The most ridiculous reform proposed by SEBI so far!

Aug 13, 2012

In this issue:
» Bank bailouts have wiped out privatization proceeds!
» China's huge deficit in pension funding
» Will this institute make Indian cities better?
» Drought doubles up problems for Indian farmers
» ...and more!


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00:00
 
How do the idea of having a 'safety net' and 'guaranteed returns in 6 months' sound for your investments? No doubt they are very comforting. Well most readers would assume that the instrument being referred to would be a fixed deposit or a debt paper. But what if even your equity investments were ring fenced against market volatility? Well, as investors most of us would prefer safe returns in shortest possible time. But that the capital market regulator should go to any extent promising goodies to boost sentiments seems ridiculous!

The Securities and Exchange Board of India (SEBI) is worried about the lacuna in primary markets. Understandably so. The last 24 months have hardly seen any major capital market issuances by India Inc. Plenty of them have been cancelled at the last minute. Most others have seen investor money getting eroded over time. As a result investors have completely lost interest and confidence in IPOs.

Therefore, in order to reverse the fortunes of the IPO market, the SEBI has proposed some radical reforms. Key amongst them is the proposal to introduce a 'safety net' guarantee for the investors in IPOs. This safety net mechanism is being considered only for retail investors. It would be mandatory for promoters and other entities offloading shares through IPOs to compensate investors in the event of a loss. That is if the company's shares plunge below a certain threshold limit within six months of listing, the promoters will be liable to pay.

We believe that if implemented, such ridiculous reforms could be the perfect recipe for heightened speculation in stock markets. First of all the very idea of making returns from stocks in six months is uncalled for. Moreover, market speculators will hardly miss an opportunity to speculate on such IPOs. If promoters fail to compensate investors in the event of heightened volatility, confidence of retail investors in capital markets will be quashed for good.

Instead of making such absurd promises, we believe that the SEBI could do with some initiatives to ensure better corporate governance amongst companies. That coupled with promoting the idea of long term investing in stocks will solve the purpose. Fiscal incentives and adequate transparency on companies could go a long way in boosting stock investing. To top that we would also suggest that the regulator takes some solid steps in educating retail investors about stock investing.

Do you think that SEBI's suggestion to guarantee returns from IPOs in 6 months would boost market sentiments? Let us know your comments or post them on our Facebook page / Google+ page.

01:30
 Chart of the day
 
The growth in sales and profits of Indian companies for the quarter ended June 2012 has been one of the lowest in recent times. Add to that lingering concerns about key sectors like power, banking, telecom and energy. Domestic investors have almost lost confidence in the stocks from these sectors. However, as reported by Business Standard, data from the BSE shows that the share of FIIs investments in the market capitalisation of BSE companies has risen over the past 2 years. This is even as the market cap of BSE companies at the end of March 2012 were down by 16% since the peak of December 2010.

Data source: Business Standard

02:05
 
Financial Times, the popular financial daily, has come up with a very interest statistic. First, it has taken proceeds of the last 30 years from Government backed privatisations across the world. And then it has compared those with the amount these very same Governments have put into rescuing crisis hit banks. Do you know what the outcome has come to? Well, it so happens that the privatisation proceeds of roughly US$ 1.8 trillion get nearly wiped out by the US$ 1.7 trillion that has been pumped into various banks in order to bail them out. In other words, Governments have nationalised assets just as they have privatised them.

You would wonder why there haven't been more privatisations despite the efficiencies that the private companies bring to the table. The answer could be had from the fact that whenever political and economic interests have clashed, it is mostly the former that has prevailed. Thus, Governments may have shown a tendency to indulge in more privatisation. But they have backed off at the very first signs of opposition. Besides, the volatility in capital markets hasn't helped either. And as things stand today, there isn't a very strong chance of privatisation edging out nationalisation over the next few years at least.

02:35
 
Pension costs. This phrase is giving the Chinese government a headache. With an aging population, the costs became more of a burden for the government. As per a research carried out by Deutsche Bank which was published in the Bloomberg Businessweek, currently around 13% of the population of China is over 60. This is expected to increase to 34% by 2050. The rapidly aging population would lead to a huge deficit in the pension funding. As a result, the central government would be forced to fill up the balance. The government has stated that currently, it has sufficient funds to meet the pension related liability for a while. However, it is unknown as to how long would the funds last.

Another problem with the entire pension system is the huge inequality. In the rural areas, people are paid as low as 55 Yuan while in the urban areas, the amount is nearly 1,500 Yuan. This means that the people who are earning well continue to earn well even after retirement while those in the lower income group sink further. This has angered the younger working population who has expressed their dissatisfaction of funding the government retirees without having sufficient funds to fund their own retirements. The one possible solution for this is participation by the local provincial governments, but they don't like handing out cash for pensions. As a result, the Chinese government's credibility over sustaining the pension system has come under fire. It would interesting to watch and see how it performs in the future.

03:12
 
Most cities in India are faced with the challenges of rapid urbanisation. As a result, town planning has become very important. Indeed, there has been a sharp rise in the influx of people in India's leading metros. But poor planning has led to shortage of space and increased congestion. And it is not that the concept of town planning is something new. This was practiced even by the ancient civilizations of Mohenjo Daro and Harappa. Thus, there is an attempt now being made by India's prominent business leaders and academicians to lay the intellectual and financial foundations of the Indian Institute of Human Settlements. Nandan Nilekani and Uday Kotak are some of the names that have already doled out donations to this institute. Of course, there are already many ills afflicting the cities. And the establishment of such an institute may not be able to completely resolve these issues. Also, it could be a while before the institute really scales up as well. But one needs to start somewhere and this could be the solution that India is looking for from a long term perspective.

03:40
 
How can India's per capita income increase fivefold by 2025? It needs to reach levels of US$ 8,000-10,000 from the present US$ 1,600. This will help the country achieve the status of a middle income country. According to C Rangarajan, Chairman of PM's Economic Advisory Council, this can only happen if India grows at 9% annually. Economic growth is an important factor to generate employment and reduce poverty. Leveraging technology in every sector can also help enhance production levels. Right now, India is passing through a tough phase where growth has slowed and inflation continues to run high. The going may be rough. But one cannot ignore the fact that from the seven years beginning 2005-06, the avg. annual growth rate has been 8.3%. Can history repeat itself? We sure hope it does. But it will require sustained efforts on the policy front.

04:00
 
The weather officials have finally confirmed that India is facing a drought. So far, the rainfall has been 17% below normal. The situation is unlikely to improve in the coming weeks. For an economist, the drought in India may only mean a drop in the country's GDP (Gross Domestic Product) growth by some basis points. Given that agriculture now contributes just about 14% to India's GDP, the impact would be relatively less adverse than some decades ago.

But the ground reality is very different. For the 600 million people who depend on agriculture for their livelihood, the drought is severe curse. The worst affected are small farmers whose only assets are their small land holdings and livestock. One bad monsoon can wipe out a significant chunk of their annual income, thereby putting them into a severe crisis. Though the drought will not affect supply of staples such as rice, wheat and sugar, there is a shortage of grain crops used for animal feed. This will either force farmers to borrow to sustain their cattle. Or they may be forced to sell their cattle to slaughterhouses. Either way, both farmers and livestock would be adversely affected. The government has promised that it will provide animal feed to all vulnerable farmers. But reaching out to such a huge and scattered population will be a big challenge. The other big challenge will be on the fiscal front. With slowing economic growth and increasing fiscal deficit, this will only add further pressure on government finances.

04:40
 
The indices in Indian equity markets hovered around the dotted line for most part of today's session. The BSE Sensex was trading higher by around 20 points at the time of writing. Commodity, IT and auto stocks were under the maximum selling pressure. Most other Asian indices closed higher today with Europe opening on a negative note.

04:56
 Today's investing mantra
"Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics, the more uncertain and speculative are the conclusions we draw therefrom." - Benjamin Graham

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28 Responses to "The most ridiculous reform proposed by SEBI so far!"

N.M.R.Shreedhar

Aug 14, 2012

At the risk of sounding contrarian, I think there is merit in SEBI's proposal. At least this will ensure that only genuine companies approach the market with IPO's , especially when they realise they will have to return to their investors if the company does,nt perform--ultimately if we believe that the price of the company is dependent on its fundamentals, why should there be an objection? We have seen enough companies whose prices have plunged below their face value either after listing or within 6 months.regds

Like 

Gopinathan k

Aug 13, 2012

Here I wish to disagree with you.The SEBI chairman seems
to be quite OK to me. All these while the retail investors
in IPOs were taken for a ride by the promoters and other
interested parties in the market,then you never raised your
voice against it,at least I donot know of,now to put some
sort of accountability into the promoter's head is not a
bad idea at all.It may not work the way SEBI wants but the
purpose for which it is made is laudable.

Like 

sunilkumar tejwani

Aug 13, 2012

the idea is to compel the greedy issuers of equity the price it sensibly and to leave some thing on the table for investors, irrespective of market volatility if the issuers price the I P O offering at reasonable valuations, chances are that it is unlikely to fall below the issue price in volatile times if the business model of the company is strong enough to sustain the economic ups and downs.

Like 

S.K.DAMANI

Aug 13, 2012

This would be another way the promoters are going to cheat out the retail investors. From all the comments made so far, the one by t.shetty is the only correct method. Except that some changes are to be made.
a) The PE ratio at which the IPO is offered should not be more than 5. That is the rate at which some of the bluest of the blue chips are available at present. SBI, Tata Steel.
b) The PE ration should be based on a consisitent period of last minimum three years (and not last one year as suggested by Mr. Shetty)
c) If inspite of these measures the scrips falls below the issue price, the person to be blamed should be the Meerchant Bankers, CA's who have certified the audited accounts of the Company and those involved with due deligence of the Company. Whether they have actually visited the plant and had a first hand look at it or have decided the rates sitting in AC. officesof the promoter.
d) Comparison with peers Companies to justify teh valuation should not be the criteria at all.

These few measures would be good enough to ensure only quality IPOs and scrips which justify their prices come to the equity market.
Thanks Damani.

Like 

NMP

Aug 13, 2012

The best way to secure the gains of the investor is to allow the promoter to make IPO on genuine price. I remember when CCI (Capital Controller of India) was there only those companies were allowed to issue price 25/-). And the companies like Eischer motors, Pantaloon issued their shares at PAR. Now any company without any track record issues shares with hefty premiums. Sab corruption hai. Paise khilao aur apni marzi se premium lene ka IPO pass karwao SEBI se.

Like 

nmp

Aug 13, 2012

The best way to secure the gains of the investor is to allow the promoter to make IPO on genuine price. I remember when CCI (Capital Controller of India) was there only those companies were allowed to issue price 25/-). And the companies like Eischer motors, Pantaloon issued their shares at PAR. Now any company without any track record issues shares with hefty premiums. Sab corruption hai. Paise khilao aur apni marzi se premium lene ka IPO pass karwao SEBI se.

Like 

nmp

Aug 13, 2012

The best way to secure the gains of the investor is to allow the promoter to make IPO on genuine price. I remember when CCI (Capital Controller of India) was there only those companies were allowed to issue price 25/-). And the companies like Eischer motors, Pantaloon issued their shares at PAR. Now any company without any track record issues shares with hefty premiums. Sab corruption hai. Paise khilao aur apni marzi se premium lene ka IPO pass karwao SEBI se.

Like 

G M Arora

Aug 13, 2012

The promotors are making money without taking responsibility. The proposal by SEBI will be helpful in building confidence of common small investor. There are many scam and manifulations are being done under the carpet of various laws & using the escape routes. Therfore the common investor has lost confidence in the present mechanism. The detailed concrete proposal should come out which can boost confidence of every inestor.

Like 

Paresh Ashara

Aug 13, 2012

SEBI proposal for guaranteed return to retail investors in IPO investments is ridiculous. Instead, it would help to restrict IPO price bands within reasonable limits. For lack of better reference, the listing could be at book value for the new issue and avoid the book building route where it is all perception driven and speculative. Let the company performance discover the market price post listing. This also is not a panacea, however, it would at least introduce method to madness.

Like 

Krishna

Aug 13, 2012

Instead of this very dangerous idea, they should invest some time strictly over the capability and strength of the company going for IPO. The SEBI should go deep into the integrity and capacity of the promoters and feasibility of the products. When that is done with utmost sincerity, the rest should be left to the market.

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