sebi extracts higher regulatory fees from the market

SEBI's fee income rose sharply in FY15.Did it lead to better discharge of regulatory duties? https://t.co/E2dBsG0sip pic.twitter.com/w7Veleohvl

— Rajesh Gajra (@JournalistRGaj) December 22, 2015

two large cap indices move in opposite directions in 2015

2015 saw 2 large cap indices--Nifty 50 & Nifty Next 50 trend in opposite directions.

indigo faced turbulence in its ipo flight path

Here are two stories I did in last two days on the Indigo (Interglobe Aviation) IPO for the newspaper I currently write for:

Bumpy landing for Indigo in Interglobe IPO

Interglobe Aviation, the company that operates the largest passenger airline in the country, Indigo, faced rough weather in getting its large-sized initial public offer (IPO) of Rs 3,018 crore fully subscribed on time on Thursday, the last day of its IPO.

Retail investors, for whom 35 per cent of the IPO was reserved, took a long time in checking in to subscribe to the IPO. At 5 pm, the usual closing time for bids for IPOs, the retail investor portion was subscribed by only 0.53 times on the BSE, it was by 0.28 times only at the National Stock Exchange. Together, on the two exchanges, the retail investor subscription at that point, was just 0.81 times of its reserved portion.

Even the employees of Interglobe, for whom around five per cent of the IPO was kept reserved, and with a price discount, did not check in fully, as at 5 pm, their aggregate subscription on the two exchanges was just 0.11 times of their reserved portion.

The quota for the other two categories, qualified institutional buyers and non-retail non-institutional investors, were fully subscribed. At 5 pm, on the two exchanges, taken together, QIBs had subscribed 17.80 times their reserved portion of about 50 per cent of the issue, and non-retail non-institutional investors had subscribed 3.57 times of their reserved portion of about 15 per cent of the issue.

A senior official at one of the exchanges, who did not wish to be quoted, told Financial Chronicle that the two exchanges extended the bidding for the retail and employee categories to 7 pm. “This is usually done on members' requests based on volume of bids applications,” he said.

But the landing for Indigo, as far as the closing out of Interglobe IPO was concerned, was further delayed as, even at 7 pm, the retail and employee portions were still not fully subscribed. At 7 pm, the retail investors had subscribed 0.90 times of their reserved portion, while employees had checked in with just 0.12 times their reserved portion.

According to Prithvi Haldea, founder of Prime Database, retail investors who lost money in the spate of IPOs during 2007-08, were cagey of investing in the spate of IPOs happening in the current financial year. “The IPO market, currently, has not reached the retail investor frenzy stage yet,” said Haldea.

The stock exchanges extended the Interglobe IPO bid time for retail and employee categories beyond 7 pm as well. It finally closed at 8.30 pm. At that time, the retail portion, at 0.93 times subscription, was still not fully subscribed. The employee category portion also stood at 0.12 times subscription at that time. But the overall issue, across all investor categories, was subscribed by 5.16 times, as of 8.30 pm, and that was expected to sail through the IPO issue for Interglobe.

Of the total number of 3.94 crore shares in the Interglobe IPO issue, amounting to Rs 3,018 crore at the upper end of the price band of Rs 700-Rs 765, around 58 per cent was through an offer of sale by selling shareholders who were the earliest investors in the company. This part of the IPO proceeds will go directly to these shareholders with the company not receiving anything out of it except for the proportionate issue expenses. The balance 42 per cent of the IPO issue involved fresh issue of equity shares, the proceeds of which will go to the company.

QIBs check in, but not the retail investor

On Wednesday, the second day of the high profile Rs 3,018 crore initial public offer (IPO) of Interglobe Aviation saw total bids across all investors crossing the issue size, but retail investors, non-institutional investors and employees did not bid fully for the shares reserved for them. The company operates the largest passenger airline in the country, IndiGo.

As per book-building bidding data from Bombay Stock Exchange’s website, at the end of Wednesday’s bidding process, the Interglobe IPO attracted bids for 4.67 crore shares in the price range of Rs 700 to Rs 765. The IPO size is for a total of 3.01 crore shares, excluding about 0.93 crore shares issued to anchor investors. The bidding data pertained to the cumulative demand from both exchanges, BSE and National Stock Exchange.

But the IPO was still, technically, not over-subscribed since only the qualified institutional buyer (QIB) category, for which 0.85 crore shares (excluding the anchor investor portion) is reserved, attracted a 5.2 times over-subscription.

The other three investor categories were partially subscribed. Retail investors, for whom 1.36 crore shares is reserved, collectively bid for only 0.19 times of their reserved portion. The non-institutional investor category, for which 0.58 crore shares is reserved, saw a marginal 0.04 times subscription, while the employee category portion of 0.22 crore shares saw a 0.04 times subscription.

Clearly, therefore, Thursday, the final day of the IPO, will be a crucial day so far as receiving the requisite subscriptions from retail investors, non-institutional and employees are concerned.

Around 58 per cent of the Interglobe IPO is an offer of sale by selling shareholders who were the earliest investors in the company. This part of the IPO proceeds will go directly to these shareholders with the company not receiving anything out of it except for the proportionate issue expenses. The balance 42 per cent of the IPO issue involves fresh issue of equity shares, the proceeds of which will go to the company.

the flip side of mutual fund & equity SIPs

No investor would not already be aware of SIP-based (systematic investment plan-based) investing, particularly in equity schemes of mutual funds and directly in equity shares of listed companies. Given the marketing motivation to entice investors to commit funds for a long term into SIPs, mutual funds and brokerage firms spare no effort to highlight the pros of SIPs.

Sure, systematic investing is a far better way to invest than irregular or lumpsum-based investing, but SIPs, the way it is marketed and promoted by the industry, is not the best way to reap the benefits of systematic investing.

Here is why.

The problem with MF SIPs

SIPs in mutual fund schemes suffer from mainly one, but severe, problem. It ignores the element of diversification which is crucial for any investment portfolio. An investor has a limited amount to deploy and scheme-specific SIPs tend to demand commitments of a higher sum.. Thus, if a large portion of deployable sum goes into a SIP of just one or at most a handful of schemes the investor is risking being caught in a vortex of badly performing schemes. For equity investors, there are over 200 equity schemes to choose from and it may not feasible for most investors to use SIPs for more than a handful of them. A SIP into a poorly-performing scheme can be disastrous.

The problem with SIPs in direct equities

The same problem of lack of diversification, like in MFs, applied to direct equity investments. You have limited amount of money to deploy in equity shares. SIPs force you to commit disproportionately high sums into a very few number of companies. Badly-performing stocks in your un-diversified SIP portfolio can destroy your wealth.

What is the solution

Investors must still do systematic investing but not through SIPs. With better technologies available in internet trading and mobile app-based trading by mutual funds and brokerage firms, it is easier to be self-disciplined and invest once every month in MF schemes or equities directly in a more-diversified set of MF schemes and stocks than what you would typically do in inflexible SIP plans that MFs and equity brokerage firms offer you.

debt issuances by Indian companies have trended sharply upwards in recent years

Here is a data analysis on debt issuances by Indian companies I did two months back for the newspaper I worked for then (click on the entire line here).

segmental business analysis of india's general insurance industry

Here is an analytical story I wrote on the general insurance industry in India two months back (click on this line)

do not look down upon a stock exiting a big index

Here is something I wrote, two months back, in the newspaper I worked for then, on the impact of stocks entering or exiting a benchmark equity index such as Nifty 50 (click anywhere on this sentence to read the article/story)

 

when an investing strategy is found in an index

Index investing can offer interesting strategies. In a story/article I wrote, around two months back, for the newspaper I work for currently, I explain some of them for Indian investors.

Here is what I wrote:

When a strategy is found in an index

Rajesh Gajra

FC Research Bureau

January 26, 2015

 

In our domestic equity market, there are broad market indices, there are sectoral indices, there are thematic indices and then there is a new breed of indices known as strategy indices. FC Research Bureau decodes a few of the strategy indices which have come into existence in the domestic market in the past few years only.

National Stock Exchange of India (NSE) offers, as per its definition of strategy indices, 13 such indices, but FCRB covers only four interesting ones -- NV20, CNX Low Volatility, CNX Alpha and CNX High Beta.

NV20 index is a value index made up of 20 stocks which is aimed to capture the most liquid value stocks from the 50-stock CNX Nifty index. The current set stocks in this index comes from eight sectors and captures around 30 per cent of the aggregate market cap of all NSE-listed stocks. This stands apart from CNX Nifty's coverage of 23 sectors and 50 per cent of aggregate market cap at NSE.

In our analysis of returns, 20-stock NV20 has performed better than the parent index of 50-stock CNX Nifty from where its members come from, in the medium-term period of four years. From its average value in 2010 to its average value in 2014, NV20 recorded an absolute return of 50.7 per cent, while the corresponding return which CNX Nifty delivered was 34.8 per cent.

Clearly, the value universe from NV20, as defined and culled by its index methodology, has outperformed the returns from a healthy mix of value and growth companies in the liquid large-cap stocks universe from CNX Nifty index.

But different strategies unravel different results across various tenures. CNX Low Volatility index, for instance, offers the option of another interesting strategy to investors.

This index captures the 50 least volatile stocks meeting a joint criteria of the 300-most largest stocks in terms of free-float market cap and 300-most traded stocks based on the last six months turnover. Volatility among the eligible stocks is calculated using one year trailing prices, and the least volatile stocks are selected.

There is a belief among a section of investing community that low volatile stocks tend to perform better in the long run. So, how has CNX Low Volatility index fared? In the four year period from 2010 to 2014, and based on average of the values of the index in a calendar year, CNX Low Volatility delivered a 4-year absolute return of 121.0 per cent.

Clearly, this level of return is far higher than CNX Nifty's corresponding four-year absolute return of 34.8 per cent. What is more interesting is that in the short term the low volatility index has struggled to match the performance of the diversified, large-cap universe. From calendar 2013 to calendar 2014, CNX Low Volatility index delivered 23.2 per cent return on its yearly average values, while the broad-based CNX Nifty delivered 24.4 per cent.

The contrast to low volatility is generally seen in high-beta stocks which move far more than the index stocks. There is an index to track this -- CNX High Beta index.

With the same basic criteria as that of CNX Low Volatility index, except for the difference of capturing the stocks with the highest beta instead of lowest volatility, the CNX High Beta index has been volatile as far as its short-term and medium-term returns are concerned. In the four-year period from 2010 to 2014, it has given an absolute return of -16.4 per cent, a negative rate of return, while in the one-year period from 2013 to 2014, it delivered a rate of return of 24.7 per cent. The result is obvious -- in both the time periods CNX High Beta failed to exceed the returns given by broad-based CNX Nifty index.

CNX Alpha is another index which aims to attract investors seeking alpha returns from the equity market. The 50-stock CNX Alpha, which comprises of 50 most alpha stocks from a universe of 300 largest and liquid stocks, has delivered a four-year return of 70.2 per cent from 2010 to 2014 and a one-year return of 38.7 per cent from 2013 to 2014. True to its objectives, the CNX Alpha index managed to outperform the broad-based CNX Nifty index.

Currently, not all the strategy indices are directly actionable by investors. But there are two mutual fund schemes connected with two strategy indices which are with Securities and Exchange Board of India for approval. Around a year back, Motilal Oswal Mutual Fund submitted a draft proposal for regulatory approval for a index product tracking the CNX 100 Equal Weight index which is one of the 13 strategy indices which NSE offers. In this month, Reliance Mutual Fund has submitted a draft offer document for R*Share NV20 ETF which will mimick the returns of the NV20 index.

BSE, the second largest stock exchange in the country, too has a bouquet of seven investment strategy indices which includes S&P BSE SME index and S&P BSE Dollex 30. The choice for investors is clearly good currently but the choice of actionable products is still limited.

lessons for the indian life insurance industry

I recently wrote on what lessons behold for the life insurance industry players in India on account for a recent rush in market-linked policies surrenders in an editorial contribution in the newspaper I present work for.

Here is what I wrote:

Insurance lessons

The surrender rush in ulips is not a problem. It is a symptom of an old problem

The means to an end is as important as the end itself. The life insurance industry, as this paper reported in Monday's front page, is in the throes of high surrenders taking place in unit-linked insurance policies (ulips). This is evidently on the back of rising net asset values of the equity-oriented ulips which has activated investors' ability to surrender nothwithing the high surrender charges of about three per cent.

 

Some of the insurance companies appear to be cribbing that this is having a crippling effect on their business. But, really, there is a need for honest introspection by the big players in the insurance industry. Surrenders taking place at a very high rate is the creation of the insurance companies and their agents in their attempts to get new business by any means even if it meant mis-leading the non-savvy investors.

 

Mis-selling was the norm in the life insurance industry till at least 2010 when the insurance regulator, Irda, stepped in to reign in exorbitant commission charges and unfair surrender terms and charges. But this applied to new policies sold therefrom and so old policyholders were still tied up with the dreadful old regime.

The exact details of which ulip investors are surrendering their policies are not known but it is possible a big chunk of them may be from the pre-2010 period. The front-loading of fund management and other charges in them meant any investor wanting to surrender in the first 3-4 years of the policy would get even less than the value of their investments. With four years behind and stock market indices touching higher and higher peaks every week the hit to investors who would want to surrender is not that high as it was till a year ago.

But the issue is not that the stock market conditions have been conducive for such a happening in insurance ulips or other traditional policies. The real question to ask is why so many investors are motivated to surrender their policies.

 

It is clearly the large amount of mis-selling by insurance companies and their agents which took place in the past, with no real accountability or regulatory desire to take action, which is forcing to investors to get out when they can. Instead of blaming the policyholders for the redemption pressure, the insurance companies need to see the pain undergone by these very policyholders as they, once stuck with a mis-sold policy involving a high annual premium, were forced to renew for a few years in order to get back a significant portion of what was their due.

Many investors in ulip and other traditional life policy have. in the past, even lost their entire investments by not renewing their policies since they could not even afford to pay the high premium amounts at the time of yearly renewal. In each and every such case the insurance industry gleefully pocketed the premiums already paid by those investors and it was like a free money for them.

But the chickens are now coming home to roost. Those investors who had the ability to renew and wait for a few years have now decided 'no more' and are getting out. It does not mean they are naive in their timing of exit. A lot of them could very well to re-invest their redeemed money back in equities through non-insurance channels such as equity mutual fund schemes. 

 

This hopefully will sensitise the insurance industry to the real needs of investors and not get blinded by the competitive fervour to show high growth rates in premium collections.

motivate the honest taxpayers

Below is an Editorial I contributed for the newspaper I work for presently:

Motivate the honest taxpayer

The honest taxpayer in India, whether an individual or a corporate, needs to be encouraged further and incentivised by the government of India and its finance ministry if more revenues are to be raised.

The news that the current government is thinking of starting a scheme to settle pending income tax tax disputes between the corporate/individual taxpayer and the Income Tax Department through a one-time settlement offer. Disputes between corporate or individual taxpayers and the IT Dept arises primarily because IT Dept raises demands of a tax liability much higher than the tax already paid by the corporate/individual taxpayer. The tax payer contests such a demand and the cases go on for years due to heavy backlog in the IT tribunals. 

Realistically speaking to get the corporate taxpayer to settle such a demand will mean asking it to pay only a fraction of the demand amount. If higher amounts were to be asked for in the settlement then the companies and other tax payers will prefer to continue contesting the cases in the tribunals.

Proposals such as this or the tax amnesty one floated by the previous government are not in the best interests of the honest tax payer. A dispute settlement or a tax amnesty scheme may rake in some revenues but it will also lose the confidence of the honest taxpayers who will see merit in evading tax or contesting tax demands.  

If the government of India thinks the IT Department has raised more tax demand from taxpayers than it should have then the correct thing to do would be to drop the earlier demand notices and raise new ones with accurate demand amounts. Else, the IT Department should not be forced to settle off-court under a government scheme.