The Hindu Business Line : Stock market tips for dummies

I AM A new entrant to the capital market. I am bursting with a lot of questions relating to capital market like why both NSE and BSE, what is PE, EPS, and so on? - Thiagarajan, e-mail

Perhaps your interest in the capital market has been kindled by the success of Maruti Udyog Ltd's IPO. You may have to refer to one of the numerous lucidly written books on the subject. Capital market is divided to primary and secondary. When a company directly accesses the public, such direct interface with the public happens in the primary market. Once funds are mobilised from the primary market, a company withdraws from the scene. In other words, it has no role in the secondary market except to the extent of recording transfer of shares held in the non-depository mode. In the secondary market, the players are the investors, brokers and speculators. They are brought together by the stock exchange.

You are right. There ought to be only one exchange in a country that is completely wired. NSE members are to be found across the country and they execute orders electronically on behalf of the investors. You may also trade directly over the Net through ICICI direct.com, and so on. Whether you make profit in the secondary market depends on several factors such as the price at which you bought the shares, the performance of the company (fundamentals), the state of the economy, geo-political situation, and so on. It is undoubtedly a high-risk game and one must play his cards well. PE means price-earnings ratio. If the earnings per share (EPS) is Rs 10 on a Rs 10 share and the market price is Rs 200, the PE is said to be 20 times.

Notice of meeting

WHETHER notice of board meeting must be given both to the original as well the alternate director? - G. Rammesh, e-mail

An alternate director vacates office as soon as the original director returns to the State in which the board meetings are ordinarily held. For this reason, it would be advisedly better to serve notice on both so as to avoid commotion in the board meeting. But this would be meaningful only if the original director (normally foreigners) takes pains to collect all the communications addressed to him from his usual Indian address because notice of board meetings have to be served at the usual Indian address in case of directors outside India. This may appear to be contrary to the concept of alternate directorship.

An alternate director is effectively a proxy and does not swell the board strength. Notice is sought to be given only to members of the board. And while the alternate director holds office, the original director is virtually out of the board. But a moment's reflection would show that by simply serving notice on board, a company is not letting both attend the meeting simultaneously.

Home loan

I INTEND purchasing a house in the joint names of self and my major son with ownership rights being 50:50. Can we both take separate loans from the same housing finance company? Can we both claim Section 88 and other benefits under the income-tax law? - R. Doraiswamy, e-mail

Housing finance companies extend loan on the strength of mortgage of the subject property. Therefore there would be one loan but the application can be joint. As far as income-tax law is concerned, you would both be assessed separately for your share of income and the tax benefits too would be available to both of you. This would have the effect of doubling the qualifying amount of Rs 20,000 under Section 88.

Old, new sick

WHAT are the major areas of difference between the earlier and the new regime for dealing with sick industrial companies? - Brij Mohan Prasad, New Delhi

Sceptics dismiss off the new regime as old wine in a new bottle — the earlier separate enactment, SICA, has been made a part of the Companies Act with BIFR being replaced by the National Company Law Tribunal. The truth, however, is that there are a few vital differences, all of which are welcome. Sick industrial companies will not be indulged as earlier — legal proceedings against the property of the company will not come to an automatic halt.

Indeed, this particular feature of the earlier regime made industrial sickness such a sought-after thing. Devious promoters intent on keeping the company creditors at bay happily courted sickness often by manipulating accounts.

The other welcome change is to look for incipient sickness instead of allowing sickness to fester — earlier what was required was 100 per cent erosion of net worth. Now there are two alternative criteria — 50 per cent erosion or failure to repay creditors for three quarters in a row.

Taxed AoPs

WHETHER a member of an association of persons (AoP), which is charged to tax at the maximum marginal rate, can be charged with tax individually? - G. R., e-mail

No. It is only in case of an AoP that pays tax at the rates applicable to individuals that the individual shares are added for rate purposes. Just for rate purposes. You would appreciate that an AoP that is burdened with the maximum marginal rate pays the maximum tax already. Therefore, nothing more can be squeezed either out of it or from its members.

Salary components

WHAT all does salary include to determine whether a person is a specified employee or not? - Prashant, e-mail

For this purpose salary includes salary as computed under the head `salaries' but excluding value of benefits or amenities not provided for by way of monetary payment (to the employee). Thus, it would be the amount remaining after deducting standard deduction under Section 16. And obviously it would not include those monetary payments that are exempt from tax.

Accordingly, voluntary retirement compensation, leave encashment, gratuity and commuted pension will all be included for this purpose to the extent they do not qualify for tax exemption. Uncommuted pension and leave encashed while in service will also be includible since they do not enjoy any tax exemption.

(ASK! Send in your queries on accounting, auditing, corporate law and taxation to ask@thehindu.co.in)

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