Archive for October, 2010

Sensex Tumbles 216 Points on Weak Global Cues

Stocks dropped on Wednesday, triggered mainly by weak sentiments in Asian markets  on concern over rising dollar, ahead of the expiry of October series of futures and option contracts.

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European markets saw a gap-down opening, but recovered later, helping the market to gain some ground in the last half-an-hour of trade. The BSE Sensex trimmed 216.02 points, or 1.07 per cent, to close at 20,005.37. Nifty index declined 69.35 points, or 1.14 per cent, to 6,012.65.

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“Strengthening of the dollar against a basket of major world currencies dragged the market on Wednesday. The Dollar Index, which has an inverse relationship with different assets classes, is rebounding these days. Due to which, investors have turned cautious on equities markets,” said Jagannadham Thunuguntla, head of research at SMC Global Securities.

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The Dollar Index on Wednesday rose to 77.92 against 76.64 on October 14. Before this, the index was falling continuously from the middle of July.

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There was also speculation that US Federal Reserve’s asset purchase plan may be a disappointing one, said Alex Mathews of Geojit BNP Paribas.

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“Nifty has a major support at 5,963 while on the upside, it faces resistance at 6,089 level. On Thursday, we are going to see the October F&O expiry. The rollovers at the end of Wednesday’s session was around 45 per cent,” he said.

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Banking stocks continued to weigh heavy while disappointing results of heavyweight NTPC hurt sentiments on the power counter.

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Union Bank, ICICI Bank and HDFC Bank fell 5.85 per cent, 2.23 per cent and 1.93 per cent, respectively. SBI inched up 0.41 per cent to Rs 3,193.45. Union Bank on Wednesday posted 40 per cent decline in September quarter PAT to Rs 303 crore compared with the same period a year ago.

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NTPC fell 3.24 per cent after the company reported 2.07 per cent drop in PAT on 20.46 per cent year-on-year rise in net sales for the September quarter. The results were announced after Tuesday’s trading hours.

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Among other stocks in news, MRPL rose 1.76 to Rs 83.95 after its Q2 net profit jumped 56.70 per cent to Rs 281.57 crore. ONGC and HPCL, the two stakeholders of the company, dipped 1.80 per cent and 1.42 per cent.

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Shriram Transport Finance hit an all-time high and rose 3.94 per cent to Rs 89.45 after its net profit surged 44.11 per cent year-on-year to Rs 298.96 crore.

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SHIFT IN GOLD DEMAND: PERFORMANCE OF ETFs

Gold’s appeal as an alternative investment option remains high. Historically equities have performed better than gold barring certain minor aberrations here and there. However, asset allocation is an important aspect of any investment strategy. By balancing asset classes of different correlations, investors hope to maximize returns and minimize risk. While many investors may believe that their portfolios are adequately diversified, they typically contain only three asset classes – stocks, bonds/fixed income instruments and cash. To counter adverse movements in a particular asset or asset class, many investors now strive to achieve more effective diversification in their portfolios by incorporating alternative investments such as commodities. While gold has shown strong returns over recent years, its most valuable contribution to a portfolio lies in the fact that it is not correlated with most other assets. This is because the gold price is not driven by the same factors that drive the performance of other assets. Demand for gold may continue to rise as investors diversify their portfolio with an asset that is not correlated with the equity markets. In the melt down seen in 2008-09, gold was not correlated with the other assets and hence saved.

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Gold’s price action in the past few months has frustrated many traders. High volatility in prices created much risk for the investors as well as for intra day traders. At this time ETFs plays a major role as Gold ETFs provides investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value. Each unit is approximately equal to price of 1 gram gold. But, there are Gold ETFs which also provide a unit which is approximately equal to the price of ½ gram of gold.

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Gold exchange traded funds (ETFs) serve several functions in both good times and bad. These days, we’re seeing it primarily workingas a safe haven for investors. According to the World Gold Council’s (WGC) latest Gold Investment Digest (GID), the quarter Q2 2010 recorded significant net inflows into various gold backed investment vehicles, as investors sought to harness gold’s investment benefits at a time of weakness and pronounced volatility in other asset classes. Investors bought 273.8 net tonnes of gold via exchange traded funds (ETFs) in Q2 2010. This represents the second largest quarterly inflow on record with the total amount of gold held in the ETFs monitored by WGC to over 2,000 tonnes (worth US$81.6 billion).

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Till now India has been the biggest consumer of gold but gold exchange traded funds (ETFs) were not much popular in India. However, things are changing fast inIndia. With increasing popularity more and more people are now putting their money on Gold ETFs. As a sign of this, India’s gold collection under exchange-traded funds rose 76 per cent in June 2010 from a year ago to 10.453 tonnes. There has been an increase of customers by 70-80 per cent (on year). Most of the participation  was from high net worth individuals and other retail investors. The gold ETFs, instruments that trade like shares and are backed by physical gold holdings, are more than three year old and may get crowded with some other funds planning their entry.

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Over the past nine years, gold has managed to post successive increases in its annual average price, navigating the choppiest of waters.

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From the above mentioned chart it is clearly visible that gold ETF’s has given significant return on yearly basis.GOLDBEES does the best and it does quite well in volumes also, thatis due to the fact that its expenses are lower than the competitors. More competition is always good for the customer, but unless someone comes up with an ETF with expenses lower than GOLDBEES, we can imagine GOLDBEES to be the best on this chart.

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ETF have shown consistent growth in volumes both in terms of number of trade and turnover. Based on the underlying asset different types of ETFs have been identified. The turnover and price of each class of ETF listed on NSE is given below.

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Advantages of Investing in Gold ETFs

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•Potentially cheaper to have price exposure to gold price as compared to other available avenues.

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•Quick and convenient dealing through demat account.

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•No storage and security issue for investors.

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•Transparent pricing.

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•Taxation of Mutual Fund.

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•Can be traded on stock exchange like buying / selling a stock.

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•Ideal for retail investor as minimum lot size to trade is one unit on secondary market.

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•NAV of a unit tracks price of approximately ½ or 1 gram of gold.

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The above mentioned benefits make gold ETFs much better investment avenue for the investors rather than investing in gold through any other source. However as we are seeing that strong investment demand for gold is quite visible, with investors viewing gold, a real asset and as a hedge against medium-term inflationary pressures and potential US dollar weakness. While also providing important diversification benefits, investors may continue to look to gold as a safe haven asset and an alternative currency in the face of volatile currency markets in coming period. Also the rising awareness among Indian investor regarding investment through gold ETFs may boost the demand in near future.

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GLOBAL BOARD OF TRADE (GBOT)

Adding another trading floor in the whole list of numerous exchanges around the world, Global Board of Trade (GBOT) ”the first international multi-asset exchange”  based out of Mauritius, was officially launched by that country’s Prime Minister Navinchandra Ramgoolam.

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GBOT is a wholly owned subsidiary of Financial Technologies (INDIA) Limited, a leading provider of trading technology solutions and a global leader in creating and operating transparent, efficient, and liquid tech-centric exchanges transacting a broad spectrum of asset classes, including equities, commodities, fixed income, and foreign currency instruments. GBOT is also a member of leading industry associations such as Association of Futures Markets (AFM), Futures and Options Association (FOA), Swiss Futures and Options Association (SFOA), and Defra EU Emissions Trading Scheme (EU ETS).

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In the Hands of………..

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GBOT has a very strong board comprising reputed names such as Mr. Venkat Chary (Chairman), Mr. Jignesh Shah (Vice- Chairman), Mr. Mohammad A. Vayid (Director), Mr. V. Hariharan (Director) , Mr. Joseph Hadrian Bosco (Managing Director and Chief Executive Officer).

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Trade Timings

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It is proposed that the normal market trading hours on Global Board of Trade for Currency and Commodity Derivatives Segments will be 09:30 Hrs Mauritian Time (05:30 Hrs GMT) till 23:30 Hrs Mauritian time ( 19:30 Hrs GMT). Any decision about revision of the trading hours, as and when it happens, will be informed to the market participants via trading circulars.

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Value Propositions

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  • The strategic location of Mauritius (i.e. GMT +4) with respect to the rest of the world will enable the investing community to hedge price risk movements vis-à-vis the asian, Europenn and American markets.

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  • Trades will be in the form of standardized contracts and participants will be anonymous , thus ensuring the price discovery  process will be free from the influence of any vested interest or non-market forces.

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  • The commodity market segment of GBOT will enable sellers and buyers of commodities to protect their business from the adverse effects of price volatility in the terrestrial markets. The price risk management will be through the time-tested process of ‘hedging’.

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  • The advantage of a moderate tax regime prevailing in Mauritius will be of immense benefit to investors and traders alike.

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  • GBOT would offer commodity as well as currency derivative products on its state-of-the-art electronic exchange platform with efficient clearing and settlement systems to ensure counter-party guarantee for all trades.

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  • For the first time worldwide, two African currency futures will be traded.

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Products:

Bullions: Gold, Silver

Currencies: EUR/USD, GBD/USD, JPY/USD, USD/MUR, ZAR/USD

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Weekly Update 25th – 29th October

Losses due to profit taking in the Indian markets during initial part of the week were recouped seeing the huge response for Coal India offering especially from the overseas investors. The issue attracted bids that exceeded the combined gross domestic product of Latvia and Iceland. However most of the Asian markets corrected in the week gone by after China unexpectedly raised interest rates to curb inflation and to prevent an asset price bubble in the economy on concerns over regions economic growth.

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The move indicates that the consensus has been reached for lower growth. Albeit past experience has shown that initial interest rate hikes does not give much harm to economic growth. China’s economy expanded by 9.6 percent in the third quarterless than the growth experienced in the prior quarter but higher than the median estimates of 9.5 percent.

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Results of companies from Europe to U.S. supported markets. According to Bloomberg data of the 132 companies in the S&P 500 that reported results since Oct. 7, more than 85 percent have topped analysts’ per- share earnings estimates.Whereas in Europe, of the 46 companies in the Stoxx 600 that have posted results since Oct. 7, 32 have beaten estimates for per-share income.

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The result season has so far been good in India. Banks have posted decent to strong earnings growth. In the Information technology sector TCS and Infosys surprised positively while Wipro surprised negatively. Auto companies are expected to deliver strong set of numbers on the back of higher volumes with price increase. Higher metal prices are likely to provide good earnings to manufacturer of base metals. Cement companies are likely to post bad set of numbers on the back of lower realization and good monsoon season.

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Market is eyeing over G-20 finance chiefs meet to try to resolve differences over countries that are devaluing their respective currencies in order to spur economic growth and to endorse market-based exchange rates in a fresh effort to defuse mounting trade tensions before they hurt the world economy. We may see some volatility in domestic markets on account of expiry week.

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Stock specific activity is likely to play out as the results season is still going on. Nifty has support between 5950-5870 and Sensex between 19640-19200.Good corporate earnings amid falling dollar index are offering opportunities to bulls to keep the momentum in their favour, especially in base metals. 19-commodity Reuters-Jefferies CRB index, which serves as a broad benchmark for commodities investors, was up for a ninth straight week since Aug. 22.

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Monetary tightening by China could not give much impact on base metals prices. In case of bullions, trend is little different. Bullions prices retreated across the board as dollar index grew stronger and investors opted to sell some of their holdings for aprofit. For the time being bullions should move in a range. Market players appears cautious to some extent ahead of next month’s decision from the Federal Reserve about whether to take steps to stimulate the economy. Even energy pack is moving in a range on mixed fundamentals. Bulls are more active in agricultural commodities owing to the ongoing festive fever.

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Equity News Update

Economy

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•India’s food price index rose 15.53% while the fuel price index climbed 11.14% in the year to October 9. In the prior week, annual food and fuel inflation stood at 16.37% and 11.14%, respectively.

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Pharmaceuticals

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•Wockhardt has received tentative approval from the United States Food & Drug Administration (USFDA) for marketing the Fexofenadine HCI 60 mgplus Pseudoephedrine HCL 120 mg extended release tablets, which is used for treatment of seasonal allergic rhinitis without causing drowsiness.

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Oil & Gas

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•Reliance Industries is planning to take shutdown of the Crude Distillation Unit (CDU) No.1 and coker at Jamnagar refinery for maintenance and inspection for a period of three to four weeks starting from last week of October, 2010.

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•Oil and Natural Gas Corp (ONGC) has kicked off a `8,800-crore redevelopment of the southern part of its Mumbai High fields, using a cost-effective technology to  maintain output from the prime western offshore fields.

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Capital Goods

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•Larsen & Toubro (L&T) has received order worth 1,449 crore from DB Power for the Bhaskar Group company’s Chhattisgarh project. The Balance of Plant is the sum of all equipment for safe operation as well as the technical coordination of all concerned parts of a power plant.

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•BHEL has bagged contracts worth 35 crore to set up grid-interactive solar power plants of 1100 kW capacity at eight locations in the union territory of Lakshadweep. The Lakshadweep administration has also asked the company to renovate existing solar power plants of 800k Wat these islands.

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Realty/ Construction/ Infrastructure

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•Ashoka Buildcon Ltd has announced the completion and start of toll collection on its Bhandara toll road project on National Highway No. 6. The project, with a project cost of 535 crores, is the largest toll road project commissioned till date by Ashoka Buildron. With this commissioning, the company has 18 BOT projects under operation and 5 under construction.

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•IL&FS Transportation Networks Ltd has informed that the consortium comprising of 50:50 Joint Venture between the Company and Ramky Infrastructure Ltd. had been awarded a project by the National Highways Authority of India for Four Laning in the State of Assam & Meghalaya on Design, Build, Finance, Operate and Transfer (DBFOT) pattern. The Projectis on Annuity basis with a concession period of 20 years including construction period of 3 years. The cost of the Project as per loan agreements is 824 Crores and the semi-annual Annuity for the Project is72.51 Crores.

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INTERNATIONAL NEWS

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•US Industrial production was disappointing in September, declining 0.2percent, following a 0.2 percent gain in August. The September decrease came in notably below analysts’ median projection for a 0.2 percent advance. Capacity utilization edged lower to 74.7 percent from 74.8percent in August.

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•US Housing starts surprised on the upside while permits went in the other direction. Importantly, the single-family component is the one showing unexpected modest strength. Housing starts in September rose 0.3 percent after jumping 10.5 percent the prior month. The September annualized pace of 0.610 million units came in significantly above the market forecast for 0.580 million units and is up 4.1 percent on a year-ago basis.

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•Eurozone consumer confidence indicator remained unchanged in October from the previous month. The EC’s consumer confidence indicator for euro area was at minus 11 in October, same as in the previous month. The latest reading came in line with economists’ expectation. The consumer confidence index for the EU nations slightly improved to minus 11.6 inOctober from minus 11.7 in September.

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•UK retail sales volume including automotive fuel decreased 0.2% in September from August, it was smaller than last month’s revised 0.7% fall.Economists were expecting a 0.3% increase in September.

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•China’s gross domestic product grew 9.6% between July and September compared to the same period a year earlier. That is slightly above analyst expectations for a 9.5%, but marks a slowdown from the 10.3% expansion in the June quarter.

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CIL sets IPO record; to list on Nov 4

India’s IPO market created history on Thursday with state-owned Coal India share issuer in the becoming the biggest country, beating Reliance Power’s 2008 initial public offering.

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At the time of going to press, the CIL issue was subscribed 15.26 times, collecting Rs 2,36,113.28 crore. The shares will debut on the market on November 4, a day before Muhurat trading that marks Diwali.

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Responding to late rush from retail investors, the company postponed the close of the issue to 9 pm.

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At the upper end of the band, CIL will be the seventh biggest Indian company by market cap, after ONGC, State Bank of India, TCS, Reliance Industries, Infosys Technologies and NTPC, based on Thursday’s closing price. CIL’s Rs 15,474 crore IPO has overtaken Reliance Power’s Rs 11,700 crore issue.

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Buoyant demand from retail and wealthy investors on the final day added to the strong response from institutional buyers. This also signalled success for the government’s upcoming share sales.

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Retail investors, who often take cues from institutions in IPOs, had put in bids for shares 1.44 times or for 28,60,44,375 shares. Retail investors will get a five per cent discount on the final issue price.

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Wealthy individuals had separately bid for 13.89 times the shares available for them.

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Bidding for the mega IPO closed on Wednesday for qualified institutional buyers, including foreign institutional investors, mutual funds and insurance firms. And for the portion reserved for them, the issue was over subscribed by 24.70 times, lead by FIIs.

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The IPO has generated a demand of 493,38,72,050 shares from FIIs. Calculated at the upper end of the price band, this demand is worth Rs 1,20,879.86 crore and at the lower end worth Rs 1,11,012.12 crore. Even at the low end, the demand surpasses the record Rs 1.08 lakh crore pumped in by FIIs into the capital
market.

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India’s largest new issue came amid a flurry of big deals in Asia.

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At the top of its price range, Coal India would be valued at 15.7 times trailing earnings. The issue also got the highest demand for an Indian issue, helped by qualified institutional buyers.

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The demand from QIBs for CIL was at Rs 1,73,398 crore with 100 per cent application amount, compared with Rs 1,88,923 crore with 10 per cent margin for Reliance Power IPO. In case of Reliance Power, the QIB portion was covered 30.68 times.

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“The response to Coal India IPO, from all classes of investors, has surpassed even the most optimistic predictions. It has caught even the biggest optimists by surprise,” SMC Global Securities strategist Jagannadham Thunuguntla said in a note.

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He said the response puts the government on target to achieve its divestment target of Rs 40,000 crore in fiscal 2011 and even exceed it if other issues like the follow-on offering of Power Grid, Steel Authority of India, ONGC, Shipping Corporation of India, Indian Oil Corporation and IPO of Manganese Ore fall in place.

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The government, which has collected Rs 17,500 crore from public issues, including Coal India, may raise its divestment target and get over Rs 58,500 crore, SMC Capital added.

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At the upper end of price range, Coal India issue is worth Rs 15,474 crore and at the lower end it would fetch about Rs 14,211.81 crore.

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The upper band would also give it a market capitalisation of Rs 1.54 lakh crore ($34.7 billion).

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Meanwhile, the broader market recovered from a two-day slump and closed up 1.95 per cent at 20,260.58 points. Now all eyes will be on whether it will be a strong listing on the eve of Diwali.

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RED HERRING PROSPECTUS: A CAREFUL EXERCISE

Initial Public Offering (IPO) is an exercise done by a company for raising capital by going public. IPO is raised generally in two ways either through fixed price or through Book Building. Generally, most of the companies follow the book building process. For this purpose, the company assigns the Merchant Banker as a Book Running Lead Manager (BRLM) for the IPO to handle the responsibility of Book Building Process.

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Book Building is a mechanism through which a consensus price of IPO can be determined on the basis of bids received from the informed investors such as Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs) and Retail Investors. The process helps in making a correct evaluation of a company’s potential and the price of its shares. In most of the IPOs generally the allocation of the total issue into these 3 categories comprises of 50%, 15%, 35% of the total issue respectively.

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However when the dilution of the promoters stake is less than 25% the minimum allocating proportion for these categories changes to 60%, 10%, 30% of the total issue,respectively. The company aspiring to be public, files Red Herring Prospectus (RHP),framed by merchant banker, to the regulatory body SEBI that is supposed to cover all the important information about the company, its promoters and its businesses with due diligence.

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RHP is supposed to be the most important document for the company as it acts as a medium of imparting all the critical information regarding the issuer company to the public.Generally prospectus spreads over 300-400 pages. However, investors can concentrate on few key chapters to have the overall understanding of the public issue. Industry Overview, Company Overview, Capital Structure, Objects of the issue, Financial Information and Management discussion and Analysis are some of the chapters that one should necessarily focus on.

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Let’s understand the relevance of each of these topics one by one:

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Industry Overview: This chapter covers the prevailing market scenario of the industry in which the company operates. We get to know that how much the particular industry contributes to the growth of the country’s economy. That is the behavior of the industry with respect to the growth momentum of the country’s economy. Moreover it entails the government plans and initiatives, budgetary allocation in accordance with five year plans for the industry. This gives the picture of potential opportunity in the industry and its key drivers. It also includes the various linkages regarding the relation of industry to the domestic and global economy.

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Business Overview: This compasses all the information related to the business domain of the company – how the business commenced its operations, grown over the period. The product details of the company and where does it lies in the value chain of the industry. The product scope,how the distribution channel works, the marketing strategy, raw material procurement, details about the vendors, clients and their relation withthe company, the revenue generation process, target market, location of operation. All these information helps in knowing the strengths and weaknesses of the company. It also gives information regarding the future aspects of the company.

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How the company is expecting to expand its business, strategies to increase the market share of the company.

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Capital Structure: It tells us about the shareholding pattern of the company. The constituents of the present equity capital of the company, since inception to the present pattern of the shareholding. The details of the how it has raised its capital under the due period. It gives us the details aboutwho are the stakeholders along with their respective stake in the company.

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Objects of the Issue: This chapter assumes high degree of significance in the RHP as it answers the very first question that comes to the mind of the investors that for what reason the company is going public. It entails the objectives of the issue as where and how the company is going to deploy the funds raised from the issue. At times the company induces the fund requirements from the internal accruals that can be from the present business profits of the company or through the debt syndication from banks along with the issue proceeds.

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Company sometimes also utilize the issue proceeds to repay its debt so as to reduce its interest burden. Thus, it contains the purposes of the issue with their respective amount being required.

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Financial Information: This includes all the financial statements of the company on the stand alone and consolidated basis viz. Profit and loss statement, balance sheet, fund flow statement. These statements show the performance of the company from past 4-5 years along with the annexure that details various heads of these statements. Financial Statements helps the investors in knowing the health of the company in numbers.Various ratios and multiples are arrived with the help of these statements.

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Management Discussion and Analysis: This chapter summarizes the company businesses and its development in due course of time. Year-on-year financial comparison is explained in this part of the document. This helps us in knowing the management’s efficiency to grow a company. Certain important events, factors affecting the operations of the company or some specific strategies of the company are explained in this part of the document.To sum up, RHP being the formal document of the company plays an integral role in assessing the company’s business prospects and thus helps investors in taking decision for subscribing an IPO or otherwise.

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However, it is generally perceived as a lengthy exercise by some section of investors.This can be achieved by going through the above discussed topics that can impart all the relevant information of the company leading to a wise investment decision. After all, “Moneywise Be wise”.

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