a release from nism alumni on financial markets
TRANSCRIPT
Alumni Magazine
ISSUE - 022018-19
FINANCIALMARKETS
A release fromNISM Alumni on
ChiefEditor
Mr. S. K. MohantyDirector, NISM
Mr. Sunil Jayawant KadamRegistrar, NISM
Dr. V. R. NarasimhanDean, SRSS & SCG-NISM
Mr. K. SukumaranDean, SIEFL & SSE-NISM
Santosh Kusum,Infosys(PGPSM 2017-18)
Karan Rathore,Ernst & Young(PGPSM 2012-13 &PGDQF 2016-17)
Manju NatarajanICICI Treasury(PGCSM 2016-17)
SonaliMCX(PGDM(SM) 2017-19)
Sai Venkata Reddy Gummithi(PGDM(SM) 2018-20)
Shivam Ashish (PGDM(SM) 2019-21)
Chief Advisor Advisors
Prof. Latha ChariProf. In-charge, SSIR-NISM
Dr. Pradiptarathi PandaLecturer, SSIR-NISM
Editor
Mr. Ashutosh KumarAcademic Associate,SSIR-NISM
Asst. Editor
EditorialBoardMembers Mr. Jeetendra Solanki
Manager (Design),MCD-NISM
Designedby
Disclaimer:All information found here, including any ideas, opinions, views, predictions, forecasts,commentaries or suggestions, expressed or implied herein, are for informational, and educationalpurposes only. The views expressed in the issue are those of the respective authors anddo not necessarily reflect of NISM or SEBI.
Index
01. Director’s Message 02
02. Message from Deans 03-04
03. Message from Chief Editor 05
04. Message from Editor 06
05. Commodity Derivatives – Hedging in Agri Commodities 08
06. Artificial Intelligence – Unlocking Growth 11
07. Analysis of the recent SEBI Circular on Streng- thening Guidelines and
Raising Industry standards for RTA, Issuer Companies and Banker to an Issue 13
08. CreditMetrics by JP Morgan 21
09. Need of Fundo-Techno View 23
10. The Un-Fundamental Market 25
11. Opportunities Lies In Small & Mid Cap Stocks 27
12. Geopolitical Economics & INDIA 30
13. All you Know about IPO 32
14. Information Technology Sector Analysis (1 Year) 40
15. Why Is Godrej Properties A Hot Bet Among Investors? 42
16. Chemical Industry 45
17. How the Federal Reserve Operates in the History of Mankind? 52
18. Alumni Speak 54
19. Glimpses of 1st Alumni Meet 59
01
An educational institution is only as good as its graduates. NISM is playing a key role in developing skills in securities markets professionals through its various programmes. At NISM we are very proud of our Alumni who have not only strived to be the best in the world of securities markets but to be the best for the world. I am glad to receive you in our campus on the occasion of the 2nd Alumni Meet. I am also pleased to see the second edition of the alumni magazine ‘Jigyansa’. Bringing out this publication will increase the creative power to analyze the securities markets and pass your innovative ideas to the securities markets industry. I congratulate to the alumni who have contributed to the ‘Jigyansa’. I also want to see the contribution in terms of articles, research reports and innovative initiatives to develop the securities markets and help each other by sharing your ideas.
Each one of you stays connected, take part in all the activities of alumni, share your thoughts and your achievements in alumni professional and social media. We have an alumni portal where you can connect to others and share your experience. The portal also helps for job posting for experienced alumnus, internship position for students which helps all of you.
I welcome all of you once again to the 2nd Alumni Meet. Wishing you all a bright and successful career.
Mr. S. K. MohantyDirector, NISM
Director’sMessage
02
Greetings and Welcome back.
By enthusiasm one acquires enormous strength and self-belief. Enthusiasm exhibited through contribution to this alumni magazine Jigyansa, will be a testimony of one's belief in the self and conviction in the learning process.
Alumni is the reflection of learning from the institution and application of such learning to professional endevours. Alumni shows the light to the path that current students can confidently tread.
Our best wishes to alumni and students.
Thanks and regards,
Dr. V. R. NarasimhanDean, NISM
Message from Dean
03
I am glad to learn that the second alumni meet of National Institute of Securities Markets is happening in the month of November 2019. I recollect with pride the successful years in the past where in students joined NISM courses with little or poor knowledge of finan-cial markets and their stint in NISM groomed them as financial market professionals. Today, NISM alumni are occupying significant positions in industry and contributing to the growth and stability of financial markets. They are taking decisions that enhance shareholder value and contribute to the bottom line of their organisations.
NISM has grown during the last one decade, introducing new courses and collaborating with various institutions of repute. The market intermediaries as well as leading business schools consider NISM certifications as a benchmark of financial standards and welcome its employees and students to get certified from NISM. NISM organises trainings and workshops on various compliance issues, thus enriching to the best governance stand-ards in India.
Let us rejoice at this moment where NISM marches its journey towards excellence and the alumni sharpening their skills in managing their assigned professional responsibilities.I wish the alumni meet all the success and wish everyone to succeed in their professional and personal front.
Regards,
Prof. K. SukumaranDean, NISM
Message from Dean
04
It gives me great pleasure to welcome you all back to NISM on the occasion of the 2nd Alumni Meet. The Alumni Student Cell along with faculty Dr. Pradiptarathi Panda and Mr. Ashutosh have contributed immensely to make this meet happen. The aim of the alumni cell is to keep the links between you and our institute alive, provide a platform for all NISM alumni to reconnect with peers, juniors, seniors and with the faculties of NISM. We welcome you all to share your success and experiences with the current year students. This will instill confidence and motivate the current students positively.
I am also glad to note that the number of students from the previous batches participating in the alumni meet has significantly increased. Your enthusiastic participation through articles for the ‘Jigyansa’- alumni magazine, guiding student internships, guest lectures, career sessions for the current students is welcome.
We are glad to celebrate your success, and wish you the very best in all your future ende-vours.
Best wishes, Dr. Latha ChariProfessor, NISM
Message fromChief Editor
05
To celebrate the old memories, to reconnect with all alumni, teachers and staff members; the Alumni Association of NISM started in 2018. The association is running with the help of a group of dedicated students, Alumni and NISM management. To develop the crea-tive power of Alumnus, and to help our Alumni to be known in the industry through their innovative analysis of securities markets, we have started the alumni magazine “Jig-yansa”. One of our alumni called as Mr. Santosh Kushuma who has named the alumni magazine as “Jigyansa” which means “Curiosity to Know”. Since securities markets are fluctuating in nanoseconds, the curiosity of all the participants of these markets is keep-ing on increasing. This magazine helps the Alma Mater to know the markets, its recent developments and opportunities behind it. To serve the purpose, the first issue of the “Jigyansa" was released in the eve of 1st Alumni Meet. The current edition of the maga-zine is the second birth of “Jigyansa”. I thank each one of the contributors and readers of this magazine.
The article in this edition of ‘Jigyansa’ is embedded with various segments and their developments in Financial Markets. The article starts with the “Commodity Derivatives –Hedging in Agri Commodities” which describes the history and the mechanism of hedging through commodity derivatives in India. Since the financial markets have applied machine learning and artificial intelligence to deal with many asset classes, the second article covers “Artificial Intelligence – Unlocking Growth". If we look into the regulatory reforms in Indian capital markets, SEBI comes out with several circulars every month. The third article covers "Analysis of the recent SEBI Circular on Strengthening Guidelines and Raising Industry standards for RTA, Issuer Companies and Banker to an Issue". The whole issue of financial crisis arises due to an increase in the default rate, which leads to distressed assets. The fourth article describe "Credit Metrics by JP Morgan". When investors are running towards fundamental analysis, an interesting article on “The Un-Fundamental Market” describes how to look beyond fundamental analysis. A mix of this two analysis reflects in the article "Need to Fundo Techno View”.
Message fromEditor
06
We usually look into large-cap companies to invest in the long-term. However, there are many small and mid-cap stocks providing more than triple returns as compared to returns from large-cap. The next article describes "Opportunities Lies in Small & Mid Cap Stocks-Big Companies Have Small Moves. Small Companies Have Big Moves". An interesting article on “Geopolitical Economics & INDIA” describes the need and significance of it in respect to India. The Indian primary markets attract more investors because of high return potential. There are also several regulatory changes the Indian primary market has seen in India. The article on “All you Know about IPO” has given all answers on functions of IPO in India. An Article on “Information Technology Sector Analysis (1 Year)” describes the growth and opportunities of IT sector in India. The real-estate is attracting many investors to invest. The market leader in the real estate industry is the Godrej properties. The next article deals with "Why Is Godrej Properties a Hot Bet Among Investors?” The next article of sectoral analysis is on “Chemical Industry”. The last article focuses on “How the Federal Reserve Operates in the history of mankind?”. Our Alumnus is the brand ambassador for us. We have not left out without putting their emotions about NISM programmes and facilities. We have placed particular testimonials from our alumni in the preceding section, followed by the glimpses of 1st Alumni Meet.
Last but not least, the alumni activity is a collective dedication, hard work and commitments of many of the alumni and students. We have placed some of their names in this magazine indicating their committees.
NISM alumni have got its logo, website, YouTube, LinkedIn, Facebook, Twitter and Instagram. Please stay connected through each one of them. We have started Alumni Best Service Awards for those alumni who are helping in placement, Alumni Professional Achievement Awards for those who are achieving in their professional careers. Moreover, we are issuing lifetime access to the campus library to all those alumni who have registered in the alumni portal.
I thank all of you for your help, cooperation and dedication. Special thanks to Latha Ma’am, respected Deans, Registrar sir and Director sir. I also thank Mr Asutosh Kumar, Mr Jeetendra Solanki, and all the editorial board members for helping to bring the 2nd issue of this maga-zine. My special thanks to the student's alumni team who are working day and night for the alumni association as well as the alumni meet. They have been divided into several commit-tees like- contact, website, social media, alumni interaction, event management, cultural and overall organising committee. I thank each one of them.
We look forward to you all to reconnect, reunite and innovate in the field of finance. I welcome all of you on the eve of 2nd Alumni Meet. Best wishes to all of you for a bright future.
Dr. Pradiptarathi PandaEditor
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Introduction
In the order of employment or modes of earning the livelihood, agriculture was given the highest priority among doing own business or doing job.
India has been rich in minerals and resources and its fertile land with different suitable weather conditions around the year supports agriculture to the best.
Agriculture was considered the best stream among all but today things are not the same.With an increase in population and unequal distribution of income and wealth among the different sections of society and resorting to old & outdated methods of farming from the past many years, things have become worse for farmers or people engaged in farming activity.
Evolution of Commodity Markets
Commodities are products that can be bought, sold or traded in different kinds of markets.
Organized trading on an exchange started in 1848 with the establishment of the Chicago Board of Trade (CBOT). The first milestone in the 125 years rich history of organized trading in commodities in India was the constitution of the Bombay Cotton Trade Association in the year 1875.
India had a vibrant futures market in commodities till it was discontinued in the mid-1960's, due to war, natural calamities and the consequent shortages. The advent of economic liberalization helped the cause of emphasizing on the importance of commodity trading. In the global markets, there are four categories of commodities in which trading takes place:• Energy (e.g., crude oil, heating oil, natural gas and gasoline). • Metals (e.g., precious metals such as gold, silver, platinum and palladium; base metals such as
aluminium, copper, lead, nickel, tin and zinc; and industrial metals such as steel).
Commodity Deriva-tives – Hedging inAgri Commodities
Prateek VijaySr. Executive - Business Development
Multi Commodity Exchange of India Ltd.
PGPSM2017-18
Years back it was said…..
UTTAM KRSIHI - FARMING IS CONSIDERED BEST
MADHYAM VYAWASAY - BUSINESS IS CONSIDERED SECONDARY
NIKRISHTA NAUKARI - LAST BUT NOT THE LEAST IS JOB
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• Livestock and meat (e.g., lean hogs, pork bellies, live cattle and feeder cattle). • Agricultural (e.g., corn, soybean, wheat, rice, cocoa, coffee, cotton and sugar)
Commodity Derivatives Market in India
At present, there are major five national electronic multi-commodity exchanges:1. Multi Commodity Exchange of India Ltd. (MCX) – Mumbai2. National Commodity and Derivatives Exchange Ltd. (NCDEX), Mumbai3. Indian Commodity Exchange (ICEX), Mumbai 4. National Stock Exchange (NSE) - Mumbai 5. Bombay Stock Exchange (BSE) - Mumbai
The commodity derivatives exchanges provide trading in commodity derivatives (futures and options) along with polled spot prices of these commodities.
Commodity Spot Markets: Commodity spot markets and commodity derivatives markets are related because the latter derives its price from the former.
The spot market price is the current price of the commodity in the physical market, while the derivate market price is the price of the forward contract of the same commodity derived from the price of an underlying commodity.
The two major functions of Commodity Derivatives Exchanges are Price Discovery and Price Risk Management.
Price Discovery in Commodity Markets
Price discovery is a process of determining the price of a specific commodity through primary supply and demand factors prevalent in the market place.
Physical markets in India are generally considered to be fragmented and impacted by information asymmetries and instances of intentional external influences leading to greater price discovery inefficiencies.
However, prices discovered in the commodities exchange market are more efficient due to trans-parency where information flows and assimilation are instantaneous and more importantly, relia-ble.
Hedging & its Advantages
Hedging is a method of strategically using financial instruments to offset the risk of any adverse price movements.
Farmers are all too familiar with the rampant uncertainty that riddles the markets and crops every season. To mitigate risk and help ease the stress associated with it, agriculture professionals should consider putting together a hedging strategy. Hedging helps farmers to mitigate risk from the following situations:
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I. Protect Against a Bountiful Harvest: When the supply of the harvest is in excess and prices tend to fall in the future due to increased supply.
II. Protect Against a Poor Harvest: When the supply of the harvest is less the requirement than prices tends to increase in future.
An apt hedging strategy can offset costs regardless of what direction the market move.
Hedging Example
Cotton: when the prices are going down
Assume a ginner is holding a huge stock of cotton (29mm) bales in October. By hedging, he can lock in the price for his stock in October itself and protect himself against the possibility of falling prices. The spot price of cotton (29 mm) in October is `18,500 a bale and the price of December 2019 futures contract is `18,700 a bale.
The ginner sells (short) 1 lot of December 2019 futures contracts in October at `18,700 for delivery in December. He pays only 5% of the contract value as initial margin to the exchange for entering a position in the futures market. The prices fall in December. The ginner sells his stock in the physical market for `18,000 a bale and takes an opposite position in the futures market; by buying a (long) lot of December 2019 futures contract at `18,100 a bale.
Time Cash Futures
October 2019 Spot Market at `18500 a bale
December 2019Sell 1000 bales of cotton at`18000 a bale
Result A potential loss of `500 a bale
Sell one lot of Dec 2019 at`18700 a bale
Buy 1 lot of Dec 2019 futurescontract at `18100 a bale
Gained `600 per bale
RESULT: Thus, the ginner protected himself from falling prices with an effective selling price of`18,600 a bale (`18,000 + `600).
Conclusion
In order to increase the hedging participation government has taken many initiatives (e.g. E-NAM, etc.). Several Agri-products are exempt from CTT (Commodity Transaction Tax).
To gain the most from hedging, it is essential to identify and understand the objectives behind hedging and get clarity around their risk profile. A properly designed, hedging strategy enables corporations to reduce risk. Hedging does not eliminate risk, and it merely helps to transfer risk.
SEBI, though it’s COTs initiative and exchanges via their Investor Protection Fund is conducting various literacy drives across the nations covering APMC’s and educating local farmers about hedging and its benefits.
There is still a strong need to create awareness and educate farmers for hedging their commodity price risk which at large level can be done with the help of student bodies and an institution like NISM can play a great role in furthering this objective.
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Artificial Intelligence (AI) the term was coined by John McCarthy in 1955. So, what is Artificial Intel-ligence? Predominantly, it refers to the development of machines or system that can perform convoluted tasks which requires intelligence and thus thought to be the preserve of humans. AI is an umbrella concept that covers various methods to improve data analysis and predictions. Graham and Dodd’s seminal publication (1934) states value investing, security analysis remains a strong influence on stock selection in both fundamental and quantitative investment strategies of firms today. Modern Portfolio Theory (MPT) a groundbreaking theory given by in which Nobel Prize winner Harry Markowitz articulated investors’ “trade-off” between risk and returned in the year 1954. Followed by that almost two decades later in 1970, Kenneth French and Eugene Fama introduced factor analysis and expanded the definition of common factor risk or beta. Combined, these theories serve as the foundation of quantitative investing. Use of statistical techniques for investment outcomes and asset pricing behaviour started out in late 1990 but became more wide-spread later on as computing power further increased in the industry. As the days went on the statistical techniques improved as we as computing power. And this Computing power or AI covers various methods to improve data analysis and predictions. The most simplistic example of this type of algorithm used as AI is linear regression, which is a supervised learning technique where it uses basic algebra for mining data. So below mentioned figure shows different layers of AI, which has its own set of clusters further on.
Artificial Intelligence is remodelling financial ecosystem. As 'AI' is prominently changing the conventional way of trading practices and traditional operating models of financial institutions. Through the numerous sets of data and advanced iterative processing and intelligent algo-rithms which is enabling the software to learn automati-cally from pattern or features of the data, which is better known as cognitive computing a sub-field of AI. Using Machine Learning, we can pinpoint investment strate-gies by using the unstructured datasets and create a prospective deal. As Yoshinori Nomura, who runs a fund trading Japanese TOPIX futures, has described how his Simplex AI machine’s decision to bet on Brexit, against its
human overseer’s better judgement, proved correct and returned 3.4 percent to the fund in a single day. With the help stress-testing, an AI can detect and report anomalies providing risk man-
Artificial Intelligence– Unlocking Growth
PGPSM2018-19
11
Chinmayee KumarCustomer Advisory
SBI CAP Securities Ltd.
agement solutions. Credit Suisse initiated to spot irregularities in trade practice, so they embarked on a joint venture with AI firm Palantir technologies firm based in the USA to monitor irregular trad-ing behaviour. They’re using AI technology to compare the actions of traders to the normal behav-iour of their colleagues. They’re now able to spot suspicious actions and pre-empt and prevent law-breaking activities. Due-diligence documentation and the routine preparatory task can be done automatically through new documentation tools and platforms which allows large-scale key services. It provides a digitized platform to store contents from research reports to legal docu-ments, which makes it easier for an investor to find all the information regarding her/his account at one place making life similar. Personalized voice assistants are helping the clients with their queries all through the day, reducing the reliance on manual labour by providing personalized solutions. Sometimes conventional research methods fall back in looking up on old deals, found-ing team background, brokerage received from clients by using unstructured data AI generates new indicators for future success. A North American bank and brokerage firm use a Robo-adviser to allocate cash among exchange-traded funds according to formulas based on client question-naires. The adviser maps each investor to at least one of about 40 pre-set portfolios. What’s more, its proprietary algorithms are pre-programmed to update portfolios in response to gains and losses by checking relevant markets at set times. As capital markets has ocean depth of uncertainty AI has the ability to upgrade itself by analyzing new risk parameter that influences initial margin requirement for instance innovation in a trade from one dealer to another, offsetting pairs of trade. An American company Bridgewater, one of the world’s largest hedge fund groups, is running an innovative AI strategy to improve investment decision making. The fund is using historical data and statistical probabilities to develop trading algorithms capable of evolving with markets over time. Founder Ray Dalio hopes to have his PriOS (Principles Operating System) AI running as much as three-quarters of investment decisions at the firm within five years. The obvious appeal is not just that automated investment decision making reduces costs, but also that it operates more quickly than a human and possesses no emotional volatility. It clearly has major implications for fund man-agers, whose roles will likely have to evolve to functions that only a human is capable of. Pre-trade risk analysis can determine the impact of different trade scenarios on overall portfolio positions and factor in the cost of risk capital in profitability calculations. Continuous risk modelling enables institutions to automate risk models, understand changes to exposure in real-time and re-calibrate capital levels. Scrutinizing alternative datasets with machine learning algorithms can improve the coverage and granularity of risk models, as well as improve the quality of data fed into the system overall. These are a few constructive sides of AI affecting our industry. So, how would you weigh in? What’s your opinion about artificial intelligence?
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Introduction
The Securities and Exchange Board of India (SEBI) constituted a committee to raise the industry standards and strengthening the guidelines for representatives of Depositories, RTAs, Issuer Com-panies and Bankers to Issue. Before diving into the guidelines laid down by the SEBI, let us first understand the stakeholders of the Indian financial systems to which it is binding. The Indian finan-cial ecosystem is made up of various financial institutions and financial intermediaries. Each day, a number of institutions work in cohesion that facilitates millions of electronic transactions and order matching for the trade of stocks, bonds, commodities etc. Let us understand the role of the Regis-trar and Transfer Agent (RTA) and its importance to the financial system.
Definition of Registrar and Transfer Agents
By definition, the Registrar and/or Transfer agents are institutions or trusts who record, update and maintain records of investor transactions for the convenience of the asset management industry. Transactions carried out by investors such as buying, changing personal details, exchange data, email processing and related information etc. takes place frequently and hence, have to be record-ed and maintained. The Registrar and transfer agents possess specialist skillset, expertise and technological infrastructure to maintain this data professionally and help financial intermediaries save costs and time required to maintain and safeguard accurate and detailed records of transac-tions undertaken by investors. In India, notable RTA operations are that of Karvy, Computer Age Management Services (CAMS) and Deutsche Investor Services and others. The RTAs have also extended their service line to provide regular updates to investors regarding new offers, dates of maturity and other allied investment-related information for their convenience.
Responsibilities of RTAs
The core responsibility of an RTA is to maintain the transactional and personal records of investors on behalf of the financial intermediaries. These transactions may have taken place through various branches of offices that are set up across various parts of the country.
Analysis of the recentSEBI Circular on Streng-thening Guidelines andRaising Industrystandards for RTA,Issuer Companies andBanker to an Issue
Nikhil Borkar
PGDQF2015-16
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These RTAs act as a one-point system for investors. This facilitates the investors with a simple and unified method of receiving application forms of various financial intermediaries.
This system also enables completion of their transactions and receives updates regarding their account statements. RTAs also provide investors with updated information regarding mutual fund offers, amount regarding dividend distributions and maturity dates of fixed maturity plans.
Benefits of the Registrar and Transfer Agents
The RTAs provide tremendous value to the investors and financial intermediaries and financial institutions such as mutual funds etc. The RTAs provide greater accessibility at lower costs to mutual funds, financial institutions, and other intermediaries. Investors must be cautious in select-ing and appointing their RTA advisor to make sure that the RTA is genuine, has good standing in the market and has appropriate credentials and regulatory licenses. Unscrupulous agents may swindle your investments, leaving the investors in distress. Hence, investors are advised to ensure that they conduct their due diligence about the RTA before proceeding with investment decisions. Investors with multiple investments can rest assured that engaging the services of an RTA elimi-nates the need to scramble and connect with different mutual fund houses for information about investments and other deals. The RTAs help investors make investments and conduct all associat-ed transactions for them. These costs are born by the mutual funds and other financial institutions, based on the volume of transactions undertaken and facilitated by the RTA. The amount later is directed by the financial institution by charging as a part of the expense ratio.
Banker to an issue
A banker to an issue is a financial intermediary that performs a wide collection of activities to an issue, like submitting the application, ensuring safeguard mechanisms of investor money subscribed to the application etc. To perform the role of a banker to an issue, SEBI requires financial intermediaries to adhere to regulations and rules. After satisfying the requirements, SEBI grants the registration and permission to carry out activities of banker to an issue. The requirements are as below:
1. The application must be completed and the applicant should have the necessary infrastructure, data processing facilities and communication systems that can sufficiently run the operations effectively.
2. Directors of the applicant can’t be involved in any of the application and must not hold securities of any form in the securities market.
3. The banker to an issuer must also ensure that the information such as number of issues coming to the banker, dates when the application was received by the banker, number of applications received with investor money, dates when the investor money has been refunded.
Depositories to an Issue
A depository is a financial intermediary that assists an investor to purchase and sell financial securi-ties like bonds and stocks in an electronic, paperless manner. Securities held in the depository accounts are in many ways, similar to the funds held in bank accounts.
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Role of Depositories
The depositories function as an intermediary between the financial shareholders and the listed company that has issued its financial instrument. The shares issued by the company are issued through agents it is collaborating with it called as depository participants or DPs. A DP could be any financial institution such as a bank, a broker or any financial entity that is complaint to SEBI norms and is responsible for the share transfer from the depositories to the investors. After the transaction is done, the investor receives communication, confirming the same, from the depository.
Benefits of a Depository
The depository minimizes the risk associated with holding and safeguarding physical securities. Prior to this, the buyer of securities would have to keep following up to check if the shares have been transferred securely to his account; and that no loss, theft or damage has incurred. Once the depository system was set up, such risks have reduced greatly as the transfer of shares is done electronically. The electronic systems also have enabled in reducing the paperwork involved in trading, leading to a faster transfer of shares. As electronic trading was made mandatory for institu-tional investors, a spike in overall trading volume in the Indian market was observed. Due to the depository system, foreign investors felt more confident about investing and trading in the Indian market as the electronic system reduces the probability of forgery, delay and unscrupulous share transfer.
The SEBI Regulations
The Securities and Exchange Board of India (SEBI) issued a circular, exercising the powers conferred to it under Section 11(1) of the Securities and Exchange Board of India Act, 1992, to safe-guard the investor’s interest in the securities market and to promote the regulation and develop-ment of the market. With this in mind, the Securities and Exchange Board of India (SEBI) set up a committee with the intention to “strengthen the guidelines and improving the standards of RTAs”. The scope of the participants included stakeholders of the financial system such as Bankers to an Issue, RTAs, Depositories and Issuer Companies. The committee sought to suggest guidelines that could strengthen and streamline the processes and procedures pertaining to the maintenance and handling of transactional records, transfer of financial instruments and payment of interest/re-demption/dividend by the Issuing Company, RTAs and the Bankers to Issue.
The committee, based on its consultations and study, has recommended guidelines in the broad areas as below:1. Provisions pertaining to Payment of Dividend/interest/redemption2. Mandatory internal audit of Registrar and Transfer Agents (RTAs)3. Provisions pertaining to Transmission/Transfer/Correction of errors etc.
Unless otherwise specifically stated, the SEBI committee indicates that the documents/records must be maintained for a time period that is not less than eight years post completion of the trans-action by Issuing Company, Bankers to issue and RTAs working on behalf of the issuer companies. The Banker to an Issue, RTAs and Issuer Companies must strictly comply with the guidelines laid
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down by the SEBI committee. The issuer companies must carefully monitor RTAs activities in order to ensure its compliance with the provisions laid down by SEBI. In instances where the share trans-fer agent activities are conducted in-house by the issuer company, it is clarified that the issuer com-pany must comply with all the related and relevant norms applicable to share transfer activities.The committee also encourages the bankers to an issue, RTAs and issuer companies to instate even more stringent internal controls and checks, should they wish to do so. Except in cases where a timeframe is laid down, all the guidelines communicated by the SEBI circular is effective and enforced with immediate effect. The SEBI has advised stock exchanges to draw attention towards the contents of the SEBI circular to all the entities listed on their respective exchanges. Provisions for Payment of Interest/ Dividend/ Redemption
The Issuer Company, RTA and the dividend/redemption/interest processing bank must ensure that the dividend/redemption/interest master file, i.e the file that contains a detailed list of all the benefi-ciaries entitled to dividend/redemption/interest distribution by whichever name is placed on the date of record. The master file must also include the name of the company, Folio number, Client ID/DPID, name of the first securities holder, the date of redemptions of Interest/Redemption/Divi-dend payments, the Interest/Redemption/Dividend amount, details of the payee, the name of the bank, Bank account details, the branch of the bank of holder of securities, the MICR number, the Interest/Redemption/Dividend warrant number, details of the payment that has been made through a secured procedure/process as per the banker's secured framework. A copy of the Inter-est/Redemption/Dividend Master data file that contains details for every Interest/Redemption/Divi-dend paid must be maintained by the bank, and the RTAs and the Issuer Companies are to recon-cile the same.
In instances, where the bank account details of the financial instrument holder aren't available with the RTA or there has been a change in bank account details, the RTA must obtain account details and a cancelled cheque to update the data of the security holder. The original cancelled cheque must bear the name of the holder of the financial instrument; failing which, the financial instrument holder must submit a copy of the bank passbook that is attested by the bank. After the securities holder fulfils the procedural requirements, the RTA can then update its database with the bank details after due diligence. The dividend that remains unpaid must be transferred electronically to the bank account. In instances where the bank details like Magnetic Ink Character Recognition (MICR), Indian Financial System Code (IFSC) etc. that are required to make an electronic payment isn't available or if the electronic payment has been rejected by the bank or the payment instruc-tions have failed; the RTA on behalf of the issuer company or the issuer company itself could ask the banker to make payment via physical banking instruments like a Demand Draft or a Banker's Cheque to the securities holder by incorporating his bank account information.
The bank processing the Interest/redemption/dividend must ensure that if any instrument like Interest/redemption/dividend warrants etc. remains unpaid well beyond the valid period of the instrument, would be cancelled and the interest/redemption/dividend amount that would have been transferred by the issuer to the said account must be credited back at the earliest to the Issuer Company’s relevant bank account. Banks must also provide the details of unpaid instruments at the time when data is being shared with the RTAs and the Issuer Company. This provision would be deemed to be in effect after 30 days from the date of the issue of the SEBI circular.
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Re-issue/Revalidation requests to the bank processing Interest/redemption/dividend by the RTA must contain at least the Client ID/DPID, Original Instrument number, Name of the Company, MICR number, name of the holder of the security, payee's name, Bank account number of the payee, name of the bank, revalidation reason etc. The RTA must keep a record of all the re-issue and revali-dation requests.
The Interest/redemption/dividend processing bank, the RTA and the Issuer Company must ensure that the banks provide reconciliation of the unpaid and paid details that includes the payee name, bank transaction reference number etc., of the Interest/redemption/dividend paid fortnightly in the initial validity of the instrument and post expiry of the validity period of the financial instrument, quarterly till transfer of funds to Investor Education and Protection Fund. The Interest/redemption/-dividend reconciliation data that is sent by the banks to the Issuer companies/RTAs must contain details of all new financial instruments issued/dividend interest/redemption payment.
Details of new dividend instruments as well as old must be provided. The RTA must also perform reconciliation and intimate the Issuer Companies/Bankers in instances where discrepancies are found. The RTA, the Interest/redemption/dividend payment processing bank and the Issuer Company must maintain the reconciliation files sent by the banker as their records for the dura-tion of eight years. The RTA must also link to every specific folio the details of rejection of e-remit-tance, Interest/redemption/dividend instruments being undelivered, expiration of Interest/re-demption/dividend instruments and the new payment of Interest/redemption/dividend done via new financial instruments, including the status of the payment. The RTA's system must also maintain an audit trail.
Mandatory Internal audit of RTAs
All the RTAs are required to conduct an internal audit on an annual basis by an independent and qualified Certified Information Systems Auditor (CISA) or Company Secretaries or Chartered Accountants or Cost and Management Accountants with no conflict of interest with the RTA.
The eligibility criteria of auditors for performing the internal audit of the RTA is as below:1. The auditor can be appointed for a maximum term of five years with a cooling of a duration of two
years.2. The audit firms must also have a minimum of three years of operational experience in the finan-
cial services sector.
The audit must cover all the aspects of the operations of the RTA, which includes investor griev-ance redressal framework and compliance with the stipulated requirements as mentioned in the SEBI Act, Rules and Regulations, and the circulars/guidelines issued periodically by the SEBI. The scope of the audit must cover all the matters concerning the functions of the RTA.
The audit report must state the adopted methodology by the auditor, the deficiencies that were observed and the recommendations to the management to address the deficiencies.
The report must also include a summary of the audit and the business operations, which covers the size of operations, the number of audited transactions and the cases where deviations/violations were observed while conducting the audit and ensuring all regulatory compliance requirements
17
The observations made by the auditor along with the corrective actions undertaken by the RTA must be submitted to the Board of Directors of the Issuer Company.
The RTA must satisfy the Issuer Company’s inspection regarding the efficacy and adequacy of the corrective measures undertaken by the RTA. If not, the Issuer Company could ask the RTA to under-take even more stringent corrective actions.
Provisions pertaining to Transmission/Transfer/Correction of Errors
The Issuer Company and the RTAs must ensure that once a folio is allocated to an individual, it shouldn't ever be re-allocated to some other individual under any scenario. Folio numbers that are ceased i.e the kind of folio that has zero balance must not be re-allocated to any other individual.The Issuer companies and RTAs must ensure that all the historical records of transactions pertain-ing to a folio (wrt financial instruments held or interest/dividend/redemption issued to that folio, certificates issued or other changes) must be linked to that particular folio for easy retrieval.
The RTAs are expected to follow the concept of “Maker-Checker” in all its operational activities so that they can ensure the accuracy of the data and have a mechanism to check the occurrence of unauthorized transactions and maintain records. The Issuer Companies and RTAs must ensure that all modification of the folio records must be enabled only through front end modules. Any form of modification/correction via backend must be allowed. The Issuer companies and the RTAs must maintain a "System Log" consisting of all the details of all the changes (user access history, date and time of change, user identification etc.). This provision would be enforceable after a quarter or 90 days of the release of the SEBI circular.
The RTAs must obtain prior approval from the Issuer Company as in cases of transmission and
Serial No. Audit period &name of IssuerCompany
Observationsof the Auditor
Comments ofthe Board of the RTA
Correctiveactions taken
are met.
The report must also comment on the adequacy and efficiency of the RTA systems with regards to them meeting the requirements mentioned in the SEBI issued guidelines and regulations and redressal of investor grievance.
The RTA must submit a copy of the audit report prepared by the internal auditor to the Issuer Com-pany within the quarter from the financial year-end. A copy of the audit report must also be saved by the RTA for future reference.
The RTA's governing council (Board of Partners, Board of Directors, Proprietors etc. as per their applicability) must consider the internal auditor's report and take the necessary measures to rectify the deficiencies that have been brought to their attention if any. The RTA must send the Issuer Company an Action Taken Report within one month and maintain a copy of the same for future reference.
The format in which the Action Taken Report must be submitted is given below:
18
transfer in cases where there is a correction of the errors.
The Issuer company must be provided with a digital copy of all the Member data containing infor-mation pertaining to Name, Folio Number, Address, Certificate number, Distinctive numbers, number of shares etc, by the RTAs at the end of every financial quarter under due certification. The data must also contain the details of the transactions taking place in the physical folio during the period. A copy of the database containing these details must be maintained by the Issuer compa-nies and the RTAs independently must maintain this as a permanent record.
The Issuer company must be provided with a copy of the register of the debenture holders at the end of every financial quarter under due certification, by the RTAs. The records must include infor-mation pertaining to the holder's name, husband/father's name, occupation, registration date with the Registrar of Companies, date of allotment, debentures that are held by every holder making a distinction between every debenture by its number with the exception of instances where such debentures are held with a depository, certificate number of debentures and its distinctive num-bers, date of payment, date of debenture transfers, the registration date on which the name of the person was registered as a debenture holder, the debentures amount agreed to be considered as paid, date when any debenture holder stopped being a holder of a specific debenture, serial number of the financial instrument that was transferred, name and folio number of the transferor, name and folio number of the transferee, debenture numbers and the number of debentures trans-ferred, transfer number, instructions for interest payment, date of transfer. A copy of the database containing these details must be maintained by the Issuer companies, and the RTAs independent-ly must maintain this as a permanent record.
Company returns or documents pertaining to the company’s security filed with the Registrar of Companies (ROC) that are processed and collated by the RTAs must also be maintained by the RTAs; a digital copy must also be shared with the Issuer Company. The Issuer companies are also mandated to ensure the preservation of these data files that are filed with the Registrar of Compa-nies (ROC) on their end.
The Issuer companies and RTAs are required to draft a written policy and maintain stringent control on the interest/dividend/redemption warrants, blank certificates among other stationery. Periodic physical verification must also be carried out. The report pertaining to reconciliation must be main-tained by the Issuer Company as well as the RTAs. Besides maintaining the details of security certif-icates issued or re-issued in respective folios, the RTAs must preserve a register containing data pertaining to Folio number, name towards whom it was printed/issued, the date on which it was issued/printed, reason of printing etc.
If an individual holds physical securities the Depositories, Issuer companies and RTAs must ensure that the bonus securities issued for these folios must compulsorily be in the physical form. To put it differently, in cases where the folios maintain physical financial instruments, the bonus securities can't be allocated in the Demat format.The RTAs on behalf of the Issuer companies must make special arrangements to have details of the bank account of people in possession of physical securities, collect a copy of their PAN card. When collecting and collating such details, the RTAs must ensure the following:
1. The RTAs must preserve a record regarding folios which don’t have Bank Account details/PAN card as on the date of the SEBI circular and must be verifiable.
19
2. The RTAs must send a notice under speed/registered post asking the holder to submit Bank Account Details and PAN card by providing a copy of the attested bank passbook/ an original cancelled cheque showing the name of the account holder and a copy of their PAN card. These documents must be sent within three months or 90 days of the SEBI circular and consequently two more reminders with a time span of 30 days between the two. A 21 days notice period in order to furnish the documents would be provided by all the 3 letters.
3. In cases pertaining to Sikkim residents, the requirement of the copy of PAN card can be substitut-ed by any valid government-issued identity proof.
4. The RTAs must properly maintain all the records of communications; letters sent, replies gotten and the subsequent action taken on the matter. The same information must be then also attached and accessible to each such folio.
5. In cases where the holders of securities fail to comply with RTA request to furnish bank account details and PAN Card copy within 180 days of the SEBI circular or respond that the financial instruments in their name as per RTA records don’t belong to them would be placed under more enhanced due diligence by the Issuer Company.
6. After the completion of the notice period for the final reminder, the RTAs must share a list of all such accounts along with their details to the Issuer Companies.
Henceforth, all transactions pertaining to physical securities must be carried out with enhanced levels of surveillance and supervision by the RTAs and the company.
The RTAs and Issuer Company must deploy an enhanced level of scrutiny and due diligence in instances such as the following:1. In cases where interest/redemption/dividend is yet to be paid for three or more years.2. Suspense account that remains unclaimed as per the SEBI (Listing Obligations and Disclosure
Requirements) Regulations.3. IEPF suspense account was set up in accordance with Companies Act 2013.4. In cases where the bank account details/PAN card isn’t linked to the folio.5. Other strict criteria decided by the RTAs and the Issuer Company.
After every financial quarter, the RTAs must share with the Issuer Company a list of such folio accounts.
The RTAs must maintain a register that contains the details of all the documents and records that were destroyed. The register must contain the details regarding name of the authority exercising authority to destroy the details, date on which the destruction of details was authorized, descrip-tion of the documents and records destroyed, presence (with signature) of whom records were destroyed and date of destruction. The accuracy and authenticity of this register must be cross-checked during the internal audit. This register must be maintained until perpetuity.
References: 1. https://www.sebi.gov.in/legal/circulars/apr-2018/strengthening-the-guidelines-and-raising- industry-standards-for-rta-issuer-companies-and-banker-to-an-issue_38749.html2. https://www.careerride.com/fa-bankers-to-issue.aspx 3. https://www.investopedia.com/terms/d/depository.asp 4. https://economictimes.indiatimes.com/wealth/mutu-al-funds/understanding-registrar-and-transfer-agent-and-his-role/articleshow/52877173.cms
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• CreditMetrics was introduced by JP Morgan in 1997. In late 1998, the group was spun off into a new company called the RiskMetrics Group (RMG);
• RMG offers two products – RiskMetrics for measuring Value at Risk (VaR) for market risk products and CreditMetrics for measuring VaR debt instruments and loans.
• The concept of Value at Risk (VaR) seeks to measure the maximum loss of value on a given asset or liability over a given time period at a given confidence level (e.g., 95 percent, 97.5 percent, 99 percent, etc.).
• Bonds (or for that matter, loans) are priced (meaning the coupon rate or the interest) on the basis of their risk perception – the higher the risk, the higher the coupon rate (in case of loans, this gets translated to a higher interest rate).
• If the Bond should migrate to another rating (either higher or lower), and if it is a quoted bond, it will see a corresponding shift in its price. If the rating has seen an upgrade, the price will move upwards. Conversely, if there is a rating downgrade, the market price of the bond will drop.
• The next step is to generate the values that such bonds will assume. All scenarios are considered. They could either stay in their own category (which is what happens in the majority of cases) or they could move to any other category from AAA to a D.
• The probability of the migration is obtained from a rating migration table such as:
CreditMetrics byJP Morgan
PGPSM2012-13&PGDQF2016-17
Rating at year-end (%)
Initialrating AAA AA
AAA
AA
A
BBB
BB
B
CCC
90.81
0.70
0.09
0.02
0.03
0
0.22
8.33
90.65
2.27
0.33
0.14
0.11
0
A
0.68
7.79
91.05
5.95
0.67
0.24
0.22
BBB
0.06
0.64
5.52
86.93
7.73
0.43
1.30
BB
0.12
0.06
0.74
5.30
80.53
6.48
2.38
B
0
0.14
0.26
1.17
8.84
83346
11.24
CCC
0
0.02
0.01
0.12
1.00
.4.07
64.86
Default
0
0
0.06
0.18
1.06
5.20
19.79
Karan Singh RathoreSr. ConsultantErnst & Young
21
Source : Standard & Poor
• The values obtained in 6 above are then multiplied by the probability to get the weighted average (e.g., the mean). The difference between the observed values and the mean are then used to calculate the variance and the standard deviation.
• VaR is then calculated depending on the expected level. For example, for a 5% VaR by using a 1.65 sigma factor and for a 1% VaR using a 2.33 factor.
Comments:
1. This method is suitable for marketable assets such as quoted bonds. For non-quoted bonds and
loans which have no ready market, this approach may not be entirely relevant.
2. It is assumed that the loss distribution is normal while in reality a credit loss function is skewed
and has long tails. The results, therefore, may not be quite accurate.
22
Everyone loves to invest and sees himself becoming India’s next Jhunjhunwala, being a Technical Analyst I could not resist myself looking for technical aspect in any of the fundamental company like Reliance, Maruti, Bajaj Finance, HDFC Twins and many more.
If you ask any investor into the Market that do you analyse any fundamental ratio to find a funda-mental sound stock majority will say no because people believe these bluechips are all time favourite to get them a place in the portfolio and yes there are people who properly analyse ratios to find a gem, I would not take much of your time will move directly to explain you the need of writing this article.
Market is all about “Timing”, the better you time it the more you make returns.
Many Investors only try understanding fundamentals but not technicals, but technicals always help anyone to time the Market better.
A recent examples which I noticed in case of Reliance Industries when Aramko bought 20% stake in Reliance Industries, next day after the news stock fired up to 6% and many people bought this gem at highs of 1300 levels.
Later after few week the stock again cracked and was again available at lesser price, why I am telling you this story because there was stiff resistance in Reliance at price 1302-1310, below is the chart:
Need of Fundo-Techno View
PGPSM2016-17
Navodit TiwariCo-founder
TradeTime Education and Research
23
Here “Blue Line” is the resistance marked by Red Arrows, Green Arrow show the price till it has corrected(1173) which is almost 130 points that mean 10% from the highs which stock made after Armaco news.
That news was really great and it has definitely made the stock more fundamentally sound as the money they will receive can clear their debt to a suitable levels.
But people knowing Technicals would have timed it better and would have bought the same stock 10% cheaper.
Considering the resistance it was also safe to buy once the stock has surpassed resistance levelTechnical Analysis can be done using its various tools available, Here we have just taken Support and Resistance.
Reliance looks good and eyeing for 1800+ levels after so much of positive news and after such strong charts
Hence the need of Fundo-Techno view is must to time the market better and to generate better returns in your portfolio.
I hope you have enjoyed reading it and found a faster way to become India's next “Rakesh Jhunjhunwala”.
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As of Saturday, October 19, 2019, The British Parliament has delayed a key vote on the new Brexit deal; that would have to some extent smoothened the blow of the divorce of the gateway partner-ship. The presidency of Donald Trump is facing ever-mounting battle to keep Democrats from impeaching him, and central bankers are running out of weapons to battle an imminent slowdown from the great comeback from the sub-prime financial crisis. On the national front, India is facing its challenges under a leader determined to get his way in order to structurally change the Indian economy. Amid all the noise the markets are still near all-time highs, and at times a tweet giving a glimmer of hope is all that’s needed for a day of cautious exuberance.
Since the referendum, the United Kingdom has become a major source of uncertainty for the global markets. Its membership with the European Union, seen as a gateway for American, Indian and other companies in order to enter the European markets is in shatters, and the viability of London as the banker to the worlds high and low threatened. The British parliament rejecting every deal presented to it by Her Majesty’s Government, has investors rattled as to the possibility of a smooth transition. The EU keeping a hard line; in order to discourage its existing members from such a step, it has not helped No. 10 Downing Street’s cause. With Theresa May stepping down from the throne, dejected at her unfruitful efforts of convincing the parliament, and members of her cabinet from agreeing with her divorce deal. Her successor has taken a harder line against rebel MPs and the opposers by fixing the date of Brexit no further than 31st October, 2019. However, even he has been made to bow down to the power of parliament, which passed bills that disal-lowed the prime ministers from a no deal Brexit. The precarious position is been felt most in the Irish land, which has become the epicenter of the negotiations; due to its geographical landscape, being the only point of land border, and the Northern Ireland’s majority; the DUP, providing No. 10 with the support for it to form the government, it has become rather tricky for the Prime Minister to strike a balance.
With the American economy humming, and month on month jobs data leading to the lowest unemployment rate in fifty years of 3.7% in August 2019, it has not been a straightforward ride for the market with an untamed White House. The White House has seen its fair share of controversies under its current resident who has set twitter ablaze uncountable times. With the possibility of Donald Trump being impeached, the trigger for it not the only time the president has managed to be the epicenter. The Donald has proved himself as a hard negotiator, with the US-China trade talks still on tight ropes, the reconstituted North American Free Trade Agreement (NAFTA), and the Euro-pean Union in constant appeasing to avoid any such negotiations. He is perhaps one of few who
The Un-FundamentalMarket
PGDM(SM)2017-19
Prabhat Modi Research Associate
Morningstar India Pvt. Ltd
25
have used the power of the office of the president of the United States wisely for his country. Unfor-tunately, that is not where he stopped, it takes something to be out of box and brake constitutional and traditional protocols, but abusing them is a true art mastered by The Donald. Being the only president to not disclose his finances, investigated for colluding with a cold war enemy, and using the power of his office to promote his businesses, he has not held himself back. However, the phone call; extorting help to punch down a potential competitor in next year’s US elections, with Ukraine leading to the Democrats initiating an impeachment inquiry was the ultimate trigger needed by his in-house opposers. The president has also not held back from criticizing the Federal Reserve Bank on its policies, which he wants to use in his trade war with China. Furthermore, his latest decision to pull out of Syria, leaving his allies in the region, the Kurds to be slaughtered by Turkey has made it easy for the Syrian dictator, and his allies; Russians, and Iranians, to take over the region unopposed. This has led to a worsening humanitarian crisis in the region, with Kurds having to reach a deal with the Syrian dictator; on the brink to take back control of the country post a nine-year civil war, to save itself.
The Nifty 50 index has within the past year, under the shadow of global markets, touched its all-time high. This has come amidst growth fears, ineffective monetary policies, lagging govern-ment policies, unprecedented sector slowdown, and global headwinds. The banking, and non-banking financial sector, and the Indian economy have faced a tipping point post the IL&FS failure leading to liquidity crunch resulting in a challenging year for the country’s consumption sectors. The automobile sector is slugging through an unprecedented slowdown resulting due to liquidity crunch, government policies regarding engine regulations; due to switch over to the higher efficiency BS VI engines, and a public bracing for economic slowdown. However, the government has tried to quash the fears of a slowdown by slashing the corporate tax rate to 22%, however, this has done little to stray the path India has taken towards a slowing growth scenario. This was later confirmed by the IMF’s cripplingly slashing India’s forecasted growth rate to 6.1%. Although it has come with its share of volatility, it is hard to justify the buoyancy seen in the index over the past year. The slowdown is particularly perilous for India’s youth waiting to enter the work-force, as India has been marketed by its ‘strongman’ leader as a future consumption story, the youth needs a source of income for consumption story to play out as hoped by investors pouring billions into the Indian markets.
The headwinds seem to be the winners of the day, however, they are being denied any say in the directions the markets take, for the moment. Market participants seem to have nerves of steel, ready to be shattered by any of the headwinds getting any stronger. The British parliament, for now, seems to be running the show, with The Donald holding the fort, and for the Indian markets, policy tweaks are being placed to support it at a superfluous level, with the structural economy grinding to a halt. It seems unknown at this time; what trigger shall make this more fundamental to the risks. However, it should be noted that ignorance of the facts, something seen before the subprime crisis, is not the case, as observed from the fact that asset managers are piling cash at the fastest pace. In conclusion, one can only hope for the markets to become fundamental with the softest of blows that can be expected.
26
Nearly 95% of all Indian listed companies are small cap companies.
Small-cap funds are suitable for investors who are willing to take a relatively higher amount of risk for potentially high returns. There are many variety of unique small & mid-cap companies with high growth potential available for investment.
India has a population of around 1.2 billion, out of which only 20-25 million people invest in shares or mutual funds. We have touched only 2% of India and we have to reach the remaining 98%. That is the issue, BSE has been working for 140 years. The stock market has created a lot of wealth of around $1.4 trillion.
Pick small-caps with growth opportunity
Use this volatility in your long-term journey to accomplish financial goals. I think that an interesting return opportunity always exists in small-cap funds. Having said this, investors should have a part of their portfolio in small-cap funds. These funds are usually packed with businesses in their early stages of development with high growth rates. With new sectors evolving, these funds get the opportunity to invest and participate in the journey of small to mid to large growth over the next 10-15 years. There might be sluggish periods but the bounce back is normally quick. I think that investors should give equal weightage to the companies with different market capitalisation.
Opportunities LiesIn Small & Mid CapStocks - Big CompaniesHave Small Moves,Small Companies Have Big Moves
PGPSM2018-19
Dillipan Prabhakar
27
Increase mid-cap exposure
Though benchmark indices Sensex and Nifty are close to all-time highs, the broader market, particularly the mid and small-cap segment, has been battered over the past one and half years. The valuation gap between mid-caps and large-caps is down. In terms of valuations, the Nifty Mid-cap index is now trading at valuations which are similar to or marginally lower than the levels seen in 2014 wherein the first legs of the midcap bull-run started so opportunities are more.
Small cap is a term used to classify companies with relatively small market capitalization. A compa-ny's market capitalization is the market value of its outstanding shares. Small Caps are a set of com-panies with market capitalisation less than ` 5,000 Cr. These are small-sized emerging companies, and a few are likely to grow on to become Mid Cap or Large Cap companies.
Mid Caps are a set of companies with market capitalisation of more than `5,000 Cr but less than `20,000 Cr. These companies are usually mid-sized and have a reasonable track record and sustainability. Though they are riskier than Large-Cap companies, they usually have a higher survival rates than Small-Cap companies. This set of companies is a sweet spot as these tend to be less volatile than Small-Caps, and have more growth potential than Large-Caps. As the name implies, a mid-cap company falls in the middle of the pack between large-cap and small-cap com-panies.
Large-cap is a shortened version of the term “large market capitalization.” In India, normally com-panies with the market capitalization higher than `20,000 Cr is considered as Large-cap compa-nies.
The amount used for the classifications “large-cap,” mid-cap” or “small-cap” are only approxima-tions that change over time.
When and Why Small-Cap Stocks Can Beat Large-Cap Stocks:
From an intuitive perspective, small companies can begin to rebound in growing economies faster than larger companies. Their collective fate isn't tied directly to interest rates and other economic factors to help them grow. Like a small boat in the water, small companies can move faster and navigate more precisely than the large companies that move like giant ocean liners.
Decisions about new products and services and how to bring them to market can also be made and implemented faster with small companies because they have fewer committees, fewer layers of management, and fewer potential obstructions of the kind that exist in the typical bureaucratic organization of large companies.
When the economy begins to emerge from recession and starts growing again, small-cap stocks can respond to the positive environment quicker and potentially grow faster than large-cap stocks.Small companies—and most growth-oriented stocks across all capitalization—typically raise most of their capital from investors by selling shares of stock. Larger companies borrow money by issuing bonds. Higher interest rates have a less negative impact on the ability of small companies
28
to grow because they don't rely heavily on bonds to expand operations and fund projects.
29
Macroeconomist Christian Takushi has developed the concept of Geopolitical Economics, and defined it as follows:
Geopolitical Economics is primarily macroeconomic analysis & reasoning that takes into account geopolitical forces and factors. How geography and control over all types of resources are not only shaping the political process and foreign policy but increasingly the economy and financial markets. Nevertheless, not in exclusive mono-causality, but with causality in both directions. Geo-political interests are increasingly driving economic and monetary policy, but economic interests are also shaping military, foreign & energy policy. This reflects the complexity of a fast-evolving globalised economy with its feedback-loops.
Because "Geopolitics" encompasses all factors related to the geography & resources of nation-states (from river-grids, impassable mountains, minerals, gas, oil to labour force, population, their religion and political system), and those factors are undergoing dramatic changes, Macroeco-nomic Analysis can no longer focus solely on monetary and financial phenomena as it did during the Cold-War era. It will otherwise continue to produce unacceptably inaccurate Economic Outlooks. The post-modern Global Economy is becoming increasingly geopolitically-influenced, thus we live in the era of Geopolitical Economics. The world under pressure, let’s see some current geopolitical, economic issues of the country.
1. Technology Transfers
While the US is clamping down on technology transfers to China, questions are raised whether that would include clamping down transfers even to India. India does not have a significant R&D culture, and much of the efforts are too dispersed to have a major impact on the Indian economy.
2. US-China Trade War
The US-China Trade War is essentially a power struggle. The trade might be a side issue and tech-nology may be a bigger issue. Partial decoupling between the US and China in the technology sector may be imminent. In fact, the detention of Meng Wangzhou is not accidental, it’s a way of putting pressure on China. With the Chinese economy already going through a rough patch, the trade war raises worries of hastening an eventual meltdown. There have also been significant changes in the overall US-China strategic contestation. The concept such as ‘New Type of Great
GeopoliticalEconomics & INDIA
Shardendu PrakashSub Broker - Angel Broking &
Co-founder - Middle Street
PGPSM2017-18
30
Power’ seems to be fading away. There is also contestation within China on the way it is handling the US-China trade contestations. There is a growing narrative that Xi Jinping may have over-reached in taking the US head-on.
3. Global Trade Slowdown:
Global Trade is no longer the lead engine for the global economy. The current global economy is not only facing short-term cyclical slowdown but is also on a declining slope supply chains. As mentioned by Prime Minister Modi, India will need to double its exports to achieve double-digit growth to be able to enter the USD 5 tn of the long term cycle. Further, the US' efforts at partial trade decoupling with China has created problems for economies interconnected with China-based trillion GDP club.
Now I am going to end this article talking about Brexit because to understand geopolitical economics, we must need to know about it. How it affects us?
India is one of the top investors in the UK, and there are about 800 Indian-owned companies in the country employing roughly 110,000 people. (Eg: Jaguar Land Rover is owned by the Tata group).So these are following some points tell you about Brexit positive impact in India:
• There are many who think a weakening British currency might be good news.• India being more of an importing country than an exporting nation, the overall effect may turn out
positive for India (if the dollar doesn’t appreciate much against rupee).• With lower pound value, Indian companies may be able to acquire many hi-tech assets.• As investors look around the world for safe havens in these turbulent times, India stands out both
in terms of stability and growth.• Brexit might give a boost to trade ties between India and the UK.• Britain will now be free to discuss a bilateral trade pact with India.• Due to the fall in the value of Pound sterling, those who import from the UK will gain. Indian export
companies operating in the UK may also gain.• More Indian tourists can afford to visit Britain in the coming days as the currency value has fallen.• More Indian students can afford to study in Britain (for higher education) as the fees may seem
cheaper.• Brexit would weaken global growth and lead to a meaningful decline in commodity prices. This is
only going to enhance both the relative and absolute appeal of India.• Lower commodity prices will help the macro fundamentals: be it fiscal deficit, current account
deficit or inflation, which will give the government more levers to pump up the investment cycle.
31
In recent times, you would have heard the word Initial Public Offering(IPO) many times, mainly because of IRCTC, which got 111x more subscription! Be it newspapers, analysts, news anchors and your friends.
Today we see in detail what IPO actually is, how it works, and I will also answer some of the general-ly asked IPO queries.
Meaning of an Initial Public Offering
An initial public offer of shares or IPO is the first sale of a corporate's common shares to investors at large. The main purpose of an IPO is to raise equity capital for further growth of the business. Eligi-bility criteria for raising capital from the public investors are defined by SEBI in its regulations and include minimum requirements for net tangible assets, profitability and net-worth. SEBI's regula-tions also impose timelines within which the securities must be issued and other requirements such as a mandatory listing of the shares on a nationwide stock exchange and offering the shares in dematerialized form etc.
All you Knowabout IPO
PGDQF2017-18
Aditya Kondawar BP Wealth
Equity Research Analyst
Fund Raising Options
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The IPO Life-cycle (From company deciding to go for an IPO to the company getting listed on exchanges):
How are the IPO Prices decided?
There are 3 stages of price discovery of a company issuing an IPO.
Stage 1:
When the company wants to do an IPO it hires investment bankers or Book running lead managers who file their IPO Prospectus with SEBI and also they decide the price band of the IPO. Now, this price band is arrived by a process of book building. The investment bankers investigate the com-pany’s financials, its peers, and its management and also they decide on a price band. For exam-ple, if XYZ is the textiles sector, they look at their business earnings and listed peers and they decide a price band of `500–700.
Stage 2:
After investment bankers decided the price band of `500–700 they take this company’s data and price band to market makers such as Mutual Funds, PE investors etc. and build a book of demand and price. Suppose they got maximum demand in the price range of 530–620. This is the IPO price which is decided for the IPO. Do note this is all pre-IPO stage. Now the company comes out in the market with its IPO with the bid range price of 530–620 rupees.
Stage 3:
Now the company’s IPO opens in the market with a price band of ` 530–620. Now again a question comes that how is the listing price on a listing day decided?
Again the demand and supply are taken into account, and the price at which maximum demand has come will be the cut-off price. So, in this case, let's say maximum allocable demand has come at 585 rupees (most people have bid at this price or lower) and hence this is the price at which the share will list. After it lists the market forces of demand and supply will take the share price up or down.
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If there is more supply than there is demand, share prices will fall, and if it is vice versa share prices will rise.
Frequently Asked Questions and their answers:
Why does the price of IPO companies skyrocket after their listing?
I believe stock prices skyrocket for IPOs, mainly because of two reasons:
Market is Overvalued
Suppose there is a bull run going on in a country's stock markets. It is then obvious that people will shy away from investing in bull markets as valuations are overstretched. Hence when a new com-pany issues its IPO and when it lists, there is a frenzy to buy the company's shares. Again this happens only sometimes because the company's IPO itself may be overpriced. This usually happens because IPO issuing companies know there is a heavy demand for shares during a bull run.
Demand Supply Law
What happens in IPOs is that the supply stays the same, but the demand is huge for the same amount of shares, and hence people start putting more and more premium on the shares to buy them. Hence when the IPO lists on the stock exchange, it does so with a huge premium. This is famously referred to as the IPO ‘Pop’.
What is an IPO Prospectus?
IPO Prospectus is also called an offer document.Capital Markets or ideally Primary markets help a company raise capital (for a stake in their compa-ny) or borrow money (in exchange for interest payments and principal repayment) from investors for the first time. An offer document, as the name suggests, is a document prepared by the compa-ny for the various classes of investors when they are raising capital from the Primary Markets. An offer document contains a vast amount of information.
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An offer document contains things such as:• Risk Factors in the Issue• Investment bankers to the Issue• Registrars to the Issue• Issue Open and Close Date• Pricing of Issue• Opportunities in investing in the Issue.• Company Strengths• Company Strategies• Objectives of the Raised Capital.• Information on Company Management (Remuneration and DIN)• Equity Capital and Share Issuance History of Company.• Balance sheet for the last 3 -5 Years.• Profit and Loss Statement for the last 3-5 years.• Cash Flow Statement for the last 3-5 Years.• Company Financial Ratios such as Return on Net Worth, Price to Earnings, Price to Book Value.• Peer Comparison.
The Significance of Offer Document is that it helps an investor to get the complete picture of a com-pany going for capital raising. This is important because:• It helps investors to make an informed decision of investing or not in the Issue.• It helps investors to save time as the investor does not have to consume a lot of time researching
the quantitative and qualitative factors of the company.• An Offer Document is first reviewed and audited by independent auditors appointed by the com-
pany, and then the offer document is submitted to the Market Regulator: Securities and Exchange Board of India. Only after SEBI reviews it, the company is allowed to raise capital in the Market. Hence an offer document has enormous importance since SEBI will vet it line by line. This is to check for fraudulence and also to instil investor confidence.
What is the sure-shot way to get an allotment for the IPO?
There is no sure way to get allotment for the applied IPO. In case of over-subscription, the registrar to the particular issue does a lottery draw and allots the securities. For instance, if there is 10 times over-subscription in Retail Investors Category, only 1 out of 10 people will get their applied shares. And even that 1 person will be chosen randomly. So it all depends on your luck.
What exactly is the difference between an SME IPO and a regular IPO? Is there any risk in applying to SME IPOs?
The minimum investment: The minimum investment in Normal IPO is `12,000 to 15,000. On the other hand, for SME IPO it is ̀ 1,20,000 to 1,50,000. This is because only long term and capital inten-sive players are allowed for SME IPOs. The main reason for this rule is that SMEs are upcoming busi-nesses and volatile and impatient investors may hammer a listed SMEs market cap.
Business Roles: Normal IPO companies may have clearly defined business roles such as CFO, CTO, CEO, CXO whereas it would not be surprising to see 2 major roles to be handled by the same person in a SME (as the company size is small).
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Underwriting: Full underwriting is compulsory in SME IPO, whereas underwriting in normal IPO depends on the issuing company.
Allottees: Allottees should be more than 200 in SME IPO, whereas, in normal IPO, certain percent-ages are set. ( For Retail Investors, Non-institutional Investors and Qualified Institutional Buyers) and no certain allottee number is pre-defined.
If an IPO is undersubscribed, does anyone lose money? How does this work?
If an IPO is under-subscribed, no one loses money because the IPO going company has to refund the amount to the investors who had applied.
Best Example: Green Signal Bio-Pharma
The initial public offering (IPO) of Chennai-based pharmaceutical company Green Signal Bio Pharma failed to go through on the final day of the offering as institutional investors stayed away.
The timeline for IPOs is typically three days. Green Signal had extended its IPO timeline twice — from November 11 to November 17, and then from November 17 to November 22, 2016. (Even Parag milk foods had extended its IPO deadline. However, the IPO got through)Besides extending the timeline for the second time, the company also lowered its pricing on November 17 from `76-80 a share to ` 68-76 a share and was hoping to raise `110 crore at the upper end of the price band.
Minimum Subscription
The minimum shares the company needs to get from the public out of the total issue by the date of closure. (Presently every company need to raise 90% of the issued amount). Else, the company shall refund the whole amount received. This 90 % has to be exclusive of the cheques that are not cleared or the ASBA application amount in the current scenario.
It’s the Company’s Loss
It may look like the investors didn't lose money, and the company didn't get the money. Nothing great in that, right? But actually, the company gets very negative publicity in the markets because it shows that the investors are not interested at all in buying the shares of the company which even-tually lowers its reputation, even if it is a good company. (also they may lose some money in invest-ment banking expenses, investor roadshows, prospectus filing charges with SEBI and more if any.) They may not lose anything tangible, but they may lose out on intangible things such as Customer loyalty, goodwill.
During IPO bidding, where is the blocked amount of investors stored until shares have been allocated to them?
The amount is stored in the investor's account itself. ASBA stands for Application Supported by Blocked Amount, and the amount merely gets blocked till the time of allotment. If you get allot-
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ment, the money will be deducted and if you don't get allotment money will be unblocked.
For instance, if you apply IPO shares worth `15,000 from your bank account, which has 15,100 rupees when you check your balance, it will just show 100 rupees. If you don't get allotment, balance will be `15,100 again.
Who are the Participants in an IPO?
Should Retail Investors apply in IPOs?
Before Investing in IPOs, you should understand the business of the company, its past financial performance, the purpose of raising capital, quality of management etc. If the IPO checks out on all the parameters set by a retail investor, they can invest in an IPO.
What is the difference between Offer for Sale(OFS) and Fresh Issue?
OFS: PE, promoters, venture capitalists or HNIs who invested in the company at an early stage are converting their non-traded company shares into tradeable shares by selling it to the public via an IPO. In a nutshell, privately held shares are now being made public via IPO.
The only problem here is that the money raised through OFS won't affect the company at all since they would not get any money from the IPO; the exiting investors will get the money.
OFS may have an adverse effect on the prices of shares and the reputation of the company if:• Famous Investor/Fund House exits the company via OFS• Famous Investor/Fund House exits the company via OFS at a discounted price
Again, this is just a hypothetical situation. The actual reaction of the market may vary. (Many PSUs have done their OFS, but still, the share prices have fared well in the long run)
Fresh Issue: Company is issuing new shares (which dilute the present shareholding stake of all shareholders), but the money raised from fresh issue of shares will be all received by the company, unlike OFS.
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What are the things to look for in an IPO before investing?
• The price band for IPO is not overpriced (an overpriced issue automatically shows that the exiting investor or management is greedy for money and would not even leave money on the table for investors). DMart IPO was priced such that ample money was left on the table for investors. This speaks highly of Mr Radhakishan Damani.
• It should not be an offer for sale. Offer for sale means that the company would not get any money raised from IPO, but instead, the exiting investor will get all the money. ( On the contra-ry, some Public sector companies' OFS sailed through nicely. Ex: HUDCO )
• You must check how the proceeds raised from the IPO will be used. If a company says only debt will be repaid , then it is not such an attractive option, but if a company says they will partly pay a debt, open a new factory or general corporate purpose, then it shows that money will actually flow in the business which is good for an investor.
• Some Financial Metrics: Debt to equity, RoE, RoA, RoCE, Promoter Holding, Cash flow analysis, and so on.
• The Sector should be a growing sector so that the company can perform better in the future.
• Do peer analysis to check if the company is overpriced or not. Peer Analysis also helps you to know how much company has captured the market for its peers.
• Many People buy IPOs solely for the 'IPO pop' (IPO pop means monetizing on the premium listing of the stock on exchange). This also influences the stock to move wildly in the starting couple of weeks. The stock may rise rapidly or fall rapidly but if you have a strong conviction, hold on to the stock because the price will reflect its true value only in the long term.
Is it profitable to invest in IPOs for the long term?
So it was beneficial for me for holding stocks for the long term. Some of my IPO long term hold-ings include:• RBL bank bought at `225 • Indigo bought at `765 • Endurance Technologies bought at `472 How does one increase chances for an allotment?
Apply for IPOs from Demat accounts of different family members. This ensures a higher proba-bility of allotment. For instance if there is 10 times oversubscription and if you have only applied through one Demat account your allotment chance is 10% but if you have 10 Demat accounts and you have applied through all of them then your allotment chance is 100% of at least 1 lot(10% on each Demat account, 10% into 10). This means you are bound to get one lot of allot-ment in one of the ten Demat accounts for sure.
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If shares are allotted, should you exit immediately on a listing day?
This depends on your strategy, and some IPOs are good to hold for the long term, whereas some are just good for the short term. For instance, I held onto my Indigo shares which were allotted to me during IPO because I saw long term prospects in this bank. On the other hand, I sold my BSE shares on a listing day since BSE faces stiff competition from NSE.
Who are Anchor Investors?
You would have seen anchor investors name popping up before an IPO opens for a subscription. Some examples of such news:
Ahead of IPO, Matrimony.com raises `226 crore from anchor investorsDixon Technologies raises `179.8 crore from anchor investorsPrataap snacks raised `143 crore from anchor investors
Anchor investors or cornerstone investors (as they are called globally) are marquee institutional investors like sovereign wealth funds, mutual funds and pension funds that are invited to subscribe for shares ahead of the IPO to boost the popularity of the issue and provide confidence to potential IPO investors. Anchor allotment is done a day before an IPO opens. Roping in anchor investors gives a lot of comfort to the issuer and banker, as nearly a third of the IPO gets covered even before the opening day. A healthy anchor book also gives a lot of comfort to small investors as it indicates the faith shown by institutional investors, say experts.
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The IT sector has given a tremendous return in the past 1 year. In the past 1 year, the sectoral index has given a return of more than 20%. It has outperformed the nifty 50 INDEX and all the other major sectors like Pharma, Power, Banking, Auto. Tata Consultancy Service (TCS) has outperformed the IT sector index with a return of more than 30%. The other major large-cap companies in the Sector like INFOSYS, WIPRO, HCL TECHNOLOGIES, TechMahindra has given the return 26.6%,28%,12.47% and 34.9% respectively.
If we look into mutual fund investment options which is considered to be the most suitable for the common public, IT sectoral MFs have given a great return with most of them even reaching more than 20% in the past 1 year.
The upward trend of the dollar against rupee has helped this industry to give this whopping return.
The following graph1 represent the outperformance of the IT sector against the nifty50 index.
InformationTechnology SectorAnalysis (1 Year)
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Vansh Chirvi ArbitrageurSMC Global
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Graph 1 - It sector outperformance over the nifty 50 index
The graph shows the outperformance of the IT sector in the past 1 year. In the past 1 year the IT Index was up around 24.53% while the Nifty was up around 3.33%. These figures show the dominance of the IT sector index against the nifty 50. Graph 2 represents the individual performance of the top IT companies in India.
Graph 2 – Individual performance of the IT sector companies
• TCS – It is represented by the black line in the graph. The company has given around 35.8% return in the past 1 year. This company has the highest market capitalization in the Nifty 50 companies and is the most stable company for the long term investors.
• INFOSYS - It is represented by the blue line in the graph. The company has given around 26.68% return in the past 1 year.
• WIPRO - It is represented by the Yellow line in the graph. The company has given around 28% return in the past 1 year.
• TECH MAHINDRA - It is represented by the Redline in the graph. The company has given around 34.9% return in the past 1 year.
• HCL TECHNOLOGY - It is represented by the grey line in the graph. The company has given around 12.47% return in the past 1 year.
Summary (Facts):
• The appreciation of the US dollar against the Indian rupee was the main factor which has driven the return of the Indian IT sector on the hilltop.
• Most of these companies have hit their 52 weeks high in October when the USD-INR HIT its 52 weeks high. It shows that the IT index is highly correlated to the DOLLAR index.
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Shares of Godrej Properties Ltd. have returned the highest gains among peers so far this year as the developer was among the biggest beneficiaries of a wave of consolidation among cash-starved developers after the IL&FS crisis.
The realty arm of the Godrej Group had a joint-development portfolio of 75 million square feet as of March, according to its annual report released in September. According to Morgan Stanley, was the highest among peers. It spiked nearly by half in three months ended June to 109 million sq ft.
Godrej Properties added nearly 35 million sq ft through such partnerships in just one quarter as small- and medium-sized developers struggled to raise funds. Non-bank lenders—their primary source of credit—have turned selective as shock defaults by IL&FS Group last year increased borrowing costs. That, coupled with a slowing economy, only hurt a nascent recovery from the setbacks of Prime Minister Narendra Modi’s cash ban and a stricter housing law that led to an inventory pile-up.
But large developers like Godrej Properties with a strong parentage find it easier to raise funds and remained insulated from the credit crunch, allowing them to take on projects from struggling peers. The strategy, the company said in an analyst call after April-June earnings, bodes well.
The NBFC crisis has only expanded the opportunity to pool in stressed assets for Godrej Properties, Mohit Agrawal, real estate analyst at IIFL, told Bloomberg Quint. “With its JV/JD (joint venture/joint development) model having attained maturity, cash flows are expected to improve substantially over the next two-three years, with aggressive addition of new projects planned.”
Project area executed under Joint Ventures in a million sq. ft.
Why is GodrejProperties a Hot Betamong Investors?
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Sharad DubeEquity Research Analyst
Bloomberg Quint
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According to Puneet Gulati, director (equity research) at HSBC, Godrej Properties is one of the few real estate companies that have a pan-India presence to source and sell large projects. "The com-pany has the best management teams and processes to execute joint development agreements and raised money last year with access to a fund platform," he said. "Its strong brand and good track record of executions allow it to command a preference over other developers in the minds of buyers and to sell properties at a premium."
Godrej Properties, according to its exchange filings, has lined up as many as 11 projects for the year ending March 2020, with a total area of 7.98 million square feet. It launched 16 in the previous fiscal.
Godrej Properties Project Launches:
The company has the highest booking value among peers at ` 5,316 crore as of March, led by nine new launches across various projects, according to its annual report.
The Booking Value Picture Of Developers (In ` Cr):
And ` 2,100 crore that Godrej Properties raised through a qualified institutional placement in the quarter ended June helped it slash its net debt by half.
Improving Leverage Ratios For Godrej Properties (Source: Annual Report)
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The company with 60 percent year-to-date gains has been the best performer among real estate companies so far this year, outperforming the benchmark Nifty Reality Index.
Nifty Realty Index Performance (YTD)
Nearly 56 percent of the analysts tracking the stock recommend a ‘Buy’, 19 percent suggest ‘Hold’ and the rest advise ‘Exit’, according to Bloomberg data. But given the surge this year, the average of 12-month price targets indicates a downside of 13 percent.
Edelweiss Securities and JM Financial said sharp price cuts in the realty market due to distress sale by developers to shore up liquidity is a risk since Godrej Properties enjoys a premium due to its brand. And they also cautioned about execution risk given a large number of relatively small projects.
Nifty Realty Index
Godrej Properties
Brigade Enterprises
Prestige Estate Projects
Phoenix Mills
Sunteck Realty
Oberoi Realty
Mahindra Lifespace
Sobha
DLF
Indiabulls Real Estate
6.8%
50.6%
40.7%
29.3%
23.7%
17.7%
11.2%
7.5%
4.4%
-18.8%
-50.1%
Source: Bloomberg (As On October 1)
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As per the Department of Chemicals and Petrochemicals (DCPC), the Indian chemicals industry is the sixth-largest producer of chemicals worldwide and the fourth largest in Asia. The chemical industry is a vital component of the Indian economy, accounting for ~2% of the GDP. It is a well-di-versified industry covering more than 80,000 commercial products. It includes basic chemicals and its products, petrochemicals, fertilizers, pesticides, paints, varnishes, gases, soaps, perfumes and toiletry, and pharmaceuticals. The Chemicals & Chemical Products account for ~7.9% in the overall Index of Industrial Production (IIP), which has been growing at a (CAGR) of 2.9% YoY. As per DCPC secretary, Rajeev Kapoor, the Indian chemical sector is growing at 8-10% annually and is poised to reach USD 300 bn by 2025.
Global Speciality Chemicals Market
Globally, speciality chemicals are driven by extensive product research and innovation, which is a significant differentiator over the commoditised chemical industry. Vast raw material resources and low-cost labour are contributing to the improved growth in the Asia-Pacific region, as foreign players are investing in emerging/developing nations.
According to Grand View Research, the global speciality chemicals market was estimated at US$ 1.16 Tn in 2016 and is expected to grow at a CAGR of 5.6% over 2017 to 2025, to reach US$ 1.79 Tn by 2025.
The shutdown of capacity in China driving the growth for India.
For many years, China had many liberal policies on both financial as well as environment front with the motivation to grow faster and become one of the major economies of the world. The slack envi-ronment regulations and policies led to severe concerns on the pollution level in the country. As a result, in the past few years, the Chinese government started focusing more on improving the health of its citizens at the expense of the health of its economy (accepting the slower growth).
The Chinese government implemented many stricter environmental policies that include heavy penalties, forced up-gradation of plants for effective waste treatment, the shutdown of many high polluting manufacturing plants, and shifting of plants to industrial zone situated away from human habitats. This has led to a sharp rise in the cost of manufacturing in China and has taken away the key advantage of low-cost manufacturing from Chinese chemical manufacturing companies. The temporary and permanent shutdown in China, one of the largest chemical markets of the world,
ChemicalIndustry
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Jyothi Swaroop Finology Ventures Pvt. Ltd.
Equity Research Analyst
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has helped Indian chemical companies to garner market share in the global market. Moreover, the companies are unlikely to enjoy a similar cost advantage, which they used to enjoy in the past, making it more advantageous for Indian companies which are having superior quality products. This indicates that Indian companies are likely to continue to reap benefits in the near to medium term.
has helped Indian chemical companies to garner market share in the global market. Moreover, the companies are unlikely to enjoy a similar cost advantage, which they used to enjoy in the past, making it more advantageous for Indian companies which are having superior quality products. This indicates that Indian companies are likely to continue to reap benefits in the near to medium term.
Major Segment of the Chemical Sector
The Chemical sector can be broadly classified into the following segments, such as bulk chemi-cals, petrochemicals, agrochemicals, speciality chemicals, colourant chemicals, biopharma, bio-Agri, and bio-industrial products.
• Bulk Chemicals: Bulk chemicals are a group of chemicals that are made on a large scale and act as inputs to downstream industries. Bulk chemical includes basic organic chemicals (methanol, acetic acid, formaldehyde, Phenol, etc.) and basic inorganic chemicals (caustic soda, Chlorine, Soda Ash, etc.).
• Petrochemicals: Petrochemicals are derived from numerous chemical compounds, mainly hydrocarbons, which are derived from crude oil and natural gas. Major segments for petrochemi-cals are basic petrochemicals and end-product petrochemicals.
Based on chemical structure, petrochemicals can be divided into three groups' Olefins, Aromatics, and Synthesis Gas. Examples of Olefins include ethylene/propylene, which is used in industrial production of chemicals, plastics & plastics products. Aromatics include benzene, which is used in making dyes as well as in making synthetic detergents. Synthesis Gas is used to produce methanol and ammonia, which are further utilized in making urea (fertilizer).
Source: - Department of chemicals and petrochemicals
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Fertilizers: Fertilizers are materials
Organic or inorganic, natural or synthetic - that provides for one or more nutrients required for plant growth. Fertilizers can broadly be categorized into nitrogenous, phosphate, potassium, and com-plex fertilizers. The application of fertilizers varies from region to region based on the regional nutri-ent requirement, cost of fertilizers, and farmer preferences.
Specialty Chemicals
Speciality Chemicals are R&D intensive, high value, and low volume chemicals. These chemicals are derived from basic chemicals and are targeted towards specific end-use applications. Going down the chemical value chain, speciality chemicals are typically produced in smaller quantities. Markets are medium-size and are often relatively concentrated. Product innovation and the amount of intellectual property owned allow for a favourable pricing position. Here, the number of new product launches is a crucial element.
Speciality chemicals can be divided into various sub-segments based on end-use applications. The major sub-segments are:
Agro-chemicals
Chemicals that are primarily meant for protecting agriculture crops against insecticides and pesti-cides are covered under this sub-group. Agrochemicals broadly cover Insecticides, Fungicides, Herbicides, Bio-pesticides, etc. Market cap: - `44,380 crMajor players: - Insecticides India Ltd, Rallis India Ltd.
ColourantsA dye, pigment, or other substance that colours something, further dyes are classified into Reactive dyes, solvent dyes, sulphur dyes, and ingrain dyes. Pigments are classified into organic and inorganic.Market cap: - `63,700 crMajor players: - Aarti chemicals, Sudarshan chemicals, Atul chemicals.
Construction chemicalsChemicals used with cement, concrete, or other construction materials at the time of construction to hold everything together.Market cap: - `7,525 crMajor players: - BASF chemistry, SIKA.
Flavours & FragrancesGroup of companies impacting the human senses of taste (or) smell. Based on their source and processes, flavour and fragrance ingredients can be broadly classified into two types Essential oils and Aroma chemicals.Market cap: - `44,478 crMajor players: - PRIVI organics, Synthite.
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Personal Care IngredientsGroup of chemicals used in skincare, hair care, oral care, and make-up products. Personal care speciality ingredients are classified into active and inactive ingredients based on their role in the product.Market cap: - `9,450 crMajor players: - SAMI Labs, Vivimed Labs
Polymer & AdditivesChemical components that are added to the base polymer to enhance its performance. Further polymer additives are divided into Plasticizers, Heat stabilizers, Antioxidants.Market cap: - `5,600 crMajor players: - Plastiblends, Fine Organics.
SurfactantsChemicals that are used as detergents, wetting agents, emulsifiers, foaming agents, and disper-sants. Types of surfactants include Anionic, Nonionic, Cationic, and Amphoteric surfactants.Market cap: - `38,710 crMajor players: - Galaxy surfactants, Ultramarine & Pigments.
Textile ChemicalsChemicals used in producing textiles, including apparel, stages of textile processing, deals with Dyeing, Printing, Finishing, and Coating.Market cap: - `15,400 crMajor players: - CHEMBOND.
Water treatment chemicalsChemicals used to remove suspended solids, viruses, fungi, bacteria, algae, and minerals from water, the significant categories coagulants & flocculant, Biocides, and disinfectants, Defoamers or antifoams, pH adjusters and Boiler water chemicals.Market cap: - `6,160 crMajor players: - CHEMBOND, Ion exchange.
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has helped Indian chemical companies to garner market share in the global market. Moreover, the companies are unlikely to enjoy a similar cost advantage, which they used to enjoy in the past, making it more advantageous for Indian companies which are having superior quality products. This indicates that Indian companies are likely to continue to reap benefits in the near to medium term.
Make in India & other Government initiatives
To support the industry, the center has allowed 100 percent Foreign Direct Investment (FDI) in the sector. The Government of India (GOI) has identified chemicals as one of the focus sectors under its ‘Make in India’ initiative. Both Central and State governments had taken various measures to attract investment in the industry.
The government has established chemical hubs (Petroleum, Chemicals and Petrochemicals Investment Regions – PCPIR) to provide the required ecosystem (the raw material/market for inter-mediate producers, transportation, utilities, etc.) and a common effluent treatment plant (CETP) to ensure environmental compliance.
PCPIRs are being developed in Andhra Pradesh, Gujarat, Odisha, and Tamil Nadu. PCPIRs already received investments worth USD 24.68bn until end-FY15, but the government believes they can attract investments up to USD 117.42bn.
Factors that make Specialty chemicals Industry attractive
• The speciality chemical industry is knowledge-driven & oligopolistic. This industry is capital intensive because companies that manufacture such chemicals need to have process expertise as well as research and development capability (R&D). These factors act as entry barriers, allow-ing incumbents to retain a competitive advantage over others.
• The manufacturing industry approves the product after a lot of testing and then accordingly designs its production process. So, these chemicals are high-value specialized products used in specific proportions by manufacturing industries. Hence, customer stickiness is very high, lead-ing to the predictability of revenue.
• The end product price is decided through negotiation. Thus, an increase in the cost of raw materi-als is passed onto the end-user. This allows companies to maintain their margins and profits.
• Substitution risks for the speciality chemicals industry are low. Speciality chemicals are used in a myriad of different products with specific technical requirements that are barely met by other technological solutions, or there is no alternative technical solution for speciality chemicals.
Some other demand drivers
Consumer Product Manufacturers
Chemicals are used in the manufacture of an extensive range of consumer products ranging from body care, cosmetics, hair care, and home care products, which have a consistent demand in the market.
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Pesticide Manufacturers:
Improved awareness about the advantages of using pesticides, progress in the number of farmers able to afford (Pay-for) pesticides, and growth in access have helped push demand for pesticides in the country.
Manufacturers of Soaps & Detergents
Enlarged awareness in personal detergents, increase in consumption of consumer products, higher disposable income, and broader access to consumer products due to the growth in the retail sector has caused in higher consumption of soaps & detergents.
Key risks that may affect Specialty chemical industry
End-user industries
The speciality chemical industry, which stems from a likely development of alternative technolo-gies and applications has a resulting chance of getting obsolete if not they are closely associated with end-users, So while assessing understand the global demand of end-users of such chemicals and the steadiness of the expertise-technology and product application that drives their demand.
Foreign currency-related risks (Crude oil prices)
The foreign currency risk can arise from unhedged liabilities, particularly for companies earning most of their revenues in domestic/local currency and companies with exposure to foreign curren-cy borrowings, which could affect to part-funding of capital expenditure and working capital requirements. So here, while assessing, we have to check the tenure of contracts with clients and check nature hedge policy is available or not, this results in mitigation of currency risks.
Concentration Risk
Specialty chemicals being niche products are developed for a few customers, which exposes the chemical entity concerned to the customer as well as industry. Concentration risk assumes critical prominence when the customer either goes through a business downturn (recessions) or stages out production of a product line that involves the use of speciality chemicals. To counter this risk, check for any entity offering a diverse range of products to withstand the impact of substitution by new products or a downturn in the consumer industry/company.
Environmental Risk
High importance should be given to the environment and pollution control systems employed by a company. Given that environmental regulations are becoming severer in India with rising concerns on pollution standards and actional measures like shut down or high penalty were seen. So while assessing check company's compliance with environmental norms (which could be either Zero discharge of effluent discharge in line with ecological parameters).
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Feedstock Risks
The raw material (input) cost is the single major cost component for a chemical entity; issues relat-ed to availability and pricing of raw material have a critical impact on the company’s operating efficiency. The availability of raw material is most important, which results in temporary shutdowns or severe losses while assessing one should be clear with the sources of raw material, supplier's concentration risk, bargaining power, and pricing structure of the entity.
Economies of Scale
The Speciality chemical industry is being capital intensive; it's okay if a company has a competitive cost advantage, which helps them to build a large capacity plant and an increase in productions. The ability to sustain high capacity utilization levels is getting influenced by some factors like favourable demand, the extent of cost competitiveness, and availability of feedstock. If any compa-ny has overcapacity in the domestic market, exports can help them in maintaining high capacity utilisations.
Future Outlook
• Indian suppliers are increasingly occupying space vacated by the Chinese, healthy domestic demand, and improving operating rates. (CAPEX) Capital expenditure (CAPEX) of speciality chemical manufacturers is set to sprint 70% to almost ` 13,000 crore in fiscal 2020 from ` 7,500 in fiscal 2018.
• The demand for speciality chemicals grew at a steady rate from 8 to 10 between fiscals 2017 and 2019, due to the constant demand from end-user industries such as textiles automobiles, paints, personal care, and plywood. This consequently surged the capacity utilization to 85% in fiscal 2019 compared with 75% in fiscal 2019.
• The ongoing CAPEX and cash accruals of the speciality chemical entities are bound to increase at a CAGR of 12% to `12,000 cr in fiscal 2022 from `8,400 cr in the last fiscal 2018.
• Looking forward to volatility in crude oil prices and currency fluctuations and supplies from Chinese producers are vital factors to monitor.
Statements from CRISIL Report“Utilisation rates of new capacities coming up will remain high over the medium term because of improving environmental compliance and cost competitiveness,” said Anuj Sethi, Senior Director, CRISIL Ratings. "As a result, the share of Indian speciality chemicals in the global supply chain is seen rising 100 basis points to 5.2% in fiscal 2022, from 4.2% last fiscal."
"Despite substantial investments incapacity, the debt/Ebitda (earnings before interest, tax, depreci-ation, and amortization) ratio of these manufacturers is expected to improve to 1 time in fiscal 2020, compared with 1.2 times in fiscal 2018,” said Gautam Shahi, Director, CRISIL Ratings. "Healthy cash accrual and prudent funding of Capex will support credit profiles."
Sources:Global market insights, JM Financials, IBEF, CRISIL, ICRA & Company websites.
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Government creates IOU (“I owe you”): This all starts before the election when a politician makes big promises like they will provide free electricity etc. and in return public caste their vote to him. But nothing is free in this world, even government needs money to fulfil public demands and national expenditure. This led to deficit spending. It occurs when expenses exceed income. For this treasury of the country borrows loan from the central bank’s by issuing a bond (an instrument created for the purpose of raising capital). This bond is often termed as national debt. Now who pays this debt? The answer is common people by paying tax.
Swapping IOUs and creating money
How government get loans? Simply this is the process where treasury of the country deals with federal reserve having bank as middle man. When government creates bond, a number of banks participate in auction to purchase that bond. Then bank goes to federal reserve which pays to buy that bond from the bank. The bank earns commission in this process. In fact, federal reserve doesn’t have money. It creates money just by handing over the Cheque to the bank. The printed money is then provided to bank which is paid to the government to buy new bonds. This cycle keeps on repeating.
Government spends this numbers
When treasury receives money from the bank, it transfers those amounts to government. Now government spend this money on deficit spending for public, infrastructure and war etc. It is then provided to government employees, contractors and soldiers. They use to deposit this money in banks not to keep it safe but as a loan. The bank invests this money in stock market or provide loans on interest and earn profits.
Banks multiply the money
Almost all bank work on fractional reserve banking principle. It means when we put our money into a savings account at a bank, the bank doesn’t just stock it away in a vault underground some-where. Instead, it lends our money to different individuals and companies who need it. It saves 10% of deposit and lends 90% as loan. By this bank is actually creating money. Banks have to keep a small fraction of their deposits on reserve in case depositors wish to withdraw their deposits. Bank-
How the FederalReserve in the Historyof Mankind?
PGDM (SM)2019-21
Shivam Ashish
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ing system produces 90% to 96% of total currency. So what’s the big deal? This increases the supply of currency due to which value of currency decreases. This is the main reason for inflation.
Our numbers are taxed
Most of our taxes are not used for development purpose but for paying the national debt. Today’s monetary system is not only unconstitutional but a theft of prosperity, liberty and purchasing power due to inflation.
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ALUMNISPEAK
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Being a student of commerce and company secretary program, I was looking for a course in the field of capital markets to enhance my knowledge & skills. Therefore I choose NISM PGPSM, which eventually turned out to be one of the best decisions I have made. For me, NISM will always remain more than an institution as it's a temple of knowledge with state of the art infrastructure, huge library resources, premium hostel & recreational facilities, laboratories pertaining to latest technol-ogies and clean and vast beautiful campus with a canteen that serves good, hygienic food. The course structure, expert lectures and other co-curricular activities manifold one's knowledge and provide an environment for the holistic development of an individual. The Campus life here has given loads of memories that I shall cherish forever be it classroom presentations, sports activities, poetry club, cultural programs, movie screening, swimming etc. NISM offers you everything that you expect from a premium educational institute; everyday, there is something new to learn and explore. My one year at NISM has helped me in overall personality development be it Leadership skills, organisational, communication etc. with which I have been able to reinvent myself into a more confident individual.
PGDM-NISM is a course nicely structured for someone who wishes to step into the Financial Markets in India. You get to learn a lot from the faculty members as they hold a vast level of knowl-edge of the markets. A lot of industry veterans with years of experience and expert knowledge in the domain are also invited for interaction with the students. A backing by SEBI is an added advan-tage. The new campus at Patalganga is a great place to study and live. The campus boasts of a high-end infrastructure close to the financial capital of India. We were fortunate enough to experience the Trading simulation labs set up at the campus. We were also provided access to databases like Bloomberg to become Industry ready. Apart from studies, the recreational facilities provided here are also very good.
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Prateek VijayPGPSM 2017-18
Business Development - Financial Institutions MarketingMulti Commodity Exchange of India Ltd.
Aditya JaiswalPGDM-SM 2017-19
ExecutiveTrading & Surveillance
Indian Commodities Exchange
NISM is a place of learning, fun, culture, lore, literature and many such life preaching activities. Studying at the NISM brought an added value to my life. It allowed me to meet different kinds of people and learn several things. I have received a vast amount of support from faculty members, and I can say that my two years at NISM have been excellent. It is truly a memory to cherish for a lifetime.
Whenever NISM is being mentioned anywhere, it drives me back to one of the best phases of my life with all the beautiful memories storming in my mind.
Ours is the first batch of PGDM, it has always been a turmoil for all of us with regards to 'what the outcome of the course would be', whether it was a right decision', 'where will this head us to', 'what turns our career would take', etc. But NISM made it sure to make us comfortable in every prospect and proved all our doubts wrong and now I can proudly say that it was one of my best decisions to join NISM-PDGM.
NISM has excellent infrastructure, sterling facilities, and supportive management. NISM is surrounded by capital market think tanks, professionals along lots of bears and bulls, which helped me become capital market professionals. I show my special gratitude to the placement committee who worked hard for shaping our careers by providing excellent opportunities. I thanks NISM for providing me such a platform from which I can now enhance my career and look forward to my bright future.
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Akshansh ChoudharyPGDM-SM 2017-19
Assistant Manager-Forex,Treasury Operations,
The Karur Vysya Bank Ltd.
Sakshi SrivastavaPGDM-SM 2017-19
Karvy Fintech Pvt. Ltd Management Trainee, Hyderabad
Having graduated from the NISM university, stepping out in the world of financial markets, I feel well equipped with both the knowledge and experience required to thrive. The experience of the faculty, along with best in class technology builds a campus that nurtures Young Minds into capa-ble individuals. It has been an overwhelming experience for me, both emotionally and academical-ly, giving me memories I will cherish through my life and Knowledge I will rely on upon through every step of my professional journey.
Overall, I recommend NISM to every individual seeking stability in the financial markets, as they provide the right guidance, an adequate amount of academic and practical exposure, guiding and mentoring you closely through your entire journey, not just until you remain a student, but through-out your journey of life.
Two years at the National Institute of Securities has been the most challenging and developing phase of mine. The professors taught us with such ease and made us capable of stepping into this competitive financial world. Apart from the teaching, there were many functions which entertained us all and gave a homely feeling in the campus. So thank you for this memorable journey.
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Zain KarmaliPGDM-SM 2017-19
Partner, Li-Karma Financial Services LLP
Rishika JainPGDM-SM 2017-19
Officer - 1 on probationAssistant Manager
Karur Vysya Bank
PGDM(SM) is a well-structured course, designed to suit people coming from diverse disciplines wanting to enter the financial markets. It has helped me gather the right skill-sets required by the industry. The right mix of theoretical knowledge with piratical skills delivered through talks by industry experts, experienced faculty and state-of-the-art infrastructure is what one can expect out of this course. NISM already has a brand value in the securities market in India, and I'm proud to carry it. During my two years, I've tried to take advantage of the available financial databases and resources while doing research reports and assignments. I feel grateful to the faculty members and the management for the opportunity to intern with an investment bank and the market regulator, SEBI during this course. I received enormous support from my faculties and got placed with the National Stock Exchange in the Listing department. I feel delighted to recommend NISM and espe-cially the two-year PGDM(SM) course to others.
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Souradeep GhoshPGDM-SM 2017-19
Management Trainee - Listing ComplianceNational Stock Exchange
GLIMPSESOF
1STALUMNIMEET
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The 1st Alumni Meet of NISM was held on 18th February 2019 in the Patalganga Campus of the institute. The Alumni association is being formed with the objective of bringing all alumni onto one platform, through which they can network with past and future batches, to discuss various development in the financial markets, celebrate achievements, and get involved in several activities of the institute like training, industry interaction, providing internships to students, collaborative work in emerging areas in financial markets and so on.
The meet began with the lighting of the lamp by dignitaries and Saraswati Vandana by students. To welcome all the alumni, the Director of NISM, Dr. M. Thenmozhi, has given an address on the importance of Alumni Association for an organisation as well as for the alumni. The keynote address was given by the former Director of NISM Dr. Sandip Ghose. Dr. Ghose has encouraged all the alumni and all the participants of the meet on the skills required for the 21st century and how we can balance ourselves in every situation that we face in our life. The chief guest of the occasion was Mr. Ashwini Bhatia, CEO, SBI Mutual Fund. Mr. Bhatia has given a broad picture of his struggle and how he became a CEO today from a Probationary Officer of SBI in 1985. He has emphasized that it is important to imbibe punctuality, commit-ment, and honesty to be successful in one’s career and life.
The institute has created an alumni portal, and the portal has been inaugurated by the chief guest of the function Mr. Bhatia. The alumni magazine named as “Jigyansa” and student maga-
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zine “Vridhi” were launched at the meet. The winner of the ALUMNI Logo competition was Mr. Dhananjay Devgadkar (Designer, NISM) was awarded an appreciation letter and a cash prize of `25,000 by the Director. The Alumni logo has been given below.
The formal function was over with a vote of thanks by Mr. Sunil Jayawant Kadam, Registrar, NISM.
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To motivate the alumni, there was a panel discussion on “Motivational thoughts & secrets to success” by the under 40 young achievers award winners of AIWMI. The panel discussion was moderated by Mr. Aditya Gadge (Founder & CEO, AIWMI), and there were four young achievers in the panel to discuss their life journey and the secret of success. The panel members for this panel were Ashish Fafadia-Partner Blume Ventures, Sahil Nandu-Partner-Adelmo Advisors, Jay Shah- Founder One Tree Wealth Partners and Ankit Shah, head- the Risk team for Invesco’s Asia Pacific business. This was followed by a second-panel discussion on the theme "Future of Data Science in Securi-ties Markets” organised by the core committee of alumni. There were five panelists and was moderated by Karan Rathore, Ernst and Young. The other panelists of this sessions are Santhosh Kusuma- State Street Corporation, Sriram Nerkar- ORION Metals Trading LCC, Sonica Phos- Morgan Stanley and Anurag Raj, Think Analytics.
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The function was embedded with cultural function by NISM alumni and students. The cultural function was held in the amphitheatre. There was a DJ night after the dinner in which all students and alumni have participated with great enthusiasm.
The Programme was coordinated by Prof. Latha Chari (Prof. In-charge-SSIR-NISM) and Mr. Pradiptarathi Panda (Lecturer, SSIR-NISM).
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Adil Dsa
Sai V. Gummithi
Website
Anand Raj
Gaurav Tripathi
Amogha Sriteja
Nishaanth Kannan
Astha Gupta
Shivani Sharma
EventManagementCo-ordinator
(Students of PGDM(SM) 2018-20)
Nikhil Jain
Bhagyashree Kashwed
Aanchal Tandon
Meghna Shetty
Cultural
Architt Prasad
Vignesh MN
Manali Gokhale
Saksham
Shubham Vidua
Kirtana Srinivasan
Mrinmoy Chakraborty
Nishita Manjrekar
Somya Mishra
Shivam Ashish
Akhilesh V. Krishnan
Devansh Sharma
Turangam Borah
Tanvi Seth
Shardul Mahajan
Contact
Malaya Mohapatra
Ramdev Singh
Amit Mehra
Website
S. Ullash Kumar
Vansh Agarwal
Sachin Kumar
EventManagement Social Media
Tangudu Neelakantha
(Students of PGDM(SM) 2019-21)
Alumni Committee Members
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NATIONAL INSTITUTE OF SECURITIES MARKETS
www.nism.ac.in
NISM Vashi OfficeNISM Bhavan, Plot No. 82, Sector - 17,Vashi, Navi Mumbai, Maharashtra - 400703Tele: 022-66735100-02Fax: 022-66735110
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