Different between NSDL and CDSL

Difference Between NSDL and CDSL

The process of buying and selling shares is possible in India because of depositories and as an investor, it is important to know about the two functioning depositories.

In India, there are two depositories: National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CDSL). Both the depositories hold your financial securities, like shares and bo plnds, in dematerialised form and facilitate trading in stock exchanges. However, to make use of the depositories and start your investing journey, you must open a Demat account and a trading account. You must always remember to open the best Demat account with a reliable stockbroker as it will help you make wise investment decisions.

Understanding depositories and depository participants:

Both NSDL and CDSL are depositories that maintain ownership records of financial securities. They are linked with investors through Depository Participants (DPs), also called stockbrokers.

A DP is a depository agent acting as an intermediary between the depository and its clients. DPs are registered with the depository via the relevant provisions of the SEBI Act. You have to open a Demat account with a DP to avail the services of depositories.

Typically, DPs are stock brokerage firms that provide investors with the service of opening Demat and trading accounts along with providing a trading platform, market reports and other value-added services.

Functioning of Depositories

Once you start trading, the securities you buy or sell are debited or credited from the depository and reflected in your Demat account.

Depositories provide information to listed companies about shareholders while facilitating trading transactions. Furthermore, the listed companies approach the depositories to get information about the shareholders to send notifications such as dividend rights, stock splits etc.

What is NSDL?

NSDL is the oldest and largest depository in India. It commenced operations in 1996 in Mumbai. It was the first depository to provide trading services in electronic format.

According to data from SEBI, NSDL has around 2.4 crore active investors, with more than 36,123 depository participant service centres across 2,000 cities.

NSDL is entrusted with the safekeeping of the following financial securities in the electronic format:

Stocks

Bonds

Debentures

Commercial papers

Mutual Funds

NSDL offers a wide range of services, like:

Dematerialisation services

Rematerialisation services

Transfers between depositories

Off-market transfers

Lending of securities

Collateral and mortgage of securities

What is CDSL?

CDSL started operations in Mumbai in 1999 and is the second-largest depository in the country after NSDL.

Like NSDL, it provides all services, like holding financial securities in the electronic format and facilitating trade and settlement of orders. All forms of stocks and securities - just like NSDL - are held at this central depository.

According to data from SEBI, it has more than 5.2 crore active customer accounts with around 21,434 depository participant service centres.

Registration of DPs with NSDL and CDSL:

A stockbroking firm usually selects between the two depositories for registration on the basis of fees and charges, services, and other aspects such as ease of doing business. As an investor, you can check with your DP to know whether they are registered with NSDL or CDSL. Some stockbrokers are also registered with both depositories.

Difference between NSDL and CDSL:

In terms of services to investors, there is no key difference between having a Demat account with a DP registered either with NSDL or CDSL. Both are regulated by SEBI and provide similar trading and investing services. The only difference between both the depositories is their operating markets. While NSDL has National Stock Exchange (NSE) as the primary operating market, CDSL’s primary market is the Bombay Stock Exchange (BSE).

Conclusion:

An investor can easily open a Demat account, and a trading account with a DP linked with either of the depositories. While beginning your investment journey in stock markets, always remember to choose a trusted and reliable stockbroker who can provide you with cutting-edge trading platforms and features like a free online Demat account and zero Annual Maintenance Charge (AMC).

What is Demat Account?

What is Demat Account?

The Demat full form stands for a Dematerialised Account. Demat is a form of an online portfolio that holds a customer’s shares and other securities. 

A Demat account is used to hold shares and securities in an electronic (dematerialised) format. These accounts can also be used to create a portfolio of one’s bonds, ETFs, mutual funds, and similar stock market assets.

Demat trading was first introduced in India in 1996 for NSE transactions. As per SEBI regulations, all shares and debentures of listed companies have to be dematerialised in order to carry out transactions in any stock exchange from 31st March 2019.

Features of Demat Account

Here are some of the key features to understand demat account meaning better-

Easy Access

It provides quick & easy access to all your investments and statements through net banking.

Easy Dematerialization of Securities

The depository participant (DP) helps to convert all your physical certificates to electronic form and vice versa. 

Receiving Stock Dividends & Benefits

It uses quick & easy methods to receive dividends, interest or refunds. It is all auto-credited in the account. It also uses Electronic Clearing Service (ECS) for updating investors’ accounts with stock splits, bonus issues, rights, public issues, etc.

Easy Share Transfers

Transfer of shares has become much easier and time-saving with the use of a demat account.

Liquidity of Shares

Demat Accounts have made it simpler, faster and more convenient to get money by selling shares.

Loan Against Securities

After opening a demat account, one can also avail of a loan against the securities held in your account.

Freezing Demat Account

One can freeze a certain amount or type of their demat account securities for a certain period of time. This eventually will stop the transfer of money from any debit or credit card into your account.

How Does A Demat Account Work?

In general, Demat Accounts are used to hold the purchased shares by an individual-

A significant thing to note here is that the buyer and seller may hold a demat account with DPs associated with different depositories.

Documents Required for Opening a Demat Account

PAN card

Aadhar card

Address Proof

Passport size photos

ID proof

You may also want to know How to Open a Demat Account

Types of Demat Account

An investor can opt to open demat account of any of the following types-

Regular Demat Account

All residing Indian citizens are eligible to open regular Demat accounts.

Repatriable Demat Account

Non-resident Indians can open Demat accounts of repatriable types. One can transfer money from overseas through such accounts, provided it is linked to an NRE bank account.

Non-repatriable Demat Account

Non-repatriable accounts are also for NRIs, however, these accounts cannot be used to transfer funds from abroad. An individual has to link an NRO bank account to own and operate this type of Demat account.

Customers holding Demat accounts need to open a trading account to buy or sell securities from the stock market. While respective Depositories and Depository Participants regulate Demat accounts, a trading account follows the regulations mandated by SEBI.

Benefits of Demat Accounts

Investors who opt to open Demat account can enjoy several benefits. Here are some of the most common benefits.

Demat accounts eliminate the risk of damage, forgery, misplacement, or theft of physical shares.

The electronic system is also considerably simpler and can be completed within hours. It has eliminated several time-consuming operations, which has made the entire process streamlined and time-saving.

Demat accounts come with remote access benefits, provided individuals have a registered net banking facility with the concerned financial institution.

Investors can merge bank accounts with dematerialized accounts to facilitate electronic fund transfers.

Customers can benefit from a nomination facility if they open a Demat account online.

Account holders with a specific unit of securities in their portfolio can opt to freeze their accounts for a specific period. This can prove helpful to avoid any unwanted transaction into one’s Demat account.

Demat Account Number and DP ID

Investors are also issued a DP ID, or Depository Participant ID, by their preferred broking firm or other financial institutions. DP ID forms a part of one’s account number, as this ID denotes the first eight-digit of the account number.

Both depository and depository participants use this data when an investor converts physical shares to Demat, transfers shares from one Demat account to another, or transfers money from a Demat account to a bank account.

Demat Account Charges

Although any investor can open a free Demat account, there are certain charges that are levied on that account to ensure its smooth operations. Each brokerage firm (including banks) comes with its unique brokerage charges. Here are some of those–

Annual Maintenance Charges

Almost every firm levies a fee as an annual maintenance charge for Demat account. Depositories follow specific guidelines to calculate the fee applicable for each investor.

SEBI has implanted a revised rate for Basic Services Demat Account, or BSDA, from 1st June 2019. According to the revised guidelines, no annual maintenance charge will be applicable for debt securities of up to Rs.1 lakh, while a maximum of Rs.100 can be levied on holdings of Rs.1 lakh to Rs.2 lakh.

Custodian Fees

Depository partners charge a custodian fee as a one-time or annual basis. The sum is paid directly to the depository (NDSL or CDSL) by the company.

Demat and Remat charges

Such expenses are levied as a percentage of the total value of shares purchased or sold to cover all digitisation or physical print costs of securities.

Other than the above-mentioned fees, an investor is also liable to pay fees like credit charges, applicable taxes and CESS, rejected instruction charges, etc.

Demat accounts play a crucial role in stock market investments, as it is one of the most common methods of investing in the stock market. However, recently, several online platforms provide the benefit of online trading without such account

What is IPO?

What is IPO?

Initial Public Offering (IPO) refers to the process where private companies sell their shares to the public to raise equity capital from the public investors. The process of IPO transforms a privately-held company into a public company.

 This process also creates an opportunity for smart investors to earn a handsome return on their investments.

Investing in IPOs can be a smart move if you are an informed investor. But not every new IPO is a great opportunity. Benefits and risks go hand-in-hand. Before you join the bandwagon, it is important to understand the basics.

Types of IPO

There are two common types of IPO. They are-

1) Fixed Price Offering

Fixed Price IPO can be referred to as the issue price that some companies set for the initial sale of their shares. The investors come to know about the price of the stocks that the company decides to make public. 

The demand for the stocks in the market can be known once the issue is closed. If the investors partake in this IPO, they must ensure that they pay the full price of the shares when making the application.  

2) Book Building Offering

In the case of book building,  the company initiating an IPO offers a 20% price band on the stocks to the investors. Interested investors bid on the shares before the final price is decided. Here, the investors need to specify the number of shares they intend to buy and the amount they are willing to pay per share. 

The lowest share price is referred to as floor price and the highest stock price is known as cap price. The ultimate decision regarding the price of the shares is determined by investors’ bids.

IPO Advantages and Disadvantages

Investing in IPOs comes with both merits and demerits. Here are a few of the benefits and drawbacks you must know before making your investment decision.

Benefits of Investing in an IPO

Investing in an initial public offering withholds the below-mentioned advantages-

Increased Recognition

When weighing the advantages and cons of an IPO, this good factor comes out on top. It assists management in gaining more reputation and credibility by becoming a trustworthy organization.

Companies that are publicly traded are typically more well-known than their private competitors. In addition, a successful process attracts media attention in the financial sector.

Access to Capital

A corporation may never receive more capital than it raises by going public. A company's growth trajectory might be substantially altered by the substantial cash available. An ambitious company may enter a new period of financial stability following its IPO.

This decision can help R&D, hire new employees, establish facilities, pay off debt, finance capital expenditures, and purchase new technologies, among other things.

Diversification Opportunity

When a corporation becomes public, its shares are traded on an exchange amongst investors. This increases investor diversity because no single investor owns a majority of the company's outstanding stock. As a result, purchasing stock in a publicly listed company can help diversify investment portfolios.

Management Discipline

Going public encourages managers to prioritize profitability over other objectives, such as growth or expansion. It also makes contact with shareholders easier because they can't hide their issues.

Third-Party Perspective

When a company goes public, it gains an independent perspective on its business model, marketing strategy, and other factors that could hinder it from becoming profitable.

Disadvantages of Investing in IPO

There are a few factors an investor would have to consider before starting to invest in an IPO-

More Costs

IPOs can be quite costly. Aside from the continuous costs of regulatory compliance for public firms, the IPO transaction process necessitates the investment of capital in an underwriter, an investment bank, and an advertiser to ensure that everything runs well.

Lesser Autonomy

Public companies are led by a board of directors, which reports directly to shareholders rather than the CEO or president. Even if the board delegated authority to a management team to oversee day-to-day business operations, the board retains the final say and the authority to fire CEOs, including those who founded the company.

Some businesses circumvent this by going public in a way that grants its founder veto power.

Extra Pressure

In the midst of market turmoil, publicly traded firms are under enormous pressure to keep their stock values high. Executives may be unable to make hazardous decisions if the stock price suffers as a result. This occasionally foregoes long-term planning in favor of immediate gratification.

Terms Associated with IPO

Issuer

An issuer can be the company or the firm that wants to issue shares in the secondary market to finance its operations.

Underwriter

An underwriter can be a banker, financial institution, merchant banker, or a broker. It assists the company to underwrite their stocks.

The underwriters also commit that they will subscribe to the balance shares if the stocks offered at IPO are not picked by the investors.

Fixed Price IPO

Fixed Price IPO can be referred to as the issue price that some companies set for the initial sale of their shares. 

Price Band

A price band can be defined as a value-setting method where a seller offers an upper and lower cost limit, the range within which the interested buyers can place their bids.

The range of the price band guides the buyers. 

Draft Red Herring Prospectus (DRHP)

The DRHP is the document that makes the public know about the company’s IPO listings after the approval made by SEBI.

Under Subscription

Under Subscription takes place when the number of securities applied for is less than the number of shares made available to the public.

Oversubscription

Oversubscription is when the number of shares offered to the public is less than the number of shares applied for.   

Green Shoe Option

It refers to an over-allotment option. It is an underwriting agreement that permits the underwriter to sell more shares than initially planned by the company. It happens when the demand for a share is seen higher than expected.

Book Building

Book building is the process by which an underwriter or a merchant banker tries to determine the price at which the IPO will be offered.

A book is made by the underwriter, where he submits the bids made by the institutional investors and fund managers for the number of shares and the price they are willing to pay. 

Flipping

Flipping is the practice of reselling an IPO stock in the first few days to earn a quick profit.

Any individual who is an adult and is capable of entering into a legal contract can serve the eligibility norms to apply in the IPO of a company.  However, there are some other inevitable norms an investor needs to meet.

The eligibility criteria are-

It is required that the investor interested in buying a share in an IPO has a PAN card issued by the Income Tax department of the country.

One also needs to have a valid demat account. 

It is not required to have a trading account, a Demat account serves the purpose. However, in case an investor sells the stocks on listings, he will need a trading account. 

It is often advised to open a trading account along with the Demat account when an investor is looking forward to investing in an IPO

CAGR

What is CAGR?

CAGR (Compound Annual Growth Rate) measures your investments' average annual growth over a given period. It shows you the average rate of return on your investments over a year. CAGR is a helpful tool for investors because it precisely measures investment growth (or decline) over time. When calculating CAGR, profits are assumed to be reinvested at the end of each year of the time horizon. Therefore, CAGR is a representative number, not an accurate return. In most cases, an investment cannot grow at the same rate year after year. Despite this, the CAGR calculator is widely used to compare alternative investments.

Keeping this common application of the calculation in mind, it is prudent that investors find a convenient way to calculate CAGR. Anyone who wants to estimate the return on investment can use the CAGR calculator. The Compound Annual Growth Rate formula is used in this application's calculations (CAGR formula). For example, if you have a mutual fund that has appreciated over time, you can use the calculator to determine the rate of return on your investment. The CAGR return calculator will provide you with an annual growth rate that you can compare to a benchmark return.

How to calculate CAGR?

To calculate the compounded annual growth rate on investment, use the CAGR calculation formula and perform the following steps: 

• Divide the investment value at the end of the period by the initial value.
• Increase the result to the power of one divided by the tenure of the investment in years.
• Subtract one from the total.

Mathematically speaking, the CAGR formula is given by the following equation-

CAGR = (FV / PV) ^ (1 / n) – 1

In the above formula, FV stands for the future value of the investment, PV stands for the present value of the investment, and n stands for the number of years of investment. To understand the calculation better, let's look at a hypothetical situation. Consider you invested Rs.20000 in a mutual fund in 2015. The investment will be worth Rs.35000 in 2020. Using the formula, the CAGR of this mutual fund investment will be-

CAGR= (35000/ 20000) ^ (1/5) – 1 = 11.84%

Here, the results mean the mutual fund investment gave you an average return of 11.84% per annum. You can also calculate the absolute returns on investment using the CAGR calculator. The calculation will be-

Absolute returns= (FV- PV) / PV * 100 = (35000-20000)/ 20000 * 100 = 75%

This means your mutual fund investment gave you an absolute return of 75% over its tenure.

How to calculate CAGR

Benefits Of CAGR Calculator Online

It enables investors to assess the returns in a variety of scenarios. You can use several test cases to evaluate returns in various scenarios. 

It is straightforward to use. You only need to enter the initial value, the final deal, and desired investment period, and the online CAGR calculator will take care of the rest. 

Assume that you purchased some units of an equity fund earlier and that their value has since increased. You can calculate the gains on your investment using the CAGR online calculator.

It gives you a comprehensive idea of your return on investment. 

You can also use the compound annual growth rate calculator to compare stock performance to that of peers or the industry as a whole. 

Impact of Risk Weights raised by RBI on Bank's and NBFCs

 RBI Risk Weights decision: How Will It Impact Banks, NBFCs

17th Nov, 2023

The Reserve Bank of India (RBI) on November 16 increased the risk weights on consumer credit exposure of commercial banks and non-banking finance companies (NBFCs) by 25 per cent.

Consumer credit of commercial banks and NBFCs attracts a risk weight of 100 per cent, which now has been raised to 125 per cent.

According to the RBI circular, the increase in risk weights of consumer credit exposure of commercial banks (outstanding as well as new) includes personal loans, but excludes housing loans, education loans, vehicle loans and loans secured by gold and gold jewellery.

For the NBFCs, the increase in risk weights extended to retail loans, excluding housing loans, educational loans, vehicle loans, loans against gold jewellery and microfinance/SHG loans.

The RBI also raised the risk weight credit card receivables of scheduled commercial banks and NBFCs by 25 per cent.

After this revision, credit card loans by banks will now attract a risk weight of 150 per cent, as compared with 125 per cent earlier, while those by NBFCs will attract a risk weight of 125 per cent, up from the previous 100 per cent.  

On Friday, top banking and NBFC stocks like HDFC Bank, ICICI Bank, Bajaj Finance and SBI Cards fell up to 6 per cent

Potential Impact On The Banks

According to Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, “the immediate impact of the RBI action is that this will increase the capital requirements of the banks, which, in turn, will increase their cost of capital. Since the credit demand in segments like unsecured retail loans is robust banks can easily pass on the increased cost to borrowers. So, there will be a marginal increase in the cost of credit for borrowers. However, the impact on banks’ profitability will be negligible.”

From the perspective of macro financial stability this is a welcome decision, Vijayakumar added.

The RBI move is targeted to curb incipient risks building in these segments and to reduce reliance of NBFCs on bank lending. According to analysts, the higher unsecured credit risk would negatively impact capital adequacy ratio (CARs) of banks. Capital adequacy ratio gives a quick picture to whether a bank has enough funds to cover losses and remain solvent under difficult financial circumstances.

Unsecured retails loans have been surging by 20-60 per cent year-on-year across major lenders and have been a cause of concern as highlighted by the regulator in last few months.

According to Motilal Oswal Financial Services, after the revision in risk weight, lenders could increase interest rates on these products to offset the impact on profitability. The cost of borrowings for NBFCs will also go up as banks look to increase lending rates while higher risk weight leads to higher capital consumption. There have been concerns about higher delinquencies in low-ticket personal loans, but clearly the RBI has not made any such distinction and has taken measures to curb the growth across retail segments.

The financial services firm added that the RBI action is likely to have a 30-85 basis points impact on capital ratios (excluding SBI Cards). RBL Bank, HDFC Bank, and ICICI Bank are expected to have the maximum impact, while SBI Cards remains most vulnerable with a 416 basis points impact, according to estimates.

Earning Per Share (EPS)1@

 EPS tells about the earning per equity share.

EPS= Net Profit after tax and Pref dividend / Number of equity shares 

40000/10000= Rs 4 per share 

Net Profit before tax Rs 100000

Tax 50%

10% Preference dividend on Rs 100000

Equity Share Capital (of Rs 10 each) Rs 100000 

Importance of Ratio- 

1.The earning per share helps in determining the market price of the equity share of the company.

2. It helps in estimating the company's capacity to pay dividend to its equity shareholders.

3. It is basic requirement for calculating P/E ratio.

ROCE

'Stock Investment made Easy'

Fundamental Analysis of a Company

ROCE 

Return on Capital Employed

ROCE is a profitability ratio it is also known as 'Return on Investment' ratio it indicates the percentage of Return on the total capital employed in the business

ROCE= EBIT/Capital Employed×100

The term capital employed = share capital+reserve and surplus+long term loans- ( non business assets + ficticious assets)

EBIT = Earning before Interest and tax.

Eg. EBIT= 40000

Capital Employed= 500000

ROCE= 40000/500000×100

= 8%

(Capital Employed= share capital +Reserve+long-term loan - non trading assets )

= 500000

Significance of ROCE 

1. The business can survive only when the return on capital employed is more than the cost of capital in the business.

Suppose once have been borrowed at 9% and ROC is 8% it shows that the form had not been employing the funds efficiently.

2. ROCE measures the overall efficiency of the firm. we can easily compare one form to another firm by using ROCE.

3. we can compare ROCE to Cost of capital to find out feasibility of borrowing funds from outside.