The allegation by aMap that WPP agencies were not using its rating system has brought the rating issue back to the fore
TV audience measurement in India has had a chequered history. First, there was the migration from diaries to electronic people meters, then the rivalry between TAM & INTAM among other things. In 2004, aMap was launched to challenge the stranglehold of TAM, and another debate arose on daily ratings versus weekly ratings. Now aMap claims that it reaches 6,000 homes versus TAM’s 5,000. So, every few months there is a ruckus, then the dust settles. The vital issues, however, continue to be swept under the carpet.
The TV advertising industry has grown to about Rs 6,500 crore per annum — a burn rate of about Rs 18 crore a day. A lot of this money is going up in smoke, thanks to the fact that the current measurement system does not address three major issues. One, the TV viewing audience has swelled with non-metro urban areas and rural areas registering huge growth. Metros too have seen multiple TV ownership within up-market urban households going up. This has led to the most common complaint by media agencies and channel owners about inadequate geographic representation.
Two, more channels, especially those with niche content, have been launched. Viewership studies have often been accused of not having adequate representation of audiences watching niche channels. The demand for an enhanced panel for measuring viewership of niche channels and audiences has been accepted as a valid one. However, three years have gone by and there has been no concrete action. The sheer volume of an increasingly heterogeneous audience demands better representation across demographic profiles. For instance, two channels of the same genre could have a completely different audience profile. The bottomline: much more is required from viewership data if it is to aid decisions on changes in content or help fine tune advertiser targeting of TV audiences.
The third issue is the change in access modes. From TV antennas to the cablewallah to conditional access systems (CAS), measurement systems need to build in the ability to cope with change. Till date, we have not seen any data for direct-to-home (DTH) households, where the current universe has crossed a million homes. If inadequate sample size was an issue in a CAS-less scenario, it is likely to get worse when the dust over DTH, CAS and free-access settles down.
Most of these issues are basic and have been brought up in the past. However, even after five years of debate, little has been done to address them. Is this because we were operating in a monopolistic market (one service provider and no competition)? Hardware costs have come down but are not reflected in the cost or expansion of the service. Investments have been amortised, margins have improved, but the service continues to limp year after year. All that changes is the degree of dissatisfaction among users.
The past two years have seen the launch of a competitive service. Broadcasters, agencies and advertisers agree that TAM has not delivered the best solutions. Yet, despite there being a competitive offering, there are few takers. The media business is getting what it deserves, an inadequate measurement system which mirrors the chalta hai (blasé) attitude of the key stakeholders. With the latest noise, there are reports of a joint industry body (JIB) meeting on the issue. If that is correct, then, things are finally moving. Whether or not they reach a logical conclusion, only time will tell.
In less than three years since the acquisition, Reliance Communications has turned around Flag Telecom. It now wants to leverage Flag’s assets to fulfil its global aspirations. A little less than three years ago, when Reliance Infocomm (now Reliance Communications) acquired Flag Telecom, a distressed asset, for $207 million, opinion was divided. Would it be Reliance’s ticket to the global markets or was it an overpriced buy in a sector plagued by excess capacity? Though Flag had emerged from Chapter 11 bankruptcy proceedings, it had been on the block for over a year before Reliance picked it up. And it was still making huge losses — in the six months ending June 2003, the company made losses to the tune of $41 million.
Cut to 2006. Flag has broken even (in the quarter ending September 2006) and is largely responsible for the five-fold jump in the Ebidta margins of Reliance’s global business in the past six quarters (from 4.7 per cent in June 2005 to 24.3 per cent in September 2006). Look at it this way — 25 per cent of Reliance Communications’ revenues and Ebidta margins come from its global business, and Flag is a major contributor. Another 25 per cent comes from Reliance’s enterprise business, in which Flag is the backbone for all voice and data traffic out of India. Since its listing in March, Reliance’s market cap has gone up exponentially, from Rs 35,575 crore to over Rs 85,000 crore — Flag is seen to be one of the key drivers for its valuation. Between January and September, Flag Telecom has sold bandwidth to the tune of $450 million. “Flag is on an expansion path,” says Punit Garg, CEO, Flag Telecom. Now that it has put Flag back on its feet, Reliance wants to leverage Flag’s assets to grow its global operations.
Bridging The Missing Links
With the acquisition of Flag, Reliance owned 50,000 km of submarine cables criss-crossing the globe. At the time, there was a profusion of submarine cables, especially in the trans-Atlantic and trans-Pacific regions. Also, if Reliance focused on providing connectivity to the US — where the maximum traffic comes from — it would have to take on global giants like AT&T and British Telecom on their home turf.
This, then, is Reliance’s strategy for Flag: by targeting untapped but growing markets like the Middle East and Africa, Reliance wants to position itself as a key player in these regions. But other telecom providers are also eyeing these lucrative markets. VSNL is looking at tapping the India-Europe traffic as well as the Asian markets, and has announced two consortium cables costing $600 million. The two cables — one linking India and Europe, the other linking Singapore, Hong Kong and Japan — are expected to be lit in 2008. Reliance’s edge over rivals is that it acquired this network at a throwaway price. Compare the cost of acquisition with how much Reliance spent on the Falcon submarine cable system. Reliance bought over 50,000 km of submarine cable for $207 million, and it spent $400 million on building the 11,600-km long Falcon cable system in September, to leverage Flag’s assets. The 2.56 terabit Falcon cable system is integrated with the Flag network, and runs through 11 countries, mostly in the Gulf region and North Africa. With 14 landing stations along the way, Falcon’s aim is to provide connectivity to markets, which are either unconnected by submarine cables (like Maldives, which has so far been connected only by satellite) or under a monopolistic telecom regime.
In Saudi Arabia, it has two landing stations on the Falcon network. For one, it has tied up with Saudi Telecom, the incumbent operator. For the other, it tied up with Etihad-Etisalat, the challenging operator. So, between the two, Reliance has a 100 per cent market share in the region, for international connectivity. Flag is also keen to tap key Asian markets, especially Japan. It has direct connectivity to Taiwan, South Korea and China. Flag claims it has already sold as much as 50 per cent of lit capacity on Falcon. Reliance has been pumping money into upgrading the Flag Europe Asia (FEA) leg of the Flag cable system. In May, Flag won the arbitration case against VSNL, which allowed it to upgrade capacity on the FEA system and lease it to international telecom entities.
Global Talent For Global Business
With Flag’s assets, Reliance is keen to move into new segments like enterprise and services. To run Flag as a global company, Garg thought it was crucial that the team should comprise skilled talent, with experience in handling large global operations — typically from the global carrier giants such as Verizon and Sprint. To head its American operations, Flag hired Mike Sauer, former head of global business at MCI Telecommunications Corporation. For the Europe and Middle East operations, Garg hired Mark Heraghty, former CEO of Cable and Wireless Europe. He got Bhaskar Thyagarajan from Sprint-Nextel to be vice-president (marketing) and to head the products team in India. For the marketing and strategy head, Garg went after Jarrett Appleby, head (strategy) of MCI (Verizon). “It took me more than six months to persuade him,” says Garg. Flag has also increased its workforce by 15 per cent post-acquisition.
A second reason why India wants some changes is that it suspects that Mauritius is providing an easy way for some less scrupulous Indian businesses to ‘round trip’ their money and bring it back into India through this route. Round tripping occurs when capital that originates in one country, say, India, goes through another country, usually an offshore tax haven, and then re-enters the first country (India) as ‘foreign’ investment. A senior investigation wing official explains the possible modus operandi of this round tripping. “Money leaves India through inflation of exports or imports or for some other ostensible business purpose or through the hawala route. It goes to another country and comes back into India through the Mauritius route. It is not easy to track down the money trail.”
There is no real evidence of this, but it has been alleged time and again by the authorities that insider trading is also carried out through this route, with promoters of companies buying shares of their own companies through a Mauritian GBC-1 and then selling it to make profits. The profits moreover, are free of capital gains tax due to the treaty. Since none of the Indian authorities — neither the finance ministry, the RBI or Sebi — know who the real owner of the GBC-1 is, there is no way of knowing who is up to what. “There has been evidence of misuse and these we feel are increasing,” says a senior government official. Many leading Indian companies have been receiving — in some cases, fairly large investments through the Mauritian route (see ‘Mauritian Money Flows Into Some Large Indian Firms’). Of course, there is nothing illegal in this. But the authorities allege that it is hard to believe that the promoters of these companies don’t know who is holding such substantial investments in their company.
The Left Front led by Rajya Sabha member Tapan Sen has been putting increasing pressure on the government to look into the misuse of the treaty. In letters dated 25 May and 4 August 2006 to finance minister P. Chidambaram, Sen argues that the National Common Minimum Programme (NCMP) commits the government to stop misuse of double taxation treaties. He argues that the NCMP stipulates that the “vulnerability of the financial system to the flow of speculative capital will be reduced”. He points to a CAG audit which says that income of FIIs and their sub accounts engaged in the business of investment in stock markets was being erroneously categorised as capital gains and being exempted from tax by routinely invoking DTA agreements.
The entire Mauritian DTAC was questioned some years ago in what was known as the ‘Azadi Bachao Andolan’. The matter was taken to court but the Supreme Court had upheld the treaty and its validity. From 1993 and in the JPC report in 2002, questions of misuse of the treaty have been raised time and again, but despite lots of loud noises no concrete steps have been taken by the various governments in power to check misuse.
Finally, there is the question of revenue loss to India. As the volume of transactions through Mauritius increases exponentially, the revenue loss is also turning out to be substantial because of the taxes being avoided. It has been estimated by the Indian side that the notional tax loss on the profits of just 20 such companies is Rs 140 crore in one year. “Now multiply this by the number of companies and every year and the quantum jumps dramatically,” says an official. He argues that since more and more money is now being routed through Mauritius, this loss is rising. According to Indian finance ministry sources, the total gain to Mauritius on account of the treaty works to only Rs 100 crore a year in terms of licence fees, renewal fees and so on, and only around 1,000 people are employed directly in the management companies. “It is evident that the loss of revenue on account of just 20 companies is more for India than the total gain to the Mauritian economy,” says a source. That alone, they argue, is grounds enough for India to ask for substantive modification.
Of course, Mauritius’ problem with that argument is that even the amount gained by its economy through licence fees and other transactions is substantial revenue for a tiny country like it. But more than the actual financial gain, it would mean losing a carefully built up new sector at a time, when its staple money earners — sugar and textiles — are on a shaky wicket
Easier Said Than Done
Modifying the treaty on the lines that the Indian government may want is easier said than done, simply because the resistance to change isn’t just from the Mauritian side. Besides, the economic, political and diplomatic relationship between India and Mauritius, there is a ‘small army’ of people within India which has a great interest in seeing that the treaty is not tampered with. “To start with, the Indian corporate sector benefits hugely from this loophole,” explains a finance ministry official. All examples of what they call misuse — though it’s not illegal — involve well known Indian business houses. Virtually all the leading foreign banks are custodians of the funds that flow in and out of the country, the volume of which is rising every year. Data collected from just four custodian foreign banks shows that there was a total inflow of $38,260 million during a two-year period (April 2004-March 2006) and a total outflow of $27,992 million.
Most of the top consultancy firms (E&Y, KPMG, PWC), for instance, advise their foreign clients who look at investing into India to come through the Mauritius route. There are several law firms in India, who advise the clients on all legal aspects. “When a client wants to come into India, depending on the nature of the investment, he is advised to come through Mauritius as that will be to his best tax advantage. The entire design and structuring of the company is done keeping this in mind,” explains a source in one of the legal firms. “There will be many more companies and individuals lobbying against any changes to the treaty in India than there will be in Mauritius,” says an executive in one of the top consultancy firms in India. He argues that substantive changes to the treaty will impact the Indian stockmarket adversely.
Supporters of the treaty argue that India needs to clean up its own act — either make it easier for investors to invest directly or routes like this one will persist. Says a partner in one of the top consultancy firms in India: “The government must make it easier to invest directly to discourage people from using these routes.” His point is that if it is not Mauritius, it will be Cyprus or somewhere else. For instance, he points out, the high dividend tax (33 per cent) on money repatriated makes it very unattractive for Indian businesses to repatriate dividends into India. “The companies simply park it overseas for other global business,” he says.
Indian PSU and government officials in Mauritius say that cases of misuse have, in fact, reduced. “In the 1990s, it was much, much easier to set up the GBC-1s and very less information was required by the regulatory authorities. It is far more stringent now,” says an Indian PSU official in Port Louis. Couldip Lala, director of IFS, one of the biggest management companies in Mauritius, argues that much of the talk that none of these companies have much Mauritian presence is untrue. Sure, there are Mauritian directors who serve in hundreds of GBC-1s, but then there is no reason why a person should not sit on the board of several companies if the nature of the companies allows him to handle many companies simultaneously.
“It is the time you invest not the numbers that are relevant. If it is a passive single investment with 2-3 board meetings in a year, it is not onerous. It is different from being on the board of a large manufacturing company,” he argues. Lala’s company has four directors and all the GBC-1s (around 500 are live) are divided among the four. Since two directors are required for each company’s board, each director is on the board of 250 companies. According to certain sources in Mauritius, one of the big management companies in Mauritius (these are owned and run by local Mauritians in most cases) provided directorships to 1,205 GBC-1s and one director served on the board of 776 GBC-1s! The fact that this is in contradiction to the established global norms of corporate governance doesn’t bother Lala or anyone else in Mauritius in particular, because as they see it, the very nature of the companies differs.
Lala also argues that “substance” depends on the type of operations a company undertakes. “Take an Indian example. A Tata Motors and a Tata Holding will have very different infrastructure, staff, etc. The holding company, which decides where to invest how much may not need much more than just a board and some secretarial services, whereas the manufacturing company will have huge infrastructure and staff. The nature of the business conducted by many of the GBC-1s do not require them to have this kind of staff or infrastructure,” Lala explains. His point is that one can’t have employees, offices and a set-up when it is not needed.
Lala says that many Indian companies are investing through Mauritius in other countries. The Mahindra group, according to him, is investing into China through Mauritius as the treaty between India and China is less favourable than the one between Mauritius and China. “Treaty shopping is certainly not illegal and investors all over the world choose the best jurisdiction to invest through. The idea is to structure your investment in such a way that you maximise your returns and that is legitimate. The only question one can ask is whether treaty shopping is fair,” he says.
Mauritian management company officials say that some other countries make it even easier to set up offshore companies. “There is no regulation or equivalent of the FSC in many other countries with whom India has such treaties,” points out Anil R. Ballah, advisor, Abacus Management Solutions, who has worked closely with many management companies in Mauritius. He argues that Mauritius has checks and balances which ensure that the money coming in is not drug or terrorism funds, something that many other tax havens don’t bother with. Their point is that management companies, FSC and banks in Mauritius do their best to verify the ownership and source of funds, but that may not be possible in cases where there is malafide intent.
While that may be true, the Indian government says it is trying to plug all such legal loopholes, so that whether there is malafide intent or not, the system becomes more transparent. A joint working group has been set up between India and Mauritius to resolve this problem and, by the end of the year, some specific proposals may be on the table. Though political considerations and hectic lobbying by interests in India are likely to prevail over revenue and other considerations, any radical changes to the treaty will be like a small tsunami for this beautiful island nation.
It has no office, no staff, not even a nameplate. If you try and locate the companies that are investing millions of dollars into the Indian stockmarket through Mauritius, you simply can’t find them. That’s because the GBC-1 companies exist only in the files of the management companies, who provide them all services after they help them start operations.
These management companies provide secretaries, staff, chartered accountants and ‘nominee directors’ to the GBC-1, the last being a pre-requisite for setting up such companies. These directors lend their name as they are ‘supposedly’ participating in board meetings of hundreds of companies. The board meetings are held telephonically with only the Mauritian directors present. In effect, all investment decisions are taken by individuals, who are not resident in Mauritius. Says a senior Indian government source: “If that’s not shell, what is? It’s evident that these companies are a conduit for routing investments from all over the world.”
Setting up these companies in Mauritius is fairly easy. All it needs is one shareholder and one director. The companies aren’t allowed to hold immovable property, cannot invest in securities listed on the stock exchange of Mauritius and cannot transact with the residents either, unless authorised to do so. It can open and maintain a bank account in foreign currency only. “The companies are there for one purpose and one purpose alone,” says an official. Moreover, under the Mauritius income tax law, such a company has to pay no tax on capital gains and interest income.
Mauritian authorities argue that these companies are not shell. “We have done everything to ensure substance. We can look at ways of increasing substance”, says FSC chairman Milan J. Meetarbhan (see interview on page 38)). His argument is that what Mauritius offers is way better than many of the other tax havens provide and several jurisdictions are very lax with their laws. But the Indian government doesn’t buy this argument. Their point is that either there is substance or there isn’t. “How can one increase substance? Either there is substance or there is no substance. There is no question of increasing substance,” says an official.
Asia Cryo-Cell could radically transform India’s clinical research landscape with its public stem cell registry As the creator of Lifecell, India’s first private stem cell bank, one would expect an aura of excitement at Asia Cryo-Cell. A visit to their lab in Keelakottaiyur near Chennai, where the company has its cord blood stem cell bank, dispels this notion. The scientists at the lab take a cautious line on what they say.
Despite ‘harvesting’ stem cells from the umbilical cord, rather than the controversial embryonic mode, they steer clear of any discussion on why the international regulatory bodies still do not permit the extraction of stem cells from any fertile source. This caution, however, is not hindering its ambitious plan to start a public stem cell bank.
Asia Cryo-Cell wants to be the first to create a registry of stem cells in India. Any hospital in the world will then be able to access this public bank to buy stem cells. Considering that a vial of these precious cells cost as much as $50,000, this is big business.
“Unless a public stem cell bank can create a large repository of over 20,000 entries, it would not make sense,” says V.R. Chandramouli, CEO, Asia Cryo-Cell. Its private stem cell bank has over 4,200 donors, but the cells are the donors’ private property and can be used for treating only their kith and kin.
The other major challenge is creating trust — getting people from all walks of life to voluntarily give samples. Even though Asia Cryo-Cell was founded by Abhaya Kumar, the man behind the $100-million Shasun Drugs and Chemicals, and has R. Thyagarajan, founder of the Rs 6,000-crore Sriram Group, as chairman, it is open to the idea of bringing in bigger names. To this end, Chandramouli and his team are entering into joint ventures with like-minded institutions globally.
One big collaboration is with Hygiea, a Japanese research organisation. It will work on therapies for amyotrophic lateral sclerosis (ALS), liver disorders and paralytic stroke. Asia Cryo-Cell will also work with US-based Senaron for basic and clinical research in stem cell-based therapies. While most of these plans are still on paper, Chandramouli is confident that his company will grow to a Rs 100-crore firm by 2009.
The company hopes to kickstart Asia Cryo-Cell Malaysia by April 2007 to address the markets in Indonesia, the Philippines, Singapore and Bangladesh. Working with KPJ Hospitals, Malaysia, it plans to take over a private stem cell bank there and create a public bank on this base. A cord blood collection centre will also be set up in Dubai to cater to the large pool of NRIs who wish to save stem cells in India.
While attempts at global technical collaborations are on, Asia Cryo-Cell has already found some financers for its plans. “Some major venture capital firms have shown interest,” says Chandramouli. He hopes to make an announcement in this regard in the next three weeks or so.
This is where we start sharing what we have learnt over the last few years. We will share our learnings from the Stock Market and what we think is a reasonable approach to investment & trading without taking too much risk. While we are sure that this works well, we understand that many might not agree with our approach (at least not entirely so). Some may want to be more risk taking, some might want less, we can only claim to have suggested a middle path.
We request you to keep an open mind while reading and understand what we are sharing, and then decide which are the actions that you might want to adopt and which are the ones you want to steer clear of. Remember – there is no single style of investing successfully in the Stock Market. The various people who have been successful and their varying backgrounds and styles are testimony to the fact.
Before you get into the Stock Market, we suggest that as a preparation you need to spend some time getting used to what it feels like. Maybe a week or two before you take the plunge. We think the following 2 steps are very useful ways of getting a FEEL!
1. Spend some time getting used to the Stock Market – Try and keep some time aside every day (min 30 minutes) to watch CNBC TV18 or NDTV Profit or CNBC Awaaz (Hindi). Try to figure out what is going on with the help of the Knowledge gained in the previous Chapters. Watch the SENSEX and the NIFTY go up or down and what the experts and analysts think is happening. Learn which companies are moving up and down and by how much. Listen to the possible reasons being assigned to these movements. Watch Technical Analysts being asked for their Analysis on various companies and see how they make their predictions. We feel that this initial step is very important for anyone entering the Stock Market. Not only does it get you acquainted with the terms you have read about so far, it also gets you a feel of what REAL LIFE market looks like. At this stage you might find yourself referring to this book time and again to look up the terms discussed earlier. Don’t hold back, refer to this book as many times as required so that you get totally used to these terms and start remembering what they mean and refer to.
2. Create a Dummy Portfolio on Equity Master or Money Control. There are websites out there that let you create Portfolios. A Portfolio is nothing but a listing of all your Shares – which company, how many shares, when you bought it, at what price you bought it and so on. Decide an amount you would like to invest in total (say ‘X’) and also decide on any 10 companies that you like at the moment – see what their current prices are create a Hypothetical Portfolio with each Share worth approx 10% of ‘X’. Then watch for movement on these Stocks. As the market fluctuates, these websites will let you watch how your Portfolio is doing and whether you are making money or losing money overall, and also how you are doing that particular day. This is an immensely useful exercise and you will immediately find your emotions and thoughts kicking in as you see some of the Stocks doing well (making money for you) and some which are not. This is what will happen when you actually put your money in (though you will probably feel things more strongly then), so a week or two spent watching a Hypothetical Portfolio can be immensely useful. Two websites that let you maintain Hypothetical Portfolios are:
Once you have gone through the above mentioned preparatory exercises, go ahead and create a list of company whose stocks you would like to buy. You would obviously have a budget, don’t worry if your budget is small – the idea is to learn at this stage. Break your budget down into stocks of 3-4 companies. Decide on a broker, online or otherwise, get an account opened, and purchase your shares! Do not worry if things do not go very well in the beginning, allow yourself time to learn.
Now that you have taken the steps to start investing in the Stock Market, here are what we think are 3 Best Practices to Safe and Profitable Investing in Securities:
1. Buy on information, not on gut.
Though hard to follow all the time, the safest investors are the ones who always make sure they have information about a company they are buying into. Even if they have a gut feel about a small company or a Mid Cap Stock that has been doing very well, they make sure that they do some research about future potential of the company. Once they are sure that fundamentally the company has good numbers to show, they might want to buy into it, but at much lesser risk. Make your investments safer by not buying on impulses.
2. Something you cannot know right in the beginning,
but will learn once you invest is your own basic attitude to investment. There are Short Term, Middle Term and Long Term investors. Again, there is no fixed rule on which is the best, there are enough success stories of people in each investment duration. The important thing is to gauge and figure out what your own tendencies are and then stick to that. Some people are content in keeping stocks for a long time and get restless if asked to sell too soon. Others get restless if asked to hold for too long, they have the desire to book profits as soon as certain personal targets for the stock are met. Listening to brokers and analysts about what your tendency should be towards investment durations will not help if it is not in sync with your own attitude, it will just create restlessness. We urge you to decide in the first 6-12 months what your inclinations are and follow that to book short-term gains or to invest in the long term. We find that a big percentage of successful investors are clear about what they feel is a good duration to hold the stock and then stick to their own style.
3. Stop trying to figure out the Peaks and the Nadirs of the market.
Nobody has been able to do that consistently and we doubt anybody ever will. So if you think that the market is going high and your stocks have given you decent returns, but that there is further possibility of the stock doing well, a good strategy is to sell little at a time and keep selling, as the stock keeps moving up. That way you do not have to predict the peak, and we doubt if anyone can. Similarly if markets go down and you think a particular stock might be a good buy, but you are not sure whether markets will go down further, you could buy a little and then proceed to keep buying more if the market goes down further, that way you would not have to predict when the market is going to hit its bottom.
We are sure that if these 3 Best Practices are followed, you will have a successful investment portfolio within a short span of time. There are people who are unsuccessful investors for a variety of reasons. Do not let them dissuade you from giving this a try and end up missing a big opportunity in life. Remember the ultimate truth is that in the Stock Market – profits made by you are not someone else’s losses. They are profits actually created by the good performance of the company you have invested in. It is wealth generated! So keep yourself tuned in to the Financial Market and you will soon find yourself learning and enjoying the excitement. We wish you all the best on your Financial Journey ahead!
All brokers are also big information houses themselves, as far information about the Stock Market is concerned. The Brokerage firms covered in Chapter 7 (or anyone else that you work with) could keep you occupied with a lot of information, predictions, forecasts and bulletins for a lot of your time. These would cover information required to buy or sell shares, debentures (or bonds) or derivatives (Futures and Options). And all this information could make its way to you through Investment Newsletters, Emails or even SMS, depending on which brokerage firm you decide to work with and the agreement you have with them.
However – apart from your own Broker, there are other sources of information (paid or otherwise) that you should explore. We would like to list a few of the options available for you. We figure that the more the sources of information, the greater the chances of staying away from absolute speculation. So here goes!
The most popular TV channels covering happenings in the Indian Market would be CNBC TV18, Awaaz (Hindi) and NDTV Profit. These channels are pretty much dedicated to covering the Stock Market round the clock and also other news that could affect the prices of one of more companies. These would keep you updated not only about what is happening to most of the companies listing on the Exchange, but also statements by The Finance Ministry, the Governor of RBI, the SEBI Chairman and so on. At night these channels would also cover the happenings in the World market so that you can relate how changes in one market soon reflect in other markets. Apart from these, Headlines Today and NDTV 24×7 also give news updates about the latest happenings in the Stock Market pretty frequently.
MoneyControl is arguably the biggest investment portal in India. It is owned by CNBC TV 18 and is very rich in content. This should prove very useful for you if you are unable to get TV coverage but have internet connection. Is a widely used portal by professionals at work and even from home. From their website – “moneycontrol.com was conceived as a personal finance vortal in February, 1999 and it took almost nine months to give it birth on November 5, 1999. And this precocious child of the cyberworld has been growing at a breath taking rate ever since. On the way, we had another memorable date with destiny, when we were acquired by e-Eighteen.Com Limited on June 1, 2000 and became part of the Television Eighteen India Limited group. Today, moneycontrol.com is the premier end-to-end business and finance vortal for Indian netizens everywhere. Come, be part of the journey as our valued member and leave it to us to make this relationship click….”
MoneyControl.com lets you manage online portfolios for free and also lets you categorize your stocks by date, by purchase and sale, by Industry, etc.
Giving you the best information.
Since this is our own portal, it wouldn’t be fit to write too much about it. However, we would like to mention how this is different from the other portals. Investment-India.com was setup and is managed by IT Professionals who would like to create a forum for discussion and postings by like minded people who have a common interest – the Stock Market. This website is now managed by the same professionals to share information that we have learnt over the last many years of Share Market Investing.
We have understood the basics; we have taken the time to get used to Market and Trading Terms. Now is when we want to take the plunge and start experiencing ourselves. To do so, one would need to start trading. To “trade” means to buy and sell securities from any of the Exchanges. There are two basic ways exchanges execute a trade:
(a) Exchange Floor (through normal brokers)
(b) Electronically (through online brokers)
Our recommendation – Maximus Financial Services Pvt. Ltd. ! They help you opening an account and also give you a 3 month Free subscription to their Terrific Stock Pick of the week newsletter! MaximusFinance.com helps you open an online Demat Account within no time. MaximusFinance.com is also known well for its regular weekly Stock Picks (sent as email newsletters to subscribers of the service). Check out their website for more details !
Most people already have an idea of what Trading on the floor of a Stock Exchange (BSE or NSE) is like, thanks to television and the movies. When the market is open, you see hundreds of people rushing about shouting and gesturing to one another, talking on phones, watching monitors, and entering data into terminals. It could not look any more chaotic.
Here is what a typical sale would work like on the Exchange Floor. You tell your broker to buy 100 shares of Reliance Industries at market. Your broker’s order department sends the order to their floor clerk on the exchange. The floor clerk alerts one of the firm’s floor traders who locates another floor trader willing to sell 100 shares of Reliance. This is easier than is sounds, because the floor trader knows which floor traders make markets in particular stocks. The two agree on a price and complete the deal. The notification process goes back up the line and your broker calls you back with the final price. The process may take a few minutes or longer depending on the stock and the market. A few days later, you will receive the confirmation notice. Of course, this example was a simple trade, complex trades and large blocks of stocks involve considerable more detail.
Slowly more and more trading is moving to the online networks and off the trading floors. There are online brokers like SSKI(ShareKhan), ICICIDirect, KotakStreet, 5Paisa.com & IndiaBulls. Once you have an account with any of these Online Brokers, you will be able to invest online and be able to watch and monitor and manage your portfolio with ease. BSE does some part of its trading Electronically, NSE is supposed to have a much bigger % of its trading online.
The electronic markets use vast computer networks to match buyers and sellers, rather than human brokers. While this system lacks the romantic and exciting images of the floor, it is efficient and fast. Many large institutional traders, such as pension funds, mutual funds, and so forth, prefer this method of trading.
Depending on whether you are more comfortable in trading over the phone by talking to Brokers, or whether you like to get into yourself and are more comfortable in ordering online yourself through Online Brokerage companies, you can select from amongst the following. The Brokerage companies and banks listed below are not an exhaustive list of available options, they are just a few names to get you going. As you stay longer in the market you will be able to figure out more and be able to decide on any other firm if you so desire.
Some More Online Brokerage Firms, apart from MaximusFinance.com :
1. S S Kantilal Ishwarlal Securities Pvt. Ltd. (www.sharekhan.com)
From their website – “Sharekhan is an equities focused organization tracing its lineage to SSKI, a veteran equities solutions company with over 8 decades of experience in the Indian stock markets.
Sharekhan is about Focus. Sharekhan does not claim expertise in too many things. Sharekhan’s expertise lies in stocks and that’s what he talks about with authority. So when he says that investing in stocks should not be confused with trading in stocks or a portfolio-based strategy is better than betting on a single horse, it is something that is spoken with years of focused learning and experience in the stock markets. And these beliefs are reflected in everything Sharekhan does for you!
To sum up, Sharekhan brings to you a user- friendly online trading facility, coupled with a wealth of content that will help you stalk the right shares. ”
2. ICICI Direct (www.icicidirect.com)
From their website – “ What so unique about ICICIdirect.com?
The Unique 3-in-1 account that gives you !
Convenience: the 3-in-1 account integrates your banking, broking and demat accounts. This enables you to trade in shares without going through the hassles of tracking settlement cycles, writing cheques and Transfer Instructions, chasing your broker for cheques or Transfer Instructions etc.
Speed: You can now get the latest quotes of scrips on ICICIdirect.com and place an order almost instantly.
Control: You can be assured that you have in fact placed an order at the price you always wanted to, but may not have been able to do so till now. Thereby giving you control over your own trades.
Independence: Instead of transferring monies to a broker’s pool or towards deposits, you can manage your own demat and bank accounts when you trade through ICICIdirect.com. Trust: ICICIdirect.com comes to you from ICICI, the organisation trusted by millions of Indians.”
3. Kotak Securities Ltd. (www.kotakstreet.com)
From their website – “Kotak Securities Ltd., a strategic joint venture between Kotak Mahindra Bank and Goldman Sachs (holding 25% – one of the world’s leading investment banks and brokerage firms) is India’s leading stock broking house with a market share of 5 – 6 %. Kotak Securities Ltd. has been the largest in IPO distribution – It was ranked number One in 2003-04 as Book Running Lead Managers in public equity offerings by PRIME Database. It has also won the Best Equity House Award from Finance Asia – April 2004.
The company has 42 branches servicing around 1,00,000 customers. Kotakstreet.com the online division of Kotak Securities Limited offers Internet Broking services and also online IPO and Mutual Fund Investments. Kotak Securities Limited manages assets over 1200 crores under Portfolio Management Services (PMS) which is mainly to the high end of the market. Kotak Securities Limited has newly launched “Kotak Infinity” as a distinct discretionary Portfolio Management Service which looks into the middle end of the market.”
4. IL & FS Investmart (www.investmartindia.com)
From their website – “Your world of financial services and India’s financial multiplex, IL&FS Investsmart Limited (IIL) is a premier financial service organisation providing individuals and corporates with customised financial management solutions. We work towards understanding your financial goals and helping you attain them. Our institutional expertise, combined with a thorough understanding of the financial markets results in appropriate investment solutions for you. At IL&FS Investsmart, we recognise that your dreams, needs, aspirations, concerns and resources are unique. This is reflected in every move we make with and for you. We have a deep appreciation for the value of building a long-term partnership with you.”
Chapter 6- Share Trading Terms (Day Trading, Market & Limit Order, Stop Loss, Booking Profit & Loss)
Now that you already know some of the Basic Stock Analysis terms, we are going to move on to a few terms that are in constant use while trading on the exchange. You will hear these terms in Analysis by Experts and read about them in websites and newsletters. It is important to understand these terms to be able to be able to Trade or invest efficiently, so you might want to focus on this chapter.
Day trading is the type of trading on the Share Market where a trader enters several securities for just a fraction of a trading day. The typical day trader might hold a stock for only a few hours and may aim for a small percentage profit. Though the percentage gains that day traders attempt to capture are often miniscule, but these gains when multiplied by large volumes of hundreds (or even thousands) of shares, can turn out to be very profitable amounts.
The typical day trader usually trades on several different stocks in a single day. In contrast, the term Investor is most often used to refer to someone who buys a stock in the expectation of remaining invested in it for a long term.
Market Order & Limit Order
A Market Order is an order to buy or sell a specific number of shares at the best price available at the time the order is routed to the trading floor. Because market orders are normally executed immediately at the current market price after they have been routed to the relevant exchange, these orders are almost always filled within a very short period of time.
Stop Loss Orders
In addition to placing Stop Loss orders to limit your losses, you can also use the technique of “trailing stops” as a means of locking in your profits should the stock price increase. Referring to the example above, assume that the share price of XYZ increased to Rs.60.00. You now have an unrealised gain of Rs. 15.00 per share. You believe that the share price will go even higher so you decide not to sell the shares at his time. However, at the same time, you wish to protect or lock in a portion of your unrealised profit on these shares in the event that the share price does in fact move back down. To do this, you would cancel the existing stop loss order of Rs. 40.00 and place a new stop loss order at, say, Rs. 55.00. If the share price declines to Rs. 55.00 your position will be sold out at a gain of Rs. 10.00 per share. If the stock continues to go up, you profit even more and may decide to place another stop loss order at a higher price to lock in further gains. You can continue to “trail stop” up as the price rises as many times as you wish.
There are many views on where you should set your stop loss price levels. Though this discussion can get complex and beyond the scope of this book, a common and simple approach is to set your stop loss price between 10% to 20% below the price you paid for the stock. Remember though, that this is only a thumb rule and may not be the best range for all situations.
Booking Profit and Loss:
Unless these shares are sold, the profit or loss made due to a change in the market price is only notional since the market price can reverse in trend. So it is only when the shares are sold, that the profit or loss is actually confirmed for that trade. Selling of shares to confirm and claim profit is called “Booking Profit” and selling shares to reclaim money even at a loss is called “Booking Loss”.
Going Long and Short:
Analysis of Stocks
There are 2 primary ways in which people look at companies to evaluate which ones would be good ones to invest in.
Fundamental Analysis revolves around studying a company’s earnings history, balance sheet, management, product line and other factors that affect the Company’s profitability and growth to be able to decide which Companies look good for investment. Fundamental analysts search for intrinsic value of the company and hence the stock. In short Fundamental Analysis is based on Business Fundamentals studied through the Company’s Books of Accounts. Usually Fundamental Analysts tend to be Long Term investors.
Technical Analysis is stock analysis that seeks to detect and interpret patterns in past prices to be able to predict future movements.
Technical analysis dwells on charts of stock price movements and trading volume, as opposed to a company’s business, earnings, and competition. Investors who use technical analysis focus on the psychology of the market, scrutinizing investor behaviour. They try to determine where the big, institutional money is going so they can put their cash in the same places. Technical Analysis does not have too much meaning in the long run and is hence used in Medium term and Short Term investments.
We have explained some of the terms most widely used in Fundamental and Technical Analysis of shares. The attempt is to make sure that you are aware of what these are, understand what analysts are saying when they are discussing any particular company, and slowly begin to put your learning to use to do some analysis and predictions of your own. The terms discussed in this chapter will cover only the basics, discussing Fundamental and Technical Analysis would be beyond the scope of this book – apart from being an Information overload at this point J
EPS (Earnings Per Share)
One of the most important indicators about how a company is doing is to check for its Earnings Per Share (EPS). It is defined as the Net earning of the company (Profit After Tax) divided by the number of shares of the company. So, hypothetically, if a company made a Profit of Rs.100 for a year, and the company had 20 shares, the EPS would be Rs.5/share – So if you watch where a company’s EPS is and compare it to previous year’s EPS, you should get an idea of how well the company is growing. It is important to keep in mind while making this comparison that the company might have allocated additional shares in between, in which case these shares would need to be considered in the calculation.
EPS can be calculated for the previous year (“trailing EPS”), for the current year (“current EPS”), or for the coming year (“forward EPS”). Note that last year’s EPS would be actual, while current year and forward year EPS would be estimates.
P/E (Price to Earnings) Ratio
The Price Earnings Ratio of a share is the ratio of its Market Value (currently traded market price) to its Earnings Per Share (EPS). To extrapolate on the previous example, if the same share with the EPS of Rs. 5/share had a market value of Rs. 50, it would be said to have a P/E = 50/10 = 10.
Just to set the perspective, at the time of writing this book, all the shares trading on the Indian Stock Exchange together have an average P/E of 14-15. However, this is not constant across all sectors. E.g. most companies in the Metal Sector are currently trading at a P/E of 5-7, whereas most companies in the IT Sector would be trading at a P/E in excess of 20-30.
The Price Earnings Ratio is usually the quickest measure of how costly the share is based on its current performance. The numbers are also an indicator of how soon the market expects that particular company or sector to grow. The normal market sentiment is – Higher the P/E, the greater would be the expectation that the company’s earnings would grow fast.
The last year’s price/earnings ratio (P/E ratio) would be actual, while current year and forward year price/earnings ratio (P/E ratio) would be estimates, but in each case, the “P” in the equation is the current price. Companies that are not currently profitable (that is, ones which have negative earnings) don’t have a P/E ratio at all.
PEG Ratio is defined as a stock’s P/E ratio divided by the forecasted growth rate of its Earnings Per Share (“forward EPS”). As a general rule of thumb, a stock has a PEG value less than 0.5 is considered a very attractive buy, one between 0.5 and 1 is supposed to be a possibly good buy, one between 1.0 and 1.5 is an opportunity to hold on to the share if you are already invested in, and a PEG value of 2 is an opportunity to sell. What is very important, however, is that all this should be based on a realistic and fairly reasonable value of “forward EPS”.
Support & Resistance
Support and Resistance are very important Technical Analysis elements and probably the best day trading option if you want to be on the right side of the market.
Support is a price level at which a stock or other security stops falling (at least temporarily), hence the name. Resistance is a level at which price stops rising, at least temporarily.
Disclosure in Market terms means exactly what it does in normal usage. Disclosure is letting people know about certain details about yourself or your company. To reduce fraud SEBI has made it compulsory for many people to disclose their holdings, e.g. a Stock Analyst who is recommending a stock might also be holding the same stock himself and would hence gain from extra buying into the stock – hence the Analyst is supposed to disclose any personal or business interest he might have in the Stock he is discussing. Similarly companies going in for an IPO would be needed to disclose potential risks to business so that people who are thinking about investing would be aware of what the risks are and can then take an educated decision.
Chapter 4- What does the Share Market consist of: Exchanges, Indices, SEBI, Types of Markets, Blue Chips and Mid Caps
The Stock Exchange
The Stock Exchange (also called the Stock Market) is the marketplace where Shares and Securities are traded. Securities, as we mentioned before, is the broad term covering Shares/Stock and Debentures/Bonds. So, a Stock Exchange would facilitate purchase and sale of all of these. Unlike other markets, one is not permitted to buy and sell shares directly in the Stock Market – one has to do so through a Stockbroker. The Stockbroker is a licensed member of the Stock Exchange and is authorized to buy and sell shares on our behalf on a commission basis. This commission is called ‘Brokerage’.
Companies have to list their Securities with one or more Stock Exchanges for them to be eligible for trading. At the time of writing, there are 23 Stock Exchanges in the country. However the most popular ones are both in Mumbai, The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
The Stock Exchange, Mumbai, popularly known as “BSE” was established in 1875 as “The Native Share and Stock Brokers Association”. It is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is a voluntary non-profit making Association of Persons (AOP) and is currently engaged in the process of converting itself into demutualised and corporate entity. It has evolved over the years into its present status as the premier Stock Exchange in the country. It is the first Stock Exchange in the Country to have obtained permanent recognition in 1956 from the Govt. of India under the Securities Contracts (Regulation) Act, 1956. Read More…
The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. Read more…
Market Regulatory Body – SEBI (Securities and Exchange Board of India)
Securities & Exchange Board of India (SEBI) formed under the SEBI Act, 1992 – is the body that is responsible for protecting the interests of investors in securities, promoting the development of, and regulating, the securities market. The SEBI Act came into force on 30th January, 1992 and with its establishment, all public issues are governed by the rules & regulations issued by SEBI.
SEBI was formed to promote fair dealing in issue of securities and to ensure that the capital markets function efficiently, transparently and economically in the better interests of both the issuers and the investors. The promoters of a company should be able to raise funds at a relatively low cost. At the same time, investors must be protected from unethical practices and their rights must be safeguarded so that there is a steady flow of savings into the market. There must be proper regulation and code of conduct and fair practice by intermediaries to make them competitive and professional. Read More…
Stock Exchange Index
A Stock Exchange Index is a number which is calculated using various methods and whose purpose is to reveal the performance of the entire market. A Stock Exchange Index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value. The most widely followed Stock Indices in India are the SENSEX and NIFTY.
The Bombay Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market. This was called the SENSEX. The SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, SENSEX is a basket of 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.
Due to its wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of the Indian stock market. As the oldest index in the country, it provides the time series data over a fairly long period of time (From 1979 onwards). Right from early nineties the stock market witnessed heightened activity in terms of various Bull and Bear runs (explained later). The SENSEX captured all these events in the most judicial manner. One can identify the booms and busts of the Indian stock market through SENSEX.
SENSEX 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 “Free-float Market Capitalization” methodology of index construction is regarded as an industry best practice globally. Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalization of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market. It generally excludes promoters’ holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course.
The base period of SENSEX is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of SENSEX involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate SENSEX every 15 seconds and disseminated in real time.
The S&P CNX Nifty (called NIFTY for Short) is the Index used to represent the overall performance of the stocks trading at NSE. The NIFTY was designed based upon solid economic research. A trillion calculations were expended to evolve the rules for the Nifty index. The results of this effort were remarkably simple: (a) the correct size to use is 50 (b) stocks considered for the S&P CNX Nifty must be liquid by the `impact cost’ criterion, (c) the largest 50 stocks that meet the criterion go into the index.
The design of the S&P CNX Nifty was a contrast to the adhoc methods that had gone into index construction in the preceding years, where indexes were made out of intuition and lacked a scientific basis. The research that led up to S&P CNX Nifty is well respected internationally as a pioneering effort in better understanding how to make a stock market index.
BULL & BEAR MARKET
A Bull Market is a prolonged period in which investment prices rise faster than their historical average. Bull markets can happen as a result of an economic recovery, an economic boom, or investor psychology. Conversely, a Bear Market is a prolonged period in which investment prices fall, accompanied by widespread pessimism. Bear markets usually occur when the economy is in a recession and unemployment is high, or when inflation is rising quickly.
If the period of falling stock prices is short and immediately follows a period of rising stock prices, it is instead called a correction. Another interesting term (though not used as frequently) is Chicken Market – which just signifies a prolonged period where the market doesn’t move up or down significantly and just hovers around a single value.
Blue Chips are generally the stocks of very large companies with a solid record of stable earnings and/or dividend growth and a reputation for high quality management and/or products. More generally, a Blue Chip is anything of very high quality. Some Indian Blue Chips would be Infosys, Reliance, HDFC, HLL, ITC and ONGC. Some Internationally traded Blue Chips would be Procter & Gamble, Gillette, Pfizer, IBM, Intel and GE. The term blue chip usually refers to a stock, but could in theory apply to any financial asset with potential risk. A blue chip stock is one that entails unusually small risk (risk being a subjective judgment).
To explain Mid Cap we would first need to explain “Market Capitalization”. Market capitalization is calculated by multiplying the current stock price (CMP) with the number of shares outstanding or issued by the company. The definition of mid-cap shares can vary from market to market and from country to country.
In case of India, the National Stock Exchange (NSE) defines the mid-cap universe as stocks whose average six months’ market capitalization is between Rs 75 Crores and Rs 750 Crores. In the US, mid-cap shares are those stocks that have a market capitalization ranging from 1 Billion Dollars to 5 Billion Dollars. In India, these shares would be classified as large-cap shares. Thus, classification of shares into large-cap, mid-cap, small-cap is made on the basis of the relative size of the market in the country. The total market capitalization of US markets is $15 trillion. In India, the market capitalization of listed companies is around $600 Billion.
Large-cap shares have lesser growth potential since the turnover and profits of large companies are already high in the context of that particular market. On the other hand, mid-cap shares are considered an attractive investment avenue because their growth rate should be faster. It is analogous to investing in an emerging market like India compared to a mature market.