MARKET INDICES

Market indices are developed by individual stock exchanges to provide Representative sample of the market Birds eye view of the market activity Barometer of economy to reflect the growth Just as inflation rate and interest rate are used as single point representative of nations economy indices tell about the market activity.

FEATURES - MARKET INDICES

Market indices should have following characteristics: Fair representation of the overall market, Must include all sectors of economy, Must be broad-based, Include major stocks, but should not be skewed Cover significant proportion of market capitalisation, Requires a base from where to estimate the changes in future, etc.

TYPES - MARKET INDICES

Market value weight Price weight Equal weight

MARKET VALUE BASED INDEX

Changes in market capitalisation are reflected in the index.
Outstanding Base STOCK Shares Price (in lacs) (Rs) A 500 120 B 800 150 C 600 110 TOTAL Index Value Current Price (Rs) 200 400 150 Current Base Value Value (Rs lacs) (Rs lacs) 60,000 1,00,000 1,20,000 3,20,000 66,000 90,000 2,46,000 5,10,000 1,000 2,073

PRICE BASED INDEX

Changes in market prices are reflected in the index.

STOCK A B C Total Index Value

Outstanding Shares (in lacs) 500 800 600

Base Price (Rs) 120 150 110 380 1,000

Current Price (Rs) 200 400 150 750 1,974

EQUAL WEIGHT INDEX

Changes in market prices on equal basis are reflected in the

index.

Outstanding Base Price Shares (Rs) (in lacs) A 500 120 B 800 150 C 600 110 Cumulative change Index Value

STOCK

Current Price (Rs) 200 400 150 1000

% Change in Price 66.67% 166.67% 36.36% 269.70% 899

INDIAN INDICES
Sensex of BSE of 30 stocks Nifty 50 of NSE: 50 stocks

FEATURES - NIFTY Base 1,000 on Nov 3, 1995 with market cap of Rs 2.06 trillion Real time basis and up to two decimal places Market cap based, from June 26, 2009 based on free float Represents about 52% of traded value, and 63% of market capitalisation Reviewed every 6 months with notice of 6 weeks

ELIGIBILTY FOR INDEX (NIFTY)

Liquidity based: Impact cost for order of Rs 2 crore to be less than 0.50% (current impact cost of NIFTY is 0.13%) Capitalisation based: Index shares must have market capitalisation of Rs 5 billion or more Scrip entering must have twice the market capitalisation of smallest in the current index making an exit Float based: Minimum of 10% must be available for investors

ADJUSTMENT OF INDEX
Index value is adjusted for Rights Issue, Debt and Warrants conversion, Public Issues, including ADRs/GDRs, Corporate Restructuring, Mergers and Acquisitions Index value does not require adjustment for Bonus, Share splits Base value is adjusted for addition/deletion in the index

TOTAL RETURN INDEX

Index changes are measure of only capital gain/loss No adjustment for dividend is made in the Index Change in values of Index represents only the capital

gain/loss Dividend need to be adjusted for separately if total return is the criteria. Dividend is indexed and then added to value of index

ADJUSTMENT OF INDEX
Market cap on Cum date, Rs Index Value Number of existing shares of firm Market price of the share, Rs Existing Market cap of firm, Rs Number of new shares Price of new shares, Rs Market cap added, Rs New market cap of firm, Rs New Number of shares Theoretical price, Rs Market cap reduced, Rs New market cap of Index, Rs Old base cap of index, Rs New base cap of index, Rs RIGHTS 1:4 2,553.60b 1,160.15 13,70,12,320 181.45 24.86b 3,42,53,080 55.00 1.88b 26.74b 17,12,65,400 156.16 2,555.48b 2,201.09b 2,202.72b BONUS 1:2 2,227.00b 1,015.80 2,57,68,086 2,862.00 73.75b 1,28,84,043 73.75b 3,86,52,129 1,908.00 2,227.00b No adjustment No adjustment DEBT CONVERSION 1,852.20b 897.25 90,31,56,100 17.80 16.08b 23,64,62,800 17.80 4.21b 20.29b 1,13,96,18,900 17.80 1,856.41b 2,064.31b 2,069.00b MERGER 1,990.00b 924.10 19,91,67,287 1,704.20 339.42b 2,04,02,209 1,704.20 34.77b 374.19b 21,95,69,496 1,704.20 37.10b 1,987.67b 2,153.45b 2,150.92b

SECURITISATION
Securitisation is the process of conversion of cash flows

into marketable securities. It is a process by which illiquid assets, such as instalments of consumer loans, housing loans, auto loans, credit card receivables etc. are converted in to tradable securities, and sold to third parties. Process of converting loans, receivables into negotiable instruments.

SECURITISATION
It helps disintermediation, encourages price

competition and lowers interest cost. In USA over $ 2.3 trillion is outstanding as MBS (1999) and about 25% of auto loans and credit card receivables are funded through Securitisation.

BENEFITS OF SECURITISATION
Alternative source of fund: Originator can augment

resources for funding by securitising future receivables. May be cheaper as the rating done for the securitisation may be higher than the stand-alone rating of the originator. P & L Management Tool: Results in up front booking of profit, and therefore level of assets that can be securitised may be determined depending upon the profit desired. Sustained securitisation by NBFCs leads to improved ROCE and ROE as resources are enhanced with same capital. Balance Sheet Management Tool: For originator it is an off balance sheet transaction generating funds without addition to borrowing. NBFCs can continue to meet capital adequacy requirement and yet generate more funds.

SECURITISATION & OTHER MODES

Securitisation vs. Secured Lending:
Securitisation is with non-recourse or limited recourse against a

pool of assets rather than the issuer. Securitisation results in transfer of risk and reward from originator to the investors. Secured lending is with recourse where lender has lien on general cash flows of the originator.

Existing Assets vs. Future Assets:

Possible to securitise future cash flows Securitisation of existing asset is done where the product/

services have already been delivered, while securitising the future flows the product/services have not been delivered by the originator, e.g. securitisation of sales of future ticket by airline, giving rise to generation risk.

SECURITISATION vs. BONDS

Securitisation vs. Bonds: Securitisation is done by Pass Through Certificates (PTCs). Originator collects receivable and passes to Issuer, who in turn services the investors. SECURITISATION BONDS Safety Measures (Provide cushion) Realisation
Loan to Value Seasoning of receivable Charge on assets

Repayment of Interest and principal Face Value

Simultaneous Reduces with each payment

Delay in passing through

No delay Separately Remains same

CASH FLOW - SECURITISATION

Loan Amount Tenure No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 100 20 EQIs Principal 100.0000 96.6851 93.2336 89.6396 85.8974 82.0008 77.9435 73.7188 69.3198 64.7394 59.9701 55.0040 49.8331 44.4488 38.8425 33.0049 26.9265 20.5974 14.0072 7.1451 0.0000 EQI 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 7.4399 148.7970 Return Annuity Factor Interest 4.1250 3.9883 3.8459 3.6976 3.5433 3.3825 3.2152 3.0409 2.8594 2.6705 2.4738 2.2689 2.0556 1.8335 1.6023 1.3615 1.1107 0.8496 0.5778 0.2947 48.7970 16.50% 13.4411 Repayment 3.3149 3.4516 3.5940 3.7422 3.8966 4.0573 4.2247 4.3989 4.5804 4.7693 4.9661 5.1709 5.3842 5.6063 5.8376 6.0784 6.3291 6.5902 6.8621 7.1451 100.0000

CASH FLOW - SECURITISATION

Seasoning Principal Tenure No. 1 2 3 4 5 6 7 8 9 10 11 12 24 months 69.3198 12 EQIs Annuity Factor Principal EQI 55.4559 5.8662 51.7386 5.8662 47.8773 5.8662 43.8664 5.8662 39.7001 5.8662 35.3723 5.8662 30.8768 5.8662 26.2071 5.8662 21.3565 5.8662 16.3178 5.8662 11.0840 5.8662 5.6473 5.8662 Loan to Value Securitised Debt Return 9.4535 Interest 2.1489 2.0049 1.8552 1.6998 1.5384 1.3707 1.1965 1.0155 0.8276 0.6323 0.4295 0.2188 Repayment 3.7173 3.8613 4.0109 4.1663 4.3278 4.4955 4.6697 4.8506 5.0386 5.2339 5.4367 5.6473 80% 55.4559 15.50%