CHAPTER-II

INDUSTRY PROFILE

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 1. Evolution

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years
ago. The earliest records of security dealings in India are meager and obscure. The East India
Company was the dominant institution in those days and business in its loan securities used to
be transacted towards the close of the eighteenth century.

By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers
recognized by banks and merchants during 1840 and 1850.

The 1850's witnessed a rapid development of commercial enterprise and brokerage business
attracted many men into the field and by 1860 the number of brokers increased into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States of Europe
was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about
200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began
(for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87).

At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found
a place in a street (now appropriately called as Dalal Street) where they would conveniently
assemble and transact business. In 1887, they formally established in Bombay, the "Native
Share and Stock Brokers' Association" (which is alternatively known as " The Stock Exchange
"). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in
1899. Thus, the Stock Exchange at Bombay was consolidated.

2. Other leading cities in stock market operations

Ahmadabad gained importance next to Bombay with respect to cotton textile industry. After
1880, many mills originated from Ahmadabad and rapidly forged ahead. As new mills were
floated, the need for a Stock Exchange at Ahmadabad was realized and in 1894 the brokers
formed "The Ahmadabad Share and Stock Brokers' Association".

What the cotton textile industry was to Bombay and Ahmadabad, the jute industry was to
Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta. After
the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares, which was
followed by a boom in tea shares in the 1880's and 1890's; and a coal boom between 1904 and
1914. On June 1914, some leading brokers formed "The Calcutta Stock Exchange Association".

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In the beginning of the twentieth century, the industrial revolution was on the way in India with
the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel Company
Limited in 1913, an important stage in industrial advancement under Indian enterprise was
reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally
enjoyed phenomenal prosperity, due to the First World War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning
in its midst, under the name and style of "The Madras Stock Exchange" with 140 members.
However, when boom faded, the number of members stood reduced from 140 to 3, by 1923,
and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where there was a rapid
increase in the number of textile mills and many plantation companies were floated. In 1937, a
stock exchange was once again organized in Madras - Madras Stock Exchange Association
(Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange Limited).

Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the
Punjab Stock Exchange Limited, which was incorporated in 1936.

The Second World War broke out in 1939. It gave a sharp boom which was followed by a
slump. But, in 1943, the situation changed radically, when India was fully mobilized as a supply
base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities, those
dealing in them found in the stock market as the only outlet for their activities. They were
anxious to join the trade and their number was swelled by numerous others. Many new
associations were constituted for the purpose and Stock Exchanges in all parts of the country
were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and
Hyderabad Stock Exchange Limited (1944) were incorporated.

In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the
Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947, amalgamated
into the Delhi Stock Exchnage Association Limited.

3. Post-independence Scenario

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Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was
closed during partition of the country and later migrated to Delhi and merged with Delhi Stock
Exchange.

Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

Most of the other exchanges languished till 1957 when they applied to the Central Government
for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta,
Madras, Ahmadabad, Delhi, Hyderabad and Indore, the well established exchanges, were
recognized under the Act. Some of the members of the other Associations were required to be
admitted by the recognized stock exchanges on a concessional basis, but acting on the principle
of unitary control, all these pseudo stock exchanges were refused recognition by the
Government of India and they thereupon ceased to function.

Thus, during early sixties there were eight recognized stock exchanges in India (mentioned
above). The number virtually remained unchanged, for nearly two decades. During eighties,
however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar
Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange
Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock
Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh
Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989),
Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange
Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently
established exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one
recognized stock exchanges in India excluding the Over The Counter Exchange of India
Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indian stock markets since
independence. It is quite evident from the Table that Indian stock markets have not only grown
just in number of exchanges, but also in number of listed companies and in capital of listed
companies. The remarkable growth after 1985 can be clearly seen from the Table, and this was
due to the favouring government policies towards security market industry.

4. Trading Pattern of the Indian Stock Market

Trading in Indian stock exchanges are limited to listed securities of public limited companies.
They are broadly divided into two categories, namely, specified securities (forward list) and
non-specified securities (cash list). Equity shares of dividend paying, growth-oriented
companies with a paid-up capital of atleast Rs.50 million and a market capitalization of atleast
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Rs.140 million and having more than 20,000 shareholders are, normally, put in the specified
group and the balance in non-specified group.

Two types of transactions can be carried out on the Indian stock exchanges: (a) spot delivery
transactions "for delivery and payment within the time or on the date stipulated when entering
into the contract which shall not be more than 14 days following the date of the contract" : and
(b) forward transactions "delivery and payment can be extended by further period of 14 days
each so that the overall period does not exceed 90 days from the date of the contract". The latter
is permitted only in the case of specified shares. The brokers who carry over the outstandings
pay carry over charges (cantango or backwardation) which are usually determined by the rates
of interest prevailing.

A member broker in an Indian stock exchange can act as an agent, buy and sell securities for his
clients on a commission basis and also can act as a trader or dealer as a principal, buy and sell
securities on his own account and risk, in contrast with the practice prevailing on New York and
London Stock Exchanges, where a member can act as a jobber or a broker only.

The nature of trading on Indian Stock Exchanges are that of age old conventional style of face-
to-face trading with bids and offers being made by open outcry. However, there is a great
amount of effort to modernize the Indian stock exchanges in the very recent times.

5. Over The Counter Exchange of India (OTCEI)

The traditional trading mechanism prevailed in the Indian stock markets gave way to many
functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long
settlement periods and benami transactions, which affected the small investors to a great extent.
To provide improved services to investors, the country's first ringless, scripless, electronic stock
exchange - OTCEI - was created in 1992 by country's premier financial institutions - Unit Trust
of India, Industrial Credit and Investment Corporation of India, Industrial Development Bank of
India, SBI Capital Markets, Industrial Finance Corporation of India, General Insurance
Corporation and its subsidiaries and CanBank Financial Services.

Trading at OTCEI is done over the centres spread across the country. Securities traded on the
OTCEI are classified into:

 Listed Securities - The shares and debentures of the companies listed on the OTC can
be bought or sold at any OTC counter all over the country and they should not be listed
anywhere else

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  Permitted Securities - Certain shares and debentures listed on other exchanges and units
of mutual funds are allowed to be traded

 Initiated debentures - Any equity holding atleast one lakh debentures of a particular
scrip can offer them for trading on the OTC.

OTC has a unique feature of trading compared to other traditional exchanges. That is,
certificates of listed securities and initiated debentures are not traded at OTC. The original
certificate will be safely with the custodian. But, a counter receipt is generated out at the
counter which substitutes the share certificate and is used for all transactions.

In the case of permitted securities, the system is similar to a traditional stock exchange. The
difference is that the delivery and payment procedure will be completed within 14 days.

Compared to the traditional Exchanges, OTC Exchange network has the following advantages:

 OTCEI has widely dispersed trading mechanism across the country which provides
greater liquidity and lesser risk of intermediary charges.

 Greater transparency and accuracy of prices is obtained due to the screen-based

scripless trading.

 Since the exact price of the transaction is shown on the computer screen, the investor
gets to know the exact price at which s/he is trading.

 Faster settlement and transfer process compared to other exchanges.

 In the case of an OTC issue (new issue), the allotment procedure is completed in a
month and trading commences after a month of the issue closure, whereas it takes a
longer period for the same with respect to other exchanges.

Thus, with the superior trading mechanism coupled with information transparency investors are
gradually becoming aware of the manifold advantages of the OTCEI.

With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock
market trading system on par with the international standards. On the basis of the
recommendations of high powered Pherwani Committee, the National Stock Exchange was
incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and Investment
Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations,
selected commercial banks and others.

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Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.

Wholesale debt market operations are similar to money market operations - institutions and
corporate bodies enter into high value transactions in financial instruments such as government
securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc.

There are two kinds of players in NSE:

(a) trading members and

(b) participants.

Recognized members of NSE are called trading members who trade on behalf of themselves
and their clients. Participants include trading members and large players like banks who take
direct settlement responsibility.

Trading at NSE takes place through a fully automated screen-based trading mechanism which
adopts the principle of an order-driven market. Trading members can stay at their offices and
execute the trading, since they are linked through a communication network. The prices at
which the buyer and seller are willing to transact will appear on the screen. When the prices
match the transaction will be completed and a confirmation slip will be printed at the office of
the trading member.

NSE has several advantages over the traditional trading exchanges. They are as follows:

 NSE brings an integrated stock market trading network across the nation.

 Investors can trade at the same price from anywhere in the country since inter-market
operations are streamlined coupled with the countrywide access to the securities.

 Delays in communication, late payments and the malpractice’s prevailing in the

traditional trading mechanism can be done away with greater operational efficiency and
informational transparency in the stock market operations, with the support of total
computerized network.

Unless stock markets provide professionalized service, small investors and foreign investors
will not be interested in capital market operations. And capital market being one of the major
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source of long-term finance for industrial projects, India cannot afford to damage the capital
market path. In this regard NSE gains vital importance in the Indian capital market system.

Preamble

Often, in the economic literature we find the terms ‘development’ and ‘growth’ are used
interchangeably. However, there is a difference. Economic growth refers to the sustained
increase in per capita or total income, while the term economic development implies sustained
structural change, including all the complex effects of economic growth. In other words, growth
is associated with free enterprise, where as development requires some sort of control and
regulation of the forces affecting development. Thus, economic development is a process and
growth is a phenomenon.

Economic planning is very critical for a nation, especially a developing country like India to
take the country in the path of economic development to attain economic growth.

One of the major objective of planning in India is to increase the rate of economic development,
implying that increasing the rate of capital formation by raising the levels of income, saving and
investment. However, increasing the rate of capital formation in India is beset with a number of
difficulties. People are poverty ridden. Their capacity to save is extremely low due to low levels
of income and high propensity to consume. Therefor, the rate of investment is low which leads
to capital deficiency and low productivity. Low productivity means low income and the vicious
circle continues. Thus, to break this 5vicious economic circle, planning is inevitable for India.

The market mechanism works imperfectly in developing nations due to the ignorance and
unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is very
vital. In India, a large portion of the economy is non-monitised; the product, factors of
production, money and capital markets is not organized properly. Thus the prevailing price
mechanism fails to bring about adjustments between aggregate demand and supply of goods and
services. Thus, to improve the economy, market imperfections has to be removed; available
resources has to be mobilized and utilized efficiently; and structural rigidities has to be
overcome. These can be attained only through planning.

In India, capital is scarce; and unemployment and disguised unemployment is prevalent. Thus,
where capital was being scarce and labour being abundant, providing useful employment
opportunities to an increasing labour force is a difficult exercise. Only a centralized planning
model can solve this macro problem of India.

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Further, in a country like India where agricultural dependence is very high, one cannot ignore
this segment in the process of economic development. Therefore, an economic development
model has to consider a balanced approach to link both agriculture and industry and lead for a
paralleled growth. Not to mention, both agriculture and industry cannot develop without
adequate infrastructural facilities which only the state can provide and this is possible only
through a well carved out planning strategy. The government’s role in providing infrastructure
is unavoidable due to the fact that the role of private sector in infrastructural development of
India is very minimal since these infrastructure projects are considered as unprofitable by the
private sector.

Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce the
prevailing income inequalities. This is possible only through planning.

6. Planning History of India

The development of planning in India began prior to the first Five Year Plan of independent
India, long before independence even. The idea of central directions of resources to overcome
persistent poverty gradually, because one of the main policies advocated by nationalists early in
the century. The Congress Party worked out a program for economic advancement during the
1920’s, and 1930’s and by the 1938 they formed a National Planning Committee under the
chairmanship of future Prime Minister Nehru. The Committee had little time to do anything but
prepare programs and reports before the Second World War which put an end to it. But it was
already more than an academic exercise remote from administration. Provisional government
had been elected in 1938, and the Congress Party leaders held positions of responsibility. After
the war, the Interim government of the pre-independence years appointed an Advisory Planning
Board. The Board produced a number of somewhat disconnected Plans itself. But, more
important in the long run, it recommended the appointment of a Planning Commission.

The Planning Commission did not start work properly until 1950. During the first three years of
independent India, the state and economy scarcely had a stable structure at all, while millions of
refugees crossed the newly established borders of India and Pakistan, and while ex-princely
states (over 500 of them) were being merged into India or Pakistan. The Planning Commission
as it now exists, was not set up until the new India had adopted its Constitution in January 1950.

The Planning Commission was set up the following Directive principles :

 To make an assessment of the material, capital and human resources of the country,
including technical personnel, and investigate the possibilities of augmenting such of
these resources as are found to be deficient in relation to the nation’s requirement.
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  To formulate a plan for the most effective and balanced use of the country’s resources.

 Having determined the priorities, to define the stages in which the plan should be
carried out, and propose the allocation of resources for the completion of each stage.

 To indicate the factors which are tending to retard economic development, and
determine the conditions which, in view of the current social and political situation,
should be established for the successful execution of the Plan.

 To determine the nature of the machinery this will be necessary for securing the
successful implementation of each stage of Plan in all its aspects.

 To appraise from time to time the progress achieved in the execution of each stage of
the Plan and recommend the adjustments of policy and measures that such appraisals
may show to be necessary.

 To make such interim or auxiliary recommendations as appear to it to be appropriate

either for facilitating the discharge of the duties assigned to it or on a consideration of
the prevailing economic conditions, current policies, measures and development
programs; or on an examination of such specific problems as may be referred to it for
advice by Central or State Governments.

The long-term general objectives of Indian Planning are as follows:

 Increasing National Income

 Reducing inequalities in the distribution of income and wealth

 Elimination of poverty

 Providing additional employment; and

 Alleviating bottlenecks in the areas of : agricultural production, manufacturing capacity

for producer’s goods and balance of payments.

Economic growth, as the primary objective has remained in focus in all Five Year Plans.
Approximately, economic growth has been targeted at a rate of five per cent per annum. High
priority to economic growth in Indian Plans looks very much justified in view of long period of
stagnation during the British rule

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11
COMPANY PROFILE

Indiabulls is India’s leading Financial and Real Estate Company with a wide presence
throughout India. They ensure convenience and reliability in all their products and services.
Indiabulls has over 640 branches all over India. The customers of Indiabulls are more than
4,50,000 which covers from a wide range of financial services and products from securities,
derivatives trading, depositary services, research & advisory services, consumer secured &
unsecured credit, loan against shares and mortgage & housing finance. The company employs
around 4000 Relationship managers who help the clients to satisfy their customized financial
goals. Indiabulls entered the Real Estate business in the year 2005 with its group of companies.
Large scale projects worth several hundred million dollars are evaluated by them.

Indiabulls Financial Services Ltd is listed on the National Stock Exchange (NSE), Bombay
Stock Exchange (BSE) and Luxembourg Stock Exchange. The market capitalization of
Indiabulls is around USD 2500 million (29thDecember, 2006). Consolidated net worth of the
group is around USD 700 million. Indiabulls and its group companies have attracted USD 500
million of equity capital in Foreign Direct Investment (FDI) since March 2000. Some of the
large shareholders of Indiabulls are the largest financial institutions of the world such as
Fidelity Funds, Goldman Sachs, Merrill Lynch, Morgan Stanley and Farallon Capital.

In middle of 1999, when e-commerce was just about starting in India, Sameer Gehlaut and his
close IIT Delhi friend Rajiv Rattan got together and bought a defunct securities company with a
NSE membership and started offering brokerage services . A Few months later, their friend
Saurabh Mittal also joined them. By December 1999, the company embarked on its journey to
build one of the first online platforms in India for offering internet brokerage services. In
January 2000, the 3 founders incorporated Indiabulls Financial Services and made it as the
flagship company.

In mid 2000, Indiabulls Financial Services received venture capital funding from Mr L.N.
Mittal & Mr Harish Fabiani. In late 2000, Indiabulls Securities, a subsidiary of Indiabulls
Financial Services started offering online brokerage services and simultaneously opened
physical offices across India. By 2003, Indiabulls securities had established a strong pan India
presence and client base through its offices and on the internet.

In September 2004, Indiabulls Financial Services went public with an IPO at Rs 19 a share. In
late 2004, Indiabulls Financial Services started its financing business with consumer loans. In
March 2005, Indiabulls Properties Private Ltd, a subsidiary of Indiabulls Financial Services,

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participated in government auction of Jupiter Mills, a defunct 11 acre textile mill owned by
NTC in Lower Parel, Mumbai. Indiabulls Properties private Ltd won the mill in auction and that
purchase started Indiabulls real estate business. A few months later, Indiabulls Real Estate
company pvt ltd bought Elphinstone mill in Lower Parel, another textile mill auctioned by
NTC.

With real estate business gaining size, Indiabulls Financial Services demerged the real estate
business under Indiabulls Real Estate and each shareholder of Indiabulls Financial Services
received additional share of Indiabulls Real Estate through the demerger. Subsequently,
Indiabulls Financial Services also demerged Indiabulls Securities and each shareholder of
Indiabulls Financial Services also received a share of Indiabulls Securities.

In year 2013, Indiabulls Real Estate incorporated a 140% subsidiary, Indiabulls Power, to build
power plants and started work on building Nashik & Amrawati thermal power plants. Indiabulls
Power went public in September 2013.

Today, Indiabulls Group has a networth of Rs 16,796 Crore & has a strong presence in
important sectors like financial services, power & real estate through independently listed
companies and Indiabulls Group continues its journey of building businesses with strong cash
flows.

MANAGEMENT TEAM

Indiabulls Group

 Mr Rajiv Rattan - Vice Chairman

 Mr Saurabh Mittal - Vice Chairman
 Mr Gagan Banga - Group Spokesperson
 Mr Ashok Kacker - Group President
 Mr Saket Bahuguna - Group CLO
 Mr Ashok Sharma - Group CFO
 Mr Ajit Mittal - Group Director
 Mr Gurbans Singh - Group Director
 Mr Tejinderpal Singh Miglani - Group CIO

Indiabulls Financial Services Limited

 Mr Gagan Banga - CEO

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  Mr Ashwini Kumar Hooda - DMD

Indiabulls Real Estate Limited

 Mr Vipul Bansal - CEO

 Mr Narendra Gehlaut - Joint MD

Indiabulls Power Limited

 Mr Ranjit Gupta - CEO

 Mr Murali Subramanian - COO

Indiabulls Securities Limited

 Mr Divyesh Shah - CEO

 Mr Vijay Babbar – DMD

Indiabulls supports Money life Foundation in Empowering Investors

“Moneylife Foundation” in collaboration with Indiabulls, recently organized an ‘Investor,

Empower Yourself’ seminar, which was held at the lush Town & Country Club at New
Gurgaon, in the National Capital Region (NCR), on Saturday, 7th May 2011. This was the first
occasion for Moneylife Foundation to venture into other territories outside Maharashtra.
Indiabulls played a major role in helping this event happen successfully.

The event witnessed over 300 attendees not only from Gurgaon but also from other parts of
National Capital Region (NCR), Delhi, Allahabad, Ludhiana, Chandigarh & other cities from
northern region of India. The venue was fully packed with eager & curious investors.
“Moneylife Foundation” expressed its gratitude towards helpful team of Indiabulls led by Mr.
Gagan Banga, CEO - Indiabulls Financial Services Ltd, for making this event such a huge
success.

The event started with introductory remarks & guidance by Mr. Gagan Banga, CEO - Indiabulls
Financial Services Ltd. Mr. Veeresh Malik, Consulting Editor, Moneylife, Delhi gave a brief
introduction about Moneylife Foundation.Then audience was guided by Sucheta Dalal, Trustee
- Moneylife Foundation and Managing Editor- Moneylife, on How to be Safe with your money
& Debashis Basu, Trustee - Moneylife Foundation and Editor- Moneylife about How to be
smart with your investments. Mr. Sachin Choudhary, Director & Business Head - Indiabulls

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Housing Finance Ltd, talked about Do's and Don’ts of Housing Mortgages. Ms. Sucheta Dalal
also explained the importance & procedure of Wills & Nominations.

This event helped people in understanding how to become an aware and empowered investor.
The attendees included both finically literate & new investors. They posted number of
intelligent questions which were adequately answered by all the speakers. Empowering today’s
investors by creating awareness and guiding them in taking wise decisions when it comes to
money or investments was the main objective of ‘Investor, Empower Yourself’ seminar. During
the Panel Discussion with the panel members Sucheta Dalal, Debashis Basu & Sachin
Choudhary, quite a few interesting & informative issues regarding Investments were discussed.
Mr. Monu Ratra, National Sales Manager - Indiabulls housing Finance Ltd gave Vote of
Thanks.

This event received many request and suggestions from audience about continuing with such
events all over India so that citizens of India will be more empowered investors & ultimately
nation will benefit from it. There were some requests from audience to telecast further events
live on television & internet so that those who are unable to attend the event will also get the
guidance. The knowledge shared about the investments during the event was well appreciated
by all.

Moneylife Foundation has been instrumental in promoting financial literacy & pro-customer
advocacy in India. Moneylife Foundation has been organizing such events at the Moneylife
Knowledge Centre in Mumbai, and also in various cities across Maharashtra. The Foundation
has completed 15 months of spreading financial literacy & has hosted around 49 speakers and
61 events. Currently, more than 5,000 people are members of the Foundation.

After the seminar, Indiabulls received feedbacks from some attendees congratulating Indiabulls’
team about the success of seminar. Many of the attendees mentioned that they are looking
forward to such seminars in future.

Indiabulls has been participating in such Corporate Social Activities with many other socially
aware groups and trusts & Indiabulls is committed to continue in doing so in future.

THE HUB

The Hub at One Indiabulls Centre at Lower Parel is an intelligently designed business centre in
Mumbai
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In the past few years serviced office industry has been maturing in India and today is a
mainstream occupancy option for businesses of all sizes. Whether a start-up, SME or a multi-
national, companies are now opting for viable alternative to leasing or the outright purchase of
commercial workspace.

Thus managed business centers have emerged as an innovative solution to these workspace
requirements. The Hub at One Indiabulls Centre at Lower Parel is one such intelligently
designed business centre in Mumbai that offers 25,000sqft of fully equipped, serviced
workspace not only suitable for large corporations but also for small businesses and lean team
set ups due to the option of small customized spaces.

The real advantage of The Hub is not just that it is more cost effective but also it offers best
possible working environment by offering conveniences such as advanced security, pantry and
maintenance services including IT and utility bills for electricity, water & HVAC.

What’s more, those moving into The Hub serviced offices enjoy the added benefit of cutting
edge IT and telecom infrastructure, reception and secretarial support, hi-tech meeting rooms and
video conferencing suites as well as business lounge, food courts and state of the art fitness
centre.

Not to forget among various factors that can affect a business and its success and growth, is the
address or the location of the office especially those of newly established enterprises. The Hub
within a world class contemporary business complex located between Nariman Point and
Bandra Kurla Complex and in close proximity to Bandra Worli Sea Link is undeniably in the
finest commercial location in Mumbai’s upcoming central business district- Lower Parel.

Undeniably, The Hub is a new age business centre that provides a very attractive proposition to
businesses of all sizes to help their own business grow and prosper.

Indiabulls CSR Initiative - Drug Access Program for cancer patients in partnership with
Novartis

As part of our deep commitment to social causes, Indiabulls has taken up this noble project
named “Novartis Oncology Access” in partnership with Novartis (manufacturer of drugs) &
Max foundation (NGO). We as the financial partner are helping them assess actual income of
patient & family & based on assessed income; recommend the drugs donation slab as per
approved guidelines & SOP.

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Novartis are the developers & makers of Glivec (Imatinib) - a medication for the treatment of
Ph+ chronic myeloid leukemia (CML) in chronic phase, accelerated phase and blast crisis for
both pediatric and adult patients. This drug is also indicated for adult patients with adjuvant,
unresectable and/or metastatic c-kit / cd-117 gastrointestinal stromal tumors (GIST). Tasigna
(nilotinib) a drug recently launched by Novartis is used as medication for the treatment of Ph+
chronic myeloid leukemia (CML) in chronic phase, accelerated phase and blast crisis for only
adult patients.

NOA program:

The NOA program is a drug access program for to help patients who have been prescribed
Glivec and Tasigna but cannot afford to pay for the entire treatment cost. This program is run
by Novartis along with its partner Physicians- enrolls patient under this program after
diagnosis, The MAX Foundation- independent NGO – Assist patient throughout the program
in completing formalities & procurement of medicines, Indiabulls Financial Services -
independent body for financial evaluation of patient, collection & safekeeping the submitted
documents with confidentiality and C&F outlets – Independent pharmacist, dispenses drugs to
patients & manage drug inventory.

Indiabulls Financial Services: As a NOA partner we are performing task of the local credit
evaluation agency which works as an independent and unbiased body for the financial analysis
and assessment of the patient and family members’ earning capacity to afford medical expenses
on critical disease. The analysis bases on income levels assessment by way of financial
evaluation ,field verification, living standard, personal discussion with patient/ care taker &
guidelines as per standard operating procedure (SOP) which is prepared by Novartis based on
the WHO guidelines for drug donation programs using Business for Social Responsibility’s
(BSR) cost of living index, a well-established international guide often used as eligibility
criteria for determining access to drug assistance programs. Based on the family composite
Income a suitable donation decision is given.

Contractibility

Indiabulls has designated a dedicated Help-Line Number: 022 30491720 that will receive
patient calls during office hours (9:00 a.m. to 6.00 p.m.) so it may handle in-bound calls in
response only to queries regarding the submission of requirements for the NOA. For any
medical or clinical queries, Indiabulls Financial Services refer patients to their treating
physician.

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Businesses

Indiabulls Group is one of the country's leading business houses with business interests in
Power, Financial Services, Real Estate and Infrastructure . Indiabulls Group companies are
listed in Indian and overseas financial markets. The Net worth of the Group is Rs 16,796 Crore
and the total planned capital expenditure of the Group by 2013-14 is Rs 35,000 Crore.

Indiabulls Power is currently developing Thermal Power Projects with an aggregate capacity
of 5400 MW. The first unit is expected to go on stream in May 2012. The net worth of
Indiabulls Power is Rs 3,917 Crore. The company has a total capital expenditure of Rs 27,500
Crore. The company has been assigned 'BBB' rating.

Indiabulls Financial Services is one of India’s leading non-banking finance companies

providing Home Loans, Commercial Vehicle Loans and Secured SME Loans. The company has
a net worth of Rs 4,680 crore with an asset book of over Rs 18,500 Crore. The company has
disbursed loans over Rs 45,000 Crore to over 3,00,000 customers till date. Amongst its financial
services and banking peers, Indiabulls Financial Services ranks amongst the top few companies
both in terms of net worth and capital adequacy. Indiabulls Financial Services has been assigned
‘AA+’ rating and has presence in over 90 cities and towns with a total branch network of 140
branches.

Indiabulls Real Estate is among India's top Real Estate companies with development projects
spread across residential complexes, integrated townships, commercial office complexes, hotels,
malls, Special Economic Zones (SEZs) and infrastructure development. Indiabulls Real Estate
partnered with Farallon Capital Management LLC of USA to bring the first FDI into real estate
in the country. The company has a networth of Rs 7,953 Crore and has purchased prime land,
mostly in the metros and other Tier 1 cities worth Rs 4,000 Crore in government auctions alone.
Indiabulls Real Estate is currently developing 57 million sqft into premium quality, high-end
commercial, residential and retail spaces. The company has been assigned 'A+' rating.

Indiabulls Securities is one of India's leading capital markets companies providing securities
broking and advisory services. Indiabulls Securities also provides depository services, equity
research services and IPO distribution to its clients and offers commodities trading through a
separate company. These services are provided both through on-line and off-line distribution
channels. Indiabulls Securities is a pioneer of on-line securities trading in India. Indiabulls
Securities’ in-house trading platform is one of the fastest and most efficient trading platforms in
the country. Indiabulls Securities has been assigned the highest rating BQ-1 by CRISIL.

18
Indiabulls foundation

India has witnessed an economic transformation over the past two decades, translating into
higher incomes, better educational opportunities, improved infrastructure, a dynamic private
sector, and leadership in the global community. We have much to be proud of.

But we also recognize that we have a long way to go. Over 700 million people live under $2 a
day. Learning levels in schools remain abysmally low, most of our rural population do not have
access to basic health care, regular electricity, clean water, and sanitation. India has some of the
world’s worst statistics on basic development indicators such as malnutrition, infant mortality,
and gender discrimination.

As a society, we are at the confluence of accelerated economic progress and extreme

deprivation, all in the same country, at the same time.

As corporate citizens, we at Indiabulls are conscious of the opportunities and the

responsibility that this confluence presents.

Investments to increase income levels of our poorest people will expand business opportunities
manifold. Investments to improve education, health and skills training will improve the
efficiency of the economy. Protecting our environment will actually lower our costs of doing
business. Providing our youth with gainful employment and a chance to improve their lives will
ensure societal and political stability- setting a strong foundation for economic sustainability.
All of these investments will help create an inclusive society, ensuring a sustainable return to
our shareholders.

The Indiabulls Group is keen to help in building an inclusive and prosperous society and we are
beginning our efforts in this direction through Indiabulls Foundation.

One of the first initiatives of the Foundation is to support the development of rural districts. Our
aim is to support development across multiple domains in a district based approach. Some of
the areas where we want to help are in economic development and skills training, access to
drinking water, school education, public health, agriculture and support to the local government.

Commercial Vehicle Loans

Indiabulls Commercial Vehicle Loans offers commercial auto loans to a variety of business
owners. We are a preferred financer with first time buyers as well as fleet operators providing
commercial vehicle loans with simple documentation and quick results.
19
 The Commercial Vehicle Finance provided by us helps the small and medium
operators to acquire vehicles with minimum hassle and documentation.We provide customized
financing options to suit your needs.Our strength lies in the quick completion of transactions,
long association with transporters and the intimate knowledge of the market and its nuances.Our
finance schemes are easy to understand with no hidden costs.

We assure you a quick, transparent and hassle-free deal.

1. Product Offering

 Finance for new commercial vehicles

 Finance for used vehicles
 Tractor Loans

2. Proposed Finance

 Tyre Funding
 Accidental Funding
 Engine Funding
 Take over loans
 Top up loan on existing loan with us

3. Features of Loan Offering

 Loan for up to 15 years old vehicles.

 The best loan offering in the market – up to 95% for used vehicles & 140% for new
commercial vehicle chassis
 Max tenure of upto 48 months for used vehicles 60 months for new commercial
vehicle chassis
 Max tenure of upto 48 months for used vehicles 60 months for new commercial
vehicle chassis
 Customized loan to suit your needs
 Door Step Services
 Easy Documentation
 Quick & Hassle free services
 Attractive Rate of Interest
 No intermediary or Direct Marketing Agent for loan processing

20
 Organization Structure- Board of Directors:

Senior Vice President

Regional Manager

Branch Manager

Senior Sales Manager

Support System Sales Function

RM/SRM
Back Office Local Compliance

Executive Officer

ARM

Dealer

21
Trading Products of Indiabulls Securities

Indiabulls Securities

Trading Products

Cash Account Intraday Account Margin Trading

Indiabulls Securities provide three products for trading. They are

 Cash Account
 Intraday Account
 Margin Trading (Mantra)

Cash Account: It provides the client to buy 4 times of cash balance in his trading account.

Intraday Product: It provides the client to buy 8 times of his cash balance in the trading
account.

Mantra Account: Also called as margin trading, is a special account to buy on leverage for a
longer duration

22
Indiabulls Financial Services Ltd

Indiabulls Financial Services Ltd. was incorporated in the year 2005.The Auditors of Indiabulls
Financial Services Ltd. are Deloitte, Haskins & Sells. The main activity of this company is in
relation to securities and stock brokerage. It was also responsible for setting up one of India’s
first trading platforms.

The subsidiaries of Indiabulls Financial Services Ltd. include:

 Indiabulls Capital Services Ltd.

 Indiabulls Commodities Pvt. Ltd.
 Indiabulls Credit Services Ltd.
 Indiabulls Finance Co. Pvt. Ltd
 Indiabulls Housing Finance Ltd.
 Indiabulls Insurance Advisors Pvt. Ltd.
 Indiabulls Resources Ltd.
 Indiabulls Securities Ltd.

Projects Pipeline

Projects Launched in Q1 FY 13

1. BLU, Worli, Mumbai – 7‐Star luxury residential complex spread over 14 acres in South
Mumbai with breathtaking sea views

2. IB Golf City, Savroli, MMR – Premium residential township with 18‐hole golf course spread
over 350 acres of greens1 IB City Sonepat Haryana 150 Acres of integrated township with
plotted development commercialY 13

1. City, Sonepat, – development, and group housing

2. IB Enigma II, Sec 144, Gurgaon – Super premium residential complex with Villa’s and high
rise towers spread over 34 acres

3. IB Imperial, Sec 146, Gurgaon – 54 Acres of Integrated township with high end residential
apartments, villa’s, luxury retail and commercial

4. IB Commercial Centre, Sec 149, Gurgaon – Over 5 acres of commercial development on the
Dwarka Expressway

23
5. IB Greens, Chennai – Premium residential township with high rise towers near the IT
corridor spreadover 32 acres

6. IB Mint, Sec 144, Gurgaon – Iconic Commercial tower on the Dwarka Expressway

7. IB Greens, Indore ‐ 15 Acres of Integrated township with high end residential apartments,
retail andcommercial in the heart of the city

8. IB Mega Mall, Agra & Kanpur – Destination mall/multiplex in the heart of the city

The Bankers of Indiabulls Financial Services Ltd. are as follows:

 ABN-Amro Bank
 Andhra Bank
 Bank of Maharashtra
 Bank of Rajasthan Ltd.
 Canara Bank
 Citibank
 Corporation Bank
 Dena Bank
 HDFC Bank Ltd
 HSBC Ltd.
 INDIABULLS Ltd.
 IDBI Ltd
 Industrial Bank Ltd.
 ING Vysya Bank Ltd
 Karnataka Bank
 Punjab National Bank
 State Bank Of India
 Syndicate Bank
 Union Bank Of India
 UTI Bank Ltd.
 INDIABULLS STOCK BROKING Ltd.

24
 CHAPTER-III
LITERATURE REVIEW

3.1 Risk Analysis

3.2 Types of risks
3.3 Measurement of risk
3.4 Return Analysis
3.5 Risk and return Trade off
3.6 Risk-return relationship

25
 Risk Analysis

Risk in investment exists because of the inability to make perfect or accurate forecasts.
Risk in investment is defined as the variability that is likely to occur in future cash flows
from an investment. The greater variability of these cash flows indicates greater risk.
Variance or standard deviation measures the deviation about expected cash flows of each
of the possible cash flows and is known as the absolute measure of risk; while co-
efficient of variation is a relative measure of risk.

For carrying out risk analysis, following methods are used-

Payback [How long will it take to recover the investment]
Certainty equivalent [The amount that will certainly come to you]
Risk adjusted discount rate [Present value i.e. PV of future inflows with discount rate]

However in practice, sensitivity analysis and conservative forecast techniques being

simpler and easier to handle, are used for risk analysis. Sensitivity analysis [a variation of
break even analysis] allows estimating the impact of change in the behavior of critical
variables on the investment cash flows. Conservative forecasts include using short payback
or higher discount rates for discounting cash flows.

Types of risks:

Investment Risks:
Investment risk is related to the probability of earning a low or negative actual return
as compared to the return that is estimated. There are 2 types of investments risks:

26
Stand-alone risk:
This risk is associated with a single asset, meaning that the risk will cease to exist if that
particular asset is not held. The impact of stand alone risk can be mitigated by
diversifying the portfolio.
Stand-alone risk = Market risk + Firm specific
risk Where,

Market risk is a portion of the security's stand-alone risk that cannot be eliminated
trough diversification and it is measured by beta

Firm risk is a portion of a security's stand-alone risk that can be eliminated through
proper diversification

Portfolio risk
This is the risk involved in a certain combination of assets in a portfolio which fails to
deliver the overall objective of the portfolio. Risk can be minimized but cannot be
eliminated, whether the portfolio is balanced or not. A balanced portfolio reduces risk
while a non-balanced portfolio increases risk.

Sources of risks:
Inflation
Business cycle
Interest rates
Management
Business risk
Financial risk

27
 Types of Risk

Unfortunately, the concept of risk is not a simple concept in finance. There are many
different types of risk identified and some types are relatively more or relatively less
important in different situations and applications. In some theoretical models of economic
or financial processes, for example, some types of risks or even all risk may be entirely
eliminated. For the practitioner operating in the real world, however, risk can never be
entirely eliminated. It is ever-present and must be identified and dealt with.

In the study of finance, there are a number of different types of risk has been identified. It
is important to remember, however, that all types of risks exhibit the same positive risk-
return relationship.

Systematic Risk Vs Unsystematic Risk

There is one more way to classify financial risk – is risk will impact whole economy or
particular company or a sector.

Systematic Risk – it is also known as market risk or economic risk or non diversifiable risk
& it impacts full economy or share market. Let’s say if interest rate will increase whole
economy will slow down & there is no way to hide from this impact. As such there is no
way to reduce systematic risk other than investing your money in some other country. Beta
can be helpful in understanding this.

Unsystematic Risk – it affects a small part of economy or sometime even single company.
Bad management or low demand in some particular sector will impact a single company or
a single sector – such risks can be reduced by diversifying once investments. So this is also
called Diversifiable Risk.

28
 Systematic risk

1. Interest Rate Risk

The uncertainty associated with the effects of changes in market interest rates. There are two
types of interest rate risk identified; price risk and reinvestment rate risk. The price risk is
sometimes referred to as maturity risk since the greater the maturity of an investment, the
greater the change in price for a given change in interest rates. Both types of interest rate risks
are important in investments, corporate financial planning, and banking.

Price Risk: The uncertainty associated with potential changes in the price of an
asset caused by changes in interest rate levels and rates of return in the economy.
This risk occurs because changes in interest rates affect changes in discount rates
which, in turn, affect the present value of future cash flows. The relationship is an
inverse relationship. If interest rates (and discount rates) rise, prices fall. The
reverse is also true.

Since interest rates directly affect discount rates and present values of future cash
flows represent underlying economic value, we have the following relationships.

Reinvestment Rate Risk: The uncertainty associated with the impact that
changing interest rates have on available rates of return when reinvesting cash
flows received from an earlier investment. It is a direct or positive relationship.

30
 2. Market risk

This is the risk that the value of a portfolio, either an investment portfolio or a trading
portfolio, will decrease due to the change in market risk factors. The four standard market
risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices:

Equity risk is the risk that stock prices in general (not related to a particular company
or industry) or the implied volatility will change.
Interest rate risk is the risk that interest rates or the implied volatility will change.
Currency risk is the risk that foreign exchange rates or the implied volatility will
change, which affects, for example, the value of an asset held in that currency.

Commodity risk is the risk that commodity prices (e.g. corn, copper, crude oil) or
implied volatility will change.

3. Inflation Risk (Purchasing Power Risk)

Inflation risk is the loss of purchasing power due to the effects of inflation. When inflation
is present, the currency loses its value due to the rising price level in the economy. The
higher the inflation rate, the faster the money loses its value.

31
 Unsystematic risk

1. Business risk

The uncertainty associated with a business firm's operating environment and reflected in
the variability of earnings before interest and taxes (EBIT). Since this earnings measure has
not had financing expenses removed, it reflects the risk associated with business operations
rather than methods of debt financing. This risk is often discussed in General Business
Management courses.

2. Financial risk

The uncertainty brought about by the choice of a firm’s financing methods and reflected
in the variability of earnings before taxes (EBT), a measure of earnings that has been
adjusted for and is influenced by the cost of debt financing. This risk is often discussed
within the context of the Capital Structure topics.

Total Risk

While there are many different types of specific risk, we said earlier that in the most
general sense, risk is the possibility of experiencing an outcome that is different from
what is expected. If we focus on this definition of risk, we can define what is referred to
as total risk. In financial terms, this total risk reflects the variability of returns from some
type of financial investment.

Measures of Total Risk

The standard deviation is often referred to as a "measure of total risk" because it captures the
variation of possible outcomes about the expected value (or mean). In financial asset pricing
theory the Capital Asset Pricing Model (CAPM) separates this "total risk" into two different
types of risk (systematic risk and unsystematic risk). Another related measure of total risk is
the "coefficient of variation" which is calculated as the standard deviation divided by the
expected value. It is often referred to as a scaled measure of total risk or a relative measure of
total risk. The following notes will discuss these concepts in more detail.

32
 Measurement of risks

Statistical measures that are historical predictors of investment risk and volatility and
major components in modern portfolio theory (MPT) . MPT is a standard financial and
academic methodology for assessing the performance of a stock or a stock fund
compared to its benchmark index.
There are five principal risk measures:

Alpha: Measures risk relative to the market or benchmark index

Beta: Measures volatility or systemic risk compared to the market or the benchmark index
R-Squared: Measures the percentage of an investment's movement that are attributable
to movements in its benchmark index
Standard Deviation: Measures how much return on an investment is deviating from
the expected normal or average returns
Sharpe Ratio: An indicator of whether an investment's return is due to smart
investing decisions or a result of excess risk.
Each risk measure is unique in how it measures risk. When comparing two or more
potential investments, an investor should always compare the same risk measures to each
different potential investment to get a relative performance.

33
Definition of 'Beta'
A measure of the volatility, or systematic risk of a security or a portfolio in comparison to
the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that
calculates the expected return of an asset based on its beta and expected market returns.
Also known as "beta coefficient".

Beta is calculated using regression analysis, and you can think of beta as the tendency of
a security's returns to respond to swings in the market. A beta of 1 indicates that the
security's price will move with the market. If beta is less than 1 means that the security
will be less volatile than the market. A beta of greater than 1 indicates that the security's
price will be more volatile than the market. For example, if a stock's beta is 1.2, it's
theoretically 20% more volatile than the market.

Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based
stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but
also posing more risk.

Definition of 'Alpha'
1. A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk)
of a mutual fund and compares its risk-adjusted performance to a benchmark index. The
excess return of the fund relative to the return of the benchmark index is a fund's alpha.
2. The abnormal rate of return on a security or portfolio in excess of what would be
predicted by an equilibrium model like the capital asset pricing model (CAPM).
3. Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-
squared, and the Sharpe ratio. These are all statistical measurements used in modern
portfolio theory (MPT). All of these indicators are intended to help investors determine the
risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent
the value that a portfolio manager adds to or subtracts from a fund's return.
A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%.
Correspondingly, a similar negative alpha would indicate an underperformance of 1%.

4. If a CAPM analysis estimates that a portfolio should earn 10% based on the risk of the
portfolio but the portfolio actually earns 15%, the portfolio's alpha would be 5%. This 5%
is the excess return over what was predicted in the CAPM model.

34
Definition of 'Standard Deviation'

1. A measure of the dispersion of a set of data from its mean. The more spread apart the data,
the higher the deviation. Standard deviation is calculated as the square root of variance.

2. In finance, standard deviation is applied to the annual rate of return of an investment to

measure the investment's volatility. Standard deviation is also known as historical
volatility and is used by investors as a gauge for the amount of expected volatility.

Standard deviation is a statistical measurement that sheds light on historical volatility.

For example, a volatile stock will have a high standard deviation while the deviation of a
stable blue chip stock will be lower. A large dispersion tells us how much the return on
the fund is deviating from the expected normal returns.

Definition of 'R-Squared'

A statistical measure that represents the percentage of a fund or security's movements that
can be explained by movements in a benchmark index. For fixed-income securities, the
benchmark is the T-bill. For equities, the benchmark is the S&P 500.

R-squared values range from 0 to 100. An R-squared of 100 means that all movements of
a security are completely explained by movements in the index. A high R-squared
(between 85 and 100) indicates the fund's performance patterns have been in line with the
index. A fund with a low R-squared (70 or less) doesn't act much like the index.

A higher R-squared value will indicate a more useful beta figure. For example, if a fund
has an R-squared value of close to 100 but has a beta below 1, it is most likely offering
higher risk-adjusted returns. A low R-squared means you should ignore the beta.

When most people think of investments they think of stocks or mutual funds. An
investment is more than this. An investment requires one to set aside an amount today
with the expectation of receiving a larger sum in the future.

35
 Return Analysis

An investment is the current commitment of funds done in the expectation of earning

greater amount in future. Returns are subject to uncertainty or variance Longer the period
of investment, greater will be the returns sought. An investor will also like to ensure that
the returns are greater than the rate of inflation.
An investor will look forward to getting compensated by way of an expected return based
on 3 factors -
Risk involved
Duration of investment [Time value of
money] Expected price levels [Inflation]

The basic rate or time value of money is the real risk free rate [RRFR] which is free of any
risk premium and inflation. This rate generally remains stable; but in the long run there
could be gradual changes in the RRFR depending upon factors such as consumption trends,
economic growth and openness of the economy.
If we include the component of inflation into the RRFR without the risk premium,
such a return will be known as nominal risk free rate [NRFR]
NRFR = ( 1 + RRFR ) * ( 1 + expected rate of inflation ) - 1
Third component is the risk premium that represents all kinds of uncertainties and
is calculated as follows -
Expected return = NRFR + Risk premium.

36
Any investor who lays aside money today expects to get more in return later. How much is
more? Well, the best way to calculate this is to look at your rate of return. In its simplest
form, you would take the ending value of your investment, divide it by your initial
investment, take the n root of it (where n= the number of years you held the investment),
and minus one. Confused? Well, let's give an example.

If I invested $100 for three years and after this period it was worth $150, my rate of
return would be [150/100^ (1/3)]-1=14.47%. Don't worry we'll look at this concept more
when we study present and future values.

Now that you have your rate of return you may be asking, "How much is enough?" Well,
looking at past market history, equities on average returned 10% annually, small caps
12%, bonds 5%, and t-bills around 3-4%. We will ignore all this for now and state the
required return more formally.

Firstly, investors should be compensated for the real interest rate and inflation (note: the
real rate plus inflation=nominal rate). This nominal rate is the rate of return on US
Government bonds. Investors expect at least this when they buy a stock. The reason? A
stock has risk and government bonds don't. If stock does not outperform bonds then
investors will prefer the bonds. The second component of required return is inflation
which is already incorporated into our nominal rate.

Lastly we have a premium for risk. Since investors do not know for sure if their
investment will make them money, they want to be compensated for this additional risk
with additional return.

37
Return on security (single asset) consists of two parts:

Return = dividend + capital gain rate

R = D1 + (P1 – P0) P0

WHERE R = RATE OF RETURN IN YEAR 1

D1 = DIVIDEND PER SHARE IN YEAR 1

P0 = PRICE OF SHARE IN THE BEGINNING OF THE YEAR

P1 = PRICE OF SHARE IN THE END OF THE YEAR

Average rate of return

R = 1 [ R1+R2+……+Rn] n

R =1ΣRtnt=1 Where,

R = average rate of return.

Rt = Realised rates of return in periods 1,2, …..t

n = total no. of periods

Expected rate of return:

It is the weighted average of all possible returns multiplied

by their respective probabilities.

E(R) = R1P1 + R2P2 + ………+ RnPn

E(R) = ΣRiPii Where,

Ri is the outcome i,

Pi is the probability of occurrence of i.

n= No of periods

38
 Risk and return trade off:

Investors make investment with the objective of earning some tangible benefit. This
benefit in financial terminology is termed as return and is a reward for taking a specified
amount of risk.
Risk is defined as the possibility of the actual return being different from the expected
return on an investment over the period of investment. Low risk leads to low returns. For
instance, incase of government securities, while the rate of return is low, the risk of
defaulting is also low. High risks lead to higher potential returns, but may also lead to
higher losses. Long-term returns on stocks are much higher than the returns on
Government securities, but the risk of losing money is also higher.
Rate of return on an investment cal be calculated using the following
formula-Return = (Amount received - Amount invested) / Amount invested
He risk and return trade off says that the potential rises with an increase in risk. An
investor must decide a balance between the desire for the lowest possible risk and highest
possible return.

39
 Risk-Return relationship

By now you should understand that even with the most conservative investments you face
some element of risk. However, not investing your money is also risky. For example,
putting your money under the mattress invites the risk of theft and the loss in purchasing
power if prices of goods and services rise in the economy. When you recognize the
different levels of risk for each type of investment asset, you can better manage the total
risk in your investment portfolio.

A direct correlation exists between risk and return and is illustrated in Figure. The greater
the risk, the greater is the potential return. However, investing in securities with the
greatest return and, therefore, the greatest risk can lead to financial ruin if everything does
not go according to plan.

Risk and Return

Understanding the risks pertaining to the different investments is of little consequence unless
you’re aware of your attitude toward risk. How much risk you can tolerate depends on many
factors, such as the type of person you are, your investment objectives, the dollar amount of
your total assets, the size of your portfolio, and the time horizon for your investments.

40
How nervous are you about your investments? Will you check the prices of your stocks daily?
Can you sleep at night if your stocks decline in price below their acquisition prices? Will you call
your broker every time a stock falls by a point or two? If so, you do not tolerate risk well, and
your portfolio should be geared toward conservative investments that generate income through
capital preservation. The percentage of your portfolio allocated to stocks may be low to zero
depending on your comfort zone. If you are not bothered when your stocks decline in price
because with a long holding period you can wait out the decline, your portfolio of investments
can be designed with a higher percentage of stocks. Figure 2 illustrates the continuum of risk
tolerance.

A wide range of returns is associated with each type of security. For example, the many types of
common stocks, such as blue-chip stocks, growth stocks, income stocks, and speculative stocks, react
differently. Income stocks generally are lower risk and offer returns mainly in the form of dividends,
whereas growth stocks are riskier and usually offer higher returns in the form of capital gains.
Similarly, a broad range of risks and returns can be found for the different types of bonds. You should
be aware of this broad range of risks and returns for the different types of securities so that you can
find an acceptable level of risk for yourself.

Figure 2: Continuum of Risk Tolerance

41
42