Dears,Here I m trying to unearth some myths about IPOs.Most of the the material is of elementry level , but every investor should know this.Thanx for your response.regards,RaviThe 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? 
See the table as a referance of the example quoted here.
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.
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.
FIIs: Winning streak in Indian equities CONTRIBUTED HUMBLY BY S. Vaidya Nathan
FOREIGN institutional investors have developed a fancy for Indian stocks on a scale unparalleled in the last decade. The last couple of years, in particular, have seen a 50-per cent increase in the number of FIIs investing in India. FIIs that entered India in the 1990s reaped rich dividends, mainly in the sustained bull market from mid-2003. Those that joined the party over the past couple of years too have done quite well. And this is likely to augur well for Indian equities.
The experience of the new entrants, however, is in sharp contrast to that of their earlier counterparts. Not accustomed to the ways of Corporate India, it took the latter a couple of years to get over the initial shocks and become wise to market realities.
The new entrants, however, had an easier time of it, buoyed by wealth creation in the market, backed by robust fundamentals of India Inc and a booming economy. This trend, about two years old now, appears to have the momentum to keep going for at least another year.
Indeed, this has raised FII interest in the country. In the past month-and-half, equity prices have moved to historic highs, as the upward trend has been boosted by robust FII flows; this is a mini turnaround of sorts as the FIIs were net sellers in April and May. At $7 billion, the inflows are well on their way to best the $8.5 billion that poured into Indian equities last year — about 25 per cent of it in seasoned equity offerings and IPOs of several large-cap companies. In contrast, a larger proportion of inflows this year has gone into buying from the market.
On a comparable basis, FII inflows this year are already at record highs. It is now certain that, even in absolute terms, they will set new marks for the third year in a row in 2005. This would ensure that Indian equities retain much of the higher valuation levels they command and close the year with sizeable gains.
Sea change in FII portfolio: An investment of about $22 billion between July 2003 and now has completely altered the FII profile:
Inflows during this period account for about 60 per cent of FII exposures in India and dwarf the volumes of the last ten years. The actions of the FIIs that invested in this period could be significant determinants of market trends. About $15 billion of exposures from this period are in-the-money positions, and the FIIs are well-placed to revamp their portfolios.
For FII funds invested in Indian equities in this period, a Nifty level of 1800 would be a cushion on the downside (it is now at about 2350). They enjoy a similar cushion in the Junior Nifty and CNX Midcap, which have to be considered as the FIIs are now invested in several mid-cap stocks.
The funds invested before July 2003 would be deep-in-the-money positions requiring only a Nifty of about 1200 for break-even. This comfort level, especially for the plethora of new entrants, is indeed high.
As the scale of the investment in India has risen manifold in recent years, the FIIs have had to invest in a larger number of stocks. They now have exposure in more than 500 companies. And this at a time when the economy has been notching up healthy growth rates and, more important, when Corporate India is in its best ever shape.
In terms of sector preferences, too, the FII portfolio is more diversified than at any time in the past. This, too, is a significant positive for the market.
To understand why, one has to look back a bit. The last, and the only, occasion when the FIIs held exposures in so many stocks was in 1994-95; the investment universe was smaller, too. Then, the FIIs were blindly buying into anything Indian. Stock selection was conspicuous by its absence.
A classic example was the 350-stock portfolio that Morgan Stanley built within a year of its launch of its domestic fund.
Such a blind`Buy India' strategy meant the FIIs would be taken to the cleaners, as a host of Indian companies issued global depository receipts at exorbitant prices. They were.
Then, the FIIs changed tack and adopted a focussed approach to sectors and stocks. FMCG, pharmaceuticals and IT stocks dominated their portfolios in 1996-98, and IT/telecom/media stocks in 1999-2001. Only from 2002 did they start to diversify their sector preferences.
The FIIs remained just investors till 1997; it was not hard to zero in on sectors and stocks that attracted their attention. Their trading levels rose manifold between 1998 and 2000, as they churned their portfolios vigorously. But they play an even greater role as traders now.
Their trading volumes this year may be three times the 2000 level and, on most days, their buying and selling accounts for about 20 per cent of the trading volumes.
Factor in their activity in futures and options, where they account for a fourth of the Rs 20,000-crore market, and the extent to which they can influence price trends becomes clear.
Interest to be sustained: With Korea and Taiwan, India is one of the preferred FII destinations in Asia since mid-2003.
Indian equities are expected to figure prominently in FII preferences for the following reasons:
Rising market capitalisation, an increasing number of large-cap stocks and would-be large caps that have good potential, an expansion of quality stocks in the mid-cap space and a string of IPOs have expanded investment opportunities.
Corporate restructuring, cost reduction efforts and a revival in sectors such as steel, sugar, textiles, chemicals and fertilisers, which rarely figured in investor preferences between 1996 and 2002, have also provided more investment options.
The valuation levels still appear attractive, with Nifty trading at about 15 times its earnings for FY-05 and at about 12 times the expected FY-06 earnings. For large-cap stocks, such valuation levels are attractive, especially for investors with a longer-term perspective. Yes, valuation levels of mid-cap stocks in many cases matches those of their large-cap counterparts.
If liquidity flows remain strong, higher valuations in this space cannot be ruled out.
The earnings card for the April-June quarter was more robust than expected and this trend is evident across sectors. Industrial production has also moved into the double-digit territory the past two months, and interest rates and inflation are likely to remain at current levels. If these trends continue, expect the FIIs to court Indian equities as assiduously as they have done over the past couple of years.
The comfort offered by the stable rupee, with a window for appreciation if the yuan rises against the dollar over the next year or two, will enhance India's attractiveness; the widely-held view by experts on the likely weakness in the dollar over the longer term is likely to ensure that emerging markets, including India, figure prominently in FII preferences.
The risk to equities is the high and rising price of crude. If the Government keeps price increases in the broad economy at moderate levels and puts in place a mechanism to protect the interests of the oil companies, growth may not be affected. Sectors that could be among the preferred plays for the FIIs are engineering and construction, cement, IT and finance and select stocks in metals, oil and gas, sugar, chemicals and automobiles.
Is there evidence that the fundamentals do not support a liquidity-driven uptrend? At present, there is none. Nor is a spurt in prices of the 2003-2004 kind likely to be repeated, even if FII flows provide support.
But if and when the liquidity-fuelled upside takes the broad market or select stocks to levels not warranted by fundamentals, book profits aggressively.
-- DISCLAIMER --
The information and statistical data herein have been obtained from sources I believe to be reliable but in no way are warranted by me as to accuracy or completeness.
I do not undertake to advise you as to any change of my views and I may hold securities which are recommended here.
This is not a solicitation or any offer to buy or sell.
All information and advice is given in good faith but without any warranty.
Facts: The settlement between the Ambani brothers will see the effect of Reliance Industries Limited segregating the business of power, financial and telecommunication into three different companies to be formed. Current Holdings: Reliance Industries Limited (RIL) holds 47.2% in Reliance Capital Limited (RCL) and 46.5% in Reliance Energy Limited (REL) and approx 46% in Reliance Infocom( post conversion of Rs 8100 crores of preference shares at agreed price of Rs 32 per share).
Details of the Scheme: As per the Demerger details announced, stakes in these three different business will go to three different Special Purpose Vehicle’s (SPV) formed for the purpose.Subsequently SPV’s will be merged with relevant operating company post hive off so that RIL shareholders have shares in the operating companies directly.It is still unclear from the available details whether shareholding by SPV in operating company will be cancelled (or not) resulting in further dilution? In my view the same will be cancelled.
In this process, the impact on reserves and loans of RIL is yet to be determined. Further, there exists certain uncertainty with regard to reorganisation of share capital RIL.
In my opinion, RIL capital will be maintained as it is without any reorganisation in terms of face value or paid up value.
In the process, reserves of RIL will come down to the extent of cost for shareholdings of SPVs, it means reduction in net worth of RIL and as a result, book value per share of RIL post restructuring to the extent of around Rs 80 to Rs 100 per share. It will adversely impact debt equity ratio depending upon amount of debt transferred to SPVs. In my opinion no debt will be likely to be transferred to SPVs.
In Reliance Energy, Reliance Capital and Global Fuel Management Services, RIL shareholders will be direct shareholders, while in Infocom; they will be indirect shareholders through their shareholding in Reliance communication venture.
So at the end of the restructuring RIL shareholder holding 100 shares today will end up holding 5 shares in Reliance Capital 7 shares in Reliance Energy 100 shares each of Global Fuel Management Services and Reliance Communication Ventures Limited and both will be listed before March 06.
And probably he will continue to have 100 shares in parent RIL without any dilution
Share Valuation Impact:
The impact of the above Demerger on the share value of RIL and the value of new shares to be issued in consideration can be analysed as follows:
7 shares of Reliance Energy @ of Rs. 625/- each
Rs. 4,375/-
5 shares of Reliance Capital @ of Rs. 460/- each
Rs. 2,300/-
100 shares of Reliance Communication Ventures valued @ of Rs. 180/- each, approximately Rs. 18,000/-
100 shares of Global Fuel Management Services Limited @ of Rs. 50/- each approximately Rs. 5,000/-
Total value of new shares to be allotted for every 100 existing shares of RIL
Rs. 29,675/-
Also the shareholder will continue to hold the shares of RIL. Eventually the share value of 100 RIL shares as on the date is Rs. 73,000/- (Rs. 730/- per share being the market quote) lesser than the value of new shares to be allotted post demerger of Rs. 29,675/-, amounting to Rs. 43,325/-.
Conclusion:
Now the issue to be addressed and analysed remains:
Whether the above share valuation of RIL is in line with the impact of the above-mentioned events?
Whether the shareholders think that the above compensation for offsetting the said businesses from RIL is at fair value?
Only time can reveal the answers to the above and till then all of us just have to wait and watch!
End Notes: The basis of above calculations is as follows:
The projected EPS of RIL for FY 2006 is Rs. 65/- (excluding dividend income from shares of group companies transferred to SPVs) and the petrochemical industry PE is 12.44. So ideally the market value should be approximately Rs. 809 post-Demerger.
The share value of Reliance Capital and Reliance Energy is taken on the basis of approximate market quotes of 3/08/05.
The share value of Reliance Communication Ventures is taken on the basis of the proposed market capitalization of Rs. 25,000 crores divided by likely number of shares of RIL i.e. 139.35 crores shares.
The share value of Global Fuel Management Services Limited is assumed to be Rs. 50/- as there is no data available for the same.
