Monday, October 25, 2010

Technical Analysis of IPO?

Technical Analysis is done based on the price-volume behaviour of listed shares. Before an IPO, the shares are not traded in the market. Therefore, one cannot do technical analysis of shares, pre-IPO.

However, during the Coal India IPO, a different kind of technical analysis seemed to be at work - analysis of allotment possibilites. Accordingly, investors invested a multiple of the shares they wanted. The excess application maximises the number of shares that would be allotted to them, under the partial allotment formula in an over-subscribed issue.

Recently, institutions were permitted to invest through ASBA (Application Supported by Blocked Amount). Under ASBA, the money goes out of the investor's bank account only on allotment. The amount that goes out is limited to the value of the shares allotted. This has made the task of putting in excess applications, simpler.

Old timers in the market may recall that about two decades ago, investors had the facility of investing through StockInvest, which was to be backed by money in the bank account of the investor. The facility fell through, after a few banks started issuing StockInvest without the value being backed by money in the bank account of the investor. Let us hope that banks do not adopt the same mal-practice under ASBA.

A few months ago, SEBI stipulated that Foreign institutional investors need to bring in the entire share application money at the time of investment. This, coupled with the excess application scenario, means that the FII inflows (and potential outflows of excess money post-allotment) increase the challenge for RBI in ensuring stability in the foreign currency market. A good example of the law of unintended consequences!

Coal India IPO is a good example of areas for regulaters to watch out for.

Thursday, September 16, 2010

SEBI Chairman's Thought Provoking Points on MFs

Over 200 luminaries were present at SEBI's workshop for Mutual Fund Trustees and Independent Directors of Asset Management Companies yesterday, at Mumbai. SEBI Chairman, Mr. Bhave made a couple of interesting observations:

1. Profits of Asset Management Companies have gone up four-fold since SEBI banned entry loads.

2. People talk of investors withdrawing money from mutual funds - decline of Rs10,000 crore in 1 year. The gross figures are - Addition Rs63K; Reduction Rs73K. If Rs63,000crore of new money came into mutual funds - then taking a saving of 2% (on account of entry load being banned), investors have benefited to the extent of Rs1,260crore. Which other regulatory move has given back Rs1,260 crore to investors in 1 year?

Definitely worth pondering over.

Tuesday, August 24, 2010

Pink Newspapers need to Learn Finance

A leading pink newspaper in India is talking of Mukesh v/s Anil Phase II, and how Anil Agarwal will get more wealthy than Mukesh Ambani based on his acquisition of Cairn Energy.

Let us understand the basics. Does the transaction of buying a share of Cairn Energy make you wealthier? With the investment, money only changes form - from your bank account to investment in Cairn. If financed by a loan, then both your assets (investment) and liabilities (loan) go up, keeping your net wealth (assets minus liabilities) constant.

Your wealth increases as and when the Cairn share appreciates in the market after your share purchase - or if Cairn pays you a dividend. Elementary, Watson.

This episode only highlights the inherent flaw in the various Lists of the Wealthy that publications churn out. They draw conclusions based on measuring the tip of the ice berg viz. listed shares. The long list of items left out - unlisted shares, non-corporate liabilities, bank balances, physical assets like gold, paintings and yachts ...

Sunday, August 8, 2010

The Tata Succession Story

Mr. Ratan Tata has formed a committee of five to decide on his sucessor. He himself is not part of the committee.

Most leaders of family-managed businesses do not go through such a process. They decide on the successor and decision makers around them approve the decision.

On the same vein, Ratan could have had breakfast with Mr. Pallonji Mistry (the other significant shareholder in the group), and decided to appoint Mr. Noel Tata as successor. Noel, for the uninitiated, is cousin of Ratan and son-in-law of Mr. Mistry. He has not had much exposure with any of the major companies in the Tata group.

That Ratan has gone for a committee, speaks well of him. The great JRD did not go for that approach, when he anointed Ratan as his successor. Has Ratan gone far enough along the path of "corporate governance correctness"?

A professional company would appoint a committee of independent directors in such a situation. Who are the five luminaries in Ratan's committee?
1. Mr. NA Soonawalla has been a close associate of Ratan for decades. Can we expect him to do anything that Ratan would not approve of?
2. Mr. RK Krishnakumar too owes his corporate success to Ratan. Another person who is likely to toe the Ratan line.
3. Ms. Shirin Bharucha has been legal adviser to the Tata group for over 5 decades, and involved in many Tata trusts. What's in it for her to go beyond the family to push for an outsider?
4. Mr. Cyrus Mistry is son of the above-mentioned Mr. Mistry. Noel is his brother-in-law.
5. Lord Bhattacharyya, founder of Warwick Manufacturing Group, has been advising Ratan since his early days. He is one person who is likely to express an independent view.

The score is thus 1-4 against any real independent view in the committee. The committee may thus end up becoming Ratan's mouth-piece.

A couple of interesting things have happened in the last few weeks:
1. Talk has started of how Ratan's successor needs to have international expertise. Around the same time, Noel took charge at Tata International.
2. More than a decade ago, R Gopalakrishnan, left Hindustan Lever when he was passed over for the top slot there. It was the rumoured that he may be groomed to take over from Ratan. Gopal has now chosen to step down from the Tata Motors board for "personal reasons". Is he second-time unlucky? Will he step down from more boards when his directorship comes up for re-appointment?

The intention is not to question the credentials of Ratan - or the 5 luminaries in the committee - or Noel. Everyone has built up a name over time. One only wonders whether the committee approach is an eye-wash to give a professional face to a decision that is already taken.

Interestingly, in the 1980s, JRD opted for Ratan after passing over corporate satraps like Mr. Russi Modi (Tata Steel), Mr. Ajit Kerkar (Indian Hotels) and Mr. Darbari Seth (Tata Chemicals). To be fair, Ratan proved his worst critics wrong. (Though, Ratan himself would be wishing he had not become another text book case of leaders making brave, but mistimed, acquisitions towards the end of their reign.)

Will history repeat itself, with Noel following the footsteps of Ratan? The signals will be clearer by March 2011.

Friday, August 6, 2010

Next IPO Scam (Part 2)

In Part 1 of this post, last week, I mentioned about the unusual activity in the newly listed share. Volumes had gone crazy and the share price was jacked up to double the IPO price. I mentioned that the indicaters pointed to circular trading.

The share price has expectedly gone down to below the IPO price. Wonder how many small investors have burnt their fingers. Wonder whether the manipulaters have managed to make their money - or whether greed will make them go for an action replay!

Thursday, August 5, 2010

Global Financial Safety Net

Gov. Kim Choong-soo, South Korea's central banker has called for strengthening of the global financial safety net.

Let us be clear where many of these problems and bailouts originate. Markets, by nature, go up and down. Thus, they throw open possibilities of profits as well as losses.

So long as exposures are "reasonably intelligent" (i.e. not taking exposure to absolute duds), valuation losses can get translated into valuation profits, so long as the person has the holding power. This is the principle on which most bail-outs are based - Long Term Capital Management in the US in the 1990s, Unit Trust of India a few years later, and the most recent bailouts in the US and Europe. Over time, valuation gains in the market address the problem; financiers can be repaid. As a luminary mentioned last year, it is privatisation of profits and nationalisation of losses!

Let us look at the trend.

1. First, there were individuals who chose to speculate beyond their limits (or live beyond their means). Banks who funded them had to take losses. The individuals were effectively bailed out. (There was no other option. Unlike organisations, individuals cannot be liquidated through legal means!)

2. Then, banks (and others) chose to speculate beyond their limits. Governments stepped in to bail them out.

3. Then Governments went beyond their limits - other governments stepped in to bail them out.

As we go higher and higher in the hierarchy of defaulting entities, the problem gets more and more challenging. An individual defaulting can only bruise the lender's balance sheet. A country defaulting can spark a global recession - or worse, depression.

Now, a global finacial safety net, is a message to banks and countries - we are there to bail you out in case of trouble. Will this not promote more greed to benefit from the markets by speculating beyond limits?

Enjoy your profits. If you can't bear the losses, some one in this globalised world will step in to bail you out. Greater the losses, more the chances of being bailed out. You will be TBTF i.e. Too Big To Fail.

Wednesday, August 4, 2010

Telecom Companies to pay Entertainment Tax!

The biggest music company in India is Airtel - thanks to the caller tune downloads.

Maharashtra government seems to be keeping track. They want to charge entertainment tax on the business!

Tuesday, August 3, 2010

Annual Subscription Model for Newspapers

Subscription is an inexpensive way to access magazines. Most regular readers prefer this option, instead of buying it from the news-stands or other regular newspaper vendor.

I always wondered why newspapers don't offer something similar - until Mint offered such a facility at my residence, over the weekend. Annual subscription to Mint for Rs295.

When it comes to magazines, we are prepared to accept a delay of a few days, that is inherent to delivery by the courier. But we want newspapers the same day; we love to read it along with the morning cofffee. Therefore, Mint has included the newspaper vendor as part of the delivery mechanism.

Same delivery mechanism, but at lower cost, means better value for the reader. On the other hand, Mint has an assurance that the reader will not switch, at a time when more "pink" newspapers are set to hit the market.

Smart tactics. Is the Times Group listening?

Monday, August 2, 2010

Mr. Kapil Sibal's Vision for Education

The Hon. Minister for Human Resources Development floored the audience at the Indo- American Summit on Saturday, with his eloquent vision for education. The highlights of his speech:

1. 21st century stands for Science, Solutions and Sustainability. Education is all about sustainable solutions for mankind. For the first time in human history, resources available with nature are perhaps inadequate for sustenance. Solutions can be found through collaboration.

2. Inclusive education agenda is required for inclusive economic growth. If we do not empower 36% of the population with education - the balance 64% of the population will have to subsidise 400mn population. No economy in the world can sustain that kind of subsidy.

3. 220mn children in India go to school. Only 14mn go to college. So, more than 200mn do not go for higher education. No economy can sustain with such numbers. Today we have about 500 universities and 25,000 colleges. Gross Enrolment Ratio of students is 12.4%. If this is to go to 30% by 2020, India needs another 40mn students in colleges - require another 800-1200 universities and another 35,000 - 40,000 colleges.

4. We need expansion, inclusion and quality. 100,000 students going to the US is a bad economic model. Many more cannot afford to go to the US - they may even be better than the ones who can afford. If we look at output per $ investment, the same investment in India will generate a lot more output. This is not a new economic model - it has already been done in manufacturing and services, where the the US have invested in China and India to enhance their competitiveness. In education, it is better to invest the dollar where the human resource is, rather than have the human resource go to where the investment is. Better to set up colleges in India and send faculty to India, rather than expect that 5-10mn people will travel to the US - because they will never be able to afford going to the US.

5. In the US, there are a total of 75,000 engineers. In India, Bangalore alone has 65,000 engineers. This is the rationale for the economic model. Need to view the business opportunity in a new way. Like the couple who came to Mumbai and decided to offer IB program in municipal schools for children of tea vendors. Children of that school are going to Yale and other parts of the world.

6. I cannot give a $100 computer to children. It is not a sustainable solution for India. What is sustainable in west may not work here. A nano car is sustainable here. Empowerment with sustainable solutions calls for such cost-effectiveness in education.

7. Unions in education institutions under colonial rule were part of the freedom struggle. But today, in education institutions, we need unions for empowerment of the minds. Need to change from being obstructive to being constructive.

8. Universities need the freedom and creativity. Need to challenge the past. If some one had not challenged the laws of gravity, we will never have flown.

9. We also need a society that tolerates dissent; a mind that is sensitive.

My comments:
After the minister left, many of the speakers were back to minutae based on blinkered thinking. One young member of the audience rightly asked one of the speakers - if we are the big segment that you are worried about, why don't you get more of us in the education-related committees?

Sunday, August 1, 2010

The Art of Choosing

I really liked this video of about 20 minutes. It discusses the issues of choice in different cultures. The content, as well as the presenter are interesting.

Make sure you watch it till the end. If the hyperlink does not work, copy and paste the web address in your brower.

Friday, July 30, 2010

Dr. Nitin Nohria (Dean, HBS) on India

A galaxy of industry biggies were at the JRD Tata Memorial Oration yesterday. A few interesting points made by Dr. Nohria in his address:
1. The last Century belonged to the US. It was able to do that because American economy / companies kept evolving. GE is the only company that was in the Dow Jones for the whole of the century.
2. Japan had its time in the 80s. But they could not stay there because they did not evolve.
3. In the last decade or so, India's position in the global economy is being recognised. It is tough to get there - it is tougher to stay there. If we become complacent - and think we will get our "rightful" share of the global economy - we will not remain there.
4. Sumantra Ghosal believed that companies need to be good at three things - being cost effective, addressing localised market segments & innovation. (a) In the first decade after liberalisation, Indian companies became cost effective to withstand global competition. Bharti did that through a majorly outsourced telecom model, keeping only key aspects like branding to themselves. (b) In the second decade, companies like Bharti targeted localised market segments - not corporate or urban middle class - but discovered newer markets in rural India. CK Prahalad's fortune at the bottom of pyramid is at work. (c) This decade, companies need to get on to innovation.

My personal comments:
1. Bharti was spoken about - but not Reliance. Remember? This was a JRD Tata Memorial Oration.
2. One hour is too long for reading a prepared speech. Nohria could have engaged with the audience better. But yes, the quality of his thoughts carried the day through. Brilliance was oozing out of the bald pate!

Thursday, July 29, 2010

Next IPO Scam?

New listing. Share price doubles on first day of trading. Trading on first day more than 12 times the shares offered in IPO!
Circular trading to push up prices? Another IPO scam from the same state where the last major one came from?

Wednesday, July 28, 2010

Timing of Price-Sensitive Corporate Announcements

This is the season for quarterly financial results. Most companies are announcing their results during the stock exchange trading hours viz. 9 am to 3.30 pm. The electronic media broadcasts the information immediately; pricing of the stock in the share market is influenced soon after - often based on half-baked information and knee-jerk reactions. Where is the time for a balanced analysis? This is the age of 2-minute noodles and 2-second stock analysis! By the time the information hits the traditional print media the share market has already decided what is good, bad and ugly.

Should companies announce price-sensitive information after the stock exchange trading hours? This would give enough time for balanced analyis, before the stock exchange commences trading the next day. Also, it ensures that stock prices are influenced, not only by the electronic media (with its inclination to sensationalism), but also by the print media.

Reliance Industries was among the few large companies this earnings season, to announce their results after trading hours, yesterday.

Hong Kong and its Economy

Met Raymond Yip of the Hong Kong Trade Development Council yesterday. He mentioned, how, over 90% of their Gross Domestic Product (GDP) comes out of services - one of the highest proportion in the world.
What followed was interesting - they control a big slice of manufacturing through their shareholding in China and other countries. This aspect of manufacturing does not get captured in GDP, which goes on the basis of geographical territory. Gross National Product (GNP), which goes on the basis of ownership, would capture it. Thus, when Tatas own steel operations abroad, the output would be part of GDP of UK, but become part of GNP of India.
With globalisation, companies have their operations spread all over the world. This trend will only increase. Should we consider giving more importance to Gross National Product (GNP), when we evaluate the role of countries?

Me and my Berries

Over the years, many of you kept suggesting that I start a blog. So, dear readers and participants in my programs, here I come.
I propose to share my views on various developments around me - in small bites. You can decide how much you can stomach - like berries. These are my thought berries.
I hope to be regular, but do not have any frequency in mind.
Happy reading. Look forward to hearing from you and making this platform interactive.