Don't fall for the IPO tax trap - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Don't fall for the IPO tax trap 

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In this issue:
» Finmin mulls giving tax breaks to IPOs applicants
» SEBI sees longer trading hours as fruitful! To whom we ask?
» Tata brings JLR to India
» Dollar finally gets some bullish views
» ...and more!!

If the finance ministry were to have its way, you might soon get a tax benefit for getting fooled by company insiders and investment bankers. Yes really! As per a leading business daily, the finance ministry is mulling the idea of providing investors with tax breaks for applying to IPOs (initial public offerings) as part of its budget proposals. And this has already brought cheers to the investment banking industry that helps companies finalise offer documents as also manage the entire IPO process, as one of its representatives has said, "Of course, it (tax break) will help the industry get out of the rut."

The newspaper has also gone ahead in commenting that - "For investors, the move would mean a new investment avenue far more rewarding than the existing ones."

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Rewarding? How? The report is possibly hinting at the 'listing gains' that a majority of applicants look for while applying to an IPO. There's an impression that an IPO allotment is like winning a lottery—it produces multiplied gains. Sure, many IPOs have created wealth, but in the end they are blind bets.

Some great investors, including Warren Buffett, will not touch IPOs. He wants years of listing and financial compliance before buying a business. And rightly so! As he says, "It's almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."

Weighing the evidences objectively, intelligent investors should conclude that IPO does not stand only for 'initial public offering'. More accurately, it is also shorthand for -
  • It's Probably Overpriced', or
  • 'Imaginary Profits Only', or even
  • 'Insiders' Private Opportunity'.
What do you say? And then they plan to give tax breaks for such 'imaginary' profit opportunities.

The Union Budget to be announced on July 6th has attracted tremendous attention from the media. Some have even gone on to say that this will be the 'biggest budget ever' and also that it will be the biggest opportunity for the government to 'deliver' what India wants. And then, we have minister after minister telling how he/she is going to bring about a sea change in his/her ministry's focus area.

We think that the government's 100-day plan (and all the media folklore around it) is aimed to achieve few objectives. You may see all the plans in place in 100 days but their implementation will take many-many years, probably more than the next five year for which the current government will hold its term.

Nandan Nilekani, who will head the Unique Identity Authority of India, believes the project is on par with the government initiatives on providing bijli-sadak-makan (electricity, roads and houses). It will provide a foundation for other infrastructure to be built upon it. He also believes that the project will transform the Indian society because by acknowledging the existence of a citizen, the government automatically provides him or her better access.

We agree with Mr. Nilekani. Take for example the subsidies that are given on oil products - petrol, diesel, kerosene and LPG. Since it is an indirect subsidy, .i.e., product prices are same for everyone, it is unintelligent and indiscriminate. Even the fuel that Ambanis and the Tatas use is subsidised.

With the help of the Unique Identity, fuel subsidies can be direct, i.e. delivered to the needy. This will not only be a better use of the tax payers' money, it will genuinely improve the financial condition of oil marketing companies - Indian Oil, BPCL and HPCL - who are struggling to cope with the indiscriminate fuel subsidy. But then, let us first see this happen.

As if 5 hours and 35 minutes were not enough, the SEBI (Securities & Exchange Board of India) is contemplating increasing the trading hours for Indian markets by around 2 hours and 25 minutes. From the current schedule of 9.55 am to 3.30 pm, the cash and derivative markets will then remain open from 9.00 am to 5.00 pm. The rationale SEBI gives for proposing increase in trading time is that this would give market participants in India a better chance to 'react' to development in global markets.

Well, at a time when the SEBI still needs to go a long way in establishing better safeguards for minority investors and promote equity culture by way of educating investors on long-term investing, increasing the trading times so that traders are better equipped to track daily global developments doesn't make material sense.

For you, dear investor, this would mean longer hours to see Mr. Market in action who, with his baggage of stock quotations, will have a greater chance of frightening or enticing you. And, least to say, for many who are glued to the stock ticker on a minute by minute basis, this would mean lesser productivity at work as more time will be spent in tracking how stocks are doing!

Anyways, at the time of writing, stocks in India were trading marginally in the positive led by gains in realty and metal sectors. The Sensex was trading almost 60 points up, closely following its peers in China and Japan. Stocks in Europe have opened mixed today.

While the BRICs are losing their patience with the US dollar, one man considered to be the world's best in the foreign exchange business is bullish on it. "I'm reasonably bullish on the dollar," says Henrik Gullberg, a currency strategist at Deutsche Bank, which Euromoney Institutional Investor Plc ranks as the world's biggest foreign-exchange trader. And the reason he gives is that the US economy is 'a quarter or two' ahead of the Euro region in rebounding from an economic slump. Now, that's interesting!

Tata Motors, which acquired the iconic British brands Jaguar and Land Rover (JLR) last year, has now decided to bring them to the Indian markets. It wasn't as if these products were not available in India before. However, from here on, Tata Motors will be the exclusive importer of JLR brands. Any hopes though of India contributing significantly towards the global sales of JLR will have to be quickly quashed as the company has set a very small sales target for itself.

It is looking to sell 100-120 units in the current calendar year, a tiny number even when one considers the luxury car market in India, which at 8,500 units annually is currently dominated by German car makers such as Audi, BMW and Mercedes Benz. Over the long term though, just as Russia and China currently are, the Indian market does hold a lot of potential. Important to add that during the calendar year 2008, JLR volumes in Russia and China grew at a staggering 60% and 63% respectively.

As if the global economic slowdown was not enough, the Indian pharma sector has one more serious problem to deal with, namely the US FDA (Food & Drug Authority) issuing warning letters with respect to manufacturing plants not meeting its quality standards. The US FDA of late has become very stringent. The first two companies to face its wrath were Ranbaxy and Lupin.

Now, the latest victim is Caraco, in which Sun Pharma has a 76% stake. In both Ranbaxy's and Caraco's case, the US FDA as such has not found any health hazards with respect to the drugs already marketed in the US although Caraco had to recall some products from the US in the fourth quarter.

However, given that the manufacturing plants have not been complying with good manufacturing practices, new drugs approvals will not happen unless the issue gets resolved. This is a considerable dampener for the sector as companies who have come under the scanner will not only see their revenues and profits but also their credibility taking a hit.

What is more, while the genesis of the global slowdown can be pinned on some unscrupulous bankers and institutions in the US, as far as the US FDA issues are concerned, domestic pharma companies have only themselves to blame.

04:58  Today's investing mantra
"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Isaac's talents didn't extend to investing. He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by the loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." - Warren Buffett
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7 Responses to "Don't fall for the IPO tax trap"

N.M.Rajugopal Shreedhar

Jun 30, 2009

Extending the trading time is a very good idea,especially for people like us who do small time on-line trading. Perhaps you have not tried on-line trading during market hours, just for yr info it's extremely difficult to place an order--hopefully, more trading hours would be a relief.
by the way, do we need to look at all issues unfavourably? can we not be a little more optimistic? regards


Suhaas Jogdeo

Jun 29, 2009

Dear Sir

Extension of trading hours by SEBI.

This was my idea, supplied to SEBI, NSE
and BSE, vide my email dt 5 Sep 2008 to them.
This idea was formed based on my own experience and various discussions, over the last 6 years or so, I have had with the working class. If many an industry are working round-the-clock, why not the 'Street' ?

Relevant extracts of my said email are reproduced below :

Quote :

With the current timings, i.e. 0955 to 1530 hours, the office-goers from IT & ITES, BPOs, Government Offices, Banks & Financial Institutions, Industries, i.e. the white-collar professionals having more inclination, strengths, knowledge and money to invest, are deprived of the daily opportunity to participate in stock investments & trading.

They are, thus, largely away from the stock market, as they need to heavily depend on calls to / from brokers, which is seldom possible during office hours.

Majority of this class have Internet at home & Dmat accounts. However, they are unable to participate in the stock market owing to the above timings.

To enable their active participation in the market, I have the following suggestions for your kind consideration :

1. Phase I :

On a trial basis, change the trade timing to be :

0955 hours to 1530 hours & 1600 to 2000 hours

2. Phase II :

If Phase I above is successful, enhance it further as under :

0955 hours to 1400 hours, 1600 to 1900 hours, 2100 to 2300 hours & 0400 to 0800 hours.

The above timings will allow investors & traders, who are working in various shifts.

Shall appreciate your views.

Best regards.

Suhaas Jogdeo



Jun 29, 2009

Your wrap is excellent...really a 5 minuter but exhaustive coverage. Thanks.


Sudhir Apte

Jun 29, 2009

Bravo! Never believed that such blunt and truthful advice about IPOs will ever be given so openly. Truly, you aaare brave. Keep it up !



Jun 29, 2009

very good information


Hitesh Shah

Jun 29, 2009


You wrote "Rewarding? How? The report is possibly hinting at the 'listing gains' that a majority of applicants look for while applying to an IPO. There's an impression that an IPO allotment is like winning a lottery - it produces multiplied gains. Sure, many IPOs have created wealth, but in the end they are blind bets."

If at all the proposal goes through, there will be a lock-in, so listing gains cannot be availed.



Jun 29, 2009

Thanks very much for daily 5 minute wrap up. I have been a regular reader of it for a long time.

I would like to share two points on today's wrap up:

1. The lure of making quick listing gains also extends to FPOs i.e. follow on issues as Graham outlined in his book "Intelligent Investor". Hence I wish you could have warned your readers not only on fresh IPOs but also avoiding all FPOs.

2. Quoting three alternate meanings for the word "IPO" from Jason Zweig's commentary pages without mentioning his name or referencing him is plagiarism. Hope you understand and avoid it in future lest it can seriously affect credibility of your writing.

Best wishes,

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