Major Securities Scams in India

There have been many occasions in the past where some people have taken advantages of knowledge of how the system works and manipulated the system to gain huge amount of money for themselves or their organization. While many of these cases do not come to public, the major ones that have been disclosed in public have shown the enormity of the scale at which these perpetuators have operated and the weakness of our system to stop them or catch them early. To get an idea of the size of these frauds let us have a look at India’s one of the most famous scam. Harshad Mehta’s securities scam, which came into light in 1992, involved misappropriation of funds well above 3500 crores INR (about a billion USD in 1992). The aftermath of this scam led to investors losing more than 100,000 crore INR (about 25 to 30 billion USD) in 2 months in stock market. Though after this scam regulation were strengthened and legal penalty was given to the accused, yet the steps were not enough to avoid another major scam which shook the markets. This time it was Ketan Parekh in 2001 and the scale of the damages were similar. And recently in 2009 another major scam came into public and shook the already feeble markets: the Satyam Accounting Fraud to the tune of 7000 crore INR (about 1.5 billion USD). The reoccurrence of these scams may suggest the lacuna in the current regulatory system which provides the scope for such practices.

There is always information asymmetry between different players in the financial markets. This being a necessary part of the system cannot be eliminated. However, appropriate rules and regulations can be put in place to prevent the misuse of this information asymmetry by any players. Rules for insider trading are in place in almost every country; still these can’t be fool-proof.

Year	Major Victims	Size of scam	Major accused
1991/92	Investors in related shares	Rs. 3500 crores	Harshad Mehta
	State Bank of Saurashtra	Investors lost market value
	SBI Caps	to the tune of 100,000 crores
	Standard Chartered Bank	rupees
	National Housing Bank
2001	Investors in related shares	~ Rs. 3000 crores	Ketan Parekh
	Calcutta Stock Exchange	20,000 crores rupees lost in
	UTI	the market capitalization
	MMCB
2008/09	Satyam Computers Ltd.	~Rs. 7000 crores (approx. $1.5 b USD)	B. Raju

How Indian investment banks and brokerage firms performed on stock market during financial crisis

Amid the stock market crash lets look at how the Indian investment and brokerage firms fared. Below is the list of main companies in this category along with their one year high and low prices. The Price column shown the current market price (as on 17 January 2009).

	52Week High	52Week Low	Price
Apollo Sindhoori	77	25	52
Centrum Capital	1,839	722	1,625
Edelweiss Capital	1,508	234	239
Emkay Global	401	24	32
Future Capital	1,190	125	157
Geojit Fin Serv	132	20	24
IL & FS Investmart	227	58	65
India Infoline	344	34	46
Indiabulls Securities	300	17	19
JM Financial	137	17	21
Motilal Oswal	379	48	63
Religare Enterprises Limited	650	275	321

The table below shows an estimate of variation between their year high and low prices. We have presented the percentage of fall in share price occurring when the prices fell from year high to reach the year low price.

	Variation
Religare Enterprises Limited	-58%
Centrum Capital	-61%
Apollo Sindhoori	-68%
IL & FS Investmart	-74%
Edelweiss Capital	-84%
Geojit Fin Serv	-85%
Motilal Oswal	-87%
JM Financial	-88%
Future Capital	-89%
India Infoline	-90%
Emkay Global	-94%
Indiabulls Securities	-94%

Finally, lets look at how much these stocks have fallen from their highs to current levels and what percentage have they risen from their

	Fall from highs	Rise from lows
Centrum Capital	-12%	125%
Apollo Sindhoori	-32%	108%
Religare Enterprises Limited	-51%	17%
IL & FS Investmart	-71%	12%
Geojit Fin Serv	-82%	20%
Motilal Oswal	-83%	31%
Edelweiss Capital	-84%	2%
JM Financial	-85%	24%
India Infoline	-87%	35%
Future Capital	-87%	26%
Emkay Global	-92%	33%
Indiabulls Securities	-94%	12%

With an exception of Centrum Capital and Apollo the entire sector has seen huge decline in its market value. Most of the stocks have fallen by more than 80% from their year highs.

Aren’t stocks riskier than other financial instruments?.. and the more after the recent fall?

This is quite common doubt among most of the people who stay away from the market and are satisfied with meager returns from their fixed deposits or bonds. It is quite probable that market condition change with time, causing a great company to lose its business and its stock to fall. But, rarely a stock is priced below its fundamental value and if at all it does, there could not be a better opportunity to buy such strong stocks. A realistic investor will move from stock to stock with the change in market condition hence averting any such loses.


In last 5 years, NIFTY Index has moved from 1051.80 on June 16^th 2003 to 4517.10 on June 13^th 2008. Had someone invested in Index fund 5 years ago would have made an average of more than 60% return at simple interest and more than 30% return even if taken in compounded terms. And all this return would have come without any botheration of switching from one stock to another(except for the fact that constituents of Nifty are changed).A 30% return overshadows all the misgivings about the risk involved with investing in equity. Equity might be riskier in short term but it becomes safer as the duration increases. The graph does reflect unexpected fall in 2004, 2006 and again in 2008, but such negative returns has always remained for short term and a long term investor would not bother for such movement. Such an impressive return even after taking the latest fall into account gives a clear impression that investment in fundamentally sound company would rarely disappoint.

A retail investor is often scared of speculation in market. Speculators are bound to be there, and this in fact helps in increasing the volume of trade. It brings down the impact cost, as a buyer will always find someone available to sell at that price and vice versa. Most of the speculation happens in small-cap companies. But looking at the fundamentals will easily filter out such stocks from investment perspective. Moreover the speculators have also started moving to derivatives from these small-caps, making equity more reliable.

Investor loses when he buys the right stocks at the wrong price and at the wrong time. Recent fall of DLF Limited is an example of such a stock which came below its issue price. A month back buy of this stock could be termed as right pick at wrong time. Though the stock is fundamentally strong, the recent slow down and doubt about the economic growth in coming days brought down the price of infrastructure firms drastically and DLF was no exception.

People start believing stocks to be prudent investment when it is not. Last year was golden year for many people who blindly invested in stocks without looking even at basic fundamentals like balance sheet & income statements and made decent gain. Stock was hyped all the way to be the obvious choice, but the correction taken place this year has made people believe it to be riskier and safe to stay away thing. And this happened when many stocks are available at bargain price which should have been bought.

To sum up – People lose in market because they seem to be more comfortable in investing in business they are entirely ignorant about. The stock becomes riskier for those who get into market without any planning and knowledge. Hence, one needs to do self analysis to see how much of risk he is comfortable with, whether he is a short term investor or a long term investor, and how will he react to the sudden, unexpected and severe drops in the prices.

Derivative Market - Financial weapons of mass destruction!!

Yesterday I made a decent 40% profit on the CALL option which I had bought a couple of days back. I started getting interest in option trading last year and followed market religiously. Index option of NIFTY has got decent volume and a volatile market like this could get fair return in the derivative side. The foray in derivative market was a good learning for me. Option market is good for those who have fair idea of economics, who do not get tempted and most important who trades in a market which follows logic.

In case of Indian derivative market, the volume is really thin as compared to equity market. The inflation reported to 42 month’s high at 7.61 on May 9th 2008, but the market did not move down for “some time”. Analysts came with opinion that the current inflation figure was expected and already accounted for. The market started falling after that and the opinion changed that the high inflation was causing the mayhem... On May 12th, the Index of industrial Production (IIP) number came, which was lowest in the last 6 years. Markets fell initially, but regained its loss in the second half with no positive trigger. Not only this, it closed surprisingly in green. Next day market fell by around 2% and the IIP number was blamed for such movement... The inflation on May 16th was reported as 7.83, the highest in last 44 months but market went up in spite of low IIP number and such high inflation. Same story gets repeated and market closes in green - about 0.50-1.0% higher than the previous day close. There are many such instances, which indicate that Indian market is rigged, does not follow logic and is well manipulated for the benefit of a few.

In such a scenario, whether derivative trading is sensible investment alternative or not is an issue to be debated. As per the report from Chicago & New York, between 80-95 % of the amateur players lose in the Futures & Option market. And these odds are worse than the worst odds at casino or at the racetrack. The large potential return in this market is attractive to many small investors who are not satisfied with getting rich slowly by investing in stocks for long term. They venture into the derivative market to get rich faster and eventually lose all their saving in a very short span of time. Options are only for certain period and get expired at the end of the period. One has invested in stock and his research suggests that price will come down soon, so he buys PUT option to hedge his losses. But price does not come down in this month. The option expires worthless and he loses all the money he had paid as the premium. To be protected continually, he has to keep buying PUT option every month which he can not afford to do. The worst thing happens when the sure thing proves to be true and the price of the stock comes down the next month. Not only he has lost his money, he has done it while being right about the stock. Instead of being rewarded he is wiped out from the market with very thin saving at hand.

Another sad part of the story is that these options are very expensive. The more volatile the market is and the more time-horizon the option has got, the higher the premium is. The Black-Scholes formula for calculating the premium of option suggests that NIFTY has got roughly 20-35% of volatility (Volatility index), which results in quite higher premium.

Options are zero-sum game, for every Rupee won in the market there is someone who lost a Rupee, and interestingly, minority does all the winning. Buying option has nothing to do with owning a share and it does not make one owner of the dividend paid by the company. One contributes to the growth of the economy of the country when he buys the share of stock even in the secondary market. But in options market, not a bit of money is put to any constructive use.

To sum up, trading in derivative is one of the riskiest investments. While stock itself is highly priced, the derivative trading could lead to major disaster. Warren Buffet referred these volatile, dangerous options as “financial weapons of mass destruction”. Small investors should be cautious of making investment in such financial instruments and should be rationale than being tempted.

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

Impending recession and the aftermath

The bearish movement in Indian stock market in last couple of weeks draws everyone’s attention towards the world economy again. In the era of globalization, any significant move in the economy of big players is going to have well spread impact (Article on Decoupling theory). And if the movement is there in US economy no country will be left untouched...

The movement in the US economy started in the month of September with the Subprime crisis followed by credit crunch in the US market. All the major banks in US reported huge losses and Federal Reserve had to cut the interest rate first time after 2003 by 50 basis points (0.50%). The complete effect of subprime crisis was yet to be realized and that was evident with further writing off bad debt by major bank in 3^rd quarter of 2007. The economy started slowing down, and financial market came under much stress. Fed had to intervene again within 4 months of earlier cut and the interest rate was dropped by 75 basis points to 3.5%. This was again followed by reduction in benchmark short-term interest rate by 50 basis points to 3% within 9 days of previous cut. This was the most aggressive movement in interest rates since 2001, and is expected to keep the housing slump and the credit crunch brought on by a meltdown in the home-lending market from pushing the broader economy into the red.

But even after all these measures, the consumer spending in the U.S. increased at the slowest pace in last six months. The unemployment insurance jumped, U. S. economic growth slowed to 0.6% annual rate in the 4^th quarter from 4.9% in the prior three quarters. All these facts indicate towards an impending slowdown and countries need to hedge the movement to all possible extent.

Countries like India has got major exports in U.S. and reduced consumption rate will certainly impact the export business heavily. While, the export industries are already suffering with appreciation in Rupees and it will get worsen with any slowdown in demand abroad; the crude oil price had come down after the speculation on reduced demand by the world’s biggest energy consuming country U.S. This will relax the Indian oil companies a bit with reduced subsidy (more about Crude oil price and its impact).

The significant cut in interest rate by Federal Reserve is aimed to avoid any credit crunch and after the RBI (Reserve Bank of India) decision not to cut the interest rate, heavy credit inflow is expected in coming month. The volatility in stock market reflects the suspicious and bearish environment. The GDP in the year 2007 grew by 9.6% and growth is expected to be close to 9% in FY2008. The government needs to be well prepared for any uncertainty and be ready with flexible policy to avoid any major impact.

Domestic Institutional Investors (DII) were the major buyers which held the markets

Domestic Institutional Investors (DII), which includes Mutual Funds, Insurance firms, and Domestic Financial Institutions (DFI) mainly banks etc., were the major buyers in the past week when the FIIs sold away heavily in the equity markets. While the FIIs have taken away Rs. 15,000 crores from the markets, DIIs have put in about Rs. 10,000 crores. Major part of DII money has come from insurance and financial institutions. Government had asked these institutions to place money in bluechip firms to give support to the markets. LIC, the biggest insurance firm of India, alone has been estimated to have put in $1 billion(Rs. 4000 crores) in the last week.
In the year 2008(till January 25, 2008) FIIs have sold worth Rs. 23,000 crores, while DIIs have bought worth Rs. 12,800 crores.

FII sold heavily in mid January crash

While the Mutual Funds started selling in the initial days of the previous week, they started pumping in the money during the fall of the stocks. FIIs on the other hand were about neutral in the week before but they suddenly started selling off heavily each day and even on last few days of the week when the sensex gained significantly, FIIs were net sellers to the extent of more than 1000 crores of rupees. Though the last day selling was very less compared to previous three days in which they sold about 2500 crores worth of stocks each day.

Where to get the FII and Mutual Fund investment activity in Indian stock/equity & debt markets?

FII (Foreign Institutional Investors) and Mutual funds activities are very important for short term traders to speculate the trend. Being major players most of the time their actions moves the market up or down. Fortunately SEBI (Securities and Exchange Board of India) publishes the total amount of buying and selling done by FIIs and Mutual Funds in the Indian equity and debt market.

The data are made available to the public through SEBI's website in the "FII / Mutual Funds Trends" column. The webpage gives the last trading day's activities by FIIs and MFs and has archives for each day of current month. To visit the archieves for periods earlier than one month another archive section for both FIIs and Mutual Funds is available. To access any historical data enter the closing date of that month and click 'go'.

According to a note on SEBI's website:

"Note: The data pertains to all the activities undertaken by FIIs in Indian Securities Market, including trades done in secondary market, primary market and activities involoved in right/bonus issues, private placement, merger & acquisition etc."

SEBI has a 'investors awareness campaign' and provides the investors with the latest data/information to help them make informed choices.

Reliance Power IPO subscribed for more than market value of the Portuguese and Czech stock markets (Update 1)

As per Bloomberg, the bid for Reliance Power initial public offer (IPO) exceeded Portugal Market Value. The company is likely to raise more than Rs 10000 crore from this public issue excluding promoters’ contribution. This is the largest IPO in Indian market till date. The company sought to raise around 117 billion Rs ($3 billion) through 228 million shares on offer. The offer had got subscribed within 60 seconds on the day of opening and finally got oversubscribed by 73.04 times as per National Stock Exchange (NSE). The offer received an order worth more than $190 billion, which is equivalent to combined value of Portugal and Czech stock markets.

The 3’rd richest man of India, Mr. Anil Ambani will increase his wealth further with listing of this Stock. Reliance energy has got 50% stake on Reliance Power. Power stocks have driven the market well in the year 2007 and the trend is expected to continue. Reliance Energy share price increased from around 600 Rs in February, 2007 to more than 2400 Rs in January this year. The addition of Reliance Power is expected to receive a good demand in the market when it gets listed early next month.

The issue price was fixed at 450 Rs today (19'th Jan) and is expected to gain 300-400 Rs on the day of listing. With already $45 billion of wealth with him, Anil Ambani might take a leap with this addition in his asset and that could make him the richest person of the world. The next update from Forbes magazine on official ranking of richest people of the world will certainly bringing more Indians among top rankers. According to the earlier update from Forbes, the wealth of Ambani brothers together with L. N. Mittal and K. P. Singh is more than the 40 richest Chinese. This IPO was one of the most talked and coming month might change fortunes of many.

Applying Dividend Discount Model (DDM) to 'State Bank of India' (SBI)

Dividend Discount Model values a firm's equity on the basis of the future dividends that the company is expected to give. Discounting all the future dividends gives the value of the stock as this is the only money an investor is going to get if he keeps the stock till perpetuity.

The general valuation formula for DDM is:
P = D1/(k - g)

where
P - ideal price of the stock
D1 - dividends for the year 1
k - cost of equity/ discounting rate
g - growth rate of the dividends

There are some assumptions in this model which require careful use of this model for finding the intrinsic value of a stock based on its dividends.

We will use a live example of State Bank of India (SBI) to illustrate the use of DDM. The following is the last 10 year dividend history of the company:

Year End	Total Dividends paid (Rs crores)	PAT (Rs crores)	Retained Earnings (Rs crores)	Retention ratio, b
Mar-98	211	1861	1650	0.89
Mar-99	211	1029	818	0.8
Mar-00	263	2051	1788	0.87
Mar-01	263	1880	1617	0.86
Mar-02	316	2423	2107	0.87
Mar-03	447	3105	2658	0.86
Mar-04	579	3681	3102	0.84
Mar-05	658	4305	3647	0.85
Mar-06	737	4405	3668	0.83
Mar-07	737	4534	3797	0.84

Using this we find that SBI has policy to retain about 85% of their earnings and distribute 15% as dividends to its shareholders. The retained earnings add on to the shareholder's equity and should earn profits for SBI. For each year we also looked into the returns on the equity (ROE) for SBI. the data is as follows:

Year End	Retention ratio, b	ROE	Growth rate, g
Mar-98	0.89	21.2	18.8
Mar-99	0.8	10.3	8.2
Mar-00	0.87	18.2	15.9
Mar-01	0.86	14.7	12.6
Mar-02	0.87	17	14.7
Mar-03	0.86	19.2	16.4
Mar-04	0.84	19.7	16.6
Mar-05	0.85	19.4	16.5
Mar-06	0.83	17	14.2
Mar-07	0.84	15.4	12.9

We have calculated the growth rate of dividends using:
growth rate = retention ratio X Return on equity ; g = b*ROE
Since dividends next year will be equal to this year's dividends plus the earnings on the retained earnings of this year with SBI.

The average growth rate for the 10 year period was about 14.7%.

SBI paid dividends of Rs 14 per share in 2007. Hence D0 = 14.
D1= 14*(1+g) = 14 * 1.147 ~ 16

Finding the discount rate is the trickiest part of the valuation and it depends on many factors and can be estimated using CAPM or other similar models. For simplifications we will take cost of equity as given in this case. We will take cost of equity as 15% and assume that SBI will enjoy this high growth for next 20 years before settling at something less than India's GDP growth rate (~ 7 %) and find out the value in the next article. Till then you can try it on your own.

[Hint: SBI is currently trading at 2400]


[To be completed in next post...]

What moves Sensex or Nifty?

We have seen in the previous post the constituents of Sensex/Nifty and their weights in the index. Lets see what is the effect of price change of a stock on the index. We will take the example of S&P CNX Nifty. As discussed before Nifty is an index based on full market capitalization i.e. the index is proportional to the sum of the market capitalization of all its constituent stocks. The weights of the stocks in the index will vary. Lets take the data of 31 December 2007 for understanding the concept. Nifty closed at 6138.6 on December 31, 2007. The top four weighted stocks in Nifty were:

Stock Name	Market Capitalisation	Weightage
	(Rs. Crores)	%
Reliance	4,19,043	11.89%
ONGC	2,64,568	7.51%
NTPC	2,06,879	5.87%
Bharti Airtel	1,89,100	5.37%
Total	35,22,527	100%

Suppose Reliance's stock price changes by 10%, how will Nifty change?
This is a very simple question. Since market capitalization is directly proportional to stock price, Reliance's market capitalization will increase by 10%. Assuming other constituents of Nifty unchanged this will lead to an increase in Nifty value by:

Change in Total Market Capitalization of all constituents of Nifty = Change in Market Capitalization of Reliance = 10% of 419043 = 41,904.3

New Total Market Cap = 35,22,527 + 41,904.3 = 35,64,431.3

New Nifty Value / New Total Market Cap = Old Nifty Value / Old Total Market Cap

So, New Nifty Value = 6138.6 * 35,64,431.3 / 35,22,527 = 6211.625

Change in Nifty value = 73.025
% change in Nifty = 1.1896%

We got that a 10% change in Reliance's stock price will change Nifty by 1.1896%. This is same as the weight of Reliance in Nifty. So, all this calculation was meaningless and we can find the change directly from the weight of that stock in Nifty :).

Nifty falls below 6000 mark first time in 2008 led by Mutual funds sell off

Indian stock market has seen heavy sell off in the past two days. The benchmark indices Nifty and Sensex have touched a low level of about 4-5% from the closing value two days back. We will try to analyse the reasons for this abrupt selling, but first we shall look into the trends of the Indian stock market for past one year. The following graphs are self-explanatory:

Variation of Nifty-50 over one year. Returns in excess of 50% in one year.

Past one month variation in Nifty index. Highly volatile. Nifty fell sharply in mid December 2007, and also rise sharply the next week. Touched new highs of 6300 in January 2008 before falling back sharply below the 6000 level in mid January. Will Nifty rise back sharply as seen in December last year, perhaps no one can say so for sure.

The last two days heavy sell off can be seen in this chart. On January 15, and 16 Nifty has fallen sharply and only in last hour of trading on January 16, bulls have tried to come back.

Reasons for sharp fall:

If we look at two big group of players in the Indian markets, the FIIs and the mutual funds, the perception of both are not same. While mutual funds have been one of major reason as they have sold off heavily in equities in the last two trading session, FIIs have been buying steadily though their activity has slowed down.
One of the apparent reason is the Reliance Power IPO, India's biggest IPO so far, which opened for subscription on January 15, 2008. The size of the IPO is about 3 billion dollars and it got fully subscribed within minutes of its opening. The excitement about the IPO has lead to it getting more than 10 times offer for subscription on the first day itself. This is remarkable considering the size of the issue. About 27 billion dollars have shifted to Reliance Power and it appears that a substantial part of it has been coming from the stock markets. There is a craze for IPOs and this has led to spectacular performance of the IPOs in the last year. Moreover, at levels above 6300 for Nifty many investors don't see any significant upside and have taken their money from stock market to the IPO which has higher chances of giving them 40-50% returns on listing.

BSNL may sell stocks worth $10billion (Rs 40,000 crores) through India's biggest IPO

Indian Government announced on monday that it may sell $10 billion(Rs. 40,000 crores) stake in BSNL, one of the India's biggest telecom company. This will be done through initial public offering (IPO) of shares and fund will be used for expansions plans. BSNL will be the second biggest telecom company in Asia after China Telecom by market capitalization.

The IPO will value the BSNL at Rs 400,000 crore, much ahead of Bharti Airtel, the country’s No.1 company whose market capitalization is Rs. 172,179 crores (January 14, 2007). BSNL will also become the India's second biggest listed company after Reliance Industries Limited(RIL) which has market capitalization of about Rs 448,193 crore.

On Tuesday India's biggest IPO so far will be opened for subscription. A $3 billion (Rs 11,700 crore) IPO by Reliance Power will break the previous best record of 9,190 crores by the real estate major DLF Ltd.

How did various Indian stock market indices performed in 2007

Returns of the four major indices of National Stock Exchange(NSE) of India in the year 2007 are are:

CNX 100	CNX 500	Midcap	Nifty
56%	61%	78%	53%

While late rally in midcap stocks lead to its overall better performance, CNX500 also outsmarted Nifty50. This suggests that the appreciation of stock prices in the year 2007 was across the market and not limited to the stocks in benchmark indices like Nifty and Sensex.

The graph showing the variation within the year of the above indices:
Relative performance of the four indices is shown in the graph below:

Correlation of Sensex and Nifty

How much correlated are Sensex and Nifty? Lets look at the graphs of the two indices for last five years:Analyzing the data for last five years using regression shows a high correlation between them. Lets look at the picture for last one year.

Based on the past data, one can easily conclude that Sensex and Nifty are highly correlated indices.

What is BSE Sensex? What constitutes Sensex?

SENSEX (Sensitive Index) is the India's most popular stock market index developed by Bombay Stock Exchange (BSE) in 1986. SENSEX has 30 constituent stocks representing a sample of large, liquid and representative companies. The base year of SENSEX is 1978-79 and the base value is 100.

The Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period.

The selection of constituents in SENSEX is based on several factors including the listed history, trading frequency, rank based on market capitalization and liquidity, industry representation, etc.

The index is reviewed every quarter and in the case of a revision in the Index constituents, the announcement of the change is made at least six weeks in advance of the actual change.

The present constituents of SENSEX are:

Name	Industry
ACC Ltd.	Cement
Ambuja Cements Ltd.	Cement
Bajaj Auto Ltd.	Automobile - 2/3 wheeler
Bharat Heavy Electricals Ltd.	Electrical Equipment
Bharti Airtel Ltd.	Telecommunication
Cipla Ltd.	Pharmaceuticals
DLF Ltd.	Construction
Grasim Industries Ltd.	Cement
HDFC	Finance - Housing
HDFC Bank Ltd.	Banking
Hindalco Industries Ltd.	Aluminium
Hindustan Unilever Ltd.	Diversified
ICICI Bank Ltd.	Banking
Infosys Technologies Ltd.	Softwares
ITC Ltd.	Diversified
Larsen & Toubro Limited	Engineering
Mahindra & Mahindra Ltd.	Automobiles - 4 wheelers
Maruti Suzuki India Ltd.	Automobiles - 4 wheelers
NTPC Ltd.	Power
ONGC Ltd.	Oil Exploration/Production
Ranbaxy Laboratories Ltd.	Pharmaceuticals
Reliance Communications Limited	Telecommunication
Reliance Energy Ltd.	Power
Reliance Industries Ltd.	Diversified
Satyam Computer Services Ltd.	Softwares
State Bank of India	Banking
Tata Consultancy Services Limited	Softwares
Tata Motors Ltd.	Automobiles - 4 wheelers
Tata Steel Ltd.	Steel
Wipro Ltd.	Softwares

The weightage and market capitalization of the constituents of Nifty as on 11 January 2008 are shown below:

Name	Free-Float Market Capitalization (Rs. Crores)	Weight in Sensex (%)
ACC Ltd.	10,105.36	0.72
Ambuja Cements Ltd.	12,685.74	0.9
Bajaj Auto Ltd.	16,555.77	1.17
Bharat Heavy Electricals Ltd.	64,149.25	4.55
Bharti Airtel Ltd.	41,721.91	2.96
Cipla Ltd.	10,316.99	0.73
DLF Ltd.	30,585.98	2.17
Grasim Industries Ltd.	23,225.91	1.65
HDFC	72,575.42	5.15
HDFC Bank Ltd.	49,869.91	3.54
Hindalco Industries Ltd.	17,386.76	1.23
Hindustan Unilever Ltd.	24,753.83	1.75
ICICI Bank Ltd.	157,659.91	11.18
Infosys Technologies Ltd.	76,723.99	5.44
ITC Ltd.	58,650.90	4.16
Larsen & Toubro Limited	109,360.09	7.75
Mahindra & Mahindra Ltd.	15,231.08	1.08
Maruti Suzuki India Ltd.	12,982.17	0.92
NTPC Ltd.	33,678.60	2.39
ONGC Ltd.	55,905.85	3.96
Ranbaxy Laboratories Ltd.	10,326.60	0.73
Reliance Communications Limited	57,241.77	4.06
Reliance Energy Ltd.	37,925.18	2.69
Reliance Industries Ltd.	227,361.54	16.12
Satyam Computer Services Ltd.	26,113.26	1.85
State Bank of India	57,722.49	4.09
Tata Consultancy Services Limited	24,197.37	1.72
Tata Motors Ltd.	17,635.05	1.25
Tata Steel Ltd.	43,674.83	3.1
Wipro Ltd.	14,190.08	1.01
TOTAL	1,410,513.59	100%

What is S&P CNX Nifty? What constitutes Nifty?

S&P CNX Nifty (Standard & Poor's CRISIL National Stock EXchange index-NSE fifty) is the benchmark index of NSE reflecting the performance of Indian stock markets. The fifty stocks in the index have market capitalization more than that of rest of the traded stocks at NSE. Nifty is managed by India Index Services and Products Ltd. (IISL), a joint venture between NSE and CRISIL.

Nifty is computed using market capitalization weighted method. Hence, the level of the index reflects the total market value of all the stocks in the index relative to base period (index base value of 1000 on November 3, 1995).

The stocks for inclusion in Nifty have to satisfy several criterias like liquidity (measured by impact cost), market capitalization, floating stocks, etc.

The present constituents of Nifty are:

Company Name	Industry
ABB Ltd.	Electrical Equipment
ACC Ltd.	Cement
Ambuja Cements Ltd.	Cement
Bajaj Auto Ltd.	Automobile - 2/3 wheeler
Bharat Heavy Electricals Ltd.	Electrical Equipment
Bharat Petroleum Corporation Ltd.	Refineries
Bharti Airtel Ltd.	Telecommunication
Cairn India Ltd.	Oil Exploration/Production
Cipla Ltd.	Pharmaceuticals
Dr. Reddy's Laboratories Ltd.	Pharmaceuticals
GAIL (India) Ltd.	Gas
Glaxosmithkline Pharmaceuticals Ltd.	Pharmaceuticals
Grasim Industries Ltd.	Cement
HCL Technologies Ltd.	Softwares
HDFC Bank Ltd.	Banking
Hero Honda Motors Ltd.	Automobile - 2/3 wheeler
Hindalco Industries Ltd.	Aluminium
Hindustan Unilever Ltd.	Diversified
HDFC Ltd.	Finance - Housing
I T C Ltd.	Diversified
ICICI Bank Ltd.	Banking
Idea Cellular Ltd.	Telecommunication
Infosys Technologies Ltd.	Softwares
Larsen & Toubro Ltd.	Engineering
Mahindra & Mahindra Ltd.	Automobiles - 4 wheelers
Maruti Suzuki India Ltd.	Automobiles - 4 wheelers
NTPC Ltd.	Power
National Aluminium Co. Ltd.	Aluminium
Oil & Natural Gas Corporation Ltd.	Oil Exploration/Production
Punjab National Bank	Banking
Ranbaxy Laboratories Ltd.	Pharmaceuticals
Reliance Communications Ltd.	Telecommunication
Reliance Energy Ltd.	Power
Reliance Industries Ltd.	Diversified
Reliance Petroleum Ltd.	Refineries
Satyam Computer Services Ltd.	Softwares
Siemens Ltd.	Electrical Equipment
State Bank of India	Banking
Steel Authority of India Ltd.	Steel
Sterlite Industries (India) Ltd.	Metals
Sun Pharmaceutical Industries Ltd.	Pharmaceuticals
Suzlon Energy Ltd.	Electrical Equipment
Tata Consultancy Services Ltd.	Softwares
Tata Motors Ltd.	Automobiles - 4 wheelers
Tata Power Co. Ltd.	Power
Tata Steel Ltd.	Steel
Unitech Ltd.	Construction
Videsh Sanchar Nigam Ltd.	Telecommunication
Wipro Ltd.	Softwares
Zee Entertainment Enterprises Ltd.	Media

Sector	No. of companies in Nifty
Automobile	5
Cement & Construction	4
Diversified	3
Electrical Equipment	4
Engineering	1
Financial	5
Gas & Oil	3
Media	1
Metals	5
Pharmaceuticals	5
Power	3
Refineries	2
Softwares	5
Telecommunication	4

The weightage and market capitalization of the constituents of Nifty as on 31 december 2007 are shown below:

S.N.	STOCK	Market Capitalisation (Rs. Crores)	Weightage %
1	ABB	32,046	0.91%
2	ACC	19,227	0.55%
3	BAJAJ AUTO	26,590	0.75%
4	BHARTI AIRTEL	1,89,100	5.37%
5	BHEL	1,26,773	3.60%
6	BPCL	18,932	0.54%
7	CIPLA	16,529	0.47%
8	NTPC	2,06,879	5.87%
9	DRREDDY	12,312	0.35%
10	GAIL	45,970	1.31%
11	GLAXO	8,701	0.25%
12	GRASIM	33,573	0.95%
13	AMBUJA CEMENT	22,379	0.64%
14	HCL TECH	21,882	0.62%
15	HDFC	80,804	2.29%
16	HDFC BANK	61,223	1.74%
17	HERO HONDA	13,905	0.39%
18	HINDALCO	26,366	0.75%
19	UNILEVER	46,868	1.33%
20	CAIRN	45,749	1.30%
21	ICICI BANK	1,35,658	3.85%
22	INFOSYS	1,01,153	2.87%
23	UNITECH	79,424	2.25%
24	ITC	78,875	2.24%
25	RPL	1,00,530	2.85%
26	L&T	1,21,406	3.45%
27	MARUTI	28,732	0.82%
28	M&M	21,182	0.60%
29	IDEA	36,658	1.04%
30	NATIONAL ALUMINIUM	31,246	0.89%
31	ONGC	2,64,568	7.51%
32	STERLITE	73,314	2.08%
33	PNB	20,952	0.59%
34	RANBAXY	15,874	0.45%
35	RELIANCE POWER	50,451	1.43%
36	RELIANCE INDUSTRIES	4,19,043	11.90%
37	SAIL	1,17,531	3.34%
38	SATYAM COMPUTERS	30,260	0.86%
39	SBI	1,24,793	3.54%
40	SIEMENS	31,867	0.90%
41	SUN PHARMA	24,208	0.69%
42	SUZLON	57,985	1.65%
43	TATA POWER	31,958	0.91%
44	RELIANCE COMMUNICATIONS	1,53,921	4.37%
45	TATA MOTORS	28,601	0.81%
46	TCS	1,05,435	2.99%
47	TATA STEEL	68,356	1.94%
48	VSNL	21,787	0.62%
49	WIPRO	76,769	2.18%
50	ZEEL	14,180	0.40%
	TOTAL	35,22,527	100.00%

Data Source: NSE