CHANGE

GOLDMAN SACHS - GNP PREDICTION 2050

Green Shoe Option - Working Mechanism

In my article 'Green Shoe Option - An IPO's Best Friend" discussed on 22nd November 2012, I introduced you to a price stabilization mechanism and its importance during and IPO. In today's article I will discuss with you on 'How Green Shoe Option Works'

Price Stabilization
This is how a greenshoe option works: 

The underwriter works like a dealer, finding buyers for the shares that their client is offering.
A price for the shares is determined by the sellers (company owners and directors) and the buyers (underwriters and clients). When the price is determined, the shares are ready to be publicly traded. The underwriter has to ensure that these shares do not trade below the offering price. If the underwriter finds there is a possibility of the shares trading below the offering price, they can exercise the greenshoe option.

In order to keep the price under control, the underwriter oversells or shorts up to 15% more shares than initially offered by the company.

For example, if a company decides to publicly sell 1 million shares, the underwriters (or "stabilizers") can exercise their greenshoe option and sell 1.15 million shares. When the shares are priced and can be publicly traded, the underwriters can buy back 15% of the shares. This enables underwriters to stabilize fluctuating share prices by increasing or decreasing the supply of shares according to initial public demand.

If the market price of the share exceeds the offering price that is originally set before trading, the underwriters could not buy back the shares without incurring a loss. This is where the greenshoe option is useful: it allows the underwriters to buy back the shares at the offering price, thus protecting them from the loss.

If a public offering trades below the offering price of the company, it is referred to as a "break issue". This can create the assumption that the stock being offered might be unreliable, which can push investors to either sell the shares they already bought or refrain from buying more. To stabilize share prices in this case, the underwriters exercise their option and buy back the shares at the offering price and return the shares to the lender (issuer).




Such an option which was first used by the company Green Shoe (because of which it was named as Green shoe Option) is used by many companies outside India during their IPO process but is not a big hit in India. Statistics speaks of itself when we read that from 2003 to 2011, 365 IPO's were introduced in India out of which only 18 companies opted for this option which is less than 5% of the total public offerings made till today. Some of the participants in this include the IT giant TCS and Deccan Chronicle Holdings Ltd. in the year 2004, Cairn India Ltd. in 2006, Idea Cellular Ltd. in 2007, Indiabulls Power Ltd. in 2009.

During various researches done on this particular topic, researchers have considered various reasons on why Indian companies may not opt for the price stabilization mechanism, some concerns which sounded valued to me are
1) The issues where GSO is opted may not indicate the correct share prices and it will deprive “Value Investor” from purchasing shares from other investors when the price falls.
2) The legal and regulatory compliances are burdensome, due to this, the issuer companies and merchant bankers are not ready to take additional responsibility.



A survey conducted by The Economic Times said that a typical response was “Unlike in the US, SEBI does not permit merchant bankers to make money in trading. They will have to buy the stock if the price falls below the offer price, but they are not allowed to sell even if the stock value goes up. We are required to stabilise the price around the offer price for which we get a fixed fee”


I believe awareness should be conducted among the companies, underwriters, merchant bankers and investors about the importance and benefits of having GSO included in an IPO process.
SEBI being the regulator of the primary and secondary market may make GSO a mandatory clause in order to benefit the Investors and build their confidence in participating in the Primary market.

DABBA TRADING - NIGHTMARE FOR INVESTORS

We often read about dabba trading, not being permitted by the regulators. Many do not know the mechanics, and also the risk associated with it, till now. A dabba traders office is like any other broker’s office having terminals linked to the stock exchange showing market rates of stocks. However, the difference is that the investor’s trades do not get executed on the stock exchange system but in the dabba operator’s books only. This kind of operation, where trade is kept within the books of the operator is called “dabba” in the popular market terms. A Dabba operator flouts rules and regulations relating to Client Protection, which includes registrations, margins, transaction, execution and settlements. Not only has he evaded the Income tax regulations, which prohibit dealings in cash, but also service tax rules and many other mandatory requirements. If we deeply research into this subject we can understand that a dabba trader do not have the periodical derivative FNO settlement dates being followed. A dabba operator allows the client to carry forward the trade, be it in cash or in derivative segment for a period, not necessarily prescribed by the stock exchange..The settlement cycles are decided by the dabba operator, himself. There is no daily mark to market settlement if the trade is in client’s favour, whereas losses are extracted regularly from the clients.

To describe Dabba trading in lay man words , “You put money to get 100 shares, but the software will register only 10 shares officially in the market, and you will see 100 in your screen, which makes you believe that you really purchased 100 stocks, which is inaccurate”. It is not the investor who makes money, the broker who involves in trading on behalf of an investor makes the money, with 10% of cash put in their pockets illegally and unknown to the investor. Also these brokers don’t deal with successful investors, mostly targets the average and pity ones.

I believe it to be an offence, not much different from smuggling or black marketing. As a result, frequent raids are conducted on dabba trading operators in which their computers and records are seized. Those working in his office are also taken in the custody once they find such activities taking shape. If we run through the media, we can learn that the Gujarat police has conducted several raids in the past and alerted citizens. Media has also played its role in reducing the menace of dabba trading. Some dabba traders hedge their positions in the

market by partly executing the trade in the market, maybe in their own proprietary accounts or some benami names. Dabba traders disappear when the market goes against them, resulting in huge losses for their clients. The brokers who permit such activity in their branches or even sub-broker’s offices are the affected parties. Stock exchanges take

complaints against dabba trading very seriously and enforce strict penalties. Even suspension is levied, if stock exchange inspections confirm the complaint As Sensex jumps, resulting in the spurt in trading activity, dabba traders bounce back in the business. Hence constant vigilance is required.

IBN Live in one of their article revealed that Dabba trading, is still a thriving business in Mumbai, Ahmedabad, Rajkot, Jaipur and Ludhiana long after the SEBI had banned it. They claim that the dark side of this unauthorised stock trade is that it has undergone a technological makeover and paper notebooks have given way to hi-tech software. Available for Rs 2,000 to 8,000 in Mehsana, Gujarat, this software deletes one zero from the number of shares entered for trade. So, if a broker keys in hundred shares, only 10 will get fed into the official exchange terminal. However, the Dabba traders' screen will still show 100 shares. Many a times, it’s hard to understand the state of mind of the investors because some investors, for their profit, trade with these dabba traders knowing their illegal activities only because they facilitate trade with only 10 per cent margin instead of the 25 per cent as in a legal trabsaction in the Future and Option Segment (FNO). That means to buy shares worth Rs 1,000, an investor needs to deposit only Rs 100. However, it's not the investors who make money in this trade, but the brokers, who are quite often not even registered with a stock exchange.

 The clients patronizing such dabba traders may find some short-term benefits here. They do not follow ‘Know Your Client’ norms; fill cumbersome forms, sign long agreements and requirements like PAN card. Margins are bypassed and leveraging is freely available. Unaccounted cash is used for making payments rather than making payment by cheque. There are histories written in blood when Dabba shops close overnight, with traders disappearing from the locality once they see a killing in the market. They go to the extent of employing goons for the recovery of losses. In such a case, neither Stock Exchange Arbitration is available to the investor nor there is any access to customer protection funds which is of up to Rs. 100000.

Nobody has a clue about the dabba market size but it’s functioning on a large scale and it is certainly something which might beat any estimation made during research. However the figures of the Dabba Market turnover for the year 2005 was 5.72 lakh crores which then multiplied near to 24 times to 119.48 lakh crores in the year 2011 and after SEBI’s stringent action and trading policies saw this market shrinking 53.11 lakh crores till July 2012.

CORRUPTION PERCEPTIONS INDEX 2012

TOP TEN COUNTRIES WITH HIGHEST QUALITY OF LIFE

Top Ten Countries with Highest Quality of Life is based on Human Development Index (HDI). Top countries include Norway, Australia and Sweden.

Figures indicate Inequality Adjusted (HDI).

Norway - 0.846
Australia - 0.864
Sweden - 0.824
Netherlands - 0.818
Germany - 0.814
Switzerland - 0.813
Ireland - 0.813
Canada - 0.812
USA - 0.799
South Korea - 0.731

TOP TEN COUNTRIES MOST IN DEBT

The Top Ten Countries Most in Debt has been prepared on the basis of the Total External Debt of a country. (in million $).

United States - 14710000
United Kingdom - 9836000
France - 5633000
Germany - 5624000
Japan - 2719000
Italy - 2684000
Netherlands - 2655000
Spain - 2570000
Ireland - 2352000
Luxembourg - 2146000

TOP TEN FASTEST GROWING ECONOMIES

The Top Ten Fastest Growing Economies map has been prepared on the basis of the GDP growth rate of a country.

Figures indicate GDP growth rate (%).

Equitorial Guinea - 18.9
China - 9.2
Ireland - 6.5
Vietnam - 6
Sudan - 5.6
Maldives - 5.4
Chile - 5.2
Guyana - 5.0
Myanmar - 4.8
South Korea - 4.7

TOP TEN POWERFUL COUNTRIES

The Top Ten Most Powerful Countries in the world is based on the 2011.

 Figures indicate National Power Index (NPI).

USA - 0.904
China - 0.854
France - 0.844
United Kingdom - 0.825
Germany - 0.774
Russia - 0.770
Japan - 0.752
Italy - 0.696
Canada - 0.682
Sapin - 0.668

TOP TEN POOREST COUNTRIES

The Top Ten Poorest Countries has been prepared on the basis of the GDP of a country. A country with a GDP per capita of $765 dollars or less is defined as a low-income or poor country.

Figures indicate Gross Domestic Product (GDP) per capita in $.

DR Congo - 348
Liberia - 456
Zimbanwe - 487
Burundi - 615
Eritrea - 735
Central African Republic - 768
Niger - 771
Sierra Leone - 849
Malawi - 860
Togo - 899

TOP TEN RICHEST COUNTRIES

The map of Top Ten Richest Countries in the world is based on the GDP (per capita $) of each country. Top countries include Qatar, Luxembourg and Singapore.

Figures indicate Gross Domestic Product (GDP) per capita in $.


1) Qatar - 88,222
2) Luxembourg - 81,466
3) Singapore - 56,694
4) Norway - 51,959
5) Brunei - 48,333
6) United Arab Emirates 47,439
7) The United States - 46,860
8) Hong Kong - 45,944
9) Switzerland - 41,950
10) Netherlands - 40,973

PERSONALISE YOUR FINANCE

One of the best ways to get your financial affairs in order is to consult with a financial planner—someone who can answer questions about your specific goals and individual situation and guide you towards covering all your bases (from budgeting to saving enough for emergencies to consolidating student loans or planning properly for retirement).

Its turning very important to understand the need of getting an expert advise but the fact arises that we also need to make sure that we are not being imposed schemes that do not suit our financial goals. It happens that many a times based on the commission being received by the financial adviser they tend to push schemes or plans a portfolio for you which might be more of high risk asset class and is not balanced.

Many financial advisers encourage investors to chase returns and to invest in expensive actively managed funds. Advisers were much more likely to recommend actively managed mutual funds. The frequency of recommendations for actively managed funds combined with recurrent downplaying of fees helps conclude that advisers recommend the more expensive funds because it puts more money in their own pockets.

3 Tips:

1) Understand if your financial adviser is being pushy about a particular scheme.
2) Its a red flag when a product is recommended before your entire financial situation is known.
3) Beware if investment recommendations are made before quantifying how much is "Enough" to save.





 

PERCEPTION - OUR GUIDE TO RIGHT STEPS

UNDERSTAND GLOBAL ECONOMIC CRISIS

I'm sure understanding of this would be essential to connect more closer to the world of finance.