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Project Appraisal
Swagat Kishore MishraDepartment of Economics and Finance
WILP: Project Appraisal
Lecture 14
Email: [email protected]
Tel. 0832-2580207 (O) 08879506995 (M)
1Course No. ETZC414 Project AppraisalOctober 14, 2014
mailto:[email protected]:[email protected]:[email protected]:[email protected]
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Financing of Projects-2
i. Derivatives
ii. Options
iii. Debentures
iv. Gold ETF
v. IPOs
vi. Global Depository Receipts (GDR)
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Derivatives Trading
Derivative is an instrument, such as Futures and
Options contracts, which derives their values from an
underlying security, or an index.
Contract is a legal bonding between two or more
parties, where the reason for the contract, time
period and the amount is specified. The minimum
value of a contract is 2 lacs. No contract value would
be less than 2 lacs.
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Currency Derivatives
Never keep all your eggs in one basket" - Financial markets are
aclassic example of this proverb. These markets all around the
worldin all categories and at all points of time have taught us to
keep ourinvestments diversified into various instruments. Hence, we
atKotak Securities have brought a new investment opportunity for
allResident Indians, who can now diversify their portfolio, by
tradingin Currency Derivatives.
Currency derivative is a contract between the seller and
buyer,
whose value is to be derived from the underlying asset, the
currencyamount. A derivative based on currency exchange rates is a
future
contract which stipulates the rate at which a given currency can
beexchanged for another currency as at a future date.
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Fixed Deposits and Bonds
Corporate Fixed Deposits
The idea of investing in Fixed Interest investment options has
always beenhighly popular among Indian investors, with as much as
60% of the savingsbeing diverted into Bank Fixed Deposits. However
with increasing inflation and
low rates on Bank Fixed Deposits, investors seek Fixed Deposits
with betteryields and safety of their hard earned savings. This is
where the CorporateFixed Deposits find its existence &
preference over other asset classes.
Corporate Fixed Deposits are the deposits placed by investors
directly with thecompany for a specified term carrying a specified
rate of interest. Thesedeposits offer a higher rate of interest as
compared to bank fixed deposits &
are targeted at conservative set of investors with low risk
appetite who do notwish to be disturbed by unpredictable market
movements. Corporate FixedDeposits rest on the strength of twin
benefits of returns & protection
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Bonds
Bonds are among the highly popular investment options under debt
as anasset class. Simply put, bond is a debt investment under which
investorsgives money to the issuer for a pre-defined period at a
specified rate ofinterest. This implies that the investor has given
a loan to the issuing
entity, and will be repaid at the end of the specified
tenure.
Bonds or Debentures are generally issued by corporates,
government forthe purpose of raising money to fund their activities
& projects. Bondsprovide corporates & governments an
alternate channel to meet their
fund requirement. The tax implications of bonds defer depending
on thetype of Bonds, however these bonds are exempt from Wealth Tax
underWealth Tax Act, 1957.
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Bonds / debentures
There are various classifications of bonds/debentures. Thetypes
of bonds/debentures from the investor'sperspective are listed
below:
Tax Free Bonds- like NHAI Infrastructure Bonds,
PFCInfrastructure Bonds and many more
Tax Saving Infrastructure Bonds- IDFC Long TermInfrastructure
Bonds, L&T Infrastructure Bonds and manymore
Tax Saving 54E(C) Bonds
Non- convertible Debentures Convertible Debentures-IDRs
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Gold Exchange Traded Fund (ETF)
In India, gold is not only an integral part of our cultural
buying but is also
considered to be the safest form of storing wealth. Rightly
then, India is
today the world's largest consumer of Gold (Source: World Gold
Council).
To enable you to take the advantage of the bull rally in
this
commodity,Exchange Traded Funds (ETFs) have acted as a boon.
Also known as paper gold, Gold ETFs are open-ended mutual fund
schemes
that invests your money in standard gold bullion (0.995 pure).
Your holding
will be denoted in units and listed on a stock exchange.
These are passively managed funds and are designed to PROVIDE
returns that
would closely track the returns from physical gold in the spot
market.
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Why Invest In Gold?
Historically, gold prices have shown better stability even
during periods of crisis, as compared to other investment
types.
Most experts advise investing in gold as a 'must', since
gold
creates a robust portfolio that withstands market
fluctuations.
Gold has reflected providing stable returns in the long run.
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Why invest in Gold ETF?
Diversification: As an asset class, it gives you the benefits
of
diversification in your portfolio.
Liquidity:Since it trades like a share, buying and selling
happens quickly and therefore it is highly liquid.
Safety: With Gold ETF you don't have to worry about the
risk of theft and quality of gold.
Security: All transactions happen in electronic mode, so
there is no risk in case of unforeseen circumstances.
Lower Cost: The expenses incurred in buying and selling
Gold ETF are much lower than the cost incurred in buying,
selling, storing and insuring physical gold
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Factors Physical Gold Commodity
Exchange
Gold ETF
Control On
Quality of Gold
Low High High
Cost Of Holding High High
Brokerage
Costs
Low
Risk Of Theft High Low Low
Available
Denominations
Small Small Small
Wealth Tax Yes No No
Long-Term
Capital Gains
Tax
After 3 years No After 1 Year
Liquidity Moderate High High
Benefits of investing in Gold ETF:
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Initial Public Offering (IPO)
If you are an early adopter and like to invest in companies that
are new to the
share markets, an Initial Public Offering is what you should
look for. Initial
Public Offering is nothing but the first sale of a company's
equity to the public.
Companies usually issue Initial Public offering due to the
following reasons:
To generate additional capital for funding of projects/expansion
plans
To dilute shareholdings of existing promoters/venture
capitalists
To enable liquidity for shareholders
To enhance corporate image by increasing visibility
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Why should you invest in an IPO?
It provides you with an opportunity to make profits on
listing
As price offered during IPOs are often attractive, it makes for
a sound
investment decision
You get the opportunity to be a part of the growth story of the
issuingcompany
How does an IPO take place?
When a company wants to go public, the first thing it does is
hire an
investment bankThe company and the investment bank will first
meet to negotiate the deal.
Subjects usually discussed include the amount of money a company
will raise,
the type of securities to be issued, and all the details in the
underwriting
agreement
The underwriter puts together what is known as the RED
HERRING.
This is an initial prospectus containing all the information
about the company
except for the offer price and the effective date, which aren't
known at that
time.
With the red herring in hand, the underwriter and company
attempt to hype
and build up interest for the issue. They go on a road show for
Foreign
Institutional Investor.
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GDR Primary Benefits
IssuersAccess capital in international markets
Conduct a securities offering in an efficient and cost-
effective manner
Expand market for shares, potentially enhancing overall
liquidityBroaden and diversify shareholder base
Investors
Globalize/diversify investment portfolio Trade, clear and settle
according to home market
conventions
Eliminate cross-border custody/safekeeping charges
Receive dividend payments in U.S. dollars
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RBI, FEMA, etc for Indian Economy
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