1. PENNY STOCKS
SRIDHARAN. A.M.
ADVOCATE

2. TWO KINDS OF SHARES Sec.43 of the Companies Act, 2013 Equity Shares
Preference shares
Preference shares are the ones which enjoys preferential right in relation to payment of dividend and repayment of capital
Notification issued on 05/06/2015 exempts private companies to have different kinds of shares where its Memorandum or Article so provides

3. Equity Shares Equity shares with voting rights or
Equity shares with differential rights as to dividend , voting or otherwise in accordance with such rules as may be prescribed

4. Preference shares Cumulative preference shares
Non-cumulative preference shares
Redeemable preference shares
Irredeemable preference shares
Convertible preference shares
Non-convertible preference shares

5. Listing of securities
A Public company can only list its securities in the stock exchanges
A Private Company is a company which by its Articles prohibits any invitation to the public to subscribe for any securities of the company;

6. Laws Governing the Listing of Securities
Some important laws are:-
Companies Act, 2013
Securities and Exchange Board of India Act, 1992
Securities Contracts (Regulation) Act, 1956
The Depositories Act, 1996
SEBI (Issue of Capital and Disclosure Requirements Regulations), 2009
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
SEBI (SAST) Regulations, 2011
SEBI (Delisting of Equity Shares) Regulations, 2009

7. SEBI (Issue of Capital and Disclosure Requirements Regulations), 2009
a Public issue;
a rights issue, where the aggregate value of specified securities is Rs.50 lakhs or more;
an issue of bonus shares by a listed issuer;
a preferential issue;
a qualified institutions placement by a listed issuer;
an issue of Indian Depository Receipts

8. Public Offer
Initial Public Offer: “IPO” means an offer of specified securities by an unlisted issuer to the public for subscription and includes an offer for sale of specified securities to the public by any existing holders of such securities in an unlisted issuer;
Further Public Offer: “FPO” means an offer of specified securities by a listed issuer to the public for subscription and includes an offer for sale of specified securities to the public by any existing holders of such securities in a listed issuer;

9. Specified Securities
Specified Securities means equity shares and convertible securities

10. Conditions for Public Issue
No issuer shall make a public issue or rights issue of
If the issuer, any of its promoters, promoter group or directors or persons in control of the issuer are debarred from accessing the capital market by the Board;
If the issuer is in default of payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any, for a period of more than 6 months;
Unless it has made an application to one or more recognised stock exchanges for listing of specified securities on such stock exchanges and has chosen one of them as recognised stock exchanges;
Unless it has entered into an agreement with a depository for dematerialisation of specified securities already issued or proposed to be issued;
Unless all existing partly paid up equity shares of the issuer have either been fully paid up or forfeited

11. Conditions for initial public offer
26. (1) An issuer may make an initial public offer, if:
(a) it has net tangible assets of at least three crore rupees in each of the preceding three full years (of twelve months each), of which not more than fifty per cent are held in monetary assets:
Provided that if more than fifty per cent. of the net tangible assets are held in monetary assets, the issuer has made firm commitments to utilise such excess monetary assets in its business or project;
Provided further that the limit of fifty per cent. on monetary assets shall not be applicable in case the public offer is made entirely through an offer for sale

12. Conditions for initial public offer
(b) it has a minimum average pre-tax operating profit of rupees fifteen crore, calculated on a restated and consolidated basis, during the three most profitable years out of the immediately preceding five years.
(c) it has a net worth of at least one crore rupees in each of the preceding three full years (of twelve months each);
(d) the aggregate of the proposed issue and all previous issues made in the same financial year in terms of issue size does not exceed five times its pre-issue net worth as per the audited balance sheet of the preceding financial year;
(e) if it has changed its name within the last one year, at least fifty per cent. of the revenue for the preceding one full year has been earned by it from the activity indicated by the new name

13. Conditions for Initial Public Offer
(2) An issuer not satisfying the condition stipulated in sub-regulation (1) may make an initial public offer if the issue is made through the book-building process and the issuer undertakes to allot, at least seventy five percent of the net offer to public, to qualified institutional buyers and to refund full subscription money if it fails to make the said minimum allotment to qualified institutional buyers.

14. Depository, Depository Participant, Investor, Beneficial Owner Account
A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant.  It also provides services related to transactions in securities.
At present two Depositories viz. National Securities Depository Limited   (NSDL) and Central Depository Services (India) Limited (CDSL) are registered with SEBI.
A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services. Public financial institutions, scheduled commercial banks, foreign banks operating in India with the approval of the Reserve Bank of India, state financial corporations, custodians, stock-brokers, clearing corporations /clearing houses, NBFCs and Registrar to an Issue or Share Transfer Agent complying with the requirements prescribed by SEBI can be registered as DP. Banking services can be availed through a branch whereas depository services can be availed through a DP

15. Some instances of manipulation of public issues
Viswapriya finance and Investments Limited

16. Some basic terminologies
Net worth is the amount by which assets exceed liabilites
Net worth in relation to a company is the amount available to shareholders for distribution
Paid up capital + Reserves and surplus – debit balance in profit & loss account fictitious assets
Intrinsic value of a share: Networth/Number of shares. Also known as book value of a share

17. Earning Per Share
Earning per share is the portion of net profit allocated to a shares
Net profit after tax/Number of shares
Diluted Earning per share: Diluted EPS ascertained by dividing net profit with no. Of outstanding equity shares and convertible preferred shares, convertible debentures,stock options (primarily employee-based) and warrants

18. P/E ratio
Higher P/E Ratio indicates the shares of a company is highly priced in the market;
Assuming the price of a share in market is Rs.320/- and the PE Ratio is 10. Then the Earning per share is Rs.32/-.
PE Ratio and Dividend yield have reverse relationship.
High PE Ratio leads to low dividend yield
Low PE Ratio indicates high dividend yield

19. Penny stocks
Penny stocks are those that trade at a very low price, have very low market capitalisation, are mostly illiquid, and are usually listed on a smaller exchange. Penny stocks in the Indian stock market can have prices below Rs 10. These stocks are very speculative in nature and are considered highly risky because of lack of liquidity, smaller number of shareholders, large bid-ask spreads and limited disclosure of information: The Economic Times
Penny stocks can be described as the stocks which is trading below its face value
SEC in US stocks traded less than US $ 5

20. PENNY STOCKS Why stocks are trading below their face value?
Continuous losses resulting in erosion of net worth

21. PENNY STOCKS
Since the valuation is very low, general public hesitate to invest.
Unscrupulous promoters buy the shares at bottom level
Manipulate the market;
After a year, the share price reaches certain price make their own group companies to buy the said shares so as to convert the black money into white money;

22. PENNY STOCKS
Companies in Steel Sector beaten down because of dumping of steel products by China, South Korea and Japan
Government introduced Minimum Import Price in Feb and anti dumping duty on hot rolled steel products as well as cold rolled steel products

23. PENNY STOCKS
Losses do happen because of mis-management of the Companies by promoters.
Many of the Companies cost of materials consumed have gone up but neither the inventory nor the sales have gone up

24. PENNY STOCKS
Under the Companies Act, 1956 under Schedule VI, the Companies were under obligation to furnish Installed capacity and actual production for the items they manufacture.
Quantitative information of opening stock, closing stock and actual production
Schedule VI was amended in the year 2011 on the recommendations of Malcom Committee

25. PENNY STOCKS
When a company utilises 70% of its installed capacity and is able to sell all its products barring a minimum inventory and shows still loss then there is mis-management
Per contra, a company utilises 30% to 40% of installed capacity and shows profits, then black money is converted into white money
There is a relationship between, installed capacity, actual production, inventory, sundry debtors

26. PENNY STOCKS
When a company has group companies or subsidiary or holding company engaged in the similar line of business, there would be traded goods, (bought or sold to group companies) which invariably used for increasing or decreasing the profits.

27. PENNY STOCKS How to find out manipulation
Cash flow statement for 5 years would reveal to some extent
Cash flow from operating activities
Cash flow from financing activities
Cash flow from investing activities

28. Certain instances of mis-management
Bank Reconciliation Statement
Financial year for 18 months
Hiking the cost of materials consumed
Outsourcing production

29. Thank you
SRIDHARAN. A.M.
ADVOCATE