The Telecom War in India - Jio, Airtel, Vodafone cover

The Telecom War in India – Jio, Airtel, Vodafone?

Understanding the Telecom war in India and current Scenario: The Telecom industry in India has gone from being one of the most attractive to a cruel environment to all its players. The industry currently consists of three players i.e. Jio, Airtel, and Vodafone Idea. But if we look over the last two decades there have been over 16 players who have tried their hand in the industry.

We already know about the innate challenges the industry poses due to the ever-evolving technological environment. A newly arrived technological advancement may be completely obsolete in the next five years. But these are the challenges that a telco foresees and enters the industry with. Today, we’ll discuss the telecom war in India. Here, we’ll try to find out the key factors that have brought the industry to currently operate with barely three players and also look into the current telecom scenario.

telecom war in India

Telecom Industry – The Story So Far

In the pre-liberalization period, there existed only state-owned companies like BSNL. The operations of these companies can be dated back to the British era. Post the liberalization the government began issuing licenses to private players in exchange for a license fee.

This license fee set, however, was in accordance with The Telegraph Act of 1885 set to govern the state players. The private telcos found it hard to adhere to this and constantly defaulted on the fee payments.

Noticing this the government introduced the National Telecom Policy in 1999 where the telcos were given the option to either pay the existing license fee or share a percentage of their revenue which was called AGR ( Adjusted Gross Revenue)

— The More the Better

During this period the government believed that the greater the number of players the greater the benefits the consumers would receive. This has bought up to 16 players in the telecom industry. This, however, ended up doing much more harm to the industry due to the competitive pricing practices followed by the telcos to emerge as the top players.

Telcos kept entering the industry and vanishing from the industry at the same time. The majority of the players were acquired or forced to merge with the top players. The remaining players went bankrupt or had their licenses revoked.

telecom companies in india that went bankrout

(Source: Wikipedia)

— AGR Dispute

During this period the Department of Telecommunications (DoT) entered into legal disputed with the players. If must be noted that Revenue meant that any income received by the company irrespective of it making profits or losses. The companies agreed to pay AGR assuming that the revenues to be paid would be from the core(telecom related) activities of the industry. The DoT argued that a percentage of the revenue from all sources ( core and non-core) is to be paid.

This involved installation charges, value-added services, interest income, dividend, and even profit on the sale of assets, insurance claims, and forex gains. This meant that the telcos now owed 1.47 Lakh crore in AGR to the DoT. Other government entities like TRAI (Telecom Regulatory Authority of India) and TDSAT (Telecom Disputes Settlement and Appellate Tribunal) also voiced their concern over this claim.

AGR Dispute in India Telecom Industry

Both TRAI and TDSAT supported the telcos in this against the DoT. The TRAI even recommended excluding non-telecom revenues from the AGR but DoT challenged the TRAI recommendations. This led to a 14 year legal battle between the telcos and the DoT. The decision ultimately came in favor of the DoT on 24th October 2019. The courts ordered the telcos to pay  1.47 Lakh crore in AGR to the DoT. 

GAIL and PGCIL telecom Industry

Interestingly government entities like GAIL and PGCIL also had acquired a license from the DoT. The DoT also a government entity now claims that it is owed 1.72 Lakh Crore from GAIL. This is after computing its share from any revenue that GAIL made. The amount sought by the DoT is more than 3 times the net worth of GAIL.

— Enter Jio: A Mukesh Ambani Offering

These troubles in the telecom industry seem monumental and we have not even considered other factors like the 2G scam that took place. The worst, however, was yet to come for the telcos. In 2016, a new player Jio entered the industry. The predatory pricing strategy followed by Jio offered consumers 4G data for free. This further put tremendous stress on the telecom industry.

When Reliance Jio entered the markets in 2016 there were up to 7 telcos who had a substantial footing in the industry. By the end of 2019, there were only 3 other companies competing. Out of the three only Jio was profitable by extremely slim margins and airtel running but on losses. Vodafone and Idea too in losses were barely surviving the pricing onslaught. 

— Spectrum Dues

spectrum dues telecom

Apart from the AGR the telcos also owe the government dues from spectrum allocation auctions. The telecom industry makes the use of electromagnetic waves that are made available through a spectrum. Hence a spectrum is considered a national resource and allocated carefully by the government. The spectrum allocation charges are paid in installments to the government. With the telcos already in debt, they further started defaulting on these too.

Finance Minister Nirmala Sitharaman announced a moratorium on these installments for 2 years. But the moratorium provided by the government does not come interest-free as they will still have to pay additional interest accrued during the 2 year period. Airtel currently owes Rs. 11,476 crores on its installments with Vodafone Idea owing Rs. 23920 crores.

Telecom War in India: Current Scenario

All sympathies do not lie with the telcos. Prior to the Jio’s entrance, the telcos enjoyed a  period where they charged consumers exorbitantly. This was the main reason why Jio already had their stage set in 2016. Their offer of charge-free services to customers enabled them to immediately gobble up a section of the market share.

This was followed by the telecom war in India and competitive pricing which forced existing players like Airtel, Vodafone, and Idea to lower their prices and profit margins. 

How telcos are adapting to increased debt & 5G Preparation?

The telecom industry has forced its payers to adapt to raising funds from foreign investors in exchange for a stake in the company.

— Reliance Jio

After Reliance entered the telecom sector its debt shot up by 438%. Mukesh Ambani has set out to make Reliance a zero net debt company. This would mean wiping out 1.54 lakh crore of its debt. The following table shows the stakes sold and amount raised

Stake sold to% of Stake Sold Amount raised (Rs Cr)
Facebook9.9943,574
Sterling Silverlake1.155,655.75
KKR2.3211,637
General Analytics1.346,598
Vista Equity2.3211,637
Mubadala1.859,094
Total18.9788,195.75

Read More: Facebook- Jio Deal: What $5.7B investment means to Stakeholders?

— Airtel 

Airtel remains the only major player other than Jio which able to survive, compete, and raise capital with ease at this stage. It recently announced a 2.75% stake sale to raise 7500 crores ($1billion). In January, Airtel raised $15000 crores through qualified institutional placement and foreign currency convertible bonds for 7,500 crores ($1billion)

— Vodafone Idea

Vodafone and Idea have merged to form Vodafone Idea. This has enabled VodafoneIdea to become the top company in terms of subscribers. But this has only ensured their survival in the Indian markets. 

Vodafone Group CEO Nick Read has vowed to not invest in the Indian markets. This can be justified due to the court ruling against the telcos with regard to AGR.  This has made investing in India a lost cause for Vodafone as all incomes earned by the companies ill be used to pay back the existing AGR dues apart from the new AGR dues that will keep on accruing.

Also, their survival will require debt to finance 5G costs. This investment which does not generate any income in the foreseeable future will be hard to be explained to Vodafone shareholders in the UK. Vodafone Idea not only faces difficulty in raising investment but also struggles with its low 4G utilization. (Also read: Vodafone Idea has managed to attract attention from Google which eyes a 5% stake in the telco.)

In an advent, if one of the 3 players does not survive it would lead to the Indian markets turning into a duopoly. The two telcos that do survive may form cartels which will eventually result in a pricing agreement. This in addition to the AGR dues to the DoT and 5G spectrum will result in the consumers holding the burden through increased prices.

RankOperatorSubscribers (millions)Market ShareOwnership
1Jio382.8932.99%Jio Platforms
2Airtel329.0228.35%Bharti Airtel Limited
3Vodafone Idea325.5428.05%Vodafone Group (45.1%), Aditya Birla Group (26%), Axiata Group Berhad (8.17%), Private Equity (20.73%)
4BSNL123.1310.61%Government of India

(Table: Mobile Operators in India as of 29 February 2020 according to TRAI)

What the Government can do? 

To reduce the burden on the telecom industry the existing players have requested the Telecom Secretary to provide the 5G spectrum free of cost to existing players in an attempt to rescue the industry. The government can also ensure that cartels are not formed and players survive by benefitting the consumers.

This can be done by providing the 5G spectrums in exchange for the telcos agreeing to adhere to both floor pricing and price ceiling. By doing this the telecom industry will be provided some relief through 5G spectrum allocation as requested by telcos. The floor prices and price ceiling will ensure healthy competition and limit any adverse impacts on consumers.

Closing Thoughts

The story of the Indian Telecom Industry so far shows that the government is just inches away from slaughtering the golden duck in an attempt to increase its revenue. It is high time the Center interferes so that both the industry does not lean towards a duopoly or monopoly and at the same time the consumers do not face the brunt. Any efforts from the government to recover unreasonable amounts from AGR will push the telcos to increase debt borrowing from the banks.

This increased debt in addition to the cost of surviving by further investing in the 5G spectrum will force the burden towards the consumers. In an event of intense telecom war in India where a major player throws in the towel to quit, the already ailing banking sector will be further hit. Other stakeholders like the employees who earlier dependent on the telcos will further be added to the casualty lists.

9 Best Performing Industries During COVID-19 Storm

9 Best Performing Industries During COVID-19 Outbreak

A study of best-performing Industries during COVID-19 / Coronavirus storm: Even after COVID-19 changing soo much in our lives we still are faced with the question, “What is life going to be like from tomorrow?”. Covid-19 has the governments and other influential intellectuals scratching their heads due to the level of uncertainty it poses. Will the virus just disappear in a few months? Or Will a vaccine come in time? Or Will we just have to learn to live with it just like AIDS? This uncertainty has even made it hard to get a peek at what the future will be like let alone predict it.

Despite all this chaos, some businesses have still found a way to make lemonade out of lemons and keep striving. Today, we are going to cover a few of the best performing industries during COVID-19 outbreak. Here, we’ll have a look at which sectors and industries these companies come from and why they were able to do so.

best-performing Industries during COVID-19 / Coronavirus storm

Best Performing Industries During COVID-19

1. Pharma Industry

pharma industry best-performing Industries during Coronavirus times

Although the doctors and nurses battling the virus have had to face the risk of the virus, the pharmaceutical and healthcare industry, however, remains immune. This is because of our dependence on the pharma and healthcare at the frontlines against COVID-19. Due to changes in consumer behavior and hygiene practices any industry remotely connected has also benefitted. Disinfectants and sanitizers have recorded their highest prices and sales.  

2. Information Technology (IT) Industry 

The IT sector is in a relatively good position in the midst of the pandemic in comparison to others. This can be owed to the fact that a stable internet connection and laptop are all that is required in most of the cases, enabling them to work at ease from home. The Work From Home(WFH) approach adopted by most commodities has given rise to apps like Zoom.

most downloaded apps during coranavirus times

Zoom has seen a 187% increase in its share prices since December. Other software companies that provide solutions for WFH have also seen a similar response. The inherent privacy concerns in WFH have also increased the demand for cybersecurity.

The current scenario will also see an increased push for technological acceleration. The Indian IT sector is majorly reliant on the US and European markets. Hence the impact it receives will also be dependent on the impact on the US and European markets.

3. Telecommunication Industry

The telecommunication industry may have been impacted in its day to day functioning but its market demand has increased. This is because of the increasing need to connect during lockdowns has led to an increase in the data used.

4. E-commerce Sector

ecommerce booming during coronavirus times

Many countries have found lockdowns the only option to buy some time as they try to grasp the changes. This has been a silver lining for the E-commerce segment as many consumers have turned to them for their needs. This also involves E-Retail shops that deal in fast foods like BigBasket and Grofers.

Also read: Amazon has the right businesses to weather coronavirus.

5. Fast Moving Consumer Goods (FMCG)

The FMCG sector had seen reduced demand for the initial few weeks during the lockdown but these will return to normal during the easing period. The FMCG sector, however, will benefit from the reduced crude oil prices. This has come in two forms. Firstly the benefit if one of the components is crude oil or if crude oil is part of the manufacturing process. Secondly from the reduced cost of packaging which requires crude oil in its production. Packaging currently makes 15-20% of the cost.

6. Paint Industry

Companies in the painting industry will be benefitted from the reduced crude oil prices. This is because 45% of the raw material of these companies are crude oil derived. A few of the leading companies in the paint industry are Asian paints, Kansai Nerolac, Berger paints, etc.

Also read: How Crude Oil Prices Impact Indian Market & Economy?

7. BFSI Sector

Banking, Financial Services, and Insurance companies also have an opportunity to increase their demand post the lockdown. This is because the reduced rates will result in cheaper loans. In addition to this, the government has encouraged loans to the MSME sector by acting as the guarantor in many cases.

Insurance companies will also see an increase in their product sales. This is if they are tweaked to match the Covid-19 environment once the government stops playing a major role. Companies like Paytm which are an eCommerce payment service and in the fintech business have continued their growth from demonetization into the great lockdown. This is also because of the nature of the virus and people’s increasing aversion towards cash.

8. Online Streaming, Gaming and EduTech

sectors performing well during coronavirus

With all forms of existing entertainment shut down, increased demand has been seen in online streaming websites and gaming companies. Netflix and Youtube have had to reduce the streaming quality in Europe to ease the pressure on the internet.

gaming industry boom post coronavirus lockdown

Gaming companies will have a good run during with issues being faced in its console production which will be fixed once the economy opens up.

The online education market in India was already forecasted to grow to become an $18 billion market by 2022. The great lockdown has only given a boost as numbers will be met much sooner.

9. Home Fitness

home fitness industry rise post coronavirus

The nature of the virus has made accessing Gyms and other public areas to maintain fitness dangerous. Companies like Peleton which offer an interactive experience along with their equipment have seen a rise in their share price this year.

Post Corona Environment

The post-Corona environment will be rigged against industries that have been affected during the lockdown. This is due to the changes in behavioral patterns. A level laying field can only be expected after a year or two after the pandemic. Be it a business or a human, sticking to old behavior patterns and not adapting to suit the environment will get you killed!

What are Corporate Spin-Offs meaning

What are Corporate Spin-Offs? Meaning, Pros & Cons!

Understanding corporate Spin-Offs and how they work: There are many corporate actions that act as a catalyst in the market and results in the prices of a share changing drastically within a short frame of time. A few common examples of such catalysts are mergers, acquisitions, bonus shares, buybacks, etc. The announcement of all these events results in rapidly increasing (and sometimes decreasing) of share prices in a short period. Therefore, share market investors and participants need to know what exactly these catalysts mean.  One other typical example of such events are corporate spin-offs. 

In this post, we are going to understand what are corporate spin-offs, how they work, their advantages, disadvantages and why does a company opt for spin-off. Let’s get started.

What are Corporate Spin-Offs?

A corporate spinoff is an operational strategy where an existing division of the parent company is dissolved and a new company is created in place of the division which is now independent of the parent company. Ownership in the newly formed independent company is given to the shareholders of the parent company on pro-rata based on the holdings in the parent company.

The new company resulting from this corporate action is known as the company spun-off. The company spun-off acquires its assets, employees, and other resources from the parent company.

corporate spin off

A spin-off is a mandatory corporate action. In a mandatory corporate action, the board takes the decision and the shareholders are not permitted to vote.

To make the topic more comprehensible we shall be referring to the division of the company that is spun off and becomes independent as  ‘Spinoff Ltd’. The portion of the company that remains with the existing company earlier will be referred to as ‘Parent Ltd’. The shares of the newly created Spinoff Ltd are distributed to the existing shareholders of Parent Ltd in the form of a stock dividend.

Why does a company opt for Spin-off?

There are a number of reasons why a company may opt for a spin-off. Here are the top grounds why a company may go for a spin-off:

1. Benefits of Focus

Companies that go for a spinoff generally have divisions that are least synergetic and have distinct core competencies from that of the Parent Ltd They find turning these divisions into independent companies i.e. into Spinoff Ltd would be most appropriate.

A spin-off would enable both the Parent Ltd and the Spinoff Ltd to sharpen focus on its resources and manage themselves better off independently. 

Spinoff Ltd benefits from the spin-off the most because they get a new management that is focussed only on the goals of Spinoff Ltd. The newly assigned leaders present here would be experts in the field with focus only on the goals of the Spinoff Ltd. This would also help Spinoff Ltd override corporate bureaucracy that was impeding its growth in Parent Ltd.  

2. Due to Failure to sell a division

At times Parent Ltd might have decided to sell off one of its divisions but does so unsuccessfully. In such cases, the company uses spin-off as a last resort to separate itself from the division.

3. Reduced agency costs 

At times the parent company may enter sectors that are soo diverse from its core competencies that its investors may show no interest in the new division or may even oppose the new division. In these cases, the company incurs agency costs while resolving disagreements between the management and the shareholders.

If the new division is the cause of disagreement a spin-off will prove beneficial to Parent Ltd.

This will also result in satisfied shareholders.

4. Risk, Profitability, and Debt

If a division of a company increases its overall risk due to the sector it operates in the board may take a decision to spin-off that division. 

A division may also have all the characteristics of growth in the future but its current performance or losses may be affecting the parent company. In such a situation the division may be spun off.

 When a Spinoff Ltd is created it may take on the debt of the Parent Ltd. Or at times Parent Ltd. may give Spinoff Ltd a fresh start by not transferring any debt. This will depend on the strategic perspective of the board.

5. Reduced Overheads 

Parent Ltd will benefit from the reduced overheads that pertain to the division which now becomes Spinoff Ltd. On the other hand, Spinoff Ltd will enjoy the freedom of taking care of its own overheads as required without any interference.

parent company and spinoff company

Although there are a number of reasons why a company may opt for a spin-off it is basically due to the fact that it feels that by doing so it would turn out to be beneficial to both Parent Ltd and Spinoff Ltd if they operated independently.

What is the Spin-off Process?

A spin-off may take anywhere from half a year up to over 2 years or even more to be executed. Once the board takes the decision there are multiple steps that follow. They include identifying well-suited leaders for Spinoff Ltd. Creating an operating model and financial plans to suit the business of Spinoff Ltd.

This is because the parent company is still responsible for its division. Proper communication about the terms of the spin-off to the shareholders is also necessary. This is followed by completing the legal requirements. The parent company also focuses and helps Spinoff Ltd to create a new distinct identity before the spin-off.

Types of Corporate Spin-offs

Here we classify spinoff on the basis of the ownership retained by the parent company.

– No ownership retained

In what is called a pure spin-off the parent company does not retain any ownership in Spinoff Ltd. 100% of the ownership in Spinoff Ltd is distributed among the existing shareholders of the company. Here Spinoff Ltd gets greater autonomy in its operations once the spin-off is complete.

– Minority Ownership Retained

Parent Ltd is also allowed to hold up to 20% of Spinoff Ltd. In such a case say if 20% is retained by Parent Ltd, the remaining 80% is distributed among the shareholders on a pro-rata basis. Here the parent company enjoys a greater focus on is operations and still retains some influence and decision making ability in the company spun-off. 

There is also a possibility of a partial spin-off where the company may only spin-off a part of its division and retain minority or not retain ownership accordingly.

Effects of spin-off on price of securities of the company involved

Once a spin-off takes place the share prices of Parent Ltd will fall. This is because a spin-off involves the transfer of assets from Parent Ltd to Spinoff Ltd. This will result in reduced book value of Parent Ltd and hence its reduced price. However, the reduction in price is set-off by the share price of Spinoff Ltd. This is because Spinoff Ltd will receive the same assets transferred from Parent Ltd. Hence the investor will not face any immediate loss of value.

For eg. say the market cap of the company before the spin-off stands at Rs.10 crores and its current share price is Rs.100. Say the assets that will be transferred to Spinoff Ltd are worth Rs.2 crores. After the spin-off, the market cap of Parent Ltd will be worth 8 crores resulting in a post spinoff share price of Rs.80. The share price of Spinoff Ltd would be Rs.20 with a current market cap of Rs.2 crores.

Reduced demand from Funds

These prices will remain temporarily as the shares will be subject to market volatility. Spin-offs are said to cause sell-offs, particularly in the index-based funds. This is because an index shows the topmost companies in a market based on their market cap. The companies undergoing spin-off may no longer suit the requirements of the market index.

Parent Ltd too may lose its position among the top stocks due to the reduced market cap after the spin-off. This will cause funds that follow the indexes to sell the shares of Parent Ltd as well. Other funds may too sell the shares of Spinoff Ltd. This is because Spinoff Ltd may not suit their capital requirements, dividend requirements, etc. This will result in a reduced demand and fall in the price.

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

Disadvantages of Corporate Spin-Offs

1. Increased cost

The cost of the spin-off will have to be borne by Parent Ltd. They will include legal duties and other costs of set-up.

2. Employee’s Discomfort

The employees in the division being spun may have joined the Parent Ltd owing to its reputation. They may be put in a situation where they will lose that identity and at the same time be confronted by the uncertainty of Spinoff Ltd.

Spin-offs as part of an Investing Strategy

The share price of Parent Ltd gets reduced after the spin-off. But this is made up for by the shares of Spinoff Ltd that the existing shareholders receive as a stock dividend. As discussed earlier due to market reactions the price may further fall.

After a spin-off takes place investors have the option to either hold onto both the shares of Parent Ltd and the shares of Spinoff Ltd. Or they have the option to sell both or either one. But before deciding which is better let us have a look at what historical studies have shown us about a spin-off.

Spin-offs as part of an Investing Strategy

— Parent company shares   

According to a study by Patrick Cusatis, James Miles, and J. Randall Woolridge published in 1993 issue of The Journal of Financial Economics, it was observed that the parent companies beat the S&P 500 Index by 18% during the first 3 years. A study by JPMorgan showed the parent companies beating the market returns by 5% during the first 18 months.

A more recent study by the Lehman Brothers investigated by Chip Dickson between 2000 and 2005 showed that parent companies beat the market average by 40% during the first two years. Due to their strong market cap, holding onto shares of Parent Ltd will be well suited for those investors that look for stable and low-risk returns. This is because as we will observe ahead, the returns from Spinoff Ltd are higher in comparison. But the shares of Parent Ltd are observed to perform even in times of market downturn.

— Shares of the company spun off

According to the same study published in the 1993 issue of The Journal of Financial Economics, it was observed that the companies spun-off beat the S&P 500 Index by 30% during the first 3 years. The study by JPMorgan showed the companies spun-off beating the market returns by 20% during the first 18 months. The study by Lehman Brothers, investigated by Chip Dickson between 2000 and 2005 showed that parent companies beat the market average by 45% during the first two years. 

All the studies show that the shares of Spinoff Ltd would not only beat the market but also would perform better than the shares of the Parent Ltd. It, however, should be noted that the share price of the spun-off companies is highly subjective to market volatility. They outperform in strong markets and underperform in weak markets. Hence they are much more suited for individuals with risk appetite.

Investors should also note that it is not the case that all spin-offs are successful. There have been situations where spinoffs have performed negatively. The best way to assess future performance is for the investor to find out why the company is attempting to have the division undergo spin-off. This is to assess if the company is using the corporate action to simply get rid of its debt or if the company is getting rid of a division in which they do not see much future prospect. In such situations, a study of debts and losses pertaining to the division in the companies books will help.

WHAT IS DELISTING OF SHARES_

Delisting of Shares – Here’s what you need to know!

Understanding what is delisting of shares and what it means to shareholders: With the latest news of Vedanta delisting plans buzzing in the market, a lot of investors are confused about what delisting of shares actually means and why companies go for delisting. Moreover, investors are worried about what happens to the shareholders once the company gets delisted from the stock exchange. 

In this article, we take a look at the delisting of shares and will try to demystify most of the frequently asked questions and facts around it. Let’s get started.

What is Delisting of Shares?

Delisting refers to a listed company removing its shares from trading on a stock exchange platform. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange. The company will now be a private company.

A long as the stock is traded in one of the exchanges that are made available to investors throughout the country it is considered as a listed stock. Anyways, if a company is listed in multiple stock exchanges in a country and decides to stop trading from just one of the exchanges, it is not considered as delisting. However, if it removes its shares from all the stock exchanges barring people to trade, then it is considered as delisting of shares. 

Types of Delisting

If we try and figure out why a company is getting delisted the reasons can be grouped into two categories.

1.  Voluntary delisting

Voluntary delisting occurs when a company decides on its own to remove its securities from a stock exchange. The company pays shareholders to return the shares held by them and removes the entire lot from the exchange. 

Why would a company want to delist from the exchange?

Voluntary delisting generally occurs when the company has plans to expand or restructure. At times a company may be acquired by an investor who is looking to hold a majority share. This share may be greater than that permissible by the government. In India, it is mandatory that at least 25% of the shareholding be available to the public. An acquirer who wants over 75% of holdings may expect the company to go private and hence delist. At times the company is also delisted to allow the promoters a greater share. 

The exchange regulations may also be a cause for voluntary delisting.  This is because companies may find it difficult to comply with regulations as they may hinder their functioning. These companies would prefer to delist.

Existing shareholder approval for delisting

A delisting that is of voluntary nature can only occur if shareholders holding up to 90% of the share capital agree to the delisting offer made by the company. The shareholders at times may not agree to delist. if they foresee a rise in the price of the shares or are not happy with the current offer made by the company to buyback the shares as they feel the shares are worth much more. A delisting process may take years to complete hence the shareholders get ample time.

2. Involuntary or Compulsory Delisting

In the case of involuntary delisting, the company is forced by the regulatory authority to stop its shares from trading.  This is also used by the regulatory authority to penalize the company. The investors do not have the opportunity to vote against the delisting in this case.

Here are the Grounds for the company being compulsorily delisted:

  1. Failure to maintain the requirements set by the exchange
  2. The shares of the company being suspended from trading for more than 6 months or being traded infrequently over the last three years
  3. Bankruptcies, where the company has posted losses for the last three years and has a net worth which is negative

Here, the Promoters are required to purchase the shares from the public shareholders as per a fair value determined by an independent valuer.

Voluntary Delisting process

Assuming that promoters, shareholders, and the company’s board of directors agree, the delisting process will take a minimum of 8-10 weeks from the date of announcement of the shareholder meeting to approve the delisting proposal. Here are the steps involved in voluntary delisting of stocks:

1. Appointment of a Merchant Banker

Once the board takes the decision to delist the first major step is appointing an independent merchant banker. A merchant banker overlooks the Reverse book building process. Reverse book building is the process by which a company that wants to delist from the bourses, decides on the price that needs to be paid to public shareholders to buy back shares. Here, it has to follow a detailed regulatory process.

2. Initiate the Reverse Book Building Process through online bidding

The merchant banker oversees the Reverse book building process. It is the process used by the company to set a price that is used to attract the investors into agreeing to the delisting. In this process, the shareholders bid online the prices at which they would be willing to sell the shares. The reverse book building process is used only in India.

To protect the investors the SEBI has also set a floor price which is the minimum the company can offer to the shareholders. The floor price should be the average of weekly closing highs and lows of 26 weeks or of the last two weeks, whichever is higher.

3. Set up Escrow Account before offering terms of delisting to public

To ensure that the company has the ability to purchase the shares from the shareholders it is required to create an account specifically for this purpose. This account is known as an Escrow account. The amount in the escrow account will only be used towards delisting.

4. Gaining Shareholder Approval

 Once the merchant banker receives the prices he makes an appropriate offer to the shareholders in the form of Offer Letters sent by post. The shareholders may or may not accept the offer. The company has to gain the approval of over 90% of the shares of all the shareholders. To acquire this approval what the company does is, make an offer to the existing shareholders to buy the shares from them at a premium. The shares must be bought back by the company at a price that is equal to or higher than the floor price.

Say a situation arises where 25% of the shareholders do not participate in the book-building process. Here as long as it can be proved that the offers were delivered to the shareholders by registered or speed post and the delivery status can be confirmed, the shareholders will be deemed as compliant to the divesting of the company.

If 90% of the shareholders agree to the prices and the companies decision to delist then the company can go ahead and delist from the stock exchange. 

What happens to shareholders who refuse to sell?

If investors do not take part in the reverse book building process they still have the option to sell their shares back to promoters. It is mandated that the promoters accept the shares. The price here would be the same price exit price accepted from the reverse book building process. The shareholders will be allowed to do this for one year from the date of closure of the delisting process. 

If a shareholder still doesn’t sell the shares back within a year he will end up holding non-tradable securities. Shareholders do this in cases where they expect the company to begin trading publicly again after a period. The shares of the shareholder, however, will still be affected by all corporate actions taken by the company.

It must be noted here retail investors (i.e. investment of less than 2 Lakh in the company) do not have much influence over the price and delisting decisions. In the case of a recent delisting announcement of Vedanta Ltd, Retail investors made up only 7.26% of the total holdings.

vedanta delisting

However, if the shareholders are unhappy with the prices or the delisting they can move to the courts. In 2005, shareholders who held 2.4% holdings moved to the courts over Cadbury offering Rs. 500 per share for being delisted. This was done despite Cadbury acquiring over 90% approval for delisting. After a decade the Bombay High Court ordered the company to pay Rs.2014.50 per share.

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

Using Delisting as an investment strategy

In 2010 the government made it compulsory for companies that are traded in the stock exchange to make at least 25% available to the public. This encouraged companies that had promoters owning more than 75% of the company to delist their securities. This caused investors to target companies where the promoters have ownership of 80-90%. This was done in anticipation that the company will buy back the shares at a premium. This increased the demand and hence increased the prices. 

Investors also have to consider that a failed delisting may result in a fall in the prices as investors who may have anticipated premiums may engage in mass selloffs. Not to mention that a delisting procedure may take years.

Apart from this investors also should take note of the period during which a delisting takes place. Say a company tries to delist in times of market downturn or elongated bearish markets, it may be a strategy to buy back shares at a cheaper rate when investors are desperate for liquidity. 

HARSHAD MEHTA SCAM - complete story

Harshad Mehta Scam- How one man deceived entire Dalal Street?

Explaining the Harshad Mehta Scam of 1992: The magnitude of the Harshad Mehta scam was soo big, that if put into perspective today, it brought a bear market in the Dalal street. If we look into the numbers, this single man deceived the entire nation with an amount of over Rs 24,000 crores (which is way bigger than Nirav Modi or Vijay Mallaya scams).

Today we take a look at how the Harshad Mehta scam was executed and possibly try to understand how he was able to fool the entire Dalal market and even the Indian banking systems. Further, we’ll also discuss why he plays such a considerable role in our pop culture and that too not as an antagonist.

the big bull harshad mehta scam

Harshad Mehta’s Rs 40 Journey

Perhaps what makes the Harshad Mehta story even more interesting is that despite migrating to Mumbai with only Rs. 40 in his pocket he managed to influence the country in such a massive way. Once he discovered his interest in the stock market he worked for broker Prasann Panjivandas in the 1980s. Harshad considered Prasann Panjivandas as his guru. Over the next decade, he went on to work for several brokerage firms eventually opening up his own brokerage under the name GrowMore Research and Asset Management.

By the 1990s, Harshad Mehta had risen to such prominence in the Stock market that he was known as the ‘Amitabh Bachchan of the Stock Market’. Terms such as ‘The Big Bull’ and ‘ Raging Bull’ were regularly used in reference to him. Over time he became particularly known for his wealth in the 1990s which he did not shy away from boasting about through his 15,000 sq. ft. penthouse and array of cars. He was described by Journalist Suchita Dalal as charismatic, ebullient, and recklessly ambitious. Perhaps it was this recklessness that led to his downfall through his ambitious schemes. 

The Broken Financial Environment of the 1990s

The year 1991 marks the year of liberalization of the Indian economy. Today we are grateful for this opening-up, however, Indian businesses found their own set of challenges. The public sector was forced to face increased competition and was under pressure to display profitability in the new environment. The private sector, however, responded positively to this news as this would mean more funds from foreign investments.

The new reforms also were welcomed by the private sector as they now were allowed entry into new sectors of businesses that were earlier reserved for the government enterprises. The stock market reacted positively to this with the Bombay Stock Exchange touching 4500 points in March 1992. But liberalization was not the only factor responsible for this. The period also an increase in demand for funds. The Banks were pressured into taking advantage of the situation to improve their bottom line. 

The banks are required to maintain a certain threshold of government fixed interest bonds. The governments issue these bonds with the aim of developing the infrastructure of the country. Million-dollar development projects are taken up by the government which are financed through these bonds. How much is to be invested in these bonds depends on the bank’s Demand and Time Liabilities. The minimum threshold that the banks had to maintain as bonds in the 1990s was set at 38.5%. This minimum percentage that banks have to maintain in the form of bonds or other liquid assets is known as the Statutory Liquidity Ratio(SLR).

Along with this, the banks were also pressured to maintain profitability. Banks were, however, barred from participating in the stock market. Hence they were not able to enjoy the benefits of the Stock Market leap during 1991 and 1992. Or at least they were not supposed to.

What did banks do if they couldn’t maintain the SLR ratio?

The banks at times may have temporary surges in the Net Demand and Time Liabilities. In such times banks would be required to increase their bond holdings. Instead of going through the whole process of purchasing bonds the banks were allowed to lend and borrow these liquid securities through a system called Ready Forward Deals (RFD). An RFD is a secured short term loan (15 days) from one bank to another. The collateral here is government bonds.

Instead of actually transferring the bonds the banks would transfer something called Bank Receipts (BR). This is because the bond certificates held by the banks would be of bonds worth 100 crores whereas the requirements by the banks to maintain their SLR would be much lower. Hence BR’s were a much more convenient way of short term transfer.

The BR’s were a form of short term IOU’s (I Owe You). However, when an RF deal was exercised they never looked like loan transfer but a buy and sale of securities represented by BR’s. The borrowing banks would sell some securities represented by BR’s to the lending banks in exchange for cash. Then at the end of the period say 15 days the borrowing bank would buy the BR back (securities) at a higher price from the lending bank. The difference in the buy snd sell prices would represent the interest to be paid to the lending banks. Due to the BR’s, the actual transfer of securities doesn’t take place. BR’s could simply be canceled and returned once the deal was completed.

Was the use of Bank Receipts (BR) allowed?

The RBI set up a  Public Debt Office (PDO) facility to act as the custodian for such transfer of bonds. As per the RBI BR’s were not permitted to be used for such purposes. However, the PDO facility was plagued with inefficiencies. Hence the majority of the banks resorted to BR. This system existed with the knowledge of the RBI which allowed it to flourish as long as the system worked.

What roles did the brokers play here?

Brokers in the markets played the role of intermediaries between two banks in the RFD system. They were supposed to act as middlemen helping borrowing banks meet lending banks. A brokers’ role should have ended here where it is done in exchange for a commission. 

Where the actual exchange of securities and payments should have taken place only between the bank’s brokers soon found a way to play a larger role. Eventually, all transfer of securities and payments were made to the broker. Banks also began welcoming these because of the following reasons

  • Liquidity: Brokers provided a quick and easier alternative to dealing with in comparison to dealing with another bank. Loans and payments would hence be provided on short notice in a quick manner.
  • Secrecy: When deals were made through a broker it would not be possible for the lending banks to find out where the loans were being moved to. Similarly, the borrowing banks too would not be concerned where the loans would be coming from. The dealings were both done only with the broker.
  • Credit Worthiness: When banks would deal with each other, the transaction would be placed depending on the creditworthiness of the borrowing bank. However, once brokers took over the settlement process this benefitted the borrowing banks as they would have loans available regardless of their creditworthiness. The lending banks would lend based on the trust and creditworthiness of the broker.

Brokers entering the settlement process made it possible that the two banks would not even know with whom they have dealt with until they have already entered into the agreement. The loans were viewed as loans to the brokers and loans from the brokers. Brokers were now indispensable.

The Role played by Harshad Mehta.

Harshad Mehta used to broker the RF deals as mentioned above. He managed to convince the banks to have the cheques drawn in his name. He would then manage to transfer the money deposited in his account into the stock markets. Harshad Mehta then took advantage of the broken system and took the scam to new levels.

In a normal RF deal, there would be only 2 banks involved. Securities would be taken from a bank in exchange for cash. What Harshad Mehta did here was that when a bank would request its securities or cash back he would rope in a third bank. And eventually a fourth bank so on and so forth. Instead of having just two banks involved, there were now multiple banks all connected by a web of RF deals. 

Harshad Mehta and the Bear Cartels

Harshad Mehta used the money he got out of the banking system to combat the Bear Cartels in the stock market. The Bear Cartels were operated by Hiten Dalal, A. D. Narottam and others. They too operated with money cheated out from the banks. The Bear Cartels would aim at driving the prices low in the market which eventually undervalued various securities. The Bear Cartels would then purchase these securities at a cheap price and make huge profits once the prices normalized.

Harshad Mehta countered this by pumping money from the stock market to keep the demand up. He argued that the market has simply corrected the undervalued stock when it revalued the company at a price equivalent to the cost of building a similar enterprise. He put forward this theory with the name replacement cost theory. This theory was a fallacy on his behalf or an illusion he resented to the public to justify his investments. Such was his influence in the stock market that his words would be blindly followed similar to that of a religious guru.

He would use the money from the banks which was temporarily in his account to hike up the demand of certain shares. He selected well-established companies like ACC, Sterlite Industries, and Videocon. His investments along with the market reaction would result in these shares being exclusively traded. The price of ACC rose from Rs.200 to nearly Rs. 9000 in a span of 2 months

Harshad Mehta celebrated this victory by feeding peanuts to the bears at the Bombay Zoo as it signified his victory over the bearish trends.

Benefits to Banks

The banks were aware of Harshad Mehta’s actions but chose to look away as they too would benefit from the profits Harshad would make from the stock market. He would transfer a percentage to the banks. This would also enable banks to maintain profitability.

The Scam within the Scam

Harshad Mehta noticed early on the dependence of the RF deals on BR’s. In addition to this, the RF deal system also placed a great deal of reliance on prominent brokers like Harshad Mehta. So he along with two other banks namely Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB) decided to further exploit the system. With the help of these two banks, he was able to forge BR’s. The BR’s that were forged were not backed by any securities. This meant that they were just pieces of paper with no real value. This is similar to a situation where you can avail loans with no collateral. Harshad Mehta further would pump this money into the stock market increasing his amount of influence. 

The RBI is supposed to conduct on-site inspections and audits of the investment accounts of the banks. A thorough audit would reveal that amount represented by BR’s in circulation was significantly higher than the government bonds actually held by the banks. When the RBI did notice irregularities it did not act decisively against Bank of Karad (BOK) and the Metropolitan Co-operative Bank (MCB). 

Another method through which the collateral was eliminated was by forging government bonds themselves. Here the BR’s are skipped and fake government bonds are created. This is because PSU bonds are represented by allotment letters making it easier for them to be forged. However, this forgery amounted for a very small amount of funds misappropriated. 

Exposing the Harshad Mehta Scam

Journalist Sucheta Dalal was intrigued by the luxurious lifestyle of Harshad Mehta. She was particularly drawn to the fleet of cars owned by Harshad Mehta. They included Toyota Corolla, Lexus Starlet, and Toyota Sera which were rarities and a dream even for the rich in India during the 1990s. This further interest had her further investigate the sources through which Harshad Mehta amassed such wealth. Sucheta Dalal exposed the scam on 23rd April 1992 in the columns of Times of India. 

It has been alleged that the Bear Cartel ganged up on Mehta and blew the whistle on him to get rid of him and the bullish run altogether. 

Aftermath of Harshad Mehta Scam Exposure

— Effect on the Stock Market

Less than 2 months after the scam was exposed, the stock market had already lost a trillion rupees. The RBI created a committee to investigate the matter. The Committee was called the Janakiraman Committee. As per the Janakiraman Committee Report, the scam was of the magnitude of Rs.4025 crores. This impact on the stock market was huge considering that the scam amounted to only 4025 crores in comparison to a trillion or 1 lakh crores.

This major fall, however, cannot be attributed to the scam alone but also to the governments’ harsh response. In an attempt to ensure that all the parties involved are brought to justice, the government did not permit the sale of any shares that had gone through the brokers in the last one year. This affected not only the brokers but also the innocent shareholders who may have gone through these brokers to purchase securities. The shares came to be known as tainted shares. Their value was reduced to pieces of paper as their holder was not allowed to sell them. This just resulted in a worsened financial environment.

Effect on the Political environment

The opposition demanded the resignation of the then Finance Minister Manmohan Singh and the RBI Governor S. Venkitaramanan. Singh even offered his resignation but this was rejected by prime minister P. V. Narasimha Rao.

Effect on the Banking Sector

When the scam was exposed the banks started demanding their money back and recovery efforts made them realize that there were no securities backing the loan either. The Investments in the stock market by Harshad Mehta were tainted and had reduced by a significant value. A number of bankers were convicted. It also led to the suicide of the chairman of Vijaya bank. 

— Further Investigation

The investigations revealed many players like Citibank, brokers like  Pallav Sheth and Ajay Kayan, industrialists like Aditya Birla, Hemendra Kothari, a number of politicians, and the RBI Governor all had played a role in the rigging of the share market. The then minister P. Chidambaram also had utilized Harshad Mehta’s services and invested in Harshad Mehtas Growmore firm through his shell companies.

harshad mehta scam

— Effect on Harshad Mehta’s Life

Harshad Mehta was charged with 72 criminal offenses and more than 600 criminal action suits. After spending 3 months in custody Mehta was released on a bail. The drama however never subdued but only intensified. In a press conference, Harshad Mehta claimed that he had bribed the then Prime Minister P.V. Narasimha Rao for Rs 1 crore to secure his release.

Harshad Mehta even displayed the suitcase in which he allegedly carried the cash. However he CBI never found any concrete evidence of this. Harshad Mehta was now also barred from participating in the stock market.

Investigators felt that Harshad Mehta was not the original perpetrator who forged the bank receipts. It was clear that Harshad Mehta capitalized and made profits using these methods. They also saw the possibility of the bear cartels ganging up on Harshad Mehta to get rid of the bearish markets by blowing the whistle on him and having the scam exposed through Sucheta Dalal. This, however, drew the investigators’ attention to the bear cartel as well as they too had used the same means as Harshad Mehta. These other brokers were eventually tried too.

In addition to this, the IT department claimed an income tax owed to them Rs.11,174 crores. Harshad Mehta’s firm GrowMore had significant clientele and the IT department had linked all the transactions that may have involved Harshad Mehta or his firm with Harshad Mehta’s income. His lawyer addressed this as bizarre as Harshad Mehtas lifetime assets were worth around Rs.3000 crores. He highlighted the possibility where by making Harshad Mehta the face of the scam allowed other powerful players a chance to have the focus lifted away from them and escape or slowly be exonerated.

Life after Release and Death

Harshad Mehta made a comeback as a market guru sharing advice on his website and newspaper columns. In September 1999 the Bombay Highcourt convicted him and sentenced him to 5 years of imprisonment. Mehta died while in criminal custody after suffering from cardiac arrest in Thane Prison on 31st December at the age of 48.

— Effect on Harshad Mehta’s Family

When Harshad Mehta died he still had 27 cases pending against him. Although all criminal cases have been cleared before his death there were still several civil cases pending in court. His wife still fights cases with recent victories over the IT department and a broker who owed Harshad Mehta 6 crores. The broker was ordered to pay the amount with 18% interest which roughly accumulated to 524 crores. The cases have dragged on for so long that his brother secured the law degree in his 50’s and represents the family in court. Harshad Mehta’s son now makes headlines regarding his investments.

Also read: 3 Past Biggest Scams That Shook Indian Stock Market

Closing Thoughts

Despite the scam, Harshad Mehta is still looked up to in certain circles, As reported by Economic Times some financial experts believe that Harshad Mehta did not commit any fraud, “he simply exploited loopholes in the system”. When Harshad Mehta was first released out of prison in 1992 he was greeted with cheers and applause as his return would signify the return of his bullish trend. It is doubted that if businessmen who have been embroiled in scandals with the likes of Vijay Mallya, Nirav Modi will receive the same welcome. 

The Harshad Mehta scam can be looked on from two sides. The first as a scam where Harshad looted the stock market and the public or the second way where Harshad Mehta was made the scapegoat as someone had to be blamed and at the same time kept other influential people away from the limelight. The Year 1991 is generally referred to as the year of progress due to liberalization but if seen from this perspective discussed here it just makes one exclaim “ What a mess!”.

Coffee Can Investing - Does This Approach Works Anymore?

Coffee Can Investing: Does This Approach Work?

An overview of Coffee Can Investing Approach: A middle class Indian would spend most of his youth being forced into education, his early adulthood building a career, and taking care of his parents. He would be hit by a midlife crisis before 50. His late adulthood would be spent preparing for retirement i.e. if he hasn’t started already and ultimately banks on his kids to take care of him. As young adults, the kids now take up the responsibility with pride as is demanded by the Indian tradition and culture.

A squirrel life, on the other hand, lives chiefly on trees as they forage for food and escape predators. One thing that is interesting about squirrels is that they too try and stock up on nuts for the future. Unfortunately for the squirrels and fortunately for us, millions of trees are accidentally planted by squirrels who bury nuts and then forget where they hid them. Because of a squirrels life spanning only 11-12 months, they do not generally get to reap the benefits of an oak they planted, as oaks take up to 30 years to grow. But they still live in forests that may well have been accidentally planted by squirrel fathers decades ago.

sqrriel coffee can investing

What does it take to retire?

Humans, unlike the squirrel, have an average lifespan of 79 years. Yet we see the middle-class Indian category struggling and not reaping any benefits. According to Saurabh Mukerjea, for a couple to retire and survive for another 25 years with a reasonably good lifestyle post-retirement, they’ll need a crore a year pre-tax which is 60-70 lakhs post-tax.

This does sound reasonable considering the expenses of their adolescent children, the fragility of their health, and most importantly inflation a few years hence. This will mean that for a family to retire in a good shape they’ll need to have financial assets of at least 15 crores. Need a minute? Today we discuss an investment strategy called Coffee Can Investing that shines some light on what seeds to plant for our 15 crore oaks in the long term.

What is coffee can investing?

Coffee Can Investing was first coined by Robert G. Kirby in a paper written by him in 1984. The strategy gets its name because in the old west people who invest in the stock market would receive physical certificates of proof which they would put away in coffee cans. They would hide these cans in their mattresses later forgetting about them.

These stocks would eventually grow enormously making its holder rich when he found it again. The success of Coffee Can Investing depends entirely on the wisdom and foresight used to select stocks in the portfolio.

The Story behind Coffee Can Investing

Robert Kirby first observed the pattern dramatically in the 1950s when working in a large investment counsel organization. One of their woman clients who had just been widowed approached him. She wanted the securities inherited from her husband to be added to her portfolio under the organization. Her husband, who was a lawyer, would look after her financials.

Robert Kirby noticed that the husband had been piggybacking on the advice she would get from the advisors within the company. He would apply the advice as directed by the advisors to his wife’s portfolio. But when it came to his portfolio he would only follow those that were related to buying shares. He paid no attention whatsoever to the sell recommendations. He would simply put $5,000 in all purchases.

When Robert Kirby reviewed the portfolio created, the husband had many stocks that were worth only $1000. However, there were quite a few considerable investments that were now worth $100,000. One jumbo holding worth $800,000 exceeded his wife’s whole portfolio. These were shares of a company called Haloid. This investment later turned out to be a zillion shares of Xerox. 

This surprised Kirby as the wifes’ portfolio was no match to that of her deceased husband. This happened despite the wifes’ portfolio being managed by an Investment organization. And all he did was buy the shares as suggested by the investment counsel organization but ignore the sell orders even if the stocks were moving negatively. 

Coffee Can Investing and Index Funds

When Kirby first wrote the paper in 1984, he noticed that there was an increase in the index funds following. This has continued to this day. An Index in a market creates a portfolio of the top securities held in that market. The Index, however, does not hold the securities. The US has the S&P 500 Index. What Index Funds do is create an actual portfolio by investing in the securities.

In the paper, Kirby criticizes these funds as they are required to trade securities on a regular basis to keep up with the portfolio the index would have. Kirby also explains how the S&P 500 Index made several hundred stock additions and eliminations. An Index fund would actively be required to trade on these stocks. The transaction costs on these alone would have a huge impact on the portfolio and the index funds growth. Hence Kirby introduced Coffee Can Investing. He identified that leaving the stocks alone was one of the reasons why the widows’ husband had grown his portfolio enormously in the 1950s. And he also considered transaction costs from trading as the greatest detriment to superior investment returns.

What is required for a Coffee Can Strategy?

To tap into these superior investment returns of Coffee Can Investing one would have to 

  1. Carefully assess and select stocks based on the company’s performance.
  2. Invest and forget about them for a long period of time. In Coffee Can Investing to reap the maximum benefits, one would have to let the investments be for at least a period of 10 years.

coffee can investing quote

How to pick stocks for this approach?

In their book, ‘Coffee Can Investing: The low-risk road to stupendous wealth’ Saurabh Mukherjea, Rakshit Ranjan, and Pranab Uniyal discuss how to pick stocks to create a Coffee Can portfolio. According to them, the stocks considered must be filtered in the following manner.

1. The company selected must have a market cap of at least 500 crores.

This is because we will need a company that has established itself. Also because we will need the past records of the company for at least 10 years. 

2. Revenue growth of the company must be at least 10% each year for the last 10 years.

3. The ROCE of the companies must be more than 15%

The ROCE will show if the management is capable of allocating that the money put by you into the company correctly. ( ROCE = Net Income/ Shareholders Equity)

The stocks selected in the portfolio still have to be diversified. The investment must be done across industries and also across different capital classes. This would, however, depend on the investor and vary accordingly. The investor would have to keep in mind that the scope for growth is limited when the companies are too big. The potential for smaller companies to grow is much higher. This, however, does not stand true for longer periods. In long term say 20 years this benefit no longer would exist with the companies in the small-cap in comparison to large-caps.

Results of Coffee Can Investing Approach

After studying trends and putting together a portfolio, The book ‘Coffee Can Investing: The low-risk road to stupendous wealth’ brings forward the concept of Patience Premium. As per Patience Premium, a period greater than one year would give you a higher probability of higher returns. Investors are not really rewarded much for periods like 1 year or even up to 7 years. The chances of returns as per the book even reduce during the 3 to 5 year period. After the 7-year and 10-year mark, the patience premium is much higher.

The best-case scenario occurs when patience premium combines with quality premium. Quality premium is the premium associated with the quality companies selected in the portfolio. A dream mix would be of good quality companies selected as per the Coffee Can portfolio filter and an investor letting the investment be for a long period. With both the premiums combined the probability of losing money is -3% yearly. After a period of 10 years, the returns would stand at 20%. They would, however, remain stagnated after this period. Hence 10 years onward the returns expected will be more or less 20%.

Why do the returns stagnate after 10 years? 

Pranab Uniyal explains this citing reference to the book ‘Mathematics of everyday life’. According to the book, large numbers behave differently from small numbers. They use a dice analogy to explain this. Say 3 people were each to roll a dice 5 times. The average obtained from rolling the dice 5 times will vary or have an extremely high probability to vary from each other. On the other hand, if all of them roll the dice say 1000 times, the average will cumulate to 3.5 for all of them.

Similarly in investing. Short periods will subject us to market volatility, which would be the easiest way to lose our investment and the results would vary too much to different investors. However, when we look at longer periods say 10 years if different investors create a Coffee Can portfolio the returns would converge at 20% yearly.

Greater the Risk, Greater the reward?

The book also challenges the quote on every investor’s tongue which says more the risk, higher the reward. Coffee Can Investing provides a way for investors to earn huge returns on their investments instead of gambling in the short term. These returns can only be achieved however only if the portfolio is held for a long period of time. One of the major reasons the investor earns here is by saving up on all the transaction costs.

Why not select assets outside the stock market? 

warren buffett quote on gold

Only 2% of the Indian population indulges in the Indian stock markets. Over 95% prefer to invest their savings in Land and Gold. This could be because we as people tend to put our trust in assets that we can see and touch. Also, a great deal of cultural influence is at play when it comes to gold.

The land came to be considered as one of the best investments due to the boom in the period between 2003 to 2013. Due to this India has currently become one of the priciest markets in the world. But the prices are not followed by an apt demand. This has left a lot of unsold properties in the market. This has made land and gold one of the worst investments in recent times especially if one wants to stay ahead of inflation. And an even worse investment if they want to compete with the stock market. 

warren buffett quote investing

Benefits of Coffee Can Investing

1. Minimum Expenses

Coffee Can Investing can be said to have been built on this factor. Apart from the cost that occurs during the one-time investment, there will be no more transaction cost for the remaining 10 year period. Tracking an index involves multiple additions and eliminations to a fund portfolio. Due to this, the investments are affected regularly from brokerage and other expenses transaction costs.

coffee can investing quote

In addition to this investment management firms have their own set of charges charged to the investors. Expenses to the investment manager are spread to all the funds and not just Index funds. Also, the quest for alpha in the market has investment managers charging investors for their apparent skills. However, for the period the investors remain the market we rarely see them beat the markets.

A Coffee Can Portfolio created by the individual would not have an Expense Ratio. Also, investors rarely consider how taxes affect their investments. Regular purchases and sales would result in added taxes on any profit earned. 

2. No need for tracking the portfolio.

This is also one of the necessities of Coffee Can Investing. Once we have filtered and achieved a portfolio of quality stock the only thing that is required is for them to be put aside and left alone for a decade.

When we invest we unfortunately always try and keep track of what is going on with the company. CEO changes, political and other economic changes would all stimulate us to act on our holdings. In fact, a Coffee Can Portfolio would even require us to not even look at our stocks during the pandemic.

3. Not Affected by volatility

The filters to create a suitable coffee can portfolio ensures that only the best stocks as per the present scenario make it to your portfolio. However, in the short term, these stocks will face very high volatility in reaction to the market, political, and other changes. In the long term, the stocks will only be judged by their intrinsic quality. However, even if a few stocks turn out to be bad investments it is best to cite what Kirby saw in the deceased husbands’ portfolio. There were stocks that did not perform as well as the others but they were more than made up for by the stocks that performed better. In the long term, the portfolio will face reduced impact from market volatility.

4. Outperformance by 8-10%

According to ‘Coffee Can Investing’ a portfolio that has followed all the steps will be performing better than the market and beating it by 8-10%

Why don’t funds just follow Coffee Can Investing?

If this investment strategy enables you to outperform the market by such a large margin then the question arises as to why shouldn’t mutual funds just follow this investing strategy.

— One of the major reasons is the wait for 10 years. In Coffee Can to judge how you have performed, you will have to wait for over a decade. Very few investors would be willing to commit to such a fund.

– Imagine a scenario where a fund does start coffee can investing. It would have to set up a team that would prepare a portfolio for the fund. What next? Coffee can would require you to simply ignore the investment for the next decade. Setting up a fund only as Coffee Can will have a huge setup cost at the beginning with returns only after a decade. In regular investment firms, the employees are rewarded for the right decisions, investments, and performance. These benefits would only be available to the employees of such firms only after a decade. This would be highly unfair to them.

Despite Coffee Can Investing not being popular in the Indian markets there still are a few Asset management companies still offering the coffee can route.

Closing Thoughts

Coffee Can Investing makes us question if we really are investors. Or due to our reaction to every market change has resulted in us inadvertently become traders. Traders holding the facade of an investor. 

At the end of his paper where Robert Kirby introduced Coffee Can Investing, he makes it clear that his argument wasn’t against index funds. They were directed towards the transaction costs, brokerage fees, taxes that are associated with every trade. Instead, if the stocks are just left alone they would perform much better

What should an Investor with limited liquidity do?

If we take a regular Indian Investor, for him to be expected to contribute a huge amount for the one-time investment would be unrealistic. Instead if one would want to follow coffee can investing but is not able to set aside a huge amount at once it would be better if he does the following.

Create a coffee can portfolio where the investor invests what he can and set it aside for a decade. When he has saved enough again say in a year, create a coffee can portfolio which is completely independent of the one he created earlier with no references to it. It should be solely based on the market conditions prevalent filtering companies based on the present scenario and set it aside for a decade.

Coffee Can Investing: The Book

For a thorough study, I would recommend giving ‘Coffee Can Investing: The low-risk road to stupendous wealth’ by Saurabh Mukherjea, Rakshit Ranjan, and Pranab Uniyal a read. Although there might be quite a few books out there on investing there are very few books written keeping the Indian Markets particularly in mind.

It would be highly rewarding to break the loop mentioned in the introduction. Happy Investing. 

The Rs 20 Lakh Crore Relief Package - Overview of First Tranche Aatma Nirbhar Bharat Abhiyan

The 20 Lakh Crore Relief Package – Overview of “First Tranche”

A detailed study on the 20 Lakh Crore Relief Package in India (First Tranche): Prime Minister Narendra Modi’s address to the nation on Tuesday will be remembered by many for a right smart spell due to two reasons. Firstly because the number we couldn’t fathom  – 20 Lac Crore (20000000000000- 10% of our GDP) is now our relief package. Secondly for the word ‘Aatma Nirbhar’ (Self Reliance).

However, if observed the address holds much more gravity, especially in our preparation for the post lockdown economy. The direction chosen to move in is towards an Aatma Nirbhar Bharat.  To achieve this the Abhiyan has focused on the five important pillars- the economy, infrastructure, system, vibrant demography, and demand. It seems like a throwback to the 20th century Swadeshi movement with national leaders calling for local purchases. It is however evident that the economy can be saved from being plundered by COVID-19 by robust demand for Indian products.

narendra modi ‘ Aatma Nirbhar’( Self Reliance) announcement

Finance Minister (FinMin) Nirmala Sitharaman announced on Wednesday the First Tranche of measures that would be taken to attempt at reviving the economy. The focus would be on the factors of production. However, the traditional factors have been recast to suit the purpose of this Abhiyan. They are:

  1. Ease of doing business
  2. Compliance and Regulation
  3. Due Diligence Observed

The FinMin also clarified that becoming ‘Aatma Nirbhar’ would not mean turning into an isolationist state that only looks inward. But instead, it talks about a country that can rest on its strengths and at the same time contribute to the globe. Today we have a closer look at the measures of the first tranche, the reasons for their implementation, and the path intended.

Measures to revive the economy -Tranche1 

Nirmala Sitharaman announced the fifteen measures to revive the economy. They are directed towards the following sectors/measures:

MSME (Micro Small Medium Enterprises)

The FinMin has focussed a considerable portion of the relief towards Micro Small and Medium Enterprises( MSME). Of the 15 key decisions, 6 are directed towards the MSME. MSMEs are our nation’s dominant job creator by employing 11 crore people.

MSMEs contribute to 45% of the country’s manufacturing output, 40% of exports, and to 30% of the GDP. Considering the figures a relief package not directed towards the MSMEs survival would result in their closure and eventually mass unemployment accelerating the GDP decline. From the numbers above it becomes evident that ensuring their survival would mean saving the economy.

MSME (Micro Small Medium Enterprises)

It can be noticed from above that there is a huge gap between credit requirements and credit available to MSMEs. Such a huge lending ability to bridge the gap is only possessed by financial corporations in the country. The government would not be able to fulfill the requirements simply because it does not have that much money to be directed towards MSMEs during an ongoing pandemic.

What are the means adopted to achieve this?

The government has two options here. Either directly give loans to the MSMEs or to take over the credit risk of the loans received by MSMEs from other sources. It becomes evident that the government has chosen the latter as the measures in Tranch 1 focus on this.

If in a normal situation if an MSME would approach banks he would be required to place a collateral of a value higher than the loan in exchange. The property available with MSMEs will be affected too as the outbreak has caused a fall in their prices as well.  The Government of India(GOI) has rolled out measures where instead of collateral it acts as the guarantor for the loan. This means that in a case where the MSMEs fail to repay, the banks would still be able to recover the loan from the government. With the government acting as a guarantor the banks are encouraged to give out more loans to the MSME’s

The reforms that enabled this are:

1. Three Lakh Crore collateral-free automatic loans for MSMEs

Here MSMEs that have no more than 25 crores outstanding in loans and a turnover of at least Rs. 100 crores are eligible. An emergency credit line to businesses and MSMEs has been set up from NBFCs and banks for up to 20% of the outstanding credit as of 29/02/20.

The loans will be provided with a 4-year tenure with no requirement for the principal to be paid for the next 12 months. They will be required to pay interest however but at a capped limit set by the GOI. Here the GOI will act as 100% guarantor for both loans and interest. This scheme can be availed till 31st October 2020. 

The Finance Ministry has estimated that this will help 45 Lakh business units to resume business utility and safeguard jobs.

2. Rs 20,000 crores subordinated debt for stressed MSMEs

Here the GOI will facilitate a provision for Rs. 20,000 crore as subordinate debt. This is aimed at MSMEs that are stressed and would be considered NPA (Non-Performing Assets) but still have managed to keep functioning. These MSMEs classified as NPAs would not be provided credit by NBFCs or banks. Here the promoter of the MSME will be given debt by the banks which will then be infused by promoters as equity in the firm. This will increase his respective ownership but will be liable for the debt received.

3. Rs. 50,000 crore, equity infusion for MSMEs through FOF.

The GOI here will set up a Fund of Fund which in turn will invest in its daughter funds. These daughter funds will provide equity funding to MSMEs that show growth potential. The GOI will invest 10,000 crores into the FOF. The remaining amount will be funded from institutions like LIC and SBI.

Rs. 50,000 crore, equity infusion for MSMEs through FOF

The MSME, however, will be encouraged to get listed on the main board of the stock exchange.

4. New Definition of MSMEs.

The FinMin pointed out before the announcement that this change of definition will be in favor of MSMEs. The new definition will revise investment slabs for those companies to be considered as Micro Small and Medium. In addition to the investment, it will also consider the turnover before classifying an MSME.

The new definition will also have no distinction between the MSME involved in manufacturing and service.

New Definition of MSMEs

  • Micro will be those with investment up to 1 crore whose turnover is LESS than 5 crores.
  • Small will be with investment up to 10 crores whose turnover is LESS than 50 crores.
  • Medium will be those with investment up to 20 crores and a turnover of  LESS than 100 crores

5. For government procurement tenders up to 200 crores will no longer be on the global tender route.

According to this global tenders that are worth up to 200 crores will no longer be available to global players.

This reform would encourage and provide MSMEs with the opportunity to procure these tenders without facing global competition. 

6. Other incentives for MSMEs 

MSMEs in the post lockdown environment will face problems of marketing and liquidity due to social distancing requirements. For these reasons, the GOI will launch an e-market linkage for MSMEs which will be promoted as a replacement for trade fairs and exhibitions. Fintech also will be applied to enhance transaction-based lending using data generated by e-market linkage.

In addition to this, all dues from the GOI and Central Public Sector Enterprises (CPSE) will be released in 45 days. 

This reform focusses on ensuring that the MSMEs are able to restart their business with ease after the lockdown as well. At the same time, their liquidity position would be improved to meet their immediate needs from the dues received.

Provident Fund Contribution

Provident Fund Contribution announcement by sitharaman

7. Reduction in rates for those covered in the first relief package.

Under the Pradhan Mantri Garib Kalyan package of Rs 1.7 lakh crores announced in the first phase of the lockdown, the GOI announced that it would contribute the employer’s portion to the PF. The companies eligible for this relief were those who had 100 employees earning less than 15000 per month. This relief was announced for a period of 3 months.

Moreover, this relief currently helps a total of 6 Lakh establishments during the months of March, April, and May. The FinMin announced that these establishments that are currently eligible would have these benefits extended to both the employees and the employer’s contributions respectively. The GOI will now pay 24% to the PF for a period of 3 months.

8. Reduction in rates for those not covered in the first relief package.

The FinMin also announced that those who were not covered earlier would now only be required to contribute 10% instead of the earlier 12% rate. This 10% contribution will be for both the employers and the employees for the next 3 months.

However, for state PSU and CPSE, the employer’s contribution will remain at 12% but the employees will be required to contribute only 10%.

The main aim of the PF contribution from the govt or rate reduction is to transfer more money into the hands of the employers and employees. The employers would have greater liquidity and hence would be able to use this to better survive. The employees, on the other hand, would have more cash in their hand which would cause a spurt in the demand in the economy. This will create liquidity of 6750 crores available to the employers and employees for the next 3 months.

NBFC( Non- Banking Finance Corporations) / HFC(Housing Finance  Corporation)/ MFI(Micro Finance Institutions

9. 30,000 crore special liquidity scheme for NBFC/ HFC/ MFI

The scheme is available to those NBFC’s that are finding it difficult to raise debt in the COVID-19 environment. The special liquidity scheme of 30,000 crores was launched for this. Under the scheme, investment was made by buying investment-grade debt papers of NBFC HFC and MFIs. It is not necessary for the companies to be graded highly and be of high quality.

Purchasers of these debt papers will receive a guarantee from the GOI.

10. Rs. 45,000 crore Partial-Credit Guarantee Scheme(PCGS) 2.0 for NBFC’s.

With the PCGS already in place, the PCGS scheme is said to supplement it. This scheme will enable finance corporations that have low credit ratings to raise finances. In PCGS 2.0 the existing PCGS scheme will now be extended to cover borrowings such as primary issuance of bonds and commercial papers of these entities. Here ‘AA’ papers and below including unrated papers will also be eligible for investment. This will particularly benefit MFI that do not have ratings high enough to attract investments.

In this scheme, the first 20% of the loss will be borne by the guarantor i.e. GOI.

The main aim of both schemes is to provide liquidity to NBFC’s, MFI, and HFC. If they are provided with the liquidity it will lead to increased lending to MSMEs. So it can be said that even these 2 schemes are aimed at the MSMEs.

Discoms

Discoms

11. 90,000 crore liquidity injections of Discoms.

The working of the electricity sector requires Power Generation Companies(Gencos) to transfer electricity to Distribution Companie(Discoms) in respective states which is then transferred to the consumers and respectively paid for. The payments then trickle down to the Gencos. The Discoms currently owe Rs 94,000 crores to the Gencos. The lockdown unfortunately only alleviated the problems and troubles of the electricity sector as many industries were shut causing a fall in the demand. In the electricity sector, the units produced cannot be stored. Hence a fall in the demand causes a loss.

The FinMin unveiled that both PFC and REC will together infuse a total of 90,000 crores into all the Discoms against all the receivables they have. These 90,000 crores in loans will be extended against the state government guarantees with the exclusive purpose of discharging liabilities of Discoms and Gencos.

The loans, however, will be given to the Discoms for specific activities and reforms which include 

  • Introducing digital payment facility by Discoms where necessary. 
  • Liquidation of outstanding dues to state govt.
  • Plan to reduce financial and operational losses.

The benefits of this have also been aimed at being passed onto the consumers in the form of rebates for the power tariffs paid.

Infrastructure

12. Relief to contractors 

Central Agencies ( like Railways, Ministry of Road Transport and Highway, Central Public Works Department) have been directed to extend all contracts for up to 6 months. This covers both construction works and goods and service contracts. It covers obligations like completion of work, intermediate milestones, and extension of the concession period in PPP(Public-Private Partnerships) contracts. 

To ease cash flows the GOI will partially release bank guarantees, to the extent contracts are partially completed. This move will also improve the cash flows for the contractors as they will be provided with liquidity which will help them meet immediate business needs when the lockdown is lifted. 

TCS Chief Strategist Himanshu Chaturvedi said ‘ The Governments Aatma Nirbhar Bharat Initiative has recognized infrastructure as one of the 5 pillars. This is an acknowledgment of the sector’s role in India’s development and large scale employment generation.

13. Relief to Real Estate 

According to this measure, the real estate is to treat COVID-19 as a ‘force majeure'(unforeseeable circumstances that prevent someone from fulfilling a contract) and extend registration and completion date by 6 months. The regulatory authorities may extend this for another period of 3 months if necessary. This was done so that the home buyers may get new timelines for delivery.

The GOI has also decided to provide projects that have been stalled due to a lack of funds with financial support. Projects that are NPA’s or undergoing NCLT will also be eligible for the proceedings. The maximum finance for a single project has been capped at 400 crores.

This scheme is said to benefit 1509 housing projects comprising of 4.58 Lac housing units.

TDS and TCS

14. Reduction of rates

In order to provide more funds at the disposal of the taxpayer the rates of TDS for non-salaried specified payments made to residents and rates of the tax collected at source for the specified receipts shall be reduced by 25% of the existing rates. 

This will be applicable for the rest of the year starting from 14/05/2020 to 31/03/21. These measures are estimated to release liquidity of Rs. 50,000 crore.

It has to be noted that this doesn’t bring down the tax liability of taxpayers, it leaves more money with them during the course of the FY. Individuals will still have to pay their tax liability every quarter or annually.

15. Other Measures

All pending refunds to charitable trusts, non-corporate business, from the GOI shall be issued immediately.

Income tax returns extended from 31st July 2020 and 31st October to 30th November 2020. The tax audit has been postponed from 30th September 2020 to 31st October 2020. 

Closing Thoughts

The 20 Lakh Crore Relief Package

Ernst and Young Chief policy advisor D.K. Srivastava estimated that the measures announced on Wednesday amounted to Rs 5.94 lac crore, which includes both the liquidity financing measures and credit guarantees, although the direct fiscal cost to the govt. In the current financial year may only be Rs 16500 crore. As mentioned earlier the government has taken over the credit risk that the MSMEs and various financial institutions.

Hence the amount that the government would invest will depend on how much of the loans taken by the MSMEs and various financial institutions will default on. Furthermore, the real trajectory of the relief package can only be understood after it is viewed together with the measures in the Second and Third Tranch. Even more so on how many of these are successfully implemented. It still goes without saying that tranch 1 is nothing short of impressive.

Why Alcohol Prohibition Lifted in India

Alcohol Prohibition Lifted in India – A Dream Too Good?

Understanding Why Alcohol Prohibition Lifted in India: On May 4th the Central Government lifted the prohibition on liquor sales. What followed was a parade through all news outlets exhibiting Indians risking their lives in thousands just to feel half-seas over. Media focus on movie box office records has been replaced by alcohol day to day sales records being reported during the pandemic. Today we try to unravel why the center decided to do so and what possible implication it could lead to.

What does alcohol mean to the government?

— Alcohol and the Soviet Union

Mikhael Gorbachev, although some might know him as the Soviet Union President during its collapse, our generation will famously remember his character played in the TV show Chernobyl ( Another disaster he oversaw as President). In 1985 Gorbachev started an anti-alcohol campaign due to its ill effects on health and crime in society.

In the first half of the 1980s, 13000-14000 deaths were drunk accidents. Over 800,000 people were caught for drunk driving and by 1985 these numbers kept increasing. The soviet union faced multiple problems due to the influence of alcohol. Accidents at work were common and at a period the condition worsened to a point where crops were not even gathered due to intoxicated farmworkers (Socialism, SMH).

Gorbachev’s campaign was a success and the government claimed increased life expectancy in males and even reduced crime rate. But all this was just a silver lining to a darker cloud. The loss of 100 billion rubles of revenue from alcohol sales led to an economic crisis after the alcohol sales moved to the black market. The campaign ended in 1987. The Berlin wall fell in 1989. The Soviet Union collapsed in 1991.

— Alcohol and India

booze money in India finshots

(Image Credits: Finshots)

The data presented above shows the revenue a state earns from the sale of alcohol. Alcohol revenues make up to 20%  of a state’s revenue. In the midst of the pandemic states like Delhi have faced a 90% fall in their revenues. For the state governments to fight the virus without any source of income will only lead to a nationwide economic crisis.

Punjab was the only state to officially request the government to ease restrictions over the sale of alcohol. Several other states like Karnataka, Maharashtra, Haryana, Rajasthan, Kerala, Tamil Nadu, Goa, and those in the Northeast raised the issue informally.

why government lifted restriction on alcohol sale

The states named in no way represent a stereotype of the people’s dependence on alcohol but instead how the state governments depend on alcohol. Investing in alcohol has been the simplest and most profitable source of income for the state governments. In 2017 as per the Kerela State Beverages Corporation (BEVCO) earned around Rs.600 for every Rs. 100 spent on alcohol. This example sums up why a government would actually consider investing in alcohol-based businesses. It incomes earned also explain why the prohibition on alcohol sale had to be lifted.

Problems with alcohol prohibition

Gujarat, Bihar, Nagaland, and Mizoram are the states in India that have prohibited all sale of alcohol to its citizens. It can already be estimated that just like Delhi, these states too will face a huge loss of revenue due to the lockdown. But these are just the beginning of their financial troubles as they would not be able to raise revenue from alcohol sales either.

If we believe that these dry states are successful in the prohibition of liquor it would present us to be too naive. By banning liquor the governments have only succeeded in diverting the funds from their pockets to the black markets. 

Similar bootlegging practices can be expected in a nationwide prohibition. But what is even more troubling features of the prohibition are the thefts and the scams. An alcohol store, for example, was looted for 4.18 lakhs in Bengaluru. Scams promising delivery of alcohol had already begun to see the light of day during the 40 days of prohibition.

Even the manufacturing of illicit liquor saw an increase. The consumption of such illicit liquor is much more dangerous and harmful to health. All these crimes have resulted in wastage of police resources. The energies that could be focussed on controlling the virus were spread to solve these cases which could have been avoided.

Raising the price of Alchohol

After the confusion and the idea of social distancing being flouted on the first day of the alcohol prohibition being lifted, the government resorted to discourage guzzlers by raising the taxes. The Delhi government added a 70% corona tax. The state of West Bengal levied a 30% tax. However, the highest increase in the prices was from the Andhra Pradesh government. The prices were 75% higher after 3 revisions. The Karnataka and Tamil Nadu government also raised the excise on alcohol.

— The relation between prices and Alcohol

The reasons for the increased price lie in obtaining the twin objective of raising revenues and discouraging alcohol purchase. This is so that lesser people venture out of their homes in search of alcohol. A survey conducted in North West England with 22,780 in 2008 speaks differently. It was conducted to explore alcohol consumption changes if the prices were adjusted.

According to the survey, 80.3% considered a lower alcohol price would increase consumption. 22.1% considered that rising prices would reduce consumption. This meant that alcohol consumption was lower price elastic. This meant that you could lower alcohol prices to increase its consumption but an increase in price would still keep consumption at the regular levels. In other words, you can increase the harm by reducing the prices but not reduce the harmful effects of alcohol by increasing prices.

— Alcohol and Growth

Alcohol Prohibition Lifted

( Source: The prices above are from the year 2017. The government would earn over 600% in the case above)

In India, a major portion of alcohol consumption is from the middle and lower-income groups. An increase in the prices of alcohol would not discourage a habitual drinker as discussed earlier. This increase would just decrease the disposable income or savings available for essential goods. Their spending on alcohol would deprive their children of nutrition and families of other essentials.

We just had a look at the impact of increased prices from an individual’s perspective. Let us have a look at what would be the case if due to this the consumption of essential goods is reduced in the economy. At the end of the day, it is essential goods that have the ability to kickstart the economy and not alcohol products. It is the demand for essential products that will enable industries to employ more labor. A study of the US states between 1971 to 2007 found that a 10% increase in per capita beer consumption resulted in a 0.41 percentage point drop in the annual income growth. The government has successfully increased its revenue but unfortunately directed demand away from essential products.

Also read: [COVID19] 10 Most Severely Affected Industries by Coronavirus

Which Direction to head in?

The points raised above have built walls to every decision taken in association with alcohol prohibition being lifted. The only exception being the decision to lift the prohibition itself.

Firstly the economy is too dependant on alcohol. The government cannot harvest any other source of income and liquor stores increase the risk of contraction. Secondly raising taxes does not discourage drinkers. Instead, it slows the opening of the economy. Thirdly a complete alcohol prohibition will only finance the black market and increases other crimes.

The following action taken by some state governments or possible consideration would help the government find a middle ground. Their application through states would result in being beneficial to both the government and the people.

— Open Alcohol outlets only after planning for appropriate social distancing measures.

The Supreme court on May 1st suggested the states to consider home delivery of alcohol. This would not only encourage social distancing the increased demand for home delivery would increase employment in the home delivery service. The food delivery company Zomato has already shown interest. This can be taken up by other delivery apps too. In a worst-case scenario even if any one of the parties comes in contact with someone who has contracted the virus, the linkage would be able to be traced by the app. This, however, should only be applied after ensuring age restriction are in place. West Bengal and Chattisgarh have already adopted the home delivery model.

The Delhi government has started issuing E-Tokens to buy liquor. Allowing only limited people at a set time only at particular stores with the pass. This also could also enforce social distancing but still involves the risk of venturing out.

— Reduce the price to levels the same as before the lockdown

The price increase has to be curbed. It is understood that the government is in dire need of income. This, however, will not even benefit the economy in the long term perspective as all revenue will stop once people run out of their savings. A habitual drinker will continue drinking even at higher prices. Also, the present condition involves people losing jobs and taking salary cuts. The price increase would do greater harm than good.

— Set a limit on Quantity

Settling a limit to the quantity available person is a very important step. We have already seen the survey earlier which concluded that a reduction in the prices would lead to increased demand. Hence applying the previous point without ensuring this will only negate all benefits. When clubbed with the first point, tracking the quantity via App or an online portal makes it easy.

All decisions being taken with the expectation of the worst would help us better prepare and forsee such situations. With no vaccine in sight for a year, all decisions must enable us to live accordingly for at least a year. The pandemic already has and will keep changing the way we live forever. Online Delivery with limits is the new Black!

Facebook Jio Deal 2020 mukesh ambani mark zuckerberg

Facebook- Jio Deal: What $5.7B investment means to Stakeholders?

Facebook- Jio Deal: The fourth of May bought us news different from those caused by the grim pandemic. In one of the first virtual deals, Mukesh Ambani and Mark Zuckerberg took to their Social Media to announce the agreement. According to the deal, Facebook would invest $5.7 billion in exchange for a 9.9% stake of Jio. This deal would be the largest investment for a minority stake by a tech company in India.

Soon after the deal was announced words bordering data privacy concerns and national security were thrown around. Today we go through what the characteristics of the deal are and its impact on the Indian markets.

How big are these numbers?

Facebook- Jio Deal: What $5.7 billion investment means to Stakeholders

Facebook investing 5.7 billion (Rs.43574 crore) for 9.9% would mean that they have valued Jio as a $57 billion company. If we take a look at FDI Equity inflow from 2019, the US totaled at only $2.7 billion. Facebook has been sitting on a huge cash pile of $52 billion and the investment hardly covers 11% of its reserves.

If we change perspective, Reliance Industries has invested 1.8 lakh crore into Jio. This would peg 10% at 18000 crores. Although Jio has been a force to reckon with, remapping the telecom industry. Questions do arise over what the additional amount means? and what Facebook saw in Jio considering it valuable to invest in?

Industries likely to face immediate impact

Facebook has struggled with its plans to turn Whatsapp into a payment app offering similar services like Paytm. Jio, on the other hand, is facing challenges entering the online consumer segment. This deal with the right exchange of data could help each with their respective goals.

Facebook-owned Whatsapp is being planned to be updated as an ordering and payment app. Facebook would also be able to use Jio’s reach to local Kiranas to promote the model. This would enable us to order products from local stores through WhatsApp and also make payments through it.

Although Jio is valued mainly as a telecom service provider, just by going through the immediate plans the effects of this deal will span across 3 Industries. The telecom, online retail, and online payments industry.

— Online Retail Industry

Of the Rs.43574 crores, 15000 crores will remain with Jio. This will be invested in its online grocery store, Jio Mart. Data collected by WhatsApp would enable Jio Mart to understand the demographics better for operations. This, however, would be a cause for concern to existing heavyweights like Amazon and Flipkart.

Online Grocery Shopping has been one of the few sectors in India that have gained demand during the pandemic. Before the outbreak, only 1% of the 80,000 crores grocery market in India was represented online. After the lockdown was imposed the online grocery shopping represents 50% of the grocery demand in the country.

— Online payments industry

Whatsapp entering the online payment service would pose a serious challenge to existing players. The need for additional apps would be challenged when a single app would allow you to text, order, and pay. Whatsapp already running deep through Indian veins, at times even being upgraded as the prime source of news would only be upgraded to the status of a super app if its goals are realized.

Also read: 5 Best UPI Apps in India in 2020 (For Android Users)

— Telecom Industry

With companies struggling with liquidity during the pandemic, a better time would not come for Jio to receive investment. The 5G debate is soon to be settled. The government would waste no time for spectrum sales to raise the revenue it is in desperate need of. The spectrum sale is aimed at 50,000 crores. This would make Jio the front runner. Closely followed by airtel looking for investments and Vodaphone-Idea as the smallest player trying to weather the tough times.

Facebook- Jio Deal: What’s in it for Facebook?

Although there has been no clear indication over the aims of the two companies. Facebook in recent times has faced stiff competition from Apps from China like WeChat and TikTok. Due to China being a market closed to foreign investments, the world views India as the next close contender. The coming together of the two giants will have more than what meets the eye.

1. Data – The New Money

To understand the role data plays we would first have to understand Facebook better. Have you ever searched for fashionable cloth wear that you always wanted? All this only to find yourself followed by advertisements related to the product on social media? Or perhaps an advert caught your eye and you decided to know more by clicking on it.

Did you spend the following week being bombarded by advertisements for similar products? Have these come to be by chance or does the universe really want to see you in a suede jacket to align with its plans for you along with the stars? Unfortunately not!

— The Facebook Business Model

Facebook earned a revenue of $70.7 billion in 2018. This amount seems too huge for a social media platform that offers its services for free. However, social media has been only a front for the data mogul.

The very business model of Facebook lies in gathering information from its users and sharing it with advertising companies or other MNCs. The data-based on user preferences is shared with advertisement companies that are willing to pay for it. The user is then made the recommendation accordingly. Last year alone Facebook made 84$ per user in the North American region.

Unfortunately, it can also be said that the very business model by Facebook hurls away client privacy and data protection. The media giant has already been involved in public spats with the Indian government. This was over the Indian government’s data privacy concerns. It led the government to pressurize Facebook to localize Indian data storage.

facebook jio deal

The deal has already raised these privacy concerns as Jio has over 388 million clients. Jio, however, may view this as an advantage. This is because India has been Whatsapps biggest client. Whatsapp has 400 million users in India alone ( larger than Jio’s customer base). The exchange of data between the two may provide them with the opportunity to understand the preferences and needs better. There still may exist a quid pro quo as Facebook would benefit from Jio’s deep reach in the Indian markets.

— The disruption caused by Jio to Global Data plans

Data is primarily the reason why companies like Google offer free Wifi in railway stations. Facebook too had plans under the name Express Wifi. Here solar-powered drones would provide free internet beamed through the air. These models were quashed after the entry of Jio entered the market in 2016. Jio’s free internet made innovative investments from global giants a waste.

The Indian market is said to double its smartphone users to 859 million by 2022. If Facebook is even to gain 100 million clients, it would result in additional revenue every year. These numbers put Facebook’s data and investment in Jio in the right perspective.

2. Protectionism

digital india modi jio

Most of Facebook’s plans have been always roughed up by the Indian Laws. Even its Free Basics program aimed at providing affordable internet service to less developed countries was banned in India. TRAI rolled out the judgment as it was said to infringe on the principles of net neutrality.

Jio’s lobbying ability would be just as important to Facebook as Jio’s market penetration. Whatsapps online payment service is also still under review from the government. If Whatsapp plans to successfully roll out the payment service app, it’s deal with Jio will play an important role. Reliance Jio has already proved time and again its lobbying prowess in Delhi. Otherwise, how would the PM be used in a private company’s advertisements. And the companies still be get away with a hefty fine of Rs.500?

3. A platform for other products

Investing in Jio could also see an opportunity for similar products existing in both companies. They span from retail and gaming to education.

Facebook also has plans to launch its own digital currency again in 2020. This makes India a market to be explored as the Supreme Court verdict in March legalized Cryptocurrency. This, however, will be under scrutiny from the RBI. This is due to the concerns over the effects it may have on the Rupee.

Facebook- Jio Deal: What’s in it for Jio?

Jio has proven its ability to compete across sectors. A deal of this magnitude will extend Jio’s reach and further enhance its ability to compete. We have already discussed how Facebook will be benefitted from Jio’s market base. Jio in exchange will be provided with the opportunity to further expand. This is because the number of users with WhatsApp still exceeds Jio’s customer base.

Mukesh Ambani in his 2019 Annual General Meeting of Reliance Industries announced that Reliance would be debt-free by 2021. This seemed like a longshot as the outstanding debt as of September 2019 stood at 2.92 lakh crore. Instead of an IPO, Jio has decided to sell off ownership and enter into a strategic partnership with investors.

This would not only reduce debt but also provide invested partners with benefits in exchange. The first attempt at this stood with the $15 billion deal with Saudi Aramco. Unfortunately due to the Crude oil crisis, the deal fell apart. Apart from the 15000 crores aimed at Jio Mart, the remaining amount would be utilized for debt reduction. Reliance has also signed an agreement of 7000 crores with British Petroleum for 49% share in its fuel retail. Forming clever alliances would ensure Jio’s survival in the long term.

Mukesh Ambani has made it clear to not trod the same road his brother did. Too much debt was a major factor that eventually led to RCom filing for bankruptcy in 2019. The Facebook deal would result in Jio having a better Balance Sheet.

Closing Thoughts

— With regards to the Investment deal

According to former Airtel CEO Sanjay Kumar, the deal between Jio and Facebook can only be seen positively as it comes in a time where companies are cash strapped. Any Foreign investment in this period can only be seen in a positive light.

It has to be noted how Facebook has cleverly avoided being prey to oil price impact. They did this by directly investing in Jio instead of Reliance Industries, Jio’s parent company.

The deal, however, leaves a number of players affected in different industries. They will have to draw up new roadmaps. As now they will battle the pandemic and at the same time deal with the added competitive prowess of Jio. It would be unfair for Jio to be criticized on the ground of it being bought by a US MNC. Companies like Flipkart and Paytm are currently just tools for Walmart and Alibaba to be used in the Indian markets. The other companies in the telecom industry too have been financed from foreign investment.

— With regards to Data

When it comes to data privacy Mukesh Ambani’s stand provides some assurance. He has stated that data is a national resource. The value created by data generated should and be deployed by Indians. He also added that data generated in India shall remain localized within India’s geographical boundaries.

— With regards to the Future

India should take note of the Jio deal and encourage other industries to do so too. This is because global industrialists and investors will be looking for new markets to invest in. This can be expected as they would preferably avoid China due to the uncertainty in the future. Attracting investments would create jobs that were lost due to the pandemic. They would also provide the necessary boost required by the economy.

India must ensure that they are ready to contend for investments once the lockdowns are lifted. This would definitely save the plummeting economy.

what is barrier to entry cover

Understanding Barriers to Entry – Why they are Crucial!

Barriers to Entry Definition, Types & More: Any entrepreneur or company that ventures out into a business faces challenges. The external challenges that have a considerable economic impact to stop new entrants are termed as Barriers to Entry. Generally speaking, there have been many definitions of barriers to entry. Franklin Fisher defined it as “Anything that prevents entry when the entry is socially beneficial”. The vagueness of many such definitions has led to them being disregarded. If considered then even psychological barriers to becoming an entrepreneur would be included.

As per Investopedia, Barrier to Entry is the economic term describing obstacles from easily entering an industry or area of business. It goes without saying that these barriers are beneficial to existing players. This is because they result in increased profit from the market due to the reduced competition, thanks to the barriers. Today, we take a look at what exactly are Barriers to Entry.

barriers to entry meme

Types of Barriers

The barriers to entry may involve innocent or deliberate factors. Innocent factors are those that may have come into existence without much direct influence from any of the stakeholders. Deliberate factors are those that have come into existence due to the actions of the stakeholders. The barriers  are generally outlined under the following:

– Legal Barriers

Legal barriers are those that have been constructed by government or regulatory bodies. These may include licenses or permits required to conduct business, the red tape system or other standards and regulations to safeguard consumers. The legal factors vary from country to country further depending on the industry. According to the ease of doing business Index, India currently ranks 63rd.

Although it may seem that the legal factors may be independent of influence from existing players, this is not the case. Lobbying plays an important role too. Lobbying is the practice where an organization may undertake campaigns to pressure governments into specific public policy actions. In the US it is completely legal and protected by the law.

In India however, the legal status of lobbying is not clear. It is at times is mistaken for bribery. Bribery provides scope for favoritism but lobbying does not specifically ask for special treatment. Yet it is a means to influence legislative action. Lobbying by existing companies may result in barriers being put up by the government towards new entrants. 

– Technical Barriers 

The technical factors are industry-specific. They may pose themselves as barriers due to startup costs, patents, monopolies, etc. Patents are exclusive rights given to individuals or organizations for inventions in products or processes that are innovated and premiered in an industry. When the new entrants are not allowed to replicate similar products or processes it leaves very little scope for entry.

Startup costs act as barriers in industries that require huge capital to be invested in the initial stages. Some startup costs may also be classified as sunk costs. These are non-recoverable once invested eg. advertisement. The airline industry and petrochemical industry can be said to have a huge start-up cost barrier.

– Strategic Barrier

Strategic barriers are caused by existing players. One of the strategies is Predatory pricing. This may be done by pricing lower on purpose. This will make it difficult for new entrants to survive as it removes all possibility for them to break even. The cash-rich existing players may then look at the possibility of acquiring these new entrants.

Monopolies or Oligopolies may also use aggressive marketing to drive out new entrants. Zomato has continuously used competitive pricing to its advantage. Also, they then acquire new entrants(Ubereats) unable to survive.  

Also read: The Equilibrium of Duopolies in Indian Market

– The Brand Loyalty Barrier   

the brand loyalty barriers of entry

Brand loyalty from consumers is another barrier in itself. In some industries, existing players have had such a  stronghold for a period of time. This has resulted in the product name itself being replaced by the brand name. Eg. Colgate. The cost to new entrants to acquire and keep new consumers is too high.

apple brand loyalty barriers of entry

Markets generally with high entry barriers have few players and thus high-profit margins. Markets with low entry barriers, on the other hand, will have lots of players resulting in lower profit margins.

Advantages of Barriers to Entry

– Ease of regulation

Sensitive industries will involve the government premeditatedly imposing restrictions. This is generally seen in industries that involve natural resources or pharmaceuticals. Industries based in natural gas will face this as the economy is affected gravely by their prices.

The pharmaceutical industry too due to its sensitivity cordoned off most of the probable players. In the US due to the FDA regulations, 93% of the applications are not approved in the first cycle. As per Forbes it may cost between $1.3billion to $12billion and may take up to 10 years before it is approved for a prescription.

– Benefits to Consumers

The greater the barriers the more benefit the consumer gets as only the best and standard products would reach the consumers. These barriers also protect the industry from subpar products.

Also read: Pat Dorsey’s Four Moats for Picking Quality Companies

Closing Thoughts

Although barriers may seem impossible to pass and then also compete with, however, most successful companies exist today because they were able to. Innovation in these aspects has the strongest ability to clear barriers. A disruptive pricing model too has been known to be effective. In the case of the telecom sector, the entry of Jio providing not reduced prices but free services revolutionized the sector.

However, a pricing strategy can be pursued only by cash-rich startups. It is also necessary for new entrants to clear barriers. Doing this will ensure that they are taken seriously. This seriousness will be reflected in the investor community with a more positive response towards the new entrants.

Mukesh Ambani vs Anil Ambani What went Right Wrong cover

Mukesh Ambani vs Anil Ambani: What went Right/Wrong?

A case study on Mukesh Ambani vs Anil Ambani: Ever since the Cain and Abel fallout at the beginning of time, sibling rivalries haven’t been uncommon. Cleopatra securing the throne by killing her siblings, Adolf and Rudolf Dassler’s tussle which led to the formation of Adidas and Puma.

Similarly, the unfortunate split of Liam and Noel Gallagher eventually led to the breaking up of the Oasis band. And also the recently famed but unworthy (probably staged) Rob and Kim Kardashian squabble. Today we take a look at the most famous sibling feud in the Indian Subcontinent. The Mukesh vs Anil Ambani row. Here, we’ll discuss what went right or wrong in the case of the brothers.

Mukesh Ambani vs Anil Ambani: The BAD

Indian business tycoon Dhirubhai Ambani bought into existence the Reliance organization. At the time of his death in 2002, he had founded Reliance Capital, Reliance Infrastructure, Reliance Power, and Reliance Industries. But the lack of a will led to a scrimmage for assets between his two sons, Mukesh and Anil Ambani.

Until 2002, Anil was the face of the company attracting foreign investment. Mukesh after dropping out of Stanford worked behind the scenes. He focussed on running the organization and also building Reliance Communications (RCom).

Mukesh Ambani vs Anil Ambani: The Bad

(Right to Left: Mukesh Ambani with Mother Kokilaben Ambani and Brother Anil Ambani)

Tensions began when Anil demanded RCom to even out the assets. Eventually, their mother had to step in to resolve the feud that had now spilled into the public eye. The assets were finally split, with Mukesh getting Oil and Gas, Refining, and petrochemical companies. Anil got what was called the rising sun companies- Electricity, Telecom, and Financial services segment.

The companies under Mukesh were known as Reliance Industries. The companies under Anil were known as Reliance Anil Dhirubhai Ambani Group or Popularly the Reliance Group. The split of assets also came with a non-competition clause. According to this, the brothers were not allowed to venture into each other’s businesses for a decade.

The Reliance Industries Journey with Mukesh at its Helm

The Reliance Industries Journey with Mukesh at its Helm

Under the leadership of Mukesh Ambani, Reliance Industry slowly but steadily scaled new heights. By 2007, it was the first Indian company to exceed $100 billion in market capitalization. Although luck also played a role as Mukesh has been handed the petrochemical segment. The segment was based in the Krishna Godavari Basin. The basin has an excess of 1.2 billion barrels of crude oil. As time went by Reliance Industries ventured out into other segments that included the retail business, logistics, solar energy, entertainment (Reliance Eros), cloth, and SEZ development.

The most notable industry entered would be when Mukesh Ambani led Reliance Industries ventured back into the telecom industry. It used its earlier acquisition of a telecom company called Infotel and came out with Jio Infotel popularly known as Jio. His new venture, Jio, caused severe disruption in the Industry. Its entry led existing players in losses, merging with one another to weather the storm. Its entry also meant the end of the road for his brother’s Rcom.

— Where has Mukesh Ambani reached

It can be said that Mukesh Ambani has had a lot of Sunshine. Reliance Industries was ranked 106th on the Fortune Global 500 list of biggest corporations as of 2019. The company has been responsible for almost 5% of the revenue the government of India earns from Customs and Excise duty. Mukesh Ambani is said to have a net worth of $53 billion as of 2020.

According to Bloomberg, his wealth could help the Federal government for 20 days in 2018.  This makes him Asia’s richest, a billion short of getting his entry into the top 10 richest list. He currently resides in Antilla which is claimed to be the world’s most expensive home at $1 billion. So much for a student at Stanford who wanted to work at World Bank or become a professor!

Also read: Top 10 Richest Person in India (As per Forbes Ranking)

The Reliance Groups’ journey with Anil at its Helm

The Reliance Groups’ journey with Anil at its Helm

Anil Ambani also saw immense growth in wealth in the initial stages. Anil Ambani began his solo ride by investing in industries that provided quick returns. It goes without saying that the risk was high too. In 2005, he bought Adlabs which got him into the entertainment business. A few years later in 2008, he signed a deal with Steven Spielberg’s DreamWorks. The Film Lincoln produced by DreamWorks also won an Oscar.

In 2008, Anil was the world’s 6th richest person with $42 billion in wealth. One of the most notable investments was the Mumbai Metro project.

2014, however, started brewing trouble for Anil Ambani as his companies had taken huge debts. This year his media venture with Adlabs also collapsed and he had to resort to selling the screens. He also began selling a stake in the remaining TV businesses to Zee Entertainment. Other bad decisions quickened his wealth loss. This included venturing into the defense segment in 2016 with Reliance Naval and Engineering.

By 2019 the valuation of the defense company fell 90%. 2016 was also the year in which Mukesh Ambani’s Jio entered the Telecomm industry. This catapulted RCom further into losses. By end of 2019, Rcom had lost 98% of its valuation. This hit Anil hard as he held 66% of its stake.

— Where has Anil Ambani Reached

As of March 2018, the Reliance group had a total debt of 1.7 lakh crore. This led to affected his wealth and also his Rs 13,500 crore investment in Nippon the financial segment. By 2019 things got so bad for Anil, that he was threatened with jail if he did not pay dues to Ericson.

Anil Ambani was also summoned by the UK court where he was directed to repay 100 million loans from Chinese banks. He claimed in courts that he would not be able to pay as his net worth was zero.

Mukesh Ambani vs Anil Ambani: The UGLY

— 2008 Anil’s Intelligence Agency

The court approved spit of assets in 2005 did not end the rivalry between the two brothers. In 2008, Anil filed a defamation case against Mukesh suing him Rs 10,000 crores. This was due to an interview given by Mukesh to the NYtimes. Mukesh claimed that the distinguishing factor of Reliance from its competitors was the intelligence agency run by his brother which included a network of lobbyists and spies. They had infiltrated New Delhi to find facts that may seem trivial and other vulnerabilities of the bureaucrats to gain greater control. 

— 2009 Pricing feud

The 2005 split of assets also included an agreement where Mukesh Ambani’s Reliance Industries would supply his brother’s electricity generation segment fuel at $2.34 per million British thermal units. This was agreed for a period of 17 years.

However, Reliance Industries began setting a different price. They sold fuel to the Reliance group at $4.20 in 2009. The disagreement was dragged into the courts until the government intervened. The government allegedly did so as the government also has a share in the profits made by Mukesh. The cost of production to Reliance Industries was only 1$.

Anil took the spat into the front pages of the Times of India. Here Anil Ambani placed an advertisement accusing the Petroleum Ministry of favoring Reliance Industries. The Ad campaign further intensified the feud between the two brothers. In the end, the ruling was in favor of Mukesh.

— Outside Corporate

The competition between the two brothers was not limited to business. When Mukesh had bought a $52 million jet for his wife it was alleged that Anil bought his wife an $80 million yacht. The feud at this scale sounds bizarre as the brothers shared the same house till 2012. When Mukesh moved out to his $ 1 billion Antilla, Anil was building one for himself of the same value.

— Other controversies that involved the brothers 

Infotel broadband

The Comptroller and Audit General of India alleged rigging in the auction mechanism for the 4G license. Infotel had acquired the license by bidding 5000 times its net worth. Infotel was then mysteriously sold to Reliance Industries.

Reliance vs. Kejriwal

Delhi CM Kejriwal in 2014 had filed an FIR alleging irregularities in the pricing of natural gases from Krishna Godavari Basin. He alleged that the gas was priced at 8$ even though it cost Reliance only 1$ in its production.

Proximity to politicians

Both the brothers have been accused of their proximity to politicians to gain an influential role. PM Modi’s close proximity with Anil Ambani also is alleged to have a role in the Rafale controversy which was later quashed by the courts.

Mukesh Ambani vs Anil Ambani: The GOOD

Even though the brothers have torn into each other in the last two decades, it is noteworthy that they also once ran Reliance together. It is also said that during the period they knew each other so well that they would finish each other’s sentences.

The biggest test of brotherhood in the Ambani family came when the younger was threatened to be jailed over non-payment of Rs 550 crore in dues. Mukesh swooped in for the rescue by clearing the dues on Anil’s behalf. Also, considering that Anil has no been convicted by the UK courts over a loan from Chinese banks, it looks like he received a lot more help.

Rupee Cost Average meaning concept

Rupee Cost Average – Why it’s essential while Investing?

An overview of the Rupee Cost Average Approach: One of the basic strategies to succeed in the stock markets is to buy more when the prices are low. However, this involves in-depth knowledge to judge shares that are underpriced and perfect purchase timing. Today we try and look for answers in Rupee Cost Average (RCA) to reduce our losses from overpriced securities and make success in the long run.

What is Rupee Cost Average (RCA)?

Basically, Rupee Cost Average is an investment technique of buying a fixed amount of a particular investment consistently on a regular schedule over a long period of time, regardless of price. The Rupee Cost Averaging approach results in the average cost of the investment being lower in comparison to a single lump sum transaction.

RCA Relation with SIP

SIP (Systematic Investment Plan) allows an individual to invest in a fund, a predetermined amount at regular intervals. If we look at the above explanation of RCA we realize that a SIP allows us to buy fixed amounts in a fund on a regular schedule regardless of the price of the unit in the fund. Hence SIP helps an investor apply the RCA method and reap its benefits provided he/she indulges in the SIP for a long period of time.  

Example to Understand Rupee Cost Average in SIP

Say for example we have Rs 4000 and decide to invest in an Index fund that tracks with the Sensex. As of January 1st, you have 2 options i.e to either invest in a lump sum or to invest by means of a SIP. 

— Scenario 1: You Invest in a lump sum on January 1, 2020

DateAmount InvestedNAVUnitsSENSEX
01/01/20204000413.06029.683841,306.02

— Scenario 2: You decide to follow a SIP (with a decision to do so even after the amount is exhausted)

DateAmount InvestedÊNAVUnitsSENSEX
01/01/201000413.06022.420941,306.02
01/02/201000397.35532.516639,735.53
02/03/201000381.44022.621638,144.02
04/01/201000282.65313.357938,265.31
Total4000(Avg) 360.452211.0971

The difference we should note in the two scenarios above are :

– Breakeven 

In scenario one to make a profit the NAV per unit would have to rise above Rs 413.0602. In Scenario 2 if we are to observe the average cost on Investment would be lower.

Average cost = Amount Invested/ Units Received i.e. = 4000/11.0971 => Rs 360.45229.

Hence the breakeven is lower in the second case while investing through the SIP route.

— Units Received

If the units received are compared it becomes apparent the more units are received in Scenario 2. In RCA more securities are purchased when prices are low and fewer securities are bought when prices are high. This allows any losses that were made during a purchase made when the prices are high to be balanced off when the prices are reduced.

Also read: SIP or Lump sum – Which one is better?

RCA and Investor Psychology  

Generally, when we find products available at reduced costs we make sure we take advantage of the situation even if it resorts to hoarding. When it comes to stocks of a company, however, it is noticed that investors react differently.

Unfortunately, healthy companies with strong financials are also exposed to market falls. In such situations, investors panic and sell their shares invested in the company. Nonetheless, an investor with good financials observes the financials of the company, and if it looks good, he views the situation as an opportunity. He takes advantage of the situation and gains more shares.

Rupee cost average investor psychology

However, it is observed that many market participants follow basic human instincts. They do this to protect their capital from further reduction. What RCA does is protect us from our own psychology. When we indulge in RCA through a SIP we keep investing regardless of the price. When the market falls and even when the market rises. Hence if followed we reap the benefits of RCA in the long term.

Also read: 5 Common Behavioral Biases That Every Investor Should Know

RCA after a market crash

The Dow Jones market as on 03/09/1929 closed at $383. The Great Depression followed and devastated the US economy.  The US stock market then took over 25 years to reach levels it stood at before The Great Depression. On 23/11/1954 the Dow Jones closed at $385. This would mean an investor would gain only $2 ( per $385) over a period of 26 years if he invested in 1929.

the power of dollar cost averaging

However, if an investor invested using DCA( Dollar Cost Average in the US) $10000 every year, the $260,000 investments over 25 years would be worth $1.5 million as of 11/23/1954.

This is because by spreading the investments even to periods when the markets were low the investor would benefit by not only making up for the loss incurred when the markets were high but also make larger profits when the markets normalize.

Closing thoughts

The Rupee Cost Average investment strategy definitely safeguards an investor from market bubbles. Unlike other investment strategies, applying RCA doesn’t involve complex strategy and does not even require daily market tracking. This makes it easier for any individual to engage and take advantage of the market. RCA, however, does not shed light on the right time to sell.

In the current situation of ‘The Great Lockdown, we can notice that the Sensex has fallen from the all-time high of January. But if an investor understands RCA applies accordingly, he would be able to profit greater once the market normalizes.

10 Most Severely Affected Industries by Coronavirus cover

[COVID19] 10 Most Severely Affected Industries by Coronavirus

10 Severely Affected Industries by Coronavirus: Late into 2019, we were made aware of the ongoing battle China was forced into by a novel virus called the Cobvid-19. At that time, we were also soon assured by the World Health Organization (WHO) of no clear evidence of human to human transmission of the virus.

Fast-forward to today, there are over three million cases and the virus wreaks further global havoc. There hardly remains any industry around the world that hasn’t been impacted. Over the last 20 years, the healthcare industry was seen as recession-proof. However, the pandemic has physicians and dentists reducing staff to cope with the changing times.

Today we take a look at the ten most severely affected industries by coronavirus and the subsequent lockdown. Let’s get started!

10 Most Severely Affected Industries by Coronavirus

the economic impact of COVID 19 in India from sector to sector

(Source: The above graph shows the severity of the loss different sectors face)

1. Airlines and Hotels

Preventive measures of the airborne virus have led to the devastation of any business even closely associated with the tourism industry. The restrictions were first imposed against East Asian travelers and further extended to Europe. WHO also released a statement where they acknowledged that the transmission of the infection may occur between passengers in the same area of the aircraft. With no vaccine in sight, countries were forced to close their borders and eventually led to the suspension of all forms of travel.

The Economic Times has reported the aviation sector in India may lose as much as Rs 85,000 crores along with 29 Lakh jobs. The total stimulus package-1 stood at 1.7 lakh crore. Here, the workers in the airline industry that were not fired were forced into unpaid leave. According to equity master shares of most hotels, leisure, and airline firms have tumbled 60% to date. Falling fuel prices too didn’t provide any relief caused by the lack of demand.

airlines and hotels Most Severely Affected Industries by Coronavirus

The losses were not limited to commercial airlines but also any company connected with the industry. Leading airline manufacturers Airbus, Boeing, Bombardier, and Embraer have been forced to suspend production and deffer orders. Some even laying off employees.

The IATA ( International Air Transport Association) on 24th March estimated a $252 billion revenue loss globally. By mid-April, ACI observed a 95% fall in traffic in the Asia Pacific and the Middle East. Indian airlines are estimated to incur a loss of 600 million USD. This information does not include Air India, one of the major Indian carriers.

The only demand that exists in the airline industry is those for aircraft storage. Runways and taxiways in normally busy airports were closed to make room for storage.

2. Automobile Industry 

lockdown affect on automobile industry

The last thing an industry experiencing a prolonged slowdown for more than 20 months now needed would be a period of inactivity. According to FTAuto, the Indian Auto sector earns gross revenue of 2000 crores per day. As the lockdown is prolonged the losses in the automobile industry keep getting added up.

What makes the auto industry further susceptible to being impacted by the virus is the dependence on various players for different parts. Even one missing part from Tier-1 or Tier-2  is enough to stop entire carmakers or whole industries. Considering that the Indian auto industry relies on China for 27% of the imports in 2020 has been a further worst year as the regions are dealing with the virus at different time periods. Unfortunately for India, Maharashtra aka the Indian Automobile industry has over 8600 cases. 

— Recovery lessons from China

As China was at the epicenter of the virus, noticing how their industry reacted would help us potentially understand the industry may face. China has faced disruptions in its automobile industry even after localizing 95% of the production. Based on these figures prolonged disruptions can be expected in the Indian automobile industry.

If we take a look at the new car registrations the first half of February saw a drop of 92%. This was followed by a 47% drop in March. Despite this, the market bounced back rapidly. This, however, can be the psychological impact of the virus. People after the lockdown would prefer to avoid public transport, taxi, and other ride-hailing services.

3. Construction and Retail Industry

— Construction Industry  

construction industry hit by coronavirus

This industry suffers from the direct implications of the virus. The majority of the job losses due to the pandemic are in the construction sector. Presently most of the relief measures introduced by the government are directed towards workers in the real estate sector.

This is due to the high number of daily wage workers in the industry. The sector was already affected in the month of February and March. The effects are to last due to its reliance on China for Raw Materials. Even luxury construction segments are to face raw material scarcity. This is because Italy the world’s leading supplier for stone and furniture has been the worst hit. These inputs will be seen in the form of higher costs and delayed project completion throughout the industry.

— Real Estate Industry

The real estate sector in India will suffer immensely but indirectly due to the lockdown. This is because with people losing jobs and sources of income. Investment in the real estate sector is further doubted. As a result, housing sales are expected to fall by 25-35%. Due to the lockdown and fewer buyers will show interest in the retail spaces.

Coming months will also pose a potential threat to cash reserves if tenants are adversely affected by the lockdown. Also, the rising prices of raw materials may add to falling profit margins. The real estate industry currently may seem attractive to buyers whose jobs are unaffected by the pandemic. The price correction will allow buyers to acquire properties at cheaper rates. Also, the reduction in rates by the RBI will result in loans available at cheaper rates.

4. Textile Industry

textile industry - Most Severely Affected Industries by Coronavirus

The textile industry in India employs over 105 million and earns around $40 billion in foreign exchange. This industry similar to the construction industry is labor-intensive. And hence, it adds to the troubles due to the lockdown.

The nature of the industry will require concentrated relief efforts by the government. The city of Tirupur serves as the perfect embodiment of the textile industry. With over 10,000 factories it generates Rs 25,000 crores wealth through exports and the same domestically. A three-month loss due to the pandemic ould amount to Rs.12000 crore. Of the 129 Lakh people who depend on the city’s textile industry, 25% would have to face job losses. 

The textile industry in India depends on China for both imports and exports. India exports 20 – 25 million Kg’s a month to China. These exports have been affected due to a lack of demand from China. Imports from China include $460 million worth synthetic yarn and $360 million worth synthetic fibers.

In addition, India depends on China for buttons, zippers, hangers, and needles which make up  $140 million. The textile industry faces challenges not only from China but also from Europe. This is because of the countries affected by the pandemic like Italy and Spain have asked not to export to them.

The revival of the textile industry would only be possible with directed relief measures from the Indian government. This followed by a hopeful end to the pandemic in the next quarter. This will allow India to procure Apparel industries looking for an alternative to the Chinese textile industry.

5. Freight and Logistics

Freight and Logistics - Severely Affected Industries by Coronavirus

The freight and logistic industry face troubles due to the lockdown in three delivery phases

  1. The fist includes loading. This is due to the lack of manpower.
  2. The second involves the transportation phase. With many states closing their borders and truckers are being forced to abandon the consignment.
  3. The final stage involves unloading issues also due to a lack of power.

Lack of drivers, loaders, and unloaders have plagued the supply chain.

The future after the lockdown is uncertain as the demand will decide if the freight and logistics industry thrives. The fear of economic uncertainty may force consumers to tighten their spending. However, to support all the other industries that will awaken after the lockdown will require an increase in capacity to meet the demands.

The three phases also highlight the problems that may still persist if the government only allows the transport of essential goods without focussing on loading and reloading concerns.

6. Metals and Mining

metals and mining industry slowdown covid 19

The steel production and allied activities such as mining have been covered under the Essential Commodities Act. This does not provide much relief as the producers and miners face the challenge of producing with all the demand wiped out. 

The essential commodities act, however, does not cover nonferrous metals such as Aluminium, copper, zinc, and lead. These add to the troubles as unlike other industries metal production cannot be switched off and started again when required. The cost of starting again would involve losses incurred due to the disruption of the continuous process involving smelters and potlines.

The steel supply-side disruptions were already caused by China, Japan, and Malaysia who were impacted by the coronavirus much earlier due to the pandemic. They account for over half of India’s metal and metal production. The Nifty Metal index as of March 21st has already fallen 43% in comparison to 29% of the Sensex.

7. Oil and Gas Industry

oil and gas Severely Affected Industries by Coronavirus

The oil prices have faced a decline in value since Mid February.

The cheaper crude oil, however, will help in reducing the Current Account Deficit. This will also provide multiple other benefits for the government. The fuel subsidies provided can also be expected to decline. In addition, the government can also raise duties to boost revenue. The revenue mopped up can be used to revive other sectors. 

Read More: Why the Crude Oil prices dived into Negative? – A Detailed Study 

8. Power Industry

The lockdown has reduced power consumption by 46000 MW since March 20th. This is one of the primary challenges faced by only the Power sector i.e. no scope for inventory. Units once generated during the lockdown are represented as lost demand. The lockdown has reduced power consumption due to industries being shut.

In addition, the government has asked power generators to continue the supply of power even if the payments are not received for the next 3 months. The only silver lining is the opportunity for gas-based power generation to take advantage of the low prices. But the reduced demand has kept them from leveraging this opportunity.

The Power sector has been a loss-making enterprise even before the pandemic. The total outstanding dues of the power sector stood at Rs 88,311 crores as of January 2020.

9. Consumer and Retail Industry

In retail Food and Grocery accounts for about $550 billion. The textile and apparel account for $65 billion. Consumer electronic durable is worth $50 billion. Each of these sectors is affected by the purchasing power in the hands of the consumers. The great lockdown has put stress on the purchasing power in the hands of the people. This is due to the job losses and availability of other sources of income.

In addition, people brace themselves by reducing spending on nonessential items in textile and apparel and the consumer electronic durables. The further impact will be based on the duration of the virus. The textile and apparel and consumer electronics may lose out on their seasonal demand. For eg. AC sales during the summer season. 

Once the lockdown is lifted the size of the retail business will also play a role to determine how much stress it will face. Traditional and independent retailers generally have fewer employees. Bigger retail businesses will face the heat due to their large employee requirements to be met and additional burden due to rent. 

10. Chemical Industry 

The Chemical industry is worth 163 billion covering more than 80000 chemical products. The impact on the chemical industry is primarily due to its dependence on China for the procurement of raw materials.

chemical industry hit bad by coronavirus

As the table shows, not only India but globally every country has been severely dependent on China. 

Any impact on the chemical industry will be further felt in the agricultural industry too. This is due to the dependence of fertilizer companies on China for imports of Raw Material.

Closing thoughts

The industries we observed above wouldn’t generally resort to laying off employees. This is because these industries it is more expensive for the new employees to be trained again in comparison to keeping them employed. The lay off’s show that the pandemic and the great lockdown has forced industries into a corner. The revival of these industries will require an individual industry-wise focus to boost the economy. 

As we await another more considerable relief package it is worthwhile to notice how Germany aims at relieving its economy. Germany has announced a 500 billion dollar package. In this, the companies can avail loans at 0% interest and repay them once their companies are in a position to. The relief packages cannot be matched but a package making up a higher percentage of the GDP would provide the required boost.

It does not require a closer look at the above sector-wise impacts to notice overreliance on the Chinese markets. Such reliance would leave any economy crippled when the other is in crisis. This, however, does not mean that economies must close up after the pandemic. Finding other reliable markets to fall back on and not placing all the eggs in a single basket would suffice. 

The current situation will have Indian industries competing with Chinese goods which will be cheaper due to the incentives provided by the Chinese government on exports. Competing with a country is complex especially when it also is the supplier of raw materials.

What is an IPO Grey Market cover

What is an IPO Grey Market?

Understanding IPO Grey Market: If you’re actively involved in the market, you might have come across the terms White market, Black market, and surprisingly Grey market. A white market is one that is considered a legal, official, and authorized market for goods. A black market is a complete opposite which is illegal.

A grey market, on the other hand, stands for a market that exists with the knowledge of the owner of the goods but takes place outside the official channels of exchange. Today we have a closer look at the IPO grey market.

An IPO is a means for the company to raise capital for its growth and expansion needs. For the investor, it may be an opportunity to make a quick move into owning the shares of a fastly growing company. The purchase of these shares generally takes place through authorized mediums which is the stock market regulated by the SEBI.

What is an IPO Grey Market?

A successful IPO generally has all its shares subscribed or oversubscribed. In cases of oversubscription, the shares are allotted on a pro-rata, or in cases where the subscription is too high a lottery system is adopted. Here the chance of an allotment is too low. In these situations, investors turn to the grey market for prospective sellers who have also applied for allotment.

When the IPO gets sold through unofficial or unregulated markets it is known as a Grey IPO market.

What is an IPO Grey Market meme

The Grey Market generally involves a seller, buyer, and dealer.

  1. The Seller is the person who actually takes part in the application for shares with the motive of selling them in the grey market.
  2. The Dealer acts as a mediator between the buyer and the seller.
  3. The Buyer is the person who purchases the allotted or unallotted shares in the IPO from the grey market

It is necessary to note that there is no regulatory body governing the Grey Market. All the agreement transactions that take place are on the basis of mutual trust placed on each other.

Also read: What is the Process of IPO Share Allotment to Retail Investors?

Timeline of an IPO

When an investor attends the IPO through the white market, he/she applies and bids on the day the IPO opens. The process of allocation of shares generally takes around ten working days. It takes two weeks for the shares to get listed and start trading after the closure of the IPO.

how do ipo works

When an investor involves himself in the grey IPO market, the trading can start before the IPO begins and even after the allocation is done.

How does a grey market function?

In a grey market, the trading is done through a dealer or a mediator.

— Depending on the demand and conditions in the market the Grey Market Premium is set. The Grey Market Premium is the amount in excess of the offering price ( offering price is the price at which the company sells shares to investors in an IPO).

— The buyers who are willing to purchase it at this price make a deal with the mediators. The mediator, in turn, contacts the seller. The bids by the buyers can take place before the application even happens or even after their -allocation.

— The shares then get allocated to the seller. As soon as the shares are listed, on the direction of the buyer, the mediator may instruct the seller to transfer the shares to the buyer’s Demat account. Or he may request that the shares be sold in the stock market on the settlement price and transfer the sales proceeds to the buyer.

In the case where one of the party defaults there is no action that an individual can take as there is no regulatory body to monitor the transactions and all the transfers take place online.

Kostak and Kostak Price

In the grey market, it is possible for a person to have his ‘Application for the IPO’ be sold. The buyer will pay a price called the Kostak price in return for the seller promising his IPO application to the buyer. 

It does not matter if the application gets allocated or not. Irrespective the buyer will have to pay the Kostak price to the seller.

Benefits of taking part in the Grey market

The main benefit the buyers acquire is the increase in their chances of allocation of shares in cases of subscription. It generally takes up to 2 weeks from the closure till the shares get listed. The buyers in the Grey market bet on the fact that the prices will be higher on a listing day in comparison to the unofficial price (inclusive of the grey market premium) from the Grey market.

The Buyer can then sell this at a higher settlement price once the stocks are listed and make a profit. On the other hand, the buyer also faces the risk of a potential fall in the price which may result in a loss. 

Example: ABC company sets the offering price at Rs. 150per-share.

  1. Based on the demand for the shares of ABC the Grey market premium is set at Rs. 30.
  2. In this case, the total official price comes up to Rs 180.
  3. If the settlement price on the listing day is set at Rs.200 then the buyer is set to make a Rs. 20 profit.
  4. On the other hand, if the settlement price on the opening day is set at Rs. 160 then the buyer makes a loss of Rs. 20.

Taking into consideration Kostak.

In the same example as above for ABC company say the Kostak price is set at Rs.100 and a single lot size is of 100 shares. The application by the seller has been for one lot.

  1. In the above case say the price is set at Rs. 200.
  2. Here the seller will sell the lot and transfer the gain to the buyer’s account. The profit here is 20(200-180) x 100 =2000.
  3. From this amount Rs. 100 is deducted for the Kostak amount owed and the net gain is transferred to the buyer in exchange for the risk he took over.
  4. Similarly in the above example if the settlement price is at Rs.160 the buyer will face the loss of the price falling below the unofficial price and Rs 100 added from the Kostak price.

In the case of the seller not receiving an allotment for his application, the buyer will still have to pay him Rs. 100.

The buyer will also face a loss if the seller application does not get allocated. Hence in order to reduce the risk of non-allocation he creates an agreement with many sellers. Say if the IPO is oversubscribed by three times he then creates an agreement with multiple sellers he reduces the chances of loss because of Kostak price due to non-allocation.

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

Closing Thoughts

The Grey market also serves the function of giving other investors an idea of the demand the shares of a company might have and the investor may adjust his application accordingly. The demand may also indicate a price at which the shares may trade once listed.

The Grey market may also be used by the company or the underwriter to push up the demand for the shares. Hence before using the Grey market as a reference, it should be noted that they are subject to manipulation. In addition, the stock market is a risky enough place. The grey market only adds to the risk due to the lack of a regulatory body and because the risk of trust cannot be quantified.

Why the Crude Oil prices dived into Negative? - A Detailed Study cover

Why the Crude Oil prices dived into Negative? – A Detailed Study

A detailed study to better understand Why the Crude Oil prices dived into Negative?: A month ago, on March 8th, 2020, ‘30% slash in the crude oil prices’ seemed to be the biggest headlines crude oil could ever get. However, on April 20th, the crude oil prices broke into the news for its extraordinarily inconceivable negative price dump. A negative price, theoretically, would essentially mean that you are to be paid for the purchase of the commodity. Today we try and decode how the crude oil prices ventured into the negative territory and what it would mean to us.

Why the Crude Oil prices dived into Negative? - A Detailed Study

Does the ‘-ve’ represent all oils?

In short, the answer to the above question would be ‘No’. This is because there are multiple varieties of crude oils classified on the geography of their procurement, their quality, and other factors. This ensures their prices remain different just like other commodities.

Popular crude oil types are West Texas Intermediate( WTI), Brent Crude, Dubai Crude, OPEC, etc. An insight into the different types of oils would help us better understand why only a particular oil went negative. 

— The Brent Crude

The Brent Crude

The Brent Crude oil is sourced from the waters of the North Sea between the UK and Norway. It consists of 0.37% sulfur. It is known to be of perfect suitability for the production of petrol. The fact that it is sourced from the sea makes its transportation cheaper from ships. 

Financial Traders take delight in the Brexit crude oil as it is highly volatile. This gives it a larger scope to place their bets.

— The West Texas Intermediate ( WTI )The West Texas Intermediate ( WTI )

As the name suggests this oil is sourced from the US. The oil fields are drilled for their high-quality shale oil. The WTI crude oil consists of 0.24% sulfur. WTI is used in the production of diesel. However, being sourced from oil fields and the high cost of setting up pipelines make the ‘transportation and storage’ expensive.

— Others 

The Dubai crude aka Fateh is a medium sour crude oil extracted from the United Arab Emirates. The OPEC includes oil from OPEC members like (Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and also Murban crude from UAE). The Urals crude is sourced from Russia. Several other crude oils also exist like the Tapis, Bonny Light, etc. 

Just like any other commodities, these crude oils are priced differently based on the quality, cost of procurement, etc. Of the crude oils named above, the WTI had been priced at $-37.63 on April 20th.

What affected Oil Prices?

The factors that played  a role in the massive fall of the oil prices were 

— Demand and Supply Factors

The demand and supply play the most important role while determining the price of a commodity. Political tensions and war have had an impact on demand. This is because countries prefer to stock up due to future uncertainties driving up the prices. This was also noticed during the 9/11 attacks and the invasion of Iraq.

— The Russia v/s OPEC standoff

In today’s scenario, however, controlling the supply chain could have played a big role. Major players like Russia and the OPEC (spearheaded by the Saudi) had a fallout. This was over an agreement to reduce production during the pandemic in order to match the reduced demand. Russia expressed dissent over this as it seemed to favor the US WTI once prices are adjusted.

Result: In retaliation, Saudi Arabia increased its production flooding the markets in order to hurt Russian producers from falling prices. Anton Siluanov Russian finance minister responded by saying that they could handle the situation even when the prices dropped to $30 a barrel. He added that the government would be able to operate without difficulty for four years.

These conditions may have been tolerated by WTI in a normal situation. But considering the pandemic where two-third of the world’s economies are facing lockdown led to a backfire. This led to a build-up of oil reserves with no one available to make purchases.

This was because the airline industry one of the biggest consumers of crude oil has most of their planes grounded. Vehicular consumption at its minimum with people quarantining themselves and working from home. With industries requiring crude oils for production shut, this led to a huge build-up of reserves. 

Also read: The On-going Oil War (2020) – Causes & Effects

— Pricing Methodology of Crude Oil

Crude oil is priced based on the futures contracts set as benchmarks. Futures contracts are agreements to sell a commodity at a set agreed price and set date in the future. This is done due to the volatility of crude oil prices. Dealing in futures helps the producers and buyers possibly protect themselves from uncertainty. Producers and buyers enter into an agreement with a set price beforehand.

If in a situation the price set for crude oil increases at the set date the buyer is benefitted by the cheaper predetermined price. If in a situation the price decreases at the set date the seller makes a profit. This is because he can still benefit from the higher price as per the future contract.

In the crude oil future contract, however, there is another party of traders who serve as middlemen between the producers and buyers. The traders enter into agreements with the producers. They do this with no intention of acquiring the oil. They do this with the aim of earning a profit after entering into another contract with the buyers.

To combat this US President Donald Trump said the US would buy 75 million barrels to replenish the national strategic stockpile. This would also provide temporary relief to the oil businesses.

How did these factors lead to the eventual fall?

on going oil war

A  discussed earlier the WTI already incurs additional expense due to the pipeline. In addition to this, the market was heavily supplied by the OPEC crude with no takers. To combat the price fall Saudi Arabia and Russia reached an agreement. They agreed to cut output by 9.7 million barrels per day for the next two months. This, however, was not enough to stop the prices from falling.

The reserves saved in Cushing, Oklahoma kept building up. The Eventual overflow led to a situation where producers began paying buyers to take the oil. But in such a case why did the producers not destroy the crude oil as it would protect them from further losses. This is because the  U.S. antitrust law prohibits oil companies from coordinating their production. 

In addition to this, the Future contracts of May saw no buyers. Both these issues further alleviated the problem. It eventually led to the oil prices moving into the negative territory.

What does this mean for the economy?

This meant that the buyers were in a position to be paid in return for the purchase of WTI oil. However, as mentioned earlier crude oil is traded based on future contracts. It would not enable a country to take advantage of these in a short period of time. Also, with the demand for crude oil dropped due to the lockdown the respective country reserves will not be able to hoard large quantities.

The Indian government may use any benefits arising to set off the losses due to the lockdown. However, It is not a completely rosy picture for the Indian Economy. This is because 7 million Indians currently reside in economies that depend on crude oil exports. Adverse fall in their crude oil due to the WTI will lead to adverse effects in their economy. Joblessness will further affect Indian states that depend heavily on the remittances that are transferred from these countries.

There also arises the question of the Indian Government benefitting directly from the WTI. In 2018, of the $106.7 billion worth of crude oil only $2.8 billion can be attributed to WTI.

The benefits of the fall in crude oil prices being relayed to commercial customers are doubted. This is because the government has not transferred the benefits of falling prices over to commercial consumers from the last two months. This also may be seen as a silver lining as in a situation of probable rises. The government may again hold their ground and not relay the losses in the form of high prices.

Closing Thoughts

Low oil prices historically have been known to tip the scales of power from the producing countries to the importing countries. Low oil prices were also one of the reasons for the fall of the Soviet Union ( Yess… Chernobyl too!). Talking about the rebalancing of power, low oil prices are also known to encourage gender equality.

Studies with the Middle East as their prime focus have explained that oil production apart from various other reasons also impacts gender equality. Oil production being their biggest industry further discourages the women. With the number of women in the workforce reduced in turn leads to a reduced number of women with political interference. Further enhancing the patriarchal society. Talk about a silver lining.

crude oil meme

The renewable resource industry is also in danger if crude oil products result in providing longer benefits.

When we look at these effects in the short term from the Indian perspective it really helps being tipped upwards especially when we are in the midst of ‘The Great Lockdown’.

Where the Indian Economy is headed in 2020 cover

Where the Indian Economy is headed in 2020?

Indian Economy Overview 2020: The rough ride of India during coronavirus times in 2020 is now being termed as ‘The Great Indian Lockdown’ after Gita Gopinath’s (Cheif Economist at the IMF) address. The IMF has forecasted the Global GDP to contract by 3%, a downgrade of 6.3% from earlier estimates. This shrink is estimated after considering the pandemic to peak in the second quarter and recede by the second half of the year. This is an optimistic assumption considering that we do not have a vaccine in sight. 

Discussing the economic downturn may be considered trivial in the minds of a few in comparison to the testing pandemic. But considering the fact that we are from a country where 22% of the population is below the poverty line, the toll of an economy in depression could further lead to deaths from starvation. This dilemma poses a significant threat to the country especially if the pandemic is not bought into control in time.

where the economy is headed 2020

In order to find where the Indian Economy is headed in 2020, we’ll look into the GDP today. The GDP is the market value of all the finished goods and services produced within a country for a particular period. In the midst of the GDP of the whole world shrinking, we take a look at the effects on the Indian GDP to assess where eventually we are headed in the near future. 

What does each day of the lockdown mean for the GDP?

Tejal Kanitkar (National Institute of Advanced Studies) and T. Jayaraman (M. S. Swaminathan Research Foundation) have attempted to quantify the impact of the lockdown in their study. Their model assumes the estimated annual output to be distributed uniformly across the year.

They then assess the impact based on the number of working days lost. It estimates the direct and indirect impacts of lockdown on sectors using Input-Output multipliers which are assumed to be constant. The research takes into account four different scenarios based on the number of days lost as depicted by the table shown below.lockdown impact on gdp and economy

( Source: A Time for Extraordinary Action)

According to the table, the Indian economy is to suffer a loss of around 13% of the GDP if we are to consider the 1st phase of the complete lockdown and the portion of the complete lockdown in the second phase ( 21 days + 6 days). Here, we did not consider the complete extension period as relaxation were expected state-wise after April 20th. 

If, however, we are to consider a situation where the lockdown isn’t lifted till May 3rd (40 days) the losses loom at around 20% of the GDP.

In a worst-case scenario where the COVID-19 cases explode. The government will be forced to extend the lockdown till the end of May. The economy will then be estimated to lose 73 lakh crore i.e a  33% impact on the GDP. 

Also read: 21 Day Lockdown (COVID-19) – Are We Headed in Right Direction?

Positive Forecasts of the Indian economy in 2020/21

The only bittersweet news is when the forecasts of the Indian economy are compared with that of other countries. India and China are one of the few major economies that may still expand during the pandemic. The IMF has predicted the Indian economy to grow at 1.9%.IMF projection for economies - Positive Forecasts of the Indian economy

Fitch solutions and Goldmann Sachs have also cut their forecasts of the Indian GDP growth rate for the financial year 2020 -2021 to 1.8% and 1.6% respectively. The IMF has however predicted that the following year the Indian economy will be able to expand at 7.4%. This growth rate will be achievable only if the Indian economy is successfully able to control the outbreak. Additionally, a successful stimulation of the economy along with falling oil prices would enable the Economy to meet the targets.

IMF Projections for World economies

(Source: imf.org)

Challenges that still lie ahead

— Unemployment

One of the most important factors that stimulate the economy is wages. In the current scenario of the lockdown, the daily wage workers are already left without a source of income. As businesses keep sinking into losses each day the situation is further alleviated. The Centre for Monitoring the Indian Economy (CMIE) has reported that the unemployment rate has shot up to 24%. As people lose income earning capacity they begin to consume less. And if the consumption is reduced the immediate middlemen also suffer losses and eventually even the production is reduced.

— Agricultural Crisis

The Rabi crop harvest has already taken a hit due to the lockdown as it is labor-intensive. The disruptions of the supply chains have further inflicted misery on the plight of the farmers. Despite this, the RBI has claimed that the agricultural output was at an all-time high. But we have to further discuss the importance of just harvesting and quantity produced.

According to Christophe Jaffrelot ( French Political Scientist), productivity is not the sole determining factor but the price at which it is sold is also important. Farmers in these cases no longer have a minimum support price due to urban bias. Cheaper imports are bought into the market to keep the prices low for the urban population. This, in turn, affects the local farmers and is called an urban bias

— Loans to ailing Businesses

The Indian government has put forward various monetary measures to put more money in the hands of the people to stimulate the economy. These include the rate cuts by the RBI. These rate cuts give people access to loans at cheaper rates. However, the reduction in rates is to work only if the banks pass on the benefits of the reduced rates to businesses. Considering the ailing banking sector is already plagued by high NPA’s (Non-Performing Assets) in the form of bad loans. The banks may be concerned over worsening this issue by giving out loans to businesses affected by the lockdown.

Also read: FDI Restrictions: India tightening the leash on Dragon

Closing Thoughts

‘The Great Lockdown’ crisis that we face today is significantly worse than the 2008 recession. This is particularly because in the recession majority of the workforce still had the ability to work or at least look for jobs. The IMF has considered multiple scenarios including ones where the pandemic remains strong even after the second quarter and carries into 2021. In this case, we would be looking at an estimated global contraction of 6% followed by no growth in 2021. 

On being asked as to “why only India and China are expected to maintain positive growth?”. Gita Gopinath replied that this is due to the fact that India and China are already starting from a low place. She also advised that the priority at the moment should be in dealing with the health crisis. Prof Phillipe Martin put the only way out of the current situation as “ To kill the virus we have to kill the economy, at least in the short term”.

Stock Trade Settlement Process in India cover

Stock Trade Settlement Process in India: Trading & Clearing Cycle

Stock Trade Settlement Process in India: As Investors, we play the role of both buyers and sellers in the stock market. We indulge in trading activities to either purchase or sell shares. Although the mechanism may look simple with only a few parties involved, there are a number of activities performed by various other groups behind the scenes.  This is to ensure trading activities take place smoothly with minimal risk.

In today’s article, we’ll look into the stock trade settlement process in India. Here, we aim at understanding the Trade cycle, Clearing, and Settlement process while trading in shares.

Trade Cycle in India

NSE India

The Stock Exchange in India follows a ‘T+2’ rolling settlement cycle. The day the trade is executed is known as the ‘Trade Date’ and is signified as ‘T’. Every working day after the trade date is signified as T+1, T+2 and so on (weekends and stock exchange holidays not included). The trades in India settle on T+2 day.

Example: Mr. Ajay buys shares of company ABC on Monday. He buys 10 shares at Rs 1,000 per share. This activity is performed on Monday. Here Monday and the date associated is known as the Trade Date. It is signified by ‘T’.

  • On the trade date ‘T’, Rs. 10,000 is deducted from Ajay’s account and the broker provides him with a Contract Note as proof of the transaction. 
  • On T+1 day, all the internal processing of the trade gets worked out. 
  • On T+2 day, Mr. Ajay will receive shares of company ABC in the DEMAT account by the end of the day.

If in the above example Mr. Ajay had sold his shares instead of buying, then the shares would get blocked in his DEMAT account before T+2 day. They would be moved out of his DEMAT Account before T+2 day. On T+2 day proceeds from the sale will be credited to his trading account after deduction.

The example we went through above is what we, from the investor perspective, would experience while trading. We will now go through the process that makes this possible.

Process involved in the Transfer of Shares

The transfer of shares includes three processes.

1. Execution

Execution is when the order to buy/sell is completed by the buyer and the seller. An execution is said to be completed only when it is filled. This is after the trader places an order and based on the instructions of the order the broker fulfills the requirements of the order in the stock market. Only then the order is said to be filled.

2. Clearance

After the trade is executed the clearing process begins. In clearing process, it is identified how much money is owed to the seller and how many shares are owed to the buyer. Apart from identification trade recording, confirmation, determination of the obligation of different parties and risk assessment also take place. This process is managed by a third party known as a Clearing House. Clearing Activities take place on T+1 day.

Also read: Different Charges on Share Trading Explained- Brokerage, STT & More

3. Settlement

The stage involves the actual exchange of shares and money. Here the shares are moved to the buyer’s DEMAT Account and the money is transferred to the sellers trading account. These activities take place on T+2 days.

Participants involved in the Process

In the trading, clearing, and settlement stages “the Stock exchanges ensure a platform for trading while Clearing Corporation ensures the funds and security-related issues of the trading members and make sure that the trade is settled through the exchange of obligations. The depositories and clearing banks provide the necessary interface between the custodians or clearing members for settlement of securities and funds obligations”.

From the above short explanation of activities that take place, we will first look at what are the roles of different parties involved and link them to understand the procedure that takes place to ensure a clearer understanding.

1. Clearing Corporation

The National Securities Clearing Corporation Limited (NSCCL) is responsible for clearing and settlement of trades executed and risk management at the stock exchange. It ensures short and consistent containment cycles. The NSCCL is also obligated to meet all the settlements regardless of member defaults.

2. Clearing Members / Custodians

The trading members of the stock exchange place deals in the Stock Exchange which is moved to the NSCCL. The NSCCL transfers these deals to the clearing members. A clearing member is responsible for determining the position of shares and funds to suit the trade. And once it is confirmed the actual settlement process takes place.

3. Clearing Banks

The settlement of funds takes place through Clearing Banks. Every clearing member is required to open a clearing account with one of the following 13 clearing banks

  • HDFC Bank
  • ICICI Bank Ltd
  • Axis Bank Ltd
  • Kotak Mahindra Bank
  • JP Morgan Chase Bank
  • State Bank of India
  • HSBC Bank
  • Stock Holding Corporation of India Ltd
  • Infrastructure Leasing and Financial Services Ltd,
  • Deutsche Bank, Standard Chartered Bank
  • Orbis Financial Corporation Ltd
  • DBS Bank
  • Citibank.

The Clearing members receive funds in case of a pay-out in the clearing account or are to make funds available in the clearing account in case of a pay-in.

4. Depositories

We may not be thoroughly familiar with the term depository but are familiar with a related term called DEMAT Account. There are 2 depositories in India NSDL and CDSL. These depositories hold the investor DEMAT (Dematerialised) Accounts. Clearing members are also required to maintain a clearing pool Account with the depositories. The required securities must be transferred to the clearing pool account by the clearing members on the settlement day.

5. Professional Clearing Members

NSCCL admits a special category of members namely professional clearing members. PCM are not allowed to trade. They can only clear and settle trades similarly like the custodians for their clients.

Clearing and Stock Trade Settlement Process

Clearing and Stock Trade Settlement Process

(Source: AdityaTrading)

  1. Trade Details are transferred from Stock Exchange to National Securities Clearing Corporation Limited (NSCCL).
  2. NSCCL notifies the details of trade to clearing members or custodians who affirm back. Based on the affirmation, it determines obligations.
  3. Download of obligation and pay-in advice of funds or securities are sent by NSCCL to clearing members or custodians.
  4. Instructions sent to clearing banks to make funds available by pay-in time.
  5. Instructions to depositories to make securities available by pay-in-time.
  6. Pay-in of securities (NSCCL directs to debit pool account of custodians or Clearing members and credit its account to depository and depository do it)
  7. Pay-in of funds (NSCCL directs to the debit account of custodians or Clearing members and credit its account to Clearing Banks and clearing bank do it)
  8. Pay-out of securities (NSCCL directs to credit pool account of custodians or Clearing members and debit its account to depository and depository do it)
  9. Pay-out of funds (NSCCL directs to credit account of custodians or Clearing members and debit its account to Clearing Banks and clearing bank do it)
  10. Depository informs custodians 
  11. Clearing Banks inform custodians or Clearing members.

Also read: 8 Best Discount Brokers in India – Stockbrokers List 2020

Closing Thoughts

The above explained stock trade settlement process in India might look complicated but they work in perfect synchronization to ensure smooth functioning of the stock market. If we are to compare how far the markets have come since the 1960s and 1970s to today, the difference will be huge. At those times, the payments were still made with paper checks. The exchanges closed on Wednesday and took 5 business days to settle trades so that the paperwork could get done.

In comparison to the stock market not even functioning throughout the week and five days for the trade cycle, we can thank technological and procedural advances for the ease of functioning we enjoy.

Offer for Sale (OFS) vs IPO - What's the difference?

Offer for Sale (OFS) vs IPO – What’s the difference?

Offer for Sale (OFS) vs IPO: An IPO has always been popular and preceded with loads of razzmatazz to impress the investors considering the stock. An investor in India may purchase a stock from the Primary market during such public offerings. Moreover, in other cases, they can take advantage of a situation while stock already trading in the secondary market. The SEBI in 2012 brought forward Offer for Sale (OFS). This allowed promoters to sell their shares directly in an exchange instead of waiting for a public offering.

Today we look at OFS and public offerings and their attributes. In this article, you’ll learn what exactly is OFS and how to differentiate Offer for Sale (OFS) vs IPO. Let’s get started.

What is an OFS and a Public Offering?

The OFS (Offer for Sale) was introduced to allow promoters to dilute their investment in a company through simpler means. Soon other shareholders who hold more than 10% in a company were also allowed to benefit from OFS. However, OFS is currently limited to only the top 200 companies (in terms of market capitalization).

stock market bse

Public Offering are of two types. The Initial Public Offering (IPO) and Follow on Public Offer (FPO). In a Public Offering, the company offers shares to investors in exchange for capital. A Public Offering is one of the means for a company to raise further capital.

Any company that fulfills the requirements of the SEBI can go public. IPO is the first time a company raises equity capital through means of public offering. After an IPO if the need arises for capital the company can still raise equity capital by means of FPO (Follow on Public Offer).

Also read: Is it worth investing in IPOs?

how do ipo works

Differences between Offer for Sale (OFS) vs IPO

Here are the most distinguishing features between Offer for Sale (OFS) vs IPO based on prominent factors:

1. Purpose

OFS (Offer for Sale): The purpose of an OFS is to provide shareholders holding more than 10% with an easy alternative to sell their stake in the company. This is especially used by government companies to reduce their holdings in a transparent channel through an exchange. None of the amount raised from investors is transferred to the company. It is instead transferred to the promoter to suit his needs in exchange for the ownership he had.

Public Offering: A company goes for IPO or an FPO to raise capital for its growth and expansion needs. The amount, in this case, moves from the investors to the company in exchange for ownership through shares.

2. Regulations

OFS (Offer for Sale): In an OFS, it is necessary for the company to inform the exchange 2 working days (bank) before the OFS takes place. The ability to indulge in an OFS is available only to the shareholders who hold more than 10% stake in the company. The OFS takes place on the trading day.

25% of the shares undergoing an OFS are reserved for mutual fund and insurance company purchases. However, no single bidder (Mutual Fund or Insurance Company) can get more than 25% of the shares in OFS. The OFS takes place in one trading day. 10% of the shares in OFS are saved for retail investors. The maximum cumulative bid a retail investor can make is 2 Lacs.

Public Offering: An IPO is generally lengthier and takes 3-10 days to take place. An IPO requires an Investment Bank to be appointed for underwriting the IPO. This is then followed by registration with the SEBI and drafting a prospectus. 35% of the shares issued are reserved for retail investors. The maximum amount that can be invested by a retail investor in a public offering is 2 Lacs.

3. Cost

OFS (Offer for Sale): The cost incurred by the promoter and shareholder in the company during an OFS is minimal. The only requirement is for the company to have the exchanges informed two days in advance. The investor, in this case, incurs only the regular transaction charges.

Public Offering: An IPO is preceded with a lot of advertisement activities to get the word out. The more obscure the company is the greater difficulty it will face and hence will be required to spend higher at this stage. Appointment of an underwriter and other SEBI formalities adds to the expenses.  

4. Allotment

OFS (Offer for Sale): The company is to provide the floor price before the OFS takes place. That is T-2 or T-1 with ‘T’ being the day of the OFS. The floor price is the price at and above which the investors are allowed to bid. The investors generally receive a discount of 5% on their bids. If the investors bid an amount below the floor price the bid gets rejected. The investor is allowed to change the specifics of the bid throughout the day. But no cancellation can be made.

In case of oversubscription two types of allotment may be made

  1. Single Clearing Price: Here al the investors are allocated shares at the same price but on pro-rata basis
  2. Multiple Clearing Price: In this case, the investors with higher bid are given preference. This goes on till the subscriptions are full.

Public Offer: The price band here is set by the investment bank prior to the IPO. In the case of oversubscription, the shares are allotted based on a pro-rata basis or automated lottery system.

5. Effect on the Balance Sheet

OFS (Offer for Sale): In the case of an OFS, there is no change in the Balance Sheet. Here the company does not raise any additional capital. The same number of shares that may have been with a respective promoter will be present now in the hands of the new shareholders via. OFS.

Public Offering: When shares are issued in a public offering the Balance Sheet of the company will now have increased share capital under Equity and Liabilities and the asset side Cash and Cash Equivalents will account for the cash coming in.

Quick Note: New to stocks? Want to learn how to make consistent returns your stock market investments? Check out this amazing stock investing course for beginners – How to pick winning stocks? Enroll now to begin your journey in the exciting world of stock market today!

Closing Thoughts

An OFS and Public offering both are attractive from an investor perspective. This is considering the discounts received in an OFS and investors making first movers advantage in the case of Public Offering. However, investors must still beware and consider investing only after a thorough study of the company. Both these methods might be used by promoters and venture capitalists as an escape strategy when they do not see future prospects in the company.

what is factor investing meaning concept more

Factor Investing – How does it work? (Meaning, Insights & More)

Overview into Factor Investing: The selection of players in a cricket team based solely on talented batsmen and bowlers is an outdated criterion. The Indian cricket team too learned it the hard way in the 2000s. This was followed by the veteran rotation on Dhoni’s arrival as captain. The Indian cricket team today has a number of stats looked into to form a selection strategy. These include fitness levels, susceptibility to injury, player image, etc. The 2008 crisis due to bond market failure similarly made investors realize that simple diversification of a portfolio based on asset classes wasn’t enough. This gave rise to an investment strategy called Factor Investing.

What is Factor Investing?

Factor investing is a completely different way of looking at diversification. It is built on Eugene Fama and Kenneth French’s work. Fana termed it highly difficult for even professional investors to exceed market performance. According to him, it would be better to invest in a broadly composed portfolio of stock instead of engaging in futile stock-picking efforts.

American Economists Eugene Fama and Kenneth French, known for the five-factor model

(American Economists Eugene Fama and Kenneth French, known for the five-factor model)

Researchers noticed that throughout history stocks with particular factors in play were able to perform better. As research emerged certain factors stood out and were applied to a portfolio in order to create an Alpha.

What is an Alpha?

In simple words, the over and above performance of a fund over a benchmark for a long period of time it is said to be an Alpha (α). Say the Sensex rises at 15% in a year and your respective portfolio at 18%. Then the additional 3% is known as Alpha. However, Alpha’s are known as imaginary creatures of the market world. This is because no funds have been able to beat the markets consistently for a long period of time ( Not just 1-3 years).

Factors involved in factor investing

The following factors are widely used and regarded to have added to the Alpha.

1. Beta ( β)

Yes. We do require the Beta in our search for the Alpha. Beta here represents the risk. The Beta of a stock is arrived at after observing how volatile and sensitive the stocks are. Regression analysis is used to arrive at Beta.

Here is a non-quantitative method we may use to arrive at the estimate of the Beta. Firstly, plot the market movement on a graph for a  particular period. Then plot the market movement of the security in question

Case 1: If the security pretty much tracks the market then β = 1.Case 1: If the security pretty much tracks the market then β = 1

Case 2: If the security is more volatile than the market then β >1.

Case 2: If the security is more volatile than the market then β >1 Case 3: If the security has lesser volatility than the market then β < 1.  Case 3: If the security has lesser volatility than the market then β < 1 

Factor Investing does take on considerable risk. It considers that the greater risk the portfolio involves itself in the greater is the return. If we assume that the Beta of the portfolio is 1.5. Then if the market moves upwards by 10% it would lead to the portfolio rising up by 15%. However, if instead, the market moves downwards by 20%, the portfolio will fall by 30%

2. Size

Unlike the conventional approach, this approach requires investing in small-cap stocks. If we are to look at it with an open mind it would make sense as small-cap stocks would have a greater possibility of making leaps in growth when compared to their small value. Larger cap stocks although rock-solid to weather a market storm would have slower growth rates. As per CRSP data from 1927 to 2015 small-cap stocks would provide 3.3% higher returns than large-cap companies.

3. Value

According to this factor, a less expensive stock would prove more beneficial than a stock that is more expensive. It encourages investing in undervalued stocks. This approach works theoretically as investing in companies whose prices may fall but their strong fundamentals remain the same would prove more beneficial.

This is in comparison to investing in companies that have rising prices but with the same fundamentals. The inflated security would be adjusted during a market correction but one with strong fundamentals would still prove beneficial. As per CRSP if stocks with incorrect prices are bought then the difference in returns as per data from 1927 to 2015 would be 4.8% per year.

4. Momentum

This factor requires including stocks that have had an upward momentum in the portfolio. It requires a ranking of stocks based on 12 months trajectory and excluding the latest month. As per data compiled by CRSP from 1927 to 2015, the top 30% of stocks with upward momentum would provide 9.6% additional returns in comparison to the stocks from the bottom 30% that may have had a downward trajectory.

5. Quality and Profitability

According to this factor, a high-quality stock with high profitability would generate excess returns. As per ‘ A Complete Guide to Factor-Based Investing’ high-quality companies have the following traits: low earning volatility, high margins, high asset turnover, low financial leverage, low operating leverage, and low stock-specific risk. 

As per data compiled by CRSP from 1927 to 2015,  the stocks forming the top 30% of Gross Profitability gave 3.1% higher returns than those of the bottom 30%.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

How were these factors identified?

For a factor to be considered, it is necessary that it satisfies the following tests.

— Persistence

According to this, it is necessary that the factors will show up through time and are not limited to  a specific time period

— Pervasive

The factor must hold true across various regions countries and sectors

— Robust

The factor must not change if you change how the characteristics are defined and must be robust to specification.

— Investible and Sensible

The factor must be sensible and add value. Further, they must be investible if it is to be bought into the portfolio.

Results of Factor Investing

Historically one of the most prevalent investment strategies has been Active Investment. In Active Investment, a fund manager along with his team of analysts strategizes and analyses individual stocks to beat the market. In Active Investment the skill of the investment manager enables a fund to perform better than the market. The operations of the fund involves hedging and a lot of buying and selling activity takes place.

Another form of investing is Passive Investing. Here the portfolio tracks the market. In Passive Investing the investors are in for the long haul. The buying and selling that takes place are lower than those compared to Active investing. The expenses are significantly lower in comparison as Passive Investment uses programmed computers in place of fund managers.

Factor Investing can come into play by combining the Active Investment strategy and the Passive Investment Strategy. The Active Investment strategy can be used to acquire a portfolio apt with the factors and this can be programmed into a computer. The software will be able to replicate the strategy and at the same time analyze swaths of stocks. Factor Investing, if done right, results in a highly diversified portfolio. This further alleviates the risk faced through stock picking and enhances the portfolio with factors.

The following graphs depict the factor portfolio’s outperforming the market.

Securities based on different factors performing against the Russell 100

( Source: Securities based on different factors performing against the Russell 100)

Securities based on different factors performing against the Russell 100

Portfolio Diversification

When creating a portfolio it is not necessary that the focus is on one or a limited number of factors. The portfolio should be diversified to include all the factors. This is because factor investing does not involve timing investments for certain factors and doesn’t have investment periods for different factors. Also, it is uncertain when the investments based on individual factors would start enhancing the portfolio. Hence diversifying the portfolio with the factors is beneficial.

Why isn’t Factor Investing popular?

Even though factor investing is thrown around a lot in financial jargon it still has been limited in usage. It can be because of the following factors.

1. Keen on Risk

Factor investing is based on the principle the more risk you are willing to take the more probable gains await you. Risk-averse investors generally tend to avoid factor investing. Apart from risk avoidance, certain investors may not even believe in the possibility of the fund beating the market. This is because in the year 2017 only 15.77% of the funds in the US beat the market and even fewer in the long run.

2. Research

Factor investing has been well studied in the equities market. But there is still not enough research done for other assets like options futures etc.

3. Expensive

Although factor investing is cheaper than active investing and is still more expensive in comparison to Passive Investing. The problems are further alleviated as factor investing takes a longer time to reduce the odds of underperformance. Even if the fund performance beats the market the excess should also beat the additional expenses charged due to factor investing.

Closing Thoughts

Eugene Fama was recognized with the Nobel Prize in 2013. This did bring additional interest to the field of factor investing. Since then there are been multiple pieces of research and over 300 factors have been claimed to be discovered. Despite all these efforts, the perfect factor investing model is still unknown. 

The Indian markets currently have the following Indexes available in the Indian markets. They are NIFTY Alpha Low-Volatility 30, NIFTY Quality Low-Volatility 30, NIFTY Alpha Quality Low-Volatility 30, NIFTY Alpha Quality Value Low-Volatility 30. According to Akash Jain (Associate Director, S & P BSE Indices), the BSE has tested four factors in the Indian context: Quality, volatility, momentum, and value in down markets. They noticed that low volatility gave significant excess returns and in the up markets value tends to outperform. Low volatility here acts as a defensive factor and value enables stocks to perform well in macroeconomic conditions.

Factor investing has faced tough times in the recent past but it cannot be written off as it currently has over 100 years of data proving that it works. Factor investing will require a decade or two at least before it may be classified in a different category otherwise. If factor investing turns around it would be an industry-changing trend. Matt Peron ( Head of Global Equity -Northern Trust Asset Management) predicts that active managers will be increasings measured by their performance against factor indexes than market indexes. This could be because they could set the new standards to beat.

What does Weakening Rupee Against Dollar Signify_

What does Weakening Rupee Against Dollar Signify?

The weakening rupee against dollar meaning & significance: It may come across as a surprise to most of us if we were told that on 15 August 1947, 1 Rupee = 1 Dollar. Today, however, the Rupee stands at 76.16 in conversion from a dollar. In this article, we try and take a look at how this happened and get a clearer understanding of what these figures mean.

Although the Indian rupee can be traced back to ancient India, it derived its official role only in the modern era ever since it was managed by the Reserve Bank of India (RBI). After noticing current rates it does not take long to understand that the rupee has become significantly weaker in comparison to the dollar over the years. But why did this happen?

indian rupee vs dollar rates through history

(Source: BookmyForex -Indian rates throughout History)

The Devaluation road to 76.16

The requirement for the rupee to be first devalued came in 1951. This was because India opted for loans from foreign entities for their 5-year plans. The Indian economy, however, benefitted from this as it gave rise to foreign investments into India. This also gave a push to its exports as Indian goods were now cheaper in the global markets.

The wars faced in 1962 and 1965 further increased the devaluation needs to meet the requirements of the war. By 1985, the rupee stood at 12.57 in comparison to the dollar. Due to the enormous trade deficit of 1991, high rates of inflation saw the Rupee fall further to 22.74. The wars that followed, unstable governments, poor decisions, democratization, and ever-increasing deficit have brought the rupee to where it stands today. 

How does the valuation system work?

India currently follows the floating exchange rate. To understand how we arrived at this we would have to first understand the role played by the US and the Bretton Woods agreement

The two world wars had destroyed the European Economies. Most of the countries had resorted to borrowing loans from the US in exchange for gold during the war. This led to the US having the largest gold reserves after the war. This prompted the 44 countries to decide on the dollar as their reserve currency at Bretton Woods. They were in search of something stable as European currencies were on the brink of collapse after the war.

With the dollar backed by gold, it seemed like a good idea. The US had also promised the 44 countries that they would limit printing. In addition to this, they would also allow any country to exchange dollars for the gold reserve if the country in question decided.

However, as time passed it was noticed that the US was printing money as necessary to fund the Vietnam War. By 1971 the dollar in circulation was considerably lower than the gold reserves held in the US. This was protested by the French government and requested the conversion of their dollar reserve. This led to the then-President Richard Nixon canceling the Bretton Woods agreement and removing the US from the gold standard.

( Source: A Barbarous Relic: The French, Gold, and the Demise  Bretton Woods)

Rise of Petrodollar

The earlier steps taken by US president led to the US dollar losing all is value. Nixon, however, cleverly reached an agreement with Saudi Arabia and other OPEC countries to accept only the dollar in exchange for crude oil. In return, the US would provide them with security. The countries accepted the proposal as they were already in a poor state after the Arab War.

This led to the dollar becoming much more powerful than ever before. It made it a necessity for all countries to have dollars to be exchanged for crude oil. This gave rise to the petrodollar and drove us into the era of floating rates. This is a system where the exchange rate is set by the forex (foreign exchange) demand and supply for the currency. Unlike a fixed system where the government can determine the rate.

Important terms that you should know

Before we go further into understanding if the current exchange rates are good or bad, we should first understand a few terms like Forex Reserve and Current Account Deficit.

— Forex Reserve

This is the amount of foreign currency held by the central bank of a country (RBI). The RBI then has the power to control the value of the currency based on the reserve. The reserve can be sold in exchange for its local currency. This would increase the demand for the local currency resulting in appreciation of its value. The foreign reserve of a country also acts as a guarantor.

— Current Account Deficit (CAD)

The Current Account is used to measure a country’s imports in comparison to its exports. When the value of a country’s imports exceeds the value of its exports it results in a CAD.

— Currency Appreciation and Devaluation

Say the current value of the 1$ = 70 Rupees. 

If in future 1$ = 75 Rupees, we say that Rupee has devalued, i.e. it has fallen in comparison to the dollar. On the other hand,  if in future 1$ = 65 Rupees, we say that the Rupee has appreciated, i.e. it has obtained a stronger position.

Determining the value of the Indian Currency

The CAD position and the amount of Foreign reserve leads to the value of the Rupee to be appreciated or devalued. Foreign investors play an important role as they increase the reserve surplus of a country. They invest only if they see value in a currency or market. The interest rates offered by the RBI also influence investors. They prefer to enter markets with high-interest rates. The increased demand for our currency leads to appreciation. If the Interest rates are low on the other hand it would lead to devaluation of the currency.

If the currency appreciates or becomes stronger it leads to imports becoming cheaper. The appreciation will, however, hurt the exports as our goods will be less preferred due to them being more expensive for foreigners. But this would also, unfortunately, increase the trade deficit.

When a currency appreciates and if the authority chooses to let it appreciate it chooses foreign investments over its exports. The NDA government has chosen foreign investments leaving the exports to fend for itself. This is because foreign investments will push the country’s growth rate at a much faster level than revenue through exports. Further, deficits can be directly covered through these investments and if the investments are directed towards government bonds then they can be directly focussed on infrastructural development and other welfare programs. But this scenario can be assumed only if the currency appreciates.

Indian Rupee at 76.16. What to expect?

2020 has proved to be a disastrous year so far for the economies all around the world. The rupee stands 76.16 in comparison to the dollar. With COVID-19 cases worsening and the economy in complete lockdown threatening to slip into a depression.

The government has announced a number of measures to combat the COVID-19 one of them being the RBI cutting the rates. The rate cuts were aimed at supporting ailing local businesses by making loans cheaper for them. This, however, was foreseen by the foreign investors as their exit started coming as early as the first week of March. This will lead to a shortage of investments in government infrastructural projects and welfare schemes.

 The lower interest rates will lead to more money in the hands of individuals which in turn would lead to increased consumption. Increased demand would result in higher levels of inflation leading to the Rupee being devalued further. The government will have to focus on increasing the exports as Indian goods will be cheaper abroad due to the devalued rupee. This, however, would be an uphill challenge as all the other economies are also facing lockdown bracing for depression. 

Sectorwise Effects of Weakening Rupee Against Dollar

The effects of the falling Rupee on different sectors will differ. It will depend on whether the sector is import oriented or export. An import oriented sector will face disastrous consequences as they will have to pay more for the same quantities. If the sector depends on export like the Indian textile sector it may be beneficial if the markets respond favorably.

One of the silver linings has been the fall of crude oil prices due to the Russian vs OPEC feud. This could help in maintaining the Rupee value. This could also have provided some relief to the ailing Aviation, Oil and Gas, and Power sectors but the government has not passed on the benefits of the reduced prices as the prices remain at the same level as those before the fall.

Also read: Why did Indian Stock Market Crash in 2020? Causes & Effects!

Does an appreciation of currency have to be good news?

( The Plaza Accord – 1985)

The best example to consider the effects of the appreciation of a currency would be the Japanese Yen. In the 1980s, the Plaza Accord was signed in an agreement to devalue to the dollar. This saw the Yen rise from the previous 270 per dollar to 80 per dollar within a decade. This may have proved beneficial to Japanese importers and tourists and had a disastrous impact on its export industry. This led to over two decades of economic stagnation and price deflation.

Closing Thoughts

Today 1 Bangladesh Rupee = 1.28 Yen, but this does not mean in any sense that Bangladesh is performing better than the Japanese. Countries are known to intentionally devalue the currency in order to boost exports and tourism. This would also prove beneficial to the Indian tourism sector. This is because tourists target cheaper countries, but with the COVID-19 scare to persist even after it is controlled it seems like a long shot.

Appreciation of the currency, on the other hand, would also not immediately prove beneficial to the IT sector as most of the jobs are outsourced from the US and Europe due to the cheaper solution. If such a situation were to arise where 1$ = 1 Rupee, it would lead to large scale job losses. This is because companies would rather keep jobs in the US. This would lead to inflation further deteriorating the economy, eventually leading the currency to be adjusted to its original value.

If the Indian economy is to take the rupee appreciation seriously it has to be done by improving infrastructure, raising the living standards, alleviating poverty. The most important would be to increase quality production not only in our products but also in our human resource where both are competitive and better than standards available elsewhere in the world. This would increase demand and eventually lead to appreciation of the Rupee.