Wednesday, March 26, 2014

The New Universal Account Number - Great News for Salaried Employees in India

Most of us would have switched jobs at some point in our careers and in all probabilities our colleagues would’ve advised us to withdraw our PF corpus when we actually switch because they probably went through the arduous process of transferring their PF Account from one employer to another. Are you someone who had withdrawn your PF just because of this reason, in spite of wanting to get your PF Transferred? Or, Are you someone who actually endured the lengthy and painful process of getting your PF Account transferred?

If so, this news is going to be extremely pleasing for you…

What is this Good News?

The EPF Organization, the governing body of all our EPF Accounts has decided to provide Permanent PF Account Numbers to the over 5 crores members of EPF. It will be called the Universal Account Number or UAN.

Why Did the EPF Organization Decide in Favor of this UAN?

Every year over 12 lakh requests are placed by account holders to transfer their PF corpus from their old account to their new account. This is a very significant load on their staff. On top of this, the current process is time consuming and requires a lot of follow-up from the EPF Account Holder. As a result, even though people are not supposed to close their accounts when they switch jobs, they do it.

So, to motivate people to save up more money for their retirement in their PF Accounts and to reduce the hassle for both the Account Holders as well as Staff working in the EPF Offices, they decided to come up with this UAN.

What Does This Mean?

This means that, once you have your UAN, when you switch jobs, all you have to do is, give your new employer this UAN and he will start crediting your PF money into this account. There will be no hassle of actually filling up forms to initiate a transfer from your old job and follow-up regularly to actually make sure your money reaches the new PF Account…

When will this Start?

The current plan is to start rolling out these UAN’s to EPF Account holders starting October of 2014.

My Opinion About This:

Though October 2014 is still a good 6 months away, considering the magnitude of this rollout I am thinking maybe – add another 3 to 6 months to be realistic. Eitherways, this is an excellent initiative by the EPFO Senior Management and this will go a long way in ensuring that at least this generation of working class will retire with a decent enough savings…

Most of us withdraw our corpus when we switch jobs to avoid this hassle and somehow or other the money gets spent. So, with every switch and withdrawal, our eventual retirement corpus becomes that much smaller.

If we continue to accumulate our PF money throughout our working careers which will span around 20+ years, we can definitely retire with a handsome PF Corpus…

Some Last Words:

Though the purpose of the PF Corpus is to help us save up money for our retirement, given the current rate at which cost of living in India is going up, we should definitely plan to save up a separate retirement corpus that is on top of our PF Corpus.

I had published a book last year titled “Your Complete Guide to Indian Income Tax and Retiring as a Crorepati” which explains how you can save up a Crorepati Retirement Portfolio by just investing under the Section 80C Tax Savings each year.
You can click here to buy the book for just USD 4.99/-

Alternately, if you would like to pay for the book in Rupees, feel free to send an email at and I will share more details with you.

Happy Retirement

Monday, March 17, 2014

Should You Invest in the Goldman Sachs PSU ETF Scheme?

Goldman Sachs, one of the worlds leading Investment Banks is coming up with a new ETF Scheme that aims at investing in the large Public Sector Undertakings or PSU’s in India. The scheme opens for anchor investors tomorrow and retail Investors on 19th March. The idea behind this article is to give you a brief overview of whether this ETF Scheme should be a part of your Investment Portfolio.

Before we Begin: As with all stock market related instruments – ETF’s too come with an inherent risk of Loss. There is a very real possibility that the PSU stocks that come under this scheme make losses and their stock price tanks. In such a case, you will end up making losses. So, if you are someone who is not so comfortable taking risks, I would suggest you stay away from this scheme…

The Basics of this Goldman Sachs PSU ETF Scheme

The Asset Management Company (Goldman) will collect the money via NFO from investors and pass it on to the government, and in return the government will pass on a basket of shares (of underlying 10 companies) to the MF scheme, at a discount of 5 percent. The AMC will create units which will represent the shares of the underlying companies. The price movement of the ETF Unit will replicate the price movement of the underlying 10 company shares.

What are the PSUs that come under this scheme?

The following are the PSU's that come under this scheme along with their respective Weightage in the scheme.

1. ONGC Ltd - 26.72%
2. Gail Ltd - 18.48%
3. Coal India Ltd - 17.75%
4. REC Ltd - 7.16%
5. Oil India Ltd - 7.04%
6. India Oil Corporation Ltd - 6.82%
7. Power Finance Corporation - 6.49%
8. Container Corporation of India Ltd - 6.40%
9. Bharat Electronics Ltd - 2% and
10. Engineers India Ltd - 1.13%

The NFO Scheme – Dates:

For Retail Investors like you and me, the scheme opens on 19th March and Closes on 21st March. For Anchor Investors (who can invest in crores) the scheme opens on 18th March.

Benefit of Investing in the New Fund Offer (NFO) Stage:

If you invest in this ETF scheme during the NFO stage, you will get one free unit for every 15 units you hold. To avail of the bonus the investors need to hold the units for 12 months from the allotment date. The bonus offer is applicable only if you have bought the units during the NFO. The scheme comes with a face value of Rs 10 per unit.

The Benchmark Index:

The benchmark index for the scheme is CPSE index, and pricing will be 1/100th of the CPSE index.

Minimum and Maximum Application Amounts – For Retail Investors:

The minimum application amount for retail individual investor is Rs 5,000, and in multiples of Rs 1 thereafter. As a retail investor you can invest a maximum of Rs 2 lakh in the scheme.

Type & Listing Info:

The ETF type is “growth” and will be listed on the National Stock Exchange and Bombay Stock Exchange.

Entry and Exit Loads:

Both loads are set at ‘0’

Does this scheme have Tax Benefits?

Yes, investment under this scheme gives you tax benefits under the Rajiv Gandhi Equity Savings Scheme (RGESS)

My Take On This Scheme:

When you invest in this scheme, you get exposure to large PSU companies in energy space. The fact that the Government is offering a 5% discount in price for NFO Investors makes this a good start for you to enter the blue-chip Investment space. On top of this, you are going to get 1 loyalty bonus unit for every 15 units that you buy during the NFO Period. So, if you purchase 1500 units during NFO Period, you will get 100 units for free at the end of 1 year.
On top of all this, you get tax benefits under the RGESS scheme which makes this an awesome opportunity to start investing in blue-chip stocks.

I Would Give a Big Thumbs Up to this scheme and recommend it to anyone who has the ability to take risks and invest in stocks from a long term perspective.

Please Note: This scheme would be advisable only from a long-term perspective – At least 3 years or more. In the short term, the fund may underperform if the markets are volatile but in the long run these PSUs are profitable and can give you good returns. If you are expecting a short-term bang for your buck, I would recommend that you STAY AWAY from this scheme…

Happy Investing!!!

Monday, March 10, 2014

Some Last Minute Questions About Income Tax Planning and Filing Tax Returns – Answered

March is almost mid-way through and we have 3 weeks until the financial year comes to a close. February end was probably the deadline most companies set for their employees to make their Investment & Tax Saving declarations for that to be considered in the form 16 document. The idea behind this article is to go over some common questions that you may have reg. your Tax Planning or Tax Return Filing. If you feel your question is not present in this page – please feel free to leave a message in the comments section and I will be more than happy to answer it.

Question No. 1: My company deadline to submit tax related proof’s was End of Feb 2014. Does this mean I cannot claim tax benefits for any Investments I do in March 2014?

No, absolutely Not. As per our law, you are entitled to tax benefits for any and all investments that you make before the 31st of March 2014. In fact, if historical statistical data is anything to go by, the last 3-5 days of March are the days when most activity happens in Banks where people are scrambling to open up Tax Saving FD’s or in Insurance companies like LIC.

Question No. 2: My company deadline to submit tax related proof’s was End of feb 2014. Is it ok for them to set this cut-off one month prior to the actual financial year?

Yes, it is perfectly fine. Actually speaking the government does not mandate for companies to collect your tax related documents and then incorporate the same into your final form 16. As long as they deduct TDS from your salary, they are doing more than what is required out of them. They are doing this as an added benefit to their employees. Since performing tax calculation, submitting documents to the Tax Office etc are time taking activities and also since the form 16 has to be issued by May-June timeframe, most companies set up such deadlines so that they have sufficient time to complete their part in helping their employees.

Personally, I feel this is good because it will instill some discipline in us. Proper tax planning is vital to getting good returns on our investments. Last minute tax saving exercise and putting our money into some random insurance policy just to get the 30% tax benefit is a really bad idea and you may not appreciate this decision by the time the policy matures. So, it is better you start planning properly for your Tax Saving.

I recently published an e-book titled “Your Complete Guide to Indian Income Tax and Retiring as a Crorepati” in which I have explained all the different sections using which you can reduce your tax liability. You can use this book to not only save tax but also to build up a solid retirement portfolio that can help you retire as a Crorepati. Check it out now by Clicking Here.

Question No. 3: If I missed my tax related document submission deadline, how can I still get my tax benefits?

Actually speaking, you can do the adjustments yourself when you file your Tax Return forms and then submit it along with your form-16 and the additional documentation. However, this activity is a little complicated and any mistakes in your tax returns could prove costly. So, it is better you consult a competent chartered accountant or tax consultant and take their help in filing your tax returns. Though this will cost you a few hundred rupees you will not regret this decision.

Question No. 5: I have components in my salary called LTA, Medical Allowance etc. I don’t have bills to cover for the entire amount. What happens to the remaining amount?

If you do not have bills for the amount of LTA or Medical Allowance in your salary, the remaining amount is considered fully taxable income. For ex: Lets say your LTA is Rs. 50,000/- this year and you went on a family trip and claimed an LTA of Rs. 35,000/-. The remaining 15,000/- rupees is fully taxable and will be added to your taxable salary

Question No. 6: My company deducted excess TDS and I am supposed to get a refund. When will I get it?

These days the tax returns process is simplified very much and people are getting their refunds within months of filing their tax returns. Usually people with low refunds (a few thousand rupees) get it faster than those that have heavier refunds. If you need to get a refund of 1.5 lakhs because you fell into the category of people in Question No. 3 and your colleague has to get only Rs. 15,000/- because he submitted his proof documents to your company ahead of time, he will get the refund first because the amount is low. Usually the authorities scrutinize tax returns that have heavy refunds to make sure the calculations are right before they pay out the refund. Smaller numbers get processed faster.

Don’t forget to submit your investment proof’s well in advance. Not only will you get a higher take home salary (due to lower TDS) but also, your waiting time for the refund is reduced greatly. Why waste this double benefit?

Question No. 7: Is it true that the Tax Authorities don’t scrutinize documents properly for low to medium level income earners?

Absolutely NOT. They can scrutinize all documents thoroughly and for as many times as they want. Due to the sheer volume of submissions one or two cases where people had fake claims may slip through which could give you an idea that you may get away with submitting false documents. The truth is – the authorities can go back and scrutinize even tax returns from past years that have been settled if they get some doubt. If they find you are engaged in any malpractice they can arrest you and put hefty penalties. Why take this risk?

Question No. 8: I live in a house that is owned by a family member. Can I claim HRA?

No, you cannot. As you are living as a family, ideally speaking you are not supposed to claim HRA. However, if the other family member is filing tax returns and is willing to include the Rent as an income in his/her tax returns, then you can claim HRA. You need to mention their PAN Card number in your Rent Receipt to establish the connection.

Please note: Husband and Wife cannot pay rent to one another. Even father/son, brother/sister kind of combinations are not allowed since they are of the same family but they aren’t rejected due to the fact that they may be considered separate families. A husband and wife cannot be part of two separate families and hence this option is not available for them.

Question No. 9: My Actual house rent is Rs. 25,000/- and based on my HRA Calculation, my HRA Eligibility is only Rs. 20,000/-. Can my spouse claim the remaining amount?

No, they cannot. Let me give an example.
Lets say A and B live in a house in Chennai where rent is Rs. 20,000/-. Both A and B are working. A’s basic salary is Rs. 35,000/- and the HRA component in his Salary is Rs. 20,000/-. A is the husband and wants to claim HRA.

HRA Calculation for Mr. A:

Mr. A’s HRA Exemption will be the lower of:
1. 50% of Basic Salary – Rs. 17,500/- or
2. Actual Rent minus 10% of Basic – Rs. 16,500 or
3. HRA Component of Salary – Rs. 20,000

As you can see – Actual rent minus 10% of the basic salary is the lowest and his HRA eligibility will be Rs. 16,500 per month.

You may ask me – the rent I am paying is Rs. 20,000/- and there is a difference of 2500 rupees which Mrs. B can claim. Right?

If you see the calculation closely, this 16,500/- is Mr. A’s eligibility provided he claims to pay the full rent of Rs. 20,000/-

Happy Tax filing…

Wednesday, March 5, 2014

The Subrata Roy Sahara and the SEBI Fiasco With Supreme Court – Explained!!!

The past few days have been very busy for the Sahara Family. The Patriarch Mr. Subrata Roy was arrested over the weekend and is currently under judicial custody along with a few of his key management personnel for his alleged involvement in the 20,000 crore Investment Cam perpetrated by his group companies. Yes, you read it right – 20,000 crores. A common man who owes lets say just Rs. 20,000/- to his credit card will get recovery agents to his house daily and will end up getting some of his assets repossessed within weeks. Here we have a billionaire who has been saying that he will repay the money soon for years and hasn’t actually done it yet. Talk about disparity in how the LAW Treats you based on who you are…

Anyways, the purpose of this article is to explain to you what exactly happened so that you will know why this case is hogging the news so much of late…

The Beginning …

In 2010, two Sahara Group Companies Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC) were raising large sums of money – Thousands of Crores from investors by issuing Optionally Fully Convertible Debentures to the public.

An Optionally Fully Convertible Debenture is just a kind of Bond that can be converted into Equity Shares by the investors if they want to. So, this is a kind of hybrid market instrument that would come under the jurisdiction of the Securities and Exchanges Board of India (SEBI)

Back to the topic, these two companies were raising thousands of crores but SEBI was not fully aware of why they were doing so or what they were doing with the collected money. Ideally speaking, before such an issue happens, the company is expected to file a request with SEBI, get it approved and then start the collection of public money. However, that wasn’t the case.

So, how did SEBI Find out that Sahara was collecting public money?

Actually, it was a random accident. Mr. Abraham who was the Director of SEBI up until July 2011 was reviewing the Draft Red Herring Prospectus (DRHP) to raise equity for real estate company Sahara Prime City Ltd through an initial public offering (IPO). The DRHP disclosed details of two associate group companies (SIREC and SHIC) that were raising huge amounts of money from the public through optionally fully convertible debentures.

Any company that wants to issue equity shares or Debentures or any other market related instrument to the public through the IPO Process has to file a Draft Red Herring Prospectus or DRHP to SEBI to tell them the details of the public issue, why they are doing so, their financial position etc. It is pretty standard procedure in India.

So, when SEBI found out that two Sahara Group Cos were raising thousands of crores by issuing optionally fully convertible debentures which they were not aware of, they started digging to find out what exactly is happening.

So, what did SEBI Do when they found out?

SEBI asked the two companies – Sahara India Real Estate Corporation (SIREC) and Sahara Housing Investment Corporation (SHIC) to stop raising money through an order dated 24 November 2010

What did Sahara do in Response?

The usual – whatever large corporates do in our country when they are questioned…

Sahara rushed to the Lucknow bench of the Allahabad High Court, which stayed Sebi's order but not its investigation. Sebi moved the Supreme Court, but the apex court too was not of much help. It merely directed the high court to expedite the case. The high court vacated its stay only on 7 April 2011, when it found that the Sahara group was not cooperating with Sebi as it had directed.

On 29th April 2011 the Allahabad High Court lost patience with Sahara and dismissed the group’s petition against Sebi with the following remarks:
“A person, who comes to the court, is supposed to come with clean hands and bona fide intentions, and has to abide by the orders passed by the court, more so in a case where the parties' counsel agree for certain actions to be undertaken. If some assurance is given by any person to the court, as has been done in the present case, and the said assurance/understanding is not honored, the court would not come to his rescue. The application is, therefore, rejected."

What was SEBI’s Justification to go with the Court-Case Route?

The Sahara Group primarily challenged SEBI’s intrusion into the affairs of SIREC and SHIC saying that OFCDs were not under SEBI’s jurisdiction since they were hybrid instruments – neither shares nor debentures.

Also, while Sahara was arguing with SEBI about whether their issue came under SEBIs jurisdiction or not, they also claimed that the OFCDs were being privately placed with the Sahara Group and not to the general public. When no public offer was involved, how could SEBI intervene?

Was this Justification True?

Of Course Not. Any market related instrument comes under SEBIs Jurisdiction. Sebi demolished this argument easily since they were debentures that could be converted into shares. This contention was later upheld by the Securities Appellate Tribunal and the Supreme Court in 2012.

Sahara’s counter to the Private placement point was - when Sahara offices and agents were busy hawking these OFCDs, and when the two companies SIREC and SHIC had over 6 million investors, the offers can’t possibly be considered as a private placement.

Was Sahara Right in Excluding SEBI from their OFCD Issue?

Absolutely Not.

Before the OFCD Issue starts, according to the Schedule II of the Companies Act of India, SEBI has to Review and Vet the DRHP of the company. The Schedule also specifies that, when the company files its DRHP, the Company Directors have to file a Declaration saying that they have complied with all provisions of the Companies Act and the SEBI guidelines.

In reality, the Directors of these 2 Sahara companies SIREC and SHIC excluded all references to SEBI while signing their declarations.

On top of all this, this whole OFCD Issue had actually started in 2008 for SHIC and the SIREC Issue had no-closing date. How can an Issue happen which has no closing or end date?

Why Does SEBI Have these Guidelines?

The main reason behind SEBI Asking companies to follow the guidelines is to protect the Investor. If some random company starts issuing stocks or bonds in the market and dupes investors, who would be responsible?

Ya that’s right SEBI. This is why SEBI has those guidelines. Plus, unregulated collection of funds from the public could result in Money Laundering and other illegal activities which SEBI is trying to control here…

The Obvious Next Question – Why Would a company like Sahara try to bye-pass the Process?

I guess the easiest answer is because – they can. They have enough political and financial backing to get away with anything. At least – that is what they thought so up until they were caught in this situation.

Another Sahara group company, Sahara India Commercial Corporation, had kept an issue of size worth Rs 17,250 crore open for 10 years! How they managed to do this right under SEBIs nose is still a mystery. Maybe if we get into details of who helped them, maybe a lot more heads will roll…

So, What did SEBI Do, after it found Irregularities?

SEBI simply asked the following questions:
1. Why are you raising the money?
2. Who are the owners and investors in these companies that are collecting the money?
3. What do you Intend on doing with the collected money?
4. Why the OFCD Issues were open for such a long period and what will be the Closing Date?
5. Why did the OFCD Issue Open without the DRHP being filed with SEBI?

Was Sahara able to answer these questions?

Unfortunately NO. They were not able to get straight answers to questions 1, 3, 4 and 5. In fact, they dint even have a list of Investors who had invested into the company. To find out the names of its own investors, SIREC actually needed the help of professional accounting firms. If the identity of the investors and addresses themselves are not readily available with a company how is it practically possible that the issue was even a legit one?

So, What are the Courts Saying Now?

The courts were totally unhappy about the fact that the Sahara Group was non-cooperative throughout the Investigation. The Supreme Court had directed the group to refund the money collected by them to the Investors. Sahara was asked to block or pledge assets worth 20,000 crores to help SEBI recover the money and refund it to investors.

Why Did the Courts Come to such a Drastic Decision to Arrest Mr. Roy?

SEBI Even tried freezing Sahara’s assets with banks but that measure wasn’t successful. They reached out to 58 banks in India and they were able to recover a total of 1 Crore. Yes, you read it right – Just 1 crore. It is surprising how little money such a large corporate had in its accounts.

Sahara had pledged an Asset – 700 plus Acres of unbuilt land in Ambey Valley in the outskirts of Mumbai. Sahara claimed that this asset was worth over 3400 crores. But when State Bank of India tried to estimate the value of the Asset their valuation was a mere 870 crores. Other assets that Sahara were pledged were even hard to locate for SEBI. Sahara had claimed that they had 46 lakh sq. ft of land in Goregaon but based on the Land Survey numbers given, the size of the plot was just 19 lakh sq. ft. On top of this, according to governmental records the land may not even belong to Sahara. SEBI got back to the supreme court that, they were not even able to find out some of the assets pledged by the group.

On top of all this, Mr. Roy never appeared in person to explain the situation. Of course, this was up until last week when the Supreme Court got really frustrated and issued a Non Bailable Arrest Warrant against Mr. Roy which eventually resulted in him finally gracing the Supreme Court with his Presence.

Could this really be a Legit Attempt by Sahara to Raise Funds?

Maybe, maybe not. This is something only a thorough investigation by impartial authorities can find out. However, based on the facts I was able to gather from the Internet, it doesn’t seem to be a Legit Attempt by Sahara to Raise Funds. Here is why…
1. They explicitly went under the nose of SEBI. If they were legitimately trying to raise funds – why exclude SEBI?
2. They were unable to furnish basic details requested by SEBI or the Supreme Court
3. They have been trying to Impede the Investigation all along and the assets they pledged are either non-existent or don’t have the value they claim
4. Their Bank Accounts in India do not seem to have that much funds. The 20,000 crores that they collected seems to have just vanished…

The Smoking Gun

Over the past few years – Mr. Subrata Roy and his Group have purchased the following:
1. The IPL Team – Pune Warriors India
2. A Stake in a Formula 1 Team – Sahara Force India
3. A Stake in Plaza Hotel in New York
4. A Stake in Dream Downtown Hotel in New York
5. A Stake in Landmark Grosvenor House Hotel in London

All this purchases would have cost Sahara around 9000 crores or more. Sahara claims to have purchased these Assets using their liquid cash surplus and through profits made by the other Sahara Group companies.

With the amount of money they have in their bank accounts in India and given the fact that most of the Sahara Group Cos posted little to no profits over the past many years – it is practically not possible that they came up that much funds internally.

When the Enforcement Directorate probed these transactions, they found that a large chunk of funding (2500 crores) in the purchase of the Landmark Grosvenor House Hotel in London came from SIREC – one of the companies that SEBI is Investigating.

Also, the Enforcement Directorate (ED) Was also able to find suspicious cash transactions. Money was routed from SIREC to Aamby Valley, and from there to Mauritius and London. The transactions took place from mid-2011, around the time SEBI had begun probing SIREC.

The Most Recent Update:

Yesterday the Supreme Court was very hard on Mr. Subrata Roy. They were totally unhappy over the fact that he and his group have been non-cooperative throughout the whole investigation. He asked for more time to refund the money and was trying to pacify the Judges. The Judges said that they tried to accommodate him but since his behaviour was not satisfactory, they had no choice but to arrest him. Mr. Roy offered fresh Bank Guarantees worth Rs. 22,500/- crores to SEBI and the Supreme Court.

My Last Words:

As the full details are yet to be made public by Investigators, there is a possibility that all of this was a big confusion. However, based on the details that have come out so far, it looks like this whole fund raising exercise was some grand scheme orchestrated by the Sahara Group to just collect money from the public without actually divulging true details. As the authorities suspect this could be a Money Laundering exercise or some scheme by them to convert black money to white.

At this time – God Only Knows what the truth is. We would have to wait until the Authorities finish their investigations and the Supreme Court comes up with its final ruling…

Disclaimer: All Details in this article were gathered from the Internet. The Author does not guarantee the accuracy of the details posted here.

Monday, March 3, 2014

Bad News for Investors – SEBI Lets Us Down

The past month can be considered as really bad for Investors from India. The IPO Market has been very silent over the past few months due to the fact that the markets are very unstable. However, the Securities and Exchanges Board of India has gone ahead and come up with a ruling that could potentially affect the normal investor in this country.

The purpose of this article is to explain what just happened and how it might affect us…

What is this Bad News?

Every time there is an IPO offering in our country, one of the things we first check is the “Grading” that Credit Rating Agencies provide the issue. Up until now, this “Grading” was MANDATORY. Any company that was going to come up with an IPO had to get this Grading in order to be eligible to go ahead with their IPO offering.

Starting now, this “Grading” is OPTIONAL. This means that, companies no longer have to get a Grading for their public offerings.

How This Affects Us

You may be wondering, how does this affect me? Actually, this Grading is one of the first things an investor looks at, when he/she is evaluating a prospective IPO. The higher the rating, the better the supposed quality of IPO Issue – or at least that is the widespread belief.
When you are comparing two Issues, one with ***** and other with a **** rating, you would obviously choose the one with the 5* rating because – that seems to be the better choice. How either company stock behaves once it gets listed in the index is an altogether different discussion, but from an IPO analysis or evaluation perspective, this Grading was a pretty useful tool.

Thanks to SEBI, companies no longer need to get this Grading. Mediocre or poor performing companies which are sure to get a bad rating will conveniently ignore this grading activity and happily flout IPO’s which may result in widespread losses to Investors.

Why did SEBI Do This?

The justification or I would put it as an excuse from their side is that, they conducted various studies and per their outcome, a large number of investors are not influenced by the Grades. They also claim that many low-grade IPOs received a good response from Investors.

Is this the Real Reason?

Personally, I don’t think so. This could be a potential attempt to revive or rejuvenate the Primary Market which isn’t seeing much activity over the past year due to the market situation. Plus, many powerful conglomerates have been lobbying to get these grades process scrapped (Against the advice of many Investor Associations) to help them get better prices for their IPO Issues and an easier access to the primary market.
IPO Issues with average or poor grades cannot usually demand a higher offer price which would probably explain why corporates have been lobbying for this…

Are these Grades Really Useful?

Actually this is a 50-50 kind of question. Everything in our country has a “Catch”. Even though the IPO Grading was a Mandatory part of any IPO, the company coming up with the IPO was asked to pay the Credit Rating Agency for the Grade. So, realistically, if I am paying a decent amount of money for a Grading of my IPO, do you think the Credit Rating Agency will give me a bad rating?

But, at the same time, to maintain their reputation the Credit Rating Agency would most likely not give a superb rating to a bad issue. This is exactly why I am saying that this is a 50-50 kind of question. The Grades are useful but they have to be taken with a pinch of salt. We should not believe it blindly but again, if it is not mandatory most companies will probably ignore this process before they go public…

A Real Life Scenario:
Do you know that India’s Top Credit Rating Agency – CRISIL gave “Reliance Power” a 5* Rating on their IPO. We all know what happened to Reliance Power, don’t we? The stock is infamous for being one of the most active stocks during the amazing bull-run we saw in 2008 and ended up eroding millions of rupees from Investors when it tanked in price. I still remember my friend who had Invested his corpus of 5 lacs that he had saved up for his sister’s wedding in Reliance Power when it was trading at around 280 rupees per share. In about a month, the stock was trading at less than 100 rupees per share and my friend lost two-thirds of his hard earned money. My friend wasn’t the only one and there were hundreds of investors like him who lost a fortune due to Reliance Power. All this after a 5* Rating. Imagine how things may turn out of this whole grading thing is voluntary…

Some Last Words:

Personally, I am not a big fan of these IPO Grades because companies are paying for their rating but at the end of the day, these grades did help out many investors who did not have the time or the expertise to analyze IPO Offers. They were able to filter out and exclude real bad issues and stay away from them using these grades.

Going forward, since the grading is voluntary; we may end up with totally disastrous IPOs in future which may further dampen Investor Sentiment in 2014. We had only 3 IPO Issues in 2013 and if this removal of IPO Grading results in a Disaster, we may end up with even fewer IPOs in 2015…

© 2013 by All rights reserved. No part of this blog or its contents may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the Author.


Popular Posts

Important Disclaimer

All the contents of this blog are the Authors personal opinion only and are not endorsed by any Company. This website or Author does not provide stock recommendations. The purpose of this blog is to educate people about the financial industry and to share my opinion about the day to day happenings in the Indian and world economy. Contents described here are not a recommendation to buy or sell any stock or investment product. The Author does not have any vested interest in recommending or reviewing any Investment Product discussed in this Blog. Readers are requested to perform their own analysis and make investment decisions at their own personal judgement and the site or the author cannot be claimed liable for any losses incurred out of the same.