Niveshak May18

Insolvency & Bankruptcy Code End In Sight?

May 2018 Volume XI Issue IV

Adios * Au revoir * SayĹ?nara

Dear Niveshaks,

The past few months have been busy for our team. Scattered off to different parts of the country, we were asked to prove our mettle in different fields under different circumstances.

While the experience was extremely valuable, we ended up having to compromise on one of our primary responsibilities as the Finance and Investment club of IIM

Shillong. We decided not to release the magazine over the past two months primarily because our primary demographic, the students were busy with their internships too.

However, we apologise to our regular readers and the ex-office bearers who felt let down.

This month’s cover story focusses on the Indian Bankruptcy Code[IBC] which had

its first successful nonperforming asset sale over the past few weeks.

Whether this is just the start to the successful resolution of the NPA mess or just a flash in the pan is something that is hotly debated among even among us club members without a conclusion. This after some of us have spent the past few moths working on the very topic.

The Aritcle of the Month is an investigation into whether leading European banks like Deutsche Bank, UBS, Barclays Bank were rigging the LIBOR so that they could borrow money at relatively inexpensive rates to make the bank appear less risky and insulate itself. Remember, the LIBOR is governed by just a set of mutual agreements but widely used as a proxy to gauge lending rates.

The FinGyan looks at whether the current market valuations are too high and pose a risk to the market. With a raft of IPOs last year and the continuing trend this year, Juxtapose looks at the intricacies of direct listing against an IPO. The Classroom looks at an intriguing phenomenon called the prospect theory which tries to explain one aspect of the irrational market behaviour.

Hope you have as much fun in reading the magazine as we had in making it!

To download the magazine, please go to our website: https://niveshak.wixsite.com/ home/archive

THE TEAM Aayushi Garg Abhishek Soni Arpit Murarka Bhushan Bavishkar Mahesh M Priyanshu Gupta Samprit Shah Sheshav Dosi Sriya Gupta

Stay Invested, Team Niveshak

All images, design and artwork are copyright of IIM Shillong Finance Club

Š

Finance Club Indian Institute of Management Shillong Disclaimer: The views presented are the opinion/ work of the individual author and the Finance Club of IIM Shillong bears no responsibility

Contents NIVESHAK: MAY 2018

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The Month That Was

Article of The Month: LIBOR Scandal

Cover Story: Insolvency and Bankruptcy Code

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FinGyaan: Is Indian Stock Market heading towards a crisis?

JuXtapose: Direct Listing v/s Conventional IPO

Clasroom: Prospect Theory

Niveshak May’18

The Month That Was Brent Crude crosses 80$ mark After remaining at prices below 70$ per barrel for last three years, oil market hit the 80$ price in May. OPEC’s output policy, rising interest rates being few of the reasons. With the US backing off from the Iran-nuclear deal, uncertainty looms over the supply side of the cycle.

India has been the beneficiary of the lower oil prices over the last few years. With increase in oil prices, inflation and fiscal deficit targets are to be looked at. Recently Economic Survey estimated that every $10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points, increases WPI inflation by about 1.7 percentage points and worsens the CAD by about $9-10 billion dollars. India being 3rd largest oil importer, imports 82% of its total oil requirement and Brent crude oil makes up around 28% of India’s total imports. Prices of downstream products in India such as Petrol and Diesel also hit their lifetime high in the month of May. With geopolitical factors getting stable, all eyes are set on the biannual meeting of OPEC which is scheduled on 20th June. The outcome of which, will decide the future trend in the oil market.

TATA Steel acquires Bhushan Steel With the acquisition of Bhushan Steel Ltd (BSL) for ₹35,200 crore, Tata Steel has emerged as the first company to acquire a stressed asset under the new Insolvency and Bankruptcy Code.

As on February 1, 2018, Bhushan Steel owed banks Rs 56,051 crore. Tata Steel will pay Rs 35,200 crore to the banks, as a part of the deal. This means banks will have to take a haircut of Rs 20,851 crore (Rs 56,051 crore minus Rs 35,200 crore) or 37%, on the loans they had given to Bhushan Steel.

A rate of recovery of 63% is pretty good in comparison to what banks can recover in the general scheme of things. Between April 2014 and December 2017, Rs 29,343 crore of the bad loans that have been written off (Rs 2,72,558 crore) has been recovered by public sector banks.

With new IBC in place, the bad loan recovery by banks is set to get better in coming period.

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The Month That Was

RBI increases the Repo rate first time in Modi regime RBI Governor Urjit Patel-headed Monetary Policy Committee (MPC) announced a 25 basis points hike in repo rate to 6.25 percent. The central bank also maintained its policy stance unchanged at ‘neutral.’

The neutral stance was cheered by the Dalal Street as the Bulls regained the lost momentum and Indices saw fresh buying in the coming sessions.

Rupee also appreciated by more than 1.5% after getting some support at low levels of 68.

posted a rise of 4.5 percent in its Q4 net profit. In the January-March quarter, the company reported a net profit of Rs 6,925 crore, up 4.57 percent against Rs 6,622 crore posted in the same quarter last year.

Currently, the share is trading around Rs.1750 After improved macroeconomic outlook and better Q4 results for the companies, now all eyes on set on which company will cross 100 Billion mark. Reliance and HDFC are in the race to be next to reach this milestone.

No buyers for Air India, Again!!

With crude oil getting stable at price of 75$ and normal monsoon forecast, inflation has been brought un- The debt-laden Public airline has failed to attract any der some control. After a rise in interest rates, RBI and bids during the auctioning process of the beleaguered government will see themselves in a new cycle, which Air India. can see 1 or 2 interest rise in this financial year.

TCS hits $100 billion market cap On April 23, the market capitalization of Tata Consultancy Services Ltd crossed the $100 billion milestone.

It hit a high of $103 billion (Rs 6.8 lakh crore). The shares hit a high of Rs 3,557.00 on the BSE on that day.

The rise in the TCS scrip’s fortune came after the it

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In April, the Narendra Modi administration offered to sell 76 per cent of Air India. Of AI’s total debt, bidders for the airline arm — AI Express, AI and AI-SATS (airport service company) — will have to take over the debt of Rs 24,576 crore and current liabilities of Rs 8,816 crore or a total burden of Rs 33,392 crore.

Tata Group, Singapore Airlines (SIA), which together run Vistara, and InterGlobe Aviation Ltd, owner of the IndiGo carrier, were all linked to a takeover but ruled themselves out.

Niveshak May’18

Article Of the Month

Gaurav Gambhir Department of Financial Studies, University of Delhi

LIBOR Scandal: The Biggest Banking Heist “T

that shook the banking industry around the world and he few who understand the system, will either be affecting $350 trillion worth of assets. so interested from its profits or so dependent on its favours, that there will be no opposition from that class.”

— Rothschild Brothers of London, 1863 What is LIBOR and how it is regulated?

Introduction There have been many financial scandals happened in the modern history which became household name for people around the world such as Ponzi scheme, Enron Accounting Scandal, Lehman Brother Bankruptcy etc, but one scandal which was biggest of all these scandal and still remained mostly unnoticed to most people is LIBOR Scandal which was revealed in 2012 by international investigation agency. Many big banks including Deutsche Bank, Barclays Bank, UBS and RBS were found to be manipulator of LIBOR rate. In this article let us understand what actually happened back in 2012

London Inter Bank Offered Rate is the interest rate at which banks offer to lend unsecured funds (call money) to one another in the international interbank market. It is a benchmark rate which determines the costs of borrowing for banks. LIBOR is also used as a reference rate for floating-rate bonds derivatives and other financial products and it is estimated that LIBOR affects $350 trillion of financial products around the

world.

The LIBOR rate is now under the supervision of Intercontinental Exchange Libor (previously by British Bankers Association) and published by Thomas Reu-

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Article of the Month ters and is calculated for 5 currencies. The rate is calculated using a trimmed arithmetic mean, by excluding the highest and lowest 25% of submissions given by 18 contributing banks. Libor is the most relied upon global benchmark for short-term interest rates. The rate for each currency is set by panels of between eleven and eighteen banks.

What is the Scandal?

As stated earlier the rate is used by banks to determine the cost of borrowing the overnight funds and involves billions of dollars in lending and borrowing across banks. So even a small movement in the rate help banks gain or lose huge amount of money.

It was found after an investigation that banks including Deutsche Bank, UBS, Barclays Bank were rigging the LIBOR so that they could borrow money at relatively inexpensive rates to make the bank appear less risky and insulate itself. They would also manipulate the rate so that their traders could make profits on the derivatives pegged to the base rate.

Complicit Regulators

In 2012 during the British parliamentary committee hearing on LIBOR scandal, Bob Diamond, the former CEO of Barclays Bank, described regulators on both sides of the Atlantic as partly complicit in a scandal involving the manipulation of a key interbank lending rate. He claimed that during the time of financial crisis the bank had ‘raised concern’ with British regulators that other banks and financial institutions were being dishonest about LIBOR rate.

He also disclosed a conversation between him and the Bank of England’s deputy governor, Paul Tucker that took place in October 2008. Diamond claimed that Tucker was concerned of high LIBOR rate submission

by Barclays and suggested that such high level did not need to be as “high” as they were.

When did it start?

It is believed that the scandal started as early as 2005 when it was speculated that Barclays had tried to manipulate dollar LIBOR and EURIBOR (the Euro zone’s In the above chart it could be clearly seen that a day equivalent of LIBOR) rates at the request of its deriva- after Diamond and Tucker talked about the concern, tives traders and other banks. the lending rate fell sharply indicating that there might be a possibility of truth in Bob Diamond claims.

According to a report by FSA, between 2005 and 2009, Barclays derivatives traders attempted to manipulate However, Paul Tucker told the British parliamentary LIBOR by requesting that submitters submit rates committee that he had not made the call to discuss that would “benefit the traders’ trading positions” in- markets. The concern was that the Barclays’ high Libor stead of rates that conformed to the LIBOR definition. submissions were creating the impression in the marWith the advent of Financial Crisis in 2007, Barclays ket that the bank was in trouble. He said there were manipulated LIBOR downward by requesting LIBOR worries that Barclays was ‘next in line’ after RBS and calculators that it could borrow money at relatively in- Lloyds had accepted capital from the government. expensive rates to make the bank appear less risky and insulate itself. These low rates provided the bank with Once a star, now on earth a degree of stability in an unstable time. In 2012, Barclays admitted to US and UK regulators to settle the The first person to be convicted in the LIBOR dicase.

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saster was Thomas Hayes. Once a star trader for UBS and Citi Group has now been sentenced for fourteen years in prison by US authorities.

Niveshak May’18 and Bank of America were also fined which in total sums up to £3.9bn. Experts say that bigger pains for these giants than penalty is their reputation and trust of stakeholders in LIBOR. In the recent years the regulators are thinking of an idea of replacing LIBOR with some other benchmark rate which is not controlled by these bog banks.

Replacement of LIBOR With a graduation in mathematics and an MBA from Hult Business School, Hayes started at the interest rate derivatives desk in RBS and rose through the ranks of junior trader and then moved to UBS in Tokyo, where he began making trades involving the discrepancies between the LIBOR rate and Japanese interest rates.

Hayes’s favoured activity was basis trading (a trading strategy which consists of the purchase of a particular financial instrument or commodity and the sale of its related derivative), speculation on the movements in Libor expressed in multiple currencies and various durations. His success to generate profits for his bank and therefore bonus for himself was determined by daily reporting of LIBOR rates by bankers which gave him a big incentive to manipulate the rates. By September 2008, a one basis point (1/100 of one per cent) move in Libor had about a US$750,000 effect on his bottom line. Hayes was arrested in December 2012 by British authorities for his involvement in the manipulation of LIBOR and after few days he was charged by the United States for the same crime.

Pains in the aftermath

In 2014, both the Financial Stability Board (FSB) and the Financial Stability Oversight Council (FSOC) in the U.K. reported concerns over the reliability and robustness of the interbank offering rates (IBOR). The main issues raised by the FSB and the FSOC were that the rates banks report in order for these benchmark rates to be created do not have to be based on actual transactions, and overly rely on transactions in a relatively low-volume market, which increases the potential for manipulation. As a consequence, the FSB recommended IBORs or other similar rates are determined with greatest extent possible of real transaction data.

But it is easier said than done. Abolishing a benchmark like LIBOR is far harder. Even though the exposure of LIBOR in the global financial system has reduced, it is still a massive one. The floating rate still remains an important part of financial contracts globally with exposure of $240 trillion. It is used as cost of payments on corporate business loans, credit cards, auto loans and derivatives such as interest rate swaps, according to consultants Oliver Wyman.

Therefore, we can say that even though LIBOR is not going away in the near future but its measurement and supervision has to be improved if it wants to remain the number one benchmark rate for global financial

Post the revelation and the admission of wrongdoings

by Barclays, the bank was fined £284.4m by UK and institution for the long time.

US regulators. Along with Barclays, five other banks i.e. Royal Bank of Scotland, JP Morgan, UBS, Citigroup

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Niveshak May’18

Cover Story

Insolvency and Bankruptcy Code

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he definition of Non-Performing Asset has gradually evolved. Primitive definitions of NPA explain it as an asset that does not generate any return or value for a bank. The definition was later rephrased & the concept of “Past dues” was introduced by the RBI. NPA now means a credit in respect of which interest and/ or installment of principal has remained ‘past due’ for a specific period. The period too has been revised frequently by the RBI. The first period finalized under the supervision of Narasimhan committee was four quarters which was eventually reduced to just 90 days.

The vital organs of a CDR framework are:

1) A CDR empowered group: This consists of ED level representatives of SBI, ICICI bank & other banks exposed to the credit. The CDR empowered group would work on the initial reports provided by the CDR cell & take decisions accordingly. In all cases, the decision taken the panel will be final & binding on all. To provide it a legal basis it was backed by the provisions of Debtor-Credit agreement & Inter-Credit Agreement.

2) The primary task of CDR cell was to examine the legal basis & authenticity of the papers field by the corCorporate Debt Restructuring (CDR) porate entity. Its job was to analyze the financial health of the company & if found worthy provide a debt reTo tackle the menace of NPA’s the government structuring plan within 30 days from receiving the forof India introduced the Corporate Debt Restructuring mal application from the corporate. scheme in August of the year 2001, whose aim was to find a mid way between the banks (creditors) & corpoMajor Achievements rates ploughed by genuine issues related to nonperformance of their ventures.

There has been an increase of 187% in the num-

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Cover Story ber of cases referred to CDR cell. Given such an unusual increase the CDR cell notified all banks in early 2014 to carry out forensic audits before actually discussing the cases before the CDR board. This proactive move was to check the quality & authenticity of firms requiring additional fund.

promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”

The salient features of the law are as follows: 1. The law aims to proactively identify financially distressed assets by laying down a clear, coherent & time· Since, in CDR empowered group there was a pro- bound process. vision of the representation of ED by senior management; there was a lot of delay in decision-making 2. Nomination of debt recovery tribunal & national procedure. Since the senior management had to revert company law tribunal to act as adjudicating authority to top management on multiple issues that were be- for resolving the cases yond his power, the process frequently consumed the buffer time over & above the 90 days prescribed limit 3. Establishment of an Insolvency & Bankruptcy Board & sometimes even exceeded the buffer period of 180 of India to exercise regulatory oversight over insolvency professionals & agencies. days.

Drawbacks of CDR mechanism

· The CDR cell was found to be affected by highly corrupt practices. It was observed that on numerous occasions reports were prepared at the behest of corporate friends & basic parameters like ROCE (Return on capital Employed), Debt Service Coverage Ratio (DSCR) & gaps between Internal Rate of Return (IRR) & Cost of Funds (CoF) were neglected. This brought in the implementation of faulty restructuring plans which eventually compounded the entire problem.

4. Provisions for cross border insolvency 5. The code of ethics & the role of 1st level regulator handed down to insolvency professionals. They are also given the responsibility to analyze the commercial aspects of insolvency, liquidation & form a turn around map for the firms.

6. For a firm defaulting on it’s debt, it will have to relinquish control to a Committee of Creditors who have · The RBI was neither a part of the Empowered group 180 days to evaluate the proposals for restructuring the nor the CDR cell. Hence it’s role was mainly advisory company or taking it into liquidation. It permits a one & not explicit. As a result of these banks sometimes time extension up to 90 days by the NCLT in deserving followed a lackadaisical approach & instead of classi- cases. fying a lender under NPA category & beginning the lengthy asset reconstruction procedures went for debt 180 days for Resolution Process too restructuring. The reflection of this can be seen in the long or too short? massive increase in the number of wrapped up bad loans after strict vigilance from RBI. A timeline is a matter of perception some may find

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it long while the others may find it short. But generally in case of institutions it is observed that initial adherInsolvency & Bankruptcy Code ence to time lines is low due to paucity of resources but once adequate technology, human resource & legal The law came into force on 28th May,2016 & the framework is set the mechanism become robust & the gazette notification defines the law as “An Act to con- time required for disposition of application reduces. solidate and amend the laws relating to reorganization The time line here needs to be seen from three perspecand insolvency resolution of corporate persons, part- tives. First, there is enough incentive for adherence to nership firms and individuals in a time bound manner timeline. Since, the committee creditors is formed to for maximization of value of assets of such persons, to look after the insolvency proceeding & operate the

Niveshak May’18 firm as going concern, they gain from a quick formulation of a resolution plan which eventually saves them from painful liquidation process. Secondly, there is a presence of qualified professionals who help the board in taking decisions, there are provisions for information utilities which would provide for essential data for corporate insolvency resolution process(CIRP) & there are periods for calm wherein nobody disturbs the corporate under CIRP. Thirdly, with time a concept called “pro-pack” usually used in judiciary will come up, which means that a corporate or a creditor files for CIRP only when a reasonable plan is ready & hence closes the case soon after filing.

“Since the enactment of Insolvency and Bankruptcy Code, 2016, 2,434 fresh cases have been filed before NCLT till November 30, 2017 and 2,304 cases of winding up of companies have been transferred from various High Courts,” Minister of State for Finance said in a written reply to the Lok Sabha. Of these, 2,750 cases

have been disposed of and 1,988 cases were pending during the period under review, he added. As per the information received from public sector banks, Rs 39.63 crore had been realized till the end of last month, after filing cases with NCLT, and Rs 2.89 crore had been borne by the banks as haircut.

With a mandate to strike a balance between resolution & liquidation, IBC plays a vital role in value maximization. Cases wherein the enterprise value is sufficiently higher than the liquidation value, IBC promotes resolution over liquidation. By adhering to the principle of going concern the law tries to maximize the enterprise value & increase the ROI of the firm by setting in place a resolution plan. The fundamental aim of the IBC is to facilitate recasting a corporate faltering in it’s debt obligations; while taking care of stakeholder interests. The custodian of a corporate under consideration has the duty to maximize the value of assets of the corporates & balance the interest of all stakeholders.

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Niveshak May’18

FinGyan: Is Indian Stock Market heading towards a crisis?

Pandi Selvam A Mahalingam K IIM Kozhikode

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he place that provides an opportunity of an ownership of huge billion dollar firms to a common citizen in the country, the same place that provides an ideal breeding ground for future icons like Jhunjhunwala, Damani- Stock market. As the Oracle of Omaha rightly said it is a device for transferring money from the impatient to the patient. The so-called money transferring device has been spread across the globe and has been going through peaks and troughs since the start of 2018. In general, bears dominated the market 10 days before the announcement of Indian Union budget during the last four years but in contrast bulls took over the Indian stock market for almost entire pre-budget season after the economic survey and the IMF predicting India to be the fastest growing economy in the world [1,2].

NIFTY has experienced a whooping growth of 694.85(8.49%) points whereas SENSEX has grown by 2470.5(7.3%) in the month of January whereas the same for the calendar year 2017 recorded a rise of 2344.9 and 7430.37[3,4]. Investor Sentiment Survey conducted by AAII on Jan 3 concluded that 59.8% of polled investors were bullish about the market. This is the highest level in about 7 years and significantly higher than the average of 38.5%. The net investment from FPI’s in India grew tremendously to around Rs.2 Trillion during the calendar year 2017 Rs.-23079 trillion in the previous year [5].

But the revised target of fiscal deficit to 3.3%, introduction of Long Term Capital Gains Tax and the rise in US bond yield has created a negative sentiment among the FPIs. The duo of existing Security Transaction Tax (STT) and the new LTCG tax makes India as the highest tax imposing nation among the emerging markets in Asia [4]. Such measures from the government will result in investors shifting to other emerging markets due to cost concerns. In addition, the US bond yields has recorded to a three year high exacerbating the negative concerns about Indian market among the FPIs. These events caused the SENSEX falling from 35906.66 to 33703.59 and NIFTY to drop approximately 700 points during the month of February [1,2].

The reduction of corporate tax in US from 35% to 21% was another blow to the Indian market. The measure of tax cut implies higher earnings per share for the US investors in their domestic market. This is expected to bring down the share of FPIs, the second largest investment community of Indian market. Adding to the woes, the introduction of tariffs on metals such as iron and steel industry, aluminum had an impact as the industry’s market capitalization fell by 6.5% whereas the share of major firms like JSW steel, SAIL, TATA steel fell in the range of 10-14% at a time when the Indian stock indices were experiencing the rock bottom level of the year so far [20].

In addition, weaknesses in the key structural facet of Indian economy viz. Banking Sector doomed the investor expectations. The ability of banking sector to extend access to credit is vital for the expansion of * Modified abridged vesrion

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FinGyan economy. This is substantiated by the positive co-re- magnitude and complexity of NPAs. lation coefficient seen between the market indices and the bank indices in both BSE and NSE metrics.

All the optimistic sentiments have led to an overpriced market and as per experts view the market can be

The highly increasing amount of Non-Performing Assets (NPA) of banking sector has proved to be a barrier for the banks to lend as loans worth Rs.200000 crores is expected to head for bankruptcy court. Also, the stressed loan contribution with overdue for 61 days will spike beyond 16% of gross NPA’s when compared to the current state of 10.3%[22]. The inability of banks to lend will decrease the investment spending by companies which in turn will decrease the value creating opportunities of companies.

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The banking sector has the capability of denting other domains of business as they play a key role in the foreign trade in a global economy. A negative mark on the credibility of these banks affects the international trade as well as loss of trust of domestic investors.

For example, the fraudulent activities of public sector banks such as the fraud in Punjab National Bank with the jewelry businessman Nirav Modi dented the trust between banks and diamond traders[14]. Even with the Government measures of introducing Insolvency and Bankruptcy Board of India, the recovery of NPAs seems to be a long term goal while considering the

expected to undergo a correction of 5-10% [9]. The SENSEX rose by 38% since the start of 2016 while the EPS will be expected to grow by 16% from FY16 to FY18. This was evident across all markets as the MSCI world index increased by 27% whereas the EPS climbed by only 10% in the span of 2 years from 2016 to 2017[10].

Is short term orientation the complete story of stock market?

All these factors will result in a further downfall of market in the short term. But as Warren Buffet, the world’s third richest man and a global iconic investor rightly conveyed in his letter to his shareholders 2018, a huge success as an investor will demand the power to withstand the downtimes of the market. With banks lowering the interest rate of Fixed Deposits, the stock purchases towards mutual funds has shot up since then. The domestic inflows to the mutual fund market have hit a record high of Rs 1.6 trillion so far for the current financial year with a monthly average share

Niveshak May’18 purchase of Rs 117 billion[8-the smart investor, business standard,7th march 2018]. The contribution of equity through New Fund Offers (NFO) from mutual fund sector has more than doubled to 15% when compared to a level of below 7% in the previous year[19]. This increased level of domestic inflows will increase the tally of retail investors and reduce the dependence on FPIs. The implementation of GST is expected to bring more taxpayers into the tax bracket with revenue increasing to Rs.86706 crores in the month of December after initial hiccups[16] and also the direct tax payment has been increasing after the waves of demonetization. All such disruptions are a part and parcel of an economic cycle. In between 1897 and 1949 the S&P Composite Index has witnessed ten complete market cycles comprising of the rock bottom

bear-market lows and bull-market highs. But as Warren Buffet rightly believes the ideal focus of investment should be on long term and such a dipping market opens the doors for an ideal investor.

From the graphs, it can be inferred that the Sensex from 1979 to 2018 and S&P from 1929 to 2018 has short term dips but in the long run markets will climb up. In the last century, Dow Jones Industrial Average (DJIA) has gone from 68.13 in 1900 to 25,335.74 in 2018 despite of the 2 World Wars, Great Depression 1929, Sub-prime Mortgage crisis 2008. Hence businesses will do fine overtime.

“In terms of what’s going to happen to stock market prices in a day, week, month or year I have never felt that I knew it and I have never felt that was important.

I will say in 10, 20 or 30 years stocks will be a lot higher than they are now.”

- Warren Buffet

The principles of Value investing propounded by Benjamin Graham also helps in reinstating the need for long term orientation for an investor rather than short term gains. Every investor who owns common stock must expect to see them fluctuate over the years. The availability of daily prices of stocks in stock market makes the investor enticed to buy/sell them. A true investor will pay attention to day to day prices only to the extent that fits to his book.

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Niveshak May’18

X

ju ta pose Direct Listing

A

V/S

company going through the process of direct listing does not issue any new shares or raise money through the traditional process of going public. Instead, the listing on exchanges makes it possible for the existing stockholders to sell their stocks directly to the public. This method helps the companies in generating the liquidity for its shares, cutting down the costs that involves hiring the bankers and underwriting the offering. Also, direct listing helps a company from having to deal with the share dilution or share lockups, the two areas that can be frustrating for firms that hold the startups’ shares before an IPO.

Conventional IPO

W

hen Spotify decided to list its shares, the company did not hire any investment bankers to underwrite the shares or guide them through roadshow, a marketing campaign, during which they try to understand the interest of the institutional investors in buying the stocks of the company and at what price.

The primary risk in direct listing is that without having the presence of a stabilisation agent and without creating the marketing blitz of a traditional roadshow, the company’s shares are likely to be more vulnerable to volatility on the day of listing than those which are sold in an underwritten deal.

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Niveshak May’18

Classroom :

Prospect Theory Prospect Theory relies on the fact that that people tend they would go an extra mile to limit it. to value gains and losses differently from one another, and, as a result, will base decisions on perceived gains From these observations, we can hence graphically rather than on perceived losses. This means that a per- represent as following: son when offered two equal choices- one suggesting probable gains, and the other probable loss, the individual would choose the choice with gains mentioned, even though the outcome would be exactly same.

To drive home the example, most people would consider finding 50 rs lying on the ground a greater joy, than losing 50 rs first, then finding 100rs later. This is exactly the bias associated with this theory.

Evidence for Irrational Behavior Kahneman and Tversky analysed this theory by offering people two monetary decisions that involved potential gains and losses. Respondents’ responses were then analysed to bring out the following implicationIndividuals settle easier when it comes to gains, while they engage in risk-seeking when it comes to losing.

Simply put, one might be satisfied easily with a reason able amount of gains, despite there being a prospect of gaining more gains, however when it comes to losses,

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Classroom This chart depicts the quantitative measure of pain or joy corresponding to gain or loss . As discussed, the emotional value related to gains is much more. The joy of finding 50 rs is less than the pain inflicted due to losing 50 rs. This has a lot of financial relevance and explains irrationality.

The disposition effect is the tendency that investors cling to losing stocks for a long period and to sell winning stocks too soon. Prospect theory is useful in explaining this phenomenon as well. The logical course of action would be to do the opposite: to hold on to winning stocks to further gains, while selling losing stocks to prevent additional losses.

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