Know Your Rights!!

Where a company’s sources of finance includes either securities convertible into equity shares, or options and warrants which entitle holders to obtain equity shares, such financial instruments increase the likelihood that additional equity shares will be issued in the future. This possible increase in the number of shares is called potential dilution. Case Study: Suppose IStaR Ltd. has 30,000 equity shares outstanding in the market along with INR 100,000 of convertible debentures – that is, bonds that can be converted into equity shares. According to the terms of the debenture agreement, each INR 1,000 face value bond can be exchanged for 300 equity shares. If all the debentures were exchanged, bondholders would receive 30,000 new equity shares. The effect on current equity shareholders would be to dilute their claim to earnings from 100% - when they own all equity shares – to 50% - when they own only half of all outstanding shares. Computed Basic EPS ignore this potential...

EPS is simply profit amount divided by number of shares. Valuing a company as a whole is crucial during merger negotiations, buyouts or in similar arrangements – relatively rare events in the ongoing life of a company. For day-to-day valuations, many analysts prefer to focus on the value of single equity share. Here the earnings per share (EPS) computation helps to know how much of the company’s total earnings accrue to each share. A simple capital structure exists when a company has no convertibles, no options or no warrants outstanding. The simple formula used to compute earnings per share (EPS) is: To illustrate, IStaR Ltd. discloses the following information in the year 2012: January 1 December 31 Equity shares ( ` 1 face value) 160,000 shares issued and outstanding 160,000 200,000 shares issued and outstanding 200,000 Reserves 12,000,000 16,000,000 Retained earni...

While reading through the annual report of one of the listed company (TRF Ltd – A Tata Enterprise) in India my attention was drawn to a small paragraph in the ANNEXURE TO NOTICE - Explanatory Statements pursuant to Section 173(2) of the Companies Act, 1956. Although, the paragraph was concise but it provided enormous information on the company’s profitability. Reasons for loss or inadequate profits: The financial mis-statements were noticed in a particular division for earlier years. This was done by a group of officers who were discharged from the Company and Company has initiated necessary legal proceedings against them. A new team, who had taken charge of the division had reviewed the costs of the projects under execution and corrected the same where ever necessary. Consequently, the Company had to book losses in the division bringing down the overall profits of the Company. This paragraph quite evidently mentions “mis-statements” by group of officers in a division. The compan...