The Perfectionist’s Dilemma

Here’s the perfectionist’s dilemma: They all want their ‘first’ shots to be this way ALWAYS!

But enjoy!

Inflation up, Rupee down, Bond prices fall…

In India, inflation is measured using the Wholesale Price Index or WPI. The government comes out with WPI inflation figures every Friday. The WPI presently consists of 435 items and it is dominated by manufactured goods which make up 63.75% of the index. Most developed countries use the Consumer Price Index (CPI) to calculate inflation. CPI is a statistical time-series measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation. Last year, two leading economists associated with the multi-commodity exchange had pointed to serious flaws in the present method of calculating inflation and called for a change in line with prevalent methodologies in developed economies. In a research paper, economists V Shunmugam and D G Prasad have called for a shift in the model followed by developed countries where the Consumer Price Index is used to calculate inflation. In an interview to Business Standard, C Rangrajan, noted economist, ex-RBI governor and advisor to finance minister, told the reason why government is using WPI based inflation. As he told, in India, the CPI data is not released as frequently as WPI data. WPI data is released almost weekly and sometimes at most biweekly, where as CPI data is released once in a month. There is also a lot of lag in collating all the CPI data. The latest, fully collated CPI data available is for March 2006. There is another problem with the CPI data in India. We don’t have a single CPI data, but four different CPI figures relating to agriculture goods, urban manual labor and non-urban labor etc. There is no discipline in when these different figures are released and with what frequency. So government of India has a genuine reason in not going for CPI based inflation.

So for the time being, we only have the WPI index, while RBI is working on a CPI. The WPI-based inflation rate inched up to a six-month high of 4.35% in the week ended February 9 from 4.11% in the previous week, on account of price rises in food articles such as fruit & vegetables, pulses and some manufactured products like imported edible oil, mustard oil and groundnut. Inflation was at 6.52% during the corresponding week previous year, i.e. in 2007.

There are chances of a further rise in inflation in the weeks to come on account of a hike in fuel prices. Last week, the government had raised fuel prices by 4% to reduce the under-recoveries of oil companies. A direct influence of this apprehension of an increasing rate of inflation is that this will restrain RBI from going in for a rate cut.

Meanwhile,  for the foreign exchange market it was a fluctuation high. The rupee fluctuated as much as 17 paise in a single day. At the same time, bond prices fell by 40 paise due to the rise in bond yields. The Reserve Bank of India infused Rs 17,240 crore to the banking system through its liquidity adjustment facility’s repo auction. Inter-bank call rates also stayed high, after opening at 7.85% and closing at 8.70%.

The rupee fell this week past the 40-per-dollar level for the first time since September after oil prices climbed to a record, stoking speculation Indian refiners will buy more dollars to pay for costlier crude imports. Crude oil in New York reached an all-time high $101.32 per barrel on Feb. 20. The commodity has gained more than 42 percent in the past six months, according to data compiled by Bloomberg. India meets three quarters of its energy requirements through imports.

The rupee’s loss was also due to speculation overseas funds withdrew part of their investments in local equities. Funds abroad have sold Indian equities worth $2.9 billion more than they bought this year, after making record net purchases of $17.2 billion in 2007, according to the Securities and Exchange Board of India. The benchmark Indian share index has lost 14 percent this year after advancing 47 percent last year.

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Microsoft conceding to the Open Source world!

As early as 2007, the movement of Microsoft towards opening its source to the world were emerging. Tim O’Reilly wrote: “In his keynote at OSCON, Microsoft General Manager of Platform Strategy Bill Hilf announced that Microsoft is submitting its shared source licenses to the Open Source Initiative. This is a huge, long-awaited move. It will be earthshaking for both Microsoft and for the open source community if the licenses are in fact certified as open source licenses. Microsoft has been releasing a lot of software as shared source (nearly 650 projects, according to Bill). If this is suddenly certified as true open source software, it will be a lot harder to draw a bright line between Microsoft and the open source community. Bill also announced that Microsoft has created a new top level link at microsoft.com, microsoft.com/opensource to bring together in one place all Microsoft’s open source efforts. Bill sees this as the culmination of a long process of making open source a legitimate part of Microsoft’s strategy. Open source has survived Microsoft’s process of “software darwinism” and is becoming an ever more important part of its thinking.”

According to Microsoft, the reason why it is opening its source is:

“The Open Source Interoperability Initiative is one component to a set of broad-reaching changes across Microsoft’s technology and business practices. These changes will increase the openness of Microsoft software and drive greater interoperability, opportunity and choice across the IT community of customers, partner and developers. The principles are as follows:

• Ensuring open connections to its high-volume products;
• Promoting data portability;
• Enhancing support for industry standards;
• Fostering more open engagement with the industry, including open source communities, around interoperability and standards issues.

The issue was handled in detail in the Friday’s page one article by The Wall Street Journal on Friday, Feb 22, 2008. The main reflections of this article were:

•  The Open Source initiative by Microsoft is in the same direction as its bid to acquire Yahoo Inc.
• Internet companies, in particular Google Inc., are threatening Mirosoft’s business, owing to their small online programs that are easy to mix and match as their source code is open.
• With this move, Microsoft also hopes to tone down the antitrust war it has been fighting in the European countries for years. However, EU officials are still skeptical about this policy change because they feel it is still too early to acknowledge anything, thus hinting at more such initiatives by the software giant.
• On Thursday, Microsoft published around 30,000 pages of technical documentation online, which were earlier available only for a fee. These relate mostly to Vista, Word, Excel and other Office programs.
• In a statement, Microsoft said it viewed the neew initiative as a key part of its effort to comply with antitrust actions brought by the EU.”

Bloomberg says that “specifically, Microsoft is implementing four new interoperability principles and corresponding actions across its high-volume business products:

1. ensuring open connections;
2. promoting data portability;
3. enhancing support for industry standards; and
4. fostering more open engagement with customers and the industry, including open source communities.”

In another news, IDG’s InfoWorld, the leading integrated media brand for IT solutions management, today announced the full keynote and presenter lineup for the fifth year of the Open Source Business Conference (OSBC), taking place March 25-26, 2008 at the Palace Hotel in San Francisco. The premier event for open source software and business focuses on the complete open source ecosystem — vendor, end-user, venture capitalist, and legal. Over the course of two days, keynote presentations from the best and brightest IT minds will preview the future of open source. Brad Smith, SVP, General Counsel & Corporate Secretary for Microsoft Corporation will be one of them.

Another important development at Microsoft in the wake of the recent Yahoo Inc. bid is that most employees are concerned that their jobs are in danger, especially in roles which overlap at both companies. While Microsoft’s administration has been trying to allay these fears, only time will tell the real story.

Meanwhile on the markets, Microsoft is no different from the other shares plummeting in the wake of the recession.

No hard technicals are needed to see how the stock is falling. On Friday, the previous support was also broken when the stock closed below 28.

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Indian Markets in the wake of US recessions

In the last US recession of around seven years back, i.e. in 2000-01, the Sensex fell around 50% from its peak! I was just reading a Feb ‘08 report by UBS titled “How would India fare in a global recession?” (Download the report)

The report starts by claiming that there is no major risk to both economic and corporate earnings growth! And further they say that the worst case scenario fair value of the Sensex is around 16,000 and 500 points above or below. Further they predict that the end 2008 target of sensex would be around 22,500.

Now these aren’t merely arrows shot in the air! Top economists at the UBS have justified these predictions based on account of the contrasting nature of the Indian stock market back in 2000-01 as compared to what it is today. If we take a look at the differences:

• In the previous recession, the market’s earnings decline was caused by IT services (the IT bubble burst), metals, petrochemicals, engineering, automobiles and telecom – sectors which contributed 44% to the market’s earnings at that time. Today these sectors constitute only 36% of the markets.
• Moreover, the sectors engineering, automobile and telecom are at relatively lesser risk today than in the past. This is because of many reasons, most prominent being that interest rates are lesser and these companies have lesser pipeline inventories than earlier due to increase in exports.
• GDP growth was 6.4% in FY00, falling to 4.4% in FY01 and gross domestic capital was growing at 26%. Currently, GDP estimates are higher than 8% (UBS economists put it between 8.2% to 8.8%), while gross capital formation is in excess of 30%.

But as Manas Chakravarty put in his mint column, “This recession is very different from the 2001 one, resembling more the Japanese meltdown of the late 1980s or the savings and loan crisis in the US. And unlike in 2001, each week seems to show the credit crisis spreading to new sectors. Till the extent of the crisis is known, it may be premature to compare it with what happened in 2001.”

Meanwhile Swiss financial giant UBS has confirmed that it made a loss in 2007 after exposure to the crisis-hit US housing market hit earnings. It made a full-year loss of 4.4bn Swiss Francs ($4bn; £2.02bn) during 2007, compared with a net profit of 12.3bn Swiss Francs in 2006. The US sub-prime problems have hit the balance sheets of banks worldwide. UBS management warned that it expected 2008 to be a difficult year for the firm and the industry as a whole.

However, with the clean chit and the retail license in India, UBS may well expect to gain from India. Very much like Vodafone improving after entering the Indian market. There’s a lot of action happening in the corporate world – let’s see what comes next!

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The Diluted EPS and its other brothers!

At the end of 1997, a new rule went into effect, instituted by the Financial Accounting Standards Board (FASB). It required companies to report their quarterly earnings per share (EPS) in two ways: basic and diluted. However, there is much more to the different types of EPS in the balance sheet of different companies.

By definition, EPS is net income divided by the number of shares outstanding; however, both the numerator and denominator can change depending on how you define “earnings” and “shares outstanding”. So, the EPS will differ on two accounts:

• Shares Outstanding: Shares outstanding can be classified as either primary (primary EPS) or fully diluted (diluted EPS). Primary EPS is calculated using the number of shares that have been issued and held by investors. These are the shares that are currently in the market and can be traded. Diluted EPS entails a complex calculation that determines how many shares would be outstanding if all exercisable warrants, options, etc. were converted into shares at a point in time, generally the end of a quarter. We prefer diluted EPS because it is a more conservative number that calculates EPS as if all possible shares were issued and outstanding. Companies report both primary and diluted EPS, and the focus is generally on diluted EPS, but investors should not assume this is always the case. Sometimes, diluted and primary EPS are the same because the company does not have any “in-the-money” options, warrants or convertible bonds outstanding. Companies can discuss either, so investors need to be sure which is being used.
• Earnings: As has been evident in recent headlines, EPS can be whatever the company wants it to be, depending on assumptions and accounting policies. Corporate spin-doctors focus media attention on the number the company wants in the news, which may or may not be the EPS reported in documents filed with the Securities & Exchange Board of India (SEBI: http://www.sebi.gov.in). Based on a set of assumptions, a company can report a high EPS, which reduces the P/E multiple and makes the stock look undervalued. In context of the ‘earnings’ being used, there can be four types of EPS:
  • Reported EPS: We define reported EPS as the number derived from generally accepted accounting principles (GAAP), which are reported in SEBI filings. The company derives these earnings according to the accounting guidelines used. A company’s reported earnings can be distorted by GAAP. For example, a one-time gain from the sale of machinery or a subsidiary could be considered as operating income under GAAP and cause EPS to spike. Also, a company could classify a large lump of normal operating expenses as an “unusual charge” which can boost EPS because the “unusual charge” is excluded from calculations.
  • Ongoing EPS and/or Pro Forma EPS: This EPS is calculated based upon normalized or ongoing net income and excludes anything that is an unusual one-time event. The goal is to find the stream of earnings from core operations which can be used to forecast future EPS. This can mean excluding a large one-time gain from the sale of equipment as well as an unusual expense. Attempts to determine an EPS using this methodology is also called “pro forma” EPS. The words “pro forma” indicate that assumptions were used to derive whatever number is being discussed. Different from reported EPS, pro forma EPS generally excludes some expenses/income that were used in calculating reported earnings. For example, if a company sold a large division, it could, in reporting historical results, exclude the expenses and revenues associated with that unit. This allows for more of an “apples-to-apples” comparison. Another example of pro forma is a company choosing to exclude some expenses because management feels that the expenses are non-recurring and distort the company’s “true” earnings. Non-recurring expenses, however, seem to appear with increasing regularity these days. This raises questions as to whether management knows what it is doing or is trying to build a “rainy day fund” to smooth EPS.  
  • Headline EPS: The headline EPS is the EPS number that is highlighted in the company’s press release and picked up in the media. Sometimes it is the pro forma number, but it could also be an EPS number that has been calculated by the analyst/pundit that is discussing the company. Generally, soundbites do not provide enough information to determine which EPS number is being used.
  • Cash EPS: Cash EPS is operating cash flow (not the EBITDA) divided by diluted shares outstanding. Most analysts think cash EPS is more important than other EPS numbers because it is a “purer” number. Cash EPS is better because operating cash flow cannot be manipulated as easily as net income and represents real cash earned, calculated by including changes in key asset categories such as receivables and inventories.  

Some companies don’t include the possible share dilution from options that are “underwater”. This occurs when an employee owns options to buy shares at a certain price, and due to a sudden drop in stock market value, the option is below the exercise price. If [and this is a big if], the stock does not rise over the exercise price, the option will expire worthless. On the other hand, if the stock advances to higher levels, these options will probably be exercised, increasing the number of shares outstanding, and dilution your percentage ownership in the business. The problem with not including these underwater options in the diluted figures is that options normally have extended life [in some cases around 10 years]. In that time, it is very likely if not certain that some of those options will become valuable once the company’s stock price rises.

Here’s an example from Abercrombie & Fitch’s 10K:

Options to purchase 5,630,000, 9,100,000 and 5,600,000 shares of Class A Common Stock were outstanding at year-end 2001, 2000 and 1999, respectively, but were not included in the computation of net income per diluted share because the options’ exercise prices were greater than the average market price of the underlying shares.

As you analyze companies, you must keep your eye out for such border-line deceptive practices as they are widespread and common occurrence.

(Sources:

http://www.investopedia.com/terms/c/casheps.asp

http://beginnersinvest.about.com/cs/investinglessons/l/blsharedilution.htm

http://www.fool.com/foolu/askfoolu/2002/askfoolu021113.htm

and Accounting Books)

The P/E and the PEG magical numbers!

A valuation ratio of a company’s current share price compared to its per-share earnings.

Calculated as:

A higher P/E ratio means that investors are paying more for each unit of income. The P/E is a ratio that investors throw around with confidence as if it told the complete story. Of course, it doesn’t tell the whole story (if it did, we wouldn’t need all the other numbers). Some investors read a high P/E as an “overpriced stock”.

However, it can also indicate the market has high hopes for this stock’s future and has bid up the price.

Conversely, a low P/E may indicate a “vote of no confidence” by the market or it could mean that the market has just overlooked the stock. Many investors made their fortunes spotting these overlooked but fundamentally strong stocks before the rest of the market discovered their true worth. Value investors have long considered the price earnings ratio (p/e ratio for short) a useful metric for evaluating the relative attractiveness of a company’s stock price. Made popular by the late Benjamin Graham, who was dubbed the “Father of Value Investing” as well as Warren Buffett’s mentor, Graham preached the virtues of this financial ratio as one of the quickest and easiest ways to determine if a stock is trading on an investment or speculative basis.

Once you have the magic number, it’s time you begin to wield its power. It can help you differentiate between a less-than-perfect stock that is selling at a high price because it is the latest hot-pick on Wall Street, and a great company which may have fallen out of favor and is selling for a fraction of what it is truly worth.

First, you have to understand that different industries have different p/e ranges that are considered “normal”. For example, technology companies may sell at an average of 40 p/e, while textile manufacturers may only trade at an average of 8. There are the exceptions, but for the most part, these differences between sectors are perfectly acceptable. They arise out of different expectations for different businesses; tech stocks usually sell higher because they have a much higher growth rate and earn high returns on equity, while a textile mill, subject to dismal margins and low growth prospects, will trade at a much smaller multiple. One way to know when a sector is over priced is when the average p/e ratio of all of the companies in the industry is far above the historical average.

But the P/E comes with its own set of limitations:

• Accounting: There are too many ways of creative accounting methods which can hide the actual EPS or misrepresent it. Moreover, some investors may get confused between the different types of EPS (Primary EPS, Diluted EPS, Headline EPS etc.) and thus reach a wrong P/E estimate!
• Inflation: In times of high inflation, inventory and depreciation costs tend to be understated because the replacement costs of goods and equipment rise with the general level of prices. Thus, P/E ratios tend to be lower during times of high inflation because the market sees earnings as artificially distorted upwards. As with all ratios, it’s more valuable to look at the P/E over time in order to determine the trend. Inflation makes this difficult, as past information is less useful today.
• Factors other than earnings: Besides earnings, there are other factors that affect the value of a stock. For example:
  • Brand – The name of a product or company has value. Brands such as Proctor & Gamble are worth billions.
  • Human Capital – Now more than ever, a company’s employees and their expertise are thought to add value to the company.
  • Expectations – The stock market is forward looking. You buy a stock because of high expectations for strong profits, not because of past achievements.
  • Barriers To Entry – For a company to be successful in the long run, it must have strategies to keep competitors from entering the industry. Coca-Cola, for example, has built a very extensive distribution channel–anybody can make pop, but getting that product to the market like Coke does, is very costly. 

All these factors will affect a company’s earnings growth rate. Because the P/E ratio uses past earnings (trailing twelve months), it gives a less accurate reflection of these growth potentials. Moreover, the market is usually more concerned about the future, and this is where the PEG enters.

The relationship between the price/earnings ratio and earnings growth tells a much more complete story than the P/E on its own. This is called the PEG ratio and is formulated as:

PEG Ratio =

                       

*The number used for annual growth rate can vary. It can be forward (predicted growth) or trailing, and either a one- to five-year time span. Check with the source providing the PEG ratio to see what kind of number they use. 

Looking at the value of PEG of companies is similar to looking at the P/E ratio: a lower PEG means that the stock is more undervalued. A lower ratio is “better” (cheaper) and a higher ratio is “worse” (expensive). A PEG ratio that approaches two or goes higher than 2 is believed to be too high. This means that the price paid appears to be much too high relative to the estimated future growth in earnings.

   

UBS gets clean chit in Terror Funding case

The Reserve Bank of India deputy governor announced the clearance of UBS’ retail banking license in India. Last year, the banking regulator issued a licence, allowing UBS to open its first branch in Mumbai, but later put it on hold. RBI’s clearance also means that, technically, UBS can go ahead and buy the Indian mutual fund business of Standard Chartered Bank.

The enforcement directorate, the economic crime investing wing of the ministry of finance had earlier blamed UBS AG for non-cooperation in tracking down a multinational trail of money transfers across Switzerland, New York, the Virgin Islands and Pune, between Indian stud farm owner Hasan Ali Khan and a fugitive Saudi arms dealer Adnan Khashoggi, whose arms supplies to Tamil terrorists, the LTTE, were revealed during an investigation into the 1991 assassination of Rajiv Gandhi.

Between July 2006 and June 2007, RBI gave licences to seven foreign banks operating in India for opening 20 branches. In addition to that, it allowed seven foreign banks to open representative offices here. Under the World Trade Organization (WTO) norms, the Indian banking regulator is required to offer 12 new licences every year to all foreign banks. At the end of last October, 29 foreign banks from 19 nations were operating in India with 273 branches.

Let’s take a brief look at the technicality of the term Money Laundering,

Money laundering, the metaphorical “cleaning of money” with regards to appearances in law, is the practice of engaging in specific financial transactions in order to conceal the identity, source and/or destination of money and is a main operation of underground economy. Based in Luxembourg, Clearstream, “a bank of banks” which practice “financial clearing”, centralizing debit and credit operations for hundreds of banks, has been accused of being a major operator of the underground economy via a system of un-published accounts; Bahrain International Bank, owned by Osama bin Laden, would have profited from these transfer facilities. The scandal prompted André Lussi, Clearstream CEO, to resign on December 31, 2001; several judicial investigations were opened; and the European Commission was interpelled by Members of the European Parliament (MEPs) Harlem Désir, Glyn Ford and Francis Wurtz, who asked the Commission to investigate the accusations and to ensure that the 10 June 1990 directive (91/308 CE) on control of financial establishment was applied in all member states, including Luxembourg, in an effective way.
The international response to the underground economy has been co-ordinated by the Financial Action Task Force on Money Laundering (“FATF”, also known by its French acronym of “GAFI”), whose original 40 principles form the basis of most international responses to money laundering activity. A further 8 principles, designed to counteract funding to terrorist organisations, were added on June 30, 2003 in response to the September 11, 2001, with another added 22 October 2004, to form what are now known as the “40 + 9″ principles of anti-money laundering and counter-terrorism funding (AML/CTF). Compliance with, or a movement towards compliance with, these principles is now seen as a requirement of an internationally active bank or other financial service entity. (Source: http://www.solarnavigator.net/venture_capital/money_laundering.htm)

India has been fighting money laundering since ages now. Earlier it was mainly done by the underworld or the Mafia, then corrupt politicians joined the gang, and later terrorists and other insurgents including naxalites and militants climbed the bandwagon too. Last year, SEBI had reframed the rules of issuances of ‘Participatory Notes’ (PN) by the Foreign Institutional Investors (FIIs) on reports that money launderers are using the PN route to invest in stock markets. Since then PN investments with underlying as derivatives have been completely banned in India. Even though Know Your Customer (KYC) specifications have been communicated to the FIIs time and again, it is usually difficult and impossible for the FIIs also to completely adhere to these specs.

A welcome to Mr. C. B. Bhave and a farewell to Mr. M. Damodaran

I think Saturday is the best day to post my first article on this blog. At least I don’t have to concentrate on the markets for two days. Well, I think one of the most important decisions to come across regarding the Indian markets is the appointment of the new SEBI (Securities and Exchange Board of India) chief. The whole industry is hopeful that this would be a good omen for the markets. However, it is good to know of the background of the Respected new Chief.

Rediff ran a story on him as:

“It’s like a homecoming for Chandrasekhar (Chandu) Bhaskar Bhave, the newly-appointed chairman of India’s capital market regulator. The 1975-batch IAS officer of the Maharashtra cadre was the executive director in charge of the secondary and later the primary markets between 1992 and 1996. That was the time when the Securities and Exchange Board of India was taking its initial steps to reform the stock exchanges and putting in place systems that help in investor protection. The Bombay Stock Exchange was then known as a brokers’ club and Bhave was on the board of the exchange in his capacity as a representative of Sebi.
It was during his stint in Sebi that his boss, G V Ramakrishna, banned badla. Bhave also played a pivotal role in ensuring that market players get sophisticated hedging tools and are properly regulated. Bhave maintained that the capital market regulator’s primary job is to protect individual investors and simultaneously develop systems that take care of the interests of issuers — companies and intermediaries. He also ensured that the new National Stock Exchange’s surveillance systems were top class.
The slimly built Bhave, who plays tennis regularly, has a self-effacing style, but is a tough administrator.
As the head of the National Securities Depository Ltd (NSDL), he revolutionised the capital market by getting market players to accept the new system of dematerialised shares and debentures. He won buyers’ support by arguing that demat would eliminate bad deliveries of shares and impressed upon the sellers that this would facilitate early settlement and early payments. Setting up of a depository that converts physical share certificates into electronic form was not at all easy. For example, the UK has still not been able to implement it. But under Bhave, NSDL set up the depository at under Rs 100 crore (Rs 1 billion), or a seventh of the original estimate, and achieved paperless trading within just three years, the fastest in the world.”
Mr. Bhave thus faces many challenges as the investment climate is much more dynamic now than when he was the executive director. Let’s take note of a few of these challenges:

• the market sentiment is not favourable for small investors and many of them have had huge losses in some of the recent high profile IPOs.
• Private equity players are getting stronger and more influential in the market and there is a demand to regulate them. This is an international issue and the Indian market regulator will have to face it, too.
• Need to reform the primary market to speed up the processes as well. The price discovery mechanism, for example, is not efficient even in book-building as institutional investors are paying just 10 per cent and putting bids for 10 times of the amount they pay in IPOs.
• Short selling and physical settlement in derivatives. The allotment and listing also need to be much faster.

His predecessor M Damodaran has ensured that the homework for all these is ready and it is up to Bhave to “implement” them. However, there is an important twist to this story too! It’s also an irony of sorts that Bhave, 57, is joining as the regulator. His organisation, NSDL, has been fighting a bitter legal battle with Sebi since April 2006, when Sebi uncovered a massive scam involving the cornering of share allotments in IPOs for small investors.
In November 2006, Sebi ordered NSDL and a few others ‘implicated’ in the IPO scam to return Rs 115 crore (Rs 1.15 billion) in “illegal profits” made from IPO deals. Of this, NSDL’s share was Rs 45 crore. NSDL appealed to the Securities Appellate Tribunal (SAT), which, in December, set aside the Sebi order, describing its action as a clear “violation of the principles of natural justice.” Sebi investigation on the IPO scam isn’t concluded. So as the new Sebi chairman, Bhave will have to resolve this tricky issue. As a regulator, he cannot be seen to be hurting the interest of the organisation which he founded.

Mr. Chandrasekhar Bhaskar Bhave will be the sixth Chairman of the market watchdog. Bhave had earlier served SEBI as an Executive Director under its first Chairman G V Ramakrishna. His predecessors, apart from outgoing Chairman M Damodaran and Ramakrishna, are G N Bajpai, D R Mehta, S S Nadkarni.

The departing chief Mr. Meleveetil Damodaran was the chairman of SEBI before which he had headed the IDBI Bank. Prior to that appointment Shri Meleveetil Damodaran took over charge as Chairman, Unit Trust of India, with effect from 15th July 2001. He belongs to the Indian Administrative Service, Manipur-Tripura cadre. He was officer on special duty with the Reserve Bank of India dealing primarily with the restructuring of 3 identified weak public sector banks prior to this appointment. Earlier, he was Joint Secretary (Banking Division), Ministry of Finance for five years. Mr. M Damodaran was a common face in almost all Financial Dailies of India. He was considered to be a man with a lot of intellect and more importantly, plenty of luck! Take the case of IDBI Bank, where he negotiated a Rs 9,000 crore (Rs 90 billion) bail-out for the institution. The government would never have let IDBI collapse in the first place, so the rescue act would have happened anyway. But Damodaran was in the right place at the right time and managed it quite well. Even in his earlier assignment as chairman of the Unit Trust of India (UTI), lady luck was by his side – as always. The image of the institution had taken such a battering after the ignominious departure of the earlier chairman and the markets were in such a bad shape that the only way UTI could go was up. With the government keen to restore the image of UTI, because public money was involved, Damodaran found it relatively easy to get his proposals cleared. His lasting contribution was to stem the rot by giving fund managers more autonomy and performance-driven incentives. A revival in the markets did the rest. Damodaran’s tenure at Sebi (he took over as chairman in February 2005) has been mixed. The regulator did unearth the demat scam – individuals opening multiple accounts. The quasi-ban on participatory notes – they will be banned in the F&O segment – has taken its time coming, but is a shrewd move. Once again, luck is on 59-year-old Damodaran’s side because the markets are on a roll and given that the economy continues to grow at a fast clip, India continues to be an attractive destination. There may be a temporary slowdown in flows but they should pick up. Independent observers, however, say the smaller companies have borne the brunt of his battle against price manipulation while the big fishes seem to be getting away. Also, Sebi hasn’t managed to win too many cases; the most high-profile case against foreign brokerage UBS, where Sebi banned it from issuing offshore derivative instruments (ODIs) following investigations into its activities in the crash of May 17, 2004, is still to be heard by the Supreme Court.

Reliance Power ‘proposes’ Bonus Issue

Reliance Power today “proposed” a bonus issue to non-promoters. The Anil Ambani promoted Reliance Power on Sunday said it has decided to issue bonus shares to all categories of share holders excluding the promoters. The final decision would come on February 24.

If the proposal is accepted this would be the first time that an Indian company is issuing bonus shares immediately after its public issue. Of course, Reliance Power was among the few IPOs in Indian history which made tall promises to retail investors and then got bunked down in the volatility of the Indian markets, especially the fall sharp of February’s first half. However, since then the markets have recovered and Reliance shares (both ADAG and Mukesh’s group) have been the frontrunners in this recovery.

As we can see from the chart, the proposal itself is working in improving the standing of Reliance Power (RPOWER.NS). Of course, pundits say that the reliance power standings will improve in November 2008.

A bonus issue (or scrip issue) is a stock split in which a company issues new shares without charge in order to bring its issued capital (outstanding stock) in line with its employed capital (the increased capital available to the company after profits). This usually happens after a company has made profits, thus increasing its employed capital. So we can say that this move is quite unprecendented and it might just pay off!