The Hindu Business Line : Miles to go before your profits can leap

You have asked a question which merits not a chapter but an entire tome for an answer. Suffice it to say, you must follow the company and industry performance in addition to the stock exchange quotations. Evidently, you have made this investment with a long-term horizon in view. Which makes it all the more important to watch your investment grow.

If the growth prospects get stymied for any reason, you must dispose of the shares without any qualms. Don't develop any emotional or sentimental attachment with any share unless of course you acquired it for a very low price, may be at par.

Sell at every boom and buy at every bottom is a dictate of profound significance. But the million-dollar question is how to identify the crest of peak and the ebb of a bottom. As a rule of thumb however, one must sell when he has had his reasonable target of returns unless he has definite positive information to hold back. When a share is on its irrevocable downhill journey, it would be advisedly better to minimise loss rather than chase the illusory profit.

Does ESOP dilute?

I AM TOLD that employees' stock options are potentially dilutive in the sense that it is destructive of shareholder value. Is this true?

Parijat Dikshit, New Delhi

Well, every new share issued dilutes the earnings per share unless the funds thus raised raise the earnings pari passu. But rights and bonus issues do not hurt the existing shareholders because they retain their inter se stake in the company post issue. But issue to outsiders, such as preferential issue, ESOPs and so on, hurt the existing shareholders in terms of dilution in EPS and net worth.

Under ESOPs, additional shares are typically issued to employees at discount to the market price. In order to stem the dilution resulting from additional issue of shares, the system of shadow options has come into vogue — pay the discount to the employees in cash, which then is treated as employee remuneration.

This serves two purposes — like ESOPs, it rewards employees, but unlike ESOPs, without adding to the share capital of the company, which is what dilutes the EPS and net worth. Employees instead use their discretion whether to buy the company's share from the market or not with the aid of the subsidy received from their employer.

What's CP?

WHAT is commercial paper? Please explain in simple terms. I am a commerce graduate.

Pushpalata, Chennai

Commercial paper (CP) is a promissory note allowed to be issued by rated companies for durations ranging from 30 to 365 days. It is issued at discount to maturity, with the discount reflecting the built-in interest. CP has enabled quite a few well-managed companies to raise working capital finance. Earlier, companies went to banks. In the CP era, it is the other way round. This has tremendous significance. Earlier, the banks dictated terms. Now the companies issuing CP dictate terms. With returns slightly better than from government securities, banks prefer to park their funds in CPs of reputed companies.

Building loan

I BORROWED money to construct my office. The construction took three years and I had to pay interest all these years. What benefit will I get for such interest?

Bhaskar Reddy, Kurnool

When the house is ready and becomes taxable, you would be able to claim the interest paid during the construction period in five equal instalments spanning five assessment years. This is in addition to the interest that you were liable for during the relevant previous year.

Shares to friend

I INTEND to sell some shares to my friend, thus bypassing the stock exchange. Can this be done? The sale price agreed upon is less than the market price. Can this be so?

Saurab Arora, e-mail

It is not compulsory for one to buy or sell only through a recognised stock exchange though it is advisable to do so because of the control exercised over the member-broker by the stock exchange. Should the broker be remiss in making payment or in delivering the shares, the stock exchange will come to the rescue of the buyer/seller.

But since the buyer you have chosen is your friend in whom you have confidence and you are going to receive payment simultaneously on delivery of shares to him, you have nothing to worry. That the price agreed upon is less than the market price is of no consequence unless the AO suspects under-reporting of the true consideration which I believe is not the case.

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

S. Murlidharan

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