Bank IPOs: An investing checklist
By Equitymaster.com
The primary market (IPO) for equities seems to be witnessing a revival of sorts with the
stock markets going through a bullish phase. While this is a general behaviour that is
observed in periods of bullish stock markets, we would like investors to be cautious
regarding the decisions (in terms of IPOs) they take. This is because companies in
order to take advantage of the positive sentiment sometimes take retail investors for a
ride, and hence investors need to be extra careful regarding the same.
Public sector banks, off late, have been successful in tapping the primary markets. There
have been two IPOs already in 2003, with another one is scheduled in the next few days.
What should retail investors consider as far as bank IPOs are concerned. While in our
earlier article Check List for Investors we had addressed this topic, i.e. a checklist for
retail investors in more general terms, in this article we would like to enumerate the
checklist that investors need to focus on as far as Bank IPOs are concerned.
Does the retail investor easily understand the sector, its dynamics and its prospects?
Since we are discussing about the banking sector, the investor needs to first understand
the sector dynamics thoroughly before making any investment decision. A detailed article
on how the banking industry functions, has been carried by us. The current status as well
as the prospects of the industry has to be analysed well.
Is track record of the bank important?
The performance history of the bank is a very important factor that needs to be
considered when analyzing any company. The history indicates the strategies adopted by
the bank, its success or failures and whether it is a laggard or a leader. The financial
performance of the company indicates the effects of the decisions it has taken in the past.
It also indicates the financial health of the bank. The history of the bank should also be
analysed well enough to understand the position of the bank in the sector as a whole.
Further, in case of banks it is imperative that one looks in to the quality of assets (NPA
levels) that the bank has in its books. This will indicate whether the bank will be able to
survive in case of any sudden pullout by customers. This is because the bank is
responsible towards its depositors to ensure a good quality of assets, which will
essentially protect their interests.
The past should also be studied to analyse the performance of the banks and their
management. Management performance and corporate governance are key factors that
need to be looked in to, especially for banks, as they deal with a large quantum of retail
money and hence they are more accountable to the same. Transparency and disclosure
levels are other key areas that need to be looked in to. A bank that has been unable to
shield the depositors' monies, is unlikely to do justice to its shareholders funds.
Site bank ipo shttp://in.biz.yahoo.com/list/031014/21/28gea.html
How relevant is competition in case of banks?
Competition plays a key role in any sector. Competition is intense in the banking sector,
which in the Indian context is highly fragmented. Competition in the banking sector
determines the spreads that individual banks earn over their lending portfolios. When one
analyses competition in case of this sector, the emphasis has to be on a thorough analysis
of the bank's relative standing in the sector. One needs to analyse whether the bank is a
follower or a leader (as far as strategies are concerned) in the sector.
What role does management background play in the analysis?
Apart from all these factors the management standing and expertise of the bank is also an
important factor that needs to be looked into. Management and its composition in relation
to the promoter holding in the bank needs to be carefully looked into. The analysis of the
management is important, as one may be able to assess the probability of the bank
keeping to its targets, based on the management's capabilities. The assessment of the
management capabilities can be done only if one delves deeper in to the track record of
the bank, and the management's role in the same.
Where does the money go?
Investors need to know what is the stated objective of the bank as far as the IPO is
concerned. Banks need to raise capital for various reasons and one of the foremost among
them are for augmenting capital (for growing the quantum of business). An IPO will
augment the Tier-I capital of the bank, which will help the bank to do more business.
How do you put all the above in a snapshot?
The questions above will help the investor to assess the nature of the banking industry
and the bank's position and performance relative to competition. Investors now need to
look deeper in to what all this means for the stock price of the bank. The stock price or
the valuation of the bank is dependent on almost all the factors that have been mentioned
above. A detailed analysis of the bank's financial performance over the years would help
us compile certain key ratios relevant to the sector. These ratios when compared to that of
other banks will give us an idea of the relative financial standing of the bank among its
peers.
Once this is done we will be in a better position to try and arrive at a fair valuation for the
bank stock. This will give us an indication of the fairness of the IPO in terms of pricing
of the issue.
A lot of investors jump into the IPO bandwagon in a market bull run, hoping to make a
killing when the IPO lists, even if they understand that the concerned bank may not be a
worthwhile investment. The idea is that in a bull run, everything will fly, irrespective of
the fundamentals. Such a strategy seems to rely on the `bigger fool' theory. But one must
remember, this strategy could backfire. Research is the key to successful investing,
whether in a bull or a bear run.
http://www.blonnet.com/2006/09/21/stories/2006092104701500.htm
Stock Markets
Money & Banking - Investment Banking
Bankers impose more self-checks prior to IPOs
Shailesh Menon
Focus on sector-specific offerings for more credibility
Track record
Merchant bankers analyse the quality of management of the company and
viability of the offering to investors.
Stringent quality standards have forced lead managers to focus on issues
falling in profitable and promising sectors.
Mumbai , Sept. 20
Termed as an effort to save gullible investors from fly-by-night operators coming
out with IPOs, merchant bankers are imposing more self-checks before taking up
public issues.
Many have even begun focusing on sector-specific offerings to add quality and
credibility to their issue profile.
According to lead managers, stale offerings (that even include IPOs of
unprofitable companies) and issues "not made in good faith", lower the
credibility levels of merchant bankers. Several "hollow issues" in the past (mostly
in the mid and late 90s) have adversely affected their gradation and performance
track record, they say.
"The reputation of a lead manager is heavily dependent on the issue he
manages. Only a sound performance track record can make you want for
companies planning to come out with IPOs.
The whole idea is to dispirit fraudulent companies and unviable concerns from
entering the market," said Mr Girish Nadkarni, COO - Investment Banking &
Institutional Equity, IL&FS Investsmart Ltd.
Among several aspects and antecedents looked into, merchant bankers analyse
the quality of management of the company and viability of the offering to
investors.
Quality offerings
Stringent quality standards have forced lead managers to focus on issues falling
in profitable and promising sectors.
"We are focusing on IPOs from companies operating in emerging sectors like
food processing, agriculture, textiles and tourism and hospitality. With a focused
approach, we can come out with quality offerings that will be a good investment
option for investors," said Mr Ananta P. Sarma, Executive Vice-President & Head
- Investment Banking, IDBI Capital Market Services Ltd.
Lead managers have also begun focusing on sectors such as construction, auto
and auto-ancillary, real estate development and retailing.
Larger issue size
As part of its move to add more value to public offerings, several book runners
have decided to only manage issues having a considerable size. Many have
decided to focus only on issues of mid-cap size companies. A major reason for
this shift in strategy is the fact that only large-size issues impress institutional
buyers.
"Major lead managers have graduated from small offerings to large-sized IPOs.
The benchmark now is anything between Rs 100 crore and Rs 150 crore. These
limits will keep changing with markets and the economy growing bigger and
better," said Mr B. Madhuprasad, Vice-Chairman, Keynote Corporate Service Ltd.
Consequent to this, merchant bankers foresee an increase in the scope of private
equity funds and VC funds. These funds are expected to hold larger stakes in the
small-cap
http://www.blonnet.com/2006/01/25/stories/2006012500980600.htm
Banking - RBI & Other Central Banks
Markets - IPOs
Industry & Economy - Economic Offences
Banks' role in IPO scam — Risk control systems under RBI
scanner
Our Bureau
Mumbai , Jan. 24
THE Reserve Bank of India said it would assess whether banks were meeting the
Know Your Customer norms and other guidelines related to opening of accounts,
in the light of the recent IPO scam.
RBI would also examine the risk and control systems in the seven banks fined by
it to find out whether their managements had overlooked the irregularities, said
the RBI Governor, Dr Y.V. Reddy.
Addressing a press conference after announcing the Third Quarter of Annual
Statement of Monetary Policy for 2005-06, Dr Reddy said it was not a systemic
problem, but failure within the banks' internal inspection.
"We tell banks to have their systems and control in place and don't breathe down
their backs," said Dr Reddy.
RBI will also conduct an inquiry to see if any irregularity was reported and if RBI
officials overlooked them. This would also warrant appropriate action, Dr Reddy
said.
On January 23, RBI fined seven banks for their role in the recent IPO scam. It
also issued a directive stating that an account payee cheque should go only to
the account of the person named in the cheque and not any other.
This move was prompted by the modus operandi used by those involved in the
scam.
The banks had violated norms on KYC, breached prudent banking practices and
facilitated misuse of IPO finance to ineligible borrowers, said RBI in its press
release.
Dr Reddy said, "Instead of using account payee cheques under convenience for
contingencies, banks misused them."
After being informed of the irregularity by SEBI, RBI sent inspection teams to
these banks. The inspection revealed that 14 branches were involved in the
scam, Dr Reddy said.
RBI will also conduct an enquiry to see if any of these violations were brought to
their notice, Dr Reddy said.
As per the law, RBI is not permitted to impose penalty exceeding Rs 5 lakh per
violation, Dr Reddy said.
george.smith@timesgroup.com
MONDAY MUSINGS
20.07.2009
We may increase India investment allocation
Nomura wants to establish itself as a trustworthy financial institution
covering investment banking, equities, fixed income and asset management,
says deputy president and COO Takumi Shibata
UNTIL recently, no Japanese financial institution was able to make a
dent in the Indian markets despite several attempts over the years. That
changed after Nomura acquired Lehman Brothers’ business in Asia, the
Middle East and Europe in 2008. The company recently picked up a 35%
stake in LIC Mutual Fund — the seventh-largest MF in India. Takumi
Shibata, deputy president and COO of Nomura Holdings and Nomura
Securities, who played a key role in the Lehman acquisition, gives George
Smith Alexander the lowdown on Nomura’s plans to step up BPO
operations in the country and increase allocations of its funds for
investments into the equities market.
Govt puts contingency plans in place
THE canals are running low, forcing farmers like Mr Sandhu to turn to the tube
wells, for which power is supplied free of cost by the Punjab government. Only, the
state just doesn’t have any more power to distribute, free or paid for. One of the
‘Temples of Modern India’, the Bhakra Beas Dam, first rang the alarm bells by issuing
a shut-down warning as June trickled away in drizzles. Extreme temperatures
brought down water levels in the dam by 90 feet, dropping by a foot a day and
forcing the state government to undertake emergency measures: a blanket ban on
air-conditioning in all government offices, including the chief minister’s. “I was never
really bothered about the monsoon. But this year, I have spent more than Rs 50,000
on diesel alone to ensure water for the paddy crop,” Mr Sandhu says. He is the first
link in a chain that is threatening to dry up India’s hopes of seeing the green shoots
of economic recovery grow into a GDP expansion of over 7% this fiscal.
Service tax to add to woes of coastal and
inland waterways
20.07.2009
OUR SHIPPING BUREAU MUMBAI 19 JULY
If one go by the demands placed before the government by the shipping industry,
which is trying to stay afloat in the financial downturn plaguing sea trade across the
world, the year's Budget could be said to have turned a deaf ear towards Indian
shipowners and shipping industry. But, according to industry circles, what was least
expected from the Budget was inclusion of coastal shipping and inland waterways
under service tax net, as the segments were witnessing promising developments
under the tutelage of earlier shipping ministry.
The fledging sector has been making efforts to align itself with mainstream
developments, thanks to the coming in of many state-level ports and enabling
legislations like riversea regulation from the directorate general of shipping. In such
a context, coastal and inland waterways operators feel that the new tax could prove
fatal to many of their colleagues.
21.07.2009
FIIs may get more play in govt paper
G-Sec Investment Cap May Be Raised As Govt Tries To Ensure Its
Borrowings Don’t Dry Up Liquidity
MK Venu & Rohini Singh ET NOW
THE finance ministry and Reserve Bank of India (RBI) are readying measures to
improve liquidity in the system and mute talk of the Centre’s massive borrowing
programme inflating government bond yields.
As the first step, the investment cap in government securities (G-Secs) by foreign
portfolio investors, or FIIs, is likely to be raised, an official privy to the move said.
The current limit for FII investment in government securities is $6.5 billion while for
corporate debt, it is $15 billion. FIIs are close to exhausting their investment limits in
G-Secs while there is plenty of room for such inflows in corporate debt.
“Once global debt flows resume, global investors may find government paper
attractive. The overall investment ceiling in G-Secs will be relaxed after the current
limit is breached,” said the official, who asked not to be named.
NSE weighs listing global ETFs on itself
Deeptha Rajkumar MUMBAI
THE National Stock Exchange (NSE) is toying with the idea of listing global exchange
traded funds (ETFs) on the bourse. Market watchers see this move as part of the
exchange’s efforts to increase its bouquet of products. Global ETFs are expected to
be favoured by high net worth individuals and wealth management firms, looking for
portfolio diversification.
When contacted, NSE officials refused to comment.
To begin with, the exchange may allow listing of ETFs of global asset management
companies, which also have operations in India, said a person familiar with the
development.
For instance, a fund like BlackRock, which manages an India ETF listed on NYSE,
could (hypothetically) have a US ETF listed on NSE. This way an Indian investor could
take exposure to US markets, without investing directly in that market.
Links
21.07.2009 www.mcx-
sxcom
Bond yields rise, Re gains 54 ps
Our Bureau MUMBAI
GOVERNMENT bond yields rose on Monday, ahead of Friday’s Rs 12,000-
crore bond auction. The benchmark 10-year yield rose eight basis points
from its previous close to trade at 6.91%, as traders sold securities to free
up cash for the next auction. When yields rise, prices fall.
Last week, RBI announced that out of the next 10 auctions, seven will
raise Rs 12,000 crore for the government while there will be three other
auctions of Rs 11,000 crore, Rs 8,000 crore and Rs 7,000 crore each. This
week, the government will sell securities worth Rs 12,000 crore.
“Despite the borrowing programme being 1.5 times that of last year and
3 times of FY08, we expect yields to remain range-bound with the 10-year
benchmark likely to be capped at 7.5%,” said
22.07.09
Bulls take a break, Sensex sheds 129 in
choppy trade
Our Bureau MUMBAI
22.07.2009
EQUITY benchmarks ended weak on Tuesday in choppy trade, mirroring the
uncertain trend in overseas markets. Concerns over the scanty rainfall across the
country, which will delay the revival of economic growth, also resulted in indices
falling the most in the past six sessions.
BSE’s 30-share Sensex closed at 15062.49, down 128.52 points, or 0.85%. NSE’s
50-share Nifty ended at 4469.10, down 33.15 points, or 0.74%. The trend in the
broader market was divided, with losers edging past gainers 1343: 1289 on BSE.
US markets opened higher, but gains were capped, even as America’s Federal
Reserve chairman Ben Bernanke said the outlook for the world’s largest economy
appears to be improving. He also signalled that interest rates would be kept intact till
the economic situation improved
Sebi to do away with no-delivery period
22.07.2009
Our Bureau MUMBAI
MARKET regulator Sebi has decided to fully do away with the system of no-delivery
period — the duration prior to the record date, or book closure, when delivery of
listed shares does not happen — for all corporate actions. This is following the
complete shift in ownership of shares from physical to the demat form.
In the no-delivery period, shares can be traded, but are not transferred from one
holder to another. The first day of the no-delivery period is the ex-date and the buyer
of the shares on or after the ex-date will not be eligible for benefits of the corporate
action such as bonus, rights shares and dividend. The trades are settled only after
this period. This system was relevant when delivery of shares was done in a physical
format, through certificates.
The share certificates had to be delivered to the registrar of companies before the
book closure so that investors get the bonus, rights shares or dividend. Now, with
shares being held in the demat format, the concept of no-delivery period has lost
significance.
22.07.09
Power cos draw up money raising plans
Adani Power Places 36 M Shares To Raise Rs 375 Cr Ahead Of IPO, NHPC
To Raise Rs 1,680 Cr
Apurv Gupta MUMBAI
ENCOURAGED by the current stability in stock market and the opportunities that an
electricity-starved nation presents, power producers are lining up plans to raise
thousands of crores through share issues over the next couple of months.
Adani Power has completed placing with institutional investors some 36 million
shares to raise Rs 375 crore ahead of an initial public offering (IPO) of 300 million
shares while NHPC said last week that it would be raising Rs 1,680 crore in an IPO
likely next month.
Indiabulls Power, Sterlite Energy and JSW Energy are among those looking to sell
shares through IPOs and pre-IPO placements, said bankers aware of these
companies’ plans.
Rights issue market gets back its rhythm
23.07.09
Merchant Bankers Hope Large-Sized Offers May Soon Hit The Market To
Take Advantage Of Improved Sentiment
Vijay Gurav MUMBAI
THE rights issue market is showing early signs of revival with a few recent offers
getting fully subscribed. Merchant bankers say this response may encourage many
other companies to raise funds through the rights issue route. Many companies had
deferred their fund raising plans, following the failure of some major rights issues,
amid last year’s stock market turmoil
MFs give arbitrage funds a break, stop fresh
inflows
23.07.09
Inadequate Arbitrage Opportunities Trigger Move
Nishanth Vasudevan MUMBAI
AT A time when domestic mutual funds continue to aggressively scramble for more
money to boost their asset base, they have made an exception for one category —
arbitrage funds. Several top arbitrage schemes of mutual funds have stopped
accepting fresh money from investors, as lack of sufficient arbitrage opportunities
between the cash and futures markets have made it tedious for them to generate
competitive returns to the existing unitholders itself.
23.07.09
Bond yields dip, Re falls to 48.51
Our Bureau MUMBAI
GOVERNMENT bond yields ended lower ahead of a buyback of securities by RBI on
Thursday, even as volumes rose. Traders are taking fresh positions after two straight
days of profit booking. The government will buy bonds up to Rs 6,000 crore from
traders on Thursday.
24.07.09
Dividend-paying cos seen scoring over rest
of the pack
Cos With Consistent Payout History Offer Better Returns In Past 3 Yrs
Nishanth Vasudevan MUMBAI
CONVENTIONAL wisdom says stocks of companies with consistent dividend-paying
record are better investments over the long run. While annual stock movements of
dividend-paying companies from 1996 to 2005 have contradicted such theories, the
last three years have seen these shares perform better or losing lesser, albeit
marginally, than those which do not, according to an ICICI Securities study, which
picked stocks on the BSE-100 Index for the analysis.
24.07.09
Crisil upgrades 8 PSBs as govt promises
funds
Our Bureau MUMBAI
RATING agency Crisil has upgraded eight public sector banks, following the
government’s intent to retain a majority stake in the lenders and ensure they remain
well capitalised. Following the upgrades, these banks will be in a position to negotiate
better rates on the capital they raise through bonds.
Bank of India and Union Bank of India have now become AAA (triple A) rated
companies upgraded from AA+ earlier. Triple A is the highest level of credit rating
assigned by Crisil. Other two, Canara Bank and Corporation Bank, which already
enjoyed a triple A rating, have had their outlook revised to stable from negative.
In addition to this six more banks, Allahabad Bank, Bank of Maharashtra, Dena
Bank, IDBI Bank, Punjab & Sind and UCO Bank have had their ratings upgraded or
their rating outlook revised for the better.
24.07.09
Bonds end flat, Re strengthens to 48.47
Our Bureau MUMBAI
GOVERNMENT bonds ended flat after RBI bought back lesser securities than
indicated earlier. However, the yields, at which securities were bought back, were in
line with market expectations. All eyes are now on RBI’s credit policy review meeting
next week where the central bank is expected to keep rates steady, but lower its
credit and growth targets for banks.
RBI on Thursday bought back only Rs 3,600 crore worth of bonds, against Rs 6,000
crore it said it was to buy originally. It said it had bought the five-year benchmark
bond at 6.62% and papers maturing in 2020 and 2032 at 7.02% and 7.80%,
respectively. Earlier in the session, yields were trading lower with traders taking fresh
positions after a few days of profit booking. But yields rose after auction results
came in.
