More than three years of record breaking wealth creation on the stock market has every investor wondering how much money can still be made, and how. A quick answer is—a lot and without taking too much risk. The recently closed initial public offerings (IPOs) of Reliance Power and Future Capital point to what we are talking of. That IPOs can be a treasure trove for investors is something we have already said in this magazine (issue dated 30 November 2006 available at www.moneytoday.in).
| Word's Worth |
| “Some adjustments in income tax slabs could be made but not any substantial reduction in rates” — C Rangarajan, Prime Minister’s Economic Advisory Council chairman |
| “We expect the interest rates to drop in the first quarter.After that we will see if we can write down the rates [for our customers]” — V Kamath, CEO and managing director, ICICI Bank |
| “Everybody is entering equities as penny stocks worth Rs 5-10 are rallying.You are getting 100-200% in a month’s time on shares” -Krishna K Nathani, managing director Indiabullion.com |
| "From a long-term perspective staying invested in realty for 5-7 years likely to yield returns” — Sutapa Banerjee, senior VP, ABN Amro Bank |
| Source: Economic Times, The Telegraph, Reuters, Mail Today |
What is different now is the quantity and quality of public issues that are lined up in 2008. These IPOs and FPOs will suit investors of varying risk appetites and their diversification needs. In 2007, Rs 45,317 crore was raised through public issues—an all time record.
According to Prime Database, 2008 could boast a figure of Rs 70,000 crore, 50% more than 2007’s record. Another Rs 50,000 crore could be collected by new fund offers (NFOs) of mutual funds. So by December 2008, the big bang Reliance Power IPO could appear as no more than a trailer. On the quality of the forthcoming issues—a matter of higher relevance to retail investor than the number of offerings—two trends hold out hope.
Most of the forthcoming IPOs are from known promoters. Says Prithvi Haldea, chairman, Prime Database: “Unlike in the past, almost all issuers are from wellestablished companies planning to raise capital for expansion or disinvestment by venture capitalists.” Demerger of businesses, which is expected to pick up this year, will also bring some quality issues.
The companies planning IPOs are from diverse sectors (see tables), something of key relevance to investors looking to reduce risk through diversification. The rush to raise money has more to do with the fundamentals of the economy than promoters’ desire to cash in on investment frenzy generated by the secondary market.
The continuing pace of high economic growth fuelled by rising consumer demand—both domestic and exports—has most businesses committing huge investments. Most public issues will feed this investment demand. Yet all this doesn’t mean you can invest in any public issue with your eyes, ears and mind shut.
There are six thumb rules of investing and benefitting from IPOs that are elucidated in the issue mentioned earlier. These are specific to investors interested in shortterm gains. That’s not to say IPOs won’t deliver good returns in the long term, it’s just that your investment strategy will have to be different and similar to what you would adopt to pick up stocks in the secondary market—in short, betting on quality issues with sound management backing and strong business plans.
| IPOs in the next three months | ||
| EXPECTED DATE | COMPANY | ISSUE SIZE (Rs cr) |
| 24-27 Jan | KNR Constructions | 140-150 |
| 31 Jan - 6 Feb | Wockhardt Hospital | 1,000 |
| 30-31 Jan | Manjushree Extrusions | 35.7 |
| Jan (last week) | Techpro Systems | 250 (approx) |
| Jan-Feb | GSS America Infotech | 150 (approx) |
| Jan-Feb | EMAAR MGF | 5,000 (approx) |
| 31 Jan - 5 Feb | IRB Infra Developers | 1,100-1,150 |
| 4-7 Feb | Globus Spirit | 68 |
| 4-8 Feb | SVEC Constructions | 40-50 |
| Feb (week 2) | Vascon Engineering | 500 (approx) |
| Feb (week 2) | Jhaveri Flexo India | 50 |
| Feb (first half) | Onmobile Global | 400 |
| Feb | Alkali Metal | 55 |
| Feb-Mar | Rural Electrification Corporation | 957 |
| Feb-Mar | Oil India | 450-500 |
| Mar | Lodha Builders | 8,000 |
| Approximate dates and issue sizes | ||
| Other IPOs in 2008 | ||
| COMPANY | ISSUE SIZE (Rs cr) | |
| State Bank of India | 15,000 | |
| Essar Power | 5,000 | |
| UTI Asset Management | 4,000 | |
| Vatika Group | 4,000 | |
| National Aviation | 2,500 | |
-Narayan Krishnamurthy
| Hiring slump | |
It is not exactly an auspicious start to the new year for a job seeker. Apart from the telecom and ITeS sectors, hiring activity in January-March 2008 will slowdown in most sectors including IT, retail and infrastructure, reveals the TeamLease Employment Outlook Survey for January-March 2008. -Rajshree Kukreti | |
| JOB SCENARIO | |
| Sectors where job growth is slowing: | |
| Infrastructure, retail, media and FMCG, financial services, IT, and manufacturing and engineering | |
| Sectors where job growth is rising: | |
| Telecom and information technology enabled services (ITeS). |
Yes, says the National Consumer Commission: “The stock exchange acts through its members, and controls the mode, manner and performance of the contract between the investors and member brokers...so it’s a service provider.”
It also pointed out that a stock exchange is required to maintain a customer protection fund, set up on Sebi guidelines—the exchange and its members have to make yearly contributions—which can go towards settling any claims.
However, the amount of compensation you are entitled to depends on the rules of that particular exchange. For instance, the ceiling for Delhi Stock Exchange (DSE) is Rs 1 lakh, but the Bombay Stock Exchange, the upper limit is Rs 10 lakh.
This verdict was passed on a petition filed by DSE, challenging the State Commission’s order directing it to compensate eight investors when brokerage firm PK Wadhwa & Co defaulted. DSE pled that an investor is only a broker’s responsibility but the commission has asked it to assume responsibility.
-Rakesh Rai
| Good to know |
| A stock exchange is liable in case of default by a member broker if: |
| • The investor is unable to recover the amount invested through a member broker for purchase of shares. |
| • The investor does not get the amount receivable for the shares sold by the member broker |
| Telling figures |
| Some figures that have immediate or long-term personal finance implications |
| Rs 40,702 cr is the outstanding retail portfolio of moneylenders, which speaks volumes about the penetration of banks in India |
| 1 crore is the incremental demand for housing, per annum.This is why realty remains red hot investment sector |
| 105.35 million is the number of individual earners in the country who own at least one life insurance policy. India’s paid workforce size is 321.4 million. |
Upping the ante
| Tax on SAR |
| Smart and savvy employees, who opted for share appreciation rights (SAR), a diluted form of employee stock option plans or Esops, have cause for concern— their holiday on tax is over. The Mumbai-based Income Tax Appellate Tribunal in its verdict said that SAR is an incentive plan or deferred wage contingent on company’s performance in the stock market, which will be taxed under the salary head of beneficiaries’ income. Unlike Esops where one holds shares, SAR lets employees exercise the right to claim value appreciation of the underlying equity shares without actually owning them. Esops are treated as fringe benefits and is taxed at 33.99% of fair value. In case of SAR, as there is no ownership, the appreciation will be added to the individual’s income and taxed accordingly. — R Sree Ram |
Pension plans from insurance companies are almost the same; they all offer a market-linked option these days in the accumulation phase. However, Dream Life Pension from Bharti Axa, comes with an accumulator option, over and above the regular contributions. Hence, you as a policyholder have the option to exercise the accumulator facility by which you can increase your annual contribution by 5% or 8%.
In the long run such an additional contribution can help you meet, if not beat, inflation. Being a market-linked plan, one can make the most of equity exposures over the long term. But the policy comes with only three fund options, which broadly covers the spectrum from low to high risk, with up to 100% equity exposure.
Though the initial premium allocation charges are as high as 21%, depending on the amount of annual contribution, it ends by the sixth year. A policy administration charge, at Rs 30 a month, is applicable throughout the tenure of the policy.
At the end of the accumulation phase or on vesting, onethird of the corpus can be withdrawn tax-free and, as mandated by the law, an annuity has to be bought with the rest of the amount. This plan is good for anyone looking at retirement planning and contributions for over 10 years.
-Narayan Krishnamurthy
| At a glance | |
| ENTRY AGE (YEARS) | 18-55 |
| INVESTING AGE (YEARS) | 44-65 |
| MINIMUM PREMIUM (Rs) | Annual 12,000; single 25,000 |
| ACCUMULATOR OPTION (%) | 5 and 8 |
| MINIMUM TOP-UP PREMIUM (Rs) | 2,500 |
Random nuggets of wisdom
There has been a dramatic slowdown in foreign flows into the Indian markets since end-Oct 2007. But this has not affected the stock market indices, indicating the weaning of the FII impact on the fortunes of the Indian stock markets.
