BIZ VOCAB
FII – Foreign Institutional Investors A Foreign Institutional Investor is an investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Institutional investors include hedge funds, insurance companies, pension funds and mutual funds. The term is used most commonly in India to refer to outside companies investing in the financial markets of India. International institutional investors must register with the Securities and Exchange Board of India to participate in the market. Positive tidings about the Indian economy combined with a fast‐growing market have made India an attractive destination for foreign institutional investors. Korea and Taiwan have always been the biggest recipients of FII money. It was only in 2004 that India managed to receive the second highest FII inflow at over $8.5bn. In 2005 FIIs invested more in Indian equities than in Korean or Taiwanese equities.
WEEKLY ECONOMIC INDICATORS ECONOMIC
WEEK
WEEKLY
INDICATORS
ENDING
CHANGE (%)
5th OCTOBER
RUPEE/ USD
39.48
-0.58
RUPEE/ €
55.56
-0.94
SENSEX
17773.36
3.63
NIFTY
5185.85
3.71
OIL($/barrel)
78.52
-0.27
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NEWS SNIPPETS Indian asset managers diversify portfolio Indian money managers are increasingly taking the Foreign Institutional Investors(FII) route to tap overseas investors and a rush of overseas money currently flowing into the country. Kotak Mahindra (UK) is the first Indian company to take the direct FII route to invest foreign money in India. UTI International is set to launch The Rainbow Fund under the FII route. ICICI Bank's India Optima Fund has registered this fund as a sub‐account with Securities Exchange Board of India, under its FII account. First Global also has plans for a similar fund. While, several Indian brokerages and fund houses have a number of international funds offerings as part of their business. However, almost all of these international funds are managed under the offshore investment route. Under the offshore route, fund managers have to open a feeder fund in India, which serves as a vehicle for buying into Indian mutual funds. But when fund sizes become larger, it's best to buy equities directly through the FII, rather than use the offshore route to invest in Indian mutual funds. It's difficult to tailor the investments towards specific sectors and assets through the offshore route. Hence, these new funds will be a multi‐class open‐ended fund, with more flexibility to diversify across the Indian equity market.
Monetrix Opinion •
These funds have strong prospects of being successful as Indian asset management firms will have an advantage of knowing the Indian market well compared to the traditional FIIs. They would be able to offer a diverse pool of specialized funds that focus on a select class of Indian equities.
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However, given the highly competitive nature of this sector, other players are soon expected to follow suit and would flourish attributing to the current huge amount of FII inflows.
Nokia to acquire Chicago‐ based Navteq Nokia Corp. has agreed to purchase navigation‐software maker Navteq Corp. for about $8.1 billion ($78 a share). Nokia and Navteq already have a business relationship, where Navteq provides information for Nokia's mobile phones. Nokia's interest in Navteq represents a vigorous move into the mobile‐services arena, where Nokia has already been building a suite of products around games and music with its CEO, Mr. Olli‐Pekka Kallasvuo making a series of small acquisitions over time. But no deal has carried the price tag of a Navteq, which trades at about 54 times its current earnings. Founded in 1985, Navteq is one of the world's leaders in electronic mapping, which enables in‐vehicle navigation devices and a new generation of mobile‐phone applications used for shopping, emergency services and advertising. MDI, Gurgaon 2
Expectations •
Many phones like the iPhone or the Blackberry are already available with Navteq‐powered Google Maps. Will Nokia try to charge extra for its devices after including these mapping services or will every future Nokia phone come with free maps is to be seen. •
Nokia should negotiate with Google to share in any future map‐based advertising revenues in return for distributing the mobile version of Google Maps with every new Nokia phone. So, consumers would get free maps and would remain loyal to Nokia.
Trade deficit widens as imports rise 33% In the month of August, the trade deficit of the country was reported at $6.9 billion (37% rise over July) primarily due to more imports of machinery encouraged by a rising rupee and to meet the demands of a growing economy. Though exports grew by around 18% in absolute terms, but only by 4.3% in rupee terms. In the current scenario, exporters of traditional items such as gems and jewellery, and textiles are increasingly finding it difficult to overcome the effect of the rising rupee and are concerned about losing out to other regional competitive exporters especially China.
Impact and results •
The rupee has appreciated against other major currencies too, though relatively less than against the dollar and therefore, the Commerce Minister suggested the companies to look at export deals in currencies other than the dollar.
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The Federation of Indian Export Organizations has suggested that the Government should undertake monetary measures to reduce interest rates and administrative measures to reduce working capital needs of exporters
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The smaller exporters are putting their investment plans on hold in the wake of the sharp appreciation of the rupee against the dollar, which has eroded their cost competitiveness in the global market. This could adversely impact the overall economic growth.
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LaSelle Sold to Bank of America Bank of America has completed a $21 billion purchase of the US subsidiary of ABN AMRO – LaSelle. Royal Bank of Scotland had fought hard to prevent the sale of LaSalle to Bank of America because it had wanted ABN's US subsidiary in the break‐up bid it has mounted in conjunction with Belgian‐Dutch insurer and bank Fortis and Santander of Spain. But the court’s ruling that shareholder’s votes are not needed for the sale of LaSelle turned things in favour of Bank of America.
Impact •
Bank of America ‐ the United States' second‐biggest bank will strengthen it’s position in Chicago and Detroit. It will gain 17000 commercial banking clients,1.4 million retail customers,411 banking centers and 1500 ATM’s in Illionis, Michigan and Indiana.
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ABN will record a book gain of $7.3 billion.
Unified Bodies for financial Agents Four Financial Market Regulators are setting up an independent body that will bring mutual funds, insurance , banking and pension fund agents and advisors under common regulatory surveillance. The idea is to explore whether a common test can be prescribed to certify all agents. Mooted first by Securities Exchange Board of India (SEBI) chairman Damodaran , this panel will have representatives from SEBI, Reserve Bank of India, the Insurance Regulatory and Development Authority (Irda) and the Pension Fund Regulatory Development Authority (PFRDA).
Opinion •
With the growing popularity of Mutual Funds and rising Stock Market, financial advisors need to be flexible and work in areas other than their area of specialization. So this will maintain a uniform standard for the qualifying tests for the financial advisors.
MDI, Gurgaon 4
WORTH A READ IPO Valuation and its future How an IPO is priced now? Valuation of Initial Public Offerings, IPOs, occupies an important place in finance perhaps because it provides public capital market participants their first opportunity to value a set of corporate assets. Valuation of IPOs is also quite relevant from an economic efficiency perspective: this is the first opportunity that managers of such (usually young) companies get to observe the price signals from the public capital markets. Such signals can either affirm or repudiate management's beliefs regarding its future growth opportunities ‐ with obvious implications for the real economy via employment and corporate investment.
Is it an art or science? Investment bankers say the valuation process is as much an art as a science. The scientific part of the pricing equation is based on numbers: an issuer's historical and projected financial results, as well as valuations for comparable companies. The art is in the investment banker's assessment of market conditions and investors' demand for the new issue. Estimating a company's value begins well in advance of the IPO date. Businesses planning to go public typically interview several investment banking firms before selecting one to underwrite the offering. The investment bankers, in turn, investigate the company to determine if they want to handle the deal. They perform a detailed review of the company's finances, the quality of its management team and the company's position in its major markets. The investment bankers also consider "comparables," which are publicly traded companies in the same industry as the IPO candidate. Selecting the right comparables is straightforward when working with established companies in clearly defined or mature industries. It is more challenging, though, to find appropriate benchmarks for younger companies, especially those in new and rapidly changing industries.
A NEW MODEL The solution: Change the valuation model. IPO Valuation Guidelines When there are no directly comparable firms that can be used to value an IPO, investment bankers frequently rely on the following factors:
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Financial Results
Accounting policies themselves and their effect on reporting. Assets. Back orders. Cost of capital. General and administrative expenses as a percentage of sales. Historical and projected growth rate of sales and earnings. Long‐term debt. Profit margins. Receivables. Stockholders' equity.
The Company
Cost of production. Experience and quality of management. Growth opportunity in geographic or technological terms. Industry outlook. Regional or national? Market share. New‐product development from conception to production, as opposed to the rest of the industry. Percentage of total sales to the largest customers. Raw material suppliers. The scope of the product line as compared to the industry leaders. Years in operation.
Legal Considerations
Environmental issues. Liabilities and lawsuits. National, state or local legislation, whether positive or negative. Patents, trademarks or proprietary knowledge.
IN THE ZONE After considering the issues relevant to each deal, the investment bankers make an initial estimate of the firm's value. The resulting offering price, which is based on that valuation, is influenced by several factors •
"Desirable" range. MDI, Gurgaon 6
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Percentage of company sold Float. The company must sell enough shares to ensure liquidity in the market or institutional investors (such as pension plans, mutual funds) may be unable to buy the stock.
Letting the world know Establishing a reasonable value for the company is the critical first step, but the investment bankers must also consider the market's receptiveness toward IPOs in general and their new issue in particular. Most IPO issuers put on a "road show"—a series of presentations to potential institutional investors—to promote the offering and gather feedback on the market's interest in the stock. In addition to road show presentations, investment bankers use their sales forces to canvass potential investors for their price sensitivity.
Ultimate pricing Although the company hires the underwriters and pays the IPO fees, the investment banker must balance the conflicting goals of several audiences. The issuer wants the highest price—within reason— for its shares, while investors want to pay the lowest price. Overpricing the issue increases the risk of a poor after‐market performance, which can lead to lawsuits from disgruntled investors. Underpricing costs the company substantial sums and can damage the investment banker's reputation. Finally, in a firm commitment offering (rather than a best‐efforts deal), the investment banker agrees to buy all the shares the issuer offers. The investment bank has an incentive to sell out the entire offering quickly, otherwise it ties up its own capital in the deal. In an effort to satisfy all parties, investment bankers have traditionally set a stock's offering price 10% to 20% below its estimated value. This practice, known as "leaving something on the table," serves several purposes. It entices institutional investors to buy the issue because they are getting a bargain, and their participation is usually critical to selling out an issue. Assuming the stock's price moves up to its fair value in the after‐market—the IPO price "pop"—investors earn a fast return as a reward for investing in an unseasoned issue. Underpricing also serves a defensive purpose. Should a disgruntled investor claim the issue was overpriced; the investment bank can point to its valuation method and the discount as evidence of its conservative practices.
Future: Can IPO price be determined by auction? In the current system, investors have an illusion of discovering the price. That’s not true because the underwriting entities have already estimated a price band for the stock in consultation with other stakeholders to the issue. The investors’ options are severely circumscribed.
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Global experience suggests that firms have enriched investors in greater measure when they let the investors decide the price (auction method). The auction mechanism works well because the investor is in the driving seat, not the merchant banker or the issuer. Potential investors are expected to point out two things — the price at which they will buy and the quantity that they are willing to subscribe to at that price. The lowest bid is taken as the price and any oversubscription is taken care of by pro‐rata allotment of shares. This system takes care of the aspirations of the retail investor as normally they give the lowest bid.
Counterview Despite the publicity surrounding some high‐profile Dutch auction IPOs (Google, for example), book‐ building remains the sales method of choice in the US and other countries. In an auction, investors are likely to end at a less favourable price than they might in a more controlled environment that allows for more customised solutions. Auctions increase the risks for issuers and investors, as neither knows how many bidders will participate. Too few entrants can kill the offering, while too many can erode potential profits. For the issuer, multiple bidders could elevate the risks by leading to inaccurate pricing, significant aftermarket volatility, and unpredictable bidder participation. This may explain why some auctions are conducted by invitation only. Hence, a balanced approach would be required before we decide to press on the button to accept the auction based pricing model in case of IPOs.
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