Month: December 2012

Best place to invest in 2013

Over the weekend I read Venture Capitalist Brad Feld’s post Ignore Trends and Predictions and thought it was great advice for not only VC investors but others as well.

This is the time when you will see a slew of articles on what to do in 2013, the best places to invest etc. and while all these are well meaning and have some utility in terms of what new products have been introduced in recent years, what has been doing well etc., there isn’t much more to this beyond that .

This is what Brad Feld has to say:

Every year, at this time, I get a flurry of requests for my “predictions for 2013” or “exciting, hot, new trends for 2013 that I’m looking at.”

I respond with “I don’t care about trends and my only prediction is that one day I will die.”

This is usually not a particularly satisfying response to whomever sent me the request. One of two things happen: They either ignore my response and drop me from their prediction request list for whatever article they are writing. Alternatively, they press a little further, usually with something like “c’mon, you’re a venture capitalist — you must have an opinion about what is going to be hot next year.”

Actually, I don’t. I have never been a short term investor, and I don’t think entrepreneurs should be short term thinkers. Creating a company is really hard and it almost always takes a long time. Sure, there are occasional short term success stories — companies founded two years ago that get bought for $1 billion, but these are rarities. Black swans. Things you don’t see in nature and can’t count on.

In an Indian context – it is easy to see how this is applicable. In November last year, I did a post along the same lines (Read: Which is the best place to invest?) in which I compared returns on stock, gold and fixed deposits for the past five years, and showed how differently each asset class behaved every year, and how it was virtually impossible to predict what will happen in the next year.

I have updated the chart with data for 2012, and here’s what it looks like now.

Gold Nifty and FD Returns for the past 6 years

For anyone who remembers how the sentiment was last year, you would remember how nobody said this is the year to buy stocks and certainly no one predicted that stocks will do twice as well as gold in 2012.

Most of the times our prediction about the future is just that it will be more of the past and that is seldom right. The good news however is that you don’t need to make predictions or be right every year, as long as you are right long term with your goals and asset allocation.

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My interview in a book about blogging by Deepak Raj

Deepak Raj who runs the extremely popular blog: BikeAdvice approached me a few months ago as he was writing a book on blogging and wanted to do an interview with me.

He interviewed 4 other popular bloggers from India, and created a mini book called BLOG ROCKSTARS – 5 Bloggers Reveal Their Secrets to Successful Blogging.

The other 4 bloggers he interviewed were:

  1. Shabbir Bhimani – IMTips
  2. Faisal Ali Khan – Motor Beam
  3. Manish Chauhan – JagoInvestor
  4. Raag Vamdatt – RaagVamdatt.com

He had sent all of us a questionnaire which we filled up and sent back to him, and then based on that he asked some follow up questions as well.

Here are a few sample questions that he asked:

  • How do you define the success of a blog?
  • What has been your most effective marketing method so far for bringing new readers?
  • In your opinion, what are the most common mistakes new bloggers make?
  • What is the biggest opportunity that has come your way through blogging?

It was interesting to see that people had a lot of varied answers to the questions and if you are familiar with any of these other blogs then you would know that each of the bloggers have very distinct styles.

Deepak runs a million pageviews per month blog which is huge, and I thought he asked some good very good questions.

If you are interested in blogging, and want to get a glimpse of how bloggers from India have approached this then I believe this book will be useful for you.

This is a digital book that you can buy on Amazon for $2.99 and then read on your Kindle or the Kindle app on your PC, Mac, iPhone or Android phone as well as tablet.

And I’m sure some of you are wondering if I get anything financially from the sale of this book, and the answer is no, I don’t get anything from the book sales.

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Last weekend links of 2012

Sandipan Deb writes a thoughtful piece on the government response to the Delhi rape case.

Ajay Shah writes about how we must go from outrage to action, and though I don’t agree with some points (especially that nothing got done in terms of corruption) – I think this is a very important piece for everyone to read and think about. The comments, specially the one that disagrees with the author are very good as well.

Unfortunately, several rape cases have been reported since the Delhi incident, and they are all so gruesome they give you the chills. Hindu has an article on the incidents, and also what various states are doing to combat them. West Bengal will set up 65 all women police stations, of which 10 have already been set up.

I think we have reached a certain point where change is bound to happen, and I feel that this will be change for the good. For far too long we were suffering from a strange kind of apathy which we’re breaking free from today. Not all change is radical, and not all change needs to be radical, any improvement is welcome, and these protests will ensure that there are some improvements in the way the country works.

On to other subjects, Prof. Jayanth Varma writes how bigger mutual funds from the same family sometimes bail out smaller funds by buying their illiquid shares.

Mahavir Chopra has a post on the room rates of hospitals in big cities.

Hemant has a great post on 7 habits for financial success.

Finally, does the Universe have a purpose?

Enjoy your weekend!

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The CARE IPO pop and a new type of IPO lottery

CARE listed a few days ago, and it was heartening to see that there was a listing pop, and the share did well to close at a 23% premium to its closing price or about Rs. 170 more than it’s offer price of Rs. 750.

The allotment on the CARE IPO was different from the others we have seen previously, and while a lot of retail investors didn’t get anything at all, people who got the allotment, got 20 shares regardless of how many they applied for.

So, you got 20 shares if you applied for 260 shares, and you got 20 shares if you applied for 40 shares.

This is an unusual situation, and it creates a system which leads to a very tempting type of speculation. What happened with the CARE IPO is that by applying for 40 shares, you blocked about Rs. 30,000 and when the shares listed you could have made about Rs. 3,400 by selling the IPO pop. This isn’t bad at all if you can spare that Rs. 30,000 for a couple of weeks or so, and Sunil Srinivasan pointed to me on Twitter that if you use ASBA, you continue to earn interest on that Rs. 30,000 as well.

In the past you have had to block a large amount of money to get the minimum subscription for popular IPOs but with this new method used by SEBI, you now have an incentive to actually apply for a smaller lot during the IPO and then sell it at the pop.

Of course the assumption is that you will have a pop and not have a Bharti Infratel type listing which listed down 13% today. Is it too hard to figure out which ones will be like CARE and which ones like Bharti Infratel? Hindsight is 20/20 of course, but during my reviews on the two IPOs I did mention that Bharti Infratel valuation seems to be on the higher side while CARE has priced its IPO reasonably and I certainly didn’t do any sophisticated analysis, so with the usual risk that goes along with speculation, I’d say  the current system will promote a new type of IPO speculation – bidding across accounts with small lots for certain IPOs and then selling the pop, which is a lot better than what people had to do earlier which was bid for huge lots and get only small amounts of stock.

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Offer For Sale (OFS) – Process Explained

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

A few days ago when the CARE IPO was about to get opened, Rakesh got confused about the “Offer for Sale” process through which the share sale was to happen. He wanted to know whether the procedure to apply for CARE shares was to be same like normal IPO or something different.

To know more about it, TCB asked me to share the process details.

TCB
December 19, 2012 at 7:50 am
Dear Shiv,Can you please give details about the procedure for Offer For Sale (OFS) of Hindustan Copper, ONGC, NMDC etc. ? As you correctly said, this OFS is different from CARE Offer For Sale.I would like to know details like how to apply, how & when to pay, how & when is allotment done, what is the meaning of terminologies like indicative price, during the offer from where can we monitor the quantity and price of bids received etc.Thanks

Here is my attempt to let people understand the Offer for Sale process. Please leave your comments in case I miss something or you find any discrepancy in the post.

Poor economic growth causes poor investment sentiment which results in poor market conditions and thus forces corporates to cost cutting. In another attempt to save some unnecessary costs and to reduce the time taken to raise money, SEBI has introduced a new process called Offer for Sale (OFS).

Offer for Sale is getting really popular with the companies and as many as eight companies, like NMDC, Hindustan Copper, Eros International, Blue Dart, Honeywell Automation etc., have taken this route to either raise money from the markets or to increase non-promoter shareholding in order to comply with the minimum public shareholding guidelines.

What is “Offer for Sale” and can retail investors participate in the process?

Offer for Sale (OFS) is another form of share sale, very much similar to Follow-On Public Offer (FPO). OFS mechanism facilitates the promoters of an already listed company to sell or dilute their existing shareholdings through an exchange based bidding platform.

Except the promoters of the company, all market participants like individuals, mutual funds, foreign institutional investors (FIIs), insurance companies, corporates, other qualified institutional bidders (QIBs), HUFs etc. can bid/participate in the OFS process or buy the shares. The promoters of the company can only participate as the sellers in the process.

OFS Process

First of all, very basic, you need to compulsorily have a demat/trading account(s) and permanent account number (PAN) to participate in an Offer for Sale. The sellers are required to deposit the offered shares with the exchange before 11.00 a.m. on T–1 day, where ‘T’ is the day of OFS.

Once the OFS starts, you can participate in the process yourself using your online trading accounts like ICICI Direct, Kotak Securities etc. by placing your bids under the ‘OFS’ section of their respective broking websites.

Investors, who do not have online trading accounts, can place their bids by directing the dealer of their broking company to do it on their behalf. You can modify or cancel your bids during the offer timings except in the last 60 minutes i.e. till 2:30 p.m.

The exchange will announce the “Indicative Price” only during the last 60 minutes of the OFS. Indicative Price is the volume weighted average price of all the valid/confirmed bids. e.g. There are total 1000 shares in an offer for sale with Rs. 200 as the floor price. If the investors bid for 200 shares at Rs. 210 and 800 shares at Rs. 200, the indicative price for the offer would be [(200*210)+(800*200)]/1000 = Rs. 202.

No leverage is provided to the investors against the stock margin available in the trading accounts and thus, they are required to deposit 100% of the order value in cash to bid for it. Also, the funds allocated for OFS cannot be utilised for other investment purposes or against any other obligation of the trading member.

Once the bidding gets over, allotment price is fixed and allocation is done. The successful bidders will be allotted shares directly into their demat account on T+1 basis the very next day. In case of partial allotment or no allotment, the refunds will be made on the same day itself. This makes the OFS process really fast, just like buying shares of the company from the open market.

During the offer timings or once the offer gets completed, you can monitor the quantity and price of bids received etc. from this link of NSE, like it has the details of the OFS of Eros International Media Limited which got concluded on December 20th.

Allocation Methodology and Contract Notes

The companies can adopt one of the two methodologies for allocating the shares on offer i.e. either on a price-priority basis at multiple clearing prices or on a proportionate basis at a single clearing price.

Like you get the contract notes by the evening of the trading day on which you buy shares of a company, you’ll get a contract note in the same format when you buy shares in an OFS. Contract note will have the details of your bid price and the quantity allotted in the specified format.

What differentiates Offer for Sale (OFS) process from IPOs/FPOs?

Physical Application: Unlike IPOs/FPOs, no physical application forms are issued to apply for shares in the OFS process. OFS process is completely platform based.

Time Period: While IPOs/FPOs remain open for 3-4 days, OFS gets over in a single trading day as the markets gets closed for trading at 3:30 p.m.

Price Band: Under IPOs/FPOs, there is a price band in which the investors need to bid for the shares or simply give their consent to buy the shares at the “Cut-Off” price. With OFS, there is a “Floor Price”. As the name suggests, it is the minimum price at which you can bid for the shares under OFS. You will not be able to place an order below the floor price as it will not be accepted by the system.

Though it is not mandatory to disclose the floor price before the issue opens, the promoters usually disclose it prior to the share sale in almost all of the issues. Alternatively, the promoters can submit the floor price in a sealed envelope to the exchange which will be disclosed post closure of the offer. In case the floor price is not disclosed to the public, the investors can place their bids at any price they want.

Charges: Investors are not required to pay any kind of charges over and above the ‘Fixed Price’ in an IPO or FPO. But, the OFS process involve certain transaction charges including the brokerage, Securities Transaction Tax (STT) and other charges, which the investors normally pay when they buy shares of a company in the cash market.

On the OFS day, normal trading in the shares of the company will continue even when the bidding process is ‘ON’. The investors have the option to either buy the shares of the company in the normal market or place their bids for the shares on sale in the OFS. The investors can place only ‘Limit’ orders under the OFS facility as ‘Market’ orders are not allowed.

OFS process has the following advantages over FPOs/IPOs:

Cost effective: I think this is the biggest reason for the promoters to sell their stake through the OFS route. OFS route involves very less formalities. Unlike IPOs/FPOs, the promoters of the issue under OFS are not required to file Draft Red Herring Prospectus (DRHP). Also, there is no need to get the application forms printed. It also saves big advertisement expenses.

Saves Time: This route involves sale of shares in a single trading day and that too, during the normal trading hours i.e. between 9:15 a.m. and 3:30 p.m. The promoters can announce their intention of share sale even one trading day prior to the opening of the offer.

Transparency: Retail investors have suffered losses in the past due to manipulation in IPO/FPO allotment. OFS process is quite transparent as it is done on real-time basis with a system based bidding platform and involves least amount of paperwork.

Multiple Orders: Under OFS, there is no restriction on number of bids from a single buyer. This facility is not available in FPOs/IPOs.

The formats are changing rapidly. One-day cricket is fast losing its appeal to T-20 matches. Similarly, 3-4 days long FPOs are getting replaced by these single-trading day Offers for Sale. Very few people read the DRHP or printed details on application forms while investing. So, in a way, these OFS will reduce the issue costs to a large extent. But, will the investors be able to make wise investment decisions in these OFS? Just wait and watch.

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Update on New Year Resolution

I’ll be really surprised if anyone still remembers what my New Year resolution for this year was but even if I didn’t carry it out fully, I still did a lot about it this year, and was very glad to have made it.

I did a post last year on New Year Resolutions in which I asked a few people what their New Year resolution would be and also shared my own.

Here is what my new year resolution was:

Zero impulse purchases in 2012.

Now here is how I fared and what I learned from this resolution.

1. Avoided buying a lot of junk: I have had far from zero impulse purchases in 2012 (See also: 5 Factors that cause Impulse Buying), but I did avoid buying a lot of stuff that I would’ve bought in previous years. Just having the thought that you have to avoid impulse purchases helps you unbelievably well. That’s all I did really, just thought about cutting clutter and not buying anything that I wouldn’t need after a few weeks, and the idea helped.

2. Not on impulse but wasteful? A few times I’ve experienced this urge to buy something, and resisted it for a couple of weeks or so, and even then I felt like buying that thing. I’ve usually gone ahead and bought that thing and in my mind it doesn’t count as an impulse, but I’m not so sure if it isn’t wasteful. How many watches should someone own? What type of a car should you own? How many shirts?

I certainly don’t mind these type of expenses, but the focus on impulse has given me a perspective that I didn’t have before, which is what percentage of your wants are frivolous wants and what percentage are justified in order to just function properly in this materialistic society?

3. Grocery and food shopping is when you’re most prone to impulses: You see a bag of chips and you want to buy it, you just have a little ice cream left, and want to replenish the stock, a third type of juice won’t hurt, eggs don’t really expire. In my experience, impulse on food items are just the hardest to control, and are the most wasteful as far as I’m concerned. I haven’t done a good job on them so far, but hope to do so in the coming year by being really conscious about this.

4. Impulse on books didn’t harm me: I’m so used to buying books, getting through them quickly and moving on to the next one quickly that I made an exception to the impulse rule in mind for books. I think that didn’t harm me at all as almost every book I read was worth the time and money and the effort it would have taken me to screen these books before purchase wouldn’t have justified the money or time I saved on them.

5. What about time? I had an epiphany about a month ago when I realized that I was spending so much attention avoiding impulse purchases but what about my impulses that lead to wasted time?

At some point during the last year I started tracking the minutes it took to complete tasks and I was always surprised by how quickly each task got completed in comparison with how long I expected it to take.

For example, posts that I thought would easily take two hours (because they usually do) actually took 45 minutes, and the remaining time was frittered away wastefully by me.  I wish I wasn’t so easily distracted, but in reality I get distracted every few minutes and feel the urge to check Twitter, Facebook, a news site or anything other than the current task at hand. I think this is perhaps the worst habit I’m currently suffering from (among countless others) and I’d like to do something about it.

I’m not quite sure how I will deal with this or measure it but it’s an important thing for me right now, and in 2013, I want to be a lot more productive than I was ever in my life.

Finally, this is the first time I’ve taken a New Year resolution seriously, and I’m amazed at the results. I feel that they must have started off or at least became popular because they were really useful but somewhere along the line became nothing more than pastimes and intentions that are never serious.

But taken seriously, they can benefit you.

Why don’t you give this a try as well? Think of the one thing that you would really like to change this New Year, create a resolution and leave a comment here, writing it down will ensure a lot higher chance of success than just having it in your head.

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New “Basis of Allotment” Explained with CARE IPO

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

CARE IPO, which closed on December 11th, got oversubscribed by 34.11 times. After a very long time an IPO has seen such a good response from all the categories of investors. There was a huge appetite for its shares from Qualified Institutional Investors (QIBs) and Non-Institutional Investors (NII) categories, which saw oversubscription to the tune of 43.31 times and 110.24 times respectively.

Retail investors were a little cautious but some of them got interested to apply for it. This category got oversubscribed by 6.11 times. CARE has now become the third rating agency to get listed after CRISIL and ICRA.

CARE IPO – Explaining Basis of Allotment to Retail Individual Bidders

CARE IPO had total 71,99,700 equity shares on offer in the IPO, at an issue price of Rs. 750 per share. 35% of the offer was available for allocation to the retail individual bidders in accordance with the SEBI Regulations, which makes it 25,19,895 equity shares.

As many of you must be aware, when the investors apply for a company’s shares in an IPO, there is a bid ‘lot’ system. With CARE IPO, the bid lot size was in multiples of 20 shares and the retail investors had the option to apply for a maximum of 13 lots (260 shares) and a minimum of 1 lot (20 shares). So, the minimum investment in the CARE IPO was Rs. 15,000 and Rs. 1,95,000 as the maximum.

In August this year, SEBI announced certain new measures regarding “Basis of Allotment”. Some of the important measures are:

* Every retail participant gets a minimum bid lot irrespective of his application size. This is subject to availability of shares.
* The minimum application size band in an IPO has been increased from Rs. 5,000-7,000 earlier to Rs. 10,000-15,000 now.
* Issuers are now allowed to furnish the price band five working days prior to issue opening date as against the erstwhile two working days.

So, this new system of allotment, which got used in the CARE IPO also, has left many of the retail investors disappointed, including me.

Retail investors have been allotted only 20 shares irrespective of their application size i.e. whether they applied for 20 shares or 260 shares or any number of shares in between, they got only 20 shares allotted. That too, in the ratio of 101:256 i.e. only 101 applicants got these 20 shares out of 256 applicants.

Actually, a total of 3,19,350 retail individual applicants applied for it, in varying number of bid lots i.e. between 1 to 13 bid lots and only 1,25,994 applicants got the shares allotted in the ratio of 101:256.

Allocation to Retail Individual Bidders (after technical rejection)

As you can check the Basis of Allotment in the table above, there were 2,45,680 applicants who applied for 20 shares with each of their applications. Out of these 2,45,680 applicants, 96,929 applicants have been allotted 20 shares each or total of 19,38,580 shares.

2,45,680 * 101/256 = 96,929 * 20 shares = 19,38,580

Similarly,

15,853 * 101/256 = 6,255 * 20 shares = 1,25,100
9,199 * 101/256 = 3,629 * 20 shares = 72,580

and so on.

If you want to check the manual of CARE allotment, you can do so from this link.

I was disappointed as out of my family members’ 4 applications, we got allotted only 20 shares. There have been many investors like me who are disappointed. But, the disappointment in the allotment is primarily due to non-awareness of the new system.

If the new system is analysed deeply, it is not that bad after all. I think the idea is to encourage and favour the small retail investors and also to discourage HNIs to take the retail category route to apply for higher number of shares.

At the same time, it creates uncertainty in the minds of the retail investors whether to apply for an IPO or not, as you never know whether you will fall in those 1,25,994 successful applicants or not.

With the new system in place, the retail investors will have to change their strategy to get maximum number of shares allotted in some popular IPOs like CARE i.e. they should now apply for minimum bid lots in popular IPOs and increase the number of applications using demat accounts of their family members.

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Merry Christmas and Happy New Year

I just wanted to take a break and wish everyone a Merry Christmas and Happy New Year. I hope the coming year is joyful and prosperous for you, and you continue to make good financial decisions .

I also hope that you have benefited from OneMint this past year and it continues to assist you in making better financial decisions going forward as well.

Here is a picture of my bunny with our Christmas tree this year. Enjoy your holidays!

Merry Christmas!

 

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ELSS – Equity Exposure + Tax Savings = Deadly Combination in a ‘Down’ Market

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

A few days back I was watching CNBC-TV18 in the morning when the markets were about to start trading. Udayan Mukherjee and Mitali Mukherjee were talking to Prashant Jain about his expectations from the stock markets in 2013. Let me tell you Prashant Jain is the Chief Investment Officer of HDFC Mutual Fund and the fund manager of two of HDFC MF’s most popular schemes, HDFC Top 200 and HDFC Equity Fund, among others.

Let me also tell you that I try to regularly follow Prashant’s thoughts on investment environment and earnings expectations.

He shared his views that the markets are trading at a forward Price/Earnings (P/E) multiple of 13.5 to 14.5 times, based on the FY14 Sensex earnings per share (EPS) of Rs. 1350 to Rs. 1450, which is below the average P/E multiple of 17 times. As per him, the retail investors always lose money in the stock markets because of their poor timings of entering and exiting the stock markets.

He further said that it is unfortunate but the stock markets always get retail investors’ investments when the P/E multiples are on a higher side, say above 17-18 times and they always cut their holdings when the markets just start their journey to newer highs and the P/E multiples are on a lower side, say around 13-14 times.

If you analyse the current markets scenario when the Sensex has risen past 19000 levels, many of the investors are doing exactly the same what Prashant is suggesting. On the one side, they are either redeeming their mutual funds or surrendering the mis-sold ULIPs or cutting their holdings in stocks/booking profits too early. On the other side, they are increasing their asset allocation towards the debt/gold instruments like fixed deposits, tax-free bonds, NCDs, Gold ETFs etc.

Some investors think that if the markets have risen from 16000-17000 levels to 19000-19500 levels, it is better to sell their investments in mutual funds or shares as the markets will again fall to sub-17000 levels due to some reason and these stocks will again take 2-3 years to reach these levels.

Is this a prudent investment strategy to earn above average market returns? Definitely Not. It is next to impossible to predict the definite direction of stock markets. A common investor should invest in the markets when the markets are cheap and continue investing till the markets remain cheap. When to sell? The answer is very simple – when the markets are expensive or the P/E multiples are above reasonable levels, say above 20-22 times.

But honestly speaking, it is very difficult to follow it practically because when the markets become expensive, the growth in EPS is very strong and we get driven away by some rosy pictures getting published daily in the newspapers. Also, our greed grips us so strongly that we are just not able to book profits.

So, when the markets are down, it offers a very good opportunity for the investors to invest in direct equity or equity linked investment products. Moreover, if any of these instruments provide you an additional tax benefit u/s. 80C also along with completely tax-free returns on maturity/redemption, I think it makes it a perfect investment for most of the investors.

As per a CRISIL report published earlier this year, it showed that Equity Linked Savings Schemes (ELSS) have been better investment options than PPF, NSC etc. It showed that these schemes delivered an average annualised returns of around 22% in the last 10 years. PPF at present earns 8.80% per annum for you and that is also tax free at maturity.

The table below shows a comparison between ELSS and PPF. With similar returns of 8.80% and 22%, your Rs. 1 lakh invested today in PPF and ELSS would become Rs.2,32,428 and Rs. 7,30,463 respectively after 10 years.

Some good performing ELSS have delivered very good returns in the past 1 year period. But, I think investors should also observe their long-term performances. The table below shows the list of five such schemes with their 3-year and 1-year performances.

With a lock-in period of 3 years, I think tax saving mutual funds (ELSS) as a category should outperform all other tax saving products in the next 3-5 years. But, for that, the corporate profitability should improve and the government should start taking steps in the right direction. Lets see how these funds deliver in the times to come.

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