It was to be the year of initial public offerings (IPOs) with public issues worth Rs 70,000 crore supposedly lined up for 2008. The year started off with a bang for investors. IPOS worth Rs 12,300 crore hit the market — including the biggest ever, Reliance Power — and were subscribed several times over.
| Monthwise collections by IPOs in Rs cr | |
| JAN 2008 | 12,300 |
| DEC 2007 | 1,558 |
| NOV 2007 | 3,393 |
| SEP 2007 | 3,891 |
| AUG 2007 | 667 |
| JUN 2007 | 11,906 |
Some answers can be found in the investor response to Reliance Power IPO. Led more by greed and rumour and less by fundamentals and analysis, a majority of investors in the IPO bit off more than they could chew.. That is, they invested with money borrowed at high rates of interest,. anticipating an even higher rate of returns on the day of listing. Their plan was to quickly offload the shares at a profit, repay the highcost loan along with interest out of the proceeds and still be left with a neat profit. And thus, not-so-bad IPO was done in by the method of investing.
Meanwhile, the January stoc market crash played its own role. With their fingers burnt badly, investors refused to touch the IPOs of Wockhardt Hospitals, Emaar MGF and SVEC Constructions. Of course, factors like the US subprime crisis and FII outflows also dampened sentiments, but as the table in the story below shows, stock markets in the West had been generating negative returns for more than a year.
| SUBSCRIPTION IN RECENT IPOS | ||
| Company | Issue size | Subscription received |
| Emaar MGF | Rs 7,077 cr | 81.7% |
| Wockhardt Hospitals | Rs 777 cr | 19.3% |
| SVEC Constructions | Rs 34 cr | 19.7% |
For the millions of investors in the Reliance Power IPO (the company has the single largest number of retail shareholders), the advice is clear—hold for the long term. The stock is closer to its fair price today that it was during the IPO. The logic of investing in the secondary market will converge with the logic of investing in an IPO — invest in stocks for longer than one day!
- Babar Zaidi
World wide wealth destruction
The Indian growth story is definitely intact, going by the latest Standard & Poor’s review of global equity markets. The report finds that the world’s emerging equity markets were devastated in January this year, posting an average loss of 12.4%. It adds that developed markets lost almost 8% in the month, painting a gloomy picture for global equity markets. However, the bad news, for India and its peers, seems restricted to performance in the last three months. Over 12 months, emerging markets have all posted healthy returns while developed markets have almost all done poorly. India’s 12-month returns, for instance, grew by 47.9%, while growth in the US was -2.4%.
STOCK MARKET RETURNS | |||
| 1 Month % | 3 Months % | 12 Months % | |
| France | -12.27 | -15.27 | -0.74 |
| Germany | -13.72 | -13.84 | 13.43 |
| Japan | -4.47 | -10.31 | -10.44 |
| United Kingdom | -8.85 | -16.54 | -2.22 |
| United States | -6.07 | -10.78 | -2.42 |
| Brazil | -8.59 | -11.33 | 61.44 |
| China | -21.41 | -34.00 | 37.25 |
| India | -16.00 | -9.35 | 47.83 |
| Russia | -16.12 | -10.20 | 9.12 |
| Based on country returns in US dollar | |||
| Source: Standard & Poor's; Data as of 31 January 2008 | |||
Loans for less
First there was a lot of noise about interest rates being reduced in the credit policy. However, the Reserve Bank of India deferred the rate cut. Then the market was abuzz with rumours that home loan rates would be slashed. Luckily, this time the market got it right. It started with HDFC reducing its retail prime lending rate (RPLR) by 25 basis points (0.25 percentage points), benefiting existing floating-rate borrowers. Soon after this, public sector lenders like Canara Bank, Allahabad Bank and PNB Housing Finance slashed home loan rates by 25-50 basis points.
| NEW LOW RATES | ||
| BANK | RATE CUT (%) | CURRENT INTEREST RATE (%) |
| HDFC | 0.25* | 10.25 |
| State Bank of India | 0.25 | 10.25-10.5 |
| PNB Housing | 0.5 | 10.75 (for loans above Rs 10 lakh) |
| Bank of India | 0.25 | 9.75 (for loans up to Rs 20 lakh) |
| Canara Bank | 0.25 | 10.25-10.75 |
| *Only for existing borrowers | ||
With the rate cuts, it is not just home loan rates that are headed south. The reduction in PLR by some banks will moderate lending rates for all categories of borrowers, including housing (floating rate), personal and auto loans. For instance, Bank of India, has reduced rates on educational loans and consumer loans (including vehicle and housing loans), by 1-2.5%.
The current rate cuts, though, might not benefit all existing borrowers because only some banks have cut their benchmark rates. While SBI and HDFC have cut PLRs, others like Canara Bank, Allahabad Bank and Corporation Bank have left them unchanged. This means that existing borrowers of these banks will continue to pay the old rates.
If you are an investor, it is time to act fast if you are thinking of investing in fixed deposits, because banks have started cutting deposit rates too.
The RBI governor, while announcing the quarterly monetary policy review, had asked bankers to explore the possibility of reducing interest rates in light of the high margin between deposit and lending rates. Even the finance minister, P Chidambaram, after meeting bankers, had underlined the need to cut deposit and lending rates. If not by their actions, but by their words, officials are talking down rates.
— Rakesh Rai
Art of investing
Small investors wanting to invest in art but unable to afford it, welcomed art funds. These funds buy and sell art and share the profits among investors. Though there’s been good response to art funds— Osian’s Art Fund raised Rs 102 crore and Crayon Capital Art Fund raked in Rs 60 crore—many investors are wary.
The main reason is the lack of regulation. The Securities and Exchange Board of India (Sebi) has now announced that art funds will have to get Sebi registration before launch, and will be subject to its directives like any mutual fund scheme. Art funds will have to be far more transparent and accountable to investors in terms of valuation and pricing of artwork. They will also have to regularly declare the net asset value of the fund.
— Rajshree Kukreti
A new credit rater
Apart from the usual documents that you submit to get a loan, your credit score could just become the most important criteria to determine whether you actually get the loan or not — and at what rate of interest. So far, Credit Information Bureau of India (Cibil) was the only active retail credit bureau in India.THE FEE STRUCTURE |
| • Rs 15 LAKH - Membership fee for credit institutions |
| • Rs 50,000 - Annual fee for credit institutions |
| • Rs 100 - For individuals to access their own credit report |
| • Rs 500 - Credit information on individuals for specified users |
Now, rating firm Crisil has announced plans to enter this business. It has applied for a licence to open a credit information bureau in association with Equifax of the US and Tata Capital. As the retail credit market grows, credit information companies see credit scores becoming an important tool to analyse borrowers. Last month, the government allowed 49% FDI in credit information companies.
The good news is that according to the RBI regulations for credit information companies, individuals can now access their own credit report by paying Rs 100. The regulations also specify which companies can obtain credit information.
So, what does it take to have a good credit score? It’s perfectly simple: just pay all your bills—whether credit card bills, home loan EMI or your phone bills—on time.
— Rakesh Rai
Telling figures
Some figures that have either immediate or long-term personal finance implications.
259 lakh The number of outstanding credit cards in 2007, a nearly 50% increase since 2005-6
Rs 81,882 cr is the amount of funds transferred on the electronic funds transfer system in 2007 in over 74 lakh transactions, up from just 8.19 lakh transactions in 2003
85% is the growth in the number of debit cards in the country, from 498 lakh in 2005 to nearly 923 lakh in 2007
Word's Worth
"Unless the global markets stabilise and RBI signals a downward bias in interest rates, volatility will continue”
— A Balasubramanian, CIO, Birla Sun Life Mutual Fund
"Current tax incentives do not encourage individuals to save for 15-20 years, as tax benefits after 1-2 years are equally attractive"
— Shikha Sharma, CEO, ICICI Prudential Life
"Banks have been asked to provide adequate credit to housing and consumer durables sectors as they are the drivers of the economy"
— P Chidambaram, finance minister
"If a separate tax benefit for pension investments of up to Rs1 lakh is not introduced, the salaried sections will be hit badly as the retirement corpus will be insufficient"
— Bert Paterson, MD, Aviva India
Source: Economic Times, DNA, The Telegraph
Financial wisdom
Do you know why you’ve invested and what you’re invested in? Starting this issue, you can check your financial wisdom quotient here.
1. The rate of return on investments should be lower than the rate of inflation
YES / NO
2. Income generation is the same as asset creation
YES / NO
3. The effect of compounding does not differ whether you start investing at 21 or 41
YES / NO
4. The entry/exit load and annual expense ratio of a mutual fund make no difference to its cost
YES / NO
Rate yourself:
Give yourself 0 for every Yes and 1 for every No
0-1: Better luck next time (and do take the time to read this magazine. There’s plenty of information that could prove useful)
2-3: You’ll do — your grasp of your finances seems pretty good, though, of course, it could be better!
4: Obviously a know-it-all. Just make sure to keep reading and keeping your knowledge up-to-date
