Cash for IPOs: Are you party to it? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Cash for IPOs: Are you party to it? 

A  A  A
In this issue:
» Brokers offer 'cash rewards' for IPO applications
» Smallcaps - To be or not to be?
» 3G auction finally in process, but...
» India's long term concerns
» ...and more!!

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A few days ago, we had highlighted how brokers in the real estate industry were colluding with developers and buying huge number of flats from them in a bid to create a perception of scarcity and hence, keep the prices from falling further. Well, if a leading daily is to be believed, a similar collusion seems to be happening in the stock the IPO market to be precise.

Here, brokers and sub-brokers are seen providing cash incentives to retail investors in a bid to use their demat accounts and subscribe to an issue on their behalf and also pay fully for the same!

Apparently, the brokers and sub-brokers seem to be resorting to such means at the behest of investment banks who are finding it hard to get retail investors to subscribe to IPO issues as they have not yet come back to equities in a big way. Hence, the request for their demat accounts to be rented out. Interestingly, this practice has been prevalent for many years now despite SEBI rules that prohibit brokers from paying incentives to investors.

While both investment banks as well as brokers are at fault here, investors who get lured by such schemes aren't covering themselves with glory either as they are sending out a wrong message to their fellow investors - that of the issue getting subscribed because of good quality.

It's time someone does something about it because if allowed to go unchecked, it may give distribution of wealth a whole new meaning. You as an investor also share the responsibility of curing this not accepting a 'cash reward' from your broker to rent out your demat account.

Have you ever accepted a 'bribe' from your broker to invest in a particular IPO? Tell us

Staying with brokers, have you ever heard a broker-analyst saying on a business channel that he has an 'overweight' or 'reduce' rating on a particular stock? If yes, are you clear what he means when he recommends this? If not, you aren't alone. Despite being analysts ourselves, we are also baffled by this mumbo-jumbo used by these experts, when they can otherwise simplify their recommendations to just 'Buy, Hold, and Sell'! What's your view?

01:21  Chart of the day
Today's chart of the day shows how much Indian households invest directly in shares, calculated as percentage of the country's GDP. Interestingly, while the figure remains low throughout the last few years, it has been seen that the share of households' savings that go into stockmarkets tend to rise just before a bubble is about to reach its peak. And that's the sad part.

Data Source: RBI

Small cap stocks have been the clear leaders of the current bull-run as seen from the 141% rise in the BSE-Smallcap index since March 9th 2009. As compared to this, the BSE-Sensex and BSE-Midcap indices are up around 93% and 128% respectively.

Data source: CMIE Prowess

Even valuation of smallcap stocks have skyrocketed during this period, with the BSE-Smallcap index's average P/E moving up to 16.2 times today, from 5.9 times at the start of this rally. At these levels, small-caps are definitely a lot more risky than they were a few months ago. You, therefore, must apply utmost caution before investing in this space. Our suggestion is that you must not get carried away by the sudden frenzy in small caps unless you are pretty sure that the companies concerned are fundamentally sound and have the potential to offer even higher returns in the future.

As Warren Buffett once said - "You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map - way off the map. You may find local companies that have nothing wrong with them at all. You can't do that with big blue chips."

And if you are a woman reader and would like to know how to go about turning over some such rocks to find valuable investment options for the long term, Equitymaster has launched an exclusive investment guide for you to help you make your independent investment decisions. It's called Rendezvous With Money. Download the free copy now!

Anyways, small cap stocks again had a field day today as the BSE-Smallcap index was up around 0.9% at the time of writing. Further, while the BSE-Midcap index was up 0.7%, the BSE-Sensex was also trading higher by 0.7% (110 points). Among other Asian markets, while China closed in the red (down 2.9%), buying was seen in Japan (up 0.6%) and Korea (up 0.5%).

The 3G or third generation spectrum allocation (which will provide telecom users access to high speed data services) process finally seems to be moving ahead, and it has brought some kind of relief for the telecom companies. However, the enthusiasm levels are quite varied. While some are content with the process moving in the right direction, others are of the belief that the price is 'too high' and that rolling out services would be unviable. This has somehow turned out to be a bummer for the industry, considering that it was looking forward to roll out 3G services since the past few years.

The general consensus is that at these prices (Rs 35 bn has been fixed as the base price for 3G spectrum allocation), 3G services would not be affordable to the common man. However, keeping in mind that basic infrastructure (such as telephony) is yet to reach every nook and corner of the nation, Indian telecom service providers will be focusing on rolling out these services in larger towns and cities. While telecom companies in India may be providing the lowest tariff rates in the world, one must remember that this was not the case a few years ago.

Truant monsoons may have wreaked havoc on India's growth this fiscal, but from a longer term perspective, the country's future is threatened by shortages of food, water and energy. When talking about security, while defense is the first thing that comes to mind, India's national security advisor Shekhar Dutt believes that defense is only one aspect of it and that from a broader perspective, the above mentioned issues need to be given utmost importance.

The importance of water, in particular, has never been highlighted so much before than it is now. This year's drought has underscored the need for India to improve collection of rainwater and focus on water harvesting. Power shortages, meanwhile, have continued to obstruct India's growth and supply is short of peak demand by 17%. Lack of rainfall and adequate water has hampered crop production as a result of which food prices are soaring.

All in all, India faces some serious issues and the government will really have to pull up its socks to bring about a drastic change. Is it up to the task? We are not so sure.

Ten continuous months of falling exports have compelled the Indian government to take some urgent action. Export-oriented sectors like information technology, textiles and diamonds, which are hit badly by slump in demand from the major markets in the US and Europe can finally have some respite, given that the Commerce ministry yesterday announced that in order to aid the exporters, the government will introduce tax cuts and waive duties on imports of capital goods for technology upgrades.

Moreover, in order to boost exports to emerging markets in Latin America, Africa, Oceania and East Europe, the government aims to offset credit risk and high cost of trade associated with exporting to these regions. The ministry has also cautioned that the export growth is expected to slow down to 15% in FY11 from 25% growth that was achieved in FY09. We hope that the government is prompt in implementing its plans and they do fructify well.

04:51  Today's investing mantra
"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors." - Warren Buffett
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2 Responses to "Cash for IPOs: Are you party to it?"

Manoj Barve, Pune

Aug 30, 2009

Cash for IPO's scheme is pure bribing. Can Govt. or SEBI not undertake any effective majors to blacklist such brokers and banks who indulge in such immoral practices?



Aug 29, 2009

It is usefull toinvsterlike me.

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