India Culture, Business, Sports and Food. Get all the buzz in India now

Last week there were two important developments: the stock market crash and Reliance Power IPO response. The stock market crashed with the Sensex down by 8.70 per cent and Nifty by 7.98 per cent. The Sensex slumped from 20,827 points on January 11 to 19,013 points on January 18. Nifty, which touched 6,388 points at its highest some weeks back, closed at 5,705 points, down by 6.9 per cent. In the Sensex list of 30 shares, 25 shares closed in the negative. In the 50 listed Nifty shares, 45 shares closed negatively. All the BSE sectoral indices were down: High losses were in the oil and gas (-5.88 per cent) realty (-5.87 per cent) and bankex (-5 per cent).

The market crash was due to a number of factors: the slowdown in the US economy, heavy sales by the FIIs, slowdown in the inter-bank call money transit due to some fault in the Reserve Bank’s transfer system software, heavy losses to traders in the future and derivative market due to market crash and the demands for higher margins by the banks.

Another factor was that the Indian market with the high valuation in the P/E ratios was considered expensive by the FIIs, who shifted funds from the Indian market to the other relatively cheaper markets. It was also on record that correction was on the way in the overheated stock market valuations. The Prime Minister’s Economic Advisory Council also brought down the target of economic growth in the fiscal year 2008-09 from 9 per cent to 8.5 per cent in view of slowdown in the US economy, high crude prices and slow infrastructure development in India.

The Reliance Power IPO was oversubscribed by 72 times. It set up a new record. The retail investors’ subscription is estimated at 15 times. This may be good for Reliance Power Company but it led to heavy profit taking in the stock market by the retail investors who collected funds for subscribing to this IPO.

A major question today is when would the market recover? The market has already corrected itself by a fall in market indices between 8 to 9 per cent. Some of the top blue-chip scrips have suffered in the Sensex. Reliance Industries is down by 6.57 per cent, DLF by 7.37 per cent, ICICI Bank by 5.78 per cent, Reliance Energy by 4.01 per cent and Larsen and Toubro by 3.62 per cent. It may also be noted that the market fall took place in spite of excellent quarterly results declared by Reliance Industries and some other companies.

Even the latest quarterly results in most cases were in accord with market expectations. On last Friday, even the US, European and even the Asian stock markets were positive while the Indian stock market slumped. It would appear that though early this week there may be some minor fall in the market indices, the market is likely to stabilise and turn positive later this week and, if not, surely next week.

Investors, both long term and short term, have the opportunity to go in for select buying in those shares which are fundamentally sound and are backed by trusted managements. Reliance Industries, ABB, Larsen and Toubro are excellent scrips. Among the low-priced shares, one may list Tata Chemicals, Gujarat Alkalies. Infosys may also be good on a long-term basis.

It has been a traumatic couple of days for our market. Stocks of well-established companies have lost between 50 and 70 per cent of their market value in less than a week’s time.

That is the kind of damage that investors, and particularly traders, take a very long time to recover from. Most of the pain has played out in stock futures where traders have been butchered. While a considerable portion of the open interest has been wound down, there is still quite a bit of outstanding positions left: perhaps the reason mid-caps failed to recover as much from their lows as index stocks did: The purging continues there.

Point to point, the Nifty crashed 30 per cent from the recent high to its intra-day low of sub 4, 500. When an index collapses 30 per cent in a week, the question about the possibility of a bear market has to be raised. It is an uncomfortable, even scary, thought but it is best not to be in denial and sweep it under the carpet.

Let me begin by sticking my own neck out. I believe the case for a prolonged bear market is not very strong. That does not mean a thing as I could be wrong, my view coloured by four years of utter bullishness that one week of mayhem cannot alter easily.

There are many risks to this hypothesis. Local sentiment could be one. After a fall of such proportions domestic participation in equities could certainly die down for a long time. We have seen that after May 2006 when mid-caps underperformed for many quarters and individual portfolios languished. Globally, things are murky and there could certainly be panic withdrawals by global investors from equities as an asset class. It may be short-lived, but could happen. Coinciding with all this is some slowdown in our earnings trajectory before the ongoing capital expenditure begins to spur growth again in 2009-10.

Having said all this, India seems much better placed than most other economies and markets. Our economic growth is robust, most of our key sectors are not expected to decelerate significantly on account of a global slowdown and domestic consumption should not be affected much by a financial market meltdown. My own feeling is that we may now need to consolidate in a lower price band for some time and to that extent a “bearish” patch is entirely possible for a couple of quarters.

In any case, bear markets nowadays are more compressed as bad news gets factored in at the speed of light, as we have seen this week. Hard work may lie ahead for the next few months, but if one uses this zone to buy good quality stocks and hunker down I think it may be rewarding by the time the year is out. Maybe I am” part of the classic story of being unable to see a bear market till it is upon us, yet would remain optimistic till the fundamentals worsen visibly: I hope it won’t come to that.

The biggest ever Initial Public offer (IPO) in the history of India’s capital market has not only made Anil Ambani the richest man in India and probably in the world but has also helped the issue’s bankers make a killing. On conservative estimates, bankers to the Reliance Power issue will make more than Rs 180 crore from overnight interest payments ‘on the application money they have received in the IPO before refunds are given to applicants who could not get their full intent fulfilled.photo.cms.jpg (JPEG Image, 200×270 pixels)

The refunds do not carry interest payments but banks parking the funds get some. However, investment bankers say that a part of the profit from the application money is being used for bearing some costs such as registrar fees or postage fees.

and retail investors would be to be tune of Rs 112,063 crore. The issue had received bids for Rs 745,676 crore.

The company came out with 26 crore equity shares. Of this 3.2 crore was reserved for the promoters. The net issued to the public was 22.8 crore shares. Of this, 30 per cent, or 6.84 crore shares, were reserved for retail investors at the rate of Rs 430 per share.

The actual issue size for the public was Rs 10,121 crore, not counting the 3.2 crore shares subscribed to by the promoters. The issue has demonstrated the fact the Indian market has the ability to raise resources of any magnitude if the company has right projects and the promoters have right background. It also proves that the promoters need not to cross over the Atlantic to raise money. Rather, investors from across the Atlantic are willing to do that in search of good opportunities.

Although the call rate in the money market is currently hovering around 8 per cent, even at the rate of 6 per cent, bankers would make Rs 18.4 crore per day on the money garnered but intended to be refunded without interest payment. And on an average basis this money lies with banks for around 10 days before they start giving refund to the investors. This, in turn, translates into a floating income of around Rs 184 crore for “the bankers as a whole.

There are seven private sector banks - ICICI Bank, ABN Amro, HSBC, Standard Chartered, HDFC Bank, Kotak Mahindra Bank and Axis Bank - involved in this IPO.