Allotment procedure of IPO shares..

Few things frustate an investor more than applying for shares and not getting them, especially when talk of booming share prices leaves them with stars in their eyes.

A number of my friends have been similarly disappointed.

They simply did not get an allotment after they applied for an Initial Public Offering.

An IPO refers to the first time a company offers its shares to the public. After the shares are alloted through the IPO, the stock will be listed on the stock exchange so that the shares can be bought and sold.

A number of IPOs are in the limelight at the moment.

Since many people apply for an IPO, very few end up with the shares.

Let me explain why this happens and how the IPO game works.

The company will 'discover' its price

Earlier, the company determined a fixed price for the stock issue. The issue was marketed to the general public through advertisements and a media campaign.

Today, companies prefer a book building process. Book building is the process of price discovery. That means there is no fixed price for the share.

Instead, the company issuing the shares comes up with a price band. The lowest price is referred to as the floor and the highest, the cap.

Bids are then invited for the shares. Each investor states how many shares s/he wants and what s/he is willing to pay for those shares (depending on the price band).

The actual price is then discovered based on these bids.

Who can play the game?

Three classes of investors can bid for the shares:

Qualified Institutional Buyers: QIBs include mutual funds and Foreign Institutional Investors. At least 50% of the shares are reserved for this category.
Retail investors: Anyone who bids for shares under Rs 50,000 is a retail investor. At least 25% is reserved for this category.
The balance bids are offered to high networth individuals and employees of the company.
How the game is played

Individuals who apply for the IPO put in their bids.

The process is transparent. You can check on the issue subscription at the BSE and NSE Web sites.

After evaluating the bid prices, the company will accept the lowest price that will allow it to dispose the entire block of shares. That is called the cut-off price.

Let's take an example.

Number of shares issued by the company = 100.

Price band = Rs 30 - Rs 40.

Now let's check what individuals have bid for.

Bid Number of shares Price per share
1 20 Rs 40
2 10 Rs 38
3 20 Rs 37
4 30 Rs 36
5 20 Rs 35
6 20 Rs 33
7 20 Rs 30

The shares will be sold at the Bid 5 price of 20 shares for Rs 35.

Why?

Because Bidders 1 to 5 are willing to pay at least Rs 35 per share.
The total bids from Bidders 1 to 5 ensure all 100 shares will be sold (20 + 10 + 20 + 30 + 20).
The cut-off price is therefore Bid 5's price = Rs 35.

Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don't get an allotment because their bids are below the cut-off price.

How to make bidding work for you
Go for the higher price band.

As a retail investor, you don't have to specify an exact price.

Make out a cheque for the number of shares you are applying for at the highest end of the price band. If you are applying for 10 shares, the amount wll be Rs 400 (10 x Rs 40 -- the higher end of the price band).

On allotment, the extra amount paid will be refunded to you. Since the cut-off price is Rs 35, the 10 shares will cost you Rs 350 (10 x Rs 35). The balance Rs 50 will be refunded to you.

How the allotment is done

The bids are first allotted to the different categories and the over-subscription (more shares applied for than the shares available) in each category is determined.

Retail investors and high networth individuals get allotments on a proportional basis.

Assuming you are a retail investor and have applied for 200 shares in the issue, and the issue is over-subscribed five times in the retail category, you qualify to get 40 shares (200 shares/5).

Sometimes, the over-subscription is huge or the issue is priced so high that you can't really bid for too many shares before the Rs 50,000 limit is reached.

In such cases, allotments are made on the basis of a lottery.

Say a retail investor has applied for 5 shares in an issue, and the retail category has been over-subscribed 10 times, the investor is entitled to half a share.

Since that isn't possible, it may then be decided that every 1 in 2 retail investors will get allotment. The investors are then selected by lottery and the issue allotted on a proportional basis among.

That is why there is no way you can be sure of getting an allotment.

How to make an allotment work for you

Put in bids in the names of your family members. The problem is, you will need to open demat accounts for them first.

Most regular IPO investors try to calculate how much the issue will be over-subscribed and then put in their bids accordingly.

For instance, if you want 10 shares and feel the retail portion of the issue will be over-subscribed three times, you should bid for 30 shares.

You could also apply separately in the high networth category if you have the money.

Direct Tax Code.

The cabinet approved a new direct tax code on Thursday that will replace archaic income and wealth tax laws in the country, a key reform initiative that is aimed at widening the tax net and increasing federal revenues.

The direct tax code bill will now be placed before parliament for approval on Monday. The government aims to implement it from April 1, 2011.

Here are some questions regarding the tax reform.

WHAT IS THE DIRECT TAX CODE ALL ABOUT?

India wants to modernise its direct tax laws, mainly its income tax act which is now nearly 50 years old. The government, wants a modern tax code in step with the needs of an economy which is now the third largest in Asia.

The new tax code is expected to widen the tax base, end unnecessary exemptions, moderate tax rates and add to the government's coffers.

The federal budget has estimated about $92 billion in direct tax receipts for the year that ends in March 2011.

WHY IS IT IMPORTANT FOR INDIAN FIRMS AND FOREIGN INVESTORS?

One of the key aims of the new tax code is to provide a system which takes into account increased cross border mergers and acquisitions by Indian corporates over the last few years.

The new code is also expected to streamline tax rates and administration for foreign institutional investors, for whom India is a top destination.

Despite the crisis in the euro zone, capital flows have been robust this year with an inflow of $8.5 billion so far.

WILL IT PROVIDE GREATER STABILITY TO INVESTORS?

The code aims to provide greater tax clarity and stability to investors who want to invest in Indian projects and companies.

These officials have said the government would not like to tinker with tax rates every year to provide a greater degree of tax certainty to corporates, investors and individuals.

WHAT WILL BE THE IMPACT ON INDIAN AND FOREIGN CORPORATES?

On the face of it, the corporate tax rate has been reduced from a little over 33 percent to 30 percent. But tax experts say whether a company pays more tax or less will also depend on a key provision called the minimum alternate tax (MAT).

MAT is applicable to those companies who do not show book profits liable to tax, as they claim a plethora of exemptions on account of being in capital intensive industries. The MAT rate has now been increased from 18 to 20 percent in the new code.

Foreign corporates today pay a higher rate of tax. However, the new rate of taxation for foreign corporates is not yet known.

WILL IT BE REVENUE POSITIVE FOR THE GOVERNMENT?

The government has marginally lowered the tax burden for individuals and has effectively left corporates with largely similar tax rates as before, hoping that these changes will make the new code revenue positive.

Though the exact impact is not yet known, finance ministry officials have said the new code will help shore up the tax GDP ratio significantly from around the current 11 percent level.

WILL THE ANNUAL BUDGET BE LESS IMPORTANT?

An important part of the budget every year has been the detailing of the tax rates. However, with the introduction of the new direct tax code, the tax rates will not be part of the budget presented to Parliament every year.

SEBI clears smart order routing for all investors

Capital market regulator the Securities and Exchange Board of India (Sebi) has approved the launch of smart order routing to every class of investors on stock exchanges, putting an end to the conflict between the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

By using smart order routing technology, investors will be able to obtain the best possible price while buying or selling shares, similar to what is being done manually by stock brokers, except that this technology makes it much faster to execute. Stock brokers say that smart order routing determines which exchanges offer the best price at any given time. Speed is the key to the success of programme trading. If the price feed is not fast enough, the software will be unable to capitalise on some of the opportunities that last for a second or less.

The BSE had said in a public forum that the NSE was dragging its feet on allowing smart order routing on fears that it may lose some of the orders, if this was allowed. The NSE, on its part, said that security concerns related to audit trail had prompted a second look at the proposal.

“Smart order routing would help in better price discovery and also increase electronic trading volume,” Parag Gude, MD-consolidated equities, Morgan Stanley

Algorithm-based trading or programme trading has really not taken off in a big way in India and one reason, say stock brokers, is a lack of liquidity beyond the top 15-20 most actively-traded stocks. The other reason is the systems at stock exchanges are not equipped to handle very heavy trade volumes when the market is unusually active.

According to Sebi, stock brokers, who are interested in offering the smart order routing facility, will have to apply to the respective stock exchanges, which, in turn, will have to communicate their decision to brokers within 30 days. Brokers will also have to submit a third-party system audit of its smart order routing system and software.

Stock exchanges will disseminate a list of approved system auditors (CISA or equivalent) qualified to undertake such system audits. System audit of the smart order routing systems and software will be periodically carried out by brokers, and certificate, in this regard will have to be submitted to the exchange.

Brokers will have to provide an undertaking that the new system will route orders in a neutral manner. They have to provide an alternative mode of trading system in case of failure, besides maintaining logs to facilitate an audit trail.

Stock exchanges will have to provide a unique identification number (UID) for orders placed through this facility and maintain data on all orders and trades. Within three months from implementation of the smart order routing, bourses will have to ensure that a system is put in place to time stamp market data feed that’s disseminated to the market.

The regulator has also stipulated that apart from strengthening investor grievance cells to address complaints, exchanges will also have to share necessary data as and when required in order to facilitate necessary examination in case of investor complaints.

The broker server routing orders will have to be located in India. The markets regulator has also asked stock exchanges to communicate the status of the implementation of the provisions of this circular in the monthly development report.


Source: http://economictimes.indiatimes.com/markets/stocks/market-news/NSE-BSE-battle-ends-Sebi-clears-smart-order-routing-for-all-investors/articleshow/6448585.cms

Thanks.

Reliance rejigs holding pattern to save on tax

Reliance Industries Ltd (RIL) has undertaken a significant restructuring of promoter holdings, under which a significant chunk of shares have been transferred to a limited liability partnership (LLP), reports Business Standard. The move would reduce the dividend distribution tax before the Direct Taxes Code (DTC) kicks in. In the financial year ended March 31, the company paid

dividend distribution tax of INR3.5bn. For FY09, the outgo was INR3.2bn. The promoter group, which held shares through 32 entities, would now transfer their shares, representing 34.17% of

voting rights, to a total of 61 entities, including 27 LLPs. The transaction was completed on August 11. LLPs are an alternative corporate business vehicle that offers the benefits of not only limited

liability, but also allows its members the flexibility to organise their internal structure as a partnership based on an agreement.

Amazingly Only 451 clients account for 50% of NSE daily turnover !!!

As many as 451 client identities accounted for about 50 per cent of the average daily turnover in the cash equity segment of the National Stock Exchange in the first quarter this fiscal.

This was stated by the Minister of State for Finance, Mr Namo Narain Meena, in a written reply to question posed by Mr Sukhdev Singh Dhindsa in the Rajya Sabha.

The number is even more intriguing in the derivatives segment, with only 106 clients accounting for 50 per cent of the average daily turnover.

Daily Average

While the average daily turnover in the NSE's cash segment is Rs 13,000 crore, it is about Rs 90,000 crore in the derivatives segment.

In the first quarter of 2010-11, more than 30.90 lakh clients traded in the NSE cash equity segment, Mr. Meena said.

About 52 per cent of the exchange's turnover was contributed by retail investors, high net worth individuals and corporate clients. While institutional clients contributed about 24 per cent, proprietary traders accounted for about 24 per cent of the exchange turnover, Mr Meena said.

Even in the case of derivatives segment, about 52 per cent of turnover in NSE was contributed by retail investors, high net worth individual and corporate clients. However, institutional clients accounted for only 12 per cent, while proprietary traders contributed 36 per cent of the turnover.

Mr. Meena also said that top 25 trading members of the NSE accounted for about 42 per cent and 43 per cent of cash and derivatives segment turnovers respectively during the first quarter this fiscal.

In a reply to a question from Mr. Mohammad Adeeb, the Minister noted that foreign brokerage firms with direct or indirect controlling interests in domestic brokerage houses accounted for 12 per cent and 9 per cent of the turnovers in NSE's cash and derivatives segment respectively.

Source: www.thehindubusinessline.com 

A Nice debate - An SIP or One-Time Investment?

An SIP or One-Time Investment?

If I continuously invest Rs 5,000 per month in an equity fund, is it possible to build a corpus over 15 years? Would I not make much more by investing it all at one go and holding on for that long? Would I need to change funds to keep the growth going?
— Ashwin Arora

Regarding the possibility of building a corpus over 15 years, it certainly is plausible. Even if you invest just Rs 5,000/month and earn an annual return of 12 per cent, you would end up with Rs 25.20 lakh at the end of 15 years.
Alright, that's theoretical. So let's look at some actual funds to see if this thesis holds up. I have taken a 15-year time frame and looked at a Systematic Investment Plan (SIP) of Rs 5,000/month over this entire period. The diverse line up includes some superstars as well as dogs. That's deliberate. It will convey a more realistic picture. As you can see, there is no arguing with the numbers. And even though the worst performing fund made money, the difference between the best and the worst is nothing short of glaring.
Your second question is interesting, and you may even be right, but look at the table below for a reality check. If you are looking at a one-time investment, you would first of all need to be in possession of capital, in this case Rs 9 lakh, that too 15 years ago. Once you overcome this hurdle, you would end up being a hostage to market timing. What if you had invested the money at the peak of the market cycle, say January 2008 when the Sensex was at around 21,000. Can you imagine the worth of your investment by December 2008 when the Sensex dipped to an abysmally low 8,500? Psychologically, the impact of seeing your investment reduce to half can be disastrous. The good thing about a systematic investment plan (SIP) is that it helps you ride the market upheavals to your advantage. And it does what you want, which is accumulate wealth over the years in a low-cost, transparent fashion without a strain on your finances.

Bajaj Corp Limited IPO

BRLM: Kotak Mahindra Capital Company Ltd
Issue Period: August 2 – August 5, 2010
For QIB: August 2 – August 4, 2010
For Retail : August,5, 2010
Face Value: Rs.5/-

Price Band: Rs. 630/- – Rs. 660/-
Lot Size: 10 Equity Shares and Multiples of 10 Equity Shares thereafter
Registrar: Karvy Computershare P. Ltd.
Issue: 45,00,000 Equity Shares
QIB Book: 27,00,000 Equity Shares (60% of Net issue size)
HNI Book: 4,50,000 Equity Shares (10% of Net issue size)
Retail Book: 13,50,000 Equity Shares (30% of Net issue size)