answer to When coronavirus vaccine will be available

[Update] COVID-19 Vaccine: When can we expect it to be ready?

A study on When will COVID-19 Vaccine be made available? Enabling us to get on with our lives:

The same question has been lurking in all our minds, “When will the pandemic end?”. The virus has contracted to over 17 million people, leading to the death of 656,000+ people and has affected all of us.

The cry for this ‘Pandemic of Fear’ to end is also mainly due to the mental desperation arrived at after being cooped up in our houses all day. Never has the world had to shut down at such a massive scale. This has baffled not only us but also scientists with every modern development trying to catch up.( Source: Citizen undergoing Swab test in Delhi)

( Source: Citizen undergoing Swab test in Delhi)

Experts have never seen a virus with such varied symptoms where few are ill with minor symptoms. Some with enough to be in bed for a few weeks while others need to get hospitalized with intensive care requiring ventilators to breathe at times even leading to death. After noticing these symptoms Dr. Fauci (Director of the National Institute of Allergy and Infectious Diseases) went ahead and termed the virus as the Perfect Storm.

In a desperate attempt to buy time countries all around the world resorted to closing down the economy. But soon were forced to open up after noticing the social but mainly economic damages. Studies from Oxford University predicted that the virus may just simply disappear by itself. The government soon realized that the only thing much worse off than the lockdown was sitting in hopes that it would simply disappear.

This would raise the problem of the virus spreading wildly and killing many more before a level of immunity is achieved by the population. This has led to the government desperately looking for a way out. Today we take a closer look at the different options that have been considered and how the most viable exit strategy is being played out in India.

Different Routes Out for COVID-19 Pandemic

Experts have identified three ways out of this mess. They are:

1. Developing a vaccine

Where people who are vaccinated are immune and do not get ill even if they are exposed 

2. Herd immunity

Here 60% of the population gets affected by the virus in order to recover and develop immunity so that the virus can no longer cause an outbreak.

3. Permanently change our behavior/society to adapt to functioning in the midst of COVID-19

Every route shown above helps in reducing the transmission of the virus. But when we focus on what can be controlled a behavioral change has already been initiated and vaccines are already in development and are being viewed as the most optimal solution to the pandemic. The question that comes with developing a vaccine is ‘By When?’. 

Lets Talk COVID-19 Vaccines

Vaccines were first discovered in 1796 in order to put a stop to Smallpox. Vaccines use weaker strains of weaker viruses to fight off a virus. In the case of Smallpox, it was observed that those affected by Cowpox would remain immune to Smallpox, and hence safer variants were used as vaccines to prevent Smallpox.

In the case of COVID-19 (Sars-cov-2) too, weaker strains of the virus itself are being tested in order to find out if people vaccinated with a weakened form of the virus can provide enough immunity to protect people from COVID-19. At the moment there are over 150 countries are engaged in COVID-19 vaccine global access facility.

The procedure that goes into testing a vaccine

The testing process is divided into the following phases:

Phase 1: Here normal people of a small sample size receive the vaccine. The aim at this stage is to find out if the vaccine produces any adverse side-effects or reactions. The failure rate for vaccines at this stage is about 37 percent.

Phase 2: In the second stage, hundreds of healthy volunteers get tested for immunogenic and adverse effects. Here, the failure rate is about 69 percent. Phase one and Phase 2 put together are to take a minimum of 5 months.

Phase 3: the scientists continue to monitor toxicity, immunogenicity, and severe adverse events (SAEs) on a much larger scale, and here in all probability, the failure rate is 42 percent and the phase generally takes 6 months.

It is hard to predict the time the current vaccine may take. If we observe vaccines that were created historically, the total time taken varied depending on the virus and technology available at disposal. Chickenpox vaccine took 28 years and the Rotavirus vaccine that led to millions of deaths in Africa and Asia( particularly in India) took over 15 years for development. Hence pinning all our hopes on a vaccine may not be the best idea after all!

Although there have been significant technological advancement and the fact that many countries around the world are in a race to develop a vaccine may just speed up the process. A WHO official stated that after taking into account the speedy development on a global front a vaccine ready for public deployment may take 4-5 years. This puts the estimated date for the vaccine to be rolled out for the public by 2025. 

Where is India with regard to COVID-19 Vaccine?

Even though there are multiple countries around the world developing vaccines India caught everyone’s attention when a letter from Director General of the Indian Council of Medical Research(ICMR) Dr. Balram Bhargava got leaked which suggested that the first vaccines be rolled out by August 15. This received significant flak from around the world for its rushed timeline. The letter saidIt is envisaged to launch the vaccine for public health use latest by 15th August 2020 after completion of all clinical trials. BBIL is working expeditiously to meet the target, the however final outcome will depend on the cooperation of all clinical trial sites involved in this project.”

The vaccine in question is called Covaxin that has been developed by Hyderabad-based, Bharat Biotech India Ltd(BBIL). Covaxin has received approvals from the Drug Controller General of India for Phase 1 and Phase 2 trials.

A scientist familiar with India COVID-19 development strategy said that despite the vaccine having potential it was “overly optimistic” to expect it this soon. This, however, was one of the most subtle comments made against the deadline. Other scientists brought attention to the absurdity of making vaccines available this soon.

Anant Bhan, an independent ethics and policy researcher and past president of the International Association of Bioethics argued that such a rushed timeline carries potential risks and provides inadequate attention to required safety procedures. The only thing worse than dealing with coronavirus would be releasing a rushed vaccine.  T. Sundararaman( Global coordinator of the People’s Health Movement) said that such actions only lower the credibility of Indian Science. After all who would want another episode similar to that of Patanjali releasing a vaccine. 

(Balram Bhargava - Director General of the Indian Council of Medical Research)(Balram Bhargava – Director General of the Indian Council of Medical Research)

In a statement on Saturday, ICMR said Bhargava’s letter was “meant to cut unnecessary red tape, without bypassing any necessary process, and speed up recruitment of participants.”

Unfortunately, communities like Anti Vaxxers already exist where parents refuse to vaccinate children over the fear of side effects. Such rushed trails only push more people towards such causes. Here they would prefer to live with precautions rather due to fear of taking botched up vaccines.

Critics have already linked the political connections even in the manufacture of the vaccine. The date set as the deadline i.e. 15 August also coincides with India’s Independence Day. Although a sense of patriarchal pride would flow through every Indian if such a feat would have been possible to achieve. The criticisms, however, arise as August 15 is also the day PM Narendra Modi traditionally delivers a speech on Red Fort touting his governments’ achievements and major achievements.

“You want to make sure that, in your desire to get back to normal, that we don’t leapfrog over some of the benchmarks we need to reach in order to get to the next stage.” Dr. Anthony Fauci.

How will COVID-19 Vaccine be made available to all?

If and when the vaccine gets delivered it has already been made clear by PM Modi that the first recipients would be those working in Healthcare to protect us.

 It is logical that those next in line would be those most vulnerable. These include the elderly, women dealing with pregnancies, and infants then followed by others. Bharat Biotech, however, has said that if their Covax vaccine is approved it will be made available at Rs. 1000. 

But let us take the case of vaccines developed for other viruses like HIV. This may help us better understand why multiple countries and organizations are racing to create a vaccine apart from the obvious ‘ Save the World’. Along with credits for the creation, the owner of the vaccine receives Global Intellectual Property rights. The patent rights are granted for up to 20 years. During this period the owner has a monopoly over the product and can set the price they feel fit. This, unfortunately, has been used to limit access to such essential goods.

The HIV virus affected over 40 million people around the world with South Africa being one of the worst affected. In order to combat this South Africa started to manufacture low-cost generic antiretroviral medicines to treat HIV. One would expect such a thing to be allowed on Humanitarian grounds but if we have learned anything fro the Martin Shkreli case, such a thing doesn’t happen.  

40 US pharmaceutical firms with the South African government that started in February 1998 to prevent the country from manufacturing low-cost generic antiretroviral medicines used to treat HIV. Such information just makes us hope that the first to manufacture the vaccine is simply a country or organization that believes in making the vaccine affordable if not free and accessible to all.

Bottomline

An ounce of COVID-19 prevention is worth a pound of COVID-19 cure. And with no vaccine available today, prevention is the best way to protect a community from COVID-19.” – Dr. Ali S. Khan (Author of The Next Pandemic and from the team that identified and stopped infectious diseases – monkeypox, Ebola, and, yes, SARS – before they become pandemics.)

Although a lot of companies, non-profit organization and government are working to make COVID-19 Vaccine available as soon as possible, however, there is still a long way to go for all.

What are NPA's And How do they affect Banks cover

What are NPA’s? And How do they affect Banks?

Understanding what are NPA’s or Non-Performing Assets: While evaluating banking sector companies, one of the key aspects that every investor needs to check is its NPA. In this article, we are going to discuss what are NPA’s, How NPA’s are categorized, How do these NPA’s affect the banks, and the reasons for high NPA’s in India. Let’s get started.

What are NPA’s?

Loans and advances that are given by the bank require the borrower to make payments in the form of installments that include the principal and interest amounts. At times the borrowers miss out on these installments, either due to lack of funds or at times willfully. When the principal or interest payments are missed and remain due for over 90 days the loans are classified as NPA’s.

Understanding what are NPA’s or Non-Performing Assets

Categorization of NPA’s

Banks then further classify these loans categorized as NPA’s on the basis of time i.e. on the length of non-payment of the loans. This further classification helps banks judge the possibility of recovering the loans with interest. Further classifications are done as follows 

1. Standard Assets

Standard Assets are loans that have remained as NPA’s for a period of 12 months or less. The risk associated with Standard Assets is low as the possibility of repayment still remains.

2. Sub-standard Assets

Sub Standard Assets are loans that have remained as NPA’s for a period of 12 months or less. Here the risk associated with the nonpayment of the loan is increased in comparison to Standard assets.

3. Doubtful Debts

Loans classified as NPA’s that are classified as NPA’s for a period exceeding 18 months are known as Doubtful Debts. The probability of loan recovery from these NPA’s is extremely low. Banks that have high NPA’s with the majority exceeding 18 months are affected with reduced liquidity.

In addition to this, the banks also suffer a loss to their reputation as the banks are held responsible to verify the creditworthiness of the borrowers before giving away loans. This shows poor management and poor judgment on the part of the banks.

4. Loss Assets

NPA’s that are identified by auditors to be non-collectible or recoverable is classified as NPA. At times banks look at the possibility of salvaging the collaterals placed but if that does not happen the loss assets dent the Balance Sheets. The Banks will have to further create provisions where a portion of the profits are transferred in order to writeoff the assets.

Gross vs. Net NPA’s

NPA’s are also classified as gross or net NPA’s. Gross NPA’s include both the principal and interest aspects of the loan classifies as NPA. Net NPA is arrived at when the principal amount is deducted by any payments received by the bank from the borrower with respect to the loan and also includes the amount the bank receives through its insurance claims or provisions set for the loan.

I.e Net NPA = Loan Amount – [Interest payments received + Insurance (DICGC & DCGC) + provisions made if any]

How do these NPA’s affect the banks?

A balance sheet that has a high percentage of NPA’s immediately impacts the banks’ cash flow and future earnings. Firstly if these NPA’s if paid on time would’ve generated added capital to the banks which, in turn, could be used to by the banks to extend further loans. In addition to the reduced ability to generate profits the bank also has to create provisions in order to set off the loss due to NPA’s. This provision will be sourced from the future profits of the bank which otherwise could have been used to maintain stable growth.

What do high NPA’s mean to other stakeholders?

The best example to assess the effect of NPA’s on stakeholders will be that of ‘Yes Bank’. The high NPA’s will have a significant impact on its customers where all withdrawals available to customers were capped at Rs. 50,000. This impacted many businesses as surviving on a cash flow simply would not even cover employee expenditures of the respective business. 

NPA’s are also an important aspect when it comes to investment decisions. High NPA’s are a red flag that the investments in that particular bank are not viable. The shares of Yes Bank suffered an 85% downfall after the news of their poor financials broke out.

Also read: The Unravelling of Yes Bank – Fiasco Explained

India’s position with regards to NPAIndia’s position with regards to NPA(Source: Moneycontrol)

Indias NPA’s stood at 9.1% as of March 2019. Although there was a decline from 14.7% in the previous years there was little to rejoice about. This is because according to data if a bank provides loans that it can be expected that they may not be repaid as high as 9% of the total loans given.

The NPA situation, however, has rarely improved in India. As of 2017, there were only 4 countries with worse NPA’s than India. These countries were infamously known as PIIGS in Europe due to their NPA’s. They included Portugal, Italy, Ireland, Greece, and Spain. It is noteworthy that Spain’s NPA stood lower than India at 5.28%.

What are the reasons for high NPA’s in India?

What are the reasons for high NPA’s in India?

(Source)

A) Economic: The Indian Economy enjoyed a boom phase from 2000-2008 where banks started lending extensively to companies in the hopes that the boom phase last where everyone benefits. However, the 2008 financial crisis hit the economy hard and gravely affected corporate profits.

This further affected the NPA’s during the recession. It was also around the period when the government banned mining projects affecting the infrastructure sector. Hence it can be observed that the majority of the NPA’s are formed by power, iron, steel, and construction companies.

B) Negligence and Corruption: The negligence of banks in assessing the creditworthiness is a major reason for increasing NPA’s. This is normally seen in cases where big corporates are involved. Then comes the problem of corruption when where loans are made available to corporates even when they have poor financials and credit ratings.

The best case study present here has been the case of Vijay Mallya. Loans were given to Kingfisher by BOI on Current Assets like office stationery, boarding pass printers, and folding chairs placed as collateral. 

Also read: Demystifying Vijay Mallya Scam

Bottomline

Current times also show instances why it is important to have good NPA’s. Banks that do are able to weather a financial crisis better. Indian banks that already suffer from poor NPA’s now face a struggle to survive the COVID-19 environment. Rating agency CARE has estimated that the Gross NPA’s of Indian banks are likely to rise to 9.6-9.9%, compared to the December quarter of last year where it stood at 9.3%. Experts, however, believe that they are to rise significantly more than that.

Due to the economic slowdown, one may expect banks to provide lesser loans at high rates as they may not see viable investments. But this is not what happens. In order to restart the economy, it is very important that the banks provide capital to ailing and new businesses. This has now put the banks in a pickle where they already suffer poor health and now they have had to go ahead and provide a moratorium on existing loan payments and added loans to help businesses survive.

New Margin Trading Rules by SEBI cover

Margin Trading: The New Tighter Rule by SEBI (Dec 2020)!

New Margin Trading Rule by SEBI: Recently, SEBI published a new circular on margins that astonished the entire trading community along with the stockbrokers. Through this circular, SEBI announced tighter margin norms for the traders. In this article, we are going to discuss what exactly is this new margin rule introduced by SEBI and how it will affect the people trading in share market.

What is Margin trading?

In terms of the financial market, Margin would be a direct synonym to leveraging. It simply gives you the power to buy/trade in stocks that we can’t afford to buy. Through Margin trading, one is allowed to buy the stocks by just paying the part of the actual value of shares.

The margin can be paid either in terms of cash or in shares as security. The balance amount of shares are funded by the brokers. In other words, Margin simply refers to the amount of money borrowed from the broker to buy the shares of a company. The broker acts as the lender of money and the securities in the investor’s trading account, are kept as collateral.

The margin is settled later when the positions are squared off. We receive profit if we sell the shares at profit or we stand to lose the margin if we make losses.

— How to trade using Margin?

To trade using a margin account, one must have a separate margin account and not the standard brokerage account. A margin account is a separate trading account in which the broker lends money to the investor to buy a security which otherwise he will not be able to buy. The loan or the margin money which is borrowed from the broker comes at a cost i.e., the interest. Therefore, one should use a margin account for short term trading as the interest on the margin money keeps accruing.

Say, if you deposit Rs. 1,00,000 in your margin account and you have a 50% margin in your account, which means buying power of Rs. 2,00,000. Now, if you buy stocks of Rs. 70,000, you still have the buying power of Rs. 1,30,000. And we have enough cash in our margin account to cover for the transaction. We start borrowing only, once we have bought shares worth Rs. 1,00,000.

— Three steps in Margin trading

  1. We need to maintain the Minimum Margin (MM) throughout the trading session because volatility in the stocks can push the prices (up or down) more than one’s anticipation.
  2. The position needs to be squared off at the end of each session. If we have bought on margin, we need to sell it off before the end of the day (EOD) and vice-versa if we have sold using margin.
  3. If we want to carry the trade onto the next session, we need to convert it to the delivery trade. And for that, we need to keep the cash ready.

If any of the above three steps are missed then the broker automatically squares off the position in the market.

New Margin Trading Rule by SEBI

The Securities and Exchange Board of India (SEBI) gave out guidelines pertaining to Margin trading (which account for nearly 90% of the daily turnover of the stock market), which has not been welcomed by the brokerage firms with open arms. These rules will put an end to intraday trading and turnover generated out of it.

The brokers have been instructed to collect VaR (value at risk) and ELM (extreme loss margin) upfront from their clients. These rules will be implemented in a phased manner starting in December 2020.

  • Phase 1: From December 2020, the brokers will be penalized if the margin is more than 25% of the sum of VaR and ELM.
  • Phase 2: From March 2021 and June 21, brokers will be penalized if the margin exceeds 50% and 70% of the sum of VaR and ELM
  • Phase 3: From August 2021, brokers will be penalized if the margin exceeds VaR and ELM

Also read: What is SEBI? And What is its role in Financial Market?

Reactions from the Brokerage community

The broking community feels that this will put an end to leverage based intra-day trading. Currently, some brokers collect as low as Re. 1 for every Rs. 100 worth of trade. Here are some of the reactions from Big brokerage houses:

Nithin Kamath, CEO of Zerodha Brokerage Tweeted, “Today’s SEBI circular says that all brokerage firms have to stop intraday leverage products by August 2021 in a phased manner”. In another tweet, he added:

“While many (even we) don’t like restriction on intraday leverages by SEBI, I don’t think any regulator in the world has done so much to protect retail investors. A lot of this slows brokerage business but what is good for the client eventually is good for the business as well.”

nithin kamath on New Margin Trading Rule by SEBI

Jimeet Modi, CEO, and founder of Samco Securities said, “This was expected since last year after the December 2019 circular. Now the industry and exchanges will need to adjust to this new reality. This probably will also accelerate the market share towards discount brokers from full-service brokers. Differentiated margins was a service offering by full-service brokers which has now been arbitraged away. Our estimate is that almost 30-35 percent of the intraday turnover is based on additional leverage provided by brokers. Now assuming full margin is required, total turnover would shrink by approx 20 percent since balance part margin was still being collected from clients.”

How Market Turnover is impacted by new SEBI rule?

On July 21, SEBI gave out a circular pertaining to new rules on Margin trading. And these rules are directly going to impact the market turnover both in the cash and derivatives segment. The cash segment on NSE recorded an average daily turnover of Rs. 50,322 cr (April), Rs. 52,656 cr (May), Rs. 61,395 cr (June). And the derivatives market is nearly 18-20 times of the cash market. NSE is the largest derivatives exchange in the world with an average daily turnover of more than rupees 11 lakh crore.

Some of the brokerage houses are of the view, with the new rules if VaR+ELM, the daily turnover may shrink by almost 20-30%. The clients will also have to maintain a higher margin in their account and which will also impact their return on investment. And these changes in rules will not only impact the brokers but will also impact the government, in the form of reduced Securities Transaction Tax (STT).

Non-Banking Financial Companies (NBFCs) - What are they cover

Non-Banking Financial Companies (NBFCs) – What are they?

Understanding what are Non-Banking Financial Companies (NBFCs) in India: One of the key approaches to make money from the stock market is to select a fast-growing industry and look for the best investment opportunity in that industry. If the industry is growing at a good pace, the chances are that the top constituent companies in that industry will too grow at a similar pace.

One industry that is very powerful, growing at a good pace since last decade and is often confused by banking industry in NBFC in India. In this article, we are going to discuss what are Non-Banking Financial Companies (NBFCs) in India, their examples, the definition of  NBFCs as per RBI and a few top NBFCs in India. Let’s get started.

What are Non-Banking Financial Companies (NBFCs)?

In simple terms, Non-Banking Financial Companies are financial institutions that do not possess a banking license from the RBI but still provide bank-like financial services like loans, credit facility, retirement planning, etc.

The need for an NBFC arises when the banking structure already present does not fulfill all the financial needs in the economy. These may be due to rules and regulations that bind the banking sector or lack of reach in the service provided and accessibility to certain consumers across the nation. Here are some of the examples of NBFC’s:

  • Investment Banks
  • Mortgage Lenders
  • Money Market Funds
  • Insurance companies
  • Hedge and Private Equity Funds
  • P2P lenders
  • Currency Exchanges
  • Pawnshops
  • Chit Funds

After reading the definition, we must not mistake the role of an NBFC to a mere backup for banks in India. NBFC’s provide and lead in various services when compared to banks. NBFCs have alone made up for a 12.5% rise in Gross Domestic Product of our country.

NBFCs according to the RBI

NBFCs according to the RBI

According to the Reserve Bank of India (RBI), Non-Banking Financial Companies (NBFC) in India can be defined as:

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.” (Source: RBI)

The RBI uses the 50-50 test in order to judge if financial activity forms the principal business of a company or not in order to be considered as an NBFC. According to this test 

  1. Financial Assets must constitute more than 50% of the total assets (And)
  2. Income from these financial assets must constitute more than 50% of the gross income.

Companies that fulfill the criteria mentioned above are to be registered as NBFCs.

Difference between an NBFC and a Bank?

Even though a few activities may be performed by both they do possess the following differences:

  1. NBFC cannot accept demand deposits: Demand deposits refer to deposits that can be withdrawn without any prior notice. NBFC’s are restricted from providing this service and banks provide then in the form of Current A/C and Savings A/C.
  2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
  3. Deposit insurance facility: The deposits placed in banks are backed by insurance in order to protect the depositor against the failure of a bank. NBFC’s are not required to Insure the deposits placed.
  4. Reserve Ratio: Banks are required to maintain a portion of their deposits as reserves as directed by the RBI. An NBFC is under no such requirement.
  5. Foreign Capital: When it comes to banks the level of foreign investment is capped at 74%. Whereas 100% of foreign investment is allowed in an NBFC

Do all NBFC’s fall under the purview of RBI?

Not all NBFC’s fall under the purview of the RBI. Different NBFC’s are governed by different laws depending on the function they perform.

NBFCGOVERNING BODY
Merchant Banker
Venture Capital Fund
Stock Exchange
Stock Broker
Sub Broker
SEBI
InsuranceInsurance Regulatory and Development Authority
Chit FundsState Governments
Nidhi CompaniesMinistry of Corporate Affairs

Also read: How to read Financial Statements of a Company?

Top Non-Banking Financial Companies – NBFC’s in India

Here is a list of a few top NBFC’s in India on the basis of Annual Turnover and Net Profit:

— Bajaj Finance Ltd

Bajaj Finance Ltd

— Shriram Transport Finance Company Limited

Shriram Transport Finance Company Limited

— Muthoot Finance Limited

Muthoot Finance Limited

— Mahindra & Mahindra Financial Services Limited

Mahindra & Mahindra Financial Services Limited

— Sundaram Finance Limited

Sundaram Finance LimitedThat’s all for this post on Non-Banking Financial Companies in India. I hope it was useful for you. If you have any doubts related to NBFC in India, feel free to comment below. I’ll be happy to help. Happy Investing.

Understanding Volume Profile for Technical Analysis

How to use Volume Profile while Trading? – Technical Analysis Basics

Understanding Volume Profile for Technical Analysis: In today’s day and age, the success of any movie depends on the number of people viewing it. If the movie has a large audience anticipating it, then we can be assured that it will have a large audience watching it and which in turn garners success for the movie. Here, the number/volume of the audience plays a very key role in the success of the movie.

Further, if we were to take the example of television series or any online series, its success is measured by the number of viewers. Game of Thrones (GoT) is a classic example of it. It has one of the largest numbers of viewership in online content history. Therefore, eventually, it all boils down to the volume or number of people watching.

Similarly, in trading also, the volume is the number of shares traded on a day to day basis. If there is no volume, then the price of shares won’t move. In short, volume plays a key role in deciding the movement. In this article, we are going to discuss what is Volume Profile, how is volume calculated, the correlation between volume and price, and the Correlation between Candlesticks, Supports & Resistances with Volume. Let’s get started.

What is Volume Profile?

In simple terms, volume simply signifies the quantity of shares traded of a particular company within a specified time. If a move in prices of shares happens with high volume then, it is considered to be more reliable. And the move can be expected to continue. But if the move happens on low volume, then the authenticity of the move is always questionable.

To confirm any pattern or to apply any technical indicator on the market, the Volume profile plays the most critical role. It plays an important role in confirming the trends or patterns in the market. It also plays a very big role in understanding the buyers’ or the seller’s perspectives. Without sizable volume, even the strongest of technical indicator or pattern might not hold much significance.

Quick note: Market Profile or MKTP is the synonym for volume profile. They are used interchangeably.

How is Volume calculated?

From the above explanation, we understood that Volume simply signifies the number of shares bought or sold within a specified time-frame. The more active the share is, the higher the volume and vice-versa.

For example, in the case of RIL, if for the price of Rs. 1,900, a total of 50 share been bought and 50 share being sold, then the volume here is 50 (and not 100). For the correct volume calculation, there has to be a buyer for every seller to complete a transaction. We should not consider the volume to be 100 (50 buys + 50 sell). Let us understand it with the help of an example:

How is Volume calculated?

So, from the table above, we can notice different buying and selling activities for the security for the different levels of time. The buyers and sellers meet to create volume for the share. And the cumulative volume is a summation of all the volume traded for the day.

The following tables show the volume change in the market for the most active securities on NSE with a time gap of 40 minutes.

The following tables show the volume change in the market for the most active securities on NSE with a time gap of 40 minutes.

Figure 1: Most active share at 11.42 am (21/07/2020, NSE India)

Figure 2: Most active share at 12.22 pm (21/07/2020, NSE India)

Now, if we were to compare to the tables above, we can see the volume table of most active security and the change in them with a gap of 40 minutes.

If we take the example of Bajaj Finance from Table, we see the change in price by Rs 8 (reduced) and the volume has increased by nearly 50% in 40 minutes. So, the move with this volume can be said to be genuine and not artificial. Any move with sizable volume helps the technical charts and indicators to take shape.

Correlation between Volume and Price

While trading with keeping volume in mind, the prior price and volume trend is of high significance. If the move happens, with the volume near its average volume or more than average volume, then that move holds more significance, than the move with thin or low volume.

Now, let us understand the correlation between volume and price with the help of the following table:

Correlation between Volume and Price

If the price increases with an increase in volume, then the expectation from the market is that the bullishness or strength is expected to continue. And if the same move were to happen with low volume, we can say that one needs to be cautious and be careful about forecasting the next move.

Similarly, if the price of the share reduces, with increased volume, we can expect the bearishness to sustain and continue. And if the same move happens on less volume, we need to be careful with the next leg of this move. And similar interpretation can be done for Rangy markets.

Participants on Low and High Volume days

If the market is trading with low volume, we can say that there is a lot of retail player’s participation in the market.

However, if the market is trading on high volume, we can say that there is a lot of institutional buying and selling in the market. Higher volume moves have better conviction and a higher chance of a continuation of the move, in the near future.

Correlation between Candlesticks, S&R and Volume

If the candlestick pattern gives certain trade patterns and if the signal were to come near the supports and Resistances and to top it off if the volume profile were aligned with the technical signals, then the trade can be said to have a very high probability of being successful.

In other words, a marriage of technical factors along with volume goes a long way in generating strong trading signals. Traders can benefit significantly from it if spotted at the right time.

Also read: Introduction to Candlesticks – Single Candlestick Patterns

Conclusion

Let us quickly conclude what we discussed in this article:

  • Volume is one of the most important indicators in understanding the trend of the market.
  • It provides a very strong impetus to our technical view on the market.
  • If the market is trading on low volume, we can say that retail traders are participating in the move.
  • If the price increases with an increase in volume, we can expect the bullishness or strength to continue (and vice versa).
  • And, if the market trades on high volume, it generally is a signal that institutional players are participating in the market

That’s all for this post on Volume Profile. I hope it was useful for you. If you have any doubts regarding volume while trading in stocks, feel free to comment below. I’ll be happy to help. Happy trading.

Mandatory vs Voluntary corporate actions explained

Corporate Actions Explained – Mandatory vs Voluntary Actions!

Understanding Mandatory vs Voluntary Corporate Actions: The announcement of a Corporate Action attracts significant attention in the markets and also creates an exciting atmosphere. It may be Christmas early in the cases of dividends or at times a shock in some unfortunate cases of delisting.

Today, we try to further understand the world of corporate action through the means of an important distinction i.e. on the basis of choice available to shareholders. Here, we are going to discuss what are Corporate Actions, types of Corporate Actions and difference between Mandatory vs Voluntary corporate actions.

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What is a Corporate Action?

A corporate action is a process initiated by a company after the approval of the company’s Board of Directors and brings material change to the organization and its stakeholders. Corporate Actions include dividends, mergers, and acquisitions, rights issues, name change, change of the security identification numbers like CUSIP, SEDOL, and ISIN, etc.

A Corporate Action at times may also impact the securities (both equity and bond securities) by affecting the price. Because of this, it is mandatory for a corporate action to be announced in order to keep the shareholder informed. This is done both by the company and also the exchange the security is listed on. 

But did you know in certain cases shareholders too are given the option to vote over the processing of corporate action? Here we try to understand the basis on which corporate actions are differentiated as mandatory and voluntary.

Also read: 11 Must-Know Catalysts That Can Move The Share Price

Mandatory vs. Voluntary Corporate Actions?

Some corporate actions when announced are generally automatically applied to the investments of the shareholders. These are known as Mandatory corporate actions. 

In some cases, the shareholders are given the option to participate in the respective corporate action. Here the shareholder decides if he will be a part of the corporate action or not. These Corporate Actions are classified as voluntary.

Mandatory Corporate Actions

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A mandatory corporate action is decided on by the board of directors and affects all shareholders once it is bought into effect. There is nothing much a shareholder can do in this case. 

If the shareholder does not want to be affected by a mandatory corporate action he has to relinquish his ownership by selling off his holdings in the stock market. 

Examples of Mandatory Corporate Action

Dividends: Here the shareholder is not required to do anything in order to receive the dividend. The only function the shareholder is limited to collecting the dividend and observing the effects on his shares.

Stock Splits: In this corporate action the shares of a company are divided based on the ratio provided. Say a company announces a 2 for 1 stock split. Here for every share held by the investor, he will receive an additional share. Or in other words, the number of shares held will be doubled. The value of the shares, however, will remain the same i.e. a share that was worth at Rs.10 will be 2 shares at Rs. 5 each. 

The investor may be in favor of this decision as the shares which were earlier at a higher price may now be easily sold in the market. Or he may be disappointed as his investment may trade at a reduced market price due to its increased availability. But regardless of the scenario, he will only have to accede to the decision taken by the organization and not have any say.

Other Mandatory corporate actions include stock splits, mergers, bonus issues, name changes, Id change, etc.

Voluntary Corporate Actions

A voluntary corporate action is like an offer made by the board of directors of the company that only comes into effect if the shareholder elects to participate in the corporate action. Unlike a mandatory corporate action, a voluntary corporate action does not impact all the shareholders after it is announced. It only affects those in favour of it.

In the case of Voluntary CA, the shareholder is required to respond to the company. Only then will the company go ahead and process the corporate action. The shareholders not in favour are not impacted and their investments are left untouched.

Examples of Voluntary Corporate Action

Tender Offer: Although a tender offer may possess various forms. They however generally outline a company offering the shareholders to purchase the shares from them at a predetermined price. This price is generally slightly higher than the price the security is currently being traded at in the market. Here the investors have the option to either tender their shares to the company or simply not participate and continue to hold their shares. 

Rights Offer: Here the existing shareholders are given the right to purchase new shares before the company offers them publicly. This right offer of new shares is made generally at below the market price. The existing shareholders may go ahead and exercise their right to purchase the shares or simply not take action and remain with their current holdings. The investors that decide not to exercise their right do so at the risk of having a diluted capital. At times the investors are also given the option to transfer their rights. In this case, they can trade their right in the market. 

Closing Thoughts

Understanding corporate actions is of importance irrespective of them being voluntary or mandatory. This is because their occurrence or non-occurrence gives an insight into the company’s plans, performance, and strategy.

technical analysis Cup and Handle Pattern

Cup and Handle Pattern: Technical Analysis

Understanding Cup and Handle Pattern: Technical Analysis can be used by both traders and investors for entering into any trade. It provides a means to have a stronger conviction about the trade. Candlesticks are the most common form of Technical analysis tool used by the traders globally.

We have several types of candlestick patterns that are used by traders in their day to day trading. One such form of candlestick pattern, that gives trades with a high level of conviction is the “CUP AND HANDLE FORMATION”. In this article, we are going to cover what is a Cup and Handle Pattern and how to use them for your trades.

What is a Cup and Handle Pattern?

cup pattern

A cup and handle pattern is a formation that resembles the cup. The main body of the formation is like a “U shape” and further, we have a small body or a downward drift, which resembles a handle attached to the cup. This pattern is generally a bullish pattern as it follows a series of bearish sessions.

From the perspective of the long term, this formation pattern may take from a few weeks to a year. And for a short term view, we can see this formation in a minute, hourly, etc., time frame.

How is Cup and Handle Formed?

The market trend is generally bearish at the start of formation. We see new lows being formed, followed by a period of consolidation/stabilization, and then we have a move up, similar to initial move down. Therefore, the chart formation is like a cup. Afterward, the price then moves sideways or comes down within a channel, forming the handle for the cup.

The handle can have the shape of “Reverse C” or “A Triangle” or “A sideways zone”. Ideally, for a valid Cup and Handle formation, the handle should not have a depth of more than 50% of the size of the cup. Let us understand the formation with the help of a few examples.

— Cup and handle formation on DMart

Cup and handle formation on DMart

Figure 1: D’mart Chart (Source: www.zerodha.com)

In Figure 1, we see a formation of Cup and Handle and the formation, which took nearly four months to complete. The first phase is a part where the market sees bearish momentum. Then, in the 2nd phase, we see consolidation at the bottom of the cup.

Next, in the third phase, we see buying momentum coming back and market-moving back up to the high of the first phase. And in the final phase, we see a formation of the handle.

— Cup and handle formation on TATA Motors

Cup and handle formation on TATA Motors

Figure 2: TATA Motors’s Chart (Source: www.zerodha.com)

In Figure 2, the pattern formation is very similar to the pattern formation on the D’MART chart. There are four phases of fall, consolidation, rise, and the handle formation. The trade for TATA Motors after the formation gave a very decent return of nearly 90%.

Also read:

When to Enter the Trade using Cup and Handle Pattern?

Before entering the trade, one has to wait for the formation of the handle. During the formation of the handle, the market is often in a sideways trading mode. But when then market breaks the top of the sideways channel, the Cup and handle formation is complete and the market is expected to rise from there.

There is no guarantee of the trade making money after the completion of the formation. The market could again come back in the sideways zone and the pattern might fail. And that is why, we should always have a stop loss for the trade, entered by using this pattern.

— How to set a Stop Loss for the Trade?

Stop-loss while trading is a point beyond which the trader does not want to lose money. It is a point to exit the existing trade. So, while trading using this formation, the stop loss for the trade is the low of the handle.

This low point is chosen because the price might again comeback in the sideways territory and then make a move up. And in case the market starts to go in favor, one can keep on trailing the stop loss and rise the move.

— What is the Exit Point for the trade?

As a rule, the height of the cup should be the profit target for the trade, from the point of breakout.

Say, for example, the price at the bottom of the candle is Rs. 100 and the height of the candle is 10 units. Therefore, Rs. 110 is the breakout point for the trade. The target for this trade should be Rs.120 (Breakout price = 110 + the depth of cup = 10). The other way to keep a target for the trade would be using Fibonacci Projections.

The stabilization period at the bottom of the cup is very important for this formation, as it forms a base for the cup. The stronger the base, the better the quality of the trade. The volume at the formation of the pattern also plays a very important role in the authenticity of the trade. If formed on low volume, the pattern might not be as reliable as the one formed with higher volumes.

Quick Note: If you new to stock trading and want to learn how to read charts, candlesticks, and technical indicators, you can enroll in our “Technical Analysis Course” for beginners. Click here to check out this course! Happy learning.

Conclusion

The Cup and handle formation takes some time to spot and trade upon. Constant practice is the best way to spot this pattern. But once if we get a hang of the pattern, it provides trades with very good risk-reward.

One should ideally enter the trade at the confirmation of the pattern as it provides trades with better conviction. And always have a stop loss for every trade which we enter in the market. Happy trading and Money making.

Chinese investments in Indian Unicorn Startups cover

[Snapshot] Chinese investments in Indian Unicorn Startups

A Brief Analysis on Chinese investments in Indian Unicorn Startups:  The Galwan clash that arose due to China claiming Indian territory had left 20 Indian army soldiers martyred. The clash triggered public outrage where boycott of all Chinese companies and their products was demanded. In some cases, politicians even spilled their outrage by calling for a boycott of Chinese cuisines.

After increased escalations, 49 Chinese apps were banned by the government. This, however, has left many unclear when it comes to Indian firms that have received funding from Chinese investors. “Should these companies and their products be boycotted as well?”, was the question in the minds of many. Many such companies were left in a critical state hoping that no such backlash is directed towards them.

Today, we have a look at the chinese investments in Indian Unicorn Startups. Here, we are going to analyze the scale of Chinese investments in Indian companies and the added agony they face trying to survive the COVID-19 environment.

How much China holds on the Indian Economy?

Investments from China have totaled up to $8.7 billion ever since 2015. Of these $2 billion were made in 2018 which went on to increase in 2019 to $ 3.9 billion. 18 out of the 30 unicorns i.e. companies that have a valuation of $1 billion and above have received funding from Chinese investors.

However, it is not only the Chinese investments that had significant Indian market reach. Chinese companies too have enjoyed a significant grasp on the Indian Market. Chinese smartphones like Oppo and Xiaomi led the Indian market with an estimated 72% market share in 2019.

Government concerns over Chinese Investments

When it came to investments, Indian relations with China were not any better prior to the clashes either. The only difference is that the restrictions placed on the Chinese investments have gained significant public support post the clashes. As on April 18th, the government issued an update on the FDI policy.

This prevented direct investments into Indian companies from countries that share their borders with India. This was done in order to ensure that any investment directed into Indian firms are done so with a purely financial interest instead of those with strategic economic interests. 

China has been particularly blamed for following this approach as they try to further their domestic economic interest. Unfortunately, for us, they also have played an active role in the Indian startup ecosystem. Under the updated FDI policy billions of dollars from Chinese investments will be subject to government scrutiny. The FDI policy was updated also to address Data security and Chinese propaganda concerns. Any Chinese investor investing in Indian firms will have to get the Indian government’s approval first.

When this rule was first passed it drew considerable criticism from Indian unicorns and startups. This criticism was not in defense of the Chinese but instead simply because the Indian investor simply does not prefer to make risky investments or simply does not have that amount of domestic capital. This would not only hurt the Indian startups severely but the effects would also be seen on the Indian economy. This would be because of the shortage of investments Indian companies would face which would be required to spur their growth. 

Loopholes and Legal Consequences

Legal experts also said that enforcing the notification would be “close to impossible“. It is also unclear how effective the law is going to be. In the case of Paytm, Alibaba simply rerouted its investments from China to its subsidiary present in Japan and then invested in Paytm.

It is also unclear up to what extent of investment by Chinese investors in a foreign firm will make the firm an entity that furthers Chinese interests under Indian laws.

The FDI laws in China, however, have already been geared up to retaliate. These work against companies that operate in China but originate from countries that have discriminated against Chinese investors. 

Chinese investments in Indian Unicorn Startups

The table below shows some of the major Unicorns that have received funding from Chinese investors:

Indian UnicornChinese Investments ReceivedMajor Chinese Investors
Paytm900 millionAnt Financials (AliBaba Group) and SoftBank Vision Fund
Ola1.225 billionSoftbank , Tencent, Sailing Capital, China Eurasian Co-op Fund, Eternal Yield International, Steadview Capital
Udaan585 millionHillhouse Capital, Tencent
Swiggy500 million Meituan-Dianping, Tencent Holdings and Hillhouse Capital Group
Zomato750 million Ant Financial
BigBasket300 millionAlibaba Group
Dream11100 millionSteadview Capital and Tencent
Byju40 millionTencent
Flipkart300 millionTencent Holdings and Steadview Capital
Oyo100 millionDidi Chuxing

Why Indian companies go for Chinese investments?

Over the years India has acquired the third spot in terms of startup ecosystems but unfortunately, more than 80 percent of the money invested in these startups comes from outside of India. One of the major reasons for startups accepting Chinese investment has been due to the lack of capital present in India or lack of capital directed towards innovation-driven startups. Domestic investors have taken very little interest in the startup environment.

We also lack companies like Google and Facebook that take particular interest in such startups that are innovation-driven and with internet dependant products. Unfortunately, the country’s highest-valued firm, Reliance Ltd. in recent times also has to lookup to Facebook for investments. When it takes companies of that scale to grab the attention of global investment giants it is difficult for startups to do the same. Chinese investment firms recognized the gap and have succeeded in replacing American giants in this space. 

Another reason is the patient capital provided by Chinese investors. The companies targeted by Chinese investors are mainly startups in their initial stages. The aim of a startup at this stage is to ensure growth and increase market reach. But these goals demand huge capital expenditure.

At the initial stages, these startups are evidently not profitable for a couple of years. This is where the patient capital provided by the Chinese steps in. Unlike domestic investors looking for profitable companies or secure investment, the Chinese investment firms recognize viable startups and provide them with the capital that helps them grow. 


(India taking on dragon - An Image featured in Taiwan Times)

(India taking on dragon – An Image featured in Taiwan Times)

The Galwan clash post the updated FDI policy has put further restraint towards accepting Chinese investment. Indian startups that were particularly looking to raise funds in order to survive the COVID-19 environment will now have to look elsewhere.

Companies that already have settled agreements with Chinese investors will also be affected. This is because they may already be in the midst of investments that take place over multiple rounds. They will be forced to restrategize in the times of COVID-19 where they are desperate for investments at lower valuations.

Closing Thoughts

In the midst of the deteriorating India-China relations, demands for an alternative to the capital that were earlier provided by Chinese investors. But if we shed some light on PM’s call for an ‘Aatmanirbhar Bharat’ it also provides solutions if Aatmanirbharta in investments is followed.

Startups in 2019 raised Rs.40,000 crore. For Aatmanirbharta to be achieved in investments at least 50% i.e Rs. 20,000 crore will have to be sourced from within India. But in order to spur this growth, the root causes due to which domestic investors steer clear of startups must be addressed. 

One of the reasons is that navigating through thousands of startups before investing. Weeding out those that may lack the commercial potential takes substantial skill and effort that all may not be ready to devote. The answer to this may be provided by Alternate Investment Funds(AIF) or Venture Capital Funds. These specifically focus on investing in startups and at the same time employ necessary skill in order to differentiate between startups. 

But, at the moment only investors with a minimum annual income of Rs. 50 lakh and minimum net worth of Rs. 5 crores are allowed to invest in AIF’s. Government support and new regulations that focus on making the environment more inclusive will go a long way in providing the necessary support to startups in India.

What are Moving Averages And how to use them

What are Moving Averages (MA)? How to Use Them?

Simplifying what are Moving Averages – SMA & EMA: Moving averages are one of the simplest yet most frequently used technical analysis tools by traders. Every time you read any technical or research report, on any Index or shares of a particular company, you must have come across terminologies like the Simple Moving Average (SMA) or Exponential Moving Average (EMA). These are the two types of Moving Averages.

In this post, we discussed the basics of Moving Averages in the technical analysis of stocks. Here, we covered what are Simple Moving Averages (SMA) and Exponential Moving Averages (EMA) and how to use them correctly. Let’s get started.

An Example to Understand Moving Averages

In mathematics (or statistics), a moving average creates a series of averages of different subsets of the full data set in order to analyze data points.

For example, imagine in a game of Cricket, we want to analyze the performance of a bowler. Here, the parameter that we can use for our judgment is the number of runs conceded against every wicket picked. Let’s assume that we have the following data available for the bowler:

InningsRuns ConcededWickets
1452
2393
3602
4481
5504
6381
7405
8750
9502
Total44520

From the table above, the total runs conceded by the bowler over 9 innings is 445. Further, he has got 20 wickets against his name.  Therefore, the average number of runs conceded per wicket will be equal to 445/20 = 22.25 runs conceded per wicket This is the simplest method that we can use for calculating the average.

A similar concept can be used while looking at the price movements of the shares. Through this article, we will try to understand the concept of the moving average and its implication while trading.

What are Moving Averages?

Moving averages are the most common and sought after form of technical analysis tools used while trading. These indicators are said to be lagging indicators, as is it is constructed with the help of the data presented as the end of day prices.

In order to understand this concept easily, let us take another example. Consider the following closing prices for the shares of Reliance Industries limited:

DateClosing Prices
03/07/201788
06/07/201852
07/07/201823
08/07/201798
09/07/201824
Total9085

Now, a simple moving average (SMA) is a calculation that considers the average or arithmetic mean of a given set of prices over a specific time period. For example, the SMA or average price of shares of RIL over these five days will be equal to 9085/5 = Rs. 1,817

Next, imagine if the share price of RIL at close on 10/07/2020 is 1,800. Now, if the calculate the moving average again for the last five days, its value will change as the average price changes after accounting for new data. In other words, the average price changes as and when the value of underlying asset changes on day to day basis.

Further, the moving averages can be calculated for any time frame. It could be 5 minutes, 15 minutes, hours, days, weeks, and so on. Depending on one’s trading style and trading objective, one can choose the Moving Average charting pattern. If we are using 5 observations within the selected time frame, it is called 5 SMA, and if we are using 9 observations within the selected time frame, it is called 9 SMA and so on.

Now, the chart below is the daily chart of Airtel Limited. And we have plotted 50 Day Simple Moving Average on it.

Fig: 50 DMA of Airtel Limited (Source: www.kite.zerodha.com)Fig: 50 DMA of Airtel Limited (Source: www.kite.zerodha.com)

Now, if you carefully analyze, the 50 SMA clearly bifurcates the chart in two halves. When the market is trading over 50 SMA, we see continuous buying momentum in the market and the bulls are having a tight grip on the market. And as and when the market comes below 50 SMA, we see selling pressure in the market and the bears are having higher say in the market. Overall, in simple words, it can be said that prices above SMA are considered to be bullish and below it are bearish.

Exponential Moving Average (EMA)

Exponential Moving Average (EMA) are slightly advanced and more trusted form of moving average. The main difference between EMA and SMA is the weightage given to each and every value under consideration.

Under EMA, the more recent values are given higher weightage, but in SMA, all the values are given equal weightage. For this simple reason, EMA is sometimes said to be a better parameter for trading than SMA. We will not be going to explain the calculation methodology of EMA in this article.

The chart below is the daily chart for HDFC Bank and the yellow line plotted is the 50 EMA

Fig: 50 EMA of HDFC Bank (source: www.kite.zerodha.com)Fig: 50 EMA of HDFC Bank (source: www.kite.zerodha.com)

Now, before explaining the chart, the following rule has been set for the entry and exit of the trade. A position is entered when the current price crosses over 50 EMA and the position is held till the share price down not crossover or come below 50 EMA.

If we look at the chart, the 50 EMA in the chart above has given multiple entry and exit signals based on EMA. For example, if we look at Trade 1, the chart gave a long trade as the market came close to the EMA and it bounced back and gave a return of about 15% (not bad by any standards). And similarly, Trade 2 gave an entry near EMA and upon exit, it gave a return of near 7%.

Also read: What are Supports and Resistances? And How to identify them?

Moving Averages: Key understandings 

In this post, we tried to simplify the concept of moving averages. Let’s quickly summarize what we discussed here:

  • Moving Average gives us simple and traceable buying and selling signals
  • When the price is trading above a certain MA, it usually signals strength in the market and buyers are having more say
  • When the price is trading below a certain MA, it usually signals weakness in the market and sellers are dictating in the Market

Moving averages are considered to be a reliable indicator while understanding the trend and market sentiment. One has to continuously keep using them go get a better hang of them and find a moving average that suits their trading style. One Golden rule which every trader must follow: “Always have a stop loss for your trades” Happy trading and Happy Learning!

Demystifying Vijay Mallya Scam

Demystifying Vijay Mallya Scam | Vijay Mallya Case Study

A Study on Vijay Mallya Scam Case: Vijay Vittal Mallya, once known to you and me as ‘The King of Good Times’ or also dubbed ‘ The playboy of the East’ was born to the Indian Entrepreneur Vittal Mallya in 1955. Vittal Mallya was largely known for the role played as the director of United Breweries (UB) Group which he achieved at the age of 23. Following his fathers’ sudden demise Vijay Mallya became chairman of the UB Group.

Vijay Mallya was always known for his flamboyant and posh lifestyle. A testament to these were the lavish New Year Parties at his Kingfisher Villa in Goa or the birthday bashes thrown on his luxurious Yacht ‘ The Indian Empress’. These parties were filled with prominent sportspersons, Bollywood stars, and models. Baron to Indias biggest liquor company his riches also included a private jet, a yacht and a fleet of 250 rare cars. Today we take a look at the Vijay Mallya’s rise to the king of good times and his plummet into a debt-ridden slump.

LtoR: Vijay Mallya with his father Vittal Mallya; Vijay Mallya posing in one of his vintage cars; Vijay Mallya in an interview with Simi Garewal(LtoR: Vijay Mallya with his father Vittal Mallya; Vijay Mallya posing in one of his vintage cars; Vijay Mallya in an interview with Simi Garewal)

Let’s Begin With Vijay Mallya’s Achievements

Although his reputation as ‘The playboy of the East’ may create the fallacy that Vijay Mallya was just another spoilt brat squandering the millions he inherited. His achievements tell a completely different story. After becoming the chairman of the UB Group at the age of 28 in 1983, he transformed the beverage company into a multi-national conglomerate of over 60 companies.

One of his first major decisions was to consolidate the various companies under an umbrella group called the “UB Group”. This also involved spinning off the loss-making entities in order to focus on the core business which was alcoholic beverages. By 1998- 1999 the annual turnover had increased by 64% over 15 years to US$11 billion. The UB Group boasted a national market share in excess of 50% and also controlled 60% of the total manufacturing capacity for beer in India.

Vijay Mallya However did not stop with the success of his company in alcoholic beverages alone. He went further to acquire Berger Paints, Best, and Crompton in 1988; Mangalore Chemicals and Fertilizers in 1990, The Asian Age newspaper and the publisher of the film magazine, and Cine Blitz, a Bollywood magazine in 2001. He also went on the serve as the Chairman of Sanofi India and Bayer Crop Science among several other companies. These achievements catapulted him into the status of one of the great Indian business tycoons.

Vijay Mallya at the launch of the limited edition Kingfisher Calender. LtoR: Vijay Mallya with Preity Zinta; Models; and Enrique Iglesias(Vijay Mallya at the launch of the limited edition Kingfisher Calender. LtoR: Vijay Mallya with Preity Zinta; Models; and Enrique Iglesias)

Vijay Mallya’s reach also extended to the sports world. In 1996, he became to fist Indian tycoon to sponsor a cricket team to the world cup when he did so for the West Indies through Kingfisher (Indian beer brewed by UB). This gave birth to the famous jingle ‘Oo la Lala le o’.

His companies also owned the IPL team Royal Challengers Bangalore, I-league teams Mohun Bagan AC, East Bengal FC, and Formula 1 team Force India. Vijay Mallya is also a member of the World Motor Sport Council representing India in the FIA. He also took particular interest in horse racing and also owned stud farms with up to 200 horses.

Vijay Mallya also contributed significantly to protect Indian history by bringing back precious artifacts belonging to Tipu Sultan and Mahatma Gandhi. This included a bid that he won at 1.7 crores for the sword of Tipu Sultan at an auction in London in the year 2004. In addition to this, he also brought back 30 other items belonging to Tipu Sultan from auction houses based in the UK. In 2009 Vijay Mallya once again bid successfully for the belongings of Mahatma Gandhi at US$ 1.8 million at an auction in New York. 

Mallya also served in the Rajya Sabha, the upper house of the Parliament of India, for his home state Karnataka.

Vijay Mallya’s Kingfisher Airlines

Despite Vijay Mallya being successful in running various companies mentioned earlier, he isn’t known for their success, but for the failure of Kingfisher and the show that followed. The Kingfisher Airline was part of Vijay Mallya’s vision of having a world-class airline in India.

He was quoted saying to his core team before the launch that “We are not entering the business of transportation, but we are going to be in the hospitality business”. Mallya was also personally involved with the airlines and also personally interviewed the cabin crew in order to make sure that no mistakes were made.

(The Kingfisher Takeoff Demo which was ahead of its time. Vijay Mallya had roped in Yana Gupta ( featured in the video) for this purpose)

After its launch in 2005, Kingfisher Airlines soon became synonymous with Five Star Air Travel. This was thanks to the newly appointed planes, pretty flight attendants (whom Mallya claimed to personally appoint), good food, and also in-flight entertainment in 2006 which was first of its kind. Most importantly this domestic airline also had a first-class. Although domestic flights were not allowed to serve liquor in India, Kingfisher had free liquor in the lounges for first-class passengers. This made Kingfisher the first choice of business travelers. Executives would even give up flyer miles from competitors just to fly Kingfisher.

Vijay Mallya's Kingfisher Airlines

Vijay Mallya, however, was not content by flying Kingfisher only in Indian skies. He planned on expanding the airline globally. As per Indian rules, airlines that have been in existence for only 5 years are not allowed to fly overseas routes. Mallya decided to bypass this law by acquiring existing airlines. He first bid for Air Sahara in 2006 but lost to Jet. He later was successful in buying Air Deccan. In 2008, Kingfisher finally got permission to operate on international routes with its first flight being from Bangalore to London. By 2008, Kingfisher Airlines was carrying 10.9 Million passengers with a fleet of 77 aircraft operating 412 domestic flights daily. In 2009 Kingfisher airlines became the Indian market leader with a marketshare of 22.9%.

Despite its success, Kingfisher was consistently making losses since its inception. The shareholders kept waiting for their first dividends. Post-2010, the airline failed to capture markets which was a major red flag as its competitors continued to do so. In the year 2011, the airline first declared that it had cash flow issues. In order to keep the loss-making business functioning, Vijay Mallya resorted to continuously borrow money from the banks.

By 2012, Kingfisher Airlines was declared as an NPA by SBI. At this point, it had even failed to pay its employees which led to its pilots leaving it for better opportunities. Finally, the grounding of Kingfisher Airlines in 2012 and the cancellation of its license in December 2012 put an end to the Kingfisher journey.

What went wrong with Kingfisher?

— 2008 Recession

The news of airlines going bankrupt has been particularly dominant in the recent past. The huge capital costs with regards to airplanes, the ever-changing fuel costs, and country-wise regulations have made it one of the toughest industries to survive in. Kingfisher too got entangled with these problems post the 2008 recession. The recession had adverse impacts on all industries. As of March 2008, Kingfishers’ debt amounted to Rs. 934 crores. During the recession, the crude oil prices soared to $140 per barrel.

This was almost a two-fold increase in comparison to the 2005 – 2010 average of $72.68. The International Air Transport Association (IATA) estimated that the global aviation market would suffer losses of $5.2 billion. The airlines in India were hit harder due to the taxes and levies imposed by the government. By the end of 2008, the debt with Kingfisher had increased to Rs.5665 crores.

— Issues with Air Deccan

What went wrong with Kingfisher

When Vijay Mallya first bought Air Deccan he allowed both to function as separate companies. But over time it became clear that Kingfisher was the golden child in between the two. If there were clashes between the schedules of the two, Kingfisher was always favored. The problem arose when passengers not only left Air Deccan due to this but decided to choose competitors other than Kingfisher. 

Post the closure of Kingfisher the Serious Fraud Investigation Office (SFIO) found that serious corporate ethics were violated during the merger. Kingfisher had created three new departments in the airline to avoid paying capital gains tax.

— Business model followed by Kingfisher airlines

If we take a look at the picture offered by Kingfisher to the travelers at inception it would be safe to say that Kingfisher would be luxurious domestic travel. But over time this picture began to change. Kingfisher went ahead and purchased Air Deccan. Air Deccan did not fully suit the image that had been created by Vijay Mallya in consumers’ eyes. Air Deccan was set up as a low-cost airline.  By purchasing it Kingfisher gained a few consumers particularly those looking for cheap fares but in the process lost its distinctive sheen. This is just one of the examples of Kingfisher changing its business models. A regularly changing business model gave travelers the impression that Kingfisher wasn’t consistent and would only keep getting worse. 

Vijay Mallya Scam: Was it just Mallya’s fault?

Loans associated with Kingfisher amounted to Rs. 7000 crores. The table below shows the loans taken by Kingfisher from various banks

Was Vijay Mallya at fault

There has also been controversy when it comes to the means used and collateral placed to acquire these loans. BOI had given a loan of 300 crores to Vijay Mallya on items like office stationery, boarding pass printers, and folding chairs as collateral. The banks’ willingness to provide loans based on Current assets as capital created suspicion on the bank officials.

The loans given by SBI were on the trademarks and Goodwill of Kingfisher airlines kept as collateral. These trademarks which were worth over Rs. 4000 crores in 2009 have now plummeted to not more than Rs. 6 crores. IOB too faces similar issues where the 2 helicopters placed as collateral are not in a flying condition and hence cannot be sold to recover Rs. 100 crores of debt.

— What were the loans used for?

Over the course of time, the loans associated with Kingfisher were monumental. But the question arises if the loans that were taken by UB Group were actually implemented for its actual purpose. There have been allegations that the loans taken by Vijay Mallya were only to further his personal agenda. These allegations claim that the loans taken by Vijay Mallya were laundered overseas to various tax havens. This was done with the help of shell companies. Mallya would have the loan received from banks transferred to these shell companies where dummy directors were placed for this purpose. These companies were not active and did not even have an independent source of income. The directors placed here would act as per the directions received from the UB group at the command of Mallya. These companies were located in seven countries including the United Kingdom, the USA, Ireland, and France.

Furthermore, it is also alleged that Vijay Mallya also diverted these loans in order to fund his IPL cricket team The Royal Challengers Bangalore and his F1 racing team Force India. This was all in the midst of a period when the employees of Kingfisher were not paid their salaries. As of October 2013,  the salaries had not been paid for a period of 15 months. 

Vijay Mallya’s Viewpoint

According to Vijay Mallya, the reason for the failure of Kingfisher Airlines were the macroeconomic factors and then government policies. And as far as his name is being dragged in all NPA cases he claims that he is a victim of a media campaign. Vijay Mallya has also made an offer to banks where he would pay them Rs. 4,000 crores in order to settle all his accounts. But as per the news reports lenders together have decided that they need a minimum of Rs.4900 crores to be paid upfront.

Vijay Mallya Urges Govt To Take His Money & Close His Case

Closing thoughts

Vijay Mallya UKWhen the Vijay Mallya case is first looked at, it seems similar to those of businessmen getting unlucky. But a closer look reveals the possibility of money laundering that can only be proved once he is extradited back to India. The ability to turn UB into a global giant had turned him into a business superstar. Although his fast and flashy life inspired many to strive for such wealth, him placing himself above the greater good of all stakeholders associated with Kingfisher took all of this away.

One only wonders where did these skills evaporate when dealing with Kingfisher in times of crisis when his employees were not paid for 15 months. On being questioned about this he replied that “In a Public Limited Company where is one man, who might be the chairman, responsible for the finances of the entire Company? And what has it got to do with all my other businesses? I have built up and run the largest spirits company in the world in this country.”. Although he had already lost the billionaire status by the year 2013, his wealth still stood at over $700 million. This meant that he had the resources to provide his employees with some relief. But instead, he chose to celebrate his Birthday by spending lavishly where international singer Enrique Iglesias performed.  

His indifferent attitude shown towards the suffering of his employees coupled with the allegations of Rs. 4000 crore laundered made it impossible to sympathize with which is sad as he was looked up to by many. It is safe to compare him to a Captain of an abandoned ship. The most important man at the helm, but when things go awry also the first man to get out.

7 Things to do Before You Start Investing cover

7 Things to do Before You Start Investing

A guide on things to do before you start investing for Newbie Investors: So, you’re thinking to start investing. But before you enter, are you prepared? Do you actually meet all the requirements that will make your investment journey smoother? In this post, we’ll discuss seven such things that you should do before you start investing.

7 Things to do Before You Start Investing

1. Build an Emergency Fund

As the name suggests, an emergency fund is money that you put aside for emergencies. It is the money that you can reach out to during your hour of need and pay for those unforeseen and unexpected expenses such loss of a primary job, medical emergency, personal emergencies or even a car breakdown.

As a thumb rule, before you start making investments for your long-term goals, first you should build an emergency fund which should be greater than at least three times your monthly expenses. Keep this money aside in a separate account. You can read more about how to build an emergency fund here.

2. Have a budget & know your cash-flows

If you want to enjoy a healthy financial life, it’s really important to have a balance between your savings and your expenses. Budgeting your monthly finances and knowing your ‘cash’ inflow and outflow can help you plan how much you can afford to invest per month.

A simple profit and loss formula that you can use in your day-to-day life to understand your cash position is ‘Revenue — Expenses = Profit”.

Here, your total revenue (inflow) is the sum of all the income that you make from different sources like your job, business, interests on savings/fixed deposits, dividends, rental income, etc. And your total expenses (outflow) include your rent, groceries, transportation, bills, EMI’s, household expenses, etc.

When you deduct the total expenses from your net revenue, you’ll be able to find out how much you keep per month or year. And after calculating this, you can plan where to allocate this money and how much to invest in different investment options.

Note: If you are struggling with your personal budgeting, one of the easiest strategies that you can use to figure out how much should you save is the 50/20/30 Strategy.

50/20/30 is a really simple and straightforward budgeting strategy that can help you to define how much should you spend on your essential spendings (needs), savings and finally on your preferences (wants and choices). According to 50/20/30 strategy, you should allocate:

  • 50% of your monthly income on ‘Needs’ (like rent, food, etc)
  • 20% of your monthly income on ‘Savings’ (like your retirement fund, investments, etc)
  • And the remaining 30% of your monthly income on your ‘Wants’ (like traveling, dining out, etc)

50-30-20 rule

You can read more about the 50/20/30 budgeting strategy here.

3. Pay down high-interest debt

First of all, please note that not all loans or debts are bad. Here, we are talking about high-interest debts. For example, if you have taken a personal loan, it’s interest rate may vary from 13–18%. Similarly, a credit card company may charge you even higher interest on the outstanding amounts.

It doesn’t make much sense to invest if the profits that you make on your investments are lesser than the interests that you pay on your debts. For example, if your returns are 12% and you’re paying 14% as interest on your previous debt, then overall you’re in a loss. Here, instead of investing, it will be better to use that money to pay back and become debt-free.

Before you start investing, try to minimize or eliminate debt, especially high-interest debts and your credit card debt. These interests can kill your investment profits.

4. Take a health Insurance

When people are in the best of their physical health, an obvious question among them is why should they invest in health insurance? Paying a premium plan for ensuring health may seem an unnecessary expenditure.

However, accidents or health issues may come up anytime unexpectedly which can put a lot of financial and mental pressure. Further, it is a fact that, as you grow older, health issues come along with it. And hence, it is highly necessary to incorporate healthcare planning within the budget of your family financial planning.

Before you start investing, make sure to take health insurance first. Being medically insured can help you avoid facing financial instability in the future and enables you to get the best health treatment.

Also read: 6 Reasons Why You Should Get Health Insurance

5. Define your goals and make plans

One of the most critical things to do before you start investing is to define your investment goals/priorities and making plans to reach them. Here, you need to know why you are investing. It will keep you motivated and ‘on-track’ to achieve your goals.

Now, by definition, an investment goal is a realistic expectation to meet the returns by investing predefined money for a fixed time frame. The keywords to note here are ‘realistic expectations’ and ‘timeframe’.

Before you put your money in any investment options, set your short-term and long term goals and make plans for how you’re gonna achieve them. The goal can be person-specific like planning for children education, retirement fund, buying a new house or even financial independence. Once you’ve set your goal, you can choose the best investment options that can help you reach these goals in your defined time horizon.

Also read:How to Invest in Share Market? A Beginner’s guide

6. Evaluate your risk tolerance profile

Everyone has a different risk tolerance level depending on their age, financial situation, priorities, etc.

If you are young and have a stable job, you might be willing to invest in more unusual ‘high risk, high return’ options. However, as you grow old/retire, you might not have a job or primary source of income and hence you might depend on your retirement fund for meeting your expenses. Here, you may not be willing to take a higher risk and choose safer investment options.

Before investing, you need to define your risk sensitivity i.e. whether you’ve are high, moderate or low-risk tolerance profile.

As different investment options have different degrees of risks, you can choose your investment options depending on your profile. For example, if you have a high-risk tolerance, you may invest in stocks, mutual funds, real estate, etc. On the other hand, if risky investments keep you sleepless at nights, better to choose low-risk investment options like fixed deposits, PPF, bonds, etc.

Also read:

7. Understand the investing basics

Don’t dive in deep water if you don’t know swimming basics. Similarly, do not start investing your money, if you do not understand the elementary concepts.

Before starting your investment journey, make sure that you understand what is meant by stocks, bonds, mutual funds, diversification, liquidity, volatility, and other investing basics. Here, you do not need to become a finance geek or an accountant. However, you should have good enough knowledge of the industry to make intelligent decisions.

Closing Thoughts

These days, anyone can open their demat and trading account with minutes and start investing in stocks, mutual funds, etc. However, it is not advised to do so until you have met the basic requirements and completed a few other essential tasks. In this post, we discussed how 7 must things to do before you start investing. This included budgeting, planning, knowing your risk tolerance, and moreover, learning the basics.

That’s all for this post. I hope it was useful for you. Besides, if you are ready to get an education, here’s an amazing course on stock market investing for beginners that you should check out. Happy Investing.

What are Supports and Resistances? And How to identify them cover

What are Supports and Resistances? And How to identify them?

Understanding what are Supports and Resistances: One of the most elementary concepts while trading in stocks that every trader should know is, “Supports and Resistances”. If you’re already involved in the market, you might have heard or read terms like “Nifty50 has got a big resistance at 10,800 points” or “Stock XYZ has a support line at Rs 105”. So, what exactly do the traders mean by these terms in their analysis? We are going to discuss that through this article.

In this article, we are going to discuss what are supports and resistance, their characteristics, and how exactly to use them. By the end of this article, you will have a good idea about these concepts and use them in your trading. Let’s get started.

What are Supports and Resistances?

The Synonym for the word support is “Reinforce”.  Basically, support can be said to be a point of reinforcement. In other words, supports are those points which act as a barrier for the prices, when they start to come down. They can also be said as points, where the downtrend is expected to be paused. And we should see a new surge in buying and demand. In short, supports are those points, where buyers are more forceful than sellers.

support-resistance-basics

On the other hand, Resistances are said to be the point where the supply increases or the longs start getting out of their positions from the market. Therefore, if we were to carefully analyze, supports and resistances can be said as the point of friction or tussle between buyers and sellers. And Resistances, are those points where sellers have higher say than buyers.

Now, once the level of Supports and Resistances (S&R) are identified, they become the point of entry or exit for the trade. The prices either bounce back or correct back, from S&R level or breach these levels and go to the next S&R.

Characteristics of Supports

Here are the key characteristics of Supports while looking into the charts:

  • Supports are those points or levels, below which the market finds difficult to fall. They can also be said as a point of infliction between buyers and sellers.
  • Supports are also the point of Maximum demand from buyers, and even the sellers exit their selling positions from the market.
  • The buyers have a higher say in deciding the levels of support in the market. These levels can also be said to be the mainstay for buyers.
  • Supports, if breached, sees a quick sell-off in the market, and then the next level of support becomes a point of contention.
  • If the levels of support hold in the market, then fresh longs can be initiated, and generally, these trades have good risk to reward ratios.

— Understanding Supports with an Example

The figure below shows the daily chart of HDFC Bank. Through this chart, we get a clear illustration of the concept of supports and the impact on the market, if the supports are respected or breached.

Characteristics of Supports

Figure 1: Daily HDFC Bank chart (Source- Kite Zerodha)

Now, if we carefully look, the market finds very strong support in the range between Rs. 1030 and 1075. The sellers continuously try to breach these levels but to no avail. And after forming a base at these levels, the market starts going up.

And, we see continuous buying momentum in the share price of HDFC Bank. Trend line support is formed in the market by joining three points from where the market is bouncing. In this rally, the share price of HDFC bank moved up from 1030 levels to almost 1250 levels (a near 20 % gain).

And the moment, the price of the shares of HDFC bank breaks the Trend line support, we see an increased selling pressure and the longs unwind from the market. Following this, the share price reaches the initial support levels near dotted lines (Figure 1). And after finding support at these levels, the market starts to rally back and we see continuous buying in the market and it nearly makes a move of 25% from there.

So, if we were to just use simple supports patters while trading the above chart, we would have got a minimum of three trades with a minimum of 15% returns

Characteristics of Resistances

Here are the key characteristics of Resistances while looking into the charts:

  • Resistances are the levels that are defended by sellers. And the market finds it difficult to go beyond that level. It is a tussle point between buyers and sellers.
  • Maximum selling pressure comes from sellers at this point and even the buyers start to exit their long positions at these levels
  • If the levels of Resistance are breached in the market, we could see a massive short covering in the market, up to next resistance levels.
  • Resistances can also be called as points where fresh short positions can be initiated in the market, with good risk to reward ratio.

— Understanding Resistances with an Example

The figure above is a weekly chart of Airtel Limited. Through this chart, we get a clear illustration of the concept of Resistances, and the impact on the market if the resistances are breached.

Understanding Resistances with an Example

Figure 2: Weekly Airtel chart (Source- Kite Zerodha)

The Share price of Airtel Limited had made a new high in the year 2007 and after that, the market had corrected nearly 50% from its highs. And then again, the market made a move up and went up till near 500 levels and started correcting again. And by joining these two points, of the initial high and the recent high, we could form a trend line.

So, now this trend line forms an important resistance in the market. As and when the market made a move up, this trend line acted as an important barrier and the market started to correct back. And the market was able to breach this resistance in Mid-2014 and the share price had a massive short covering. And the market made a move till the initial swing highs of 570 levels. Therefore, this is the power of Resistances, when an important level is breached.

Now, let us understand the concept of swing trades. If we look at Figure 2, we have marked swing trade. Swing trades are those trades that we hold for a longer duration of time, usually for the completion of one full cycle. These are the trades that have a longer holding period. And we generally don’t have a profit target in place, we just keep trailing the Stop losses and ride the wave.

Watch this video to understand the concept of Supports and Resistances better:

Also read:

Closing Thoughts

In this article, we tried to simplify the concept of Supports and Resistances while looking into the charts. Let’s quickly conclude what we discussed today.

Supports and Resistances are important points of significance on charts as we get good entry or exit points for our trades. On one hand, Supports are defended by bulls/buyers and on the other hand, Resistances are defended by bears/sellers. These levels of Supports and Resistances can be used to identify targets for the trade and also for keeping Stop losses for existing trades. As a thumb rule, for a longer trade, look for the immediate resistance level as the target. On the contrary, for a short trade, look for the immediate support level as the target.

How to read Financial Statements of a Company cover

How to read Financial Statements of a Company?

A Beginner’s Guide on How to read financial statements of a company:  If you want to invest successfully in the stock market, you need to learn how to read and understand the financial reports of a company. Financial statements are tools to evaluate the financial health of the company. In this post, we are going to discuss the basics of how to read financial statements of a company. Here you’ll learn how to read the balance sheet, income statement, and cashflow statement of a company.

To be honest, you won’t find this post very interesting. Many of the points might sound complex and boring. However, it’s really important that you learn how to read financial statements of a company for achieving success in your investing journey. Reading and understanding the financials of a company is what differentiates an investor from a speculator.

As Warren Buffett used to say “Risk comes from not knowing what you are doing.”. And you can find the risk and potentials of a company through its financial reports. Without wasting any further time, Let’s get started.

How to get the financial statements of a company?

Before we start analyzing the financial statements of a company, the first thing that you need to know is where exactly to find them. Where can you see or download the financial statements of a company that you’re researching?

Well, you can find the financial statements of a company in any of the following sites: 1) BSE/NSE Website, 2) Investor relation page on Company’s website 3) Financial websites (like screener, money control, investing, etc)

In India, Securities exchange board of India (SEBI) regulates the financials announced by the company and try to keep it as fair as possible. Further, if you are using any other non-reputed website, make sure that the reports are correct and not tempered.

Quick Note: We recently launched our stock research and analysis portal, where you can also get the details about the financials of the +4,000 publically listed company in India. You can check out our portal here.

Three Core Financial Statements of A Company

Now, let us understand the different financial statements of a company. The financials of a company are split into three key sections. They are:

  1. Balance sheet
  2. Income statement (Or Profit & loss statement)
  3. Cash flow statement.

The balance sheet shows the assets and liabilities of a company i.e. what it owns and owes. Second, the income statement shows how much profit/loss the company has generated from its revenues and expenses. And finally, the Cash flow statement shows the inflows and outflows of cash from the company.

It’s essential that you know how to read all of these financial statements. Let’s understand each statement one-by-one.

How to read financial statements of a company?

1. Balance Sheet

A balance sheet is a financial statement that compares the assets and liabilities of a company to find the shareholder’s equity at a specific time. The balance sheet adheres to the following formula:

Assets = Liabilities + Shareholders’ Equity

Here, do not get confused by the term ‘shareholder’s equity’. It is just another name for ‘net worth’ of the company.  In other way, the above formula can be also written as:

Shareholder’s Equity = Assets – Liabilities 

Quick Note: You can easily understand this with an example from day to day life. If you own a computer, car, house, etc then it can be considered as your asset. Now your personal loans, credit card dues, etc are your liabilities. When you subtract your liabilities from your assets, you will get your net worth. The same concept is applicable to companies. However, here we define net worth as the shareholder’s equity.

Why are balance sheets important?

The balance sheet helps an investor to judge how a company is managing its financials. The three balance sheet segments- Assets, liabilities, and equity, give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.

balance sheet meaning

Key elements of a Balance Sheet

Assets and liabilities are two key elements of a balance sheet. However, both assets and liabilities further comprise of different elements. Let’s define both of these to understand them in details:

1) Assets: It is an economic value that a company controls with an expectation that it will provide a future benefit. Assets can be cash, land, property, inventories, etc. Further, assets can be broadly categorized into:

  • Current (short-term) assets: These are those assets that can be quickly liquidated into cash (within 12 months). For example cash and cash equivalents, inventories, account receivables, etc.
  • Non-Current (Fixed) assets: Those assets which take more than 12 months to convert into cash. For example- Land, property, equipment, long-term investments, Intangible assets (like patents, copyrights, trademarks), etc.

The sum of these assets is called the total assets of a company.

2) Liabilities: It is an obligation that a company has to pay in the future due to its past actions like borrowing money in terms of loans for business expansion purposes etc. Like assets, it can also be broadly divided into two segments:

  • Current liabilities: These are the obligations that need to be paid within 12 months. For example payroll, account payable, taxes, short-term debts, etc.
  • Non-current (Long-term) liabilities- There are those liabilities that need to be paid after 12 months. For example long-term borrowings like term loans, debentures, deferred tax liabilities, mortgage liabilities (payable after 1 year), lease payments, trade payable, etc.

Now, let us understand these segments with the help of the balance sheet of a company from the Indian stock market. Here is the balance sheet of ASIAN PAINTS for the fiscal year 2016-17. I have downloaded this report from the company’s website here.

Please note that there are always at least 2 columns on the balance sheet for consecutive fiscal years. It helps the readers to monitor the year-on-year progress.

balance sheet asian paints 201617

Source: https://www.asianpaints.com/more/investors/annual-reports.html

Although the balance sheet looks complicated, however, once you learn the basic structure, it’s easy to understand how to read the financial statements of a company. A few points to note from the balance sheet of Asian Paints:

  1. There are three segments in the balance sheet of Asian paints: Assets, equity, and liability.
  2. It adheres to the basic formula of the balance sheet: Assets = Liabilities + Shareholder’s equity. Please note that the first column of asset (TOTAL ASSETS = 9335.60) is equal to the second & third column of equity and liabilities (TOTAL EQUITY & LIABILITY = 9335.60).

Now, let us move to the second important financial statement of a company.

2. Income Statement

This is also called the Profit and loss statement. An income statement summarizes the revenues, costs, and expenses incurred during a specific period of time (usually a fiscal quarter or year). The basic equation on which a profit & loss statement is based is:

Revenues – Expenses = Profit

In simple words, what a company ‘takes in’ is called revenue and what a company ‘takes out’ is called expenses. The difference in the revenues and expenses is net profit or loss.

The fundamental structure of an income statement:

Revenue
– Cost of goods sold (COGS)
——————————————-
= Gross Profit
– Operating expenses
——————————————-
= Operating Income
– Interest expense
– Income taxes
——————————————–
= Net Income

Note: The revenue is called TOPLINE and net income is called the bottom line in the income statement.

Most of the investors check the income statement of a company to find its earning. Moreover, they look for growth in their earnings. It’s preferable to invest in a profit-making company. A company cannot grow if the underlying business is not making money.

Here is the Income statement of Asian paints for the Year 2016-17:

profit and loss statments asian paints 201617

Here are a few points that you should note form the income statement of Asian Paints:

  1. The top line (revenue) increased by 8.04% in the fiscal year 2016-17.
  2. On the other hand, the bottom line (net profit) increased by 11.84% (Rs 1802.76 Cr –> Rs 2016.24 Cr) in the from the fiscal year 2015-16 to the fiscal year 2016-17.
  3. This shows that the management has been able to increase the profits are a better pace compared to the sales. This is a healthy sign for the company.

For Asian paints, the diluted EPS also increased from Rs 18.19 in the year 2015-16 to Rs 20.22 in year 2016.17. This is again a positive sign for the company.

Also read: #19 Most Important Financial Ratios for Investors

3. Cashflow statement

This is the third key part of a company’s finances. Cash flow statement (also known as statements of cash flow) shows the flow of cash and cash equivalents during the period under report and breaks the analysis down to operating, investing, and financing activities. It helps in assessing the liquidity and solvency of a company and to check efficient cash management.

Three key components of Cash flow statements

  1. Cash from operating activities: This includes all the cash inflows and outflows generated by the revenue-generating activities of an enterprise like sale & purchase of raw materials, goods, labor cost, building inventory, advertising, and shipping the product, etc.
  2. Cash from investing activities: These activities include all cash inflows and outflows involving the investments that the company made in a specific time period such as the purchase of new plant, property, equipment, improvements capital expenditures, the cash involved in purchasing other businesses or investments.
  3. Cash from financial activities: This activity includes inflow of cash from investors such as banks and shareholders by getting loans, offering new shares, etc, as well as the outflow of cash to shareholders as dividends as the company generates income. They reflect the change in capital & borrowings of the business.

In simple words, there can be cash inflow or cash outflow from all three activities i.e. operation, investing, and finance of a company. The sum of the total cash flows from all these activities can tell you how much is the company’s total cash inflow/outflow in a specific period of time.

Here is the Cash flow statement of Asian paints for the fiscal year 2016-17.

Asian Paints Annual Report 2016-17 cash flow statement1

Asian Paints Annual Report 2016-17 cash flow statement 2

From the Asian paints cashflow statement, we can notice that the net cash from operating activities has declined from Rs 2,242.95 Crores to Rs 1,527.33. This may be little troublesome for the company as the net cash from operating activities shows how much profit the company is generating from its basic operations.

As a thumb rule, an increase in the net cash from operating activities year over year is considered a healthy sign for the company. However, while comparing also look at the data for multiple years.

Quick note: In financial statements, generally accountants do not use the negative sign. For example, if the expense is to be deducted, it is not written as -40. When writing minus sign, accountants use parentheses (—). For the same example, it will be written as (40), not -40.

Summary

Through this post, we tried to explain the three core financial statements of a company. It is important to read and understand all the three financial statements of a company as they show the health of a company from different aspects.

  1. The balance sheet shows the assets and liabilities of a company.
  2. The income statement shows how much profit/loss the company has generated from its revenues and expenses.
  3. Cash flow statement shows the inflows and outflows of cash from the company.

While investing in a company, you should pay special attention to all these financial aspects of a company. As a thumb rule, invest in a company with high-income growth, large assets compared to its liabilities and a high cash flow.

That’s all! This is how to read financial statements of a company. Although it’s not enough, however, this post aims to give a basic idea to the beginners about the financial statements of a company.

If you want to learn (in details) about where to find the financial statements of an Indian company and how to effectively study the reports, feel free to check out my online course on HOW TO PICK WINNING STOCKS here. I have explained everything about financial statements in this course.

Further please comment if you have any questions. I’ll be happy to help you out. Happy Investing!

What are Right Issues cover

What are Right Issues? And How it affect your investments?

Understanding What are Right Issues: Today if one is to pick up a newspaper he would find the pages riddled with issues on rights i.e. that related to liberty, equality, freedom of expression, opinions, speech, etc. However, you may be surprised that a few flips into the financial section will too include news with regards to the ‘Rights Issue‘. The rights mentioned here similarly outline the entitlement and privilege available but different from those concerned with social issues.

Today, we try and understand the term ‘Rights Issue’ as a corporate action as this would help in making a more accurate decision when offered rights by a company whose shares are held in our portfolio.

What are Right Issues

What are Right Issues?

A Right Issue is one of the options a company has in order to raise funds. In a Rights issue, the company gives an opportunity only to the existing shareholders to buy additional shares of the company.

The price offered by the company to the existing shareholders is at a discount to the market price. This is done in order to make the offer attractive to the shareholders and at the same time make up for any dilution of capital. A Right Issue also gives an opportunity for the shareholders the opportunity to increase their stake within the company. Shareholders here have a right but are under no obligation to purchase the shares. 

— Why do companies go for a Rights Issue?

The nature of a Right Issue also turns the corporate action into a trump card due to its ability to provide companies a shot at raising capital irrespective of the environment they are in. Troubled companies may opt for a rights issue in order to pay off their debts or use it as a means to raise funds for its operations when they are unable to borrow money.

— Is Right Issue a Red Flag that the Company?

Is Right Issue a Red Flag that the Company

A Right Offering is definitely not a red flag. This is because the right offering is also seen as a means to raise additional capital for its expansion and growth needs.

At times when the gestation period of a project undertaken by a company may be too long before it generates profit. In such cases opting for debt would be unwise as they would require regular interest payments even before the project is functional let alone be profitable making debt too expensive. Hence, a Right issue would seem like a Win-Win situation for both the company and the shareholders. This is because the right issue would not require regular servicing as long as the project remains on track to successful completion and future.

In a recent scenario Reliance Industries too opted for a rights issue but this was done in order to rid their balance sheets of all debt and at the same time reward the shareholders.

Can you buy unlimited shares in a rights issue?

Rights issues function differently than an Initial Public Offer(IPO) or a Follow on Public Offer(FPO). In a Right issue, the shareholder will be given the option to purchase rights but only in proportion to the shares they already hold. In the recent issue by RIL, the shareholders were offered shares in the ratio of 1:15. This means that for every 15 shares held one share may be bought in the right issue.

Hence the extent to which the shareholders can purchase shares is limited to the shares they already hold. Investors, however, have the option to sell their right to purchase the shares. The shareholders, however, are free to purchase a right some other investor wants to sell in the market.

Different types of Right Issues

There are two main types of rights issue of shares, which are as follows:

— Renounceable Rights Issue: When Renounceable Rights are offered to a shareholder he has the option to purchase the shares by exercising his right, or ignore the right, or sell his right at the price that the rights are being traded at in the stock market.

— Non-Renounceable Rights Issue: When Non-Renounceable Rights are offered to a shareholder he only has the option to purchase the shares by exercising his right or ignore the right. When these rights are offered the shareholder cannot sell his right to another investor.

Taking the ‘Right’ decision?

The Right Issue not being an obligation gives the investors the option to buy the shares of the company, ignore the issue, or sell the ‘right’ itself. Now, we take a look at the different options purely on a financial basis.

Taking the Right decision

Example: Say you are holding 1000 shares in the company Pineapple Ltd, whose shares are currently trading at Rs.21 in the market. Pineapple Ltd comes up with a rights issue where the shares are offered at a discount of Rs.15 per share. The right offering is made in the ratio of 2:10. The company already has 100,000 shares issued in its IPO and plans to further raise Rs. 300,000 through the rights issue bringing the total holdings to 120,000 shares.

1. Buying shares through the right issue

Here we look into the consideration of buying the shares. One of the integral portions of a rights issue is the Ex- right price. The Ex-Right price is a theoretical price that will result after the rights issue. Computation of this price helps an investor to take a stand on a financial basis on whether shares should be bought through the right or not. Let’s begin.

  • Shares held of Pineapple Ltd – 1000 shares (a)
  • The current holdings are valued in the market at Rs.21000.
  • The shares made available via. the rights offer is = (1000 x 2/10) i.e. ( shares held x ratio offered) = 200 shares. (b)
  • Cost that will be incurred through participation in the bonus issue = 200 x Rs. 15 = Rs 3000.
  • Total holdings if post right issue( if successful) = 1000 + 200 = 1200 shares.
  • Value of portfolio including investment from rights = 21000+3000 = Rs. 24000.
  • Ex Right price ( value per share post issue) = 24000/1200 = Rs. 20 per share

The investment above would prove to be beneficial as even though you have paid Rs.15 per share post the issue, they would theoretically be anticipated to be worth at Rs 20 post the issue.

2. Sell the right itself

The rights that you are entitled to as a shareholder with respect to the privilege to buy shares in a Right issue have an intrinsic value attached and can be traded in the stock market. These are known as Nil Paid Rights.

Above we have already calculated the ex right price. In certain cases, it is profitable if the ‘rights’ are traded at or above a price that is greater than the difference between the offered price and the ex right price.

I.e. (20-15) = Rs 5.

What happens if the shareholder simply gives up the right?

At times the shareholder may also choose to take no action on the right and simply ignore it. It is important for the shareholder to note that the preferential rights given here, come with the risk of dilution if ignored. This is because as discussed earlier, the shares issued derive value from the existing portfolio and investment made through the rights. This will be spread across the whole portfolio post the issue. 

Also if we go back to the previous example the shareholder would be left with only 1000 shares post the issue. Say the prices are equal to the ex right price. This would mean that the ex right shares that were earlier valued at Rs. 21,000 would be valued at Rs. 20,000 posts the issue. These would be only the beginning of the effects as the shares will be affected in the future as well eg. income from the company distributed in the form of dividends will now be distributed among 120,000 shares instead of earlier 100,000.

Right Issues in the Covid-19 environment

Right Issues in the Covid-19 environment

In the wake of the COVID-19 environment, several companies resorted to raising capital through the right issues. This included companies with strong credentials like Mahindra Finance, Tata Power, and Shriram Transport Finance. These companies have been able to raise a total of 10,000 crores during the pandemic. RIL saw its right issue s oversubscribed by 1.59 times and received applications worth more than Rs. 84,000 crores and raised 53,124 crores through the issue.

The rights issue route was adopted by the companies due to the ease of raising funds. This was because all that is required for the right issue is the board of directors’ approval. Unlike other means that require shareholders’ approval in the shareholders meeting as well which is an added risk in the current environment. In addition to this SEBI also undertook several steps to ease the process of rights issues like reducing the market cap requirements and also the minimum subscription requirements.

Also read:

Closing Thoughts

Even though Right issues have been particularly popular during the COVID-19 environment the response has not always been the same. Shareholders were always quick to realize that no matter how democratic the corporate action may seem they still are in a way forced. This is because the threat of their portfolio being diluted always remained.

Despite this, when faced with the choice to participate in a rights issue it is always better to not just rely on the financial aspect. It is also very important to find out what the purpose of the rights issue is. In addition to this, it is also a positive sign if the promoters take part in the rights issue. It shows that they themselves believe in the cause. Happy Investing.

KETAN PAREKH SCAM cover

Ketan Parekh Scam – The Infamous Stock Market Fraud!

Demystifying how Ketan Parekh Scam was executed: One of the biggest stock market frauds that became an eye-opening event for not only the equity investors but also for the Securities Exchange Board of India and such other regulatory authorities was Ketan Parekh Scam. The Market Rip-off was done in such a way that he was able to make multiple times the annual return on the stocks he manipulated.

Ketan Parekh was the God for many investors as he created a delusion that whatever he touched turned into the Gold and whatever he wished the market seemed to grant him. Just within two years of time, Ketan deceived so many investors as well as banks and the stock market that it became a case study for many these days.

The stock market has the power to make someone rich and the others lose their money in just a matter of seconds. On one hand, we have examples of people successfully trading in the stock market such as Warren Buffet, Carl Icahn and George Soros who became the multi-millionaires by investing in the stock markets. And on the other hand, we have Harshad Mehta and Ketan Parekh who not only ruled the stock markets but also found guilty of the economic crimes.

Let us understand in detail what the Ketan Parekh scam was, how did he succeed in fooling the investors and shaking the stock markets, which next-level chicanery he had planned and how he got caught.

Ketan Parekh –  Background and Foundation

ketan parekh stock market scam

Famously known as a ‘Bombay Bull’ during 1999-2000, Ketan Parekh was a mentee of Harshad Mehta (who was also involved in another scam that shook the stock market in India). Ketan, CA by profession, started his career in the late 1980s and was running a family business of NH Securities – a stockbroking firm that was started by his father. This was how he managed to thoroughly understand the inside outs of the stock market trends and the investors’ mindsets.

During his peak, marketmen literally followed his every move blindly as he used to exploit the stock prices to gain the trust of these investors. Not only this, but he also enjoyed close connections with many celebrities from Bollywood, political parties and business managers which helped him connect with Kerry Packer, leading Australian Media Entrepreneur. Kerry and Ketan joined hands to start a venture capital firm, KPV venture with $250 million that focused on investing money into the new start-ups.

How Ketan Parekh Scam was Executed

Ketan Parekh was the strong believer of the ICE sector – Information, Communication, and Entertainment and that was the time during 1999 and 2000 when the dotcom boom had just started. This enabled him to prove his predictions to be true to many other investors. Moreover, many investment firms, overseas corporates, and banks, businessmen from listed companies many of them gave their money to be managed by him as during 1999-2000, Ketan Parekh was ruling the stock market.

Ketan Parekh used Kolkata stock exchange to trade as this was the stock exchange where no strict and pivotal rules and regulations were not formed. He misused such exchange and also tied up with many other brokers to trade on his behalf and gave the commission. With these huge amounts of money, he would buy some less known companies’ 20-30% stake and suddenly such companies’ share price would skyrocket and become the talk of the town all of a sudden. Once the price would reach to a certain level, he would silently exit and sell the securities and make countless profits.

He not only manipulated stock prices but also played games with banks in order to get funds to swindle the share prices and rule over the market. He firstly bought shares of the Madhavpura Mercantile Commercial Bank’s shares so that he could gain the confidence of the bank when he approached them for a loan in the form of Pay Orders.

Pay Order is an instrument similar to the cheque but it is issued by the bank upon the payment of small advance money from the customer. When he successfully managed to rip-off the price of MMCB’s shares, he approached the other financial institutions including HCFL and UTI and pledged the pay orders with them. His loan accumulated to Rs. 750 million.

He had created a portfolio called K-10 which consists of top ten hit picks by Ketan Parekh himself. This included Aftek Infosys, Zee Telefilms, Pentamedia Graphics, Mukta Arts and so on. He was interested in low profile corporates with low market capitalization and liquidity. That is how he was able to manipulate the prices of such companies using the ‘Pump and Dump’ formula. He was also reported to have done the insider trading by purposefully influencing the stock price of certain companies who would bribe him to do so and take the advantage of the price rise to exploit the investors’ minds.

How Whatever Ketan Parekh Touched Turned into Gold?

  • The ICE sector was booming during that time and Ketan would invest majorly into these sectors which helped him gain the trust of the investors.
  • He was trading in Kolkata Stock Exchange which was lacking strict regulations itself. Hence, there was no one to watch his moves.
  • He would buy shares of low profile companies when they were trading at low prices and joined hands with certain other traders to frequently buy and sell the stocks of such companies which enabled the sudden price rise.
  • The financing method of buying shares and getting pay orders and later getting them pledged when the prices shoot up also helped him create a Bull Run in the stock market.
  • Many investors believed that slipshod reactions and regulations of SEBI who could have noticed the unusual price movements in the market helped the scam to accumulate more losses to them.
  • His connections with celebrities, political and religious leaders also aided him to get the majority of the fund from large corporates and businessmen.

Allegations and Unraveling of Ketan Parekh Scam

The SEBI and RBI started investigating into this case after the huge market crash of 176 points in a day in 2001 just one day post the budget was declared. Ketan Parekh was accused of being involved in the Insider Trading, Circular Trading, Pump and Dump and misrepresentation of facts to borrow from the banks.

Ketan Parekh declared to be guilty of a criminal offense for ripping off the Indian stock market and was barred from trading in the Bombay Stock Exchange (BSE) for 15 years up to 2017. He was also found to be involved in a Circular Trading with many banks and Insider Trading for which he was sentenced to rigorous imprisonment of one year.

However, SEBI investigated and found that despite being prohibited from trading, he used his network well and made certain companies trade on his behalf. Later in 2008, many such companies were traced by SEBI and were barred from trading too.

ketan_parekh scam found

The CBI in 2014 found the malpractices followed by him and sentenced him for two years rigorous imprisonment with a fine up to Rs. 50,000. He also siphoned off the money outside the country too. The SEBI in April 2001 reported that he had an outstanding amount to large corporates worth Rs. 12.73 billion and to MMCB Rs. 8.88 billion while to Global Trust Bank Rs. 2.66 billion. The said amount was reported in 2006 to touch the surprising level of Rs. 400 billion.

He was also reported to use Overseas Corporate Bodies and sub-accounts of Foreign Institutional Investors to receive shares from various corporate entities so as to move the money out of the country. To sum up Ketan Parekh scam allegations, he was found involved in cheating with banks by misrepresenting facts, falsifying accounts, ripping-off the stock market prices and exploiting investors’ decisions, mishandling public money, bribing company directors to enable him to do insider trading.

Also read:

Closing Thoughts

In this article, we discussed how Ketan Parekh was able to induce investors’ decisions by his malpractices. Not only the exchanges and investors but Ketan Parekh also bluffed with the banks. And all of that piled up to huge debt and one day in 2001 it became a historical event of the biggest scam in an Indian Stock Market.

It is still a part of the investigation as of now that how many other companies are still operating in the stock market after himself and other companies were barred from trading.

Why Prices of Petrol and Diesel Increasing in India (2020)

Why Prices of Petrol and Diesel Increasing in India (2020)?

Demystifying increasing prices of Petrol and Diesel in India during Covid19 period: After 67 days of lockdown, the economy finally opened up on June 1st. Since then most of us have been trying to bring our lives together and adapt to the new normal of living with COVID-19. In the midst of threats on our borders and the steady rise of corona cases, petrol and diesel prices have steadily increased in the background for 22 days. These added to the unusual events of 2020, as the diesel prices were higher than petrol.

Today we shed light on the rising petrol and diesel prices. We also try and answer the possible reason for the increase especially when just a few days ago the crude oil prices crashed into the negative territory.

coronavirus petrol diesel price meme

How are petrol and diesel Priced?

Before we look into the causes for the price increase, it is best to figure out the chain that crude oil moves through in order to better understand where the price increase has come from.

How are petrol and diesel Priced?

(Source)

Unlike other oil-rich countries, 80% of the crude oil consumed in India is sourced from other countries. This crude oil faces freight charges until it is transported to Oil Marketing Companies (OMC) which is dominated by public sector enterprises with very few private players. These companies go on to refine the crude oil into finished products.  The public players include IOCL, HPCL, BPCL, MRPL, etc. The ONC companies then charge their cut of profits in addition to the cost incurred by them for refining. The next cut is taken as profits to the dealers in petrol pumps etc. It may be surprising but the portion of the charges mentioned above make up only one-third of the amount paid by the consumers for petrol or diesel. 

The remaining two-thirds portion is made up of the taxes paid to the government. These taxes are levied in the form of excise duty, VAT and Cess charges. The excise duties are charged by the central government whereas VAT and Cess charged on petroleum are charged by the state governments.

Every Rupee that the government increases in taxes on diesel and petrol leads to Rs.14,000 crore of additional revenue to the government per annum. This sheds light as to why the government would target the petrol and diesel prices. In the current scenario, the additional revenues likely to be generated come up to 1.4-1.7 lakh crore rupees.

Reasons for the increase in prices of Petrol and Diesel

— Crude oil price normalizing

One of the major questions we would be having is that since the prices had gone negative, how is it that we are facing an all-time biggest increase in a fortnight. It is important to note that there exist different types of crude oil varying based on the place they are sourced from and the sulfur content present in them. WTI from the US, Brent crude from the UK, and the OPEC basket from the middle east. Of these the most expensive has been the Brent and the OPEC.

Unfortunately for us, these are the ones that India imports. And further depressing news has been that it was WTI crude that went negative and not the Brent and OPEC. At their lowest points in April, the Brent and OPEC were priced at $16 to $20 per barrel.Crude oil price normalizing

(Source: Oilprice.com)

These prices have since then been doubled crossing $40. The Brent and OPEC crossing $40 in recent times have been one of the reasons for the price increase. But this is not a major factor as these prices simply haven’t even touched pre-COVID levels of 2019.

— Setting off losses

As seen above despite Brent and OPEC being comparatively expensive, their global prices had reduced significantly in the months of April-May. This further raises questions as to why the prices of petrol and diesel were not reduced to match the global fall. The answer to these questions lies in the fact that the govt had chosen not to transfer the benefits to the consumers but instead use it to set off other losses.

These losses were primarily because of the COVID-19 environment. It had forced the government to move into a lockdown freezing most of the revenue channels for the govt. Which also included income from petrol and diesel as the consumption was dropped to only 30%. 

Union petroleum minister - Dharmendra Pradhan

Union petroleum minister – Dharmendra Pradhan

In this case, the government decided not to reduce the prices to match the crude oil price. But instead, they chose to maintain price levels to make up for the fall in demand for petrol and diesel and also fall in revenue from other sectors. This carried on till the lockdown was lifted at which point the crude oil prices kept increasing globally. 

The fall in demand to only 30% of consumption also caused the OMCs to sell every liter at a loss as the profit made was not able to cover the cost incurred. The OMCs were forced to further increase their margins in the’ Lockdown-Unlock’ period to cover the losses they operated on during the lockdown which led to a 22-day steady increase till the prices touched levels where they were profitable.

— INR to Dollar exchange rate

The exchange rates also impact the prices of petrol and dollar as the crude oil is traded only in exchange for the dollar. The COVID-19 pandemic hammered the already weakened rupee. The rupee currently hovers at over Rs. 75 for a dollar. The rupee traded at Rs.70 for one dollar in December 2019.

Closing Thoughts

rahul gandhi petrol diesel price

The increase in the prices of petrol and diesel-only would kick off the inflation domino effect on other products as well. The Jet Fuel too has already begun to see its share of the inflation. And we already know that ATF being the major expenses for an airline company will further be transferred to the consumer fares. Other products too face inflation in prices as the cost of freight and transportation would increase too. The already ailing Automobile industry has already started to feel the burn as the Demand for diesel vehicles has already dampened.

Needless to say, the diesel and petrol price increase is not welcome considering the state of the economy where the people are already facing job losses, pay cuts, and fear public transport in COVID-19 times

Company Bankruptcy What will happens to your shares?

Company Goes Bankrupt: What will happen to your shares?

Understanding what happens to the equity shares when a company files bankruptcy: During the economic volatility period, investors tend to become more alert with regards to their investments in the form of shares of various companies. Generally, they try to sell their stocks if they find out that the company may not do well in the future or it may take longer than expected to recover. In such cases, companies get hit quite badly because investors are reducing and the market volatility affects the share price too.

The current unprecedented time of COVID-19 too is such that the majority of the investors have already taken necessary actions in order to safeguard their investments. The fear of losing money if the company goes bankrupt has made everyone scratch their heads quite often. However, it is not necessary that if a company is bankrupt then investors will certainly lose all of their money but the fact is that the common stockholders are the last ones on the list of preference for payment. There has also been a misconception of using insolvency and bankruptcy as a synonym but they both are different.

In this write-up, we will be discussing what happens to the shares of the equity shareholders when a company files bankruptcy. Here, we’ll be covering do we mean by insolvency and bankruptcy, options under the bankruptcy, the preference of the payment when any company files bankruptcy and relaxations, and exemptions provided by the government under the stimulus package during the global disease outbreak.

Understanding Insolvency and Bankruptcy

Solvency is a financial state or a condition when a person, firm, company, or any other legal entity’s total assets exceed its total liabilities at any point in time and it can meet its long-term debts and financial obligations. The opposite of it is called “Insolvency”.

The inability to repay its debts/obligations is a state of insolvency and it can be temporary as well. Such a situation may rise from poor cash management, increased expenses, reduction in cash inflow, or because of some unpredictable accidents, mishappenings or pandemic situations resulting in huge losses to the entity/firm. Here, the person or an entity is not even able to raise enough cash in order to pay off its liabilities and obligations in the due course.

The state of insolvency usually leads to filing for bankruptcy, although, it can be avoided by taking corrective actions such as negotiating terms with credits and other lenders, cutting down overhead costs to a large extent, and by generating surplus cash.

Understanding Bankruptcy and Insolvency

The Bankruptcy, on the other hand, is a legal procedure when an insolvent person or an organization declares its inability to pay off its debts. Under bankruptcy, the person or an entity seeks help from the government to repay its debts and obligations. The bankruptcy does not mean the closure of the company as there may be a chance for the company to recover to its normal state.

When a company files for its bankruptcy, it may ask the government to help the company restructure or reorganize its debts and repayment terms to ease out the repayments. The other option the company may seek from the government is to liquidate the company and decide the order of repayment by realizing cash from its assets.

Technically, the companies themselves file for their bankruptcy but sometimes, creditors may also file the application in the relevant court to declare the company as bankrupt. The Registrar of Companies may also pass a special resolution to declare an entity as bankrupt.

Also read: Is Debt always bad for a company?

What happens when Company Goes Bankrupt?

Restructuring Debts Vs Liquidation Procedures

As discussed earlier, the two options under the Bankruptcy filing procedure provides flexibility to the corporates to either reorganize its debts and get some time to recover or to liquidate the company if the operations have already started closing down.

The Insolvency and Bankruptcy are now solely controlled by the Insolvency and Bankruptcy Code (IBC), 2016. In case of a reorganization, the relevant court appoints a resolution professional who will decide the terms of reorganization considering relevant laws and regulations of the code along with creditors’ and other lenders’ considerations.

Not only that, but the company is also given 180 days (further extended by 90 days upon presenting a valid reason) of the moratorium period. In this period, the company cannot transfer its assets or raise cash by itself, no creditor or any other lender can initiate any legal proceedings or enforcement against the company.

The common stockholders’ shares may reduce in value as the restructuring under insolvency affects the company’s share price. Also, since all other creditors and lenders will have more preference over the restructuring terms, the stock value after the reorganization may also get terribly hit. However, if the company proposes a strong plan post the restructuring then investors may be able to get the same value or more in the long term.

The second option of liquidation is more menacing and never liked by the investors. Under the liquidation procedure, the liquidator appointed by the court prepares liquidation terms and order of preference of payment where the common stockholders are the last ones to be paid back their investment. Sometimes, investors may not even get anything against the stock they hold.

— The Order of Preference for the Payment

While liquidating, an important point to mention is that everybody is not always equal in the tiers of creditors. Moreover, each tier must be paid in full before any money is repaid to the next tier. The order of preference under the Bankruptcy is provided under Section 178 of the Companies Act 2013 as provided below:

  • Firstly, the costs and expenses incurred by the bankruptcy professional appointed by the court, are paid.
  • Secured creditors are paid as they hold some security against their money receivable from the company.
  • Wages due to the employees
  • Financial debts payable to the unsecured creditors
  • Government and statutory dues
  • Any other debts of the unsecured creditors
  • Preference shareholders
  • Equity Shareholders

Quick Note: In the above order of Preference for the Payment, please note that the equity shareholders are last in the line and mentioned at the end. This is because the shareholders are practically the owners of the company and and therefore have accepted a greater risk compared to others.

Recent relaxations by the Government: COVID19 Stimulus Package

Due to the unprecedented time recently faced by everyone in our country and across the globe, the government as a part of the stimulus package announced the suspension of initiation of fresh insolvency proceedings for the next six months from 25th March. According to the stated announcement, there will be no default on the part of a company if the default is occurring out of the global disease outbreak.

Moreover, the minimum threshold amount to initiate the insolvency proceedings has also been increased from Rs. One Lakh to Rs. One Crore to cater many MSME sector companies. The government also declared sector-specific relaxations. This indicates that the investors’ money is safe for now and if the government can provide a pre-packaged resolution plan to certain companies then that will save the investors’ investments.

The Pre-Pakaged Resolution Plan (a Pre-Pack) is kind of a remedy provided by the government to the companies facing financial stress where the company and its creditors mutually agree on the sales terms with the buyer before initiating insolvency.

Companies that bounced back post Bankruptcy

Although, no investor would like his company to file bankruptcy but if that happens, there are examples of companies that filed bankruptcy and came back from the brink of the debt. Below are a few examples of such companies:

  1. General Motors: During the economic fall down in 2009, GM had filed bankruptcy due to heavy debts and pensions exceeding its total value of assets. However, post-bankruptcy it had bounced back stronger than before.
  2. Converse: The company filed for bankruptcy but later Nike acquired the stake in this company and since than the market cap of this company is rising.
  3. Marvel Entertainment: Marvel had to file for bankruptcy due to the hefty debts as comic books sales fell badly, later on, Disney bought the stake and it managed to survive.

Closing Thoughts

The Bankruptcy and Insolvency are always scary for any investor. Being a holder of common stock of a listed company gives the last priority of being paid the invested money back. This is why it is always advisable to study the company before investing.

Studying the financials, due diligence reports, and other such statutory compliance will provide information to a greater extent about the company’s financial health and if they have any plan to file insolvency if their debts are already piling up. Moreover, post insolvency if the companies get better insolvency resolution plans then too the money will be safe.

The IBC 2016 has successfully reduced the time taken for resolution plans and not only that, but the recovery rates for the creditors have also increased over the period of time. Adding to that, the recent relaxations may also prove to be a financial booster for the majority of the MSME sector companies. However, the statistics of last year’s bankruptcy filing show a huge spurt by 123% compared to 2018.

The bottom line should be to study well before investing and be always cautious of what is happening in the company you have invested your money as the bankruptcy procedures can be sometimes painful or it may turn out to be a game-changer.

DMart Owner RK Damani Success Story cover

D-Mart Founder- RK Damani Success Story [Bio, Facts, Net worth & More]

D-Mart Owner RK Damani Success Story: Radha Kishan Damani or RK Dami is a Mumbai based billionaire investor, businessman, and owner of the mega-retail chain stores “D-Mart” in India. The veteran investor Rakesh Jhunjhunwala considers him as his guru (mentor) in the Indian share market. Here are some interesting facts about RK Damani

  • Current Age: 66 (Born 1954)
  • Net worth: $15.5 Billion
  • Occupation: Trader, Investor, Businessman
  • Status: Self-Made Billionaire

According to Forbes’s latest Richest Indian’s list, RK Damani is the 7th richest person in India, with a net worth of over $15.5 Billion, which is equivalent to over Rs 116,200 Crores.

RK Damani Success Story

— Background

RK Damani does not consider himself as a highly educated person. He dropped out of college while pursuing B Com from the University of Mumbai. Before entering the stock market, RK Damani had a small ‘ball-bearing’ business. However, after the death of his father, he started working as a stockbroker in his family business. He was 32 at that time.

Therefore, unlike most tech entrepreneurs who start their startup journey in their 20s, RK Damani was a little late to join this journey, still was able to make it big.

— Stock Market Career

Although RK Damani started his career as a stockbroker, he soon understood that if he wants to make real money from the market, then he needed to trade his own money in the market, instead of being just a broker. And soon he started trading his in the Indian stock market.

RK Damani made a lot of profits from his trading in stocks. He was a very flexible trader and believed in making profits using different market swings. For example, during the Harshad Mehta scam, he made a lot of money by ‘Short-selling’ the stocks, which was not common at that time. However, after getting influenced by value investor Chandrakant Sampat, later RK Damini changed his approach. He shifted to long-term value investing.

RK Damani made a lot of money by investing and holding multi-baggers stocks. A few best-performing stocks from his portfolio are VST Industries, Sundaram Finance, Indian Cement, and Blue Dart. He also invested in VST Industries at an average of Rs 85 and it is currently trading at Rs 3,400. Further, India cement gave a return of +115% to his porfolio.

Some other companies in his portfolio are Food & Inns Ltd, Simplex Infrastructure Ltd, Mangalam Organics, Spencer’s Retail, BF Utilities, Prozone Inty Properties, Kava Ltd, Astra Microwave products, etc.

RK Damani latest stock portfolio 2020 june tradebrains

— D’Mart Owner – The career as a Businessman

RK Damani has been very interested in consumer retails for a long time. That’s why he opened D-mart in 2002 with one store in suburban Mumbai. Nevertheless, being a value investor, this was a very planned move by him.

In March 2017, D-Mart went public by offering its IPO, under the name of the parent company- ‘Avenue Supermarts’. The IPO was a big hit. Avenue supermart offered its shares to the public at a  price of Rs 299 and got listed at Rs 604 after over-subscription. (Also read: 10 secrets behind the stunning success of D-Mart’s Radhakishan Damani). Currently, the shares of Avenue Supermarts are trading at Rs 2,372 per share, as of 30 April 2020.

d mart

Further, by 2019, D-Mart has over 176 stores spread across Maharashtra, Andhra Pradesh, Telangana, Gujarat, Madhya Pradesh, Chhattisgarh, Rajasthan, National Capital Region, Tamil Nadu, Karnataka, Daman and Diu, and Punjab. Dmart stores generated a total revenue of Rs 19,916 Crores in the year ending March 2019.

dmart success story rk damani

(Fig: Dmart Stores Success Story)

— Other Facts about RK Damani

RK Damani considers himself as both a trader and an Investor. He trades in market swing and invests when he’s getting long-term value.

Personally, Mr. Damani lives a very simple life. He is known as ‘Mr. White and White’ because most of the time he wears a simple white shirt and white trousers. Besides, he avoids media and public gatherings.

(Video Credits: FinnovationZ)

That’s all for this RK Damani success story. I hope this article will motivate you towards your own success journey. Let me know whose story should we cover in the next article by commenting below. Happy Investing.