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DVR (Differential Voting Rights)

2010-04-28T19:54:00.002+05:30

Here we are going to discuss something new concept of equity shares in India ie. DVR (Differential Voting Rights). DVR are equity shares with differential voting rights and dividend benefits. A new concept for the investor community in India, DVR’s has features different from normal equity holding.
Shares issued under differential voting rights are likely to be available at a differential price, than the ordinary shares, as they carry a unique voting or dividend benefit i.e. a company can have shares where the voting right is 1 for every 10 shares and may have superior dividend pay outs say 5% over the normal dividend payout.

􀂃 DVR’s allow investors to earn better return/higher dividends in lieu of surrendering their voting rights.

􀂃 It allows a company to raise money without diluting voting rights and thus helps the promoters to defend against probable hostile takeovers.

The Companies Act permits a company to issue DVR shares, when among other conditions; the company has distributable profits and has not defaulted in filing annual accounts and returns for atleast 3 financial years. The issue of such shares cannot exceed 25% of the total issued share capital of the company. In the anomaly to above SEBI vide its circular dated July 21, 2009, in its direction to the exchanges, has asked them to amend the listing agreement, restricting
companies to issue DVR’s.

Example:
Tata Motors DVR
Tata Motors was the first company to issue shares with DVR’s in India. It had come out with rights issue of Rs. 4,147 crores to repay part of the short term bridge loan availed by its subsidiary for financing the acquisition of Jaguar-Land Rover from ford. These DVR shares carry 1/10th of voting right of ordinary shares ( i.e. DVR shares to have only one voting right for every 10 shares held) and entitle the shareholder of 5 percentage higher dividend as compared to ordinary shares. The DVR issue was done by the company at a price of Rs. 305 about 10% less than the issue price of ordinary rights at Rs.340. Trading in DVR commenced on November 5, 2008 on both the exchanges.

Gold as an Investment Option

2009-03-22T12:11:00.015+05:30

The love for gold in India is legendary. Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or safe haven against any economic, political, social, or currency-based crises. Apart from bank FDs. Even today very few populations in India understand equity market as a investment place. People still believe gold as a safe investment.

Historically, gold has proven to be a sound investment when it comes to fighting inflation–higher inflation leads to higher gold prices. Besides investment in gold has always played a significant role in religion, rituals and human sentiments, making it an indispensable investment option. This is truer for Asian investing than any other investing community around the world. Foreign investors, bankers and central banks of different countries use gold as a hedge against a declining dollar. During geopolitical and financial market instability, gold has proven to be a safe investment haven. Moreover, gold has generated phenomenal returns as an investment option in the past three years.

Here we will try to focus on some aspect of investment in gold. Its very difficult to time the market i.e. equity, real estate, or gold market. So we will not go to the discussion that is it the right time to invest in the market at the level of Rs 16000 per 10g or $955 per ounce. Its totally depend on individuals need of investments.

History of gold prices in Indian Rupee.

Currently, the fundamentals of gold as a commodity are good as there is a huge mismatch in demand and supply. From the supply side, gold mining has been stable for the last five years at 2,500 tonnes a year. New mines that are being developed are serving to replace current production, rather than cause any significant expansion in the global supply. The long lead times in gold production, with new mines often taking up to 10 years to come on stream, means mining output is relatively inelastic and unable to react quickly to a change in price outlook.

Here are some details of the returns comparison of gold and US dow jone index in US $.

Factors affecting demand in gold
(a) The volatility in the equity markets worldwide,
(b) US / Global recession,
(c) Inflationary pressures due to high oil, commodities & food prices
(d) Weakening dollar
(E) Dipping supply

Gold, with its traditionally negative co-relation with other asset classes such as stocks, fixed income securities and commodities, has made it a popular investment for portfolio diversification. An individual can invest in gold through various routes. The most conventional route is to possess it in physical form. However, this kind of investment is not only risky but also requires high carrying cost.

1- Physical form
The most conventional route is to possess it in physical form.You can buy it from any trader of gold in the physical form like biscuit, coin or bricks. This kind of investment is not only risky but also requires high carrying cost.

2- ETF (Exchange Traded Fund)
Gold ETFs are open-ended mutual fund schemes that will invest the money collected from investors in standard gold bullion (0.995 purity). The investor's holding will be denoted in units, which will be listed on a stock exchange. These are passively managed funds and are designed to provide returns in tandem with movements of physical gold in the spot market. In the last one year, almost all Gold ETFs have generated similar returns to gold bullion index.

3- Gold Bonds or certificates.
Issued by various central and commercial banks. These bonds generally carry interest rates and a lock-in period varying from three years to seven years. On maturity, depositors can take the delivery of gold or amount equivalent depending on their options.

On the basis of above data and information we can conclude that gold is a good investment option but investment at the current level is bit doubtful.

World Financial Market Meltdown: A look

2008-11-03T21:52:00.008+05:30

It’s very difficult to find out the real culprit of the whole mess-up in financial market but we can surely conclude that it’s because of loose financial policies and slapdash risk management towards the financial product. Somewhere in the race of competition we have forgotten the basic rule of financial system that every product have equal probability of profit and loss (RISK). I would like to discuss some example which I found could be the some of the rational behind this financial meltdown.

OTC Product (Over the counter)

These are the products which are traded over the counter. That means there is no defined market available for them. These products are not available for the every one, it is custom design product. If there is not a proper market for the product then how one can track the product performance and risk associated with it. In every country issuer of the product has to pay some margin on the product to the exchange to safeguard the products performance from any type of the risk. But this is also not possible for these products.

Excess loan

Here banks should have taken proper track records or ratings of customers and considered the sufficient capability of the customer before passing any loan toward them. And central bank should collect adequate margin from the banks for the advances. But in this competitive world it was not possible for the bank also to loose their customer so they ignored all basic requirements for the loan and advances.

Japan’s interest rates

One and half year back interest rate of bank of Japan (BOJ) was around 0% and Japanese Yen was trading at around 120Yen per $, which allowed the investors from different country borrow in Yen at very minimal interest rate and lend it in some other country’s currency at very high interest rate. This was pure arbitrage for the investors. But now conditions are not in the favour of those investors. Now interest rate of BOJ is 0.5% and Yen is trading below 100Yen per $ which force those investor for reverse carry trade.

How right is Rights Issue?

2008-02-01T18:10:00.000+05:30

Any company can raise money form public by three different ways
1-Initial Public Offer (raising first time from market)
2-Following Public Offer (Not the first time)
3-Rights Issue

Right Issue: in this case companies want to give rights to existing shareholder to buy the share. Here only existing shareholders are eligible for the right issue. Company can offer 1:3 or 2:5 or any number of shares. 1:3 means 1 share for every 3 share.
The company will make an announcement that it is offering the rights issue to all shareholders (those who own the shares of the company) on a particular date. This date is called the record date.
After the rights announcement but before the record date, the shares are known as cum-rights। Even if you do not currently own the shares but if you buy them at that time, you will get the rights issue. On the record date, they become ex-rights. If you buy them after this day, you do not get the rights issue.

Example:
For instance, XYZ offered its shareholders three rights shares for every share held by them. On February 1, 2008, the rights issue was offered at Rs 60 per share. The cum rights price of the shares (shares offered for sale with the associated rights) was Rs 500. If you bought these, the rights issue would have been applicable for you. The ex-rights price adjusted to Rs 170 [(500 + 60x3)/4=170 ]. These shares are offered for sale without the rights.

Q: Why should shareholder opt for rights issue?
A: Because they get additional share at discount rate।

Q: Should always opt for rights issue?
A: we should first see why company need these money, if it is for a sound business plan that will eventually increase the profits and share price, then it is a good bet.

Margin Calls

2007-10-22T21:28:00.000+05:30

Margin means leverage. That means you can buy more with less amount of money. Here broker pay the excess amount and charge interest on that excess amount. For this purpose client has to open a margin account with brokers. And initial client has to keep some amount with broker called initial margin and he can take the exposure double the initial margin. This initial margin is depending on the broker-client relationship.
There are tree types of margin client has to pay to broker
1- Initial margin
2- Maintenance margin
3- Call margin

Let’s take an example and understand all the above jargons
A client Mr. Amit Kumar kept Rs. 100000 in his margin account as initial margin. Next day he can buy future worth Rs 200000. Because the can take expose double the initial margin. Third day market crashed and the value of position become Rs. 150000 and the amount in your account become Rs 50000 (i.e. 150000-100000) and now suppose the maintenance margin is 25% that mean he should have minimum 25% of Rs 150000 in his margin account (i.e. Rs 37500) that mean he wont get any margin call. But suppose the maintenance margin is 35%, that is Rs 52500, now here the client will get a margin call of Rs 2500 (i.e. 52500-50000).
Now there is two ways to deal this situation either Client fulfil the maintenance margin condition or broker square off the position and increase the margin in the account.
Advantage and disadvantages
1- One can take more exposure than the investments
2- Margin trading is extremely risky.

P-Notes

2007-10-19T19:19:00.000+05:30

Participatory Notes (P-notes) are instruments (same is bill of exchange or loan) issued by registered FII's to overseas investors who wish to invest in the Indian stock markets without registering themselves with SEBI, and they charge interest on it. More than 50 per cent of all FII inflows into the domestic markets are estimated to be through P-Notes.

Why P-notes?
Investing through P-Notes is very simple and hence very popular among overseas investors. P-Notes are issued to the real investors on the basis of stocks purchased by the FII. The registered FII takes care of all transactions, which appear as proprietary trades in its books. Investors need not worry about regulatory filings or currency conversions and costs are also much lower than a direct entry by registering with SEBI.

Why do FII issue it?
Registered FII's also make money by allowing unregistered investors to invest through P-Notes since it is risk-free.

Problem with P-notes?
Difficult to distinguish between good money and bad money because SEBI don’t keep track of investment or invertors through P-note.

Solution to this problem?
There is no right solution to this problem, but SEBI can reduce this problem by providing easy FII licence to more and more investor.

Dollar v/s Rupee

2007-09-30T21:25:00.000+05:30

Dollar has fallen down from its Rs.41.05 level to Rs. 39.75 against Rupee. But it is not the only case with dollar and rupee, dollar is weakened against every currency. What went wrong with dollar, why people are not interested in dollar any more? What went wrong with the demand of the dollar? Why people from various country are not bullish on world biggest country’s currency. This is called as game of demand and supply. Here people are afraid about the recession of the US economy. Economists and investors from various countries are estimating the 8th recession in the US. US have just faced the one of the biggest crash in Sub-prime market. Various mortgage back funds got smashed. Many of them declare their bankruptcy and remaining are searching for acquirer. To save them government of US played very smart and only available option with them they have cut the FED interest rate. And this is not the final cut they are also planning to repeat this step in day coming. There are mainly two reasons for depreciation of dollar with reduction in interest rate. First: Any currency value is directly proportional to the interest rate of that country because investors don’t want to invest their money for the lower risk free return (risk free rate get reduced with reduction in interest rate). Second reduction in interest rate may lead to inflationary issue, and inflation is indirectly proportional to the currency. In both the above case investors start selling their investment in the dollar, which leads to reduction in the value of the Dollar. That’s the reason Rupee is appreciating and the Dollar is depreciating against every currency.

Fig: Value of Dollar per Rupee

Impact of FED’s interest rate cut on TECH!!

2007-09-12T21:40:00.000+05:30

As we all know that there are sentiments or expectations in the market that on 18th September 2007, the US central bank FED going to slash the interest rate due to sub-prime concern. Market is taking it as good news, but it’s very difficult to understand the whole impact of these cuts on the tech-firms, especially for countries that are service industry oriented (example: Technology exporter like India).
If FED cuts their interest rate then the investors who have positions in the dollar ($) currency would reduce their position which may lead to selling of dollar currency, which would weaken the dollar against other currencies. Indirectly it would appreciate the Rupee against the dollar, and appreciation of rupee may hurt the exports income and so on….. And this is not a good new for Tech companies like TCS, Infosys, Wipro etc.

Sub-Prime Concern?

2007-08-21T15:45:00.000+05:30

Sub Prime loan
It is a loan which does not comes under prime loan. For this type of loan bank charge more Interest rate than the normal prime loan, i.e. such loan don’t required any Good Guarantees.

Why People go for such loan
When people don’t have any option to pay their liability then they go for either Credit Card Payment or Sub-Prime Loan. And here Sub-Prime Loan is the better option

What is risk with these types of loan
The sub-Prime loan has the maximum Repayment default risk, because there are against very less or no mortgage (Sub-Prime Mortgage).

Why do Bank Lend Sub-Prime Loan
Bank Charges good amount of interest rate from the customer.

What is Sub-Prime MBS
Bank sell their asset ie Sub-Prime Mortgage in the market by converting them into security, Same as Bonds. This is called as Sub-Prime Mortgage Back Security.

How Bank Makes MBS Fund
Bank collect all loan including Prime and sub Prime Loan and form a fund and issue the bond to the corporate and other banks. The ratio of the prime and sub prime loan is depending on the Riskyness of the bonds.

Why do Corporate Invest in such MBS
The Yields of such Bonds are very high.

What is problem of Sub prime in US and UK
Lots of leading banks from their respective Country have the huge position in such type of Bonds. The sub prime Market in the US and UK crashed very badly. Due to which banks had to seize their investment because they were not able to value their investment, i.e. no Buying or selling in such investments. Which lead to lack of money supply (Liquidity) into the financial system. Due to which all global equity and debt market around the world face the crash.

CRR Cash Reserve Ratio (RBI Monitory Policy)

2007-07-31T21:33:00.000+05:30

RBI hiked the cash reserve ratio for banks by 50 basis points to 7%. But it failed to affect the Stock market bull momentum. When the news came on the television screen stock market fell down by almost 1% but after ½ hour it bounced back and went up by 2%. Here RBI wanted to drain access money from the banking system to control inflation between 4% to 4.5% . But due to Positive global cues, enthusing quarterly numbers and a strong bullish sentiment , it didn’t affect the market momentum.
The CRR revision will come into effect from Aug 4.

CRR: The percent of depositors' balances banks must have on hand as cash. This is a requirement determined by the country's central bank, which in the India is RBI. The reserve ratio affects the money supply in a country.

For example, if the CRR in the India is determined by the RBI to be 7%, this means all banks must have 7% of their depositors' money on reserve in the bank. So, if a bank has deposits of $1 billion, it is required to have $70 million on reserve.

Currency Carry Trade

2007-07-24T23:37:00.000+05:30

It is an arbitrage mechanism in which one party borrow fund in one currency and trade in other currency. In this trader borrow funds from low interest rate country and invest in higher interest rate country and exploit the opportunity of difference in the interest rate of two countries.
Let’s take the example of Japan and India. In Japan the interest rate is 0.50% and India the interest tare is about 8%. Arbitrager can borrow funds in YEN from Japan at the rate of 0.50% and convert that funds from YEN to RUPEE and then buy Indian stocks or bonds which can give return more than or equal to 8%. These types of trade are funded by leveraged fund, the gains or losses are huge, so it is very risky trade too.
The main issues of concern in these types of trade are change in exchange rate and change in interest rate. We have seen the small crash in March 2007, when there was an appreciation in YEN and central bank of Japan Had increased the interest rate from 0.25% to 0.50%, those days trader were reversing their YEN Carry Trade. They were selling their long position in Equity and bond market because:
1-They had to pay more DOLLARS against a YEN.
2-Cost of Borrowing has been increased.

When and Why to Exercise the Option Derivatives??

2007-07-18T21:21:00.000+05:30

Before expiry, option of Exercising Option Derivative is available with American Option. In American Option the buyer of the option has a right to exercise the option. In stock Market Index options are European option and stocks option are American option

When to Exercise?
The chances of exercise increases, when the future of the option trades in discount and the Option reaches to expiry.

Why to Exercise?
There are two reasons to exercise the option:
1- The market Price of the option is less then the intrinsic value (i.e. Spot-Strike) of the option because by exercising the option buyer of the option would get better price then selling is the market.

2- Synthetic value of the put is more than the market price of the same strike put.
Here the arbitrager can exploit the Put-Call Disparity (PCD) by selling the synthetic put and buying actual put in the market

Example:

Company XYZ
Spot=160
Future=155
Strike=150
Call Price=9
Put Price=3

Synthetic Put=Call-(Future-Strike)
Synthetic Put=9-(155-150)
Synthetic Put=4

In the Above Example the stock is in discount of 5 (i.e.160-155), arbitrager can sell synthetic put at Rs 4 and buy the actual put at Rs 3 in the market , in this trade he collects net Rs 1 and reverse the position on expiry because on expiry the would not be any Put Call Disparity. This trade is risk free trade.

Comment:
In this trade we should also see the other costs like STT and Brokerage, if the net received value is more then the all cost any one go for it.

What is Reverse-Mortgage?

2007-07-17T21:23:00.000+05:30

In a normal mortgage bank lend money or sanction loan against security or Mortgage and borrower pay EMI to the bank and pay their loan amount and the interest part.
But in the reverse mortgage system bank will pay EMI to the customer against the Mortgage. Here Customer would receive a fixed amount over a period of their life and at the end of their life (i.e. after death) of the customer; bank will takeover the property or mortgage of the customer. This facility is only available to the Senior Citizen. In this case relatives of the Senior Citizen can pay the full amount paid by the Bank to the Senior citizen and release the property from the bank custody.

This concept is very popular in western country. But in India also few banks are coming with such type of concept

Comment:
It is very difficult to comment on the success of this concept, in India we prefer to stay in joint family and we make agreement of transfer of property to our relative before death.

Market at 15000 level- Fear or Fun??

2007-07-16T15:25:00.000+05:30

Why Fear

1- Market at All time High.
2- VIX (Volatility Index) Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. Is at their all time high level. Which is negative correlated to the Indian stock Exchange (I.e. if VIX is high Market would be low and vice versa)

Why Fun

1- Lower implied volatility in Indian stock Market. (Nifty IV is 19% as on 16-07-2007)
2- July is a Result Month (Good Expectation from the Companies)
3- Lover PE Multiple (Which is going to come down after the results)

In the view of various fund managers from various top mutual funds and the brokerage houses 16000 level is not impossible.

What is Volatility ??

2007-07-16T14:03:00.000+05:30

Volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. Whereas a lower volatility would mean that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.

There are two type of volatility measure

1- Historical Volatility
Based on the Historical Return from the Index. Its shows the past uncertainty in the market. Some times it is called as realized volatility.

2- Implied Volatility (IV)
This is the current Volatility in the market. we can calculate it by using Black-Scholes Model. It shows the current uncertainty in the market. If the market is volatile the people would be ready to pay more than the normal intrinsic plus time value, this is called High IV and v-a-v.

When the market crashes then the IV in in the market tends to increase and when the market touches to their high level this IV tends to decrease, Because people who have long position they come in the market and ready to pay any price to cover their position.