Structure of IPO market -2

There is ample room for modifying the current system of book-building which is neither realistic nor reflects investor sentiment towards an IPO. This is an eyewash that does not serve the cause of the larger section of the market.

The IPO market infrastructure should be revamped, including the book building process leveraging the secondary market infrastructure. The listing day volatility can be substantially brought down if the price discovery process is made efficient and the delay between the closing date and the listing date is reduced.

The extreme volatility in a newly listed stock is mostly the creation of retail investors and speculators.

Since that is the case, the book building process should cover the responses from retail investors also to arrive at a price that truly reflects the market sentiment. The current practice of consulting only Qualified Institutional Buyers (QIBs) for the price discovery of an IPO is thus not realistic.

Structure of IPO market -1

The price band for an IPO need not always be the right remedy to bring down high volatility on the day of the listing, as well as on the few days thereafter. One needs to look at the structure of the IPO market in its totality to solve the issue on a long-term basis.

First and foremost, all institutional investors should be paying the full amount of the application as in the case of a retail investor. This will solve the psychological impact of communication on retail investors being associated with the number of times an issue is oversubscribed.

Then one could assume that it is all risk capital that is invested in the IPO and that it is fully paid on the part of the investors. In such a scenario, there is probably a case for using the stock exchange margining system appropriately, to provide a safe landing situation to an IPO in the secondary market.

Today, the speculators, particularly at the retail level, try to grab a newly listed stock after paying a relatively small margin or through the margin funding route of the stock exchange.

Public Offering Market Booming in India

India's booming initial public offering market is set to grow further in 2008, but issuers need to be more realistic about valuations to ensure the party goes on.
As long as issuers demonstrate more restraint in terms of valuations and pricing expectations, I think deals can get done.
"The challenge is that there is a lot of exuberance in the minds of issuers and that is where correction is required," Companies in India are expected to raise up to $15.8 billion from new listings in 2008, almost twice as much as last year's record $8.3 billion, according to data from Thomson Financial.
The Indian stock market has been on a five-year, record-breaking bull run partly driven by foreign funds attracted by strong domestic economic growth.
Volatility has however picked up, with the index posting intra-day falls of more than 10 per cent on two days last week before rebounding to end a turbulent week down 3 per cent.
Value was beginning to emerge in Indian equities, with the market trading at a price to earnings ratio of about 17 times for the year ending March 2009.
"These are pretty healthy levels and from a longer term point of view, the correction is making markets more robust for the future."
Indian billionaire Anil Ambani's Reliance Power last week raised $3 billion within a minute of opening. The issue, India's biggest initial public offering, attracted bids worth a total $190 billion.
"I think the message from the markets to investors in general, and issuers, is that we have got to make sure there is an element of realism in the middle of exhuberance. Back to basics,"

Get your timing right(part-2)

The past seven years' date-wise trend of the Sensex and major equity funds clearly suggests that between the 23rd of a month and the 2nd of the next month, the Sensex is lower than during the balance period.

The reason, to some extent, can be attributed to the expiry of futures contracts on the last Thursday of each month, which can lead to selling, to close positions in the market.

Once the futures expiry is complete, the market starts consolidating again, inflating the Sensex and NAV values.

We observed the NAV behaviour of four equity funds - HDFC Top 200, Reliance Vision, Pru ICICI Growth and Franklin India Blue-chip. As is evident from the adjacent table, the NAV trend for the mutual funds under observation is similar to the Sensex trend. This indicates that an investor planning to go in for a SIP has to understand the trend and then take the plunge.

The trend in the years prior to '03-04 is similar to that of the Sensex. In all the earlier years from '00-01 to '02-03, investors would have made a saving if they had invested between the 23rd of the month to the 2nd of the next month. So, plan well and make sure to maximise your returns!

HOW DO SIPs WORK?

SIPs work on the premise of rupee cost averaging. Even seasoned investors find it difficult to predict the ups and downs of the stock market. Hence, the best resort is to go in for a disciplined way of buying units on a monthly or quarterly basis.

By doing so, investors can avoid the temptation of timing their investment. 'Market timing' is an activity that is best left to professionals. Moreover, the way to weather market cycles is to invest throughout the cycle, so that the investor automatically ends up buying more units at lower NAVs and lesser units at higher NAVs. Therefore, on a net basis, investors will be able to average out their unit costs over a period of time.

Get your timing right(part-1)

“While going in for a SIP, choose dates during the fag end of the month or very early during the month. This can help you get units at lower NAVs”

The Systematic Investment Plan (SIP) route is often suggested as the best way for retail investors to invest in equity funds. This is because it cuts the element of 'timing' by allowing investors to accumulate units systematically over a period of time.

ET Investor's Guide suggests an even better investment strategy - while going in for the SIP route, choose dates during the fag end of the month or very early during the month. If history is any indication, this method can help investors get units at lower let asset values (NAVs).

In the last six out of seven years, Sensex values, on an average, have been lower during the 23rd of a month to the 2nd of the next month. The situation was no different when a similar study was performed across equity funds.

Normally, there are 3-4 possible entry dates (mostly 1st, 7th, and 10th, 15th, 20th or 25th of a month) that an investor can choose from, to invest in any mutual fund for SIP requirements. Depending on the NAV as of the investment date, the investor is allotted units to his credit. By following the above investment strategy, investors are expected to generate maximum returns over the long term. On an average, investors will get units at a lower NAV than otherwise.
There is a clear trend in the way NAVs of the equity market and equity funds behave during the end of a month, as opposed to their behaviour during the middle of the month.

Read the Fine Print(part-2)

How to Invest

The different modes in which one can invest overseas in stocks, bonds, currencies, commodities, realty, et al include:

1. Direct Foreign Investment

2. Domestic Mutual Funds investing abroad: Sebi registered mutual funds have been cumulatively permitted to make overseas investments of up to $3 billion subject to Sebi guidelines. Further, such mutual funds which were hitherto permitted to invest in equity of listed overseas companies provided the overseas listed company held at least 10% in a company listed in India, have now been permitted to make such investments without the requirement of 10% reciprocal shareholding in a Company listed in India. Currently, only a handful of domestic mutual funds like Franklin Templeton and Principal PNB have launched funds which invest in overseas securities.

3. International Mutual Funds

4. Domestic companies with large foreign business/service exposure (indirect foreign investment)

5. Securities, Brokerage or Fund houses.

Recent Announcements in the Union Budget 2007-2008

The honourable Union finance minister, P Chidambaram, has announced in his Union Budget 2007 -2008 speech that he proposes to converge the different regulations that allow individuals and Indian mutual funds to invest in overseas securities by permitting individuals to invest through Indian mutual funds.

Hence, we may expect some changes/liberalisation in foreign investments norms soon.

Asset Allocation

One needs to carefully do the asset allocation between local and international investment. Although there is no ballpark figure, it all depends upon the risk-return profile of the investor and investment opportunity. However, for a conservative investor, an asset allocation of 5 to 20% towards international investments is fairly reasonable.

Conclusion

Although the Indian stock markets have seen strong growth over the last 3 years, the recent fall indicates that going forward, the growth could slow down. Thus, with the liberalisation of foreign investment norms, investing outside India is (shown become) comparatively easier than before, but before treading into foreign waters, one needs to consider the pros and cons thereof carefully.

Read the Fine Print(part-1)

"Learn about the process & restrictions before you plan to invest abroad"

We've heard the axiom "The world is your investment landscape". With the Reserve Bank gradually liberalizing the provisions relating to foreign investment, let's see how can one really go about investing abroad and what are the crucial factors one needs to consider while investing abroad. Moreover, the Union Budget 2007 -2008 has also made some announcements to enable foreign investments.

Why Invest Abroad?

As the renowned economist Adam Smith said "Never keep all your wealth in the country where you live because anything can happen - and usually does". As per Goldman Sachs, in the next 50 years, Brazil, Russia, India and China - the BRIC economies - could become a much larger force in the world economy. Moreover, some of the European countries have witnessed goods economic/financial progress over the last few years and so have certain USA companies investing in emerging markets. The pros and cons of investing abroad are:

Foreign Investment Restrictions

Investment outside India by residents of India has been restricted since ages due to the lack of foreign exchange reserves. However, with the gradual build-up of foreign exchange reserves, RBI has been constantly relaxing the law relating to foreign investments.
Till recently, RBI permitted resident individuals to:

1. Invest in the following instruments without any upper limit:

a. Equity of listed foreign companies, who in turn have shareholding of at least 10 per cent in companies listed on a recognized Stock Exchange in India as on January 1st of the year of investment, and

b. Rated bonds and fixed income securities provided however the rating should be at least A-I/ AAA by Standard & Poor or P-a/Aaa by Moody's or FI/ AAA by Fitch IBCA etc. for short -term obligations and corresponding ratings for long-term ones.

2. Remit up to $25,000 per calendar year (January to December) for any purpose without any distinction between the transactions being on the current or capital account.

3. Remit up to $5,000 per remitter/donor per annum towards gift and donation each aggregating up to $10,000.

Recently, RBI issued AP (DIR Series) Circular No 24dated December 20,2006, which has enhanced the limit from $25,000 per calendar year to $50,000 per financial year (April to March) for any current/capital account transactions. However, the above revised limit of $50,000 includes remittances towards investments in overseas companies (the requirement of 10% reciprocal shareholding in the listed Indian company by such overseas company has been dispensed with), gift and donation.