November 10, 2013 Volume 16
FinXpress Volume 16 November 10, 2013
From The Editorial A Nostalgic week after Diwali Holidays
From The Editorial In Focus: Twitter IPO Opinion: RBI Initiative on wholly owned subsidiary: An Opportunity or a Threat Term of The Week Market This Week News Fun Corner
This past week has been quite a nostalgic affair for all of us. Hope you all enjoyed Diwali to the fullest and are now back to IMT once again with full energy and vigor. Term 3 has started for all juniors in its full spirit and the final placements are about to begin for our Seniors. Its time to once again update ourselves with the latest happenings of this dynamic and complex financial world. Here we bring t o you our In Focus informing you about the latest and the most discussed about buzz of the stock markets i.e. The Twitter IPO. Continuing with it we have our Opinion Section on the latest RBI initiative on the Wholly Owned Subsidiary. To update the people with the basket of financial knowledge we have the Term of the Week i.e. Merger Defense Mechanisms as well news and Market for the week. Our Flagship Event RISCON â€™13 is all set to start next week. We have speaker sessions, panel discussion on the latest financial happening all around the world as well inter B-School case study Encephalon to test the financial planning acumen. Do register yourselves for the knowledge-filled sessions. For further enquiries, contact your FinNiche representative of your class. We hope you enjoy the various articles in this edition of FinXpress. We look forward to your comments, acknowledgements and your criticisms regarding our online magazine. We plan to invite articles for the different sections in FinXpress in a few weeks. Hopefully, you would write one for us!
Happy Reading!!! Regards, The Editorial Team FinNiche Club
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. November 2013
TWITTER IPO —- By Himika Choudhary
With the end of day 1 of Twitter’s IPO, its stock price soar to $44.9, a 73% increase from the initial public offering price of $26. The company raised a modest of $1.8 billion and after the strong first day success, Twitter became one of the most successful IPOs of the year. The opening bell was rung by actor Patrick Stewart, a Boston police department representative and a nine – year old who sold lemonade to raise money to end child slavery. Twitter IPO turned out to be a stark contrast from the initial public offering of Facebook Inc in last May . Twitter had incurred losses amounting to almost $134 Million in the first three quarters of this year almost double of the net losses of the same period reported last year. Facebook, however, had reported $205 Million earnings in the quarter before it went public. There were views which suggested that it was not the right time for Twitter to go public as Facebook had plummeted soon after its IPO. To make sure what they did was right, Twitter selected Goldman Sachs as its lead underwriter whereas Facebook had picked Morgan Stanley. Twitter listed on New York Stock Exchange while Facebook listed on Nasdaq, to avoid trading glitches in the initial hours of trading. Basis the learning that Facebook shares had dropped after its IPO, Twitter ensured that its shares were sold for a price low enough to attract interest. At the outset, the strategies seem to have been paid off. Yet even after such a sizzling start, the frenzy seems to be fading away. At the close of market on Friday, the Twitter shares retreated. The stock closed at $41.64, 7.24 percent lower than the previous day. The view on the company is held positive but the price seems too high to be able to be
justified. Based on fundamental analysis, the investors are finding hard enough to value Twitter at $14 Billion in contrast to the $24 Billion valuation it reached on the first day. Concerns about a potential bubble in the social media sector have also been raised. Daniel Ernst of Hudson Square Research issued a “sell” recommendation saying that the “Bird should be Flipped”. According to him, the company is priced at 600 times its projected earnings and is more than fully valued. Certain other analysts felt that valuation is difficult because of uncertainties in growth of advertising and costs of market and research borne by the company. Wedbush, yet another analyst issued a “neutral” recommendation.
With the significant growth in the social media sector, the investors are overzealous lured by the massive number of users, as against any other sector having uncertain profitability. Twitter being valued at no more than $8 Billion and losses of more than $440 Million since 2010 is gaining popularity with over 230 Million users and still growing exponentially. In a period where the investors are more focused towards the opportunities and gains than the risk associated, the Twitter bubble would rise or burst is yet to be seen.
RBI initiative on Wholly-Owned Subsidiary – An Opportunity or A Threat -By Sutapa Mishra
The initial minimum paid-up voting equity capital for a WOS shall be 5 billion
Originally foreign banks have presence in India as branches only. As a result they follow the rules and regulation of the parent countries. Further their presence is limited Major Opportunities: as they require permission from the central These branches now come under the bank i.e Reserve Bank of India for opening purview of India banking systems and of any new branch. hence need to follow the RBI norms. During recession it was observed that there At least 25% of their branches need to was not enough interconnectedness of these serve the un-banked rural centers i.e. Tier banks with the Indian Government which 5 and Tier 6 cities. This will also increase would have helped to reduce the liquidity the money supply opportunities within the crunch during the crisis period. The lessons economy learnt during the time lean in favor of These banks will be allowed to open domestic incorporation of foreign banks. branches without any prior permission RBI unveils Norms: from RBI, hence acquaintance with foreign RBI allowed foreign banks to setup their banks will increase among the mass there operations in India though a wholly-owned by decentralizing the banking business independent subsidiary (WOS). which is mostly dominated by State Bank of India. The Model: Increased employment opportunities Setting up of the WOS needs approval for the common mass. from the home country and RBI. Also about one third of senior The banks which never carried any management of these WOS have to be banking business in India and needs Indian Nationals to carry out now can carry out only thorough wholly owned subsidiary. Major Threats: Foreign banks which commenced banking business in India from August With the independence of opening 2010 onwards were required to furnish branches, the foreign banks may an undertaking that they would dominate the Indian Banking system convert their branches into wholly WOS gets the permission to easy owned subsidiaries if so required by merger and acquisitions of local lenders in RBI. India which will increase the market Foreign banks which commenced competition banking business in India before August 2010 shall have the option either to continue their banking business through the branch mode or to convert those branches into a wholly owned subsidiary.
Merger Defense Mechanisms â€”- By Mukul Gupta
A target company in case of a merger triggers a defense mechanism when it does not want to get acquired. This generally happens in case of a hostile takeover. These measures can be divided into two classes: (1) pre-offer defenses (2) post-offer defenses.
Restricted voting rights: Equity ownership above some threshold level (e.g., 15% or 20%) triggers a loss of voting rights unless approved by the board of directors. This greatly reduces the effectiveness of a tender offer and forces the bidder to negotiate with As the terms imply, defensive measures can the board of directors directly. be taken either before or after a hostile offer takes place, but most M&A legal experts Golden parachutes: Golden parachutes are recommend that defenses be set up before compensation agreements between the an offer occurs, because pre-offer defenses target and its senior management that give tend to face less scrutiny in court. Thus a the managers lucrative cash payouts if they company sets up pre-emptive defense leave the target company after a merger. mechanisms in order to help ensure that it remains independent or to increase its Post-Offer Defense Mechanisms purchase price. "Just say no" defense: The first step in Pre-Offer Defense Mechanisms avoiding a hostile takeover offer is to simply say no. If the potential acquirer goes Poison Pill: In its most basic form, a poison directly to shareholders with a tender offer pill gives current shareholders the right to or a proxy fight, the target can make a purchase additional shares of stock at public case to the shareholders concerning extremely attractive prices (i.e., at a why the acquirer's offer is not in the discount to current market value), which shareholder's best interests. causes dilution and effectively increases the cost to the potential acquirer. The pills are Greenmail: Essentially, greenmail is a usually triggered when a shareholder's payoff to the potential acquirer to terminate equity stake exceeds some threshold level the hostile takeover attempt. Greenmail is (e.g., 10%). an agreement that allows the target to repurchase its shares from the acquiring Staggered board: In this strategy, the board company at a premium to the market price. of directors is split into roughly three equal- The agreement is usually accompanied by a sized groups. Each group is elected for a 3- second agreement that the acquirer will not year term in a staggered system: in the first make another takeover attempt for a year the first group is elected, the following defined period of time. year the next group is elected, and in the final year the third group is elected. The Crown jewel defense: After a hostile implications are straight-forward. In any takeover offer, a target may decide to sell a particular year, a bidder can win at most subsidiary or major asset to a neutral third one-third of the board seats. It would take a party. If the hostile acquirer views this potential acquirer at least two years to gain asset as essential to the deal (i.e., a crown majority control of the board since the jewel), then it may abandon the takeover terms are overlapping for the remaining attempt.
Market This Week BSE tanked almost 600 points closing at 20,666 level amid fears of possible QE tapering from FED. Financial, Oil & Gas, FMCG stocks were the biggest losers while TATA groups gained significantly. RBI formally announced a frame work for setting up 100% subsidiaries by foreign banks in India. BSE SENSEX
SENSEX Simple Moving Averages Thirty Days Fifty Days Hundred and Fifty Days Two Hundred Days
20,504.91 20,074.16 19,575.18 19,530.53
Nifty Simple Moving Averages
Thirty Days Fifty Days Hundred And Fifty Days Two Hundred Days
6146.20 6002.64 5900.24 5901.80
Commodity Gold Silver Crude Oil
Unit 10 grams 1 Kg 1 bbl
Rs / Unit 29715.00 48165.00 5998.00
% Change -0.69% -0.57% 0.98%
Lending / Deposit Rates
Base Rate Savings Deposit Rate Term Deposit Rate
9.8%-10.25% 4.0% 8%-9.05%
Key Policy Rates and Reserve Ratios
Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio Statutory Liquidity Ratio
8.75% 7.75% 6.75% 4% 23%
Exchange Rates INR / 1 USD INR / 1 Euro INR / 100 Jap. YEN INR / 1 Pound Sterling
62.73 84.06 63.94 100.92
NEWS Twitter shares soar in frenzied NYSE debut Twitter Inc shares jumped 73 percent in a frenzied trading debut that drove the seven-year-old company's market value to around $25 billion and evoked the heady days of the dot-com bubble. The strong performance on Thursday was encouraging for the venture capitalists who have backed other consumer Web startups, such as Square or Pinterest, though it sounded alarm bells for some investors who cautioned that the froth was unwarranted. The stock closed its first day of trade on the New York Stock Exchange at $44.90 a share after hitting a session-high of $50, nearly double the initial public offering price of $26 set late on Wednesday. India squeezes its oil firms to meet fiscal deficit target State-run oil companies are feeling the pai n o f th e fi n a n ce mi n i ste r's determination to meet his fiscal deficit target, with officials warning that exploration is under threat and losses at oil firms could steepen. Oil Minister M. Veerappa Moily warned the Finance Minister, P. Chidambaram, that the subsidy burden placed on upstream companies was making oil fields unviable. His ministry also forecast that revenue losses further downstream at fuel retailers Indian Oil Corp, Bharat Petroleum and Hindustan Petroleum will rise to 803.16 billion rupees in OctoberMarch, from 623.32 billion rupees in April-September.
reserves had risen by $1.82 billion to touch $282.95 billion for the week ended Oct 25. According to the Reserve Bank of India (RBI) Weekly Statistical Supplement, India's foreign currency assets (FCA), the biggest component of the forex reserves, decreased by $894.2 million to $253.60 billion for the week under review. RBI said the FCA expressed in US dollar terms included the effect of appreciation or depreciation of non-US currencies held in reserve such as the pound sterling, euro and yen. China Inflation hits 8-month high amid tightening fear China's annual inflation climbed to an eight-month high of 3.2 percent in October as food costs soared, fanning market worries about policy tightening as factory output and investment data pointed to signs of stabilisation in the economy. Inflation, which quickened slightly from 3.1 percent in September, was still lower than a median forecast of 3.3 percent in a Reuters poll and was below the official target of 3.5 percent for 2013. US jobs market dodges blow from government shutdown U.S. job growth unexpectedly accelerated in October as employers shrugged off a partial government shutdown, suggesting the economy was on firm footing and raising the prospect the Federal Reserve may soon decide to temper its bond-buying stimulus.
Employers added 204,000 new jobs to their payrolls last month, and 60,000 more jobs were created in September and August than previously reported, the Labor Department said on Friday. The unemployment rate, however, edged Indiaâ€™s forex reserves down $1.65 bn up to 7.3 percent from September's to $281 bn nearly five-year low as federal workers India's foreign exchange (forex) reserves were idled. Economists expect a reversal declined by $1.65 billion to touch in coming months. $281.29 billion for the week ended Nov 1, official data showed. The forex India budgeted fuel subsidies for the fiscal year to March 2014 at 650 billion rupees. The oil ministry said that is likely to be more like 1.4 trillion rupees.
Rupee weaker after ECB rate cut The rupee is trading at 62.68/69 versus its close of 62.41/42, tracking the dollar's strength versus other Asian currencies and weakness in domestic shares. The BSE Sensex trading down 0.38 percent.
The interactive meeting was organised jointly by the Federation of Indian Chambers of Commerce and Industry (FICCI), the Confederation of Indian Industry (CII) and the Associated Chambers of Commerce and Industry (Assocham).
Most Asian currencies trading weaker compared with the dollar. The euro struggled in early Asian trade after the ECB's surprise interest rate cut sent the single currency plunging to near eightweek lows, but the dollar's gains were tempered ahead of the key U.S. payrolls report later on Friday.
India has been negotiating a free trade agreement with six -nation GCC grouping since 2004. The two sides had signed a framework agreement on economic cooperation in August 2004, and have held several round of talks for the free trade agreement.
Investors to keep focus on Fed for tapering clues The U.S. stock market's rally could be put to the test next week if comments from Federal Reserve officials including Janet Yellen add to views the central bank could be scaling back its stimulus plan sooner rather than later. While next week is light on economic news, bond yields have been rising, giving further credence to the idea the Fed may soon temper its bond-buying program in the near future. With less than two months left in the year, many investors are bracing for something that could shake up the stock market and the Standard & Poor's 500's 24 percent year-to-date gain. That could come from the Fed, even if it's just that investors begin to anticipate the Fed is ready to make a move soon. India seeks Kuwaitâ€™s support for GCC free trade agreement India Friday sought Kuwait's support for early conclusion of a free trade agreement with the six-nation Gulf Cooperation Council (GCC). At an interactive meeting organised by the industry chambers here, Commerce and Industry Minister Anand Sharma urged visiting Kuwaiti Prime Minister Sheikh Jaber Al-Mubarak Al-Hamad AlSabah to play an active role for ensuring an early conclusion of the trade deal.
Kingfisher Airlines posts $114 million loss in Q2 Kingfisher Airlines Ltd, which has been grounded for more than a year, reported yet another quarterly loss with no income from operations. Net loss was 7.16 billion rupees for its fiscal second quarter ended September 30, compared with a net loss of 7.54 billion rupees a year earlier, Kingfisher said in a filing to the stock exchanges on Friday. Kingfisher, once India's no.2 carrier and headed by flamboyant liquor baron Vijay Mallya, has not flown since October last year for want of cash. Bids to revive operations have seen little success so far. The company reiterated on Friday that it was exploring various options to recapitalise and resume operations and that talks were on with prospective investors. Uflex revenue rises to Rs. 1516 crore Flexible packaging firm Uflex said its revenue rose to Rs.1,516 crore for the quarter ended September as compared to Rs.1,250 crore recorded in the same period last year. However, the company's net profit dropped to Rs.46 crore for JulySeptember quarter from Rs.57 crore recorded in the same period last year. The company had posted Rs.43 crore profit in the first quarter of the current financial year.
Fun Corner FinQuiz
Last Weekâ€™s answers
1. A _________ investment has both debt and equity features. 2. A short term loan until long term financing is obtained is called _________ loan. 3. __________ serves as the largest bank in terms of capitalization in the world. 4. A mortgage with low down payment is called __________ mortgage.. 5. Buying put option maximizes _______ _ in a bearish market while putting a cap on maximum _______ that can be incurred.
1. 2. 3. 4. 5.
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Volume 16 Publisher: Vipul Kumar Singh
In Focus: Twitter IPO Term of Week: Merger Defence Mechanism