What is IIP? How it affects stocks?

Every month the stock markets wait with bated breath to hear the IIP numbers. These numbers decide the market movement. But what is IIP? What is its relationship to the stock markets?

IIP, the key tracker of industrial production

IIP or the index of industrial production is the number denoting the condition of industrial production during a certain period. These figures are calculated in reference to the figures that existed in the past. Currently the base used for calculating IIP is 1993-1994.

Importance of IIP

As IIP shows the status of industrial activity, you can find out if the industrial activity has increased, decreased or remained same. Today it is important because with the news of recession hovering over the horizon, better IIP figures indicate increase in industrial production. It makes investors and stock markets become more optimistic.

Its relation with stock markets

The optimism amongst the stock markets and investors translates into the markets going up. This is because the markets expect the companies' performance to increase. This ultimately leads to the growth in the country's GDP. It implies improvement in country's economy, thus making it an attractive investment destination to foreign investors.

Computation of IIP

The first time IIP used the year 1937 as its reference point. It contained only 15 products. Since then, the criteria for the base year as well as the number of products have been revamped 7 times.

Currently, IIP uses 1993-94 as the reference year and includes items whose gross value of output is at least Rs 80 crores and Rs 20 crores at gross value added level. The products included are the ones used on consistent basis and can comprise of small scale sector as well as unorganized production sector.

They are segregated into 3 sections: manufacturing, mining and electricity. They are also classified on the basis of usage: capital goods, basic goods, non-basic goods, consumer durables and consumer non-durables.

The numbers for IIP are released within 6 weeks after the end of the month. This data is collated from 15 different agencies like Department of Industrial Policy and Promotion, Indian Bureau of Mines, Central Statistical Organisation and Central Electricity Authority. But at times, the entire data may not be easily available.

Hence some estimates are done to generate provisional data, which is then used to calculate provisional index. Once the actual data is available, this index is updated subsequently.

Though IIP does indicate the condition of the country's economy, it should not be taken as the sole basis for investment. This is because some sectors may show higher performance as compared to others. This was evident in the recent past when realty sector showed higher performance, pharma sector lagged behind.

 So you need to check the reason behind the increase/decrease in IIP figures before investing.

Here is the link where we can see the latest IIP results

IIP-Index of Industrial Production

Balance Sheet

Balance Sheet Basics

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Balance Sheet is the snap shot of financial strength of any company at any point of time. It gives the details of the assets and the liabilities of the company. Understanding balance sheet is very important because it gives an idea of the financial strength of the company at any given point of time. Following is the balance sheet of Global Telesystems for the year ending on 31st Mar' 2000:

As on	31-3-00
Assets
Gross Block	3978.55
Net Block	2790.57
Capital WIP	66.72
Investments	454.33
Inventory	610.81
Receivables	1546.81
Other Current Assets	3673.67
Balance Sheet Total	9142.92
Liabilities
Equity Share Capital	434.12
Reserves	5815.65
Total Debt	2096.69
Creditors and Acceptances	393.91
Other current liab/prov.	402.55
Balance Sheet Total	9142.92

Let us take a look at each of its components.

Assets

Gross block is the sum total of all assets of the company valued at their cost of acquisition. This is inclusive of the depreciation that is to be charged on each asset. Net block is the gross block less accumulated depreciation on assets. Net block is actually what the asset are worth to the company.

Capital work in progress, sometimes at the end of the financial year, there is some construction or installation going on in the company, which is not complete, such installation is recorded in the books as capital work in progress because it is asset for the business.

If the company has made some investments out of its free cash, it is recorded under the head investments. Inventory is the stock of goods that a company has at any point of time. Receivables include the debtors of the company, i.e., it includes all those accounts which are to give money back to the company. Other current assets include all the assets, which can be converted into cash within a very short period of time like cash in bank etc.

Equity Share capital is the owner's equity. It is the most permanent source of finance for the company. Reserves include the free reserves of the company which are built out of the genuine profits of the company. Together they are known as net worth of the company.

Total debt includes the long term and the short debt of the company. Long term is for a longer duration, usually for a period more than 3 years like debentures. Short term debt is for a lesser duration, usually for less than a year like bank finance for working capital.

Creditors are those entities to which the company owes money. Other liabilities and provisions include all the liabilities that do not fall under any of the above heads and various provisions made.

Role of Balance Sheet in Investment Decision making

After analyzing the income statement, move on to the balance sheet and continue your analysis. While the income statement recaps three months' worth of operations, the balance sheet is a snapshot of what the company's finances look like only on the last day of the quarter. (It's much like if you took every statement you received from every financial institution you have dealings with — banks, brokerages, credit card issuers, mortgage banks, etc. — and listed the closing balances of each account.)

When reviewing the balance sheet, keep an eye on inventories and accounts receivable. If inventories are growing too quickly, perhaps some of it is outdated or obsolete. If the accounts receivable are growing faster than sales, then it might indicate a problem, such as lax credit policies or poor internal controls. Finally, take a look at the liability side of the balance sheet. Look at both long-term and short-term debt. Have they increased? If so, why? How about accounts payable?

After you've done the numerical analysis, read the comments made by management. They should have addressed anything that looked unusual, such as a large increase in inventory. Management will also usually make some statements about the future prospects of business. These comments are only the opinion of management, so use them as such.

When all is said and done, you'll probably have some new thoughts and ideas on your investments. By all means, write them down. Use your new benchmark as a basis for analyzing your portfolio next time. Spending a few minutes like this each quarter reviewing your holdings can help you stay on track with your investment goals.

The FCCB issue

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If FCCBs offer advantages to both lenders and borrowers, why did they run into trouble during the credit crisis?

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FCCBs were also a cause for the battering that stocks of some highly leveraged companies received last year. So what are FCCBs and how do they impact companies you invest in?

What is an FCCB?

FCCB is a foreign currency-denominated bond issued by an Indian company. The bondholder can either convert the bond into a fixed number of equity shares in the company (the price is preset) or give up the conversion option and retain it as a bond; in which case, it will be repaid at maturity.

If the market price of the stock, at a future date, manages to rise past the "conversion price" for the bond, the bondholders may grab the option to switch to equity shares.

FCCBs are usually issued with the expectation that the company's stock price will continue to rise with profits. However, if that does not happen and the conversion does not go through, these bonds are to be retired at a premium over their face value.

Consider the FCCB issue of Suzlon Energy. The company issued a zero coupon FCCB with June 2012 as redemption date. However, these zero coupon bonds would be redeemed at 150.24 per cent of the principal amount if the bond does not get converted into equity.

What went wrong?

If FCCBs offer advantages to both lenders and borrowers, why did they run into trouble during the credit crisis? Simply because the prices dropped heavily and became unattractive for conversion into shares.

For instance, Subex's FCCB initially had a conversion price of Rs 656.2 as against the current price of Rs 64 (as a result of the 2008 correction). At the same time, the due dates of these bonds were fast approaching conversion.

Now, if the companies are forced to repay on due date, they would have to pay a premium on such redemption. However, some companies did not put away a sum as premium redemption reserve, believing that their bonds would be converted into shares.

To make matters worse, fall in rupee inflated the oustanding loan amount and interest payouts. The company's ability to service its debt/repay its debt is a key indicator of its financial health.

In the 2008-09 financial scenario, quite a few companies were at risk of committing default if they did not restructure their FCCB terms. This was the key reason why companies with FCCBs due for redemption were beaten down by the market.

Given the 2008 crisis, companies were allowed to either pre-pay FCCBs or restructure them by replacing with new set of FCCBs having lower conversion price (which would involve issuing more shares causing equity dilution). The RBI also allowed them to pre-pay debt by raising external resources and extended the time-frame for such pre-payment to December 2009.

In the case of Subex, the company resorted to revision of conversion price toRs 80.31 from Rs 656.2 to bring it closer to the current market price.

While companies such as Reliance Communication and Financial Technologies took the prepayment route by paying part of their debt at a discount, Suzlon, Aurobindo Pharma and Subex are some instances where the companies drastically cut the conversion price.

Companies whose FCCB redemption did not fall within, say, the next two years, remained neutral and did not resort to restructuring.

So what does this mean for investors? If the company you are investing in has outstanding FCCBs, look at the following:

Has the stock price remained far below the conversion price? If so, what would be the interest outgo on the FCCBs and would that affect profitability?

FCCB, until converted, is a debt. Hence, when looking at the debt:equity position, or leverage, do not assume that the bonds will be converted.

If the FCCBs are being converted into shares in tranches, what would be the ultimate equity expansion and would it dilute earnings?

For what are the FCCB funds being utilised? If they are being used effectively for expansion purpose, chances are that any equity expansion (on conversion) would be compensated by earnings expansion.

How and What to Look into Annual Reports

How  to Look into Annual Reports?

The thought of poring over annual reports to glean information about a company or its growth prospects may seem terribly dull to most new investors.

Nevertheless, the annual report remains the most authentic source of information about a company and contains important facts about its financial condition, growth strategy and current challenges that are not readily available upon an Internet search. A well-written report can give you a rare glimpse into the management's outlook for the industry or its views on new trends in the market. So for those who do not know (or remember) what an annual report looks like, here is a quick guide to reading this document.

The manner of presentation differs from one annual report to the other; some are mini opuses that promise to be a one-stop guide to the industry and company, others barely make the cut when it comes to providing crucial information. Most reports, though, will have the following important components:

The director's report, which will detail the company's operational performance in the year gone by.

Management Discussion and Analysis, where the management provides an outlook on the industry, competitive scenario, new challenges and risk factors and outlines its future strategy.

Detailed financial statements of the company and its subsidiaries, as well as consolidated financials, along with the auditor's report.

The basics, for starters

You may also find pictures of happy employees participating in corporate events. Heart warming, but we suggest that you skim through all that gloss and start with the director's report. This will give you an overview of the co mpany's performance across various segments and an idea of the factors that drove performance.

If you are unfamiliar with the industry the company operates in, then the Management Discussion and Analysis (MDA) is the best place to begin. Clueless about the pig iron industry? Read the Tata Metaliks report for data on the globa l pig iron and foundry market and pig iron price trends. The report also includes an interview with Tata Metaliks' management, which discusses some of the key events that took place during the previous year and its perception about the competitive scenario.

Companies put forth their views on a variety of topics that concern their industry, be it Government regulation, consumer or user industry trends or changes in the global picture in the MDA. They then articulate their own plans to capitalise on unfolding opportunities.

Between the director's report and MDA, you will get a fairly good idea of the businesses the company operates in, its key focus areas, the challenges ahead and the measures it has in place to improve financial performance in the year ahead.

For number-crunchers

For those who believe that it is numbers that do all the talking, the financial statements in the annual report provide you with details that you are unlikely to find on the BSE or NSE Web sites. For instance, you can figure out the extent to which a company is able to fund its expansion plans on the strength of its current operations by looking at its cash flow statements.

The schedules to accounts provide break-ups of income, expenditure and other items. For instance, you may want to know what components constitute "other income", particularly if it has been a significant contributor to profits that year. The item-wise split-up of the components classified under other income will help you decipher how much of the non-operational income is recurring in nature. You are also provided with segmental information — both geographic and business.

Similarly, schedules elaborate on balance sheet items such as long-term and short-term loans. For retailing companies, for instance, inventory management is crucial and you may have to compare the inventory positions over a three-year period to understand how efficiently the retailer manages its stores. Or for cash-rich companies, the quality of their investment book may well play a role in valuations.

The annual report also discloses the financial information of the company's subsidiaries, besides providing financials on a consolidated basis.

As new, high-growth ventures are typically routed through subsidiaries, companies are beginning to command valuations based on their consolidated numbers.

Be sure to look at the notes to accounts to understand the accounting treatment of various revenue and expenditure items. Those who are unfamiliar with accounting practices can make-do with looking for changes in accounting policies . This might tip you off on the impact of one-time earnings or expenses.

Also look for the auditor's qualifications to accounts for any assumptions that have been made while preparing or auditing accounts.

Nooks and corners

The annual report also contains little nuggets of information that could provide you with additional insight into the company.

Management background: For instance, you can find brief profiles about the directors on the board of the company. The presence of directors with strong industry standing lends credibility to the management of the company.

The shareholding pattern of the company will reveal the extent of promoter holding and the extent of institutional interest in the company.

Production and utilisation figures: For manufacturing concerns, the production figures assume significance. The production as a proportion of installed capacity (utilisation) could give you an idea of the efficiency at which the compan y is operating and the headroom for further volume growth. This information is particularly pertinent if the company is planning further expansion.

IPO proceeds utilisation: For newly listed companies, the progress on the expansion plans that had been outlined in the offer document and the utilisation of the IPO proceeds are also disclosed in the annual report.

Notices to resolutions: Some special resolutions passed at the annual board meeting also merit attention. For instance, resolutions passed to increase borrowing limits are cues to the company's desire to leverage its balance shee t.

Explanations are also available on why the resolution has been mooted. For example, Colgate Palmolive India's latest annual report explains the reasons for its declaration of a special dividend and a capital reduction.

This list is far from exhaustive. Going through all this might mean a lot of time and work. But it does make your information more authentic than the tip from your broker friend or the analyst on TV.

Explaination of Rights Offerings

Here is the nice explanation on Rights Issue picked from a website

Rights Offerings

An often overlooked means of raising new capital is through a rights offerings or rights issuance. Rights issues occur when a firm sells new shares to those investors who have "rights." Rights give their holders the right to buy the new shares at the subscription price. To see how these work, an example is necessary.

The first step is to determine how much the firm needs to raise. For our example suppose a firm needs to raise $50 million dollars. Currently they have 22 million shares outstanding at a price of $25 a share. The next step is to determine a subscription price. The subscription price is the price at which the rights holders purchase the new shares. In this case let the subscription price be $15/share.

In the United States it is common to give a right for each share. So there will be 22 million rights granted. How many shares must you sell?

Number of new shares = (Amount you need to raise) / (subscription price)

So in this case:

$50,000,000/$15=3,333,334 new shares

How many rights will be needed to buy a single new share?

(Number of rights granted) / (Number of shares being sold)

22,000,000 / 3,333,334

6.6 rights / new share

The next logical question is what each right is worth. Unfortunately that is not quite as easy to answer. The first thing that must be done is to calculate the price of the stock after the issue and after the new shares have been sold. To do this we make some assumptions. Notably we assume that the everyone will exercise their rights (we can relax this later but it is generally a very good assumption), and more importantly that the investment opportunities will not change and further that the rights issuance does not change the operations of the firm. If this is true, then pricing is quite simple:

Overall equity value after issuance = Equity value before issuance + amount raised

= (shares * Price) + amount raised

= 22,000,000* $25 + $50,000,000

= $600,000,000



Total number of shares (post issuance)

Number of shares outstanding before the issuance + new shares issued

22,000,000 + 3,333,334

25,333,334

Price per share = new total market value / new number of shares

= $600,000,000 / 25,333,334

= $23.68

Now we can calculate the value of each right.

New price = subscription price + [(number of rights needed) * ( value of each right)]

$ 23.68 = $15.00 + [( 6.6) * (value of each right)]

Solve for the value of each right

Right = $1.315

Note that ex-right price plus value of right = old stock price.

23.68 + 1.315 = 24.995= $25.00

This can also be found by

Right price = (Old price - subscription price) / (number of rights per new share + 1)

=($25.00 - 15.00) / (6.6 + 1)

=($10.00)/(7.6)

= $1.315

If these rights are deemed as transferable, they can be sold on the secondary market. Most rights offerings involve transferable rights.


Link where we can get some more information
http://tutor2u.net/business/finance/finance_sources_equity_rights.asp

Explanation of Debentures

Company Account: Issue of Debentures Q.1. What do you mean by the term 'Debenture'? What are the kinds of Debentures? Answer: When a company desires to borrow a considerable sum of money for its expansion, it invites the general public to subscribe to its debentures. A debenture is a certificate issued by the company acknowledging the debt due by it to its holders and is issued by means of a prospectus in the same manner as shares. Kinds of Debentures: The following are the various types of debentures issued by a company: Security Point of View Secured Debentures Fixed Charge: A fixed charge is created on certain specified assets generally immovable such as land and building, plant and machinery, long term investments and the like. So it is equivalent to mortgage. When the charge is fixed, the company can only deal with the property subject to the charge, that is, a fixed charge allows the company to retain possession of the assets but prevents the company from selling, leasing etc., of the assets without the consent of the charge holders. The property identified remains so identified during the period for which the charge is created. Floating Charge: A floating charge is generally in respect of movables, that is, properties which are constantly changing. It does not amount to mortgage of property. A charge on the stock-in-trade from time to time of a business is a floating charge. When an item is sold out of the stock, the charge ceases to attach to it and the buyer cannot be asked to pay the debt. When a new item is added to it the charge automatically attaches to it without further new agreement. So the property is certainly identified at the time of creation of charge; its very identification goes on changing and the final identification is at the point of time when the charge crystallizes or becomes fixed after which the company can mortgage or sell that property subject the charge. The charge will continue to attach only so long as the item remains unsold. Unsecured Debentures: When debentures are issued without any charge or security, they are termed as unsecured or naked debentures. Holders of unsecured debentures are ordinary unsecured creditors and do not enjoy any special rights. Tenure Point of View Redeemable Debentures: Such debentures are redeemable at par or premium after the expiry of a particular period or under a system of periodical drawings. Perpetual Debentures: Debentures may be made irredeemable or in other words perpetual. Such debentures are redeemable either on the happening of a contingency or when the company is wound up or when the company decides to redeem. Mode of Redemption Point of View Convertible Debentures: Debentures may be convertible into equity or preference shares of the company on certain dates or during certain periods on the basis of an agreement between company and debenture holders. Fully Convertible Debentures: When the full amount of debentures is converted into shares of the company at agreed terms and conditions. The conversion is to be made at or after 18 months from the date of allotment but before 36 months. Partly Convertible Debentures: When only a part of the amount of debentures is convertible into shares at a specified time and remaining part of debenture is redeemable on agreed terms. Non-Convertible Debentures: Such debentures are not convertible into equity or preference shares. Coupon Rate Point of View: Usually the debentures are issued with a specified rate of interest, which is called as coupon rate. The specified rate may either be fixed or floating. The floating interest rate is usually tagged with the bank rate and yield on Treasury bond plus a reward for risk. Since the bank rate and yield on treasury securities keep on fluctuating over a period of time any change is compensated in the risk premium. The rate of interest in such a case is quoted as "PLR + 50 basis points". In this case if it is assume a PLR of 9% the rate of interest would 9.5%. The "+ basis points" is determined in relation to risk involved. A zero coupon bond is one which does not carry a specified rate of interest. In order to compensate the investors such bonds are then issued at a substantial discount. The difference between the face value and issue price is the total amount of interest related to the duration of the bond. In order to calculate the periodic charge of interest, the amount is calculated by using the following formula: BO = MV/(1+ i)n Where BO = Value of zero coupon bond. MV = Maturity value of zero coupon bond. n = Life of zero coupon bond. i = Required rate of return. In the above formula the value of (1 +i)n is easily computed by dividing issue price in the maturity value of the bond. To find out the interest rate applicable to such bonds, we need to look for present value interest factor tables across the period equal to 'n' and find out the value near the above computed value. The interest rate in that column will be the interest on bonds. Thus, if we know the interest rate, years to maturity and the issue price, then the maturity value can be computed. In the same manner, if interest rate, years to maturity and maturity value are known, then the issue price can be computed. Present value interest factor for i rate of interest and 'n' years is written as PVIF,i.n and are given in present value of Re. 1 table shown in the appendix. BO = MV x PVIF,i,n MV= BO/PVIF, i. n PVIFi.n = BO/ MV Q.2. Briefly explain the following concepts: Debentures Bond Charge Debenture Stock Answer: 1. Debentures: The word 'Debenture' is used to signify the acknowledgement of a debt, given under the seal of the company and containing a contract for the repayment of the principal sum at a specified date and for the payment of interest (usually half yearly) at a fixed rate until the principal sum is repaid and it may or may not give a charge on the assets of the company as security for the loan. Section 2 (12) of the Companies Act states that "a debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not". 2. Bond: Bond is similar to that of debenture both in terms of contents and texture. Traditionally government issued the bonds, but now these are also issued by semi-government and non-government organizations. The significant difference between bonds and debentures is with respect to the issue condition i.e., bonds can be issued without predetermined rte of interest. 3. Charge: A charge is created on certain specified assets generally immovable such as land and building, plant and machinery, long term investments and the like. So it is equivalent to mortgage. When the charge is fixed, the company can only deal with the property subject to the charge, that is, a fixed charge allows the company to retain possession of the assets but prevents the company from selling, leasing etc., of the assets without the consent of the charge holders. The property identified remains so identified during the period for which the charge is created. 4. Debenture Stock: Debenture stock is a document representing the loan capital of the company consolidated into one single composite debt which may be divided into the transferable in convenient units of fixed amount. This sum may be of any amount and may include fraction of a rupee. Certificates are issued to each debenture stockholder indicating the amount of his contribution or holding. The debenture stock must be fully paid. Debenture is always for a fixed sum and is transferable only in its entirety by a debenture stock may be the consideration of the several debenture amounts and a single certificate issued covering many debenture. Similarly debenture stock may be transferable in parts if articles so permit. Q.3. Distinguish between Shares and Debentures. Answer: Basis of Difference Shares Debentures 1. Capital A share is a part of equity or preference share capital of a company. The holders of the shares may be described as part owner of the company. A debenture is a part of loan capital of the company. The holder of a debenture is the creditor of the company. 2. Return Return on share is known as dividend. A company declares dividend only when there are profits and its rate may vary from year to year. Return on a debenture is known as interest and the company compulsorily pays it at a fixed rate whether there are profits or losses. 3. Appropriation Dividend is an appropriation of profit and is therefore debited in Profit & Loss Appropriation Account. Interest on debenture is a charge against profits and is therefore debited in Profit & Loss Account. 4. Charge on Property Shares do not create any charge on the assets of the company. Debentures create a charge on the asset of the company. 5. Redemption Normally the share capital is not returned during the lifetime of the company. The amount of debentures has to be returned after a stipulated period of time as per the conditions of issue. 6. Discount on Issue Shares can be issued at discount only when the conditions lay down in Section 79 of the Companies Act 1956 are fulfilled. There are no restrictions on issue of debentures at a discount. 7. Premium on Issue The premium received on issue of shares can be utilised by the company subject to the conditions given in Section 78 of the Companies Act 1956. Premium received on issue of debentures can be utilised by company in any manner it likes. 8. Purchase A company cannot purchase its own shares A company can purchase own debentures from the open market. 9. Convertibility Shares cannot be converted into debentures. Debentures can be converted into shares according to the conditions of issue of debentures. 10. Control A shareholder has the right to control the affairs of the company by exercising his right to attend the general meeting of the company and by exercising his voting right. A debenture holder does not have any right to control the affairs of the company. 11. Winding up At the time of winding up the shareholders are paid their capital at the end. Debenture holders have a priority as to return of amount received from them in the event of winding up of the company. Q.4. Explain the meaning of debentures issued as collateral security by a company. Show its treatment in the Balance Sheet. Answer: When debentures are issued as security in addition to any other security against a loan or bank overdraft such an issue of debentures is known as issue of debentures as collateral security. The idea of such an issue is that if the company does not repay the loan and the interest and the main security is not sufficient, the bank will be entitled to sell the debentures in the market or the bank may keep the debentures with it. If the company repays the loan, the bank will return the debentures issued as collateral security to the company. No entry needs to be passed in the books of the company because debentures are issued only as a collateral security. Debentures become alive only when loan is not repaid. The fact of such an issue of debentures must be clearly stated in the Balance Sheet by way of a note under the loan and debentures as shown below: Balance Sheet of --- Co. Ltd. As on--- Liabilities Rs. Assets Rs. Secured Loans Bank Loan (secured by issuing 6,000 12% Debentures of Rs. 100 each) 5,00,000 Alternatively, the following entry may be passed in books of the company: Date Particulars L.F. Debit Rs. Credit Rs. Bank A/c Dr. 5,00,000 To Bank Loan A/c 5,00,000 (For loan borrowed from bank) Debentures Suspense A/c Dr. 6,00,000 To 12% Debentures A/c 6,00,000 (For 6,000 Debentures of Rs. 100 each issued as collateral security) Balance Sheet of --- Co. Ltd. as on--- Liabilities Rs. Assets Rs. Secured Loans Miscellaneous Expenditures Bank Loan 5,00,000 Debentures Suspense A/c 6,00,000 12% Debentures (6,000 12% Debentures of Rs. 100 each issued as collateral security) 6,00,000 Q.5. Briefly explain the meaning of Trust Deed. Who can be a Trustee? What the duties of a Trustee? Answer: When a series of debentures are issued to numerous debenture holders, it is not a practical proposition to create a number of separate charges on the properties of the company in favour of individual debenture holders. And it is practically impossible for the debenture holders also to keep a watch on the assets of the company in order to safeguard their own interests. It is thus becomes necessary to execute trust deed by which properties of the company are charged by way of mortgage to the trustees. A trust deed is therefore a contract between the company and the trustees for the debenture holders. Generally trust deed has to be executed before the debentures are offered for public subscriptions so that the prospective investors may satisfy themselves as to the contents of the trust deed and credibility of the trustees selected by the company to look after their interest. A trust deed is also a mortgage deed between the company and the trustees for debenture holders. The debenture holders are merely beneficiaries under the trust deed. Section 118 of the Companies Act gives the right to obtain the copies and inspect trust deed by any member of the company. The advantages of creating a trust deed are: The trustees can act expeditiously and effectively in safeguard interests of the debenture holders and enforcing the security on their behalf. They will act as watchdogs in seeing and insisting that company's obligations under the trust deed are carried out properly. They are generally empowered to settle and adjust matters of dispute with the company. In cases of doubt or difficulty they can convene meetings and enable the debenture holders to meet and discuss and authorize the trustees to pursue any course of action to be beneficial to the debenture holders as a whole. Who can be Trustees? Only the following are eligible to be debenture trustee: A scheduled bank carrying on commercial activity. A public financial institution within the meaning of sections 4A (1) of the Companies Act 1956. Insurance Company. Body Corporate. Who can not be a Trustee? No person can be appointed as a trustee if he: Beneficially holds share in the company. Beneficially entitle to receive money, which are to be paid to/the by the company to the debenture trustee. Has entered into any guarantee in respect of principal debts, secured by debenture or interest thereon. Duties of Trustees Call for periodic reports from the body corporate Take possession of trust property in accordance with the provisions of the trust deed Enforce security in the interest of debenture holders The charge created against the assets under debenture trust deed should be completed within 30 days of the issue of allotment letter and dispatch of debenture certificate. A debenture trustee who fails to comply with any conditions, contravenes any of the provisions of the Act, rules or regulations, the Companies Act or rules made thereunder, may disqualify him to act as trustee.

Thanks
Pradeep Reddy Lekkala