Objectives of Investors
Objectives of Investors:
(a) Income
(b) Appreciation of Capital
(c) Safety
(d) Liquidity
(e) Hedge against inflation.
The mix of these objectives may also depend on the time frame of his investment.
(a) Short-term/day-to-day trading gains.
(b) Short-term capital appreciation upto one year (short-term capital gains).
(c) Long-term appreciation of more than 1 to 3 years (long-term capital gains).
Investment preferences of public may be set out in terms of their savings for:
(a) Transactions purpose (for daily needs or regular payments).
(b) Precautionary purposes (for contingencies or special needs).
(c) Speculative or asset purposes (for Capital gains and building of assets).
Savings and Investments
Investors are savers but all savers cannot be good investors, as investment is a science and an art. Savings are sometimes autonomous and sometimes induced by the incentives like fiscal concessions or income or capital appreciation. The number of investors is about 50 million out of population of 900 million in *****.
Savers come from all classes except in the case of 37% of the population who are below the poverty line. The growth of urbanisation and literacy have activated the cult of investment. More recently, since the eighties the investment activity has become more popular with the change in the Govt. policies towards liberalisation and financial deregulation.
The process of liberalisation and privatisation was accelerated by the Govt. policy changes towards a market oriented economy, through economic and financial reforms started in July 1991.
What is Investment Activity?
Investment activity includes buying and selling or trading in the above claims on money and/or promissory notes. An investment for one may be disinvestment of another as in the case of stock market trading or may be a fresh investment in a new issue. In the New Issue Market, one can only buy securities. Investments can also be made in non-marketable securities or instruments or other avenues discussed in another Chapter.
All purchases of securities are thus investment although for the economy as a whole, some investments are offset by corresponding disinvestments. There are two terms which are relevant for this context, namely, Gross and Net Investments. Gross are total investments made from all sources by an economy or a single economic unit.
Net investments are those which are Gross investments, minus disinvestments for an economic unit. Gross Assets and Investments minus Depreciation for the economy or a company or Corporate Sector or Govt. Sector, is net Investment, which is termed as Capital formation.
What is Investment?
At the outset any study on Investment Activity should start with the question of what is investment. It means many things to many persons.
If one person has advanced some money to another, it may be his loan which may be considered his investment for a return. If a person has purchased one kg of gold for the purpose of price appreciation or a consumer durable like washing machine for the flow of services, it is his investment. If he purchases an insurance plan or a pension plan, it is an investment. Thus there are various types of investments, for various persons.
For the individual, it is the exchange of the money or cash for a future-claim on money or the purchase of a security of a promise to pay at a later date along with a regular income as in the case of a share, bond, debenture, etc.
For the issuer of security it is the use of money for fixed capital equipments, working capital or any other productive and unproductive activity. Sometimes, it is also a service like consultancy, construction, hotel or hospital and services in future, as in the case of consumer durables.
Impact of Inflation
All investments lose in value due to inflation or rise in prices leading to depreciation of the rupee. When the rate of inflation is about 10%, the real value of money is lost by 10% every year. The investors have therefore to protect themselves from this loss of real values of their assets by proper Investment planning and by securing returns, higher than the inflation rate.
Some investments give only income like bank deposits, P.O. Certificates, Company deposits etc. Some assets show capital appreciation if they are shares in companies or bullion, land and buildings. Some are safe and liquid, like the invest¬ments in Govt. securities, bonds of P.S.Us, etc.
A few investments are easily transferable and marketable. So also the shares and securities, listed and traded on the Stock Exchanges. But all the above investments do not satisfy all the needs and objectives of investors, referred to later, including securing a hedge against inflation. All objectives of income, capital appreciation, safety, marketability and liquidity as also hedge against inflation can be secured only by proper investment in corporate securities. The chart below shows the real rates of return on all investments.
Why do People Save?
Saving is abstaining from present consumption for a future use. Savings are sometimes autonomous coming from households as a matter of habit.
But bulk of the savings come for specific objectives, like interest income, future needs, contin¬gencies, precautionary purposes, or growth in future wealth, leading to rise in the standard of living, etc.
How do Savings Emerge?
Savings are excess of income over expenditure for any economic unit. Thus S = Y-E where S is savings, Y is income and E is expenditure. Secondly, excess funds or surplus in profits or capital gains are also available for investment. Thus, S = W2- W, where W2 is wealth in period 2 and WI is wealth in period 1 and the difference between them is capital gains or losses.
Thirdly investment is also made by many companies and individuals by borrowing, from others.
Thus the Corporate Sector and Govt. Sector are always net borrowers, as they invest more than their savings. Thus, S = B - L where "B" is borrowings and "L" is 'endings. Savings can be positive or negative.
Facts about Company Deposits
The deposits accepted by a company are not repayable before the date of maturity. It is left to the discretion of a company to allow premature repayment of a deposit. If and when the deposits are prematurely repaid they are entitled to a lower rate of interest than the contracted rate. Most importantly, the company deposits are unsecured and rank pan passe with other unsecured liabilities. Hence, the investor has no recourse to any asset of the company in case of default by a company to repay the deposit on maturity.
Care to be exercised while investing in Fixed Deposits
Invitation to deposits from public for various schemes of deposits is invariably published in newspapers in the form of a statutory advertisement giving the follow¬ing details:
(i) Terms of acceptance of deposits, rate of interest on different maturities, minimum amount of deposits, cumulative or non-cumulative nature of the deposit, etc.
16 Investment Management
(ii) Brief details of the name of the company, date of its incorporation, business carried on by it, places where the company has offices and names and address of directors.
(iii) Details of profits and dividends for the last three years.
(iv) Summarised financial position to the company (i.e., assets and liabilities) as appearing in the two latest audited balance sheets, alongwith details of contingent liabilities not provided for.
(v) Details regarding maximum amount of deposits which a company can accept.
(vi) A specific declaration that deposits accepted are unsecured and would rank pan passu with other unsecured liabilities.
(vii) A statement of deposits remaining unpaid.
Procedure for Making Application to Company Law Board
The person holding a matured fixed deposit which he has not renewed and which the company has failed to repay, has to make an application in triplicate in Form No.11. The application has to be accompanied by a fee payable by way of bank draft in favour of the Pay & Accounts Officer, Dept. of Company Affairs, ****.
The Company Law Board has four Regional Benches. The aggrieved deposi¬tors may make an application to the Bench of the Company Law Board having jurisdiction according to the Registered Office of the company. The Company Law Board would, after giving a reasonable opportunity of hearing to the company and other persons interested in the matter, make suitable orders for repayment of such deposits. Non-compliance of the order of the Company Law Board is a punishable offence attracting penalty by way of imprisonment upto 3 years and fine of not less than Rs. 50 for every day till such non-compliance continues.
Where the deposit which has fallen due for payment remains unpaid the depositor can seek remedy in a civil court, or can file an application for winding up of the company to the court after serving on the company written demand requiring the company to repay the deposit (Section 433, 434 and 439 of the Companies Act may be referred to for the purpose). The SEBI is not permitting such companies to make public issues.
Cases in Respect of which Applications to the Company Law Board will not lie
It is essential to know that under Section 58A of the Companies Act, the power to order repayment of matured deposits can be exercised by the CLB only in respect of deposits accepted Under the Companies (Acceptance of Deposit) Rules 1975 as amended from time to time.
In other words, an application to the Company Law Board of repayment of matured deposits shall not lie in the following cases:
(i) Deposits made for booking purchases of scooter, car etc.
(ii) Deposits accepted by financial companies like, hire-purchase finance com¬pany, a housing finance company, an investment company, a loan/mutual benefit financial company, a chit fund company, which are governed by the rules made by the RBI.
(iii) Deposits accepted by companies which have been notified as 'relief under¬takings' under special laws enacted by various State Governments. Court rulings point to the fact that the monetary liabilities of relief undertakings during the notified period stand suspended and any proceedings including the proceedings for compulsory repayment of deposits under Section 5 8A (9) shall accordingly remain stayed.
(iv) Deposits accepted by a sick industrial company covered by the Sick Industrial Companies (Special Provisions) Act, 1985 in respect of which, the Board for Industrial and Financial Reconstruction has specifically, by order suspended the operations of any contract, agreement, settlement, etc. under Section 22(3) of the Act.
Compulsory Repayment of Deposits which have Matured for Repayment
Compulsory Repayment of Deposits which have Matured for Repayment
The Companies Act, 1956 has been amended by the Companies (Amendement) Act, 1988 with effect from 1.9.1989 so as to provide for compulsory repayment of deposits which have matured for repayment (Section 58(9)].
Under the amended provisions, the Company Law Board has been empowered to take cognizance of non-repayment of any deposit on maturity and to direct repayment of such deposits on such conditions as may be specified by the Company Law Board in its Order. This will help and ensure repayment of public deposits and will create confidence amongst the public.