When shopping for fruit, you can get foxed by vendors selling apples of the same size and colour, at different prices. Investors face similar confusion when buying stocks, due to the multiplicity of face values.
Face value is a concept that allows the equity base of companies to be split into a number of shares. A company can also change the face value of its stock. When making initial public offerings, companies set the face value and charge a premium. For example, in September, Power Grid Corporation set a face value of Rs 10 and issued shares at a premium of Rs 42 for a total price of Rs 52 per share.
As an investor, your problem is that you cannot directly compare stocks of different face values. A share of Rs 10 face value that is quoting at Rs 1,000 is actually priced lower than a share with Re 1 face value quoting at Rs 101. For each split or dividend payout, you need to pull out a calculator.
The Securities and Exchange Board of India is considering a proposal to impose a uniform face value of Re 1 for all listed shares. If implemented, here’s how it will change the basics of stock analysis:
Dividends: Dividends are traditionally shown as a per cent of face value. This is misleading. Consider, for instance, a company that has issued its share with a face value of Rs 2 for Rs 400 and announces a dividend of 100%. The subscriber pays Rs 400 and receives Rs 2 in dividend. His real effective dividend — what is called dividend yield — is a paltry 0.5%. Uniform face value will make dividends easy to calculate.
EPS: Earnings per share (net profit divided by number of shares) will change with the change in face value. If a company has an EPS of Rs 20 on shares of Rs 10 face value, the EPS becomes Rs 2 if the face value is reduced to Re 1. The number of shares increases 10 times. Share capital: The number of shares outstanding and the paid-up share capital will be the same if the face value is Re 1. This makes many calculations easy.
CHANGING FACES | |||
| Stock | Face value | Market price* | Adjusted price** |
| TCS | 1 | 948 | 948 |
| Larsen & Toubro | 2 | 4,108 | 2,054 |
| Infosys Tech | 5 | 1,548 | 309.60 |
| Reliance Industries | 10 | 2,722 | 272.20 |
*Market price (in Rs) as on 22 Nov ** If face value was Re 1 | |||
Stock splits and bonus issues: In a bonus issue, the company hands out accumulated profits (“reserves”) as new shares. In a stocksplit, only the face value is changed. If there is a uniform face value, stock splits can’t be done. This has one downside. Companies also split shares to impart liquidity when the share price becomes too high.
PE ratio: Since both price and EPS change by the same amount with a split, there is no change of PE if uniform face value is imposed. For instance say a Rs 10 share trades at Rs 1,000 and it has a P/E of 40 and EPS of Rs 25. At a face value of Rs 1, the price is Rs 100 and the EPS Rs 2.5. So the PE remains at 40.
Uniform pricing will similify things for investors but be ready for some confusion during the switch over. Companies with high share price may lose on liquidity as could their shareholders.
BSE POWER | |
| Scrip | Weight in index (%) |
| BHEL | 21.2 |
| NTPC | 14.24 |
| RELIANCE ENERGY | 12.5 |
| SUZLON ENERGY | 9.12 |
| ABB | 7.98 |
| TATA POWER | 7.73 |
| SIEMENS | 7.29 |
| CROMPTON GRE | 4.64 |
| POWER GRID | 4.64 |
| GMR INFRA | 3.93 |
| TORRENT POWER | 2.06 |
| GVK POWERINF | 1.66 |
| AREVA | 1.53 |
| CESC | 1.49 |
Investors already know that stocks of power companies have been posting the highest returns on investment. In fact, some mutual fund houses have even launched energy funds that invest primarily in the power sector.
All in all, whether you are a direct investor or have taken the MF route, you would have been exposed to power stocks, and benefited from them. What was lacking was a benchmark to judge the performance of these stocks. The recently launched power index by the BSE plugs that gap.
It comprises 14 scrips and is representative of 90% market capitalisation of the power sector companies from the BSE-500 list.
— Tanvi Varma
Whether you are an online shopper or a seller, you might be interested in keeping tabs on emerging trends. Last quarter, we featured the hottest selling items on eBay India.
Here’s an update. This time round, the uptake has been sluggish — jewellery sold every seven minutes compared to six minutes earlier. PC games are going slower too, one every 44 minutes compared to 36 minutes last quarter.
| Jewellery: Sells every 7 minutes | Mobile handset: Sells every 15 minutes | Apparel: Sells every 13 minutes | Data storage: Sells every 18 minutes | Book: Sells every 11 minutes |
| Stamp: Sells every 24 minutes | Coin or note: Sells every 19 minutes | PC game: Sells every 44 minutes | Watch: Sells every 33 minutes | MP3 player: Sells every 20 minutes |
| Country | %tax |
|---|---|
| China | 20.4 |
| India | 29.1 |
| US (Illinois) | 29.4 |
| UK | 29.4 |
| Belgium | 50.5 |
* Based on an average salary of $91,000 for a middle manager | |
If you hate paying taxes, head to Dubai, Russia or Hong Kong, the world’s three most benign personal tax environments, according to the Worldwide Individual Tax Comparator report by international consultancy firm Mercer.
As far as India is concerned, employees here are the highest taxpayers among their Asian peers and take a whopping 29.1% deduction from their gross salary. This includes the amount paid as taxes and other payments such as social security contributions.
The UAE has the lowest tax regime with no income tax and a mere 5% deduction from an employee’s gross salary as social security contributions.
Belgium (50.5%) and Denmark (48.6%) have the highest rate of income tax. According to Mercer, MNC employees are increasingly choosing roles in countries with low tax rates so that they can enter the property market when they return home.
- Rakesh Rai
| Real estate | 32% |
| Equities | 27% |
| Fixed-income | 19% |
| Cash | 14% |
| Others | 8% |
While 32% of investments are in realty, 27% are in equities. With the Taiwanese, HNWIs have a sizeable 19% of investments in safe, fixedincome assets — the highest in Asia.
These findings are from the Capgemini-Merrill Lynch Wealth Report 2007. Though investment abroad by Indians is yet to catch on, going by the HNWI asset allocation, the trend seems to lean towards pouring in money in the Asia Pacific region (64%) rather than North America (12%) or Europe (13%).Unit linked policies are passe; it’s the fund options within that’s making news now. Bajaj Allianz Life Insurance has come up with Century Plus, a 10-year unit linked insurance plan, which allows allocation of up to 100% in equities as well as debt.
This does away with the old fashioned, conservative, aggressive and balanced approach and is closer to any equity-diversified mutual fund on the investing front.
Says Kamesh Goyal, CEO Bajaj Allianz Life Insurance: “Asset allocation helps your fund adjust to fluctuating market conditions by balancing the portfolio to maximise returns.
But there is a catch; you do not have the flexibility to decide the asset balance that you may wish to stick to; the fund manager will work on a debt-equity ratio based on risk weights.
Further, allocation is not based on your age and risk profile. Where the plan scores is that it offers a loyalty reward. All policyholders who stay with the plan for the entire tenure of 10 years are eligible for an assured addition of 7% of the premium from the sixth year onwards.
For policyholders who do not wish to continue beyond year three, there is an automatic deduction of unit value to retain the life cover, which is fixed at a minimum five times the annual premium.
— Priya Kapoor
| THE PLAN AT A GLANCE | |
| A healthy male buying this plan at age 25 and contributing Rs 25,000 a year. At a conservative 6% annual return, the fund value on maturity will be Rs 3.07 lakh. | |
| Age at entry (years) | 8-60 |
| Policy tenure | 18-70 |
| Premium paying term (years) | 3-10 |
| Minimum annual premium (Rs) | 25,000 |
Random nuggets of wisdom
Numbers speak louder than words. We highlight some figures that have immediate or long-term personal finance implications.
10 million is the total number of demat accounts in the country. At the end of June 2007, demat accounts with premier depository National Securities Depository stood at 8 million while the other depository, Central Depository Services, had 2.3 million accounts. However, this in no way reflects the number of people trading stocks.
50% is the projected growth in the non-life insurance market in India in the next six months. Currently, there are 12 non-life insurers in the segment and as many as six new players will enter the market soon.
33% The Indian real estate industry is estimated to grow by 33% to $50 billion by 2010 and $90 billion by 2015, up from $16 billion currently.This means that real estate is still an excellent investment vehicle to park your money in.
"With inflation under control, I do not see any reason for the interest rate to go up"
— OP Bhatt, chairman, State Bank of India
"We are seeing a momentum shift towards smaller stocks, with their valuations catching up with the larger-cap stocks"
— Shahina Mukadam, research head, IDBI Capital Market Service
"It has become fashionable to talk about fuller convertibility...(but) there will never be full convertibility on capital account"
— P Chidambaram, finance minister
"Strong capital controls could cause a big decline. The central bank may contemplate more measures. That's the biggest risk to Indian markets now"
— Christopher Wood, CLSA’s chief Asian equity strategist
