Investment Management

The need for demutualization of stock exchanges

Demutualization of stock exchanges implies that a mutually owned stock exchange is converted into a company owned by shareholders. In other words transforming the legal structure, of an exchange form to a business corporation form is referred to a demutualization. The ownership, management and trading is separated and are in different hands. They are clearly separated like a commercial entity. The management of the exchange is separated from the shareholders and the brokers.

Need for demutualization:

  • Stock exchanges owned by members tend to work towards the interest of members alone, which could on occasion be detrimental to rights of other stakeholders.
… Read the rest
Abey Francis

Demutualization of stock exchanges

Demutualization refers to the conversion of an existing non-profit organization into a profits-oriented company. In other words, an association that is mutually owned by members converts itself into an organization that is owned by shareholders. The company can take different shapes and forms, that is, it could be either a listed or unlisted company which may be closely held or publicly held.

Demutualization of stock exchanges involves the segregation of members’ right into distinct segments, viz. ownership rights and trading rights. It changes the relationship between members and the stock exchange. Members while retaining their trading rights acquire ownership rights in the stock exchange, which have a market value, and they also acquire the benefits of limited liability.… Read the rest

Abey Francis

Advantages and disadvantages of the Depository System

Advantages of the Depository System

The advantages of dematerialization of securities are as follows:

  • Share certificates, on dematerialization, are cancelled and the same will not be sent back to the investor. The shares, represented by dematerialized share certificates are fungible and, therefore, certificate numbers and distinctive numbers are cancelled and become non-operative.
  • It enables processing of share trading and transfers electronically without involving share certificates and transfer deeds, thus eliminating the paper work involved in scrip-based trading and share transfer system.
  • Transfer of dematerialized securities is immediate and unlike in the case of physical transfer where the change of ownership has to be informed to the company in order to be registered as such, in case of transfer in dematerialized form, beneficial ownership will be transferred as soon as the shares are transferred from one account to another.
… Read the rest
Abey Francis

Depository System in India

India has adopted the Depository System for securities trading in which book entry is done electronically and no paper is involved. The physical form of securities is extinguished and shares or securities are held in an electronic form. Before the introduction of the depository system through the Depository Act, 1996, the process of sale, purchase and transfer of securities was a huge problem, and there was no safety at all.

Key Features of the Depository System in India

1. Multi-Depository System: The depository model adopted in India provides for a competitive multi-depository system. There can be various entities providing depository services.… Read the rest

Abey Francis

Rights Issue or Rights Offering

RIGHTS ISSUE

Normally, whenever an existing company makes a fresh issue of equity capital or convertible debentures the existing shareholders or convertible debenture holders have the first right to subscribe to the issue in proportion to their existing holdings.   Only what is not subscribed to by the existing shareholders can be issued to the public.   Thus, an issue offered to the existing shareholders or convertible debenture holders as their right is known as rights issue, as opposed to an issue open to the public at large, in which case we call it a public issue.   An investor may exercise this right to subscribe to the offered issue, or he may sell the rights separately in the market.  … Read the rest

Abey Francis

Bonus Issue of Shares – Meaning, Benefits and Motives

BONUS ISSUE OF SHARES

When we invest the share capital in a business, we do so with the expectation of getting back not only our invested capital, but also a proportionate share of the surplus generated from operations, after all the other stakeholders have been paid their dues.   Thus, collectively the business owes its shareholders, their invested capital as well as the surplus generated from operations.   But in reality, while the business may pay us annual dividends, seldom is this surplus fully distributed away as dividends.   Thus, the surplus which is retained in the business is still owed to us.   This retained surplus is also reflected as retained earnings or reserves in the Balance sheet of a company.  … Read the rest

Abey Francis