Wall Street firms’ woes continue!!

Posted on March 31, 2008. Filed under: Markets |

Lehman Brothers has lost close to USD350million in a loan default on account of fraud by a medical consulting company, LTT Bio-pharma. Lehman Brothers claim that the loans were secured by Japan’s trading giant, Marubeni Corp but has been denied by Marubeni Corp.

It is very very sad to see how huge ticket loans are distributed by these popular wall street firms without even knowing who has secured the loans. Probably these are the excesses committed by the Investment Banking firms over the last 3-4 years on the back of secular growth story in the investment banking world.

Not good time for Wall Street firms. Click here to read the story.

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Wall Street firms’ woes continue!!

Posted on March 31, 2008. Filed under: Markets |

Lehman Brothers has lost close to USD350million in a loan default on account of fraud by a medical consulting company, LTT Bio-pharma. Lehman Brothers claim that the loans were secured by Japan’s trading giant, Marubeni Corp but has been denied by Marubeni Corp.

It is very very sad to see how huge ticket loans are distributed by these popular wall street firms without even knowing who has secured the loans. Probably these are the excesses committed by the Investment Banking firms over the last 3-4 years on the back of secular growth story in the investment banking world.

Not good time for Wall Street firms. Click here to read the story.

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Reliance Power IPO and the bonus issue of shares soon after!!

Posted on February 23, 2008. Filed under: Markets |

Reliance Power IPO bombed miserably at the share markets when it got listed on Feb 11. As a face saving gesture from Anil Ambani, Reliance Power has proposed issue of bonus shares to all the shareholders within days of the Initial Public Offer!! Ambani’s, known for their path-breaking style, has done this bonus issue of shares in the same style as well!!

Where else in this world, an IPO would be launched at a premium of Rs420 per share and within a week of listing the company announces bonus shares due to its poor showing. Anil Ambani, I believe is not that philanthropic in doling out bonus shares but he is slated to hit the capital markets again in the next 2-3 months for the Reliance Infratel IPO. Better luch investors!!

I came across this article by Ms Sucheeta Dalal on Reliance Power IPO and the bonus shares announcement. Sucheeta Dalal is an active investor protection activist whose consistent efforts in 2000-01 brought to light the mis-deeds of Dinesh Dalmia of Square D software.

Reliance Power’s Strange and Selective Bonus Proposal
22 Feb, 2008

By Sucheta Dalal

One of the first tasks before Securities and Exchange Board of India’s (SEBI) brand new chairman would be to decide on the selective bonus proposed by Reliance Power Limited (RPL) to reduce the price paid by its retail investors. The company claims that it is offering “free shares” to “all the shareholders, excluding promoters who would accept dilution of their stake in the broader interest of over four million investors.” That sounds wonderful and the shares shot up 7% after the announcement; but remember, the promoters paid just a fraction of the money coughed up by retail investors and are the biggest beneficiaries of the IPO. More importantly, the rather too-clever bonus proposal stretches the rulebook and probably rips it as well. It ensures a discount to retail investors with a minimal increase in capital and a substantial jump in market capitalisation. We asked a cross section of finance experts for their opinion on whether a bonus can be selectively issued to some shareholders. They included a prominent investment banker associated with the issue. Not one of them was certain it could be done; the best they could say was that RPL must have obtained legal opinion before making the announcement. Well, yes, but then the Reliance group – in fact both factions – is famous for stretching the rulebook or evolving unique interpretations of statute to suit its purpose. A former SEBI executive director is emphatic that such a bonus “vitiates the concept of equity and is like a preferential offer.” Let’s consider some issues raised by the announcement.

  • If SEBI and the Ministry of Corporate Affairs (MCA) permit a selective bonus that excludes the promoters, will it also permit the reverse where the promoters use their majority stake to award themselves a bonus and exclude retail investors or a strategic investor? Once the door is opened to a selective bonus issue for RPL, it will permit various forms of shareholder abuse.
  • Can RPL announce a selective bonus without even a board meeting? Is the role of the board limited to rubber-stamping the bonus ratio? More importantly, will SEBI question them?
  • Can RPL unilaterally decide to exclude Reliance Energy from the bonus without REL’s board discussing the issue or seeking its shareholders’ consent? Remember, Reliance Energy investors have already gone to court over the unilateral transfer of power generation licences to Reliance Power and the Mumbai High Court asked SEBI to look into their grievances. However, former SEBI chairman, M Damodaran brushed aside all issues and cleared the IPO.
  • The bonus announcement punishes those investors who sold the shares on listing by using their money to pay those who remained invested. So you have a unique situation where a company that over-priced its shares punishes those investors who prudently cut their losses and rewards those who bought the shares at a lower price after they were listed. Who were these smart buyers who got a double benefit? Can a company use the share premium account to issue a bonus within days of listing? Does this not make a mockery of the IPO price discovery process? Normally, a bonus has to be paid out of free reserves; here is a company that has not even achieved financial closure (but was still allowed to raise public money) selectively distributing the money it has collected as share premium.
  • The bonus has been announced to compensate investors and make amends for the high offer price and excessive hype; but can a bonus issue be a form of compensation? What are the tax implications of such a payout?
  • What exactly does this bonus mean for the promoters of RPL and the shareholders? The promoters invested just Rs2,000 crore, whose post-listing value had jumped to around Rs75,000 crore. On the other hand, public shareholders invested Rs12,000 crore whose value dropped to Rs7,500 crore in a matter of days. Who is being compensated?
  • On another note, grey market operators, who had refused to honour their commitments after RPL shares listed at a discount to the offer price, suddenly turned honourable around the time that the bonus was announced. Some say that they received crisp Rs1,000 notes in cash in lieu of the money they had earned by short-selling the shares. With the grey market having restored its credibility, the stage is set for similar operations in future IPOs, unless SEBI, under the new chairman, puts an end to this dubious activity.

As we said earlier, the new SEBI chairman has quite a task in dealing with this issue.

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Poor customer service experience – this time with Kotak Securities!!

Posted on February 20, 2008. Filed under: Markets |

Sometime back I was lamenting about the very poor service levels of financial services companies and their lack of apathy for customers. You can read that story here.

This is another example of that poor service levels with regard to meeting clients on the appointed time, this time by Kotak Securities. Kotak Securities was behind me for more than 5 days asking for an appointment to explain(!!) about the new “investment” product their group company, Kotak Life has launched. I guess it is nothing more than a new ULIP product. I was very reluctant to meet the financial advisor and I tried my level best to avoid him. He persisted with me for 5 days and I finally relented to meet him on last Saturday at 10.00 AM at my home. The appointment was fixed on Friday morning so I never thought this guy would fail to make it on the next day. But he never turned up on saturday and neither he has called me after that to explain why he didnt turn up. I cant really understand what happened in between Friday morning and Saturday for this guy in not turning up, that too, after pestering me for 5 days!!

The point I dont understand with these financial firms are how they can treat customers with so much disdain? Not able to meet a customer at an appointed time, is a great sin, I would say.
There is usually no clarity or quality in the explanation being made by these so called financial advisors while explaining the products nor they can understand anything beyond what they already know. I believe financial services marketing is a very sensitive area where the customer needs and aspirations are to be kept paramount, but after seeing many Indian companies flouting them with impunity, I can only pity the poor Indian investors, thats us!!

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Few facts about Warren Buffet!!

Posted on February 11, 2008. Filed under: Markets |

Got the below as a forward in one of the group mail boxes. Before you proceed to read further, there is a word of caution. Many of the things listed below, you would have read it elsewhere but it is nice to keep reading good things again and again. I have added some personal comments to the statements about the great investor within brackets.

1) He bought his first share at age 11 and he now regrets that he started too late! (Mine in mid-20’s)
2) He bought a small farm at age 14 with savings from delivering newspapers. (Still saving to pay off the existing housing loan!!)
3) He still lives in the same small 3 bedroom house in mid-town Omaha, that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence around it.
4) He drives his own car everywhere and does not have a driver or security people around him. (Really curious to know how he wards of possible kidnappers!!)
5) He never travels by private jet, although he owns the world’s largest private jet company.
6) His company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis. ( I wish my boss is like that!!!)
7) He has given his CEO’s only two rules. Rule number 1: do not lose any of your share holder’s money. Rule number 2: Do not forget rule number 1. (Fantastic rule – really you need to practice it very sincerely if you want to make big money in the markets!!)
8) He does not socialize with the high society crowd. His past time after he gets home is to make himself some pop corn and watch television. (No cholesterol or what!!??)
9) Bill Gates, the world’s richest man met him for the first time only 5 years ago. Bill Gates did not think he had anything in common with Warren Buffet. So he had scheduled his meeting only for half hour. But when Gates met him, the meeting lasted for ten hours and Bill Gates became a devotee of Warren Buffet.
10) Warren Buffet does not carry a cell phone, nor has a computer on his desk.
11) His advice to young people: Stay away from credit cards and invest in yourself.
12) Last but not the least, Warren Buffet has donated USD31 billion for Charity!! ( A back of the envelope calculation converts into INR124000 crores – thats a good amount, isnt?!!)

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Client Service Levels of Brokerage houses!?

Posted on February 7, 2008. Filed under: Markets |

I decided to close one of my demat accounts with India Infoline as it was not being used at all. Why to have multiple demat accounts and pay the annual maintenance charges?

As soon as I decided to close the Demat account, I acted really fast (unusal of me!!) and submitted a letter to the local office of India Infoline during the third week of Sep 2007. I was told at that time that it would take a maximum of 3 weeks to close the account and I would receive the cheque for the balance amount lying in my trading account. Within a fortnight I got a call promptly from the India Infoline’s Mumbai office enquiring about my intention of closing the account and couple of other questions on client servicing etc., I was very thrilled because atleast one financial service provider is acting on time.

I have personally experienced that none of the brokerage houses, financial advisors turn up on time. I had instances of following up with them to find out what has happened and they hardly even bother to call up and apologise if there is a delay. So when things were different, I was totally impressed with the service from India Infoline and that too particularly for closing a demat account.

My joy didnt last forever. After that call nothing seems to happen for more than 3 months. I would have called the RM atleast 6 times in the intervening period but I was always told that the account has been closed and I would get the cheque for the balance amount. Last week when I was crossing their T Nagar office I just dropped in to enquire what has happened to the cheque. To my utter surprise, the RM apologises and produces the cheque to me dated 19 Nov 2007. He explained that as the account has been closed in their system they didnt have any contact details of mine and holding the cheque for the last 2 months.

Number of questions comes to my mind now.
1. Why India Infoline didnt send the cheque to my home and instead sent it to their T Nagar Office?
2. Why there is no formal communcation stating that my account has closed?
3. If they have sent the cheque to the RM to hand it over to the client, why they didnt provide my contact details to him?
4. Why did the RM kept saying that he has not received the cheque in the interim period between Nov 07 – Jan 08.

Luckily for me, the amount is just thousand odd rupees and it didnt really impact my cashflow. A lot needs to be changed with regard to service levels of these brokerage houses. I have had experienced myself or heard stories of very poor service levels from Kotak Securities, India Infoline, Geojit Securities, Sharekhan etc.,

Do you have any good or bad experiences to share?

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Tumultuous Indian stock markets!!

Posted on January 22, 2008. Filed under: Markets |

The last two days has seen record falls in the major Indian stock indices across the board. The NIFTY which was trading around 6000 levels on Thursday (Jan 17) went down and touched 4455 on Jan 22 (Tuesday), a fall of more than 1600 points on the NIFTY. The NIFTY has fallen around 29% from the record high of 6300 it touched sometime back.

The fall of the markets was justified on account of the poor economic condition in US, continuous fall in other major stock indices across the world, the higher crude oil price and huge write-down by financial institutions on account of sub-prime meltdown. But if you ask me did I expect this steep correction, honestly I have to admit, I didnt. All along whenever the world markets corrected, we were insulated and it was always claimed that Indian markets were de-coupled from the world markets. I was expecting a minor correction of 300-400 points on the NIFTY but the markets corrected four times more than that. A good lesson learnt!

When the markets opened on Tuesday, it was widely expected to fall following the weak Asian markets which opened before the Indian markets. The markets opened and got closed within few minutes following the 10% lower circuit for the index. Markets re-opened after 1 hour after the cooling off period and showed some signs of reversal but not could not sustain the momentum. The real recovery in the indices happened towards the close today more due to the short covering in the market rather than due to fresh buying, I guess. The sector which has got hit badly is Power and Real Estate from the data I collected. DLF, Parsvnath, Omaxe, Patel Engg, Peninsula Land, Ansal Housing are few of the Real Estate stocks which has corrected heavily.

There is absolute liquidity crunch for the retail investors in the market due to two major IPO’s of Reliance Power and Future Capital Holdings. Both have collected huge chunks of money from the investing public and they are not due to be returned atleast for the next 15 days. Margin calls were triggered in the morning and investors were forced to sell their long term holdings to meet the margin requirements. Most the brokerage houses could not execute the orders because of the poor margin arrangements for individual broking houses with the exchange. I personally felt that with Geojit and Sharekhan broking houses. I called Geojit Securities to place an order but was turned down by the dealer to place the order citing the reason that there is no margin available. I explained to him that I want to place a cash market order and not in futures and options segment. But I was informed that they are only taking orders for squaring off existing positions and not for initiating fresh positions even in the cash market. Most of the investors would have faced a similar situation. Sorry state of affairs even for people who wanted to pick up shares in the discount sale!!

The volatility during the last two days were phenomenal and the prices moved very violently. The intraday movements were so huge it is highly unimaginable. For instance, the intraday movements in Bajaj Auto was Rs500, Patel Engg Rs100+, M&M Rs100+ just to name a few. The other thing is the difference between the bid and ask price was also very wide. This may be due to lack of volume as most of the investors could not enter because of the severe margin pressure on the brokerages.

I have listed few shares which have corrected by more than 40% in the last one week or so. These shares may correct further and nobody knows what is the real bottom at this stage. If you like a company and convinced about the fundamentals, this crash has really proved a boon for the investors to pick up these stocks at attractive prices compared to what they were 1 week ago.

RPL – 147
M&M – 600
ITC – 183
JK Lakshmi – 109
Microtech – 207
Petronet – 63
GHCL – 97
MTNL – 116
IDBI – 99
Guj Alkali – 152
Bata – 175
Guj NRE – 105
Surya Pharma – 88
Varun ship – 67
Power Grid – 99
Patel Eng – 725
Ind Hotels – 111
Hotel Leela – 41
Bongaigaon – 51

A word of caution, please check the fundamentals before you buy the scrip and be informed that I may already own some of the shares listed above.

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Mini contracts on NIFTY and SENSEX!!

Posted on January 2, 2008. Filed under: Markets, Mini-contracts, Nifty, Sensex |

Both NSE and BSE have introduced mini-contracts on their primary index, namely, NIFTY and SENSEX.
What are these mini-contracts?

As I wrote sometime back, Futures and Options contract size was determined with Rs2 lacs as the base amount for determining the contract size. Over a period of time with increase in the prices, the contract sizes of many F&Oable contracts have gone up way beyond Rs2 lacs. NIFTY with a lot size of 50, will have a contract size of Rs3.05 lacs (50 X 6100). The exchanges thought it would be a good idea to introduce a mini-contract so that margin requirements does not become a problem for small retail investors.

The mini-contracts of NSE is 20 shares instead of 50 shares for the regular NIFTY contract. The margin amount for Mini-NIFTY should be arround 13,700/- compared to Rs34,000/- for the regular NIFTY contracts. As mentioned by the exchanges, with the introduction of the mini-contracts, there will be an opportunity for retail investors to hedge their portfolio better.

I dont think people who trade on NIFTY are doing it for any hedging purposes. Atleast, 90% of the people are buying or selling NIFTY purely as a speculative bet on the market rather than as a hedging tool. With the introduction of the Mini-contracts, it would accentuate the retail participation in the futures market by enticing them with low initial margins. Exchanges and brokers would be highly benefited with the introduction of the mini contracts more than the retail investors!!

What do you say?

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Revision of F & O contracts – good news for traders and small investors!!

Posted on December 11, 2007. Filed under: Markets |

For serious F&O retail traders, I guess this is a good news. NSE has reduced the lot sizes of F&O contracts on most of the cases and increased it in few. This is a long awaited decision since the share prices of scrips have sky-rocketed in the last few months. The original idea of the F&O contracts is that the value of the lot size should be equivalent to INR200,000 and should provide an easy hedging tool for small and retail investors. Totally, the lot sizes of 92 scrips have been brought down and for 14 stocks it has been scaled up. You can view the contract lot sizes of shares which has been revised here.

The contract value is arrived at by multiplying the lot size (number of shares) into the share price. For example, the lot size of Infosys Technologies is 100 shares. The contract value is 100 x Rs1725, resulting in the contract value of Rs172,500.

With the consistent raise in the stock prices, the contract value of many scrips in F&O has crossed the intended Contract Value of Rs200,000. Take the case of BHEL. The present lot size is 300 shares. At the ongoing market rate of Rs2700, the contract size is close to 810,000.

What is the problem with the increased in the contract value? Futures contracts on individual stocks are taken by paying an initial margin and the exchange does a mark to market on a daily basis. Therefore, when the contract value is way beyond Rs200,000 per contract, the initial margin what you pay is very high. Because of that, there is an higher inital outlay and goes out of the reach of retail traders. The new lot sizes are effective Dec 28, 2007.

There are few other things which comes to my mind immediately, for which I have to search for an answer:
1. As I am aware that F&O contracts are available for a maximum of 3 months forward maturity, what would happen to Jan 2008 month contracts which are currently traded in these scrips which have undergone a change in the lot size? How the reduction or increase in lot sizes would be reflected in those contracts? What mechanism the exchange follows in this regard?

Anybody who has information on how these things happen, please feel free to share it.

With the reduction in lot sizes, I would expect that there is more retail participation in F&O. Happy trading!!!

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Indian markets makes a gap up opening!

Posted on August 20, 2007. Filed under: Markets |

As expected the Indian markets opened with a huge gap up opening in the morning. At the time of writing this, the top gainers in the NIFTY are Suzlon, Sterlite, ONGC, ICICI Bank and SAIL.
The NIFTY was trading around 4226, up almost 122 points from Friday’s close. Sensex was trading around 14500, up almost 356 points.

Brokerage views:
Today morning I saw many brokerage houses have turned bullish again and has come out with buy reports. JM Financial Services commented that the worst is over for the market and doesnt expect the market to go below 13900-14000. The opinions change so fast from these brokerage houses.

Market rumours:
The market rumours say that Anil Ambani is looking to buy out 6 telecom companies across the globe with the help of private equity funding. I am not sure with the existing liquidity crunch in the global markets, if Anil Ambani could pull this out. Reliance Communication has remained muted to this market rumour and trading around Rs510/-.

Lets see how the last hour of trading today pans out.

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