Archive for April, 2006

Reliance Petroleum Oversubscribed

1 Comment » Written on April 21st, 2006 by
Categories: IPO
The Reliance Petroleum (RPL) issue was oversubscribed over 51 times. This means there were at least 51 offers to buy every share available.

The "retail" part of the issue was oversubscribed 14.91 times. Retail means investment of under Rs. 1 Lakh; and in the RPL issue the retail segment was allocated 13.5 crore shares.

Most retail investors have applied at "cut-off" (meaning they are bidding at Rs. 62 per share). So retail investors are willing to pay over 12,480 crores for RPL shares. This is mindboggling!

Compare this with earlier big issues. The TCS issue was 4,800 crores (25% retail) ; the biggest issue till date, ONGC in 2004, was Rs. 10,000 crores (25% retail). Retail oversubscriptions was 3 times for TCS and ONGC was undersubscribed in the retail part!

That means retail investors have invested only 3600 crores (TCS) and 2000 crores (ONGC). Note that for the TCS/ONGC IPOs, retail investors were limited to Rs. 50,000, investment only but had to pay up the FULL bid upfront. In RPL, retail investors could go up till Rs. 100,000 but pay up only Rs. 16 per share (rest paid on allocation).

What this means is that the number of retail investors has gone up DRASTICALLY over the last two years. If you consider that ALL retail investors put in bids in RPL for 1600 shares (the maximum shares under the Rs. 100,000 limit at Rs. 62 per share), we get 12.48 lakh investors (minimum). The real figure is going to be much larger, perhaps more than 15 lakh investors.

This is by far the biggest response to a public issue of a company that is essentially a greenfield project. Remember here that ONGC and TCS were profit making companies and ONGC was already listed in 2004. RPL has the "R" - Reliance - which has been known to be extremely kind to investors.

Could this be another rigged IPO? We know from the Roopalben Panchal case that people are looking to rig IPOs, and the RPL response also shows signs of serious rigging. I hope SEBI will investigate.

But this is a big eye-opener. More retail investors are getting in, and perhaps, just perhaps, it's time to slow down now. With frenzy building up to unknown levels and high level of mostly gullible, uninformed investors ("retail"), the markets are bound to fall; history demonstrates that.

And it's logical as well. With more uninformed investors willing to invest on rumours and "tips", all that a big investor has to do is appear bullish by buying a large quantity of a share; the news spreads, "tips" and rumours are floated, everyone buys like crazy and the large investor quits at the high. Eventually the small guys are left holding overpriced shares, and one fine day, a few decide to cut their losses. Rumours spread, tips surface and suddenly everyone is selling.

When this is sufficiently large, the stock markets plummet. The retailers vow never to invest in stocks again; saala, bahut paisa duba. The big investors start picking up the underpriced shares again.

Get smart. Get out now. 50% at least.

I've never said this before. I still believe there is value in the market - in specific shares. But by and large, most shares are overpriced - whatever you think is overpriced now, sell them.

Posted in IPO

The Real Estate Cash Flow Calculator

32 comments Written on April 12th, 2006 by
Categories: RealEstate
If you've read Robert Kiyosaki's "Rich Dad, Poor Dad" series of books, you'll appreciate that Cash Flow is an important thing to consider. That means your cash outflow should be less than your cash inflow. But the model fails miserably in India!

If you're a fan of Rich Dad, Poor Dad, please also read http://www.johntreed.com/Kiyosaki.html.

I looked at cash flow in the real estate market seriously. And created a Real Estate Cash Flow Calculator.

The link takes you through an article that describes my results. Plus, you can download the calculator too! (It's a Microsoft Excel document)

Comments: Please send me your comments here. I'm open to learning more, and to refining the calculator so it makes sense.

Posted in RealEstate

Mutual funds must now toe the line

1 Comment » Written on April 4th, 2006 by
Categories: MutualFunds
Sebi has recently moved to correct two HUGE problems with mutual fund offers in India.

1) MF Issue Expenses: Earlier, Mutual Funds used to charge upto 6% of the collections of a "New Fund Offer" (NFO) to the investors as "Initial Marketing Expenses". And then, they could spread this over Five Years. This means that of every Rs. 1000 you invest in an NFO , upto Rs. 60 could be spent as issue expenses - and this could be spread out as Rs. 12 per year for five years!

What this really means is that if you invested the same amount of money in a fund that was over five years old, your return would be greater than investing in an NFO!

The biggest losers would usually be the BIG investors. The guys who put in 10 crores into an NFO have ZERO entry load. They then exit immediately after the NFO with even small gains - remember a 1% gain is equal to 10 lakhs (for investment of 10 crores). So the issue expenses - that is upto 60 lakhs (6% of that 10 crore) - will be borne by the small investor who put in around Rs. 10,000 or so in the fund, for the next five years!

Sebi has balanced this by proposing that all NFOs should cover the Initial Marketing Expenses by either charging the amount as entry load, or absorbing the cost without passing it to the investor. That means Asset Management Companies (AMCs) who are basically the people behind the fund cannot amortise costs across five years and have to charge it initially only. Great stuff: means you are not at a disadvantage compared to older funds and bigger investors.

2) Dividend payment abuse: Mutual Funds put HUGE advertisements saying "50% dividend" etc. This excites investors thinking that if I put in Rs. 1,000, I will get Rs. 500 back immediately, and then I still have Rs. 1,000 in the fund! Fantastic, right?

Wrong.

Mutual Funds are just a collected investment. So the current "NAV" - Net Asset Value - is simply equal to Total Value of Investments plus Cash, Divided by Total Number of Units. This means that if they pay out dividend today, then that much cash is less tomorrow and therefore the NAV will FALL to the extent of the dividend paid.

This simply means that if you had a Mutual Fund Unit whose NAV was Rs. 15 today, and you got a Rs. 5 dividend per unit, tomorrow the NAV will be Rs. 10. Net value is the same, whether they pay dividend or not.

SEBI now will make it mandatory to specify that such fall in NAV will take place. Secondly, MFs cannot announce dividends more than five days before they actually pay. That means announcements like this (Tata Mutual Fund announcing a dividend for April 12 on March 27) will no longer be legal, so it reduces the amount of "dividend greed" investments.

Happy Investing! A new financial year has started, and considering the above two announcements, on a good regulatory note!

Posted in MutualFunds