Equity Investment In India
Equity Investment In India

EQUITY INVESTMENT IN INDIA-How to Invest In Equity? 

 

 

Introduction

A larger percentage of the Indian population consists of young people who have developed an interest in equity investment. Investments in the stock market have so far yielded fabulous results and more citizens of India and foreign investors are interested in understanding the Indian stocks market.

Equity is one of the easiest ways which companies or business can raise capitals from the public even though it comes with a very high risk.

The level of risk involved in equity has a positive effect on the profit. The risk of losing investment is large, but the maximum profit can be gotten from equity.

It goes with the saying that “the higher the risk taken, the greater is the profit/loss and lowers the risk taken, lesser the profit/loss”.

The intention of this article is to explore the Indian equity investment market

 

About Equity: What is an Equity Investment?

Equity is a share capital invested by a person or a corporate body into a company. The shareholder who invests by purchasing into the company’s offers becomes the owner of the company to the extent of his percentage of capital or investment in the overall equity capital of the company.

 

Why shares or equity are issued in India

The purpose for the issuance of equity shares in India is that businesses can grow their capital base and expand its reach, in turn; share the profits that accrue to the company to shareholders in the form of dividends and bonuses.

The shares are issued to members of the public through an Initial Public Offer (IPO) before being listed on the stock exchanges. For an existing company, the price of the shares will be determined by the management of the company before it is issued to the public.

How to know where to invest

Investors in equity have often sought for developing nations like India where they can tap from their wider growth potentials to maximize their profits. Developing countries have the tendency of generating huge profits to amounts invested by the buyer within a short time.

Other interesting tips to follow are:

  • Utilize the services of an equity analyst who will search out for you the best industry or sector to invest which will bring adequate profit and sustainability.
  • Choose companies with high growth potential, reliable management team, and high demanding product.
  • Study the past records of the company as it relates to its profitability, the market share of investors and future possibilities.

Amount of money to be invested

There are some restrictions to the amount a foreigner can invest in India which cannot be above 24% of the company’s total assets. However, there is no maximum or minimum cap of money to invest in equity for a local; but the number of shares bought and its values depend on the following factors:

  • The appetite of the investor
  • Understanding the business
  • Willingness to bear the risk

 

Consequently, investments of about 30 – 40% of the total company’s stocks are considered ideal since the promoters of the companies will not permit their personal investments to be less than 55 – 65% so that they may not lose their original positions as owners of the company.

 

What you must do to buy Equity in India

A contact with a stockbroker will enlighten you on the prospects of each company that is listed in the stock exchange market after which you will undertake the following steps:

  • fill a form that requires a passport, contact, and proof of identity
  • open a trading account: meant to buy and sell shares
  • open a Demat account: meant to hold your shares

 

Demat Account

Demat Account is like a bank statement; it is to hold your shares in an electronic format. When you sell shares, it is debited from your trading account while a purchase of shares is credited to your Demat account.

 

Your bank account gets credited while your Demat account is debited each time you sell shares. Whereas, when you buy shares, you will have to make payments which involve debiting your bank account and crediting your Demat account.

 

Benefits of Equity Investment

Equity investments offer richer returns than fixed deposits. Thus, an investor will obtain the following benefits:

  • Bonuses
  • Dividends
  • Right shares
  • Transfer of ownership with interest

 

How companies identify and reward shareholders?

Shares are held through these two depositories the CDSL and NSDL. Whenever a company decides to offer dividends, they get the lists of shareholders from the depositories.  After which the dividends will be paid directly to your bank account. The same method is applicable to bonuses and other give away from the company.

 

How Equity value moves?

When the demand for shares is high, its price will be high just like any other commodity. The prices tend to fall if there is an increased selling pressure.

It is necessary to understand how the stock markets work before buying any shares. Your broker will have to educate you on the latest development in the sector and the right time to invest.

There are online platforms that offer stock brokering services, it is appropriate to understand how their platform works before making transactions.

 

When to Invest in Equity and Make Profits?

Price movements in equities are generally unstable, thus it would be necessary to invest with losses in mind.

Predictions on the outcome of shares are not always factual. Therefore, it is important to make appropriate study so you cannot always lose your money.

Available research reports from experienced brokers will serve as a perfect guide for new investors.

 

Can Equity Investment yield more returns than bank deposits?

This question depends on the following factors:

  • The shares you buy determine your profit. Purchasing shares of low investment grade can render your returns low which will eventually cause a loss of your capital.
  • Quality shares guarantee huge returns.

 

Purchasing quality shares will offer double the returns of investment that could have come from bank deposits.

 

Understanding capital gains on the sale of shares

  • You will pay capital gains on shares you bought and made profit at.
  • When you sell a share after a year of buying, there are no capital gains attached
  • Buying and selling of shares within one year with a profit will attract capital gains which you will pay when filing your income tax returns.

 

Regulations governing private equity investors and transactions in India

The major laws that directly affect the private equity transactions in India are the Foreign Exchange Management Act of 1999, SEBI Act of 1992, the Companies Act of 2013 and the Income Tax Act of 1961.

 

The average duration of Private Equity Funds

The average duration of private equity funds ranges from five to seven years. This duration is subject to change based on the type of fund and factors such as sectors at which the investment is on and purpose of setting up the fund.

 

Restrictions on Investors in Private Equity Funds

Investors in Private Equity Funds have no restrictions; however, restrictions are placed on raising funds from investors under the Alternative Investment Fund regulations, Companies Act and Foreign Investment Regulations.

 

Alternative Investment Fund Regulations: the number of investors in Alternative Investment Fund (AIF) cannot exceed 1000 if the AIF is from an institution other than a company.

 

Companies Act: a private limited company cannot sell shares to more than 200 shareholders.

 

Foreign Investment Regulations: the permit for foreign investments was implemented in November 2015 which allows residents outside India to invest in AIFs except citizens of Pakistan and Bangladesh. Before this permit was given, foreign direct investments in AIF must be approved by the Reserve Bank of India.

 

 

Equity Appreciation:

Some debt holders can achieve equity appreciation through the following ways.

 

Domestic Debt Conversion

It is possible for a domestic debt holder to convert his debt into equity as stipulated in the facility agreement. In terms of a bank as the debt holder, it will be governed by the 1949 banking regulation act. This act allows the banks to acquire up to 30% of the company’s overall capital.

 

Offshore debt holder conversion

An offshore debt hold can convert the external commercial borrowing into equity as specified by the RBI.

 

RBI strategic debt framework

The Reserve Bank of India (RBI) under the ‘strategic debt restructuring’ permits creditors to take over majority stakes in the debtor’s company, and can sell out the assets to another company as stipulated in the conditions of the framework.

 

Foreign Investors compulsory convertible shares

A foreign investor is permitted to subscribe to ‘compulsorily convertible preference shares and debentures’. It is worth noting that the conversion price is subject to the appropriate foreign exchange regulations.

 

Forms of an exit of equity funds

The only form of an exit of equity funds is by listing the company in the public market or offering to sell it to a prospective investor.

Other forms of exit include

  • Strategic sale
  • Financial sale
  • The exercise of put action

 

 

Conclusion

Equity is one of the easiest ways which companies or business can raise capitals from the public even though it comes with a very high risk.

 

The level of risk involved in equity has a positive effect on the profit. The risk of losing investment is large, but the maximum profit can be gotten from equity. India has become a favored jurisdiction in terms of equity investments. The regulations that abound are to ensure that both the investors and the companies benefit from the synergy.

 

Investment in equity comes with risks although it promises huge returns. The dividends to the investor are subject to the profits made by the company. This implies that if the company makes no profit, no bonuses or dividends will be paid to the investors.

 

 

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