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. 

May 29, 2020 Investment Basics, Market No comments yet
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!”.

May 24, 2020 Market, News No comments yet
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.

May 8, 2020 Market, News 2 comments
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.

May 7, 2020 Economics, Market No comments yet
Right time to invest or is it

The Right time to invest, or is it?

“Imagine, always wanting to own something but not being able to, because that something was too expensive, maybe not worth the price tag or maybe it was the right price but your pockets were not deep enough to buy it”

The above thoughts must be crossing every investor’s or trader’s mind right now. The stocks which were expensive in January 2020 are right now available at a discount rate of 30%-50% in May 2020. So what led to this sudden decline in prices or undervaluation or availability at a sale? Is it just an impact of Global pandemic (COVID-19), or Is it the global uncertainties. Are we heading towards a bigger recession? Or Were these share prices simply too overvalued and had just the right trigger to correct them, which in this case was COVID- 19.

To get a little deeper into the discussion, let’s take an example of a few sectors. The auto sector, the health of which usually defines the ‘luxury health’ of a nation. But over some time we have seen a continuous decline in the Nifty Auto Index, which tells us a lot about the depleting health of the sector.

The Auto index which was trading near all-time highs of 11900 in January 2018 is right now trading near lows of 5000. As we can see that this decline in the sector started long before COVID-19 was born. This also tells us a lot about the consumer’s reluctance to spend less on luxury items and save more for future uncertainties. In the current scenario, most of the Auto sectors company shares are trading at almost half the price compared to early 2019 levels. The image below is the Auto Index for the last three years.

Nifty Auto Bloombergquint (Source: Nifty Auto –BloombergQuint)

So, it is still the right time to buy or are these companies still overvalued, especially knowing that consumer demand for luxury goods will still take quite some time to bounce back. But, seeing the lucrativeness of the prices of various stocks (as they are trading at a discount of 30%-50% from top), one can start investing a portion of his desired investment now. But, it is advised to not to empty the full clip right now, as we could see some more correction in the market. So investing parts of portfolio over time is the best way ahead. And as the saying goes, “it is never a wrong time, to do the right thing”

Similarly, if we were to take the example of the Nifty Pharma index, this index was at peak during March 2015 (13,300 levels) and at its low during March 2020 (6700 levels). The figure below shows the Nifty Pharma Index Now, in this case, one can say that this might be the right time to start investing in this sector as the pharma products will have higher demand during this global pandemic and we can already start seeing pharma companies doing well over last two months.

The index has almost recovered to 9000 levels. So one can start building their portfolio have some portion dedicated to the pharma sector. Again SIP is the best strategy.

nifty pharma bloombergquint

(Source: Nifty Pharma BloombergQuint)

From the above discussion it very difficult to say that the recovery mode for the market has started or we have seen the bottom. One can never be sure. But one thing is for sure, that the market will recover sooner rather than later. One has to be very prudent and use his/her bias-free judgment to pick his or her investment strategy and timing.

One best way to do it by having a systematic Investment plan (SIP) and diversify his/her risk across sectors. It is near impossible for anyone to pick the top or bottom for any indices or sector. So it is advised to invest a portion of total desired investment and keep investing at systematic intervals of time. This way the investor will be able to average his price and a major movement in one sector or indices would not dent his portfolio significantly.

May 6, 2020 Market, News 2 comments
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.

April 30, 2020 Economics, Market, News No comments yet
10 Best Dividend Stocks in India That Will Make Your Portfolio Rich 2018

10 Best Dividend Stocks in India That Will Make Your Portfolio Rich.

Best Dividend Stocks in India for Income Investors (Updated: April 2020): Whenever a regular retail investor, like you and me, buys a stock, then their main aim is to make money through their investment. There are basically two ways by which anyone can earn money by investing in stocks. They are 1) Capital Appreciation & 2) Dividends.

The first one, capital appreciation, is quite simple and hugely famous among investors. Everyone knows this secret to earn in the stock market. Buy low and sell high. The difference is your buying and selling price is capital appreciation or profit.

For example, suppose you bought 200 stocks of a company at Rs 100 and two years hence, the price of the stock has increased to Rs 240. Here, capital appreciation is Rs 240- Rs 100 = Rs 140 per share or 140%. The overall profit that you made on your investments will be Rs 140*200 i.e. or Rs 28,000.

Almost everyone who enters the market knows this method of earning by stocks. It can also be concluded that most people enter the market hoping that their investment will be doubled or quadrupled and will make them a millionaire one day through capital appreciation.

Now, let us discuss the second method of making money through your investment in stocks- DIVIDENDS.

What are Dividends?

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” – John D Rockefeller

Whenever a company is for profit, it can use this profit amount in different ways. First, it can use the profit amount in its expansion like acquiring a new property, starting a new venture/project, etc. This strategy is generally used by fast-growing companies. Second, it can distribute the majority of the profit among its owners and shareholders. Third and final, it can distribute some portion of the profit to the shareholders and use the remaining in carrying out its expansion work.

Basically, this amount distributed by the company (from its profit) among the shareholders is called DIVIDEND.

What is a dividend? “A dividend is a distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property.”

Typically, most big and well-established companies give decent dividends to their shareholders. They may offer dividends two times a year, namely– Interim dividend and final dividend. However, this is not a hard and fast rule. A few companies, like MRF, give dividends three times a year. If you’re holding a stock of these companies and the company announces a dividend, then you’re eligible to receive the dividends as you’re a legal shareholder.

Read more: Dividend Dates Explained – Must Know Dates for Investors

Why are dividends good?

Suppose you are a long-term investor. You have invested in the stocks of a company for the next 15-20 years. Now, if the company does not give any dividends, there is no way for you to make money until you sell the stocks. On the other hand, even though your investments might be growing, however, you won’t receive any cash in the hand unless you sell.

Nonetheless, if the company gives a regular dividend, say 3-4% a year, then you can are receiving some returns from your investments. Here, your capital is growing as you’ve not sold your stocks. Along with it, you’re also receiving some dividends being a loyal shareholder of the company.

In addition, a regular dividend is also a sign of a healthy company. An entity that has given a consistent (moreover growing) dividend to its shareholders for the last 5-10 consecutive years, can be considered a financially strong company. On the contrary, the companies that give irregular dividends (or skips dividends in a bad economy or market crashes) can not be considered as a financially sound company. Therefore, big dividend yields can be an incredibly attractive feature of stock for the long term value investors.

Now that we have understood the basics of dividends, let us learn a few of the important financial terms that are frequently used while analyzing dividends (before we look into the best dividend stocks in India).

Must know financial terms regarding Dividends

Here are a few terms that every dividend investor should know. These key terms are frequently used while discussing dividend stocks.

1. Dividend yield: A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current share price. It is expressed in annual percentage.

Dividend Yield = (Dividend per Share) / (Price per Share)*100

For example, if the share price of a company is Rs 100 and it gave a dividend of Rs 5 this year, then the dividend yield will be 5%. Please note that a high dividend yield doesn’t always mean a g good dividend stock.

2. Dividend %: This is the ratio of the dividend given by the company to the face value of the share.

3. Payout ratio: It is the ratio of earnings paid out as dividends to shareholders divided by the total earnings by the company in that year. Dividend payout ratio typically expressed as a percentage and is calculated as follows:

Payout Ratio = Dividends per Share (DPS) / Earnings per Share (EPS)

As a thumb rule, avoid investing in companies with a very high dividend payout ratio. This is because a high payout ratio means the company is not retaining enough money for its expansion or growth. In other words, be cautionary if the payout ratio is greater than 70%.

Overall, if you are looking for a good dividend stock to invest, search for companies with growing dividends, steady dividend yield, and consistent payout ratio. Now, let us move further and discuss the list of ten Best Dividend Stocks in India.

Quick Tip: The fast growing companies/small businesses/startups give less dividend yield to their shareholders as they use the profit amount in their expansion. On the other hand, the Blue Chip stocks, which are large and established company and has already reached a saturation point, gives good regular dividends. Further, the public sector unit (PSU) companies are generally known for giving good dividends. Some industries like Oil and petroleum, Grid, Utility etc give decent dividends to their shareholders.

Best Dividend Stocks in India (Updated April 2020)

Here are the ten best dividend stocks in India with a history of consistent dividends over the years. They are worth investigating by intelligent dividend investors.

Company NameLast Price (Rs)Market Cap (Rs Cr)Dividend (5 Yr Avg)Div Payout (5 Yr Avg)Div Yield (5 Yr Avg)
Hindustan Petroleum190.129,386.9224.3837.94.58
Indial Oil Corp75.8571,594.6813.9749.164.12
Power Grid166.6587,184.444.3731.162.4
Rural Electrification102.8519,828.1811.2227.65.08
Oil India85.459,266.2410.3533.543.22
Power Finance88.623,655.138.7232.624.8
National Aluminum Co.28.655,344.993.5635.62
Hindustan Zinc187.2577,851.5017.9291.688.4
NTPC9392,019.384.28235.542.8
BPCL316.668,678.5425.239.384.24

Additional Top Dividend Stocks in India

Company NameLast Price (Rs)Market Cap (Rs Cr)Dividend (5 Yr Avg)Div Payout (5 Yr Avg)Div Yield (5 Yr Avg)
ONGC77.6198,377.788.13639.643.88
Coal India130.780,546.8619.52108.286.16
Hero MotoCorp2177.6943,768.8979.849.182.54
GAIL Ltd86.6540,549.696.16232.521.84
Tata Steel Ltd271.4531,181.239.847.582.22
Infosys693.92,95,531.4934.951.43.04
Bajaj Auto2683.777,648.755640.482.12
JSW Steel179.1543,304.505.816.31.24
Castrol India120.2212,062.357.980.322.26
NMDC75.122,994.496.90470.025.9

Quick Note: If you are interested to know more about other high dividend yield stocks, then you can find it here: BSE TOP DIVIDEND STOCKS

Where to find dividend information of a stock?

You can find the details regarding the dividend of stocks on any of the major financial websites in India. Here are a few reliable financial websites to get these pieces of information in India:

  1. Money Control: http://www.moneycontrol.com/
  2. Economic times- Market: http://economictimes.indiatimes.com/markets
  3. Screener: https://www.screener.in/
  4. Investing.com: https://in.investing.com/
  5. Market Mojo: https://www.marketsmojo.com/markets

Further, you can also watch this quick video to understand how exactly to use these websites to find the best dividend stocks in India. Watch here –>

Note: Are you new to stock market investing and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

Closing Thoughts

“It is an extra dividend when you like the girl you’ve fallen in love with.” – Clark Gable

An intelligent dividend investor looks for a company that can provide consistent dividends for many long years without any dividend cuts. He/She is not interested in those companies giving high dividends just for one year and not able to sustain giving similar dividends in the future. That’s why it is really important that the fundamentals of the company should be strong, along with the dividend history. A bad market, slowdown, or recession should not stop good dividend companies from giving dividends to their shareholders.

That’s all for this article. I hope this post on ‘Ten Best Dividend Stocks in India’ is useful to the readers. Further, I will highly recommend not investing in stocks based on the list mentioned above. Do your independent research and invest only when you’ve studied the company enough and confident about its fundamentals. Besides, if you have any queries, feel free to comment below. I will be happy to help. #HappyInvesting.

April 28, 2020 Investment Basics, Market, Stocks 29 comments
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’.

April 25, 2020 Economics, Market, News No comments yet
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”.

April 23, 2020 Economics, Market No comments yet
FDI RESTRICTIONS india 2020

FDI Restrictions: India tightening the leash on Dragon

“You need to revise discriminatory FDI restrictions, it is against the WTO principles of Non-discrimination and against free and fair trade” – Statement by China Embassy

The above statement came after the Indian government sanctioned new restrictions on FDI investment in India. According to these new sanctions, all the investments made by the neighboring countries in India will be under tighter scrutiny. These new rules have been specifically made keeping FDI flows from China in mind. India is trying to safeguard its interest by imposing these entry rules, as it is worried about the opportunistic takeover of Indian firms by Chinese firms in these financially vulnerable times.

As per these new sanctions, any companies (from countries that share its borders with India) will have to approach the Indian Government for permission, if they want to invest in India. Before these new sanctions, they could invest via the direct route in India. One needs to understand the fact that these new sanctions do not cap any limit on investment, it just reroutes the way to do it.

The existing FDI policies were earlier limited only to Pakistan and Bangladesh. Now, these new rules bring China, Nepal, Bhutan, and Myanmar within its gamut.

But why this sudden imposition of sanctions by India? This can be simply attributed to the fact that because of the COVID -19 pandemic, all the major stock indexes have taken a big hit and it’s made the valuation of all the companies very economical, vulnerable and attractive. So, to prevent the interest of these companies been taken over by opportunistic firms from neighboring border sharing countries, these new sanctions have been imposed.

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

fdi restrictions pic According to a press note released by the Department for promotion of Industry and Internal trade on 17th April 2020,

“A Non-resident entity can invest in India except for sectors or activities which are prohibited. However, an entity of country which shares its borders with India or where the beneficial owner is a citizen of country which shares its borders with India, can invest only via Government route.”

In addition to this, a company incorporated in Pakistan can invest only via Government permission, only in sectors other in defense, atomic energy and other sectors prohibited in foreign investment policy.

An article published in the Times of India states that “this move is very similar to barrier imposed by other countries like Germany, Spain, Italy, and Australia to block predatory capital for hostile takeover by China”

Now, what is the difference between the Automatic route and the Government route?

In simple terms, through the automatic route, the investor has to just inform RBI about the investment made while in case of government route, the investor has to take permission from a particular ministry or department.

According to an estimate by India-China economic council, an estimated Greenfield investment of 4 billion USD (Rs. 30,000 crores) has been made in Indian startups. Such has been the growth of investment in the Indian market by Chinese investors. So, is it the right time for India to tighten its FDI policy stance? Only time will tell. But for the moment, India has safeguarded its long term considerations by blocking hostile buyouts and takeovers.

Moreover, as per the data published by the Department for Promotion of Industry and Internal Trade,

“Between 2000 and 2019, FDI received from China was estimated around $2.3 billion dollars (nearly 14500 crore rupees) and all the other border sharing nations invested a combined FDI of 71 crore rupees”

This clearly explains the fear factor of the Indian Government.

pic fdi restrictions

The last nail in the coffin to introduce this policy by India would have been the purchase of 1.75 crore shares of HDFC Bank by China’s peoples Bank which increase its share in HDFC Bank to 1% from 0.2% earlier. This move is to safeguard the interest of Indian firms because of their current financial vulnerability.

Also read: China’s central bank buys 1% stake in HDFC

Other major investments in India come via third part routes like Singapore. For example, $ 500 million (Rs. 3500 crores) investment from Singapore subsidiary firm Xiaomi (China Origin) should also have to be added to official statistics as this investment indirectly comes from country sharing a border with India.

The reports published by the ministry of finance do show a huge investment to the tune of $4 billion. This investment comes via online wallet like Paytm (backed by Alibaba), BigBasket, and cab service provider like Ola (sizable investment from China). Mobile phone manufacturers like Vivo, Oppo, and other Chinese phone manufacturers. In the Pharma sector, the acquisition of Gland pharma by Fosun Pharma for $1.1 billion, etc. are some of the direct and indirect investment by China in India.

These new policies won’t be applicable to the existing investment but any future investment will have to follow the new policy rules. Therefore, the latest rules imposed by India might look like a decision taken in haste, but these sanctions were always on cards. The breakout of the COVID-19 epidemic made this decision quicker and faster. So, to answer China’s claim that India is breaking the WTO rules of free trade, one can simply say that there is no restriction on investment that can be made but it has to be just done via Government route.

Anyways, a few questions still remain unanswered:

  1. “It remains to be seen as to what would be the implications of these FDI sanctions over long time?”
  2. “Looking at the gravitas of these sanctions, how does the future of trade and investment shape up for these two Asian giants?”
  3. “Considering the importance of China and its expertise in technology and infrastructure, will the restrictions be relaxed in the future?”

Also read: What does Weakening Rupee Against Dollar Signify?

References:

  1. New FDI Rules Not Violation, Say Government Sources On China Criticism – NDTV India
  2. Govt approval must for all FDIs from neighbouring countries including China
  3. Press release by Ministry of Commerce & Industry, Government of India dated 18/04/2020
  4. The Economic Times newspaper dated 18/04/2020, 20/04/2020 The Times of India dated 18/04/2020, 20/04/2020
April 22, 2020 Economics, Market, News 2 comments
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.

April 21, 2020 Investment Basics, Market, Trading 2 comments
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.

April 15, 2020 Investment Basics, Market, Portfolio No comments yet
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.

April 13, 2020 Economics, Market, News 2 comments

Top 10 Stock Market Movies That Every Investor Should Watch!

Do you want to learn how to make money from the stock market? However, you find college textbooks or investing novels too boring to read? No need to worry. There’s another fun, entertaining, yet educational approach to learn the financial world without going through 800 pages of financial books. Enter stock market movies. 

If you are not an enthusiastic book reader, just try to watch a few amazing movies or documentaries based on the stock market and it will help you understand all about the financial markets. You can learn and explore a lot about stocks just by sitting on your couch and watching these movies on your laptop. 

In this post, we are going to discuss ten must-watch stock market movies that you can watch this weekend to learn finance. 

Top 10 Stock Market Movies to Watch

Here is a snippet from ten best stock market movies that every investor should watch. 

1. The Big Short (2015)The Big Short stock market movie

The big short ranks first in this list of top stock market movies to watch. This movie is based on a non-fiction book written by Micheal Lewis directed by Adam Mckay. It’s an Oscar-winning film in 2015 and 37 other wins.  It depicts a dramatic tale of events that led to the financial crisis. This movie combines goofy comedy with a financial crisis where eight million people lose their jobs and become homeless.

2. Wall street  (1987)

wall street stock market movies

In 1987, Oliver Stone directed this American dramatic film with stars Micheal Doughler, Charlie Sheen and Daryl Hannah. The movie revolves around a young stockbroker involved with the wealthy corporate raider. This film allowed all the financial wheeling and dealing to seem convincing. It gives us an alternative reality about stocks, which may crash down on all of us. The director made this film as a tribute to his father.

3. Trading Places (1983)

Trading places stock market movie

John Landis directed “Trading Places”  with a lead role played by Eddie Murphy.

The movie tells about the ups and downs of Trading in a Comedy genre giving the basics of socio-economics and class structure in America. The movie also depicts many stereotypical views of money.

4. Boiler Room (2000)

Boiler room stock market movie

This movie centers Seth Davis who finds a job as a stockbroker for a suburban investment firm to keep up to his father’s high standards. But the job might not be as legitimate at first appears. He is a college drop out with a serious desire to achieve success and wealth. This movie is directed by Ben Younger, released on 18th February 2000.  

5. Equity (2016)

equity stock market movie

A financial thriller movie directed by Meera Menon. The movie depicts Naomi Bishop, an investment banker, struggling to get on top. She is being watched by a prosecutor who suspects her of being corrupt. So she must untangle a web of corruption in this story while it becomes, even more, worse with a betrayal by a trusted colleague to ruin everything. She faces professional setbacks including client losing confidence.

6. The Wolf of Wall Street (2013)

The Wolf of Wall Street stock market movie

This is my favorite stock market movie of all time. It’s based on a true story of Jordan Belfort who spent 22 months in prison for defrauding investors in massive security scams. It discusses the nature of wall street brokers with a smooth-talking and easy-going Boss. He devises new ways to cover his tracks and watch his fortune grow.

7. Too Big to Fail (2011)

Too Big to Fail

This movie is written by Andrew Ross Sorkin, directed by Curtis Hanson and released in 2011. It’s about how certain corporations particularly financial institutions are so large and so interconnected that if they fail it would be disastrous to the greater economic system. This film also describes a few clips about the mortgage industry crisis.

8. Margin Call (2011)

margincall stock market movie

A thought-provoking dramatic movie directed by J.C.Chandor. It’s a fictional firm and not a real wall street firm. This movie follows people about investment banks over a 24 hour period of time before the 2008 financial crisis. It reveals how large financial institutions operate and the motivations of people who work within them. This was a thirty-five million budget movie nationwide.

9. The Ascent of Money (2008)

ascent of money stock market movie

A Documentary on the financial history of the world. It shows why our modern societies are structured and behave as they do. The history of money, credit, and banking can be depicted in this documentary. It is a six-part TV documentary written by the author Niall Ferguson in 2008 showing why stock markets produce bubbles, bursts, and Globalization of the western economy.

10. Chasing Madoff (2011)

chasing madoff stock market movie

This is a true story based on “No one would listen “ by Harry Markopolos. It’s a nonfiction narrative documentary film written and directed by Jeff Prosserman. He spent 10 years trying to get US Securities and exchange commission on their investigative proof of Bernie Madoff’s Ponzi Scheme which scammed an estimated 18billion including fake returns.

Bonus: Stock Market Movies ‘Infographic’

stock market movies

Note: Feel free to share/embed the above infographic. Just give the credits to Trade Brains. 

That’s all for this post. In case, we missed any amazing stock market movie, please comment below. Further, also mention which one is your favorite stock market movie!

April 10, 2020 Market 3 comments
10 Biggest Stock Market Crashes in India cover

10 Biggest Stock Market Crashes in India

Biggest Stock Market Crashes in India: Stock Market crashes symbolize times of wealth destruction and pain to investors. They also symbolize times of opportunity and resilience to few. A stock market crash is when a market index faces a rapid and unanticipated severe drop in a day or a few days of trading. Today we look at some of the worst single-day falls that affected the Sensex over the history of Bombay Stock Exchange(BSE).

10 Biggest Stock Market Crashes in India

The table below shows the biggest single-day falls faced by the Sensex.

Crash DateEventPoints Lost% Lost
23rd March 2020COVID-193943.7213.15%
28th April 1992Harshad Mehta Scam57012.77%
24th October 2008US Financial Crisis107010.95%
12th March 2020COVID-192919.268.18%
16th March 2020COVID-192713.417.96%
21st January 2008US Financial Crisis14087.40%
18th May 2006--8266.76%
17th March 2008US Financial Crisis9516.03%
24th August 2015--16245.93%
9th November 2016Demonetisation16895.90%

10 Biggest Stock Market Crashes in India

( Graph depicting comparative stock market crashes)

What Caused the Biggest Stock Market Crashes in India?

— COVID-19

The first COVID-19 case in India was traced on January 30th, 2020. The following weeks involved what seemed like just a COVID-19 panic. This was based on the effects the companies globally would face with the worlds leading manufacturer China busy battling the virus.

February saw a silver lining for the Indian economy as an oil feud between Russia and OPEC resulted in a global crash in oil prices to $30 per barrel. This was over a dispute over the steps to be taken to face the demand slump. However, the benefits of the price slash were not relayed to the end consumers. The prices still are still set to those before the crash. The benefit of the reduced price still remains with the government.

(Source: The Hindu Businessline )

March 6th saw Yes Bank at the brink of failure adding to the woes of COVID-19. This was due to the bad loans resulting in high NPAs with the bank eventually requiring government intervention. This further gave a clearer picture of the ailing banking sector. The markets saw a 1,000 point loss on March 4th and March 6th. Lockdowns imposed around Europe and ‘Emergency’ declared in the US saw Foreign institutional investors fleeing the Indian markets to invest in stable developed countries. As the COVID-19 cases kept worsening in India the markets entered a bearish slump.

On 23rd March the markets fell by a record of 13.15%. This was the largest fall in Indian market history. The lockdown which followed did not bring any relief to the stock markets. As of April, the markets had reached depths wiping out earnings from the last three years.

Also read:

— The 2008 Financial Crisis

The 2008 financial crisis was known as the biggest disaster after The Great Depression. The financial crisis was caused by the bubble created by the housing market in the US. It trashed not only the ‘American Dream’ but also rippled on throughout the world killing many Indian Dreams too. The Ripple effect saw the market fall a number of times in 2008. The year 2008-09 had seen the Indian markets fall by over 50% from its high.

2008 stock market crash

Also read: Revisiting 2008-09 Economic Crisis – Causes & Aftermath!

— The Harshad Mehta Scam

Harshad Mehta was known as “The Sunny Deol of the Indian Stock Market”, “ The Big Bull”, and eventually was the eponym to his scam. Harshad Mehta was a broker known for his lush luxurious lifestyle. He took advantage of the regulations which barred banks from investing in the stock markets in the 1980s and 1990s. 

the big bull harshad mehta based upcoming movie

(The Big Bull, loosely based on Harshad Mehta’ life and financial crimes is under production and will star Abhishek Bachchan )

Harshad Mehta took capital from banks and invested them into the stock markets promising banks a high return. Mehta would invest in selected securities and the huge investments made on behalf of the banks would hike up the demand for those shares. He would then sell the proceeds passing a portion of the profit to banks. The stock markets crashed the day he sold off his holdings in the market due to the over-inflated stocks.

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

Conclusion

Indian stock market crashes to date were caused due to a variety of reasons like change of ruling parties, actions taken by the government (demonetization),  ripple effect of international market crashes and now even pandemics. These crashes may seem like a picture of the riskiness and volatility of the Indian markets, however, they can also be viewed as a testament to the tougher times they have recovered from. Today the Indian Markets face bigger challenges and only time can tell how they cope with the forever changing environment of 2020.

April 8, 2020 Economics, Market, News 1 comment
Should Stock Markets Close Over Coronavirus Epidemic cover

Should Stock Markets Close Over Coronavirus Pandemic?

Should Stock Markets Close Over Coronavirus Pandemic?: A walk down memory lane, India just lost their second wicket as Sachin walks back after 6.1 overs. This moment from the 2011 World Cup final has been etched in our memories. With the two important pillars gone lets hypothetically imagine someone decides to call it quits and shuts the TV off. What new levels to your anxiety would you discover? Similar is the anxiety-driven plight of an investor on hearing the news of market closure in tough times.

Should Indian Stock Markets Close Over Coronavirus Epidemic sensex

( The Sensex Index showing a 34.22% fall from Jan 17th to Apr 03)

The stock markets, however, face stakes a million times higher. Ever since the Sensex summited at 41945.37 points on 17th January, it has fallen a total of 34.22%. The Sensex broke the max single-day fall a number of times, losing over 13% in a day ( on March 23rd) and ended at 27590.95 points as of 3rd April. After the government took additional measures by imposing a lockdown to fight Coronavirus, the ANMI ( Asociation of National Exchange Members) requested the SEBI to close the stock market.

This request was made due to the difficulty faced by employees of member partners to commute to work amidst the lockdown. The request also included that the markets should be shut till the depository and broking services are declared essential by the government. We can also see #bandkarobazaar trending on twitter but this was supported mainly to avoid further fall of the market.

Today we look at the historical market closures, reasons supporting a market shutdown and also why such an action may be detrimental.

Historical Stock Market Closures

Dating back to the 19th century the stock markets have been shut a few times around the world over dreadful occasions. The most infamous of these market closures being the 9/11 crash in the US, where the market was closed for a week.

stock market closure world war 1

HongKong had halted its trading in wake of The Black Monday crash in 1987 and Greece closed its markets for five weeks in 2015 during the economic crisis. Moreover, the stock exchanges have been forced to shut down a number of times during natural calamities too.

Nonetheless, there also have been periods of extreme difficulty such as The Great Depression of 1929, World war 2, and even the 2008 crisis of our time where the market remained open.

Should Stock Markets Close Over Coronavirus Pandemic?

Argument for closure of the market

One of the major reasons for the call towards the closure of markets has been to reduce the volatility of markets and panic selling. A closure of the markets will give investors a few days to catch their breath and reevaluate their positions instead of blindly following the market sentiments due to the COVID-19 pandemic.

— Why closure is required in the Current Scenario?

In the wake of the COVID-19 pandemic, social distancing has become a necessity. This would prove challenging for stock market employees and the employees of dependant services to risk their lives by venturing out to work. This may further escalate to the market being crippled if they are infected. 

Argument against the closure of the stock market.

— Investor confidence at risk

One of the major reasons against the closure of markets is that a market closure will further erode all investor confidence in a particular country. This will be caused due to the lack of transparency and data available to investors during the closure. In a time of crisis where investors are already panicking, a closure will only intensify their anxiety. This will increase the possibility of them selling out of the markets.

— Lack of liquidity

The effect the closure will have on the liquidity needs of individuals will also be severe. This is due to the fact that a number of individuals depend on trading for their daily income. Apart from this, investors depend on the stock market for liquidity. In a country like India, which is already troubled by the 21-day lockdown, the closure of stock markets will further intensify the liquidity issues. This is because a number of individuals have already lost their regular income by means of unemployment or pay-cuts. The stock market shutdown would further hurt them as converting their investments could have helped them through these difficult times.

Other Stock Market Closures around the world

— Phillippines

The Philippines Exchange shut on March 17th following the lockdown imposed by President Duterte. The Sri Lankan markets also followed suit. The Philippine stock exchange, however, suffered severe losses once it opened up two days after the closure. The opening day slashed 13.34%.

(Jeffrey Halley, a senior market analyst at Oanda Asia Pacific Pte)

— China

We also take a look at the Chinese stock market which was one of the worst-performing stock markets in the world before the crisis. During the crisis, however, the SSE Composite Index fell only 10%. This was despite them being the epicenter of the pandemic, whereas markets around the world shed a quarter of their earnings.

The COVID-19 hit China at a different time in comparison to the rest of the world. The markets closed on January 23rd (also due to the Chinese new year when china was still battling COVID-19)  at 2976 points and opened on February 3rd falling to 2746 points. During this period china had anticipated the effects and infused $173 billion into the markets but still suffered the loss.

However, the Chinese markets cannot be set as an example as only 4% of their market amounts to foreign capital. The rest remaining in the hands of the Chinese government, directly or Indirectly. Also, China is not known to release adverse data into the public eye. They have been accused of manipulating the actual figures of COVID-19 cases. They were also accused of suppressing the outbreak which then lead to a wider spread.

Also read: 21 Day Lockdown (COVID-19) – Is India headed in Right Direction?

Closing Thoughts

In this article, we tried to answer should stock markets close over coronavirus pandemic. In short, it could be assumed that investors around the world may forgive closures due to the COVID-19 outbreak.  This, however, does not offer enough validation in support of the closure. Thanks to technology and additional support in the form of ‘Work From Home’ continuity can be ensured.

In addition, the stock exchange can take notes from the BCP plans of RBI. The individuals critical to the RBI continuity were moved to a secure location. Here, everyone involved including the support staff (hotel etc.) were quarantined. They will even be working with hazmat suits, maintaining social distancing with a backup team too. Hopefully, the show keeps going and market closures do not add to the woes of 2020.

April 6, 2020 Economics, Market, News, Trading 2 comments
21 Day Lockdown (COVID-19) - Are We Headed in Right Direction cover

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

21 Day Lockdown (COVID-19): Due to the outbreak of coronavirus, last week, the world witnessed the largest democratic lockdown of 21 days as announced by PM Narendra Modi on March 24th, 2020. As we enjoy the privileges at our homes for social distancing and take measures to avoid Coronavirus, a greater portion of Indian population struggles to take measures to ensure their survival. Today we take a look at the cost of such a lockdown and the possible future we are looking at.

There have been many views regarding the lockdown including the one put forward by Dr. Deepak Natrajan. He took estimates based on comparison with the cases in China and the respective death rate and after periodically adjusting for one year. Later, he arrived at the conclusion that the maximum of 25000-30000 estimated deaths in India due to COVID-19. This was done to bring up the comparison of the cost of the Lockdown.

Whether this 21-day lockdown would result in smashing the economy where a hundred thousand may lose their jobs is still a point of discussion. However, most economists are estimating this pandemic resulting in many more being affected by starvation in a country already facing poverty and malnutrition.

Dr. Deepak Natrajan went on to explain how the estimated deaths due to COVID-19 are a blip in comparison to the deaths caused in a year. The deaths in India currently stands at ten lacs per year. This also sheds a light on the dilemma faced by the government over imposition a lockdown. However, it didn’t mean that he encouraged the government to do nothing but instead opt for a different route which involved aggressive testing.

Immediate effects due to the 21-day lockdown

– Hoarding

This was the first problem noticed after the lockdown was announced as people immediately resorted to the hoarding of commodities. It was done to cover the next 21 days as it was unclear from the PM address over availability of essentials and the lockdown was mistaken as a curfew.

As always, hoarding causes problems of availability. The reduced commodity results in businesses trying to benefit from the added demand by hiking up the prices which further alleviates the problem. This further reduces the purchasing power of large sections of the economy for commodity at higher prices.

– Exodus of Daily Wage Workers

The 21-day lockdown eliminated all job opportunities available to the daily wage workers and other workers in the unorganized sector. Their situation got worse with no savings to fall back on and added hostility from the landlords who viewed them as a COVID-19 threat. This inability to pay rent also lead to the exodus where workers started their journey home hundreds of kilometers away on foot.

( Migrant Workers trying to find a way out in Delhi)

Although they were further portrayed by the media as an addition to the existing problem, this was the only way out for these bread earners to escape the problems caused by the 21-day lockdown. They started this march to avail government relief in the form of deposits in Jan Dhan saving accounts and foodgrains available to their families in their hometowns. Moreover, any attention given by the state government arrived only after the exodus had already begun.

Announced Relief Packages

A relief package of 22 billion was announced by the finance minister 36 hours after the lockdown. It involved 50 Lac insurance coverage to the healthcare workers, a move in the right direction. However, there were a few schemes part of the relief that raised a few eyebrows.

– Increased wages – MGNREGA

The Finance minister announced increased MGNREGA wage by Rs.20 to Rs. 202 per day effective from April 1st. The wage increase is said to provide additional benefits to the workers. The logic to announce this as part of the relief is hard to understand as during a 21-day lockdown the work provided through MGNREGA is non-existent. The benefit of can only be availed after April 14th provided it is not too late. Moreover, the Finance Minister added that the workers will have a benefit of Rs 2000. However, this will only be available considering that that MGNREGA worker is employed for 100 days in a year.

The added benefit also seems to be unsuitable as the weighted average for the 2019-2020 record is already Rs.221 in the MGNREGA scheme. The unweighted average in major states is Rs.226 per day. The additional benefit on a closer look does not offer any relief to daily wage workers during a lockdown and also depends on the availability of work after the lockdown. The period after this 21-day lockdown is stated by many economists as a period of recession. This is arrived at after taking into consideration of the rise in unemployment as one of its factors.

– Food and Cash in hands of people.

The Finance Minister announced that Rs 2,000 will be deposited into the Jan Dhan Yojana Accounts of Farmers. Further, Rs. 1,000 will also be deposited into the Jan Dhan Accounts of pensioners, widows and the disabled. The Government is also to provide 5 kg of rice and 1 kg of pulses in addition to the existing amount received for the next three months.

In 2017 the Pradhan Mantri Jan Dhan Yojana saw the women ownership of bank accounts rise from 43% to 77%. This indicated that most of the accounts in the PMJDY were those of the spouses of the workers in the cities. To benefit from the relief provided, the individuals will have to travel back home which adds to the exodus.

(Pronab Sen-Chairman of the Standing Committee on Economic Statistics.)

Apart from this, the government also announced a hike on the withdrawal limit of EPFO to transfer cash into the hands of unemployed individuals. The Finance Minister also announced that the center will pay the PF requirements of both the employee and the employer for 90% of the employees (for the firms with less than 100 employees of salaries less than Rs.15000).

– Moratorium on Loans

The RBI allowed lending institutions to offer a moratorium to borrowers on repayment of all loans for 3 months. The banks that have approved this includes Punjab National Bank, Union Bank of India, Bank of Baroda, Canara Bank, IDBI, State Bank of India (SBI), Indian Bank & Central Bank of India.

This move will reduce the burden on the individuals and also provide them the purchasing power for necessities.

– Reduction of Rates

The RBI cut the repo rate and the reserve repo rate by 75 bps and 90 bps. The repo rate now stands at 4.4% and 4% respectively. This will result in a fall in interest on deposits and make loans cheaper. This is aimed to increase the spending and hopefully stimulate the economy. However, this was also done to ensure the enterprises that are affected by the pandemic can get back on their feet and avail cheaper loans.

(Prem Shankar Jha – Economist )

If we take a step back from this very welcome rate cut and consider the state of the baking sector and their struggles with NPA’s, Non-Performing Assets (as in Yes Bank), it is hard to foresee banks lending to businesses that have been financially weakened due to the pandemic. Any loans given out would be a leap of faith and RBI must ensure that the benefit from rate cuts is transferred from the banks.

Lockdowns around the globe

Countries like Italy, Spain, and France have implemented a national quarantine. The total count of cases in Italy and Spain are currently over 100,000 and France over 50,000. The United States, having the most number of cases (over 210,000) has still not imposed a nationwide lockdown taking a different pill than that taken by India. The US has primarily focussed only on hotspots and 24 states have asked their residents to shelter at home.

China, which only a few months ago was one of the hotspots for Corona, imposed a lockdown but only in the hotspots i.e. Wuhan and Hubai (60 million people) which could also be one of the reasons why the stock market in China was not as badly hit as that of other regions. (Also read: Coronavirus Impact on Global Indexes (2020) – US, Europe & More)

However, these countries have followed aggressive testing measures. India, on the other hand, has one of the worst testing rates in the world with only around 43,000 tests conducted so far. This was despite having the capacity to conduct 12,000 tests per day. So far there have been 2000 confirmed cases in India. Countries like Korea have used rampant testing measures like ‘Drive-Thru Coronavirus testing centers’ to flatten the curve to total cases. This has enabled them to catch up with the spread and quarantine effectively.

Also read: What we can learn from South Korea and Singapore’s efforts to stop coronavirus?

Relief Package Comparison with GDP

The relief package announced by the US is at 2 trillion dollars to fight the coronavirus. A comparison of the $22 billion relief package in India would be unfair. When the relief packages are compared to the respective GDP’s, it showed that $2 Trillion is roughly 10% of the US GDP. Other countries like Canada, Singapore have roughly invested around 5% of their GDP’s. However, India has rolled out a package of just 0.8% of its GDP to fight coronavirus outbreak.

This comes after former Finance Minister P. Chidambaram mentioning in his ten-point plan of action that a minimum relief package of Rs 5-6 Lac Crore was required. Despite that, he didn’t see an economic recovery on the horizon and also termed the COVID-19 lockdown as the biggest crisis the country has faced. Even after the migration crisis post-independence, every famine since independence, the tsunami of 2004, the 2008 financial crash are all put together. This further puts doubt on the capabilities of the relief package.

Is the Indian economy headed towards a recession?

The IMF has already stated that the situation worldwide is worse than the crisis of 2009. They also mentioned that we have already entered a recession and a possibility that the global GDP will shrink by $2.3 trillion. So far 80 countries have already asked for the emergency fund from the IMF. Kristalina Ivanova Georgieva said there is a possibility that $2.5 trillion will be topped for the financial needs of emerging markets.

Subash Chandra Garg, the former Finance Secretary, and former Economic Affairs Secretary has stated that the Indian growth will likely be negative next year unless the government takes measures to prevent it. He also commented that the two-thirds of the economy has been severely hit and the GDP after the lockdown will be reduced by 5-6%. Economist Arun Kumar has also gone ahead to say that the current situation is worse than those faced during a war.

The GDP does not represent all the sections of the society accurately as those with high incomes though few pull the average towards rearer ends. Hence in a situation with a possible negative GDP in the coming quarter will mean that those in the lower-income sections are devastated.

Closing Thoughts

— Extended Lockdown?

Despite having the worlds largest lockdown, researchers from the Cambridge university released a paper that suggests adding length to the lockdown to properly contain the virus. The paper suggested a three phase lockdown (21 days – 5 days rest – 28 days – 5 days rest – 18 days) or a continuous 49-day lockdown for the Indian region. Based on the observations of the current lockdown, the economy is operating at -50% of the GDP as per Arun Kumar. In addition to the effect on daily wage and unorganized sector workers, India cannot afford another extended lockdown without much more serious consequences.

There is a need to ramp up the testing done in India to catch up with the curve and hopefully flatten it. This is a necessity because the current scenario has exposed the cracks in the Indian infrastructure and its ability to cope with a crisis. India has one doctor per 10,000 people in comparison to 41 in Italy and 71 in South Korea.

— Inadequate relief measures

The current policies aimed at the poor in the form of increased income offer is just a mirage of actual help. A lot more has to be done to ease the suffering due to the lockdown t0 the poor. Any success in the relief package or hopefully a stronger revised relief package will require involvement and coordination with the state governments. The current exodus of workers could have been prevented if state governments were kept in the loop. The lockdown too would have been better implemented. Hoarding and police brutality are attributed to the lack of communication and direction from the government.

Subash Garg mentioned how over the last 70 years of our history there are no measures taken specifically to save and push businesses. The government has to roll out new policies to ensure this, especially in the current situation. Else these businesses will find it hard to start again. The severe times of 1990-91 bought forward reforms. Similarly to stimulate the economy, revised relief packages and new reforms are in need. It is already certain that the Corona Recession of 2020 (hopefully not depression) will replace all comparisons in the future that were earlier made with the 2009 crisis.

April 3, 2020 Economics, Market, News No comments yet
Why did Indian Stock Market crash in 2020? Causes & Effects

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

Indian Stock Market Crash in 2020: After making a peak of 42,273.87 points in Feb 2020, Sensex crashed over -38% by 23 March 2020 to 25,638.90 points. We are currently witnessing one of the fastest crashes in stock market history, even worse than the 2008 market crash as quoted by many leading market analysts. In this article, we are going to discuss the reason behind this stock market crash in 2020.

Here you’ll find everything that you want to learn regarding the Indian stock market crash in 2020. We’ll look into leading causes, facts, effects and what do economists have to say about the crisis. However, before we start the article, let’s first understand what exactly is a stock market crash so that everyone is on the same page. Let’s get started.

What is a stock market crash?

A stock market crash is when a market index faces a rapid and unanticipated severe drop in a day or a few days of trading. A double-digit percentage drop over a few days in the market index generally constitutes a stock market crash. A stock market crash may be caused due to economic bubbles, wars, large corporation hacks, changes in federal laws & regulations and natural disasters. They are generally followed by panic selling and can lead to bear markets, recessions and even depressions.

There have been a  few measures to stop a crash. One being large entities purchasing massive quantities of stocks in order to curb panic selling. Trading halts have also been introduced but both these measures have not been proved to be actually effective in pausing a crash.

(The stock market crash of 1924 was one of the most unfortunate crashes where the Dow Jones Index lost 23% in two days and eventually led to ‘The Great Depression’.)

Do Stock Market crashes lead to Recession?

A stock market crash reduces the investors’ confidence in the economy and as the falling shares slowly wipe out investor wealth. Investors resort to selling off their holding at minimal costs. Due to lack of confidence investors also refuse to partake in the purchase of shares.

With the diminished wealth of investors and the valuations of companies dropping, it makes harder for companies to raise capital and secure debt. Companies in bad financial shape lead to layoffs resulting in a fall in demand in the economy. As the decline continues the economy contracts resulting in a recession. A stock market crash does not necessarily result in recession but a recession always results in a stock market crash.

Also read: How Does The Stock Market Affect The Economy?

Why did Indian Stock Market crash in 2020?

The period between 17th January 2020 to 27th March 2020 saw the SENSEX lose 12,129.75 points. Multiple events were involved which led to a negative impact on the market.

Why did Indian Stock Market crash in 2020

The presentation of the Union Budget on 1st February 2020 coupled with the coronavirus panic led to the SENSEX falling by 2%. Later, WHO classified Coronavirus as a potential pandemic on February 28th, 2020 which led to both the Nifty and the Sensex ending with the worst weekly fall since 2009.

This was further followed by the shares of Yes Bank falling on March 6th due to bad loans and one of the worst NPA in the country. One of the founders of Yes Bank was also arrested on corruption charges. The fall after Yes Bank coupled with the effects of Coronavirus in Europe and the US resulted in the markets touching 35,636 points. (Read More: The Unravelling of Yes Bank – Fiasco Explained)

On 12th March the Sensex fell by 8.18% as a result of WHO declaring corona a pandemic. As the pandemic further spread and the number of cases in India worsened the stock Market plunged 13.5% on March 23rd. Besides, a countrywide lockdown of 21 days was announced by Prime Minister Narendra Modi starting from midnight March 24th. The lockdown was a necessity to curb the spread but it was the last thing the Indian economy required in its efforts to make a recovery.

Also read: Indian Markets: A Week Against Coronavirus & Crude Oil Fall

Is India headed towards a recession?

A recession is typically described as 2 consecutive quarters of negative growth. However, a few more factors are also in play.

The NBER ( National Bureau of Economic Research)  defines a recession as “ a significant decline in economic activity spread across the country lasting more than a few months visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

With several predictions by notable economists indicating India having a negative GDP, the lockdown has further intensified all the other factors possibly directing the economy towards a recession due to lack of income to major portions of the sector, with tourism industry already facing unemployment, the other industries will definitely face the heat. The lockdown also guarantees a drop in production and a drop in wholesale retail and sales.

What has the Government done so far?

All efforts by the government began after the lockdown was announced. The Finance Minister Nirmala Sitharaman announced a financial relief package of Rs 170,000 crores. The package included hugely appreciated Rs 50 Lac insurance cover to every individual in the health sector. The finance minister also announced 5kg of wheat and 1kg of pulses in addition to the existing scheme to over 80 crore individuals.

This too was appreciated as the 21-day lockdown would rid the daily wage workers of any source of income. The withdrawal limit of the EPFO was hiked. This was done to transfer cash into the hands of individuals. This would also provide support to unemployed workers.

In addition, the Finance Minister also announced that the center will pay the Provident Fund requirements on behalf of both the employer and also the employee for 90% of the employees. This will further reduce the burden on small businesses as it is targeted towards firms with less than 100 employees and those that have salaries less than Rs 15,000.

(RBI Governor Shaktikanta Das in talks with the Finance Minister Nirmala Sitharaman)

The RBI announced a moratorium on EMI for the next 3 months and also cut the Repo rate by 0.75% to 4.4%. The Moratorium on EMI’s will reduce the burden on individuals.

The repo rate, on the other hand, will make it cheaper for individuals to avail loans, however, deposits will receive reduced interest. This is aimed at increasing cash in the hand of an individual resulting in an increased demand which in turn may lead to stimulating the economy.

What do economists have to say about the crisis?

— Raghuram Rajan

(Raghuram Rajan- Former RBI Governor)

Former governor of the RBI, Raghuram Rajan, known for predicting the 2008 financial crisis and recession in 2005, said in an interview that the most important requirement right now is to prioritize targets such as fulfilling supplies and physical resource requirements of the healthcare sector followed by reaching out to the poor and only then should the question of reduction of taxes and temporary income support should come into the picture.

On questioned about the impact coronavirus may have on the global economy he answered that due to the unprecedented situation we should first look into the Chinese economy and observe the relaxation placed in China and the response COVID-19 has to it and accordingly take an action depending on if the virus spread begins again after the relaxation.

This would mean that the lockdown would be required to be implemented for longer periods. He also said in the interview that it may be a little too early to predict if the COVID-19 pandemic will lead us towards depression. In addition, he further added that with a recession almost certainly on the cards we still can focus on avoiding a depression based on measures taken

— P. Chidambaram

( P. Chidambaram – Former Finance Minister)

The former finance minister advocated the lockdown but mentioned that a lockdown alone was not sufficient. He mentioned that a relief package of 5-6 Lac Rupees is the absolute minimum which is required. He also provided a 10 point action plan which included the direction of cash and food towards the urban poor, assurance that the employer will be reimbursed for any wages paid during the lockdown and also proposed cuts on the GST.

On being questioned about future economic recovery he answered saying that there is no economic recovery on the horizon. Although the growth for the last quarter stood at 4.7% due to corona as per global economic loss prediction of 2% percent the same may be applied to the Indian markets.

He also added that the situation the country is put in now is worse than the migration crisis post-independence, famines to date, the tsunami of 2004 and even bigger than the 2008 financial crash and in fact even bigger than all of them put together.

— Jayati Ghosh

(Jayati Ghosh – Indian Economist)

Jayati Ghost one of India’s foremost economists and also a Professor at JNU, Jayati Ghosh, took a much more critical stance to highlight the magnitude of the problem the lockdown will create.

According to Jayati Ghosh in a country like India, a lockdown of more than a week will have severe disruptions. The damage done by the lockdown is already greater than the damage caused by demonetization due to which the economy has still not recovered. A massive shock such as this will have a negative multiplier effect and will continue to permeate.

She added that lockdown which has already disrupted the demand within the economy, with the supply chain broken down will force farmers to get rid of their stock as they will not be able to sell their produce and any bulk buying or hoarding engaged in the consumer end will only lead to shortages in the economy.

On being asked on what effect this will have on the GDP she made it clear that she has reservations already of the GDP figures being fudged and are actually lower than that reported by the government due to which we may see negative GDP in the coming quarters. 

Closing Thoughts

Prime Minister Narendra Modi announced that if the nation does not impose the lockdown, the country and our families will be set back by 21 years.

After taking a closer look which makes it clear that a lot more has to be done before it further devastates the country if poorly implemented and makes one wonder that if so, by how many years is the economy going to fall behind due to the lockdown. The government has to have a plan in place instead of abrupt decisions followed by a plan that may fall in line with such decisions. This is required to keep the economy from falling into a depression at all costs.

While looking into the Indian stock market crash in 2020, we should also not forget that it took the Dow Jones Index almost 25 years to recover from the crash that had led to The Great Depression. The financial package announced which currently makes up 0.8% of the GDP does not even reach the bare minimum set by former Finance Minister P. Chidambaram at 5 lac to 6 lac crore, let alone be compared to Western countries where they are set at 5- 15% of the GDP. The government still has to roll out policies swiftly to make the necessary yet draconian lockdown a success. 

March 29, 2020 Economics, Market, News 1 comment
Do You Need a Finance Degree For a Career in Stock Market cover

Do You Need a Finance Degree For a Career in Stock Market?

Do You Need a Finance Degree For a Career in Stock Market? The finance industry in India has been growing at a very fast pace for the last two decades. And along with the growth in the industry, there’s also a boom in job opportunities and enthusiasts willing to work in this field.

Although there are many job opportunities available in the stock market, however, one of the most frequently asked questions is- “Can a student from non-finance degree get a job on Dalal street?” How much relevant is having a finance, commerce or business degree to land a job in the world on the stock market.

Well, the short answer to this question is that you do not need a finance or business degree to get all the jobs in the stock market. A lot of financial companies hire employees from Engineering, mathematics, science, computing or economics background. In the era of internet technology, most of the financial giants are looking more for the skills and the aptitude of the candidates rather than just the degree.

Anyways, there are still a few careers in the market like Investment Banking, Equity Research, Risk Management, Portfolio Management, etc where a special skill set and expert knowledge of finance is required and having a degree can give an advantage to the candidates.

Nonetheless, having or not having a finance/commerce/business degree is just the starting point. There are a lot more things that you need to know if you want to build a career in the stock market industry which we are going to discuss in this post.

It’s always beneficial to have a background in Finance

When you have a background in finance, business, accounting or commerce, you already have got a minor exposure to the investing world. You might already know the lingo and familiar with the frequently used terms in the stock market like dividends, assets, liabilities, etc.

On the other hand, most of the non-finance guys are not even familiar with the most common terms of the market. Moreover, they find reading and understanding financial statements is quite challenging compared to people with a finance background.

Getting a job at Dalal Street Market

In a scenario where you are appearing in a job interview for a financial position, knowing these financial terms can help you impress the interviewer or at least not feeling like a dumb one. Besides, as stated, in a few financial positions, the interviewers create a barrier by shortlisting only candidates with a graduate degree in finance, commerce, business or accounting. And in all these cases, having a degree can be advantageous for you.

Moreover, if you want to become a SEBI registered investment advisor or research analyst, you will require an educational qualification of graduate or post-graduate degree in finance/accounting/commerce, etc. If you don’t meet the educational qualification, you cannot become a SEBI registered advisors/analyst and hence can’t have a career in the advisory field.

Overall, if you’re planning to become an investment advisor/research analysis, you’ll require a degree in these fields. Nonetheless, you can always enroll in post-graduate degrees of one or two years to get the degree and meet the educational qualifications.

Also read: What are the Different Career Options in Indian Stock Market?

Managing your own portfolio

When it comes to trading & investing or managing your own portfolio, you don’t require any degree.

Anyone can open their trading accounts and start trading in stocks. Many engineers, math/science majors, arts graduate or even people who don’t have any degree have been investing successfully and made a huge fortune from the market. A lot of successful stock market traders/investors do not have any background in finance or never did any course in this field. One of the best examples is Charlie Munger, a successful stock investor and vice-chairman of Berkshire Hathaway.

In short, if you are not interested in a 9-to-5 job or career in the Dalal street and just want to trade in stocks on your own, you won’t require any degree or certification. Here you can make money by using your knowledge and skillsets.

What to do when you don’t have a degree in Finance/Commerce?

It’s often said that Self-Education is the best form of learning. Even though if you do not have a degree in finance, you can learn the skills and impress the interviewer with your enthusiasm to master the market.

Start by learning the lingo. It’s really important to know financial terms if you want to break the initial barrier of entering the stock market world. Know the most frequently used investing terms and how to read the financial statements.

Further, if possible, take a few online courses to learn the trading/investing concept. Attend local investing workshops, seminars, etc. It would be best if you can find a mentor. Expand your knowledge base and try simulating platforms to trade in stocks without risking your money. And finally, try to land an internship in the finance company so that you can have a real experience of how things work in this industry.

Also read: NSE Certification Examination – The Definite Guide

Closing Thoughts

Most people believe that a career in the stock market is only for people with finance or business background. But this is not true. Do not stop yourself from entering the exciting world of the stock market just because you do not have a finance degree. Here, having a skill set is more important compared to a degree. Moreover, even if you do not have a graduation degree in Finance/Commerce, you can go for reputed financial certifications like CFA, FRM, PRM, etc that will put you in the same position as those with degrees.

My final advice will be to focus on enhancing your skills and acquiring specialized knowledge. This will help you more in building your dream life than chasing over degrees.

March 26, 2020 Beginner's guide, Market 5 comments

Coronavirus Impact on Global Indexes (2020) – US, Europe & More

Coronavirus impact on Global Indexes (2020) – US, Europe, Russia, India & More: India, currently in stage II of the novel coronavirus with over 500 cases reported throughout the country. This has resulted in an entire country imposing a lockdown. The center is still caught up in its efforts to make the gravity of the situation heard with the PM himself addressing the nation. The PM also had requested the nation to take part in a self-imposed curfew along with a noteworthy attempt at a show of admiration for all the essential services.

Indians today are going through a phase never experienced before at any of the earlier outbreaks. However, this turbulent phase has not only been limited to our personal lives but also as investors we are breaking into bearish conditions. These conditions were not foreseen at the initial stages of the outbreak.

With the Sensex falling over 36.54% since January 31st we take a look at how some other notable indexes around the world have fared against COVID-19 and also look into the respective government responses in such economies. The table below shows how the following global Indexes have performed since January 31:

CountryIndex% Change: Jan 31 - March 23, 2020
RussiaRTS41.74%
BrazilBOVESPA41.04%
IndiaSENSEX36.20%
ItalyFTSE MIB32.30%
USADOW JONES32.14%
GermanyDAX31.22%
FranceCAC30.27%
UKFTSE28.76%
ChinaSSE COMPOSITE3.15%

Quick Start: What is an Index?

Indices are used as a benchmark to measure performance. An index consists of major companies listed in the stock exchange which are measured together to arrive at a value representative of the entire market over a period of time. The stocks involved are weighted based on the capitalization of the respective company.

Country-based indexes track how the national stock exchange is performing. The NIFTY in India consists of the top 50 stocks listed in the NSE. The Sensex in India is representative of the top 30 stocks listed in the BSE. Further, an index is also a market sentiment indicator.

Coronavirus impact on Global Indexes

— Coronavirus effect on Russian Markets  (RTS – 41.74%)

Coronavirus effect on Russian Markets

The Russian Trading System (RTS) Index faced an overall drop of 41.74% since January 31st. However, the problems faced by the RTS were not limited to the coronavirus panic but also due to the oil price crash. The crash was caused due to the Russian fallout with OPEC. This had a critical effect on the Russian economy due to its main export being oil.

Coronavirus affected the market once it further spread through the European region. This further led to the Foreign Investors engaging in panic selling. Russian Sberbank which declared a $3.2 billion in profit still suffered a fall of 5% in its stock price.

CEBR a leading economic consultancy from the UK forecasted the Russian economy to sink by 4% in 2020. The forecast also included little expectation of a short term rebound. Although the central bank remains uncertain about rate cuts, Russia will create a $4 billion anti-crisis fund to protect its economy from the coronavirus shock.

— Coronavirus against the Brazilian market  (BOVESPA – 41.04%)

Coronavirus against the Brazilian market

It may seem surprising to find a South American country to have a market hit as hard as the BOVESPA Index. The BOVESPA Index suffers a 41.04% market fall even though it is not considered a hotspot for coronavirus. This was because of the dependence of Brazilian exports on the Chinese markets.

In 2018, almost 25% of Brazilian exports and almost half of the commodity exports were directed towards China. These suffered a hit during the demand slump China faced due to the outbreak. This added to the roadblocks created by their business-minded President Jair Bolsonaro over the development of the Amazon Rainforest. This has led to investors avoiding the Brazilian market particularly after his unfavorable stance towards the environment after the Amazon fires.

amazon fire brazil

The outbreak indirectly led to foreign investors further exiting the market in the crisis. The Brazilian market faces a situation where it fails to attract dip buyers as well. Furthermore, even the 30 billion package unveiled by the government has been criticized over its failure too adequately apprehend the magnitude of the problem.

— Coronavirus against European Markets

Coronavirus against European Markets DAX CAC FTSE

The problems in Europe can be attributed to most of the countries considering Corona an East Asian issue. Europe is currently a hotspot for the COVID-19 with Italy, Spain, Germany, and France being hit the worst. All of their markets fell at around 30% with further lockdowns imposed. The stock markets in Europe were further impacted after Trump announced a ban of all flights headed from Europe to the US.

( The famous painting ‘Mona Lisa’ by Italian artist Leonardo Da Vinci depicted with a medical mask over the coronavirus outbreak)

France also threatened to close its borders to the UK over its inadequate action taken towards containment of the virus. Over 6,000 people are suffering from the virus in the UK. The turmoil in Europe was further intensified with the German Chancellor Angela Merkel going into quarantine after one of her doctors was tested positive for coronavirus.

The European Central Bank is expected to cut interest rates into the negative territory. The Central Bank is to also extend long term loans to banks in an attempt to provide relief to Italy and the other European countries where coronavirus has a devastating effect.

The following packages were announced by the European governments to combat coronavirus:

CountryRescue Package(Billion)Directed towards
Italy$28Employment, Healthcare, Bonuses for Emergency Services and loans to Small and Medium businesses
Germany$610Companies hit by Corona in addition to relaxed tax norms
France$335Loans to Businesses, in addition, to pay to workers who lost jobs.
Spain$200To fight Corona Epidemic
Spain$100Small and Medium Businesses
UK$424Health services and Loan guarantee to Businesses

Britain’s Financial Conduct Authority has also directed companies to not release preliminary financial statements for at least another two weeks due to coronavirus.

— Coronavirus against the US Markets ( Dow Jones – 32.14%)

The US also suffered from the ignorance and underestimation of the virus. The virus has currently affected over 45,000 people in the US. Stock markets in the US were initially affected due to the crude oil price crash. This was due to the high marginal cost of production prevalent in the US which stands at 40$ per barrel whereas the barrel prices were slashed to around 30$ per barrel.

This was followed by the coronavirus panic and Trump travel ban against 26 European countries further impacting the Airline Industry. The number of coronavirus cases has exploded in the US since then.

(The ‘V-J Day in Times Square – New York’ iconic photograph depicted with medical masks over Coronavirus)

Measures taken by the US government include unemployment benefits, sick leave benefits, free coronavirus treatment including food and medical aid to people affected. Also, $50 billion has been announced as an immediate relief for the airline industry and $50 billion in further secured loans to other parts of the economy.

Congress is also further negotiating a 1 Trillion dollar rescue plan along with sharp rate cuts by the Federal Reserve. These measures have also led to corporations postponing layoffs in return for a big bailout.

— Coronavirus against the Indian Markets (Sensex – 36.20%)

Coronavirus against the Indian Markets (Sensex - 36.20%)

With the Sensex falling 26.54% since January 31st and the Nifty 50 falling 31.85% in the last 30 days. Trouble began with the crude oil price fall which would have been welcome in any other situation as India relies heavily on import of crude oil. Any benefits due to the price fall were put to a halt due to the effects of coronavirus on the airline and tourism industry and eventual lockdowns which resulted in a drop in demand. With the officially reported cases within the country touching 500, the question remains if the healthcare infrastructure can bear the burden of an increase in cases.

The RBI announced that it will conduct an open market purchase of bonds worth up to Rs 15,000 crore besides announcing a fresh round of fund infusion from variable-rate repos. With the cases in India increasing the government has called for lockdown in multiple states which will further affect the volatility of the market.

However, the RBI has also created a unique Business Contingency Plan(BCP) by setting up a team of 90 process critical members from the RBI of which only half will work at any given time whereas the remaining half will wait on stand-by, 60 key personnel from their external vendors and 69 additional support staff, all to work in a War Room during the outbreak. A facility has been hired where the 219 members will be hosted.

Precautions are taken to an extent where all personnel will also be donning hazmat suits. This also includes the support staff involved in maintenance, security, kitchen, front desk, and the administration. The BCP also involves maintaining isolation and social distancing of the 219 members.

In addition to the actions taken by the RBI, the state governments are also resorting to providing financial relief to those affected by the respective lockdowns imposed.

Also read: Nifty 50 Stocks – 7 Stocks crashed over 50% since Coronavirus Outbreak

— Coronavirus against the Chinese Markets ( SSE Composite Index – 3.15%)

Coronavirus against the Chinese Markets ( SSE Composite Index - 3.15%)

The Chinese Shanghai Composite Index (SSE) has fallen 0.04% since 3rd February. These figures would not form a fair comparison as the epidemic hit China first in December, whereas all the other regions faced the pandemic in the other European countries increasing in February and March itself.

However, even when the fall is measured since December the net impact on the Chinese market lies at 4.53%. Then how is it possible that of all the countries China has one of the least impacted stock markets even after being the worst-hit place by a coronavirus and also being the point of origination.

The Chinese government imposed stringent lockdowns and also suffered a 10% fall between 22 January to 3rd February. This was followed by the central bank announcing that it would inject $174 billion worth of liquidity into the market through reverse repo operations in addition to rate cuts.

The Chinese policymakers found ways to reach vulnerable households of Social Security Fees, Utility bills and provided them with other immediate requirements during the lockdown. Also, the most important economic effect against the virus would be the aggressive stand taken by the authorities by doing everything necessary particularly by ramping up its healthcare needs, stringent lockdowns which gave a brighter outlook in terms of economic prospects as life slowly resumes in China.

However, Goldmann has forecasted that the Chinese economy instead of growing by 2.5% will contract by 9% in 2020.

The Road Ahead

(The Bullish Markets enjoyed previously by investors have come to a full stop. Interestingly stocks of  gaming companies like Ubisoft are expected to be on the rise after lockdown and quarantine measures taken by the governments worldwide)

Lockdowns are now becoming a necessity. Rate cuts and infusion of cash into the economy seem to be the only way out to protect economies from the COVID-19 quicksand. However, we have currently seen countries that are facing coronavirus in the 3rd stage generally have a stronger infrastructure and better healthcare facilities but are still not able to cope.

Nations with a poorer infrastructure will face an impossible task if the spread of the virus spirals out of control. This calls for aggressive measures to the taken to prevent the spread of the virus in these countries until a suitable vaccine is officially declared by the WHO.

Pertaining to the current scenario banks like JP Morgan have forecasted a coronavirus driven recession that will rock the US and Europe by July. Deutsche Bank has also warned that based on current trends we could be facing a severe global recession over time.

March 25, 2020 Economics, Market, News 1 comment
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