Understand the Oil and Petroleum Industry in India and its major players:The Oil and Petroleum Industry in India has been among the eight core industries that contribute largely to the GDP of India. India is the 3rd largest Oil Consumer in the world after USA and China. It already attained 63% of the energy self-sufficiency by 2017 due to its increased attention to the promotion of alternative sources of energy namely, wind, solar and nuclear energy.
The stock market for Oil and Petroleum products also has started showing surge due to the announcement of the Government’s privatization program resulting in more global energy players showing interest in buying a majority stake in the Bharat Petroleum Corporation.
This article aims to provide the latest trends in the Oil and Petroleum Industry in India including its market size. Later, we will talk about the big players in this industry in India. Let’s get started.
India’s Economic Growth via Oil and Petroleum Industry
It is important to note that India’s economic growth is largely related to its demand for energy. The projections reveal that the need for the energy sector in oil and gas is expected to grow and therefore, investors consider investment opportunities in this sector in India.
Additionally, the Government of India has also adopted certain policies to cater to the industry with maximum investments. Hence, it has allowed 100% Foreign Direct Investment (FDI) in this sector including petroleum, natural gas, and refineries. This is evidential from the latest developments in Reliance Industries Limited, Cairn India, and Bharat Petroleum Corporation. As the fastest-growing sector, investors see promising returns in this sector.
Market Size of Oil and Petroleum Industry in India
Now, let us talk about the numbers to understand the market size of the oil and petroleum industry in India better:
India gained the position of the second highest refiner in Asia as its Oil Refining Capacity was calculated to be 249.9 million metric tons (MMT) in May 2020 of which the private companies contribute about 35.36% for the year 2020.
India is expected to be one of the major contributors world-wide to non-OECD petroleum consumption.
In the year 2020, crude oil production is recorded at 30.5 MMT and natural gas consumption is expected to reach to 143.08 million MMT by 2040.
Similarly, in 2020, the import of crude oil increased to 4.54 million barrels per day (mbpd) as compared to the last year and LNG import is 33.68 billion cubic meters (bcm).
The consumption of petroleum products has also seen a spurt of 4.5% at 213.69 MMT.
The export of petroleum products from the country also has risen to USD 35.8 billion as compared to USD 34.9 billion in 2019 and the quantity-wise rise is at 65.7 MMT in 2020 as compared to 60.54 MMT in 2019.
Currently, India as one the largest emitter of greenhouse gases has the share of natural gas in the energy sector of 6.2% which is expected to rise to 15% by 2030.
As the second-largest consumer of Biogas India is planning to open 5000 CBG plants by 2023 under the SATAT scheme.
Minister of Petroleum and Natural Gas, Government of India sets the target to reduce oil and gas import dependency by 10% by 2022 thereby giving a wide range of opportunities to foreign investors to invest in projects worth US$ 300 billion.
Gas Authority of India Limited (GAIL) as of March 2020 had the biggest share of 71.61% of the country’s natural gas pipeline network.
Indian Oil Corporation Limited in March 2020 was leading the segment of the product pipeline network with 51.25%.
The energy trade between India and the USA is going to cross US$ 10 billion by the end of the year 2020.
Investment and Government Initiatives
According to the senior-most market technical expert, CK Narayan, the crude oil prices will continue to grow as he analyzed after the biggest downfall during the recent pandemic, it has risen to $44 and will continue to rally further. Mr. MK Surana, the CMD of Hindustan Petroleum also predicts the surge in the price of crude oil in the last quarter of the year 2020 over $45. He also finds the Indian refinery sector as promising due to their ability to get established at the world-class level.
It is indeed worth to mention here that the petroleum and natural gas sectors were able to grab US$ 7.82 billion during the 10 years April 2000 to March 2020, according to the Department for Promotion of Industry and Internal Trade Policy (DPIIT). The initiative from the Government to set up bio-CNG plants has allowed them to spare US$ 1.1 billion to promote clean fuel.
Natural Gas production also is going to be increased to 15% by 2030 and the top players of the Liquified Natural Gas producers aim to have 1,000 LNG stations across the country which is something that will attract more investors. According to Rajeev Mathur, an executive director of GAIL (India) Ltd, the natural gas demand will be increased by 3-4% by end of March 2021. ONGC has raised US$ 300 billion through the External Commercial Borrowing.
The government is planning to invest US$ 9.97 billion to expand the gas pipeline network. The Government also approved fiscal incentives to improve recovery from oil fields with an intention to lead the hydrocarbon production to Rs. 50 lakh crores in the next 20 years.
Top Players in Oil and Petroleum Industry in India
— 1) Reliance Industries Limited
As the world’s largest refining hub, RIL’s Jamnagar, Gujarat’s plant has a refining capacity of 1.24 mbpd. Until June 2020, its segment revenue from oil and gas was US$ 455.53 million.
Its Petroleum segment has a vast network of over 1300 fuel retail outlets across the country. It becomes the first company to have the market capitalization of over Rs. 13.75 lakh crores in India.
— 2) Oil and Natural Gas Corporation (ONGC)
ONGC, as the largest crude oil and natural gas company of the country, signed a Memorandum of Understanding (MoU) with NTPC to set up a Joint Venture for the renewable energy business in India. Its market cap is more than Rs. 1.04 lakh crore.
ONGC Videsh – subsidiary of ONGC, which is India’s biggest International Oil and Gas Company, has made new oil discoveries in Colombia and Brazil as part of its Energy strategy 2040. The company also signed an MoU with ExxonMobil for offshore blocks.
— 3) Petronet LNG Limited
This company has set up the country’s first LNG receiving and regasification terminals and has a market cap of Rs. 38,227.5 crore. The company is expecting partnerships with fuel and gas retailers on LNG stations for long haul trucks and buses. With the aim to set up 300 LNG stations by 2023, it is planning to set up 1,000 LNG stations over a period of time across the country.
— 4) Indian Oil Corporation Limited (IOCL)
IOCL focuses on the safety of India’s energy sector and self-sufficiency in refining & marketing of petroleum products with over 47,800 customer touchpoints. It has a market capitalization of Rs. 1.71 crore and contributes the highest to the national exchequer by way of duties and taxes.
In March 2020, it started supply of the world’s cleanest petrol and diesel across the country and it is also planning to invest Rs. 500 crores in Karnataka.
— 5) Oil India Limited
A public sector company and the second-largest in hydrocarbon exploration and production, Oil India Limited shares are showing increasing trends. Despite blowouts at one of its sites, there are predictions from the market experts that they will be able to recover and prices will be better gradually. It has a market cap of Rs. 10,291.01 crore.
Succinctly, the energy sector in an Indian economy is growing faster than any other major economies. The industry experts also predict the energy demand to double by 2035. Moreover, the country’s contribution to the global primary energy consumption is also estimated by the analysts to double by 2035.
The growth in the consumption of crude oil is projected to grow at 3.6% Compound Annual Growth Rate – CAGR and the natural gas to grow at 4.31% CAGR by 2040. The Diesel demand too will be twice by 2029-30.
Therefore, the oil and petroleum sector look promising for the country and the coming years are going to be remarkable in terms of demand, consumption as well as the growth point of view.
An Analysis of Passenger Vehicles Industry in India to understand the latest trends and the key players: Indian economy holds the fifth-largest position in the auto market in 2019 and was expected to cross Germany by 2020 in terms of a number of sales. However, the recent pandemic has flipped the side to a completely opposite direction thereby causing a drop of over 17% in the industry.
Several Government initiatives and promising actions by the major automobile players of India was helping this industry to outperform at the world-class level by making the country a leader in this industry. The domestic Indian market is predominantly ruled by two-wheelers and passenger vehicles. The growing middle-class and young population has made the two-wheelers market the dominant one in terms of volume.
This article aims to study the Passenger Vehicles Industry in India including its current trends, biggest players, recent developments, and Government initiatives.
The Passenger Vehicles Industry in India
Passenger Vehicle (PV) is a motor vehicle which has at least four wheels where no more than eight seats are allowed in addition to the driver’s seat for transporting the passengers. Generally, cars are considered as passenger vehicles.
In India, the small and mid-sized cars selling is holding the highest position in terms of sales of the passenger vehicles (PV) industry. The PV industry recorded a market share of 12.9% in India until June 2020. Out of the total automobile exports of 4.77 million, PV accounted for 677,340 exports until June 2020. In 2019, over 3 million PVs were produced and sold domestically.
Currently, Maruti Suzuki and Hyundai are the top players in this industry. Maruti Suzuki with sales of over 208,000 Alto cars, 200,000 Dzire, and 192,000 swift cars reported in 2019 domestic sales of 1.75 million.
However, domestic sales in the PV industry recorded a decline of 9.1% until March 2020. Maruti Suzuki has already started selling BS-VI compliant vehicles that include Alto, Eeco, S-Presso, Celerio, WagonR, Swift, Baleno, Dzire, Ertiga, and XL6.
Latest Trends in the PV Industry in India
The entire automobile industry attracted Foreign Direct Investment of US$ 24.21 billion in the 10 years from April 2000 to March 2020. The growing demand has made the way for the industrialists to invest more in India’s ever-growing industry.
The announcement by Jaguar Land Rover in May 2019 of the launch of its locally assembled Range Rover Velar has made JLR cars quite affordable. The deal between the Tata AutoComp Systems (Tata Group’s Auto-component segment) and Prestolite Electric (based in Beijing) happened in January 2020 aims to enter the Electric Vehicles market by starting a joint venture of their own.
Force Motors’ investment of US$ 85.85 million focuses on the development of the two new models in the coming two years. MG Motor India is also planning to launch affordable Electric Vehicles in the next 3-4 years.
The Indian Government announced in the Budget of 2019-20 to provide tax deduction of Rs. 1.5 lakh for the interest paid on the loan taken to buy Electric Vehicles thereby promoting sales of such EVs. It is also planning to facilitate the start-ups involved in the EV space by setting up the incubation centers.
(FIG: PV Market Share Manufacture wise – FY19)
— FAME II (Faster Adoption & Manufacturing of Electric Vehicles Phase II)
It is also notable to mention here about the Government’s initiative that approved the FAME II scheme (Faster Adoption and Manufacturing of Electric Vehicles Phase II) w.e.f. April 2019 under which allocation of Rs. 10,000 crores were made to promote electric mobility in the country over the three years 2019-20 to 2021-2022.
The scheme aims to provide incentives on the purchase of such vehicles to promote electric and hybrid vehicles. They primarily aim to electrify the public transportation and shared transportation.
— Bharat Stage VI Norms
Introduced in 2000, these norms are the standards implemented by the Government to control air pollution by vehicles. The norms are based on various stages and as the stage goes up the rules become stricter.
Thus, BS-VI stage compliance would require more robust technologies and investment into such technologies to upgrade the vehicles. Consequently, the buyers will also need to pay more to buy the vehicles as the making cost goes up.
Market Leaders in the Indian PV Industry
As mentioned earlier, the PV market is predominantly led by Maruti Suzuki with more than 50% market share. The industry analysts believe this is due to their planning to empty the BS-IV inventories and keeping the BS-VI compliant vehicles available ahead of the time.
No matter what there are other players too who are contributing not as much as Maruti Suzuki, but their little contribution makes the Indian Automobile Market the fastest-growing market to be ready to compete at the global level. Let us see who these big players are, how are they contributing and what do they have in their baskets.
Here are the top seven passenger vehicle Makers in India:
Original Equipment Manufacturers (OEMs)
PV Sales FY20
PV Sales FY19
Hyundai Motor India
Mahindra & Mahindra
Honda Cars India
— 1) Maruti Suzuki India Limited
The largest car maker of India, Maruti Suzuki is a subsidiary of Japan-based Suzuki Motor Corporation. They have already launched BS-VI compliant Tour S CNG & Tour S in this year. It has already crossed the 20 million sale milestone in the year 2019. It is leading the market by reaching the target of cumulative sales of one million utility vehicles. Until June 2020 it has recorded sales of more than 1.5 million units.
— 2) Hyundai Motor India Limited (HMIL)
The subsidiary of a South Korean parent company Hyundai Motor Corporation, HMIL is the second-largest carmaker in India. Its Santro car had been recorded as a runaway success. It was the first automotive company in India to achieve the export target of 1 million cars in just 10 years. This year, its Hyundai Venue car has been awarded as the Indian car of the year. It sold in 2019 545,243 cars however its market share declined in that year.
— 3) Mahindra & Mahindra Limited
The decades-old Indian multinational vehicle manufacturing company, Mahindra & Mahindra Limited. The largest tractors manufacturer in the world records the highest production in India of cars. With the introduction of SUVs in 2019, they reported a 2.21% growth in PV sales. In a challenging time, XUV300, Alturas G4 and Marazzo have helped M&M to add sales of about 27,000 units additionally.
— 4) Tata Motors Limited
The world’s leading automobiles manufacturer and an automobile arm of the Tata Group, Tata Motors has extended its presence globally by setting up Joint Ventures with Fiat and Marcopolo. It holds a 45.1% market share in the commercial vehicle segment in the year 2019. To improve electric mobility infrastructure in the country it has created a separate vertical by joining hands with Tata Power.
— 5) Honda Cars India Limited
As the leading premium car manufacturer of India, Honda Cars was established with the specific purpose to cater PV industry with the latest technology-based vehicles. It is a subsidiary company of Japan-based Honda Motor Co. Limited. It recently launched WR-V compact SUV with robust features in two different trim options and in both petrol and diesel fuel choices.
— 6) Toyota Kirloskar Motor Private Limited
It is a subsidiary of the Japanese parent company Toyota Motor Corporation. Among the carmakers, it holds the fourth largest position in India. In 2012, it started One Make Racing Series with the Etios car and witnessed an overwhelming response from the youngsters.
— 7) Ford India Private Limited (FIPL)
It is a subsidiary of Ford Motor Company and since 2019 Mahindra and FIPL joined hands to set up a Joint Venture. It is the number 1 Passenger Vehicle Exporter in India competing with Hyundai. It exports in 35 countries almost 40% of its engine production and 25% of its car production.
With the current situation of the global pandemic, the biggest challenge these car makers will face is the changing customer preferences. Due to the Work from Home concept, the demand of the Passenger Vehicles has seen a sharp fall in the six months so far as compared to the last year.
The industry experts estimate that the customers’ preference during this time has gone back to the original small and compact cars for which Maruti Suzuki is leading the market as always. However, for SUVs and MPVs the market may not be as good as for the small and affordable cars.
The luxury cars will too see a downfall. The predictions are also against the promotion of EV sales as they need advanced technology and are quite costly. Many startups are under a red zone meaning they are already falling short of cash and liquidity making it difficult for them to survive. Interestingly, the used car business will gain as the customers may face liquidity crunch to some extent.
A Brief Study on Public vs Private Banks in India: Regardless of which sector one works in, it relies on the banking sector. This is the very reason why the banking sector is known as the backbone of the economy. A country with a poor banking sector is not only destructive to the banking industry but also to economic growth overall.
Due to its importance today we try and understand the banking sector through its division of public and private banks and analyze their contributions to helping the economy grow or not in the recent past
What do you mean by Public and Private banks?
Banks are classified as Public or Private depending on their ownership. First, let us understand the basic difference between Public vs Private Banks in India:
— Public Sector Banks
A Public sector bank is one where the government owns a majority stake (i.e. more than 50%). In common parlance, they are also known as government banks. Due to its ownership, the aims set for these banks revolve around social welfare and fulfillment of the country’s economic needs. These banks are formed by passing Acts in the parliament. Eg. Bank of India, Canara Bank, Punjab National Bank, Bank Of Baroda, State Bank of India.
A Private sector bank is one where the majority stake is held by private organizations and individuals. Private banks have profit maximization set as their main goals. These banks are registered under the Companies Act. Eg. HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank, Yes Bank.
Differences in the working of Public vs Private Banks in India
Although the banks being public or private perform the same functions, due to their aims and period of existence customers notice significant differences depending on the banks they choose.
Private banks arrived relatively late in the Indian banking sector thanks to the reforms introduced in 1991. This is one of the reasons why people find public banks secure as they already have been around longer enabling them the gain their trust. Also, the confidence that the government will not let a public bank fail adds to this security. Private banks make up for these security concerns through their technological advancements and superior customer service.
What is it like to work for these two bank types?
In the year 2013 80,000 government bank jobs received close to 40 lakh applications making it one of the most sought after careers. The reason for this has been the job security and reduced work pressure present in these banks. This, unfortunately, has reflected on the banking sector as public banks have been known to take too long to perform duties.
This can be attributed mainly to the fact that the employees do not have any incentives to work better. The competitiveness faced here is prior to the job in the examination set during the selection process.
Working for private banks, on the other hand, increases the rewards available to an individual but with additional risk. Employees receive higher remunerations but are required to work in highly competitive environments. This too has rubbed off on how the functioning of private banks is viewed i.e. fast-paced, efficient, and easier to deal with.
Longer periods of existence in the Indian markets have allowed public banks to develop a larger customer base in comparison to the private banks. The goals set have also played a major role in achieving this. Public banks function with the aims of ensuring banking accessibility throughout the country.
This has motivated the public banks to penetrate deeper into rural areas gaining a greater customer base. Private banks, on the other hand, enter only areas where they see a potential to earn a profit. This is the reason private banks mainly function in urban areas and not rural.
— Market Share
As of 2018 public sector banks account for 62% of the total banking assets and 58% of the total income, the rest occupied by private banks. Although public banks have a greater market share, their hold has been continuously slipping. As of 2016 public sector banks accounted for 75% of the total banking assets and 71% of the total income.
Public banks are steadily losing out even when it comes to loans. Figures from 2018-19 show that private banks gave a total of ₹7.3 trillion in loans, while public sector banks gave ₹2.3 trillion in loans. In comparison the total amount of loans in 2011 which stood at ₹40.8 trillion, public sector banks had a share of 74.9% and private sector banks around 17.8%.
One would expect private banks to have a high number of NPA’s considering that in order to gain an edge over public banks the private banks may be more approachable when it comes to loans, leading to higher NPA’s. But this has not been the case as the NPA’s of private sector banks have been lower in comparison to private banks.
In the 5 years leading up to 2018, the NPA’s of private sector banks increased from 0.7% in 2014 to 2.4% in 2018. Figures that seems reasonable in comparison to that of the private sector where the NPA’s rose from 2.6% in 2014 to 8.00% in 2018 and have been increasing since then.
It is evident that although the public sector still holds a greater market share they have not been able to compete with the growth rate of private banks. In order to achieve this, Private banks have capitalized on the weaknesses of Public Banks. Coupling superior customer service with the inclusion of technological changes has worked out in favor of the private banks. It is good to see that these measures adopted by private banks are forcing the public banks to implement them too.
But if the public banks keep playing catch up with the private banks they will soon be seen falling behind even in terms of market share. This has called for multiple structural reforms to ensure that does not happen because at the end of the day it is the public banks that look after and perform in the interest of the economy.
Understanding Mandatory vs Voluntary Corporate Actions: The announcement of a Corporate Action attracts significant attention in the markets and also creates an exciting atmosphere. It may be Christmas early in the cases of dividends or at times a shock in some unfortunate cases of delisting.
Today, we try to further understand the world of corporate action through the means of an important distinction i.e. on the basis of choice available to shareholders. Here, we are going to discuss what are Corporate Actions, types of Corporate Actions and difference between Mandatory vs Voluntary corporate actions.
A corporate action is a process initiated by a company after the approval of the company’s Board of Directors and brings material change to the organization and its stakeholders. Corporate Actions include dividends, mergers, and acquisitions, rights issues, name change, change of the security identification numbers like CUSIP, SEDOL, and ISIN, etc.
A Corporate Action at times may also impact the securities (both equity and bond securities) by affecting the price. Because of this, it is mandatory for a corporate action to be announced in order to keep the shareholder informed. This is done both by the company and also the exchange the security is listed on.
But did you know in certain cases shareholders too are given the option to vote over the processing of corporate action? Here we try to understand the basis on which corporate actions are differentiated as mandatory and voluntary.
Some corporate actions when announced are generally automatically applied to the investments of the shareholders. These are known as Mandatory corporate actions.
In some cases, the shareholders are given the option to participate in the respective corporate action. Here the shareholder decides if he will be a part of the corporate action or not. These Corporate Actions are classified as voluntary.
A mandatory corporate action is decided on by the board of directors and affects all shareholders once it is bought into effect. There is nothing much a shareholder can do in this case.
If the shareholder does not want to be affected by a mandatory corporate action he has to relinquish his ownership by selling off his holdings in the stock market.
Examples of Mandatory Corporate Action
Dividends: Here the shareholder is not required to do anything in order to receive the dividend. The only function the shareholder is limited to collecting the dividend and observing the effects on his shares.
Stock Splits: In this corporate action the shares of a company are divided based on the ratio provided. Say a company announces a 2 for 1 stock split. Here for every share held by the investor, he will receive an additional share. Or in other words, the number of shares held will be doubled. The value of the shares, however, will remain the same i.e. a share that was worth at Rs.10 will be 2 shares at Rs. 5 each.
The investor may be in favor of this decision as the shares which were earlier at a higher price may now be easily sold in the market. Or he may be disappointed as his investment may trade at a reduced market price due to its increased availability. But regardless of the scenario, he will only have to accede to the decision taken by the organization and not have any say.
Other Mandatory corporate actions include stock splits, mergers, bonus issues, name changes, Id change, etc.
Voluntary Corporate Actions
A voluntary corporate action is like an offer made by the board of directors of the company that only comes into effect if the shareholder elects to participate in the corporate action. Unlike a mandatory corporate action, a voluntary corporate action does not impact all the shareholders after it is announced. It only affects those in favour of it.
In the case of Voluntary CA, the shareholder is required to respond to the company. Only then will the company go ahead and process the corporate action. The shareholders not in favour are not impacted and their investments are left untouched.
Examples of Voluntary Corporate Action
Tender Offer: Although a tender offer may possess various forms. They however generally outline a company offering the shareholders to purchase the shares from them at a predetermined price. This price is generally slightly higher than the price the security is currently being traded at in the market. Here the investors have the option to either tender their shares to the company or simply not participate and continue to hold their shares.
Rights Offer: Here the existing shareholders are given the right to purchase new shares before the company offers them publicly. This right offer of new shares is made generally at below the market price. The existing shareholders may go ahead and exercise their right to purchase the shares or simply not take action and remain with their current holdings. The investors that decide not to exercise their right do so at the risk of having a diluted capital. At times the investors are also given the option to transfer their rights. In this case, they can trade their right in the market.
Understanding corporate actions is of importance irrespective of them being voluntary or mandatory. This is because their occurrence or non-occurrence gives an insight into the company’s plans, performance, and strategy.
A Brief Analysis on Chinese investments in Indian Unicorn Startups: The Galwan clash that arose due to China claiming Indian territory had left 20 Indian army soldiers martyred. The clash triggered public outrage where boycott of all Chinese companies and their products was demanded. In some cases, politicians even spilled their outrage by calling for a boycott of Chinese cuisines.
After increased escalations, 49 Chinese apps were banned by the government. This, however, has left many unclear when it comes to Indian firms that have received funding from Chinese investors. “Should these companies and their products be boycotted as well?”, was the question in the minds of many. Many such companies were left in a critical state hoping that no such backlash is directed towards them.
Today, we have a look at the chinese investments in Indian Unicorn Startups. Here, we are going to analyze the scale of Chinese investments in Indian companies and the added agony they face trying to survive the COVID-19 environment.
However, it is not only the Chinese investments that had significant Indian market reach. Chinese companies too have enjoyed a significant grasp on the Indian Market. Chinese smartphones like Oppo and Xiaomi led the Indian market with an estimated 72% market share in 2019.
Government concerns over Chinese Investments
When it came to investments, Indian relations with China were not any better prior to the clashes either. The only difference is that the restrictions placed on the Chinese investments have gained significant public support post the clashes. As on April 18th, the government issued an update on the FDI policy.
This prevented direct investments into Indian companies from countries that share their borders with India. This was done in order to ensure that any investment directed into Indian firms are done so with a purely financial interest instead of those with strategic economic interests.
China has been particularly blamed for following this approach as they try to further their domestic economic interest. Unfortunately, for us, they also have played an active role in the Indian startup ecosystem. Under the updated FDI policy billions of dollars from Chinese investments will be subject to government scrutiny. The FDI policy was updated also to address Data security and Chinese propaganda concerns. Any Chinese investor investing in Indian firms will have to get the Indian government’s approval first.
When this rule was first passed it drew considerable criticism from Indian unicorns and startups. This criticism was not in defense of the Chinese but instead simply because the Indian investor simply does not prefer to make risky investments or simply does not have that amount of domestic capital. This would not only hurt the Indian startups severely but the effects would also be seen on the Indian economy. This would be because of the shortage of investments Indian companies would face which would be required to spur their growth.
Loopholes and Legal Consequences
Legal experts also said that enforcing the notification would be “close to impossible“. It is also unclear how effective the law is going to be. In the case of Paytm, Alibaba simply rerouted its investments from China to its subsidiary present in Japan and then invested in Paytm.
It is also unclear up to what extent of investment by Chinese investors in a foreign firm will make the firm an entity that furthers Chinese interests under Indian laws.
The FDI laws in China, however, have already been geared up to retaliate. These work against companies that operate in China but originate from countries that have discriminated against Chinese investors.
Chinese investments in Indian Unicorn Startups
The table below shows some of the major Unicorns that have received funding from Chinese investors:
Chinese Investments Received
Major Chinese Investors
Ant Financials (AliBaba Group) and SoftBank Vision Fund
Softbank , Tencent, Sailing Capital, China Eurasian Co-op Fund, Eternal Yield International, Steadview Capital
Hillhouse Capital, Tencent
Meituan-Dianping, Tencent Holdings and Hillhouse Capital Group
Steadview Capital and Tencent
Tencent Holdings and Steadview Capital
Why Indian companies go for Chinese investments?
Over the years India has acquired the third spot in terms of startup ecosystems but unfortunately, more than 80 percent of the money invested in these startups comes from outside of India. One of the major reasons for startups accepting Chinese investment has been due to the lack of capital present in India or lack of capital directed towards innovation-driven startups. Domestic investors have taken very little interest in the startup environment.
We also lack companies like Google and Facebook that take particular interest in such startups that are innovation-driven and with internet dependant products. Unfortunately, the country’s highest-valued firm, Reliance Ltd. in recent times also has to lookup to Facebook for investments. When it takes companies of that scale to grab the attention of global investment giants it is difficult for startups to do the same. Chinese investment firms recognized the gap and have succeeded in replacing American giants in this space.
Another reason is the patient capital provided by Chinese investors. The companies targeted by Chinese investors are mainly startups in their initial stages. The aim of a startup at this stage is to ensure growth and increase market reach. But these goals demand huge capital expenditure.
At the initial stages, these startups are evidently not profitable for a couple of years. This is where the patient capital provided by the Chinese steps in. Unlike domestic investors looking for profitable companies or secure investment, the Chinese investment firms recognize viable startups and provide them with the capital that helps them grow.
(India taking on dragon – An Image featured in Taiwan Times)
The Galwan clash post the updated FDI policy has put further restraint towards accepting Chinese investment. Indian startups that were particularly looking to raise funds in order to survive the COVID-19 environment will now have to look elsewhere.
Companies that already have settled agreements with Chinese investors will also be affected. This is because they may already be in the midst of investments that take place over multiple rounds. They will be forced to restrategize in the times of COVID-19 where they are desperate for investments at lower valuations.
In the midst of the deteriorating India-China relations, demands for an alternative to the capital that were earlier provided by Chinese investors. But if we shed some light on PM’s call for an ‘Aatmanirbhar Bharat’ it also provides solutions if Aatmanirbharta in investments is followed.
Startups in 2019 raised Rs.40,000 crore. For Aatmanirbharta to be achieved in investments at least 50% i.e Rs. 20,000 crore will have to be sourced from within India. But in order to spur this growth, the root causes due to which domestic investors steer clear of startups must be addressed.
One of the reasons is that navigating through thousands of startups before investing. Weeding out those that may lack the commercial potential takes substantial skill and effort that all may not be ready to devote. The answer to this may be provided by Alternate Investment Funds(AIF) or Venture Capital Funds. These specifically focus on investing in startups and at the same time employ necessary skill in order to differentiate between startups.
But, at the moment only investors with a minimum annual income of Rs. 50 lakh and minimum net worth of Rs. 5 crores are allowed to invest in AIF’s. Government support and new regulations that focus on making the environment more inclusive will go a long way in providing the necessary support to startups in India.
Understanding What are Right Issues: Today if one is to pick up a newspaper he would find the pages riddled with issues on rights i.e. that related to liberty, equality, freedom of expression, opinions, speech, etc. However, you may be surprised that a few flips into the financial section will too include news with regards to the ‘Rights Issue‘. The rights mentioned here similarly outline the entitlement and privilege available but different from those concerned with social issues.
Today, we try and understand the term ‘Rights Issue’ as a corporate action as this would help in making a more accurate decision when offered rights by a company whose shares are held in our portfolio.
What are Right Issues?
A Right Issue is one of the options a company has in order to raise funds. In a Rights issue, the company gives an opportunity only to the existing shareholders to buy additional shares of the company.
The price offered by the company to the existing shareholders is at a discount to the market price. This is done in order to make the offer attractive to the shareholders and at the same time make up for any dilution of capital. A Right Issue also gives an opportunity for the shareholders the opportunity to increase their stake within the company. Shareholders here have a right but are under no obligation to purchase the shares.
— Why do companies go for a Rights Issue?
The nature of a Right Issue also turns the corporate action into a trump card due to its ability to provide companies a shot at raising capital irrespective of the environment they are in. Troubled companies may opt for a rights issue in order to pay off their debts or use it as a means to raise funds for its operations when they are unable to borrow money.
— Is Right Issue a Red Flag that the Company?
A Right Offering is definitely not a red flag. This is because the right offering is also seen as a means to raise additional capital for its expansion and growth needs.
At times when the gestation period of a project undertaken by a company may be too long before it generates profit. In such cases opting for debt would be unwise as they would require regular interest payments even before the project is functional let alone be profitable making debt too expensive. Hence, a Right issue would seem like a Win-Win situation for both the company and the shareholders. This is because the right issue would not require regular servicing as long as the project remains on track to successful completion and future.
In a recent scenario Reliance Industries too opted for a rights issue but this was done in order to rid their balance sheets of all debt and at the same time reward the shareholders.
Can you buy unlimited shares in a rights issue?
Rights issues function differently than an Initial Public Offer(IPO) or a Follow on Public Offer(FPO). In a Right issue, the shareholder will be given the option to purchase rights but only in proportion to the shares they already hold. In the recent issue by RIL, the shareholders were offered shares in the ratio of 1:15. This means that for every 15 shares held one share may be bought in the right issue.
Hence the extent to which the shareholders can purchase shares is limited to the shares they already hold. Investors, however, have the option to sell their right to purchase the shares. The shareholders, however, are free to purchase a right some other investor wants to sell in the market.
Different types of Right Issues
There are two main types of rights issue of shares, which are as follows:
— Renounceable Rights Issue: When Renounceable Rights are offered to a shareholder he has the option to purchase the shares by exercising his right, or ignore the right, or sell his right at the price that the rights are being traded at in the stock market.
— Non-Renounceable Rights Issue: When Non-Renounceable Rights are offered to a shareholder he only has the option to purchase the shares by exercising his right or ignore the right. When these rights are offered the shareholder cannot sell his right to another investor.
Taking the ‘Right’ decision?
The Right Issue not being an obligation gives the investors the option to buy the shares of the company, ignore the issue, or sell the ‘right’ itself. Now, we take a look at the different options purely on a financial basis.
Example: Say you are holding 1000 shares in the company Pineapple Ltd, whose shares are currently trading at Rs.21 in the market. Pineapple Ltd comes up with a rights issue where the shares are offered at a discount of Rs.15 per share. The right offering is made in the ratio of 2:10. The company already has 100,000 shares issued in its IPO and plans to further raise Rs. 300,000 through the rights issue bringing the total holdings to 120,000 shares.
1. Buying shares through the right issue
Here we look into the consideration of buying the shares. One of the integral portions of a rights issue is the Ex- right price. The Ex-Right price is a theoretical price that will result after the rights issue. Computation of this price helps an investor to take a stand on a financial basis on whether shares should be bought through the right or not. Let’s begin.
Shares held of Pineapple Ltd – 1000 shares (a)
The current holdings are valued in the market at Rs.21000.
The shares made available via. the rights offer is = (1000 x 2/10) i.e. ( shares held x ratio offered) = 200 shares. (b)
Cost that will be incurred through participation in the bonus issue = 200 x Rs. 15 = Rs 3000.
Total holdings if post right issue( if successful) = 1000 + 200 = 1200 shares.
Value of portfolio including investment from rights = 21000+3000 = Rs. 24000.
Ex Right price ( value per share post issue) = 24000/1200 = Rs. 20 per share
The investment above would prove to be beneficial as even though you have paid Rs.15 per share post the issue, they would theoretically be anticipated to be worth at Rs 20 post the issue.
2. Sell the right itself
The rights that you are entitled to as a shareholder with respect to the privilege to buy shares in a Right issue have an intrinsic value attached and can be traded in the stock market. These are known as Nil Paid Rights.
Above we have already calculated the ex right price. In certain cases, it is profitable if the ‘rights’ are traded at or above a price that is greater than the difference between the offered price and the ex right price.
I.e. (20-15) = Rs 5.
What happens if the shareholder simply gives up the right?
At times the shareholder may also choose to take no action on the right and simply ignore it. It is important for the shareholder to note that the preferential rights given here, come with the risk of dilution if ignored. This is because as discussed earlier, the shares issued derive value from the existing portfolio and investment made through the rights. This will be spread across the whole portfolio post the issue.
Also if we go back to the previous example the shareholder would be left with only 1000 shares post the issue. Say the prices are equal to the ex right price. This would mean that the ex right shares that were earlier valued at Rs. 21,000 would be valued at Rs. 20,000 posts the issue. These would be only the beginning of the effects as the shares will be affected in the future as well eg. income from the company distributed in the form of dividends will now be distributed among 120,000 shares instead of earlier 100,000.
Right Issues in the Covid-19 environment
In the wake of the COVID-19 environment, several companies resorted to raising capital through the right issues. This included companies with strong credentials like Mahindra Finance, Tata Power, and Shriram Transport Finance. These companies have been able to raise a total of 10,000 crores during the pandemic. RIL saw its right issue s oversubscribed by 1.59 times and received applications worth more than Rs. 84,000 crores and raised 53,124 crores through the issue.
The rights issue route was adopted by the companies due to the ease of raising funds. This was because all that is required for the right issue is the board of directors’ approval. Unlike other means that require shareholders’ approval in the shareholders meeting as well which is an added risk in the current environment. In addition to this SEBI also undertook several steps to ease the process of rights issues like reducing the market cap requirements and also the minimum subscription requirements.
Even though Right issues have been particularly popular during the COVID-19 environment the response has not always been the same. Shareholders were always quick to realize that no matter how democratic the corporate action may seem they still are in a way forced. This is because the threat of their portfolio being diluted always remained.
Despite this, when faced with the choice to participate in a rights issue it is always better to not just rely on the financial aspect. It is also very important to find out what the purpose of the rights issue is. In addition to this, it is also a positive sign if the promoters take part in the rights issue. It shows that they themselves believe in the cause. Happy Investing.
Demystifying how Ketan Parekh Scam was executed: One of the biggest stock market frauds that became an eye-opening event for not only the equity investors but also for the Securities Exchange Board of India and such other regulatory authorities was Ketan Parekh Scam. The Market Rip-off was done in such a way that he was able to make multiple times the annual return on the stocks he manipulated.
Ketan Parekh was the God for many investors as he created a delusion that whatever he touched turned into the Gold and whatever he wished the market seemed to grant him. Just within two years of time, Ketan deceived so many investors as well as banks and the stock market that it became a case study for many these days.
The stock market has the power to make someone rich and the others lose their money in just a matter of seconds. On one hand, we have examples of people successfully trading in the stock market such as Warren Buffet, Carl Icahn and George Soros who became the multi-millionaires by investing in the stock markets. And on the other hand, we have Harshad Mehta and Ketan Parekh who not only ruled the stock markets but also found guilty of the economic crimes.
Let us understand in detail what the Ketan Parekh scam was, how did he succeed in fooling the investors and shaking the stock markets, which next-level chicanery he had planned and how he got caught.
Ketan Parekh – Background and Foundation
Famously known as a ‘Bombay Bull’ during 1999-2000, Ketan Parekh was a mentee of Harshad Mehta (who was also involved in another scam that shook the stock market in India). Ketan, CA by profession, started his career in the late 1980s and was running a family business of NH Securities – a stockbroking firm that was started by his father. This was how he managed to thoroughly understand the inside outs of the stock market trends and the investors’ mindsets.
During his peak, marketmen literally followed his every move blindly as he used to exploit the stock prices to gain the trust of these investors. Not only this, but he also enjoyed close connections with many celebrities from Bollywood, political parties and business managers which helped him connect with Kerry Packer, leading Australian Media Entrepreneur. Kerry and Ketan joined hands to start a venture capital firm, KPV venture with $250 million that focused on investing money into the new start-ups.
How Ketan Parekh Scam was Executed
Ketan Parekh was the strong believer of the ICE sector – Information, Communication, and Entertainment and that was the time during 1999 and 2000 when the dotcom boom had just started. This enabled him to prove his predictions to be true to many other investors. Moreover, many investment firms, overseas corporates, and banks, businessmen from listed companies many of them gave their money to be managed by him as during 1999-2000, Ketan Parekh was ruling the stock market.
Ketan Parekh used Kolkata stock exchange to trade as this was the stock exchange where no strict and pivotal rules and regulations were not formed. He misused such exchange and also tied up with many other brokers to trade on his behalf and gave the commission. With these huge amounts of money, he would buy some less known companies’ 20-30% stake and suddenly such companies’ share price would skyrocket and become the talk of the town all of a sudden. Once the price would reach to a certain level, he would silently exit and sell the securities and make countless profits.
He not only manipulated stock prices but also played games with banks in order to get funds to swindle the share prices and rule over the market. He firstly bought shares of the Madhavpura Mercantile Commercial Bank’s shares so that he could gain the confidence of the bank when he approached them for a loan in the form of Pay Orders.
Pay Order is an instrument similar to the cheque but it is issued by the bank upon the payment of small advance money from the customer. When he successfully managed to rip-off the price of MMCB’s shares, he approached the other financial institutions including HCFL and UTI and pledged the pay orders with them. His loan accumulated to Rs. 750 million.
He had created a portfolio called K-10 which consists of top ten hit picks by Ketan Parekh himself. This included Aftek Infosys, Zee Telefilms, Pentamedia Graphics, Mukta Arts and so on. He was interested in low profile corporates with low market capitalization and liquidity. That is how he was able to manipulate the prices of such companies using the ‘Pump and Dump’ formula. He was also reported to have done the insider trading by purposefully influencing the stock price of certain companies who would bribe him to do so and take the advantage of the price rise to exploit the investors’ minds.
How Whatever Ketan Parekh Touched Turned into Gold?
The ICE sector was booming during that time and Ketan would invest majorly into these sectors which helped him gain the trust of the investors.
He was trading in Kolkata Stock Exchange which was lacking strict regulations itself. Hence, there was no one to watch his moves.
He would buy shares of low profile companies when they were trading at low prices and joined hands with certain other traders to frequently buy and sell the stocks of such companies which enabled the sudden price rise.
The financing method of buying shares and getting pay orders and later getting them pledged when the prices shoot up also helped him create a Bull Run in the stock market.
Many investors believed that slipshod reactions and regulations of SEBI who could have noticed the unusual price movements in the market helped the scam to accumulate more losses to them.
His connections with celebrities, political and religious leaders also aided him to get the majority of the fund from large corporates and businessmen.
Allegations and Unraveling of Ketan Parekh Scam
The SEBI and RBI started investigating into this case after the huge market crash of 176 points in a day in 2001 just one day post the budget was declared. Ketan Parekh was accused of being involved in the Insider Trading, Circular Trading, Pump and Dump and misrepresentation of facts to borrow from the banks.
Ketan Parekh declared to be guilty of a criminal offense for ripping off the Indian stock market and was barred from trading in the Bombay Stock Exchange (BSE) for 15 years up to 2017. He was also found to be involved in a Circular Trading with many banks and Insider Trading for which he was sentenced to rigorous imprisonment of one year.
However, SEBI investigated and found that despite being prohibited from trading, he used his network well and made certain companies trade on his behalf. Later in 2008, many such companies were traced by SEBI and were barred from trading too.
The CBI in 2014 found the malpractices followed by him and sentenced him for two years rigorous imprisonment with a fine up to Rs. 50,000. He also siphoned off the money outside the country too. The SEBI in April 2001 reported that he had an outstanding amount to large corporates worth Rs. 12.73 billion and to MMCB Rs. 8.88 billion while to Global Trust Bank Rs. 2.66 billion. The said amount was reported in 2006 to touch the surprising level of Rs. 400 billion.
He was also reported to use Overseas Corporate Bodies and sub-accounts of Foreign Institutional Investors to receive shares from various corporate entities so as to move the money out of the country. To sum up Ketan Parekh scam allegations, he was found involved in cheating with banks by misrepresenting facts, falsifying accounts, ripping-off the stock market prices and exploiting investors’ decisions, mishandling public money, bribing company directors to enable him to do insider trading.
In this article, we discussed how Ketan Parekh was able to induce investors’ decisions by his malpractices. Not only the exchanges and investors but Ketan Parekh also bluffed with the banks. And all of that piled up to huge debt and one day in 2001 it became a historical event of the biggest scam in an Indian Stock Market.
It is still a part of the investigation as of now that how many other companies are still operating in the stock market after himself and other companies were barred from trading.
Since the start of this year, the Ruchi Soya share is rising continuously. And this resulted in most of the share market investors asking the same question: Is there a Secret Sauce due to which Ruchi’s shares increased +8,000% within 6 months? Before diving deeper into this topic, let’s try to understand the scenario of Ruchi Soya’s current share price with the help of a few examples.
All the four graphs depicting share price movements shown below are from various leading stocks trading across different industries in the Indian stock markets. Can you find any anomaly in the share price movement of the below-shown shares?
Further, even if we look into the different companies in the FMCF sector, you can find one stock that is performing particularly irregular compared to others.
It takes only seconds for our eye to catch the outlier in both, the share of Ruchi Soya Industries Ltd. But what is even more surprising is that the smooth and slick 8000% upward price movement of the stock is during the times of corona. Today, we have a closer look at Ruchi Soya Industries Ltd in order to provide an insight into what actually has led to the 8000% price increase.
Ruchi’s run, however, was cut short post-2015. The company made continuous losses in 2016,2017 and 2018. An extremely unhealthy sign for a company that has accumulated huge debt in its expansion goals. The huge debt of 12,000 crores forced Ruchi to enter the insolvency proceedings in December 2017.
You may be wondering why would players take part in an aggressive bid war for a company that now had further deteriorated its sales and market grip by 2019. The answer to this lies in the already set up distribution channels and 3.3. Million tonnes per annum edible oil refining capacity in the 13 refining plants across the country. Five of these plants are port-based. The port-based refining plants are of huge significance as 70% of edible oil consumed in India is imported.
— Ruchi Soya’s Situation Post “Acquisition”
The shares of Ruchi Soya were delisted from November 2019 to 27th January 2020 due to the restructuring process. The restructuring process saw the dilution of the stake held by existing shareholders. Their shares were reduced 100:1. This can be described as a reverse stock split to understand better, where 100 shares held are now reduced to 1, but there was no Corporate Action. This was done in order to make way for Patanjali which now has an ownership of 99%.
Out of Patanjali’s total equity infusion, Rs450 crore was invested in exchange of preferential shares. Interestingly enough shares were also allotted to Ashav Advisory on a preferential basis in April. April was also the month where the shares of Ruchi Soya kept increasing from Rs.180 to Rs.413. The preference shares were allotted to Ashav Advisory at Rs.7 a piece in exchange for an Rs.1.87 crore investment after the company’s board approval.
Current Scenario of Ruchi Soya
The shares of Ruchi Ltd. were relisted on January 27th. The shares opened at Rs.17 but since then have been a nightmare for investors trying to get in on the action. Shares of Ruchi saw a continuous 5% increase every day. This has triggered the circuit breakers every day leading to the trading suspension of the shares on a daily basis.
This carried on for over a 100 day period until the shares touched Rs. 706.95. This was followed by a steady fall to Rs 519.80 which seemed like a market correction in order to touch an equilibrium price. But post-May 27th the 5% per day rally began once again. As of 24th June, the shares of Ruchi Ltd. have touched Rs. 1378.40, an 8008% increase in the value since January.
“ RSIL’s liquidity position also remains adequate as on 9MFY20, considering the absence of fixed debt obligations during FY21, a low average collection period, and the availability of unencumbered liquid 1 assets of over Rs. 380 Cr for meeting its required working capital needs.” –Brickworth rating.
Brickworth Rating agency assigned a stable outlook to the companies long term and short term borrowings this year.
Although the Preferential Shares allotment to Ashav Advisory is still pending due to Covid-19 they are still one of the biggest winners in the COVID-19 environment. Their 13 crore investment in April is now worth Rs.2577 crores
Reasons behind the 8,000% increase
The parade of Ruchi Soya has investors wishing they could somehow be a part of. The following reasons give an insight as to what were the reasons for the 8000% price increase. They would also help an observing investor take a better stand when it comes to the shares of Ruchi Soya.
— Baba Ramdev’s Vision in FMCG Industry
Patanjali first disrupted the FMCG segment when they bought their ayurvedic alternatives to the shelf. The Ayurvedic product giant now aims at completely dominating the FMCG segment in India. This would mean that Patanjali would have to take other giants like HUL head-on.
HUL in the year 2018-19 has had sales crossing over 37000 crores. Ruchi would play a crucial role in achieving this. But Patanjali however does not only aim at beating current FMCG market leaders but is aimed at per annum sales of Rs. 100,000 crores in the next two years. Current market leaders like HUL, Nestle, Procter and Gamble, Britannia, and ITC in the 320,000 crore FMCG market get over 75% of their sales from the conventional distribution channels. Whereas Patanjali, on the other hand, receives 70% of its sales from its branded franchise outlets.
Patanjali has set a target of increasing the current 5000 distributors to 25000 distributors in the next 2 years in order to achieve their sales goals. Analysts have predicted that Patanjali can achieve their 1 lakh crore sales targets by expanding their retail reach alone. In addition, Ruchi, which is part of these goals has been debt-free ever since its acquisition by Patanjali.
— Minuscule Public Shareholding and Lack of Share Supply.
Post the restructuring that took place after Patanjali’s acquisition reduced the shareholding with the public shareholders by 99%. Patanjali currently owns up to 99% of the equity shares with less than 1% remaining with the public shareholders. This means that only 28.59 lakh of the 29.59 crore shares of Patanjali are held by the public. This has created a situation where there is a huge demand for investors but the supply available of shareholders willing to sell is too low.
(The graph above shows the trading volumes of the shares of Ruchi Soya Industries Ltd. This shows the lack of significant trading volumes post-February 2020: Source)
The huge increase in the share price has caused the market cap. of Ruchi to increase from Rs. 4350 crore when Patanjali bought it to 40,447.38 crores as of 24th July. Putting it at par with other giants like PNB, DLF, Cipla, etc.
This, however, raises the question as to how has Patanjali been able to legally hold 99% of the shareholding. This is because as per market regulations any majority stakeholder of a listed company cannot hold more than the permissible limit of 75%. Patanjali, however, is part of an exception as Ruchi Soya has just come out of the bankruptcy courts. Patanjali, however, has announced that they will be selling off 20-25% of their stake within the company over the next two years.
The stocks of Ruchi Soya have been one of the biggest silver linings present in the Indian stock markets in the COVID-19 environment. But the question remains whether Ruchi will continue to be the diamond with demand exceeding the supply in the coming years. Investors after conclusively making a decision to get in will also have to decide the right time to do so.
The periods lie in either the current rally in order to be part of the Ramdev vision of which Ruchi is a part. Or to invest when Patanjali finally lets go of the 20-25% over the next 2 years when the supply will also be increased which in turn will affect the price. At the same time get an insight into role played and performance of Ruchi under Patanjali. Happy Investing!
Understanding Bharat Bond ETF as an Investment option in India: On Dec 4, 2019, Finance Minister Nirmala Sitharaman announced the formation of India’s first Bond Exchange-Traded Fund (ETF). This first corporate bond ETF of the country was named ‘Bharat Bond ETF’. This news came nearly two years after the then FM Arun Jaitley announced a plan to launch a bond ETF in his 2018 -19 budget speech.
The FM Nirmala Sitharaman announced that this move was in order to deepen Indian bond markets and at the same time provide additional money for Public sector units. Today, we try and decode what these funds newly introduced in the Indian markets really are.
What are Bond ETFs?
Before we look into what a Bond ETF is it is actually better to look into bonds and ETF’s separately so as to understand them better.
A Bond is a financial instrument used by a company to raise funds from the stock market. Here, the investors are paid interest in exchange for the amount lent to the company. It is safe to say that bonds are a means of raising debt. Here the periodical interest is paid to the investor and the principal amount is repaid on maturity. A bond does not give any ownership right to the investor but there exists a risk of default on the loan.
An Exchange Traded Fund(ETF) is a fund that is actively traded on the stock market. If you have noticed mutual funds, on the other hand, do not trade in the stock market. An investor who wishes to invest in a mutual fund does so based on a previous day’s calculated Net Asset Value(NAV) price. In the case of these mutual funds the demand and supply forces of the stock market do not influence the fund price directly and neither can they be bought and sold through the stock market.
An ETF removes this inconvenience faced by the fund. This is because ETFs are the answer for funds that hold different types of securities to be traded on the stock exchange. This is made possible in ETFs through an arbitrage mechanism to keep the prices on the stock exchange close to the funds’ NAV.
In Bond ETFs, a fund is created that invests only in bonds and at the same time, it is made available to investors through the stock market. Bharat Bond ETF does the same while investing only in public sector bonds.
How does Bharat Bond ETF work?
Bharat Bond ETF offers a portfolio to its investors which only includes public sector bonds that have a ‘AAA’ credit rating. Bharat Bond ETF offers investors two products. A BBETF maturing in 3 years and another maturing in 10 years. The main aims of the ETF are realized due to their ability to be accessed by small retail investors. The Bharat Bond ETF allows a minimum investment amount of Rs.1000.
An investor who would otherwise choose to invest in bonds directly would require investments of significantly higher amounts. The ETFs allow a maximum investment Rs. 200,000. The ETF functions as a growth model. Here the returns that are earned on the investments in the fund are reinvested. This adds to the benefits of compounding.
Why are the benefits of BBETF?
Investing in the newly introduced Bharat Bond ETF offers the following benefits:
— Reduced Investment size
Generally, when an investor would want to invest in the bond market he would be required to make a significantly higher investment. A retail investor would find this amount to be too much to be invested in one company alone.
Tuhin Kanta Pandey, the secretary of Dept. of Investment and Public Asset Mgmt.) highlighted that prior to Bharat Bond ETF retail investors would have no means of accessing bond markets as bond issuances would be done through private placements. The amounts required to be raised here was Rs 10 lakhs.
What BBETF does is it provides investors with the option to invest with a minimum sum of Rs. 1000.
— Benefits of diversification
BBETF offers its investors the benefits of diversification. The investors receive these benefits as the ETF invests in multiple bonds. This protects the investors if a few of the investments fail as the investments that perform well set off the losses.
As the Bharat Bond ETF trades in the stock market, it offers its investors liquidity as they can be bought and sold accordingly.
— Taxation Benefits
Investments in Bonds that are held for more than 3 years receive an indexation benefit. The Bharat Bond ETF also offers the benefits of indexation. Through indexation, the tax imposed on the investors will be adjusted to the amount of inflation.
— Portfolio Quality
BBETF invests only in funds that are graded as ‘AAA’ securities. ‘AAA’ is the highest rating issued to a bond by a credit rating agency. These ratings are issued based on the issuer’s ability to meet its financial requirements and at the same time have a low risk of default.
— Projected Returns
Following were the projected Yield offered by the two Bharat Bond ETFs
BHARAT Bond ETF April 2023 – 6.7%
BHARAT Bond ETF April 2030 – 7.6%
The post-tax yield after the indexation benefits are considered to stand at 6.3% and 7% for the 3 years and 10-year bonds respectively. These returns are estimates and not guaranteed. They will vary depending on the market conditions and interest rates.
Who manages the BBETF?
(Image: Nitin Jain, CEO- Edelweiss Global Investment Advisors, Radhika Gupta, CEO-Edelweiss Mutual Fund and Hemant Daga, CEO-Global Asset Management at the BHARAT Bond ETF launch)
Edelweiss was selected as the Bharat Bond ETF in its first tranche. Bharat Bond ETF has been dubbed as the world’s cheapest fund. This was because BBETF runs at almost zero cost at a 0.0005% charge per annum on the investments. This means that an investment of Rs 200,000 would have a charge of Rs. 1 per year.
Where does the BBETF invest in?
Each of the 2 BBETF products follows separate independently created indexes. The index is constructed with the help of the NSE. These indexes involve only ‘AAA’ rated stocks of public companies. The indexes are rebalanced on a quarterly basis. The maximum exposure given to a bond in the index is 15%.
Is the BBETF without any risk?
The Bharat Bond ETF is not free from risks. They include the innate risks that come with bonds.
The interest offered by a bond will remain constant until maturity. The price of a particular bond reacts on the basis of interest offered by other bond securities.
Say a year after bond ‘A’ is issued the other newly issued bonds in the marked start offering higher interest rates. This will lead to investors selling bonds ‘A’ as they would look for the higher returns from other bonds. This creates a situation where there is reduced demand for bond ‘A’ hence reducing its price.
How can I invest in BBETF?
Bharat Bond ETF is available to investors through two routes
— New Fund Offering (NFO)
An investor has the option of investing in a BBETF at the New Fund Offering. This is made available to investors twice in a year as BBETF is launched every 6 months.
— Fund of Funds (FOF)
Investors are also given the option of investing in the ETF through a FOF. This will be available to the investors throughout its tenure. The FOF also offers the investors to opt for SIP. Investors are not required to have a DEMAT account to invest via the FOF. The investor simply can do so through https://bharatbond.in/.
It should be noted that choosing the FOF route results in the increased cost charged. The added expenses of the FOF bring the cost of investment to 0.0515%.
Is there a lock-in period?
Bharat Bond ETF’s do not have a lock-in period. But they do however have an Exit load in the case of a FOF. An exit load of 0.10% is charged if an investment is withdrawn with 30 days. There is no exit load charged if the investment is withdrawn past the 30-day mark.
Bharat Bond ETF as an investment option?
Bharat Bond ETF was welcomed in the Indian markets with 1.7 times subscription. After raising Rs. 12,400 crore in its initial investment the ETF is now preparing for its second tranche. Edelweiss announced that the second tranche will take place in July for the two series maturing in 2025 and 2031.
The covid19 environment has disrupted the investment behavior of investors. Investors are now more risk-averse and look for the safety of their investments. This environment has made fixed schemes like the Bharat Bond ETF more attractive to investors. This can be owed to the mix of tax benefits, low cost, returns, liquidity, and security offered by the Bharat Bond ETF.
Understanding Insider Trading and its implications: Since the time the first stock exchange was established in the sixteenth century, a lot many people have tried different unethical ways to make money from it. Although a few are able to fool the market and make sustainable profits, however, most gets caught from the governing bodies. One such fraud on which most of the regulatory bodies keep an eagle eye is “Insider’s Trading”. In this article, we are going to discuss what exactly is Insider trading, why it is illegal and how you can protect yourself from it. Let’s get started!
What is Insider Trading?
The stock market is able to work in an efficient way when all the investors have the same information, this creates a level playing field. Here, the investors are rewarded for their analysis and expertise.
Insider Trading throws this level playing field out the window. In insider trading people who have access to sensitive private information take advantage of investors who are oblivious to these facts. Insider trading refers to trades made based on material price sensitive non-public information about the company.
Insider Trading in India is governed by the SEBI Act of 1992. Any individual who is proved guilty of insider trading can be imprisoned for a maximum of 5 years and fined between Rs. 5 lakh to Rs. 25 crores or 3 times of the profit made whichever is higher. The rules governing such trades and the degree of enforcement vary significantly from country to country.
What forms a part of insider trading?
The timing when the person in question makes the trade is also important. If the information in question is still non-public when the buy/sell of shares takes place it constitutes insider trading. It is also important to note that if the person accused of insider trading is linked to someone within the company or someone who is associated with the company, then both can be prosecuted. Acting on the information does not only constitute trading the share of the company in the stock market. Even further passing on the information is illegal. In India, close relatives of company officials are also considered as insiders.
Case 1: Say an employee of a company shares some price-sensitive information with his father. His father then goes onto share this information with his friend who uses it to profit from the stock market. Here all three involved can be prosecuted for insider trading.
Case 2: A person overhears material information at the cafeteria from employees of a company. He then goes onto profit based on this information. As long as he has no connection to the employees of the company he is not guilty of insider trading.
Case 3: An employee of a company enters into a disinvestment plan with his broker. According to this plan, he would sell his stake in the company over regular intervals over a period of one year. After 9 months the employee is made available with some material non-public information. According to this material information, the employee would make a loss if the shares are held by him. In this case, as long as the employee can prove his trades were part of a preexisting plan he can be acquitted of the insider trading charges.
Unfortunately enough at times, those accused of insider trading make use of ‘Case 2’ and ‘Case 3’ in their defense. Individuals who have brokers trading on behalf of them also claim that they had no idea of the trades taking place as they were acted on by the broker.
Who can be implicated for Insider Trading?
To understand insider trading better it is necessary to understand who can be implicated in insider trading. Generally, insider trading revolves around members of an organization who possess material information. But it isn’t always necessary for you to be a member of the organization to be a part of insider trading. Important decisions that may impact the share price involves parties that may not work within an organization. Say for example A company planning to undergo a merger with another company will involve many third parties like bankers, lawyers, and other professionals who offer their services to the company. If they act on the information they receive they can be prosecuted for insider trading.
The implementation of various decisions taken by the company requires prior approval from the government. Hence government officials too can be incriminated for acting on the confidential decisions they receive while executing their duties.
Insider trading, however, is not limited to white-collar relations. Members of an organization or employees may share the information with friends or family or acquaintances. If this information that is yet to be made public is acted on they will also be prosecuted under insider trading.
Infamous insider trading cases
— Dilip Pendse
Dilip Pendse served as the Managing director of Nishkalpa, a wholly-owned subsidiary of TATA Finance Ltd. (TFL). As of March 31st, 2001 Nishkalpa made a loss of 79.37 crores. This information was to be made public only a month later on April 30th. This information was price sensitive as it would lead to a fall in prices if leaked. Dilip Pendse was in access to this information due to the role he played within the company.
During this period Dilip leaked this price-sensitive information to his wife. In between this period, 90,000 shares which were held by his wife and a company jointly run by his wife and her father in law in Nishkalpa were sold in order to avoid losses. Dilip Pendse, his wife, and the company jointly owned by his wife and her father in law were found guilty of insider trading.
(Snoop Dogg and Martha Stewart on the sets of their TV Show. In 2003 Martha Stewart was charged for insider trading)
Martha Stewart is a prominent TV personality who has also won an Emmy for her work on the ‘Martha and Snoops Dinner Party’. In the year 2001 Martha Stewart owned up to 4000 shares of the BioPharma Company ‘ImClone Systems’. Her broker received a tipoff that the CEO of ImClone Systems sold all his holdings held in ImClone. The CEO did this as he received information that the FDA was about to reject one of ImClone’s cancer treatment drugs. Shortly after this news became public the shares of ImClone dropped 16% in one day.
Martha Stewart was able to save herself from losses amounting to $45,676. In 2004, Martha Stewart was convicted as the trade was made on the information that the CEO sold his stake, which was non-public info. Martha Stewart and her broker were announced guilty. She received 5 months in a federal correction facility and fined $30,000. The CEO of ImClone Systems was also convicted and sentenced for 7 years with a fine of $ 4.3 million.
— Rajesh Jhunjhunwala
Rakesh Jhunjhunwala was probed by the SEBI in January 2020 on account of alleged insider trading. These allegations were based on the trades made by him and his family in the IT education firm Aptech. Aptech is the only firm in Jhunjhunwala’s portfolio in which he owns managerial control. SEBI also questioned Jhunjhunwalas wife, brother, and mother in law. This, however, is not the first time that Rakesh Jhunjhunwala has been embroiled in insider trading controversy.
In 2018 too he was questioned over suspicion of insider trading in the shares of the Geometric. Rakesh Jhunjhunwala settled the case through a Consent order mechanism. In a consent order, SEBI and the accused negotiate a settlement in order to avoid a long drawn litigation process. Here an alleged violation can be settled by the accused by paying SEBI a fee without the admission or denial of guilt.
Foster Winans was a columnist at the Wall Street Journal. Due to the reach of WSJ, the stocks that he wrote about would react accordingly. Winans then began leaking the contents of his columns to a group of stockbrokers who would position themselves accordingly to make a profit.
Winans in an interview with CCR, “One day, I met a stockbroker, Peter Brant, and was going to write an article about him. After a few months, that kind of fell beside the wayside. He one day said to me — that column you write is very powerful, it moves stocks, you are doing a great job, how much do they pay you, isn’t it terrible, only $25,000 a year, with all of the skill and talent that you have, if you told me what you were going to write about the day before it is published, we’d make a lot of money.”
Winans took the deal offered by Peter Brant and was eventually caught by the SEC after being involved in 24 influenced trades over 3-4 months. But in this case, the information was the personal opinion of R. Foster Winans. His defense argued in the courts that although what Winans did was wrong he still could not be considered an insider. This was because the case did not involve any insiders(people within a company or their relatives and connections).
He was still convicted as the information shared with the stockbrokers was not public until his column was published. Winans received a sentence of 18 months in prison which was later reduced.
— Barry Switzer
Barry Switzer was the football coach for Oklahoma in 1981. While at a track meet he overheard some executives talk about some sensitive insider information. This led him to buy shares of Pheonix Resources. By doing this Barry Switzer went on to make a profit of $98,000. Barry Switzer was later acquitted due to a lack of evidence. In this case, Barry Switzer would have been guilty if any of his players or someone he knew was related to the executives present at the track meet.
How to avoid being implicated in Insider trading?
After looking at the above it may be clear that dealing with data that is non-public could be just one step away from being accused of insider trading and hence become a victim of an unnecessarily long litigation proceedings. The following steps help in avoiding this:
-If you are an employee or are dealing with an organization in a role that involves dealing with sensitive data it is important that you are aware of who you share your data with. If you aren’t directly connected with the organization identify your sources ( whether they are in any way connected to insiders). Generally, organization employees and third-party players are required to sign a non-disclosure agreement.
-Even if you receive data that is important to your trade, verify that the data you have received is public. Do this by checking reliable public sources. If you find yourself in a dilemma it is best to report the information received to the authorities.
-Do not go looking for non-public information about the company from its personnel or those who deal with the company. This will further put you at risk of being investigated if the information is leaked out. You may be accused of insider trading even if you only divulge the info you have received, even if it was overheard.
Foster Winans the WSJ journalist argued for insider trading asserting “ The only reason to invest in the market is that you think you know something others don’t.” Arguments have been drawn on who is actually harmed because of insider trading. As your transactions take place with parties that have already decided on the position and want to sell or buy. The Atlantic even described insider trading as “ arguably the closest thing that modern finance has to a victimless crime.”
There have also been arguments made calling to legalize insider trading that involves dealing with negative information. It is because this is the information companies generally keep from their shareholders. Milton Friedman who received the Nobel Memorial Price in Economic Sciences in 1976 said, “ You want more Insider Trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that.”
A Guide on NSE Indexes that you should know: An Index is basically the stock exchange creating a portfolio of the top securities held by it. Indexes have always played an important role for both investors and companies by offering a reliable benchmark. They have also been used as an investment strategy where Investment Managers just set up their fund portfolios to simply track the index in an attempt to gain similar market returns. Indexes play an important role as they also stand in representation of a country’s market and economy.
Today, we discuss the various indexes offered by the National Stock Exchange (NSE) and the role they play for different stakeholders with an attempt to help you get a better insight into indexes. Here, we’ll look into popular NSE indexes and sectorial indexes like Nifty50, Nifty100, Nifty largecap, Nifty midcap, Nifty smallcap etc. Let’s get started.
Indexes offered by the NSE
— Broad Market Indexes
Broad Market Indexes are used to give an indicator of the movement of the economy. They are considered suitable for this as they include stocks from all industries. The indexes are designed to reflect the movement of a group of stocks considered in that portfolio or the market as a whole. The broad market index considers the stock from various sectors. Broad market indexes consider only the top stocks in the market. Hence it can be safe to say that the broad market indexes are the buffet among indexes.
Assessing the broad market index from their names
The broad market indexes generally have the Index_name pertaining to the stock market followed by the number of stocks of different companies it considers. This allows a stakeholder to assess accordingly the degree of diversification and exposure available in that index.
Broad market indexes from NSE India
Here the number next to the index name ‘Nifty’ represents the number of stocks the index considers. The greater the number of shares the more diversified the portfolio will be. But the greater the number of stocks also represents the greater exposure to risk. Indexes like Nifty 500 will have the top 500 stocks available in the NSE universe. This index will have a considerable number performing well but also a great number of stocks performing negatively. The Nifty 200 will contains the top 200 stocks from Nifty 500. The Nifty 150 will contain the top 150 stocks from Nifty 200 and so on. The Nifty 50 consists of the top 50 stocks in the NSE.
Nifty 50 is considered to be a representation of the Indian markets over other broad market indexes by NSE. This is because it represents the best-case scenario in both bullish and bearish times represented by the best companies. All companies considered in these broad market indexes are large-cap.
The broad market indexes are made available based on the extent of capitalization. Market capitalization is the total value of the companies stock. Market cap is calculated by multiplying the share price of a stock with the total number of public shares offered by the company. This ensures that both the size and prize are given consideration. Based on this computation the stock market is divided into large-cap, mid-cap, and small-cap.
How are large-cap, small-cap, and mid-cap classified?
Large-cap refers to a company with a market cap of more than 28,000 crores.
Mid-cap refers to a company with a market cap valuation of more than 8,500 crores and less than 28,000 crores.
Small-cap refers to companies with a market cap valuation of fewer than 8,500 crores.
Assessing broad market indexes from their names
Here the indexes have the Index_name followed by the cap. size further followed by the number of shares held in the index portfolio. Eg. Nifty Midcap 50 — This shows that the index holds 50 different stocks of companies from the Mid-cap category.
Broad Market Indexes based on cap size offered by NSE India?
The broad market indexes offered based on capitalization are
Nifty Smallcap (50, 100, 250)
The companies included in this index portfolio are those with relatively small market capitalization. This index is important because they include stocks that are not considered in other broad market caps like Nifty ( 50, 100, 150, 200). This is because indexes like Nifty 50 include stocks from the top-performing industries which are from the large-cap category. The Nifty small-cap includes securities from which investors can earn higher amounts of returns due to the possibility of the range of growth available to small-cap companies. However, these higher returns come with higher risk from higher volatility to investors. The risk is increased considering that the information available on these companies is low.
Nifty Mid-cap (50,100,150)
The shares of the companies included here are those whose market cap falls in between large and small-cap. Mid-cap includes shares that offer better growth potential than large-cap funds and lesser risk than those from small-cap securities. The stocks included here are for investors with moderate risk appetite. The Nifty Midcap indexes can be used by companies that have a market cap of more than 5000 crores but less than 20,000 crores to assess their performance growth rate and returns offered to their investors. The same can be done by investors.
Nifty MedSml 400
The Nifty Mid Small 400 Index includes shares of 400 companies from both the Medium and Small-cap. The Nifty Midsml 400 is a combination of the Nifty Midcap 150 and Nifty Smallcap 250 index. Hence it includes 150 companies with medium-cap and 250 companies with small-cap. It is appropriate for funds to attract and offer investors a higher growth rate and returns from the small-cap companies and some degree of increased security from mid-cap companies.
Nifty Large Midcap 250
The Nifty Large Midcap includes a portfolio of 100 large-cap and 150 mid-cap companies. It is a combination of the Nifty 100 and the Nifty Midcap 150 index. This index can be followed by funds that want to offer the least risk but low returns available from large-cap to balance off the high risk and high returns of midcap.
— Other Broad Market Indices
The Nifty Next 50
The Nifty Next 50 includes shares of stock that are from Nifty 100 but do not make it into the Nifty 50 Index. Therefore it is the Nifty 100 index excluding the Nifty 50.
The Nifty VIX stands for the Nifty volatility index. Generally, indexes only include shares of companies but this index includes derivative products. This index is based on the Nifty index option prices.
Sectoral indexes summarise top performing stocks from the respective industry together and provide a summary of how the specific sector is performing. This acts as a benchmark for its users to either compare company performance with the respective sector index or compare the sector’s performance to the market. This is done by comparing the sectoral indexes with the broad market indexes.
Sectoral Indexes Offered by the NSE
Types of companies included
Number of companies Considered to portfolio
Real Estate Companies
Large Indian Banks
All vehicle Manufacturing, tires, and other auto auxiliaries
Nifty Financial Services
Banks, Financial Institutions, Housing Finance, and Other Financial Services
Nifty FMCG Index
Companies that produce durable and mass consumption productsÊ
Nifty IT Index
Companies included are those that have over 50% of their income from IT-related activities like IT infrastructure, IT education and software training, Telecommunication services and Networking Infrastructure, Software development, hardware manufacturing, and Support and Maintenance.
Media and Entertainment
Stocks from printing and publishing are also included apart from Media and Entertainment.
Strategy indices involve adopting one of the following strategies to create a portfolio. They give investors the possible top stocks that suit the respective factors. The major strategy indices are
Nifty Alpa 50
Alpha is generally the difference between the returns from an investment or portfolio in comparison to the overall market. The condition for an alpha stock to be considered into the index portfolio is that it should have a pricing history of at least a year.
Nifty 100 Quality 30
A stock qualifies as quality stock if it has
A high Return on Equity (ROE = Net Income/ Shareholders Equity)
Low Debt-Equity Ratio
An average change in Profit After Tax(PAT)
The condition for the quality stock to be considered into the index portfolio is that it should have a positive PAT in the previous year.
Nifty 50 Value 20
A stock qualifies as value stock if it has
High ROCE ( Operating Profit/Capital Employed)
High Dividend Yield
Low Price to Earnings Ratio
Low Price to Book Ratio
The condition for the value stock to be considered into the index portfolio is that it should have a positive PAT in the previous year.
Nifty 100 LowVol 30
A stock qualifies as low volatility stock if it has a low standard deviation of price returns. The condition for the low volatility stock to be considered into the index portfolio is that it should have a pricing history of at least a year.
— Multi-Factor Indices
The quest to beat the returns offered by the broad market index has given rise to multi-factor indices. In investing when the fund manager follows the portfolio of an index it is known as Passive Investing. When the fund manager devises his own strategy to create a portfolio with the aim of beating the benchmark it is known as active investing.
Multi-Factor indices use the rule-based approach of following an index from passive investing and the strategy of relying on multiple factors to select stock from active investing. The factors majorly used by strategy indices are – Alpha, Quality, Value, and Low Volatility. A strategy index creates a portfolio of 30 stocks based on 2 or more of these factors.
Some of the Multi-Factor Indices are-
NIFTY Alpha Low-Volatility 30
NIFTY Quality Low-Volatility 30
NIFTY Alpha Quality Low-Volatility 30
NIFTY Alpha Quality Value Low-Volatility 30
Performance of multi factor indices in comparison to other indices
(Source: All NIFTY multi-factor indices outperformed market cap based indices over the long term)
The indexes discussed here form a very small portion of the indexes offered by the NSE. As of data in 2016, there were 67 Indexes offered by the NSE. Just like popcorn, which is not a necessity in any staple diet, it still has a role to play during recreation. Similarly, there are various indexes offered which may not represent the market but still have an important role to play.
Understanding what is Ponzi Scheme and how to safeguard yourself from this plague: Frauds and scams are part of our lives for a very long time. From corporate frauds, government official frauds to individual scams, our society has witnessed all. Time and again we have heard of big scams like Indian Coal Allocation Scam 2012 – Rs 1,86,000 Crore, 2G Spectrum Scam 2008 – Rs 1,76,000 Crore, Commonwealth Games Scam 2010 – Rs 70,000 Crore, Satyam Scam 2009 – Rs 14,000 Crore, etc.
However, one such scam which is quite common but never came in a lot of notice or fame for the retail people is “Ponzi Schemes”. Although a lot of people have lost lakhs of rupees in these schemes, however, most of our population still do not understand what exactly are these and how they work. In this article, we are going to demystify this fraud and discuss what is Ponzi scheme, it’s history, some infamous Ponzi Schemes and how investors and common people can safeguard themselves from such fraudulent tricks. Let’s get started.
What is Ponzi Scheme?
A Ponzi scheme is an investment scam where returns are paid to existing investors from funds contributed by new investors. In a Ponzi scheme, investors are duped by being promised high returns with little or no risk on their investments. The scammers then rely on cash flow from recent investors to provide returns to older investors. The scam runs along the lines of ‘Robbing Peter to pay Paul’.
Here the investors have no idea from where their returns come from. They are misled to believe that the returns are being generated from the success of a business opportunity or the superior skills of a portfolio manager. At the initial stages, if an investor wishes to withdraw money, the scammers ensure that this is done promptly in order to gain the investors’ trust. The liquidity coupled with the superior returns results in a social feedback loop where current investors amazed by the returns suggests it to their friends and relatives.
A Ponzi scheme, however, can only exist as long as new investors keep entering the scheme as their money is used to provide returns to the older investors. If at any time a huge number of investors demand their money back at once or if new investors stop coming in, the scheme stops functioning and the scam is unraveled. India too has had an ugly history with Ponzi schemes. 978 Ponzi schemes have been identified in India, 326 of them being from Bengal alone.
History of Ponzi Schemes
The scheme is named after a man called Charles Ponzi, an Italian who committed the fraud a century ago. He promised to pay investors a 50% profit within 45 days or 100% profit in 90 days. He claimed that he was able to raise the profits by acquiring Postal Reply Coupons from countries where it was cheaper and sell these coupons in countries where they were being sold at a higher.
However, using arbitrage could never generate such magnitude of profits in order to generate 100% returns in 90 days. The investors, however, did receive their returns initially but what Ponzi did here was just take investments that were coming in from newer investors and pay off the older investors.
As investors kept pouring in, Ponzi opened a new office and hired agents to create an aura of trust and further scale the fraud. Ponzi was soon raking in a million a per day within a year. Ponzi during this period lived a luxurious lifestyle further investing in a macaroni and wine company. The scheme eventually got too big and failed to bring in new investors.
At this point, the scam began unraveling. Investors lost close to $20 million (approx 193 million in 2019). Investors were able to recover only 30 cents to a dollar they had invested. The scam also brought down 6 banks in The United States.
How is the Ponzi Scheme different from a Pyramid scheme?
A Ponzi scheme may at times be confused with a Pyramid. A Ponzi scheme promises a high rate of return and the source of these returns is hidden from the investors (which is actually from the investments of new investors).
In a Pyramid scheme, it is made clear to investors that in order to gain returns they have to recruit new investors. The new investors further have to do the same after the initial investment and so on. In addition to this investors at times are also given a right to sell a product in exchange for a commission which also turns a pyramid scheme into a marketing and sales campaign.
Some Other Infamous Ponzi Schemes.
— Bernie Madoff
The phrase ‘ Give the devil his due’ suits no one better than Bernie Madoff and his Ponzi Scheme. This is due to the size, period, and the ruse implemented by Bernie Madoff. Bernie Madoff was a pioneer in the investing world as he brought forward the advent of trading using electronic systems, and hence NASDAQ. He was also looked up to as he served as the non- executive chairman of the NASDAQ for 3 terms( 1990-93).
Bernie Madoff was convicted in 2009 which came as a shock to the investing world. But what is even more shocking is that he was only caught in 2008 for a scam investigators believe he started as early as 1964. Bernie Madoff had been described as a very charismatic individual which definitely helped in attracting naive investors towards his scam.
We notice his brilliance as unlike other Ponzi schemes, not everyone was even allowed to invest in his scam. Madoff allowed investors to invest only if they were vouched for. This made it seem like an exclusive club and a privilege to have your money handled by Madoffs investment firms. But what enabled Madoff to sustain the scheme for so long was that unlike other Ponzi Schemes Bernie offered his clients returns of only 10%. This made it look like a conservative investment. In addition to this, he also had a backroom team that created fictitious financial statements and periodical reports to further deceive the investors.
The Bernie Madoff scheme unraveled in 2009 thanks to the housing crisis. A total of $36 billion was invested into the scam, of which $18 billion was recovered.
— Crypto Ponzi
The success of cryptocurrencies took the world by storm due to the success of Bitcoin and Ethereum. But scamsters somehow have always have managed to be a step ahead adapting to cutting edge innovations. Cryptocurrencies too have not been free from scams as con-artists take advantage of investors who evidently have lesser knowledge of the working of cryptocurrencies.
Plustoken a crypto from China received investments of $2 billion. They did this by marketing themselves as a crypto wallet service. Here the investors were promised higher returns if they exchanged Bitcoin or Ehereum in exchange for Plustoken’s own crypto. This scheme was just another Ponzi were over 3 million investors were cheated.
Any investment opportunity that says this is a major flag that actually says you are never getting your money back. It is best to apply one of the basic rules of investing here that only with greater risk comes with greater reward. Low risk is accompanied by lower returns. Investors should also beware of words like ‘ everyone else is doing it and profiting’ as these create a fear of missing out.
2. Overly consistent returns
Investments react to market trends barring a few outliers from time to time. If you are given proof or notice that the investments are able to generate consistent returns regardless of the market going through extended bearish periods, then it is another red flag. Bernie Madoff’s investment firm delivered consistent returns of 8-10% every year regardless of market trends. This was a major red flag that investors missed.
3. Secretive or complex strategies
When you receive investment opportunities it is best to try and understand how the business or investment opportunity works.
Scammers in the crypto world have made use of this obliviousness that investors had towards the working of a cryptocurrency.
Scammers generally have charismatic qualities that attract people towards them. Bernie Madoff was always seen as the most genuine individual until the scam broke out. He was described as a person always reachable by phone. Investors have even claimed that he attended funerals when one of their loved ones passed away as a sign of support. This quality allowed Bernie to gain the trust of potential investors at the synagogues he prayed in and the country clubs he hung out in.
But Accountant Harry M. Markopolos claims that when he was shown Bernie Madoff’s investment firm’s data as an investment opportunity it took him 5 minutes to realize it was a fraud. Accountant Harry M. Markopolos is known as the whistle-blower to the Madoff scam. He claims that when he was shown Bernie Madoff’s investment firm’s data it took him 5 minutes to realize it was a fraud. Unfortunately, no one paid heed to his words due to Bernie Madoff’s influence in the investment world.
5. Background Checks
It is always best to perform background checks when we are presented by investment opportunities by individuals. This can be done by verifying the firm’s registration numbers.
And Finally, a lot of time going with your gut feeling can also help…
Let’s discuss how to Boycott China and Say No to Chinese Products in India the correct way: The recent announcement by The Confederation of All India Traders (CAIT) on boycotting 3,000 Chinese products has taken its toll in the entire country post the border standoffs between India and China. The CAIT believes this campaign is necessary to make China understand that they will have to bear the repercussions of standing by Pakistan. The CAIT also launched a national campaign called ‘Indian Goods- Our Pride’ to promote local goods and ban Chinese goods.
The ongoing pandemic has affected the economy so much that our Prime Minister too in his speech to the public urged everyone to support local businesses and to promote them started a ‘vocal for local’ campaign. While all of these is happening everywhere, the underlying question that remains yet to be answered is how is this campaign of boycotting Chinese products going to be effective, and what are its consequences on our GDP? Is it possible at all? If it is possible then what should be the ideal approach? Let us understand the practical impact and its impact in the future, both long-term and short-term.
Factors Accompanying and Favoring This Campaign
The Economic fall down has made everyone think twice before they buy anything from anywhere. While a lot of people are getting jobless and undergoing salary cut situations, it is also important to have a look at how compatible our infrastructure and resources are to enable those job seekers to get permanent employment that solves our country’s unemployment issue as well. Therefore, campaigns such as ‘Local for Vocal’, ‘Indian Goods – Our Pride’ are being promoted recently. Boycotting Chinese products is the first thing that comes under the Government’s eye as Chinese products share a huge market of Indian customers as they are way too cheaper than our Indian products.
The benefits of boycotting Chinese products are going to help our Indian local businesses only in the long run. When the local products and local businesses are uplifted our army will get the necessary equipment to fight for our nation. As Mr. Sonam Wangchuk explains in his video which has gone viral, the Chinese army is well equipped to fight against us as we use their products and pay very well for it. Instead, if we use local products and make our army stronger, it will not only boost our national goods but also help our soldiers to fight for us.
According to him, it is our utmost duty to stand by our country’s army and do whatever possible we can. On the other hand, when Chinese companies will lose the Indian market, there will also be a huge drop in their economy as well. The messages on uninstalling the TikTiok App are also flooding the social media sites these days which is quite encouraging to see how most of the people have accepted this campaign.
Analyzing the Flip Side
The traders’ body CAIT asked to implement 500% duty on imports from China after China supported Pakistan to remove article 370 in J&K. This will make Indian products costly reason being India imports many raw materials from China only. This move is called a politically inspired campaign as it sounds more impractical than realistic.
The primary factor why Chinese products are so popular in India is that they are sold at quite cheap rates as opposed to Indian products. It is also a fact that India imports seven times from China than it exports to them. Not only these, but India also imports smartphones, laptops, electrical devices, and medicinal drugs from them. Boycotting these products will only reduce India’s GDP to a large extent. The supply chains are interlinked geographically so much that banning Chinese products will break the entire production process. The reason being many small and medium businesses use components made in China or use the machineries to produce the goods that are made in China.
Many Chinese firms established their branches in India post-launch of ‘make in India’ campaign. These branches have provided employment to many Indian workers. Chinese products ban will have an adverse impact on these branches and that may result in a rise in the unemployment rates. Surprisingly, we all are so used to Chinese products that boycotting them would have a psychological impact on us. In fact, everything that we use daily has a bit of Chinese involvement in it.
Be it either an app or a smartphone, or a laptop, or any raw material for a product manufactured in India. The talks are also happening around Alibaba’s founder Jack Ma’s statement on India’s manufacturing companies’ work culture.
Name of the Market
Market Share (Rs. In Crores)
Other Electronics and Telecom Equipment
Other Home Appliances
As seen from the above table, the market share of Chinese Products is huge in many sectors. Boycotting these products all of a sudden is not going to make India self-reliant. There is a still long way to go. Banning these products will not only force people to buy costlier products but also it will contract the country’s GDP drastically.
Hence, there are few reasons why we should boycott Chinese products but at the same time, strong arguments and challenges are on their ways to explain why this campaign is not going to work if a concrete strategy is not made. The trade war is not only going to decrease the market of the Chinese product in India, but it is also going to hit the Indian economy as well.
The Failure of Past such Campaigns
It is evident from the past history of such campaigns that apparently could not be successful and there were many reasons behind it. China’s campaign of boycotting Japanese goods to object against Japanese colonization, US’s campaign to ban French products to protest against France’s disagreement to send army forces to Iraq after 9/11 attack and Middle East countries’ ban on American & Israeli products to support their campaign on Palestine have witnessed failures only and did end up leaving the idea very soon.
From the above past records, it does not seem a bit pragmatic for India to implement so quickly this campaign. However, we can always look at the reasons that went wrong in the above cases and learn from that so that the implementation can be effective.
How to Boycott China and ensure the Victory on this Campaign?
Although there are some reasons and explanations argue against the idea of boycotting Chinese products, but there must be certain ways through which we all can make it possible. According to Mr. Sonam Wangchuk, in his recent video, he appeals for a ‘systematic and a phased manner’ of boycotting Chinese products.
The ‘Systematic Way’ of his appeal suggests to boycott using software that is made in China in a week’s time, hardware in one year’s time, finished products and non-essential items to be also boycotted in a year’s time and slowly and gradually once we are used to these, we can move to boycott essential products and raw materials in the coming few years. This strategy is for more than a year, and it will give the necessary time and scope for local businesses and manufacturing companies to be well prepared for the substitutes in the near future.
In China, the government provides corporate loans at much cheaper rates. The Indian government too can come up with a plan where local companies and businesses are encouraged to manufacture the products that are being imported from China also by reducing loan interest rates. The infrastructure and other related services should also be made easy and faster to enable our companies’ products to be competitive globally.
In the time of the global disease outbreak, when people are either losing their jobs or experiencing reduced income, boycotting cheaper products, and promoting expensive local products may not last long. The existence of a huge market share of Chinese products in the Indian market is definitely going to hit our GDP to a greater extent. However, a systemic approach of gradually stop using Chinese products where we can find its substitutes and there is a scope for our manufacturing industry to reach to high quality and low-cost expectation may lead this campaign to a new successful level.
As citizens, our contribution can be in the form of getting used to other substitutes and slowly stop using Chinese products to promote our local businesses, and it is indeed everyone’s duty. The government’s role in this is to provide necessary support – financial or otherwise, robust infrastructure and constant efforts to make our manufacturing industry compatible to produce cheaper products with no compromise on quality. With the mutual efforts and systematic boycott approach, we will be able to make it reach its expected level.
Understand Pump and Dump scam in Share market: Starting from the Nigerian Prince in exile asking for money, us winning lotteries we never took part in, and a distant relative we never heard of trying to send us his inheritance, has bought us to a stage where we are waiting to find out how much more ridiculous these scams can get. Similarly, the stock market world with all its rules, regulations, and watchdogs is not free from scams. Today we have a look at one such method used to scam naive investors of their money called the Pump and Dump.
What’s the Pump and Dump?
In the Pump and Dump scheme, the promoter or large investors mislead the market into believing that a particular stock is valuable. They release false information which in turn gives rise to the first portion of the scheme known as ‘A Pump’. The con investors at this stage buy large portions of the valuable at cheap prices. Here due to the credibility held by the promoter or the large investor the market too begins investing in the stock.
This leads to a rise in the demand which causes the stock to be inflated with increased prices. Once the price increases the promoters begin the second phase ‘ The Dump’. Here the promoters and investors sell their stake at the higher prices making a profit. This causes a market reaction where the price falls and the naive investors who believed then news are left suffering the losses.
Furthermore, after the dump stage, the naive retail investors hold on to the stock thinking that the fall in prices is a small market corrected and still anticipate the prices to rebound. But to their misery, the stock prices keep falling to their original value making it too late for the naive retail investor to exit without losses.
At times brokerage firms and other organizations also make use of the pump and dump. Here they are either hired by the promoters or they themselves purchase a stake in the company they wish to use in their scam. Once the shares are acquired the brokerage firms then begin spreading misleading statements that attract investment in the company which leads to increased prices. At this point, they dump the stock.
— Stocks used in Pump and Dump Scams
Generally, large investors or brokerage firms target penny stocks. This is because they have low values and are easy to inflate. Large-cap stock too are at times prey to this, but even a large investor with the ability to influence a Large-cap is rare. Pump and Dump also make use of the psychological Fear Of Missing Out (FOMO). Everyone regrets not being able to invest in big multi-bagger stocks like Apple, Google and Facebook etc during their initial stages. Hence, the search for similar stocks leads retail investors to fall victim to such Pump and Dump schemes.
— Channels/Mediums used in these schemes
Pumping and dumping were traditionally done through cold calling. Here the brokers would cold call innocent investors and pressurize them into buying these stocks. They would also use strategies where they would leave a message on the answering machine with misleading information regarding the stock. This made it look like it was missed call with the information not intended for the receiver. This scheme then moved onto emails and currently even makes use of social media.
Infamous Pumpers and Dumpers
(From Left to Right: Harshad Mehta, Ketan Parekh, Jonathan Lebed, and Jordan Belfort)
1. Harshad Mehta Scam
The pumping followed by Harshad Mehta in the 1990s caused the great bull run. This earned him the nickname the Big Bull. Harshad Mehta also had tricked banks to fund the bull run. He caused the stocks of ACC by 45 times. The markets crashed the day he sold. Harshad Mehta was arrested over numerous charges ( 70 Criminal Cases and 600 Civil Action Suits).
Ketan Parekh a Chartered Accountant earlier worked with Harshad Mehta. Parekh made use of circular trading to pump and dump. He would have one of his companies buy a stock and have it sold to another company that he owned. He would do this involving many of his companies. This increased the trading volume of the stock which in turn attracted investors. This caused an increase in the prices and at this stage, Ketan Parekh would dump. Ketan Parekh was arrested in 2001.
3. Jonathan Lebed Scam
In 2000, Jonathan Lebed was only 15 years old when he successfully Pumped and Dumped. He would purchase penny stocks and then promote them at the message board. Once the prices increased he would sell them at a profit. He was caught by the SEC and a civil suit for security manipulation was charged against him. Lebed made $272,826 in profits. He settled his charges through these earnings.
4. Straton Oaks Scam
This may be perhaps one of the most famous pumps and dumps among millennials thanks to the movie Wolf of Wall Street. The movie is adapted from the memoir of Jordan Belfort. His brokerage firm Straton Oaks would inflate the prices of the stocks he owned through misleading statements and later sell them at profit.
Stocks that were Pumped and Dumped in Past
1. Surana Solar Ltd
In the case of Surana Solar Ltd, the shares rallied over 725% after new broke into the market that India’s most successful investor Rakesh Jhunhunwala had purchased a stake in the company. Everyone wanted a piece in the company that Jhunjhunwala believed in. It was later clarified that another investor had used conned the market by investing in the company using the ‘Rakesh Jhunjhunwala’ name. Once this news broke out the shares fell causing huge losses to naive retail investors.
2. Sawaca Business
The case of Sawaca Business Machines Ltd is special because the pump and dump scheme here was not used once but twice. In the price graph movement above we can see a rally from 2011-13 and again from 2014-15. The shares rallied over 2500% reaching heights of Rs 225.50 per share from 2011-13 and then fell again to their original figures. After the fall the shares rallied again from 2013-15 touching prices od Rs 204 and giving gains of over 1000%. As of 10th June 2020, the shares are valued at Rs 0.53 per share. A con investor who would have even invested Rs 10000 would see his wealth scale over 25 lakhs if pumped and dumped at the right time during the two periods. However, the loss to retail investors has been incomputable.
How to protect yourself from Pump and Dump?
1. Tenurity of stock being traded on the exchange
Generally, stocks that are used by scamsters for pumping and dumping will have been made available for less than a year. These stocks are generally penny stocks. Companies that are considered small-cap do not have considerable information made available to the investors to make informed decisions. Investors fall victim to their emotions and the pressure selling by brokers in these cases.
2. Look at the long term Stock Patterns
Generally in cases of Pump and Dump it is possible for investors to notice similar patterns during the pumping stage. After the stocks are influenced and are in the pumping stage an investor will be able to notice a steady increase every day in the penny stock. This sudden increase in price would be bizarre when coupled with the previous low trading volumes.
3. Shade of Influence
If a broker pressurizes you to purchase a penny stock there is a good possibility that it is a scam. Great stocks sell themselves and do not rely on large investors or broker pressure. Irrespective of the medium, be it emails/social media/brokers, such schemes generally violate the basic rule of high return high risk. The proposal generally promises high returns with no or low risk. There may also be claims of insider information available to influence the proposal to buy the stock. Investors must be aware of such red flags.
Scammers have adapted to the changing times but for an honest investor, the requirement to remain safe remains the same. If an investor does his own research and homework as long as he stays away from so-called tips and recommendations the possibility of him being fooled remains non-existent.
That’s all for this post on Pump and dump scam in stock market. I hope you have found this post useful and will try to stay away from these cheap scams in stock market. Take care and happy investing!
A study of best-performing Industries during COVID-19 / Coronavirus storm: Even after COVID-19 changing soo much in our lives we still are faced with the question, “What is life going to be like from tomorrow?”. Covid-19 has the governments and other influential intellectuals scratching their heads due to the level of uncertainty it poses. Will the virus just disappear in a few months? Or Will a vaccine come in time? Or Will we just have to learn to live with it just like AIDS? This uncertainty has even made it hard to get a peek at what the future will be like let alone predict it.
Despite all this chaos, some businesses have still found a way to make lemonade out of lemons and keep striving. Today, we are going to cover a few of the best performing industries during COVID-19 outbreak. Here, we’ll have a look at which sectors and industries these companies come from and why they were able to do so.
Best Performing Industries During COVID-19
1. Pharma Industry
Although the doctors and nurses battling the virus have had to face the risk of the virus, the pharmaceutical and healthcare industry, however, remains immune. This is because of our dependence on the pharma and healthcare at the frontlines against COVID-19. Due to changes in consumer behavior and hygiene practices any industry remotely connected has also benefitted. Disinfectants and sanitizers have recorded their highest prices and sales.
2. Information Technology (IT) Industry
The IT sector is in a relatively good position in the midst of the pandemic in comparison to others. This can be owed to the fact that a stable internet connection and laptop are all that is required in most of the cases, enabling them to work at ease from home. The Work From Home(WFH) approach adopted by most commodities has given rise to apps like Zoom.
Zoom has seen a 187% increase in its share prices since December. Other software companies that provide solutions for WFH have also seen a similar response. The inherent privacy concerns in WFH have also increased the demand for cybersecurity.
The current scenario will also see an increased push for technological acceleration. The Indian IT sector is majorly reliant on the US and European markets. Hence the impact it receives will also be dependent on the impact on the US and European markets.
3. Telecommunication Industry
The telecommunication industry may have been impacted in its day to day functioning but its market demand has increased. This is because of the increasing need to connect during lockdowns has led to an increase in the data used.
4. E-commerce Sector
Many countries have found lockdowns the only option to buy some time as they try to grasp the changes. This has been a silver lining for the E-commerce segment as many consumers have turned to them for their needs. This also involves E-Retail shops that deal in fast foods like BigBasket and Grofers.
The FMCG sector had seen reduced demand for the initial few weeks during the lockdown but these will return to normal during the easing period. The FMCG sector, however, will benefit from the reduced crude oil prices. This has come in two forms. Firstly the benefit if one of the components is crude oil or if crude oil is part of the manufacturing process. Secondly from the reduced cost of packaging which requires crude oil in its production. Packaging currently makes 15-20% of the cost.
6. Paint Industry
Companies in the painting industry will be benefitted from the reduced crude oil prices. This is because 45% of the raw material of these companies are crude oil derived. A few of the leading companies in the paint industry are Asian paints, Kansai Nerolac, Berger paints, etc.
Banking, Financial Services, and Insurance companies also have an opportunity to increase their demand post the lockdown. This is because the reduced rates will result in cheaper loans. In addition to this, the government has encouraged loans to the MSME sector by acting as the guarantor in many cases.
Insurance companies will also see an increase in their product sales. This is if they are tweaked to match the Covid-19 environment once the government stops playing a major role. Companies like Paytm which are an eCommerce payment service and in the fintech business have continued their growth from demonetization into the great lockdown. This is also because of the nature of the virus and people’s increasing aversion towards cash.
8. Online Streaming, Gaming and EduTech
With all forms of existing entertainment shut down, increased demand has been seen in online streaming websites and gaming companies. Netflix and Youtube have had to reduce the streaming quality in Europe to ease the pressure on the internet.
Gaming companies will have a good run during with issues being faced in its console production which will be fixed once the economy opens up.
The online education market in India was already forecasted to grow to become an $18 billion market by 2022. The great lockdown has only given a boost as numbers will be met much sooner.
9. Home Fitness
The nature of the virus has made accessing Gyms and other public areas to maintain fitness dangerous. Companies like Peleton which offer an interactive experience along with their equipment have seen a rise in their share price this year.
Post Corona Environment
The post-Corona environment will be rigged against industries that have been affected during the lockdown. This is due to the changes in behavioral patterns. A level laying field can only be expected after a year or two after the pandemic. Be it a business or a human, sticking to old behavior patterns and not adapting to suit the environment will get you killed!
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.
Failure to maintain the requirements set by the exchange
The shares of the company being suspended from trading for more than 6 months or being traded infrequently over the last three years
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.
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.
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.
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.
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.
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.
— 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.
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!”.
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 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.
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.
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.
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.
— 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.
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.
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.
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.
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.
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.
“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.
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.
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.
Hitesh Singhi is an active derivative trader with over +10 years of experience of trading in Futures and Options in Indian Equity market and International energy products like Brent Crude, WTI Crude, RBOB, Gasoline etc. He has traded on BSE, NSE, ICE Exchange & NYMEX Exchange. By qualification, Hitesh has a graduate degree in Business Management and an MBA in Finance. Connect with Hitesh over Twitter here!