Valuation of Vodafone Idea Lmited Futures in case of Rights.

Vodafone Idea Limited (Idea) came with a Rights issue of massive 25K crores. The rights will be subscribed by Vodafone and Idea. Also any unsubscribe portion will be subscribed by promoters.

I am writing this blog not to discuss the valuation of the company but the valuation of its futures in Derivatives segment. It is my endeavor  to highlight the valuation of this instruments in this special situation.

Background : CMP of Idea is 33.30, March Futures is 31.95/-,  April Future is 29/- and May Futures is quoting at 26.55/-. The Ratio of Rights is 87 : 38 shares. 

I have received suggestions to buy Cash and sell May futures (though it is quoting at a very big discount ). The rationale is that the rights is @12.50 and since the issue is very big and in a beaten down sector there can be over-allotment.

Rather than commenting on strategy, if it is a good idea, I will jot the facts on valuation (Futures Prices) in front of you and then you can take a conscious decision.

Valuations : For every special situation rights like Rights, there will be corporate benefit in derivatives segment of NSE. The corporate benefit price is derived from Closing Cash price of Stock on eve of Ex-date.

I may not know the closing price of 29th Mar, so I will base my valuation of futures (Corporate action price ) at CMP.

Based on CMP, The Adjustment factor is 0.57, so the new

a) Lot size can be approx(21230)

b) Ex rights price will be 18.82/- (March Futures will not exist on Ex date)

c) Ex-right April Fut Price will be 16.45/- (29*12000/21230)

d) Ex-Right May Fut will be 15.01/- (26.55*12000/21230)

Interpretation :

So when you are buying shares @33.30, your cost (effective cost after rights) is 18.82.

Now if you sell May futures @15.01, effective price after adjustment. You will be incurring a straight loss, but there are high probability of over-allotment.

To reach a Break-even point (BEP), You may need an extra allotment of 168 shares for every 87 shares. It means you will need an over-allotment (1.94 times , Total allotment of 2.94 times).

(I am not considering Brokerage, STT, Statutory charges, Interest, Margins cost)

There seems optimism on over-allotment and I may not know if all institutions will apply/ over apply, as Retail / HNI shareholding is comparatively small.

I am only covering Futures pricing. Option pricing will involve different calculation.

I welcome your critical comments and suggestions.

This is not a recommendation to anybody whatsoever to buy OR sell any share, but it is my thought process and views on this topic.

PS : I will try to write blog at shorter frequency.

Physical settlement of derivatives : issues and solutions...

It is Easier said than done.....


SEBI has said, It will comulsory implement Physical settlement of Stock Futures in a calibrated manner. (Here)  The intentions are noble and its a global practice.

The volumes on exchanges have extrapolated since the advent of Derivatives. It grew even more with advent of Stock Futures, Stock Options and Weekly Bank Nifty Options. One of the reasons for a rise in the volumes was simple product.

With change in Settlement process from cash to delivery, it may change the paradigm and valuation of derivatives product. We will here see regulatory challenges and possible remedial action. This discussion is to see a gradual transit without impacting volumes.

a) There is concept of Trading Members(TM), Clearing Members(CM) and Professional clearing Member(PCM). When there is a physical setlement, how would the billing be, also Pay-in  / Pay-out of Funds and Securities. (Current systems involves only money but If stocks are added, Risk will be become bigger for CM and PCM).

b) Risk of Assignment : As of now only In-the-Money stocks are assigned / Exercised and So the writer is aware of probabilty of assignment, but when the delivery is physical, there will be an unknown probability of assignment in Out-of-Money options also. (It should be remembered that Stock Options was changed from American type to European Type exercise for the same reason).

MCX has a different way to mark delivery as delivery period is for a few days, which is not possible in Equities, so there will be a  risk of assignment on option writer for OTM option and non-assignment for ITM options.

Corporate Action : As of now, Corporate actions are cash settled for Dividend, Rights, Bonus. There can be issues now, as participants may ask for shares or would be ready to give shares in corporate actions. (That can be taken care by defining rules, but that may lead to temporary mis-pricing.)

Settlement : As things stand, there can be different settlement for expiry, I dont think, there will be a bigger settlement on expiry, Which will also mean, there can be fall in volumes, which may also reduce liquidity.

Securities Transaction Tax: This is the trickiest thing for physical delivery, This will have to be tweaked by Finance ministry to align with delivery STT, else We will be able to buy / sell stocks using Futures and Options without paying STT.

Seller participants will pay only 0.01% on selling only and nothing on buying, Also only the participant exercising the option pays STT and writer won't. This anamoly would be used to reduce STT outflow. I am sure this anamoly will be fixed, but that will be at slower pace, as it involves Finance ministry and STT may appear only in the budget fot next year.

It is a welcome move, but These  issues need to be resolved for smooth implementation of physical settlement.

Suggestions:
a) let the settlement of stock futures be carried in next day trading in cash market, if that happens, all participants with open positions will have an opportunity to cover / close their positions.

There will issues in such implementation, but that will be only once. I am sure, it will help traders from not shying away in settlement days, inturn reducing volatility and mis-pricing.

PS: By bringing physical settlement, SEBI has closed the door for overseas stock futures mkt. If ever they are traded overseas , it will be a different product, just like NDF( Non deliverable forward) traded on Indian rupees.

Want to write more, but will do it via another blog.

I welcome your critical comments and suggestions.

Introduction of Graded Survelliance Measure (GSM) by Exchanges

SEBI, NSE and BSE are working hard to curb price manipulation on Stock Exchanges. There are also instances resulting in Tax Evasion using methods of Price-Rigging. In the past, Exchanges had put Risk- Management practice of declaring Illiquid Stocks, Periodic Call Auctions, Reduction in  Daily Price Freeze, Transferring Stocks in Trade-to-Trade Segment, Weekly/monthly/ Quarterly / Yearly Price Freeze etc

To further strengthen the Risk-Management and to Discourage Price Rigging and Tax-Evasion, NSE and BSE came out with another Surveillance measure "Graded Surveillance Measure (GSM)". The detail of circular are NSE here and BSE here.     

The Highlights of GSM are

a) Any abnormal price rise not commensurate with Financial health and Fundamentals like Earnings / Book Value / Fixed Asset / Net-worth / PE etc. will be identified.

b) All such identified stocks will be put in T2T with addition surveillance deposits of 100% or 200 % in Cash only by the buyers.

c) If after some time of imposing Additional surveillance deposits, The stocks remains volatile, They may be traded once weekly / Monthly and maybe with a ban on any further Price Rise.

d) The stock eligible for GSM will be identified from time to time and will be reviewed on Quarterly and Six Monthly basis. 

e) Additional Surveillance deposit will be credited only after quarterly review and It wont be refunded before quarterly review, even if the bought stock is sold in market.

The Points to ponder in this circular could be :

a) Exchanges want to curb the price rise and manipulation but hypothetically if GSM is declared in a particular stock, What may happen ? The buyers in such stock will vanish and also we may see many seller in the stocks.. but then who will buy? As buyers will have to pay additional surveillance deposits and may also probably get inquiries from stock exchange for buying. 

Then why would anybody buy that stock and If nobody buys it, price will also not fall. Also Volumes will dry and minority investor will be struck.

b) The Additional Surveillance deposits is payable only by the Buyers, and the Sellers rights are unhindered. It does not matter that sellers now were not selling when the price was rising,  also it does not  matter if the sellers are the promoters / operators along with other shareholders. They will get their money on payout.

c) As per circular, The criteria for stocks falling in GSM are conventional methods of Earning, Book Value, Fixed Assets, Net-worth , P/E etc but Are this criteria sufficient to decide if the stock is over- valued ? What about future expectations ? Higher valuation because of M & A target ? What about written down assets ? What about Investments of holding companies ? Expectation of some News / Orders / govt relaxations ?

There are different parameters to evaluate companies of different sectors and many Sectors have their unique valuation parameters . So GSM criteria can be biased on both criteria of escaping the GSM (IF accounts are manipulated) and Falling under GSM (If the companies have value but under different valuation model accepted in that industry).

Moreover GSM have yet not laid clear-cut criteria for stocks falling under it.

d) Since GSM have not laid clear-cut criteria for Stocks falling under it, There are probability to evaluation on Case-to-case basis and which may lead to decision based on perception of Risk Management officer.

e) Once the stock rises for few day, there will be fear of stocks coming under GSM, which may lead to players avoid the stocks and person who may be privy to news in such companies can make super normal profits.

f) Stocks however good, but once it falls under GSM, they may be tagged as tainted and will be avoided by traders.

g) Positively, If Risk-management is taken care using GSM, it makes a case for Weekly / Monthly / Quarterly / Yearly  circuits to go as unwanted price rise will be taken care by GSM.

i) The biggest impact may be on Small-caps and Micro-Caps.

I believe, Exchange will come out with more clarity and transparency on criteria for stocks falling under GSM, So that retail investors / Traders / Jobber / Market makers can avoid such stocks or exit from such stocks which can come under the ambit of GSM.

Bottom-line : GSM will suck liquidity from stocks and exits will become difficult.

This is not a recommendation to anybody whatsoever to buy OR sell any share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

Can Additional Periodic Pice Band on BSE distort Pirce ?

 

Recently BSE Ltd (BSE) came  out with Additional periodic price band (Here) for stocks exclusively listed on BSE.

Every Stock traded on stock exchange has a price band, wherein it can be traded for a particular day (Except for stocks in Derivative segment). But now BSE has put a Weekly / Monthly / Quarterly and Yearly  price-band on all stocks listed exclusively on BSE. It means the stock cannot move up by certain percentage in that time frame. The price-band is mentioned below.

Securities with daily price band as	Weekly   Price Band	Monthly Price Band	Quarterly Price Band	Yearly Price Band
20%	+/- 60 %	+/-100 %	+/-200 %	+/-400 %
10%	+/- 30 %	+/-60 %	+/-100 %	+/-200 %
5%	+/-20 %	+/-30 %	+/-60 %	+/-100 %
2%	+/-10 %	+/-20 %	+/-30 %	+/-50 %

Please note that there is no restriction on fall in price, The price can fall by 100 % i.e,  the fall n share price can be up to 0.00 in a year.

The Exchange quotes

"In order to enhance the market integrity and to prevent excessive price movement in the securities listed on its trading platform, BSE as a pre-emptive surveillance measure has an additional framework of periodic price bands in addition to the aforesaid daily price band framework. These additional periodic price bands shall be applicable to securities exclusively listed and traded on BSE Equity Trading Platform including securities listed on SME and SME ITP platform. The periodicity of these price band shall be weekly, monthly, quarterly and yearly"

The features of the additional periodic price-bands as per BSE are as follows

a) It is applicable only on Exclusively BSE listed stocks.

b) It will enhance market integrity.

c) It will prevent excessive price movement.

d) It is applicable to all stocks including SME and SME ITP platform.

e) It will help in surveillance mechanism on Exchange

f) Any up-move in S&P Mid cap Index will be adjusted in price-band by 2X

g) In-case of Corporate action, the price will be adjusted accordingly.

The added features cited by BSE are

a) It will reduce money laundering.

b) It may reduce volatility in such stocks.

c) It will reduce stock rigging.

d) They have also said that If there is upward change in daily circuit percentage of stock, the Additional price band will be increased, but if the circuit percentage of stock is decreased, the Additional Periodic price will remain the same. (Here)

But, There are many Drawbacks, which BSE needs to look after bringing in the additional price bands :

a) IT WILL DISTORT PRICE DISCOVERY : Additional periodic price bands will distort price discovery, because now, it does not matter, if the fundamentals of the company deserve to get re-rated on the higher side.

 

But if there is negative re-rating, the price can fall up-to 0.00 in a year.

b)  It will reduce volumes in such stocks : If the stock comes in the ambit of additional periodic price bands, It will be locked in upper circuit and thus it will reduce volumes in stock and also it will mean loss of interest by traders to trade in such stock.

c) Rise in Bid - Ask Spread : Such loss of Interest will also increase Bid / Spread in Stock, Which means such stock will have to pay liquidity premium.

d) Advantage for sellers : If the stock price reaches yearly price band, Then the price will not be able to move up, Hence it will compel the investors in such stock or some who can borrow such stocks, to go short on that stock as Price cannot not go up because of band for next 8-9 months. He can cover the position, when the price comes down. Also if he covers the short at the end of year, at same price, he will earn interest on money recd from short selling.

It will be more like Put option on stock, available at free of cost because of upper price band.

e) In-fact Gullible investors can be struck at circuit, waiting to sell at higher price and it may happen that they may not be able to sell the stock at higher price because of such bands.

f) Volumes will migrate to other exchange : Stocks which are listed on NSE exchanges does not fall under the ambit of Additional periodic price band, Hence Investors and Promoters will prefer listing on other exchange also, it may mean shift in volumes to other exchange

g) There are many stocks in price circuit limit everyday, but volumes can happen only at previous day circuit price of lower than that, The list will start getting bigger with time when many stocks will fall under yearly bands.

Some Things to Ponder for BSE

a) SEBI may have asked exchanges to find ways to curb money laundering  and Price Rigging on Stock Exchanges, But I don't think It is a proper way to curb money laundering or Price Rigging. Its just penalising all stocks for exchange incompetency. I am sure, Exchanges have resources to discover money laundering and Price Rigging by ways of Risk  management and also data mining. They have access to all order and trade data, KYC of Clients,  also they can ask for depository data. I am sure mining that data will lead not only to cases of Money laundering , price Rigging but also Front Running. Also new listing regulation can make Exchange more powerful in getting information from Companies also.

b)Why NSE has not put Additional periodic price Bands in place ?

c) Volatility is expected in trading, Exchange is not in business in reducing volatility, but they have put in place proper margin and Risk Management to take care of any eventuality. Volatility is because of uncertainty, Exchange can try only smothering  price discovery process.

d) Price of stock changes with change in Fundamentals and Sentiments. In a bullish scenario, if a company is doing well, Investors will buy the stocks, but if they are struck with price band and then there is change in sentiment ? 

e) SME stocks and SME ITP stocks are on different board, here exchanges may not have sufficient data on such companies, and it may be more difficult to bring in transparency in such stocks because of small size, but Main board has many more laws to keep tabs on company.

Additional periodic Price bands from the academic point of view :

a) Exchange has put in an additional impediment in price discovery process of stock. They have tweaked with market micro-structure, which is biased to sellers.

b) Many Stocks were transferred in PCAS (Periodic call auction) in the past, but SEBI had to later relaxed the criteria for PCAS stock, which meant most stock were out of the ambit of PCAS.

c) I am not aware if BSE has done some research work with the help of academician before implementing Additional price band. If at all, it is done, It can put it in public domain.

d)  Will Additional price band, compel companies to list on NSE, no matter if that means increasing compliance work. or Listing on NSE and doing away with BSE

e) Will Additional Periodic price band impact price discovery on upside ?

Looking at price and circuit data on BSE, I can pen few points 

a) BSE can enhance its surveillance to deal with price rigging, Money laundering and Front running. (In-fact it can take help of academicians and also NISM ( A initiative of SEBI) in dealing with huge data.

b) Exchange may lose volumes and more people will prefer to deal with stocks listed on NSE (Maybe many companies would then prefer to list only on NSE)

c) Investor may just watch rally in market and sit tight with stocks in circuit because of additional price band, later they may regret if there is change in sentiment.

d) BSE may keep additional price band for SME and SME ITP stocks and for others in the past they may reduce price bands to 2 %.

I guess BSE should not wake-up only after some high volumes stocks with institutional interest comes in Additional price Bands and they face wrath / Lobbying of such Institution. ( I guess Spicejet is nearing that level)

Till then on the softer side  " No Investor will be able to hold micro-cap Multibagger stocks in exclusively listed BSE stocks because of these rules "

I am highlighting this issues and this write up should be taken positively for my endeavor towards better price discovery and lesser Distortion of Prices in Market.

This is not a recommendation to anybody whatsoever to buy OR sell any share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

PS : I may have position in stocks or intending to take position in stocks falling under Additional periodic Price Band of BSE.

Destiny of IFCI : Will it again be a PSU

On 24th Aug, The Cabinet Ministers of India decided to convert Optionally Convertible Debentures of IFCI to the tune of Rs 923 Crores at PAR. Post conversion government will directly hold 55.57 % of IFCI and up to 68.31 % of IFCI if we take into account the stake of other PSU in IFCI. There was full disclosure in the annual reports of IFCI about the conversion at Par subject to SEBI guidelines on Takeover.

We will also look at the background of IFCI,

The Industrial Finance Corporation of India (IFCI) was converted into a company incorporated under the Companies Act, 1956 on 31.3.1993. It was then decided that holding of Government controlled institutions in IFCI should be maintained above 51 percent.

In the wake of likely systemic impact of IFCI defaulting on its liabilities, in the year 2001, the Government infused Rs.400 crore as Tier-l capital of IFCI in the form of 20 year 9.75 percent unsecured Convertible Debentures. This was a cash neutral transaction.

Thereafter, in December 2002, the Government had approved a financial assistance of Rs.5220 crore to IFCI which was to be released over the period from 2003 to 2011-12. Out of the package of Rs.5220 crore, financial assistance of Rs.2932.31 crore (Rs.523 crore as loan in the form of OCDs and Rs.2409.31 crore as grants-in-aid) was released. In 2006-07 the company started making profit and it was decided to stop release of further assistance to IFCI. The OCD terms said that IFCI can repay OCD to government.

The equity holding of Public Sector-Banks / Financial Institutions / Insurance Companies remained over the threshold limit of 51 percent till March 2004. Thereafter dilution in the holding took place in 2005 and it came below 51 percent.

Further,

Committee of Secretaries was constituted, headed by the Finance Secretary and comprising of Secretaries from the Departments of Economic Affairs, Expenditure and Financial Services. The Committee, after due consideration and taking into account all the facts, has inter-alia recommended to convert the OCDs of Rs.400 crore and Rs.523 crore into equity at par and that the Government need not make an open offer to the shareholders of IFCI and instead take exemption from SEBI under Section 11(1) of the SEBI (Substantial Acquisition of shares and takeovers) Regulations, 2011. 

Let the understand the impact of this conversion :

a) IFCI will become a Public Sector Undertaking (PSU), which will come under the ambit of bureaucracy, which may lead to delay in decision making.

b) The Expected EPS of FY12 will fall from around Rs 8 to Rs 3.60.

c) The price of Equity shares before the conversion was around Rs 35/-, After the conversion keeping other things same and Increasing the capital and decreasing the debt by Rs 923 crores, The new value comes to Rs 21 /-. (Cost of Equity)

There is a direct diminution in the value of IFCI call for us to see it lens and raises the question of Bureaucracy against Minority Investors. There are several points to look into the conversion of OCD.

a) Can Government convert the OCD in Equity?  Yes It was in the terms when OCD of Rs 523 Crores were  issued, also the Prevailing Market Price at time of issue of OCD was below Par, We should also understand that IFCI has received grants to the tune of 2409 crores.

About the issue of OCD worth 400 crores , it was a cash neutral transaction to maintain Tier I capital of the company. Also IFCI has the right to Prepay these OCD, I am not too sure How can government convert it in shares, effectively values of that Rs 400 crores become much more because of conversion, whereas IFCI investment of Rs 400 Crores in GSec does not change.

b) Can IFCI challenge such conversion : I doubt about it, The conversion is as per agreements, but which may not be bad in law but it may be bad in  spirits ? It is an executive order by CCS, where Law and State Machinery are part of it.

c) What about Minority shareholders : Minority Shareholders stand to lose, because of conversion. There was a disclosure for conversion, along with that it was mentioned that the conversion will have to follow Takeover guidelines. As per the guidelines, The government will have to buy 26% shares from minority shareholders as per SEBI formula of offer Price. But Instead the government choose to take exemption from SEBI u/s 11(1).

As per section 11(1), The SEBI board can grant exemption from making an offer for acquiring shares under the regulation after recording the reasons in writing from acquirer and if it is in the interest of investors in securities and the securities market.

I fail to understand, how exemption is in interest of Investors or Market, It seems these section is invoked to not make open offer.

d) Can SEBI look in the Matter : NO and Yes. SEBI cannot stay the conversion as they are as per terms and condition of OCD, but YES SEBI can take a stand on Open offer, I don't know how can SEBI get convinced that such exemption is in the interest of the Investors and markets. These will be a case for SEBI , where its stand for Investor Protection may be compromised.

As of now It does not seem that SEBI will be able to stand for Investor Protection and its stand may be compromised.

What about the future: IFCI as an institution is regaining its dominance, but after the conversion  there are areas where clarity will emerge only in future

a) Decision making may become slow.

b) IPO of one of its subsidiaries will be delayed, reducing its valuation

c) The talks of inducting a strategic investor will be a thing of past

d) Its biggest blessing in disguise may be that they may get a banking licence , which is also in distant future.

The returns of IFCI minority shareholders in long run will vindicate government action for conversion of shares.

I welcome you critical comments and suggestions

The MCX Equity Exchange : Can it make a mark ?

Yesterday, MCX got a permission to start an equity exchange, sounds good as it will add to product list which can be traded, but can we make a list of what may or may not happen after this development.

It makes me think that with a long history of being an oldest exchange, if BSE is struggling with volumes, how would new exchange garner volumes. BSE generates volumes in derivatives only because of LEIPS (Liquidity enhancement program), where the traders are compensated for the statutory cost else there is no volumes in derivatives exchange

Then how can MCX make its mark ?

a) MCX intends to replicate success of MCX commodities and to some extent Currencies in Equities, but we must know that i) MCX & NCDEX started trading at around the same time, when neither had lead nor volumes.ii) Today MCX has volumes but if we dissect the volumes, they are mostly speculative and only in Metals, where delivery in very miniscule, whereas NCDEX commands higher volumes in Agri Products and huge quantities are marked for deliveries. iii) There is miniscule institutional participation in MCX whereas Big Trading houses and Many MNC procure through NCDEX. 

In Equities , to garner volumes you need the participation of Retail Investors, Traders, Prop Desk and also Institutions, but if we look at the above instance Institutions don't trade on MCX. It needs to be seen, How can MCX get institutional investors on board.

b) The biggest advantage of MCX, is that it has trading software and the required domain expertise in creating a back-end of trading in place. Thanks to support of its parent Financial Technologies. ODIN software (A front-end software for trading) was the only player until before some time, but now there are many other software vendors, but its still the leader.

c) I am also concerned about the risk management and work ethics in MCX, They need to come out with strong risk Management and strict code of secrecy and work ethics of its employees.

What can MCX do to make a mark ?

I believe that MCX  will have to differentiate their products to attract more players and different breed of players.

a) The first and foremost is they should try with delivery based Stock futures and options : There is a strong demand for delivery based derivatives in Indian market, but NSE is reluctant to introduce this as there is a fear of loss in volumes and NSE trading structure for cash and derivatives segment is different as such that they cannot introduce deliver based derivatives, whereas IF MCX goes on lines of Clearing members and Trading Members for equity brokers also, they will be able to introduce delivery based derivatives.

Incidentally all institutions are for delivery based derivatives and this is an opportunity that MCX can grab, because if Big breed of Institutions trade in MCX, then others are there to follow.

The Basic rational is Institutions have to run VWAP on Expiration day to close their positions and they expect volumes for VWAP, which they get only in NSE as of now, but if the stock futures are delivery based, they need not worry about the delivery, but volumes will follow as stocks will be marked for delivery.

b) In the same manner , they can trade in American options instead of European option and institutions would be a  more comfortable in such trades and it will also create sophisticated arbitrages opportunities for complex trades, which they will love.

c) The biggest obstacle wold be INDEX, It will have to create its own INDEX to trade, but they have opportunity like they can also introduce trading in MSCI index and other such index, which are maintained by big institutions and tracked by foreign investors.

d) SEBI guidelines for Derivatives market  mandates the structure of Trading Member and Clearing Member, such structure in Equities will also help MCX to garner its long list of small brokers and avoid Risk Management issues.

MCX will also have to overcome some regulatory issues like :

a) SEBI may move to supreme court for a stay in ruling, further increasing the waiting period.

b) SAT has mandated to reduce their stake in MCX below 10% in 18 months, which will impact its valuations.

Looking forward, we can look at MCX equities exchange as an opportunity for different class of investors and to satisfy their investment needs.

I welcome your critical comments and suggestions

The Current State of Issue of Shares: Will it make or Break

Since last one year there were very few IPO in Indian Market, but there were many changes which has taken place in terms of Rules, Regulation and Guidelines by SEBI / FMO on public issues. We will discuss these laws and how it will impact investors, its sentiments and how it may impact price discovery process?

The Major changes in the guidelines are

Increase in application size of retail investors from Rs 1,00,000/- to Rs 2,00,000/- (already discussed in my previous blog) : As discussed in my previous blog it will reduce the returns on IPO market and may shy away investors. These has already taken place in market where there are no new issues and investors also do not have appetite and when good issue came in market the returns on investment in IPO was dismal (MCX). 

Finance minister has said that it will reduce the application time and it intend to do it by bringing in  IPO through stock exchanges: Finance Minister has gone on record to say that IPO process will be streamlined which will reduce application and allotment time and also it will streamline whole IPO process. They intend to do it by selling shares on Stock Exchange. In this process the investor will be expected to apply for shares on stock Exchange terminal using brokers, the allotment would be done as trade confirmation and shares will be credited in investor account using clearing house mechanism. So maybe by evening you will know your allotment and listing may happen in few days. Seems simple what will change?

a)       The issuer will save money on commission as they won’t be obliged to pay to brokers soliciting clients (There are many people who make a living on IPO forms, they will be heavily impacted and maybe the marketing of issue will be impacted)

b)      You will have to pay brokerage for applying through brokers.

c)       Now if you apply in shares you can apply it through ASBA (Wherein you can earn interest on that money till the date of allotment), but if you apply through broker you will have to give money to him in full and then only he will be eligible to apply on your behalf (It may happen that clients would be expected to pay before few days to avoid last minute rush) and will also put question on risk management of broker.

These may not impact much to investors apart from brokerage but these will be that way you apply in future.

New category of “Offer for sale” introduced by SEBI using Stock Exchange Platform: To bring IPO process under the ambit of stock exchange SEBI has created a new category of IPO “Offer for Sale” . In this category the promoters or Major stake holders can sell shares directly to investors.

The mode of application for these shares is same as discussed i.e. by putting bids through brokers, these offer is open only for one day and on listed top 100 stocks. So you know the allotment by 3.30 pm

What’s the difference in this category?

a)       We pay brokerage to apply for these shares, but we also may get allotment at discounted prices.

b)      The sellers would be promoters who want to reduce their holdings to meet SEBI guideline of Maximum 75% promoter holding by June 2013.

c)       The best part of this segment is the seller pays STT and can save capital gains tax.

d)      You can trade on those shares in 2 trading days.

There are successful, unsuccessful and controversial issue in this segment which includes ONGC flip flop.

New category of “Institutional Placement Programme” introduced by SEBI using Stock Exchange Platform : There is also a category like above but wherein only the Institutional Investors can apply. Other rules and guidelines are same as offer for sale but I have my reservation of this category. These can be misused by promoters to place their holdings with these Institutional investors maybe with some arrangement, which may be detrimental to interest of minority investors. I am sure SEBI can plug the holes in it.

SEBI law says any IPO with issue size of up to 25 crores would have pre opening session for price discovery and will be traded in T2T segment of 10 trading days post listing: SEBI say that all IPO below Rs 250 crores would be traded in T2T segment (Compulsory delivery, No Squaring off allowed) for first 10 trading days, Also on day of listing the stock will be in pre opening session for 1 hour for price discovery process.

Such steps were taken by SEBI to reduce huge volatility on the day of listing, but in turn it has taken the essence of trading from these stocks, Lets discuss what is happening?

a)       As there is no square off, traders keep away from these stocks.

b)      Because of that it reduces liquidity on the counter, it increase the cost of entry and exit.

c)       People apply in IPO is earn price appreciation on allotment but if traders move away, it reduces the probability of higher price (As there will be many investors who want to sell at the open and buyer may shy away knowing that or it may reduced its bid price)

d)      Because of these I believe listing gains would get capped and in short run its flavor.

SEBI law says any relisting and scheme of arrangement (Except for stocks in F&O segment) would have pre opening session for price discovery and will be traded in T2T segment of 10 trading days post listing: These stock will also trade in T2T segment which will hamper price discovery process in short run.

The above rules changes the way we trade in newly listed stocks and It will definitely impact the price discovery of these stocks on lower side,

But needless to say, that price discovery process and its impact on stock price will be there in short run but longer term performance of these stocks will only depends on its fundamentals.

I welcome your suggestion and comments.