HDFC bank to buy CBoP

One of the largest private sector bank,HDFC is all set to buy Centurion Bank of Punjab in an all stock deal of about Rs 10,000 crore. This is the biggest merger deal in Indian banking history.The swap ratio for the deal is not yet decided. Let us see how will HDFC Bank benefit from this:

1. Centurion has around 170 branches in northern India and 140 branches in Southern India so HDFC’s presence in these parts of the country specifically in states of Punjab, Haryana and Kerala will receive a boost

2. About 2.5 million customers of CBoP will become a part of HDFC Bank

3. Innovative services can be offered to the clients of HDFC post merger

4. HDFC will become the seventh largest bank in the country in terms of assets post merger

A similar merger was thought, about six years back between the two banks but it didn’t materialized due to valuation reasons. But after such a long time this deal is finally getting materialized on account of good understanding between the top management of the two companies.

What is Group A, B1, B2, S, T, TS, & Z classification of BSE?

The Bombay Stock Exchange (BSE), India's leading stock exchange, has classified Equity scrips into categories A, B1, B2, S, T, TS, & Z to provide a guidance to the investors. The classification is on the basis of several factors like market capitalization, trading volumes and numbers, track records, profits, dividends, shareholding patterns, and some qualitative aspects.

As on February 2008 following criterion are used for classifying stocks into various categories by the Bombay Stock Exchange(BSE).

Group A:
It is the most tracked class of scrips consisting of about 200 scrips. Market capitalization is one key factor in deciding which scrip should be classified in Group A.

According to BSE circular dated February 5, 2008 the criterion is:

1. Company must have been listed for minimum period of 3 months.

Exceptions:
* The Company can be directly listed in group 'A' provided the market capitalisation of a company being listed, based on its issue price, is higher than the average market capitalisation of 100th company in the existing group 'A' as per the ranking based on preceding 3 months data.
* Any company permitted to be traded in F&O segment from date of its listing shall be directly listed in group 'A'.
* Companies listed subsequent to any corporate action involving merger/ demerger/ capital restructuring etc.

2. Companies traded for minimum 98% of the trading days in past 3 months shall be considered eligible.

3. Companies with minimum non-promoter holding of 10% as per the shareholding pattern of most recent quarter shall be considered eligible. The criteria of minimum 10% non-promoter holding shall not be applicable to public sector undertakings (PSUs).

4. The weightage of 75% and 25% shall be given to ranking on three monthly average market capitalisation and traded turnover respectively to arrive at the final ranks.

5. The list derived, based on final rank shall be screened for compliance and investigation. Based on this screening, the list of top 200 companies shall constitute group 'A'.

6. The group re-classification shall be reviewed twice in a year i.e. February and August.

7. On inclusion of any new Company in group 'A' based on criteria 1(a) or 1(b) detailed above, the last company in the existing group 'A', based on its final rank calculated on data preceding three months shall be excluded.

At present there are 216 companies in the A group.
We will look into Group B1 & B2 later.

Group T:
"It consists of scrips which are traded on trade to trade basis."

Group S:
"The Exchange has introduced a new segment named “BSE Indonext” w.e.f. January 7, 2005. The “S” Group represent scrips forming part of the “ BSE-Indonext” segment . “S” group consists of scrips from “B1” & “B2” group on BSE and companies exclusively listed on regional stock exchanges having capital of 3 crores to 30 crores. All trades in this segment are done through BOLT system under S group."

Group TS:
"The “TS” Group consist of scrips in the “ BSE-Indonext” segment which are settled on a trade to trade basis as a surveillance measure."

Group Z:
"The 'Z' group was introduced by the Exchange in July 1999 and includes the companies which have failed to comply with the listing requirements of the Exchange and/or have failed to resolve investor complaints or have not made the required arrangements with both the Depositories, viz., Central Depository Services (I) Ltd. (CDSL) and National Securities Depository Ltd. (NSDL) for dematerialization of their securities."

Group B1 & B2:
All companies not included in group 'A', 'S' or 'Z' are clubbed under this category. B1 is ranked higher than B2.
B1 and B2 groups will be merged as a single Group B effective from March 2008.

Besides these equity groups there are two other groups i.e. Fixed Income Securities (Group F) and Government Securities (Group G).

For more details please visit the source: http://www.bseindia.com/about/tradnset.asp

Why do we need Banks?

One question that might pop up in many people’s mind is “Why do we need banks”? Is It just to deposit money and earn some interest or has it got something much more important than this. Well let’s start and try and understand “Why do we need Banks?” I will take an example, suppose we have three entities Party X, Party Y and an organization Z. Now we will take a few scenarios, first of all let us suppose that all three of them know each other, now if anyone wants money for some activity he has the option of borrowing it from the other party which is willing to lend him. Now let us consider the scenario that these three parties don’t know each other, so what can be the possible consequences. One thing that I can think off is a party who needs money for some activity will not be able to get that and hence may not be able to go ahead with the plans it had. These plans can be the expansion of a business which could have helped to generate jobs and pay the taxes to the government. In other words it could have led to the economic development of a country. So to address this important question of letting the parties interact with each other we need an interface. This interface can function as an intermediary and can help in taking money from people who have excess of them and lending it to the one’s who need them. And so here comes the concept of banks into picture.

Banks basically are involved in the task of taking money from people and giving the same money to others who need them to pursue some activity. These needy people can be organizations, students, or other individuals. Organizations in turn use this borrowed money by investing them in their businesses and generate economic activity. The corporates earn returns on their investments and so are able to return the money to banks with interest component and the banks in turn returns them to the depositor with an added interest component. Thus banks solve this basic problem of taking money from someone and giving them to others in a world where people may not know each other. I hope this article has clarified the concept of banks and helped you to understand the importance of banks to generate economic activity and attain sustainable development of a country.

Crude oil crosses $100 mark again

The crude oil prices jumps back over $100 from $97 per bbbls earlier after the news of blast in a Refinery in Texas. This is second time that oil prices have breached the $100 per barrel level. About one month back the oil prices touched the triple digit mark for the first time but soon retreated back. During the recent recession fears the prices fell back to the level of $80s. Some of the retreat was due to better supply over demand. Even though the recession fear is not totally out, and the supply-demand equation in the near future is intact, the oil prices have been rising because of speculation.

Some of the possible triggers for the recent uptrend seen in the oil prices:
OPEC meeting for decreasing production
Political issues between U.S. and Venezuela
Exxon-Venezuela conflict
Political instability in Nigeria
Blast in Texas Refinery

Fraud at Societe Generale: Was this a new lesson for the financial institution?

One more name got added to the list of

rogue traders with the revelation of fraud by Jerome Kerviel at Societe Generale. This seems to be the biggest banking fraud unless a few more traders, who might have taken massive bullish positions in this bearish market, get exposed in near future. A $7.2 billion loss outsmarted all the previous trading losses. Societe Generale is France’s second largest bank and the unauthorized bets on stock-index futures resulted in a loss of euro 4.9 billion.

Jerome Kerviel started increasing the size of his trades in the year 2007 and Bank was informed about that by the authorities of Eurex, but his net position was a profit of $81 million and hence the caution was ignored by the bank. By the end of 2007, Jerome had booked profit of about $2 billion for the bank and this time he was more ambitious. He entered into contract illegally on the name of bank’s clients. His fictitious trades largely involved future contracts on various indices such as Eurostoxx-50, German DAX and FTSE index. Most of these unauthorized contracts were entered in early January 2008 with a bullish view about the market. But marketing started witnessing a downward movement with a negative sentiment about the global slowdown. By then, bank’s client raised the alarm and the senior authority started investigation. Out of surprise, the management found that his market exposure was $50 billion which was even more than the worth of Soc Gen. The news of this isolated fraud of such huge size caused concerned in the market already reeling with the subprime crisis. European market crumbled around 7% on Monday (21’st January 2008) because of the desperate attempt by the bank to clear off the position. Ultimately the virtual loss turned to real loss of $7.2 billion.

One concern arises here about the decision of management to square off the position at the earliest is that why management had to be this hasty? Shouldn’t the bank waited for indices to go up to make huge profit or atleast avoid loss from the bet? Soc Gen., the second largest bank of France, got aware of the gravity of the situation because of such a huge bet on the indices which amounted more than the worth of the bank itself. This news had also reached to the market and the sentiments got further sour in already bearish market. The FTSE100 had fallen from 6456 on January 2’nd to 5901.7 by January 18’th (Fall of more than 8%) from the speculation of global recession. Management had to take the call well in advance to avoid Soc Gen. becoming another Barings. The management claimed that even after losing the $7.2 billion in the market, the bank was going to show profit of euro 800 million for year 2007.

Trading floors all over the world, have witnessed a series of such frauds. But, who should be blamed for such events? The rouge trader, who misuses the information available with him/her or the management, for whom only the gain matters irrespective of source and the means? All such illegal trading had initial clue as well as warning from different internal or external authority, but management has consciously ignored such indication just because the position was bringing money for the company. While traders have been unethical by using fraud accounts of clients without their permission and betting on amount more than the assigned limit; management needs to introspect and reason out their myopic view of such prevailing wrongdoings. A firm regulatory body with close eye on every transaction and proactive decision of management could avoid such event in future.

Biggest Trading Losses by Financial Institution

Derivatives – Boon or Bane

Before analyzing whether Derivative is a boon or bane. Let us start with the definition of Derivatives. Derivatives are financial instruments which derives its value from the underlying. This underlying can be anything as bullion, commodity, stock, or a stock index. Derivatives can be divided into Forwards, Futures, Options and Swaps broadly based on the purpose for which they are going to be used. Derivatives can either be traded over the Counter (OTC) or on an exchange. OTC’s are the one’s which are customized as per the requirements of the two parties and are not tradable in free market while exchange traded are the standardised one’s and are capable of being traded in an exchange. Now let us take an example and look at a simple derivative forward contract.

In this one party is the seller of the contract and the other is the buyer. Let us say the seller is selling gold at a price of Rupees 600. The seller agrees to buy gold 3 months from now at Rupees 610 and both of them get into an agreement. Essentially all the kind of derivatives contract relates to similar kind of agreements between two parties but with slight variations in terms of contract life, tradability and the purpose of the contract. Looking a bit deeper to the above example one can see that the contract is helping the buyer to first of all book an order for a future date by paying a premium to the seller and not the entire money which he would have to pay if he buys the gold today.

The buyer and the seller in a derivatives contract hold the views that the price of the commodity will rise and fall respectively in the future. Now this seems more like a gamble. But people who buy and sell these kinds of contracts do have their sound logic supported by arithmetic and experience. The derivative contracts are widely used to hedge the risk by different institutions or individuals as well.

Using derivative instruments one can earn a huge amount of profit by investing very less money in a very short span of time. But even though people have their logics behind these, one must not discount the fact that derivative is a zero sum game, wherein one person’s lose is another person’s gain. Now people can earn huge amounts of money in a short span of time but they can loose even bigger sums of money. Some of the example’s which can be cited in this regard are:

a. Nick Lesson leading to the downfall of Baring’s bank

b. Jerome Kerviel leading Societe Generale to a loss of $7.2 Billion in futures contract.

Now seeing these examples one can guess the amount of money which one can loose trading in these instruments.

But on the other hand these instruments can help people and organizations make a lot of money, and hedge their risks against the uncertainties, thus helping them to strengthen their financial positions and their bottom lines.

What is going to move the market from here?

The secondary market witnessed a steep downward movement last month. In the period of January 14-22 BSE30 Sensex lost 4100 points incurring a loss of 16,000 billion for the investors. When Nifty futures turned into discount, it created heavy short positions. Investors were not having enough money to meet the margin calls on their future contracts, and brokers were forced to sell in large numbers. The major drain of money from the secondary market happened mainly because of the following reasons-

1. Reliance power IPO, which came with a bid for nearly Rs 11000 Crores and got oversubscribed by 73 times.
   
2. Future Group, which came with IPO to fetch around Rs 490 Crores, got oversubscribed by 133 times.
   
3. FII withdrawal from the market amounted to Rs 13035.7 Crores in the month of January.

Though FII were selling in large volume because of global cues, the major part of domestic money was stuck with the IPO of Reliance and Future Group and no buyer was available in the market.

Now in the month of February, with fed cut in interest rate huge capital inflow is expected through FII’s. Reliance Power has completed the allotment of shares and it has refunded around Rs 1 lakh crores to the bidders. Future Group also refunded the sum for unalloted bids, which is around Rs 50,000 crores. This huge inflow in market is expected to make the market bullish in the short term. But the movement will majorly be decided by the sentiments, and any negative news will turn the market bearish. The concern over the recession in the US economy is going to keep the market volatile and investors need to be cautious about their investment.

Challenges ahead for Indian Monetary Policy

The much expected rate cut by RBI did not happen. In the midst of all the all sorts of speculation, RBI has adopted a policy of wait and watch for the time being. So what’s there left in Indian market in coming days? The impact of differential interest rate is going to have diverse effect. The following heads could be one way to summarize the future move.

More inflow of dollar is expected in the coming months and the huge capital inflow will further complicate the monetary policy. Rupee has already appreciated by almost 12.3% against dollar in last year and further gain could worsen the plight of export industry. Textile industry has already lost more than 50,000 jobs the issue needs to be addressed soon.

We witnessed the lowest inflation of last 5 years in December 2007, but the wholesale price index rose 3.93% in the week ended January 19. This inflation was highest in the last five months. The huge capital inflow in the market from outside is expected to put pressure on inflation. The petroleum price hike also seems imminent and this going to further accelerates inflation. RBI’s stand on keeping the interest rate intact reflects that curbing inflation is of highest priority at this point of time.

Large capital inflow has increased the liquidity in the market and monetary policy has got complicated, RBI needs to be flexible to act on each and every global clue to keep the interest of one and all.

Off Balance Sheet accounting

As an investor we would be looking for information that is from various sources like annual report, news, analysis etc. But truly there are times when we are not sure about how the company is making money. Though one may think of spending more time in knowing exactly what the company is doing. But that may not be true, as managers may choose not to disclose those to the public. Hence there is always a cap on the information available to the public when there is no ceiling set by any governing body.

This is the major reason why stock market are inefficient!. Let us look more closely at specific accounting malfeasance. This will help us see what is the information that we should be looking more closely when evaluating a company? The biggest corporate scandal in U.S happened in the starting of this decade including Enron, WorldCom.

Although Enron was involved in more than one accounting scandals, the important one was the off balance sheet accounting. It is just pure number jugglery. Towards the end of a financial year if Enron notices that there is $3, 00,000 bad debts, it will simply create a Special Purpose Entity to get this huge debt off the record and create revenue! Now you might wonder what this SPE – Special Purpose Entity is? It is another entity set up by the Enron. Now how would this SPE raise money? They would finance it through banks. Isn’t surprising to know which bank would lend money for such bad debts. But much to our surprise it is all the globally reputed banks. Now the real motivation for the banks to lend money is the coveted stocks of Enron which was consistently increasing in value. That is surprising to see, how the market will evaluate a company with such an accounting practice.

The story doesn’t end here as the equivalent stock which was pledged for this bad debt should also have an accounting entry. This is where the Enron were smart in using the loop holes in accounting standards. They booked them under the issue of stock against promise to pay- notes receivable. Although there is a long standing accounting rule that says Notes Receivable created for the issue of stock should not be treated as an asset but as a contra equity- deductions from owners’ equity. But Enron actually treated as an asset. This is the multibillion dollar “mistake” that Enron did. Without any genuine earnings they were able to bloat their balance sheet!
WorldCom story was a little different. It overstated cash flows by booking $3.8 billion in operating expenses as capital expenses. For an exhaustive list of accounting scandals refer to the link below
http://www.forbes.com/2002/07/25/accountingtracker.html

There is a separate area called the forensic accounting which provides report on the insights into this number jugglery. Now as an investor what are the word of caution?
1. Income from unspecified source, that are not revealed or from special purpose entities
2. Loading of inventories to a sister company
3. Income from asset sales or financial transactions
4. Frequent accounting restatements
5. Accrual earnings that run ahead of cash earnings consistently
Although the list is not exhaustive these are the learning from the past. But the most essential thing for any successful investment as Warren Buffet says is to invest in something where you really know and like the business! It is strange though to see the herd mentality.

Microsoft set to leave its debt-free status for acquiring Yahoo!

Microsoft surprised many analysts by announcing acquisition offer for Yahoo! last week. The offer amount is $44.6 billion based on per share offer price of $31. This is at 62% premium to the closing price of Yahoo! stock on January 31, 2008. The offer is funded by 50% equity & 50% debt. The equity is equal to 0.9509 times the Microsoft's stock closing price on January 31, 2008. Chris Liddell, Chief Financial Officer of Microsoft, said that the offer has more than 100% premium over the operating assets of Yahoo!.

If the acquisition is completed, this will be the first time Microsoft will be borrowing money. At present Microsoft is a debt free company. Yes! Microsoft has no long term debt. Surprising, isn't it? Even Yahoo! has very insignificant amount of debt. Its debt to equity ratio in the latest quarter was 0.079.

Microsoft is a cash rich firm with 21 billion USD in cash and short term investments according to their latest balance sheet (December 31, 2007). The total current assets are more than 37 billion USD. This is huge considering the total assets size of about 67 billion USD. Microsoft funds its operations with short term loans. It has 22 billion USD current liabilities. MS is planning to use its available cash and stock to pay the equity part of the acquisition value.

Yahoo! stock price has climbed more than 50% since the offer was announced last week. Google's investors have been shocked by this and the stock fell heavily after the announcement. Currently, Google is the dominant leader of the online advertising market with more than half of total market share. The market is set to grow from 40 billion USD to 80 billion USD by 2010.

Stock Markets Unwinded

Here comes an article which will let you know the basics of a stock market. So let’s straight away start the topic which I think is of interest to everyone in the country.

First of all for those who think that stock markets are the easiest ways to become rich, think twice as it is one of the most troublesome places. It can make one earn a crore a day and loose two the next day. So with this constraint in mind let’s try and know our markets a bit better.

Let’s start with what does bulls and bears mean. Bulls mean people who purchase stocks and bear the one who sells them. All of you must have heard of about market indices as BSE Sensex or Nifty. One see’s the value of indices jumping up and down throughout the day. What does the value mean? If we take example of BSE Sensex it is the weighted average of thirty stocks which are representative of all the sectors of the economy. Thus these indices change with the change in the underlying stock prices. The next question which must be floating in your mind is what causes the change in stock prices. Well there are several factors which can cause a change in the stock price. Some of them are:

1. Recession in the economy or industry
2. Lower than expected performance of the company
3. Getting a new contract
4. News of its merger or its acquisition

Seeing the factors listed above don’t one get a feeling that these factors are transient and one most see the long term growth prospects of the company. Well my friends the stock markets are driven by something known as “Market Sentiments”. Mostly these sentiments don’t take into account long term growth prospects of a company but are driven mostly by the things happening right know in the company or industry or economy of the country or the global economy as a whole.

Further, I would also like to add that demand and supply, which are yet again governed by the market sentiments play a huge part in deciding the price of the stock and in turn the index value.
Now as we have learnt about the stock price movements and index value movements let us move into a bit more detail to understand the kind of markets prevalent in the country. Now the place where shares do get traded are known as Capital Markets. These can further be classified into primary markets and the secondary markets. The primary market is one where the Initial public offer (IPO) of a company i.e. shares for the first time are on offer while secondary market includes the place where day to day trading happens. Now a few of you must be having doubts about how does the price of an IPO is decided as the share is still not out in the market. Well it a complex process and will discuss about it in the next article. So let’s wind up this article now and will be back with more articles related to the vibrant world of stock markets very soon.