Are banks and brokers chasing you again? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are banks and brokers chasing you again? 

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In this issue:
» Will economic reforms go through?
» PSU banks in trouble
» Moody's downgrades Eurozone rescue funds
» Fiscal cliff will make US dollar lose its safe haven status
» ... and more!

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Next week there is an important event that has the markets are eagerly waiting for. This is the Initial Public Offering (IPO) of the tower arm of Bharti Airtel. The Bharti Infratel IPO is expected to raise Rs 45 bn. This makes it the largest IPO to hit the market in the past 2 years. But interestingly this upcoming event has given the financial institutions like banks and NBFCs a cause to cheer as well. Their reason for joy is the expected return in IPO financing. The dry spell in the primary markets had almost led to the death of IPO financing as well. But with issues getting lined up again, financers have started to keep funds ready for IPO financing.

IPO financing refers to financing individual investors. The funds so lent to them are used by the investors to buy shares of IPOs. These are typically short term loans. The cost of funding usually is around 5-6% higher than the rates on the commercial paper. As a result, IPO funding helps brokers and financers make a quick buck in a very short period of time. From the investor's point of view, he is able to invest more money in an IPO issue. The investor hopes for a healthy listing gain from the issue. This gain would help him cover the cost of funds and make a profit at the same time. All in all it appears to be a win-win situation for both the investor and the financer.

While this may be true in theory however it may really not be true in reality. True that the financer is a winner in this deal. But for the investor there is one very big risk involved. The risk is expecting a strong listing. In case the issue does not list at a high price, the losses to the investor would be high.

The state of the IPO markets over the past two years has made the prospects of listing gains dim. Investors have punished companies that have overpriced their issues. This is true not just in India but overseas as well. Look at what happened with the most awaited issue of Facebook. Investors are still stuck with shares at a price much lower than what they had paid.

IPO issues should ideally be viewed like any other investment. If the fundamentals are strong and the valuations are attractive only then one should go ahead and invest in it. If not, then it is better to stay away from it. Investing purely for listing gains is like playing cards with the deck stacked against you. And this is exactly what IPO financing would force you to do.

Do you believe in IPO financing to fund IPO purchases? Share your comments with us or post your views on our Facebook page / Google+ page

01:10  Chart of the day
The global slowdown has affected the iron ore industry of India. Depressed global prices which have been impacted by the slowdown in demand for China has hurt India's exports of the ore. As per the Ministry of Commerce & Industry, iron ore exports from India have declined by around 75% YoY this year. This is just for the period from April to September. Iron ore exports have also been affected by the restrictions on the mining operations of India's largest iron ore producing states. India is the third largest exporter of iron ore in the world and its reduced exports would further impact the global ore prices. On the other hand, given the shortage of iron ore due to these restrictions, India has been importing iron ore in increasing volumes. Iron ore is an important component of steel. Given the shortage of domestic supply, Indian steel makers are increasingly relying on imports to meet their demand.

Source: Financial Express, Ministry of Commerce & Industry

The monsoon parliament session ended in a deadlock over the coal blocks allocation scam. The government has so far failed to initiate any major reforms to prop up the slowing economic growth. Will anything come out of the winter session? Much will depend on the outcome of the voting on the issue of FDI in multi-brand retail. The UPA government ended the deadlock after agreeing to a non-binding vote. Of course, the UPA does not need the parliament's approval. But a defeat on the issue could build pressure to withdraw the controversial reform. This could further affect passage of other reforms such as FDI in pension and insurance, simplifying the tax system and so on. This would not only put pressure on government finances and economic growth, but also have consequences for the UPA in the general elections slated in 2014.

The Competition Commission of India (CCI) seems determined to make its presence felt. Even in sectors like banking that have dedicated regulators. The governing body is keeping a hawk eye on India's most prudently regulated sector. The result of the same though may not be in the best interest of consumers and shareholders. It may be recalled that the Reserve Bank of India (RBI) had deregulated the savings bank account interest rates in October 2011. Banks were earlier paying a mandatory 4% interest on savings account balances. After the deregulation, select entities started offering interest as high as 6 to 7% on savings account balances. This saw a rush of new accounts for these entities. Needless to say that these were smaller private sector and foreign banks that had little option to entice new customers. The largest PSUs and private sector entities, however, did not budge. They claimed that interest in excess of 4% was unviable for savings accounts. More so for zero balance savings accounts.

The CCI however wants all banks to offer higher rates. By not doing so, it believes that banks are depriving customers of their rightful due. We would beg to differ here. The CCI should understand that banking as a business is very different from other commodity businesses. Also forcing banks to offer higher rates could be detrimental to the interest of customers and investors. Higher interest on loans and lower margins for banks respectively could thwart the growth prospects of the sector altogether.

The Eurozone was dealt a fresh blow as Moody's Investors Service downgraded the region's rescue funds and unemployment hit a new record high. Moody's has cut its top ratings on the two euro rescue funds - the European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) - by one notch. It has also continued to maintain a negative outlook. Earlier, France lost its triple-A debt rating due to risk to economic growth posed by the country's continued structural economic challenges. France is the second largest contributor to the two entities' financial resources. It acts as a provider of callable capital for the ESM and as a guarantor country for the EFSF. Germany is the largest backer of the schemes, and its credit rating remains at Aaa, despite a recent review by Moody's. The ESM and EFSF are crucial mechanisms for the rescue plan for the Eurozone, routing aid from Europe's wealthy countries to the crisis-stricken governments and banks of Greece, Spain, Portugal and Ireland.

For how long can the US dollar hold on to its reputation as a safe haven? For the past sometime now we have been witnessing a paradoxical situation with respect to the world's reserve currency. Considering that the US has accumulated massive debt and the government is printing money at the drop of the hat, the dollar should be losing value. But that has not been happening. Indeed, the dollar has gained against currencies such as the Euro. The only reason for this is that the Eurozone has been in a worse shape than the US. The dollar by itself does not seem to have much merit. And at some point in time, investors are going to realise this and look to invest in non-dollar denominated assets. The fast approaching fiscal cliff - combination of tax hikes and spending cuts is not helping matters either. All of this means that the US government needs to urgently come up with a solution that will reduce spending if the longer term prospects of the dollar are to stay intact.

After opening the day on a positive note, the Indian equity markets are currently trading below the dotted line. At the time of writing, the Sensex was down by 46 points (0.2%). Among the stocks leading the gains were HDFC Bank and Bharti Airtel. Other major Asian stock markets have closed the day on a mixed note. On one hand Korea and Taiwan closed in the green. However, markets in China and Hong Kong closed in the red.

04:55  Today's Investing Mantra
"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative." -Benjamin Graham
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