life in financial markets: regressive impact of sebi raising retail investor limit from rs 1 lakh to rs 2 lakh

Sebi chairman, C.B. Bhave, does not always understand the real technicalities operating in the securities market and the regulatory institution he heads, Sebi, obnoxiously relies on the lobbying pressure from the large intermediaries.

The board of Sebi today modified the definition of retail investor in the process of public issue of securities. Earlier, investors putting in application, in an initial public offer (IPO) or follow on public offer (FPO) upto an amount of Rs 1 lakh was considered as a retail investor and a 35% reservation was applied for retail investors. Today, the Sebi board has amended the public issue norms to define retail investor as one who invests upto Rs 2 lakh in an IPO or FPO.

In the press conference held today, Bhave said the move was due to incidents of public issues where retail quota was not fully subscribed. I find that a bad justification. If the retail quota is not fully subscribed and other quotas of HNI (high networth investors), QIB (qualified institutional buyers or institutional investors) are getting oversubscribed then the solution simply lies in transfering the un-subscribed retail quota portion to HNI and QIB. If the latter two also sees no full subscription then whether the retail investor definition if that of Rs 1 lakh or Rs 2 lakh does not matter anyway.

Bhave and Sebi can be really un-wise at times.

Here is also what Prithvi Haldea, managing director-cum-owner of Prime Database, a public issue data specialist had to say about today's Sebi move:

"This decision will surely lead to edging out the small investors. First-time investors typically  enter in a testing mode with  small amounts. This is also true for  lakhs of existing  small investors. With the investment limit  increased  to Rs 2 lakh, the richer individual investors, courtesy proportionate allotment, will further eat into the allocation to the small investors, resulting in huge disappointment due small or nil allotments. If the regulator is keen to  increase the retail investor base,  it should rather increase the reservation for retail investors from 35% to 60-70%, with a provision to allot unsubscribed portion to the QIBs.If the retail investor definition is indeed upped, the least we we should then have is full allotments in this category from bottom up.

This policy is wrongly based around the concern that large IPOs may not elicit sufficient retail response, and upping the cap would ensure richer individuals fulfill the quota. Coal India IPO has yet again demolished this myth. Good companies with right price will always see phenomenal response from the retail.Why should any one be bothered if the retail portion goes undersubscribed in bad issues; it should actually make every one happy.

Inflation as a reason for increasing the limit is also not tenable. As the investible income has not grown in the same proportion as the inflation, it actually means lesser monies available in the hands of the small investors, and not the other way around."

life in financial markets: fundamentals versus market prices

The financial system was in a deep crisis in 2008 and using taxpayers' money governments (including Indian government) rushed to bail out the banks and other investment firms either directly or indirectly. As a result, liquidity in the global financial system was very high in 2009 and that led to a 60-100% rise in equity prices worldwide.

I think the bailouts were un-necessary and will only encourage reckless leveraging and mis-behaviour among the large market participants.

Anyway, late last month (December 2009) I contributed a news analysis story on the Indian listed companies' fundamentals not keeping pace with the sharp rise in market prices. Last week has seen much-needed correction in stock prices but it is still not enough.

Here goes:

Will India Inc. chase the market rabbit?

Barring the scary late-October crash, the last three months has seen the stock market on an automatic gear driving the steady flow of foreign institutional investor (FII) investments. But the second half of this month (i am referring to January as readers would be reading our new issue not before 1/2 Jan) will see fundamentals come in to the limelight once again as the listed companies' financial results for the December 2008-ended quarter start pouring.

Valuation of stocks by FIIs and domestic institutional investors have risen sharply and sustained ever since net profits and earnings per share rose sharply in the last quarter of the 2008-09 financial year.

The Price to Earnings ratio of the 50-stock S&P CNX Nifty index shot up by 40% during April-June this year after the previous quarter's (January-March 2009) Nifty stocks' aggregate EPS grew by a healthy 7.8% over the October-December 2008 quarter (see table) and aggregate net profit grew by a hefty 28% in the same period.

(click on the image to see it enlarged & clear)

The first two quarters of the current financial year (2009-10) have bought out the difficulties India Inc is having in sustaining high growth in profits as they stuttered. Yet the Nifty P/E has continued crossing 23 on Christmas eve. In the last five years (see graph below) it had peaked at 27.9 on 11 January 2008 before the big crash of that year. Global liquidity has prevented prices from falling but it has also meant that valuations have got stretched.

"What we believe is that that most of the consensus earnings upgrade forecasts for next 2 years is based on looking at sharp revival of growth in second half of the current financial year and that is why the December 2009 quarter figures will be watched very closely," says Gaurav Dua, head of research at Sharekhan. Dua is clear that these results will not only have to meet Dalal Street's expecatations but also be much ahead.

(click on the image to see it enlarged & clear)

That the Indian equity market, like a few other emerging markets in Asia, has always been considered expensive have never deterred FIIs. "Global investors focus more on their confidence back home in their western economies and if that is good they come to emerging markets notwithstanding high P/E ratios," says Saurabh Mukherjea, Bombay-based head of India equities at Noble Group.

But if corporate earnings falter, or do not meet street expecation, then any liquidity-driven sustained rise in prices will lead to the Nifty P/E touching stratospheric leves of 25 and above. In its October 2009 India Strategy report, Enam Securities had looked at what can happen next and indicated that the Indian market would see a sharp upward spike "if global liquidity continues to seek strong domestic growth and 'thematic investing' starts overlooking valuations."

The suspense will be over once the Q3 results start coming in.

life in financial markets: now, India wants US to waive their securities laws

The Indian regulators (the Ministry of Corporate Affairs headed by Minister Salman Khurshid, the Securities and Exchange Board of India headed by C.B. Bhave, and the Central Bureau of Investigation) would receive the blessings of many right-thinking investors and market participants if they go about bringing to account the frauds committed by Satyam Computer (now called Tech Mahindra) on investors aided by its former chiefs and officials, instead of asking the United States of America's securities market regulator, the Securities and Exchange Commission to go easy (newsreports here, here and here) on taking action against Satyam Computer for the impact of the company's fraud on US investors as the company's ADRs were also listed on a US stock exchange.

In India, other than the arrest of its former chiefs, Satyam Computer, as a company, has received absolutely no penal action for the fraud it committed on investors and the entire market. The fraud mainly involved falsifying its financial statements with inflated profits and revenue figures, and siphoning off funds.

The US SEC would do well not to get influenced by the Indian regulators' shameful plea for going soft on Satyam. If it does go soft then it will not have done the job it is required to do to uphold the provisions of securities laws in the US. The US investors would not gain by such a laxity.

life in journalism & financial markets: no! its not appreciated!

As a financial journalist, covering financial markets in India for 19 long years, I have come across several disturbing things. This post is about one such thing.

If I have to bring about a deeper insight into issues that involve protecting basic rights of transparency of investors I am up against extremely cunning minds working in the securities market regulators, stock exchanges, depositories, brokers, depository participants, investment bankers etc.

This happens most often when I ask any of these clever people about the criteria they apply behind their policies and rules. Say I ask a broking firm, offering online trading to investors, "what are the criteria applied behind disabling of many derivatives contracts (that, otherwise, are getting traded on the exchange)?" I get this kind of answer, "You would appreciate that we will not be able to share the exact details of the algorithms we run and the criteria we
have for enabling and disabling."

This is so ridiculous. My answer is "No, sorry, it is not appreciated by me or my readers." Why should I blindly believe him that the alogs and criteria he is running for his clients is efficiently serving the purpose it is being claimed to serve (and that usually is "its for investors' interests")?

Similarly, when I ask NSE, BSE or Sebi, about what price and volume criteria they apply in their market surveillance systems, I never get the answer. I am bluntly told that it can't be disclosed. So, how can investors know whether NSE, BSE and Sebi are efficiently doing the job of ensuring there is no price manipulation?

Journalists are responsible to their readers and so they ask questions. Regulators and intermediaries are not responsible to my readers directly and so they evade these questions! The battle goes on.