Archive for July, 2009

Brokerages plan revised cost structure for MF distribution

Brokerages plan revised cost structure for MF distribution

Distributors of mutual funds are planning to revise their transaction cost structure to attract investors as the charge for buying units in a mutual fund goes from tomorrow, something they believe will increase sales.

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Distributors are now waiting to see whether asset management companies (AMCs) announce distribution commission for various MF schemes and on that basis they would charge advisory commission from customers.


On June 18, market watchdog Securities and Exchange Board of India asked mutual funds not to deduct marketing and distribution charges from the investment made by subscribers.


“Days of easy and guaranteed money for distributors are gone.

AMCs need to sacrifice their margins now and pay the distributors or they can mop up advisory commissions from investors linked to certain schemes.


However, the business of big distributors is unlikely to be hurt,” SMC Capitals Equity Head Jagannadham Thunuguntla said.


Distributors believe that although in the short term their revenue might be affected, in the medium to long term it would pick up as more investors come in. ๐Ÿ™‚

Sanlam joined hands with SMC Global, eyeing India fund launch by Feb.

Sanlam joined hands with SMC Global

South African financial services firm Sanlam expects to start mutual fund operations in India by February next year and hopes to break-even in three to five years, a top executive said on Tuesday. ๐Ÿ™‚


The firm, which has joined hands with Indian broking firm SMC Global for asset management and wealth management businesses,ย  has received an in-principal approval from the market regulator and is currently hiring a fund management team.

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“Unless something goes strangely wrong, we are hoping to get operational round about Feb. 1,” said Sanjeev Gupta, chief executive of Sanlam’s emerging market investment unit.


The firm, South Africa’s second-biggest insurer, will join the likes of

Italian bank UniCredit’s arm – Pioneer Global,

South Korea’s Mirae Asset,

France’s Axa and Japan’s Shinsei

These have started operations in India’s fiercely competitive fund industry over the last two years.


The market will become even tougher for fund managers, and particularly hostile to small and new players, as a ban on entry fees charged by mutual funds — to be imposed from Aug. 1 — slows growth and raises distribution costs.

The firm is not hopeful of making money in the initial years as it spends on building brand and strengthening distribution.

“Anytime between the third and the fifth year we feel we will probably turn the tide,” Gupta said.

To start with, the firm plans to tap offshore clients to invest in India-dedicated funds and leverage 1,800 offices of its local partner SMC to attract domestic investors.


Promoter stake reduction could raise Rs.159,000 crore :O

Promoter stake reduction could raise Rs.159,000 crore :O

Listed companies could raise over Rs.159,000 crore if Finance Minister Pranab Mukherjeeโ€™s proposal to reduce promoter stake in all listed companies to 75 percent becomes a policy , a report released Wednesday said.

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Of this, state-owned firms alone will contribute as much as Rs.138,000 crore, the report by broking firm SMC Capitals said.

Among the listed companies, there are about 180 firms where promoters hold more than 75 percent of the equity.

Of these, 28 are public sector units (PSUs),while the remaining 152 are private companies,said the SMC report.


โ€œTo comply with the proposal of reducing the promotersโ€™ stake to 75 percent, the total value of stake that needs be offloaded is a whopping Rs.159,263 crore,โ€ said SMC Capitals equity head Jagannadham Thunuguntla.

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โ€œOf this amount, stake sale in PSU companies will aggregate to about Rs.138,075 crore, and that of non-PSUs will be Rs.21,188 crore,โ€ he added.

Mukherjee had said in his budget proposal July 6 that the government would look at increasing public stake in all listed companies to 25 percent, which currently is about 15 percent.

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The chairman of the markets watchdog, Securities and Exchange Board of India (SEBI), has however proposed to the government that the increase in public holding be done in a phased manner and companies given time to dilute promoter holding to 75 percent.

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โ€œKeeping this account, it will be more practical and sensible to implement this regulation in a phased manner by the finance ministry, facilitating smoother implementation,โ€ said the report. ๐Ÿ™‚



Indian Govt. disinvestment plans to kick off soon !

Indian Govt. disinvestment plans to kick off soon !

Indian Power Firm NHPC Ltd will kick off a $1.25 billion IPO next week in the first share sale by a state company.

Since the congress party’s unexpectedly strong re-election in May spurred investors hopes for pro market reforms. ๐Ÿ™‚

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Despite opposition from labour groups and leftist parties, the government is forecast by some watchers to offload roughly $5 billion a year in state shares.


This could hearten a bond market worried about fiscal responsibility, but do little to address a yawning deficit and $90 billion borrowing plan.

Investors are expected to lap up shares in government firms, given :

a) attractive pricing,

b) a record of outperformance relative to IPOs by private firms,

c) and a roaring stock market run since March. ๐Ÿ™‚

NHPC opens its IPO on August 7 in what would be the first for a state firm in India since Feb. 2008.

Oil India is expected to follow with a $500 to $600 million issue in September.

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Also in the works could be a multi-billion-dollar IPO by telecoms firm Bharat Sanchar Nigam Ltd.

Secondary offerings by power equipment maker Bharat Heavy Electricals, Rural Electrification Corp, trading firm MMTC Ltd and mining firm NMDC Ltd. are also in queue.


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The pipeline of equity from state firms promises to top the record $6 billion raised from government asset sales between 1999 and 2004 when the pro-business Bharatya Janata Party (BJP) was in power.

During that period, shares were sold in firms such as Oil and Natural Gas Corp and Maruti Suzuki.

Since then, the government raised just $1.4 billion as allies of the ruling coalition and labour unions thwarted plans for stake sales.

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Indian state companies that listed between 2004 and 2009 have shown share price gains on average of 140 percent compared with just 3.5 percent for their private sector peers, according to a study by SMC Capitals, a deal tracking firm.

Venture capitalists have little fancy for Indian start-ups

Venture capitalists have little fancy for Indian start-ups

Dreamy-eyed Indian entrepreneurs, hoping to talk their way into getting venture capital for their start-ups might as well look elsewhere for funding.

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It doesn’t happen in India, not often anyway, investors and experts in the industry, maintain.

Venture capitalists in India only prefer growth-stage companies — firms already up and running that need money for expansion.

Most start-up entrepreneurs, as a result, dive into their own pockets or banks, or draw funds from family and friends.


Seed capital for a new business has not come of age in India, they added.

The concept of seed capital does not exist in India, there are a few funds which have come up of late, but it is minuscule compared to the need and potential.

And the problem has also compounded by the current economic scenario, where financial institutions are more concerned with keeping their capital safe than risk their funds with a new venture.

Venture capital firms invested $740 million India in 2008 compared to $876 million in the previous year.

‘The number of deals were also down to 125 in 2008 from 144 in 2007.

Jagannadham Thunuguntla, equity head at SMC Capitals, has an explanation.

‘The confidence among foreign funds, be it venture capital or private equity, hasn’t been restored after what happened back home.’

According to him, these funds will start returning to the equities markets first, and later look at other avenues.

Among start-ups, too, there is intense competition to get venture capital funding.

And more often, there is one set of firms that comes up tops — IT-based businesses or companies that use the web to reach out to customers, said veteran venture capitalists.

A lot of venture capital firms look favourably at IT start-ups because once the concept takes off it is easier for such businesses to scale up.

Also venture capitalists generally have a Silicon Valley background and have a greater understanding of such types of business models.

Past record also matters — a larger number of IT firms have given attractive returns.

‘There is a reasonably long list of IT firms — MindTree, Spectramind, Mphasis, Daksh, Naukri.com — which have delivered good exits for venture capitalists.

Perhaps, that’s the reason why people like Manish Malhotra – who quit his position with a top bank to start a hospitality agency – are still floundering with their business.

‘Venture capital is difficult to get. I come from the banking industry and know people. But even then it hasn’t been easy at all to convince them that my plans will work,’ Malhotra said.

Dreamy-eyed Indian entrepreneurs, hoping to talk their way into getting venture capital for their start-ups might as well look elsewhere for funding.

Adani IPO fully subscribed on day 1 โ€“ sources

Adani IPO fully subscribed on day 1 โ€“ sources

Adani Power Ltd’s initial public offering worth up to $623 million was fully subscribed within an hour of opening to investors on Tuesday, three sources involved in the deal said.

By 10:36 a.m (0506 GMT) the 301.65 million share offer was subscribed three times, mostly at 100 rupees, or the top end of the price range, said the sources who declined to be named.

The strong response will be encouraging to other Indian companies lining up share sales.

“Institutional money is driving it now. Retail will follow on seeing the tremendous response,” one source said.

The share offer closes on July 31.

On Monday sources said major U.S. funds T Rowe Price and TPG were among anchor investors who bought 52.85 million shares in Adani’s offering.

SMC Capitals Equity Head Jagannadham Thunuguntla who commented before the IPO openings that “Since the Adani Power IPO is being brought about by a big business house, a lot of investors are keeping their money aside to invest in it after the pre-IPO placement garnered a good response”ย  was proved right.

Indian firms have sold shares worth more than $7.5 billion so far this year, surpassing the full-year total of 2008, helped by a sharp rally in shares and rising foreign fund inflows.

Adani is the first large IPO in more than 18 months. Most share sales this year have been secondary offerings.

Industry Life Cycle

Industry life Cycle

In general, an industry will traverse through 5 stages:


1. Pioneering development:

It is characterized by modest sales growth and huge development costs.

Consequently, profits are either negligible or are in fact negative.

2. Accelerating Growth:

At this point, the industry product is gaining wider acceptance.

Hence, it is very likely that demand for this new product is outstripping supply, as the number of firms in the industry is still relatively low.

Consequently, profit margins will tend to be very high for the existing firms.

3. Mature Growth:

The abnormal high profits of the previous stage will likely attract new entrants into the industry.

As a result, supply will begin to catch up with demand, just as the growth in sales stops accelerating.

4. Stabilization (or Market Maturity):

At this stage, both supply and demand stabilize such that the growth rate of the industry now matches that of the economy as a whole.

This phase tends to be the longest of all the industry life stages because in this phase, there is neither an incentive for new firms to enter the industry nor an incentive for existing firms to exit it.

5. Decline:

As new products are introduced from other industries, the demand for the target industry’s product will begin to decline.

As a result, profitability will begin to deteriorate.

Impact of Structural Changes on Economy

First of all, a distinction should be made between cyclical and structural changes.

Cyclical changes arise as a result of the economy progressing through the various stages of its business cycle.

Structural changes, on the contrary, arise as a result of a major shift in how the economy functions.

In particular, there are four main types of structural shifts that may impact on economy:

1. Demographics:

The economy is largely influenced by the spending power of its population.
Hence, the development of the economy has been heavily influenced by the spending habits of this generation.

2. Technology:

The same innovation in technology may simultaneously give birth to a new industry and severely impair an existing one.

Collectively, if new technology improves productivity levels, then the economy as a whole will function more efficiently.

3. Politics:

New governments may mean different fiscal policies for the foreseeable future. This may boost certain industries while damaging others.

4. Regulations:

New regulations may make certain industries less competitive, while others may become more competitive.

BUSINESS CYCLE AND INDUSTRY PERFORMANCE 1

BUSINESS CYCLE AND INDUSTRY PERFORMANCE 1

As we all know that different industries perform differently depending on what part of the business cycle the economy is in.

Though at present there are signs of stabilization, including a recovery of stock markets, a decline in interest rate spreads, improved business and consumer confidence but the situation still remains uncertain and significant risks remain to economic and financial stability.

Now the hundred million dollar question is that what an investor should do when it comes to investing in stock market.

However, there are so many theories available guiding an investor regarding investment in stock market.

Through this article some guidance are forwarded regarding how business cycles are related to Industry performance thereby making one understand how one can use the study to make out the maximum from the stock market.

The following relationships have generally been observed between industry performance and the stage of the economic cycle:

a) At the economic trough, industries that supply consumer durable goods tend to bottom as market participants anticipate an economic recovery.

b) As the economy recovers, businesses begin to expand and therefore industries that provide capital goods tend to do well.

c) During the peak of the cycle, industries that provide basic materials tend to do well as the overheating economy puts an upward pressure on the prices of raw materials.

d) Once the economy begins to decline (or enters a recession), industries that supply consumer staple products begin to do well as their sales are largely unaffected by economic downturns.

e) As the economy nears the end of its decline, financial services industries begin to do well as the rate of bankruptcies stabilize and interest rates reach their cycle lows.

Sebi steps in to protect minority shareholders

In a market where there are few cases of stocks with differential voting rights (DVRs), last week’s change to the Equity Listing Agreement, at first glance, seems to protect the interests of minority shareholders.

Sebi’s step is ostensibly to prevent situations wherein companies come out with follow-on-issues, rights issues or preferential allotments with higher voting rights per share, helping promoters get greater control in the company.

Though a rarity in India, there are many examples abroad such as the Ford family, which controls 40 per cent of shareholder votes with only about 4 per cent of the equity in Ford Motors.

The dual-class stock structure has worked for many including Warren Buffett, a majority shareholder of Berkshire Hathaway, which offers Class-B shares with 1/200th of the voting rights of a Class A share.

Google, at the time of going public, reserved Class-B shares with 10 votes a share for insiders and sold Class-A shares with one vote to the public, helping retain control with select shareholders.

It’s not that the amendment by the Sebi last Wednesday sealed such a possibility in India as the US stock exchanges, the NYSE or the Nasdaq, too, do not allow it.

The New York Stock Exchange allows companies to list dual-class voting shares, but once listed, firms cannot reduce the voting rights of the existing shares or issue a new class of superior voting shares.

So, a second look at Sebi’s amendment shows something else.

“More than preventing issue of fresh shares with superior rights, the amendment is about allowing firms to come out with shares with inferior rights,” said SMC Capitals equity head Jagannadham Thunuguntla.

Though shares with differential voting rights is not new in India (Tata Motors and Pantaloon issued shares with DVRs last year), lack of awareness has kept trading in DVR shares insignificant, he said.

According to Sebi regulations, firms can come up with fresh issues that offer inferior rights in terms of voting or dividend, thereby helping raise equity without resorting to debt and giving up control.

Securities and Exchange Board of India’s (Sebi) amendment of regulations to prohibit companies from issuing fresh shares with superior rights vis a vis the rights of existing shareholders seems to have been taken in the light of experiences abroad.