Financial Markets – The Financial Book

IPO: How to apply?

Continuing inflationary pressure has surged the equity market investment as equity shares deliver higher rate of return as compared to other havens. However, the investors have faced many complexities in understanding the equity market. We have tried to make the concept of equity shares a cakewalk through our YouTube videos, just click on the link to get the elementary knowledge of Equity market:

What is a Share? Why should we invest? (link)

Benefits of owning a share!! (link)

In order to be able to invest in share market in India, the following procedure is need to be followed.

Investor has a choice of timing for investment in equity shares, firstly when the shares are issued to the public to raise capital and secondly when these shares are traded on the stock exchange. The primary objective of investing is to buy the shares at low price and sell at a higher price. If a stock promises potential future growth and is under-priced in comparison to it’s book value during its Initial Public Offering (IPO), then it is most profitable time to buy the stock.

A common investor can apply for an IPO of a company in following procedure:

The first step is to choose the IPO that applicant wishes to apply for. One can find the list of upcoming IPOs on Securities and Exchange Board of India’s (SEBI’s) website. The best way to decide is by going through the companies’ prospectus available on SEBI’s site. The prospectus gives a fair idea about the company’s business plan and its purpose.
After the selection of desired IPO, investor has to ensure sufficient funds in his or her account.
A Demat account is a prerequisite to apply for an IPO. A Demat account is nothing but a facility to store your stocks and financial securities electronically. The account can be opened by submitting your PAN card, Aadhaar card, address and identity proofs.
Now, IPO can be applied through Trading or bank account. Sometimes trading, demat and bank accounts are clubbed together by the banks for better facilities. Applicant needs to bid while applying for shares, as per the lot size mentioned in the prospectus. Lot size is the minimum number of shares applicant has to apply during an IPO.
The company usually sets a price band. The upper limit is known as the cap price while the lower is called floor price. Applicant has to bid for shares in this price range.
When this application is submitted, applicant’s account doesn’t get debited until shares are allotted to him or her. During the IPO process banks are authorized to block the amount of application in applicant’s account as per ASBA (Applications Supported by Blocked Amount, a process developed by the India’s Stock Market Regulator SEBI for applying to IPO).
If the applicant gets full allotment then he will receive a Confirmatory Allotment Note (CAN) within six working days after closure of the IPO process. On the other hand if the applicant gets fewer shares than he had applied for or fails to get allotment then bank will unlock the bid money (in part or full).
Final step is to wait for the listing of shares on stock exchanges, which is done within seven days from the finalization of issue. After the listing investor can either sell the shares (partly or fully) or keep his money invested in that company.

US Markets Falls when Economy is at its Peak, Why? Is it a good time to invest?

In recent times, we have seen biggest correction in the U.S. market since November 2016. On 3^rd Oct 2018, Dow Jones made a life-time high of 26,952 which was appreciated by the President Donald J. Trump in his tweet, “The Stock Market just reached an All-Time High during my Administration for the 102nd Time, a presidential record, by far, for less than two years. So much potential as Trade and Military Deals are completed.” But index couldn’t digest this hike and within a month of its life time high, on 29^th Oct 2018 its slipped more than 11% & made a record low of 24,122. Same goes with other major indices Nasdaq composite and S&P 500. As the market went down, numerous reasons came into lime light, rising bond yields, fears of escalating tensions with China over trade and third time rate hike by Fed. All these factors come into the picture after the incident has taken place. These are news driven factors but what about the economic conditions of the country?

On contrary to the blood bath in the market, the US economic data had shown strong set of numbers during this quarter. Corporate earnings were good, US quarterly GDP growth rate made a high at 3.5%, Unemployment rate was also at its all-time low of 3.7% and Inflation was around 2.3% and the US currency also became strong. This leaves common investor wondering, if the economy is doing well then stock market should also follow the suit. No, not necessarily, before explaining this point we would like to point out that there are two types of information available in the market:

The information for the masses
The information for the classes

For investing in stock market, we need to follow information for the classes, not for the masses. Media will always try to show you the bad picture of everything & will always try to confuse you. “The masses” believe that “if the economy is doing better, so the stock market should also do better too.” But learned investors say “An ‘economist’ is a trained professional paid to guess wrong about the economy.” The Oracle of Omaha, Warren Buffet doesn’t think about the economic numbers while investing in stocks, he always looks for the company growth rates & earnings. There is no correlation between the economy and stock market because former is macro concept and latter is micro. Peter Lynch, famous stock market investor & money manager has said; “If you spend 13 minutes thinking about economic forecast, you’ve wasted 10 minutes.” Now let’s look out the crash of 2008.

In the above chart you can see that in 2008, when market crashed, US economic data showed that economy was doing really well. But in reality, it was in a bubble situation, & finally the bubble burst. After that in 2009, the market was trading at all-time low. There was blood all over wall street, no one wanted to invest in stock market. The Great Recession spread depression & pain among the investors which forced them to dump their stocks. Unemployment came at its highest level and suddenly just after a year of good economic data economy was doing worse. GDP growth rate fell to record low.

But to everyone’s surprise the market went up by 60% in the end of that year itself. Who was buying stocks at that point of time and why? The Insiders were buying at that time, the people who follow information for the classes not for the masses. They are the big shots investors, institutions like Goldman Sachs, J.P. Morgan Chase etc. It’s a fact that only 20 large funds do the world’s 80% trading. They have between 50-100 billion USD under management. These institutions employ the smartest people in the world to analyse the future economic trend because stock market is forward looking and we can anticipate the upcoming economic scenario with stock market reaction. The moment any data is released, the market has already reacted to it. That is why investors like Warren Buffet are always ahead in the game. Hence, the best time to invest in stocks market is when everything is bad. When nobody wants to buy, they buy & vice versa because at that time you can get the shares of really profitable companies at discounted prices. Always remember what the American Oil tycoon, John D. Rockefeller had said, “The way to make money is to buy when blood is running on the streets.”

Data Source: Bloomberg, Investing, CNBC Network.

Fixed Deposits Or Fixed Income: Choose wisely !!!

Debt Market: India

There are two kinds of investors in the market one is risk-taker & other is risk-avoider. The Risk-taker (Aggressive Investor) always makes investment in risky instruments like equity for instance & end up making either huge profits or huge losses. But those who are risk avoiders (Conservative Investors) always choose an option which is least risky. India is a risk averse country especially when it comes to investment and hence most of the investors park their funds in Fixed Deposits due to its least risk feature. But there are various debt instruments which Conservative Investors can opt for, to earn higher returns than FDs.

Before proceeding further let us explain; “What are Debt instruments?”; Debt Instruments are obligation of issuer of such instrument as regards to certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument. Today let’s discuss debt investment opportunities prevailing in India:

Bonds: It is a debt instrument which is simply called “IOU”- I Owe You, in which an investor agrees to lend money to a company or government for a particular period of time in exchange of pre-determined interest rate. Various types of bonds issued in the market are – Government Bonds, Municipal Bonds, Institution Bonds, Corporate Bonds. Each bond has different risk & return involved in it. For example, Government bonds having sovereign rating (backed by Government) have the lowest risk & lowest return. On the other hand, there are corporate bonds which may vary in terms of risk return depending upon financial health of company.
Debentures: These are similar to bonds but they are mostly unsecured loans unlike bonds which are secured & backed by assets of the company. Simply put, debenture is a long-term debt instruments used by Government or large companies to obtain funds which are not secured by the any asset. These instruments are little riskier than bonds as they are not backed by any lien of assets. There are some more differences between bonds & debenture which you can read from our earlier blog; https://financialbook.in/2017/05/09/bonds-vs-debentures-whats-the-difference/
Commercial Papers (CP): CPs are also unsecured money market instruments which are issued in form of promissory notes. These were introduced in India in 1990s & are used for short term borrowings by the companies. Investment is done in denomination of 5 lakhs or more for a duration ranging between 15 to 365 days.
Certificate of Deposits(CD): CDs are financial products usually issued by banks, institutions or Credit Unions. These are regular term deposits often for 3 months, 6 months,1 year & 5 years having fixed interest rates which are usually higher than the rate offered by banks on Fixed deposits.
Government Securities: Commonly these instruments are known as G-secs which are issued by RBI on behalf of Government of India. These include Central G-sec, State G-sec, Treasury Bills. These are mostly issued in face value & do not carry default risk as they are sovereign rated. Maturity ranges from 2 years to 30 years. There is no TDS as well.
National Savings Certificate: NSC is a fixed income long-term investment. It is issued by authorized post offices with a rate of return of 8% for maturity period of 6 years. It needs minimum investment of 500 and there is no maximum limit. Its also qualifies for deduction u/s 80C. There is no TDS also.

These points have already highlighted that investment in debt market is much better than the fixed deposits. So rather than going for FDs investors must evaluate the profits that can be earned from debt instruments without using aggressive investment techniques.

IL&FS: A tale of Bankruptcy & Reincarnation

Another detrimental incident took place in Indian Financial market on Aug 28th when IL&FS, an infrastructure project finance company, defaults on repaying a few hundred crores on their commercial paper but manages to pay the same after 2 days, but later again on month of Sep IL&FS which has borrowed ₹91,000 crores earlier had defaulted in repaying debt on maturity. Speculation of illiquidity created tremendous panic resulting in continuous fall of Indian Indices. Surprisingly, a major loop hole of credit ratings came under scanner of Government as debt instruments of IL&FS were rated as AAA, AA+ etc. in the past couple of months. IL&FS filed an application with the NCLT (National Company Law Tribunal) seeking insolvency cover for itself and 40 other group of companies which was later approved as per Sec 230, Companies Act which will help IL&FS to raise capital from the market & to sell some of its assets for debt repayment. On 30^th Sep 2018, a board meeting took place in IL&FS where Mr Hari Sankaran, VC & MD, IL&FS mentioned few points mentioned below:

Outlines of group restructuring plan in a comprehensive manner.
Appointment of a specialist agency to take the plan forward
To implement asset monetisation plan.

On 1^st Oct 2018, the government took over the control of IL&FS after getting approval from Insolvency & Bankruptcy court in Mumbai. NCLT allowed government to form a new board & asked for a plan to be submitted by 15^th Oct 2018 to get out of the debt trap.

Today, On 4^th Oct 2018, the new board was formed which will be headed by Uday Kotak (CEO & MD of Kotak Mahindra Bank) as Non-executive Chairman, along with five others Girish Chandra Chaturvedi (ICICI Bank Chairman), GN Bajpai (former head of SEBI), Vineet Nayyar (Chief of Tech Mahindra) & Malini Shankar & Nanda Kishore (former IAS Officers). The new board members positions are given below,

Source: Bloomberg

The new board has shown concern over the complexity of 348 IL&FS entities. The quantum of debt obligations by the company is enormous; the board is looking into to all the secured, unsecured and even off-balance sheet financing raised by the company. This will be the first private company to be rescued by the Government since Satyam Computers in 2009. Meanwhile Mr. Kotak has addressed the press:

“We will be talking to shareholders at an appropriate time. The current focus today was much more about operating under NCLT process. At the same time taking more immediate steps which needed urgent attention of a board with an open mind”. – Uday Kotak, Non- Executive Chairman, IL&FS

Revival plan for IL&FS, India’s giant project finance company are on its way by the new board members & we have positive expectations for that.

Source:Bloomberg, Moneycontrol