Thursday, November 25, 2010

[Review] Increase of maximum size of Retail IPO/FPO portion to 2 Lakh

Recently SEBI amended the IPO norms to change the max limit for retail investors to Rs 2,00,000 from the existing limit of Rs 1,00,000. Reason stated was to increase the retail participation and to enhance the returns of the retail investors.Looks like a investor friendly step taken by SEBI.Isnt it ?.Lets try to dive deep into book building process and try to understand how its going to affect retail investors based on two large recent book building process - Coal India & PowerGrid.
In Coal india IPO there were total of 16.26 Lakh application from retail section. Among them 8.89 Lakh applications were for 1 Lakh and in total they received 81% of the total shares reserved for retail investors.Remaining 7 Lakh investors has to be content with 19% of the shares. The numbes were similar in PowerGrid FPO too .
Total Retail Applications 14.18 Lakhs
Applications for 1 Lakh 7.94 Lakhs
Total shares allocated to this segment 80%

This is not a unfair distribution since the shares are distributed in the ratio of the total shares they have bid for. Lets now consider the situation in which max limit is increased to 2 Lakhs. This is not going to affect investor who apply less than a lakh .But investors who used to apply at 1 Lakh earlier MAY increase their application size up to 2 Lakh ,depending on their affluence. Lets consider that 50% of them are affluent to invest 2 Lakh in a ipo and see how to demand graph changes

Application for 1 Lakh and above will corner more than 85% of all the shares available in retail section.This leads to a situation that investors who can invest less than a lakh (50% of total investor base) will have to share 15% of shares. In most of the cases this will lead to lottery based selection. Eventually these small investors will lose interest in this process (IPO/FPO) which will be dominated by a more affluent section. If this is the situation for large issues like Coal India (15,200 Cr) and Powergrid FPO (Rs 7440) , the deviation will be more pronounced in smaller issues of size which are more frequent to hit the streets.

Now this decision doesnt sound much investor friendly right ?? If SEBI's aim was to increase activeness of retail investors it should have maintained status quo in the max limit.

From Prem's

Friday, November 5, 2010

UnProductive Employee Unions

    Historically employee unions are formed with the aim to protect the rights of the employes and that too particular of those in the lower strata, whose voice normaly never reach the corridors of power. To achieve their aim, union leaders normaly have to confront the management in decision which are not employe friendly , call for protests ,strikes etc. But later these unions have deviated from their original path and now consider that their only work is to oppose the management on whatever decision they take.They have evolved similar to those in the category of oppostion parties in India. It might be due to their communist friends who are always in the oppostion bench ,barring couple of states. 
    Here lets take case of recent ipo of coal india and see how the employees were affected by sheer stupidity of the union leaders. As with any public sector company looking  for disinvestment , coal india too faced strict oppostion from the unions. But they couldnt defend their stand for long due to pressure from finance ministry and agreed for a ipo. Even though they couldn't stop the ipo they didnt stop opposing it. They ordered all their members to stay away from the ipo , as step to show their disaggrement. Lets see how foolish this decision have turned to be.
        This IPO was well received by investment community around the globe and based on subscription it turned out to be a block buster. There was demand for 15 times of share in offer ( ie 15 people were ready to buy a share in offer) .Retail segment was subscribed by 2.4 times. Some 15 Lakh retail investors applied for shares.But employes didnt take active part in it .Among the 3.97 Lakh employees ,only 25,000 applied for shares and employee portion was undersubscribed by 0.1 times. These 25,000 employees should have been from the middle/higher management of the company who dont mind about the union's decisions.
        Shares got listed and it moved from Rs232.75 to Rs340 on day one , a mind-blogging returns 46%. A employee who would have applied for 1 Lakh (the max he can apply) would have gained Rs46,000 on day 1. When 15 Lakh retail investors (including me) had gained around Rs15,000 and foreign investors by billions of dollars , the employees who have build up this company stands to gain nothing. Investment bankers (FII)in New york or London should be be enjoying a sparking Diwali whereas the poor employees searching for micro credit agents to fund their Diwali purchases. Rich gets richer and poor stays poor , but this time due to their foolish decision .

    Comming to the argument , these unions should leave back their age old communist policies which good to read in history books now rather than to follow it in principle. They should have used the collective argument power to get more incentives for employees. They could have asked for a 5% more discount on share price for employees than retail investors.  Most of 3.97 Lakh employes should have their monthly salary in the range of Rs10,000 .They cannot mop up 1 Lakh and start a demat account just for this . Union could have argued for special previalages by which a employe benefit trust can get all the shares allocated for them ,without paying upfront money , sold them in open market and redistribute the profits to all employees equally. Surely company management & SEBI would have wholeheartedly accept for such a demand. Such a move would have given Rs16,000 as bonus for each and every employee. Unions should start to embrace capitalism and find innovative methods to benifit their stake holders. In essential adapt to the changing (economic) climate are get ready to become extinct.

Thursday, November 4, 2010

My Home

From MyHome

I kept on postponing this writeup as it would be very lengthy one but now finally decided to pen it down. A old adage goes on to mention "Building a Home" and "Getting a marriage done" are the toughest jobs to accomplish.This might not be entirely true in current scenario ,where you can get everything done by outsourcing.But still these two items commends a lot of planning & management.The main reasons could be that these are jobs you execute very rarely and also it has high degree of dependence on external factors.
All this started a during late 2007 when my parents wanted me a build/buy a house.Their main aim was to suck out the liquidity from my current accounts so that i would have less to spend ( same reason why RBI increases CRR :) ). Moreover there is social stigma attached to home ownership.I decided to stick to my native town.It took almost six months ,around early 2008 , to zero down on the land to buy.
Land prices were on high side of my budget . One ground ( 2400 sqft) for quoting for 16 Lakhs [ Rs 666 per sq ft] in prime locations.Finally i chose a plot of 1500 sq for 5.6 Lakhs [ Rs 373 per sq ft]. 3 months back when i checked, it was quoting at 4.5 Lakhs. At that time i was not that interested as we have to cross a old unplanned settlement to reach that spot from the center of the town. But later i could see that for the price point i was comfortable , i could get only 10 KM from the center of the town.But this spot is barely 500 mts from the center.

View Prem's Home in a larger map

I have tagged my home in this map.You can see that its surrounded by paddy fields on one side and a irrigation canal which flows nearby.

So i decided to buy this plot.Another interesting factor of this plot is that its govt guide line values is 9 Lakhs .I had to register for this high value and pay tax for entire amount.I took a realty loan from SBI and they provided 80% of the guide line value.So i was able to cover the entire cost of land in the loan itself.
Interestingly this plot has appreciated to 9 Lakhs since then [ Rs 600 per sq ft] in a period of 2-3 years. But the prime area which was quoting Rs666/sq ft 3 years back are still around Rs700/sq ft.I feel that parcels of land which are cheap ( can be due to many reasons , like lying in the outskirts of city) tends to appreciate at a faster rate that what is quoting at a premium price.Hence if you wish to invest in reality go for outskirts for greater rate of return.

Next process is to get the approval for construction. For this we need to hire a Engineer ,prepare a plan for the home you are planning to build and get it approved from govt authorities. Ironically this wont be plan you will execute in 99.9% of the cases.This is because of some stringent govt rules regarding the buildup land and overall land available. The rule is that you have to leave 5 ft on adjacent sides and 10 ft on front and back.If you follow this rules a plot of 1500(30*50) has only 600 Sqft( 20*30) of buildup area..So what to do ??. Just get the approval according govt norms and build according to your wish and be ready to pay a token fine for the deviation.
The fine which i had to pay came around Rs300 for a 6 months period.

My plan as per govt norms comes around 1250 Sq.But my actual plan was around 2000 sqft. One issue which will raise because of underquoting the buildup area is that you will be able to get loans according to govt approved plan only.SBI was ready to value the construction cost as Rs1000 per Sq ft and offer loan of 85% of the total amount.There were able to sanction a loan for Rs10 Lakhs.

Next was the actual planning.This is the most critical phase as errors or suboptimal decisions made here will haunt you for ever. So spend as much time as possible by continuous review and brainstorming. Literally i should admit that i dont have creative skills or prior experience needed here. Luckily one of my friend , Sangeetha , had then recently finished the entire process of building home right from scratch . When i gave my plot sketch and my requirement , she gave outline design in a day. My plan was to have 3 BHK duplex model of 2000 sqft .To much of my surprise this plan remain the same(almost 95%), even though i tried many more possible combination for around 6 months. So better approach a right person. Another reason for spending 6 months is due the recession in West and its effects in India.Due to jittery around the layoffs i had to postponed start date for few months.Also the cost of building materials was coming down which provided a compelling reason to wait and watch.

Financialy my aim was to execute the plan with under Rs 1100 per Sq ft ( 22 Lakhs for 2000 sqft) and also be ready for a overshoot of 10% in budget. A Labour contract @ Rs150/Sqft was arranged with a contractor. According to this he will take care of arranging labour and he will be paid approx 3 Lakhs for the entire construction. We had similar deals for wood work , Plumbing & Electrical. Final cost came to around 25 Lakhs. Initial plan didn't include compoundwall , watertank , ornamental work etc. Considering all this it can be said that project did completed within budget.

Pie charts which represents various costs are given below. This doesn't include woodwork(cub boards) and final painting.

From MyHome

From MyHome

From MyHome

More photos can be seen in the following album