the company was reduced as compared to the year 2005 &
2006.

BIBLOGRAPHY
 BOOKS REFERED AUTHOR

1) Financial Management By R.P.Rastogi

2) Financial Management By P.K.Jain &
M.Y.Khan

Annual reports of Apollo Sindhoori Company.

WEBSITE
www.apollosindhoori.com
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