Equity Research and Portfolio Management

Assignment A
Question 1.(i) Sweat equity is the best form of reward for those who contribute to the growth of
a company. Discuss.
(ii) Why do investor add real estate in their portfolio?
(iii) What are the steps taken by SEBI in the primary market to protect investors?
A.1 (i) Sweat Equity, as the name suggests, is the equity issued in lieu of contribution in terms
of time given, efforts made and services rendered by the employees of the company. It is used
to refer to a form of compensation by businesses to their owners or employees. The term is
sometimes used in partnership agreements where one or more of the partners contribute no
financial capital. In the case of a business startup, employees might, upon
incorporation, receive stock or stock options in return for working for below- market salaries
(or in some cases no salary at all).
The equity that is created in a company or some other asset as a direct result of hard work by
the owner(s)
The Companies Act provides for issue of sweat equity shares to employees and/or directors of
companies on favorable terms in recognition of their work. Sweat equity makes employees
part owners of the company and gives them a share of profit earned.
Thus, it is the most suitable form of reward for those who contribute to the growth of the
company.
However, in India, as per SEBI and DCA regulations, sweat equity shares can be issued only
to employees or directors.
A.1 (ii)
The main aim of an investor, while deciding on a portfolio is to maximize return and minimize
risk of holding an asset. The total return comprises of the periodic receipts plus change in
price of the asset or capital appreciation. The risk in investment is the chance that the realized
return may be less than the expected return.
In case of investment in real estate, the investor receives periodic receipts in the form of
rentals and the property generally appreciates over period of time. Another reason to choose
real estate in portfolio is its ability to serve as an inflation hedge, since the owner can increase
rentals during inflation. Real estate also has the unique ability to reduce risk in the way
properties are leased. Portfolios that have followed a cash flow strategy and decided to lock in
rates in long-term leases have less risk exposure to market movements, but they also have
less inflation-hedging ability.
A.1 (iii)

SEBI has taken various steps and issued guidelines to protect the interest of the investors in
the primary market.
With the objective of boosting investor confidence in the primary market, SEBI brought the
concept of Anchor Investors. This allows an individual or entity to subscribe up to 30% of the
institutional share of an IPO, similar to a pre-placement agreement. Since 50% of an IPO is
typically reserved for institutional investors, this would mean up to 15% of the total offering
could be given to an anchor investor. This would thereby impute confidence to the retail
investors as they see a large investor taking a significant stake in the IPO.
SEBI has recently introduced a new process applicable to retail individual investors popularly
referred to as ASBA (Application Supported by Blocked amount) process. Under this process,
the bid amount is blocked in the investor account at the time of bidding. If and when an
allotment is made, his account will be debited and the money will be remitted to the company.
Therefore, the bid amount remains in his account earning interest during the whole process
period. Investors account will be debited only to the extent of shares allotted, if any, and the
remaining amount will be unblocked. There will be no refund as such and therefore the
investor will not encounter the problems related to non-receipt of refund.
SEBI has increased the IPO card validity from 3 months to 1 year, so that IPO Company can
bring the IPO in the market at a right time (say in a bull trend), This will provide better
opportunity for the investors.
No listed company will be allowed to issue shares with superior voting rights. There could also
be no preferential issues with superior voting rights.