Bond vs Debenture

Financial Crisis can come in any form and the person who is prepared in advance can fight with this crisis. To avoid these unforeseen financial crises everyone invests in different instrument that can generate returns on the income. There are many options available in the market that can be classified as risky and non risky. It is very well understood that risky instruments fetch high instruments and the non risky ones can give low returns.

Here, Debentures and bonds are two such options that can give good returns on the investment. Debenture is an instrument issued by a company that is generally in the form of convertible or non convertible into equities. Bonds are either issued by companies or by governmentand can be seen as a loan taken by them to meet their financial needs. These two instruments are basically loan taken from the investor but the repayment scenarios are generally different.

Debentures

Debentures come from a latin word called ‘debre’ meaning ‘to borrow’. Debentures are loans to the company. The companies issue debentures which are coveting expansion and can build sustenance in the business in the medium to long term. Just like equities these can be transferred to anyone, but does not have voting rights in the company’s general meetings. Debentures are simply loans taken by the companies and do not provide the ownership in the company. Debentures are of two types convertible and nonconvertible. The convertible debentures are the ones that can be converted into equity shares at a later time. This convertibility provides attraction to the investor but yield lower interest rates. Non convertible debentures does not convert into equity shares thus can yield a higher interest rate.

Debenture holders may be secured or unsecured, the holder of an unsecured debenture is an unsecured creditor. Like any other unsecured creditor, he has two remedies:

• He may sue for the principal and interest and execute the decree against the property of the company.
• He may present a petition for the winding up of the company under section 433 of the act, on the ground that the company is not able pay its debts.

If the company is already in the course of winding up, he may prove in such winding up the amount due to him like any other unsecured creditor. Whereas, a secured debenture holder stands in a stronger position as compared to unsecured debenture holder . In addition to the above two remedies available to the unsecured debenture holder, he can exercise the following remedies.

• Sale : he will have an express or implied power of sale.
• Debenture holders action : when a company commits a default in payment of debts, a debenture holder may bring a suit against the company to obtain payment and to enforce the security.
• Appointment of receiver: the debenture holders may appoint a receiver here termed as ‘Debenture Trustee’ to take charge of the assets
• Valuation of security and proof of balance : if the company is being wound up and his security is insufficient, the debenture holder may value his security and prove for the balance of his debt or give up his security and prove for the whole debt.

Bonds

Bonds are actual contract notes issued by the borrower (here company or government) to pay interest at regular intervals and return the principal on the maturity of the bond. These bonds are issued by the companies for future expansions. The bonds are also issued by the government for its expenses. A bond is seen as loan taken by a borrower from the investor so unlike equity share it does not give stake in the company but he is seen as a lender. These bonds are redeemed at a definite time. These are secured loans and can yield low to medium interest rate.

Debenture holders get periodical interest on their money and upon completion of the term they get their principal amount back.Bond holders do not receive periodical payments. Rather, they get principal plus interest accrued upon the completion of the term. They are much more secure than debentures and are issued mostly by government firms.

In Brief:

• Debentures have a charge on the assets of the company which is not envitable in the case of Bonds as held in the case of Laxman Bharamji v. Emperor.

• Unsecured Debentures are like unsecured loans which carries a higher rate of interest.

• Debenture holders get periodical interest whereas bond holders receive accrued payment upon completion of the term.

• Bonds are more secure as they are mostly issued by government firms in comparison to Debentures since the latter is issued by a company.

Disclosure of Track Record of the public issues managed by Merchant Bankers

SEBI in its circular CIR/MIRSD/1/2012 dated 10th Jan'2012 stated that:

1. The offer document shall contain necessary disclosures so as to enable investors to take informed decision when  it comes to Investments.Further, a merchant banker is required to exercise due diligence and satisfy himself about all the aspects of the issue with adequate of disclosures of the information that may be necessary for the Investors.

2. Therefore, it is necessary for investors to evaluate the post-issue performance of the issuer in terms of disclosures made in the offer documents. This will also enable them to understand the level of due diligence exercised by the merchant bankers. 

3. In view of the above, it has now been decided in consultation with the merchant bankers that they shall disclose the track record of the performance of the public issues managed by them. The track record shall be disclosed for a period of three financial years from the date of listing for each public issue managed by the merchant banker. In case, there are more than one merchant banker, all of them are supposed to sign the Due Diligence Certificate as disclosed in the offer document, that shall disclose the track record.

4. The circular shall be applicable for the public issues listed from the date of this circular, with immediate effect. However, in case of past public issues managed during the last three years, the track record as specified in Clause 3 above shall be disclosed latest by March 31, 2012.

Sebi to reform IPO norms

Capital markets regulator Sebi on Thursday said it is in the process of reforming the initial public offer (IPO) norms to ensure minimum price volatility on the day of listing. "We are in the process of reforming IPO process which will ensure that much safer process and volatility in the initial days of listing is much less ... We are looking into every aspect," Securities and Exchange Board of India (Sebi) whole-time member Rajeev Agarwal said. - www.business-standard.com

Lack of funds no excuse for dishonouring bonds: Delhi High court

NEW DELHI: A government cannot be allowed to dishonour its sovereign guarantee on grounds of lack of funds, the Delhi High Court has said, while ordering the Jammu-and-Kashmir-government to redeem its bonds bought from its financial institution by Airport Authority of India (AAI).

"The state cannot say that it does not have the fund to honour its sovereign guarantee. The court would enforce the sovereign guarantee, because a sovereign guarantee cannot be allowed to fail, if rule of law is to be upheld," Justice Vipin Sanghi said.

The court's direction came on the plea of AAI against default in payment of redemption of bonds as well as the half yearly interest payable by Jammu and Kashmir State Financial Corporation.

The AAI had bought the JKSFC bonds to finance its own employee's provident fund.

The court also directed the state government to pay Rs 10.4 crore to the AAI for redemption of the bonds bought by it from JKSFC.

The court also disallowed the plea that the matter did not fall under its territorial jurisdiction saying that the financial transactions between the parties took place here.

The bench directed the Jammu and Kashmir government to "honour its sovereign guarantee" and "to make payments of the amount due comprising of the face value of the bonds which is Rs 10.4 crore along with interest up to the date of redemption at the rates prescribed in the said bonds".

It further asked the state to pay overdue interest to AAI on the amount due and payable on the date of redemption at the rate of 8 per cent.

The AAI had subscribed to the bonds to "prudently manage and invest the Contributory Provident Fund (CPF) of its employees." 
Source: economictimes

Framework of SEBI

The framework of SEBi can be well understood by clicking above

What are Exchange Traded Funds

ETFs and Gold ETFs

An Exchange Traded Fund (ETF) is a security that trades on a stock exchange and generally tracks the performance of an index. It is a single stock representing a basket of securities underlying the index which can be comprised of stocks, bonds, or other assets such as commodities. However, ETFs have evolved over recent years to allow for exposure to alternative asset classes, the implementation of more sophisticated investment strategies, and even active management.

Gold Exchange Traded Funds (ETFs) are open ended mutual funds that are passively managed and most of them seek to mirror the return of an index, a commodity or a basket of assets. ETFs are listed and traded on stock exchanges like stocks. They enable investors to gain broad exposure to indices or defined underlying asset (commodity) with relative case, on a real-time basis, and at a lower cost than many other forms of investing.

Gold ETFs provided investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.

Gold ETF tracks the performance of Gold Bullion. Gold ETFs provide returns that, before expenses, closely correspond to the returns provided by physical Gold. Each unit is approximately equal to the price of 1 gram of Gold. But, there are Gold ETFs which also provide a unit which is approximately equal to the price of ½ gram of Gold.

Source:equitybulls

Financial Market Jargons

Some Financial Market Terminologies

Bear Market
A market in which stock prices are falling.

Bonds
Promissory notes issued by a corporation or government to its lenders, usually with a specified amount of interest for a specified length of time.

Bull Market
A market in which stock prices are rising.

Commodities
Products used for commerce that are traded on a separate, authorized commodities exchange. Commodities include agricultural products and natural resources such as timber, oil and metals. Commodities are the basis for futures contracts traded on these exchanges.

Debenture
A long-term debt instrument issued by corporations or governments that is backed only by the integrity of the borrower, not by collateral. A debenture is unsecured and subordinate to secured debt. A debenture is unsecured in that there are no liens or pledges on specific assets.

Delist
The removal of a security's listing on a stock exchange. This is done when the security no longer exists, the company is bankrupt, the public distribution of the security has dropped to an unacceptably low level, or the company has failed to comply with the terms of its listing agreement.

Exchange-Traded Fund (ETF)
A special type of financial trust that allows an investor to buy an entire basket of stocks through a single security, which tracks and matches the returns of a stock market index. ETFs are considered to be a special type of index mutual fund, but they are listed on an exchange and trade like a stock. Also known as an index participation unit (IPU).

Inflation
An overall increase in prices for goods and services, usually measured by the percentage change in the Consumer Price Index.

Initial Public Offering (IPO)
A company's first issue of shares to the general public.

Insider Trading
There are two types of insider trading. The first type occurs when insiders trade in the stock of their company. Insiders must report these transactions to the appropriate securities commissions. The other type of insider trading is when anyone trades securities based on material information that is not public knowledge. This type of insider trading is illegal.

Market Maker

A trader employed by a securities firm who is required to maintain reasonable liquidity in securities markets by making firm bids or offers for one or more designated securities up to a specified minimum guaranteed fill. Market makers for the stock of issuers listed on Toronto Stock Exchange are referred to as Registered Traders.

Mutual Fund
A fund managed by an expert who invests in stocks, bonds, options, money market instruments or other securities. Mutual fund units can be purchased through brokers or, in some cases, directly from the mutual fund company.

New Issuer Listing - IPO (Initial Public Offering)
An IPO (initial public offering) is an issuer's first offering of its securities made to the public in accordance with a prospectus. The offering is often made in conjunction with an issuer's initial application for listing on an exchange.

Over-The-Counter (OTC) Market
The market maintained by securities dealers for issues not listed on a stock exchange. Almost all bonds and debentures, as well as some stocks, are traded over-the-counter in Canada. An OTC market is also known as an unlisted market.

Preferred Share
A class of share capital that entitles the owner to a fixed dividend ahead of the issuer's common shares and to a stated dollar value per share in the event of liquidation. It usually does not have voting rights, unless a stated number of dividends have been omitted.

Prospectus
A legal document describing securities being offered for sale to the public. It must be prepared in accordance with provincial securities commission regulations. Prospectus documents usually disclose pertinent information concerning the company's operations, securities, management and purpose of the offering.

Put Option
A put option is a contract that gives the holder the right to sell a specified number of shares at a stated price within a fixed time period. Put options are purchased by those who think a stock may decline in price.

Securities
Transferable certificates of ownership of investment products such as notes, bonds, stocks, futures contracts and options.

Settlement
The process that follows a transaction when the seller delivers the security to the buyer and the buyer pays the seller for the security.

Share Certificate
A paper certificate that represents the number of shares an investor owns.

Short Selling
The selling of a security that the seller does not own (naked or uncovered short) or has borrowed (covered short). Short selling is a trading strategy. Short sellers assume the risk that they will be able to buy the stock at a lower price, cover the outstanding short, and realize a profit from the difference.

Underwriting
The purchase for resale of a new issue of securities by an investment dealer or group of dealers who are also known as underwriters. The formal agreements for these transactions are called underwriting agreements.

Warrant
A security giving the holder the right to purchase securities at a stipulated price within a specified time limit. Exercise of the warrant is solely at the discretion of the holder. Warrants are not exercisable after the expiry date. A warrant is often issued in conjunction with another security as part of a financing. A warrant may be traded as a listed security or it may be held privately.

Source:tmxmoney