RETAIL INVESTORS: RIGHT TIME, MAKE

INFORMED DECISIONS & ENJOY MULTIPLE

BENEFITS

Obstacles are a part and parcel of every economy. It might be restrictions imposed by the
government or any other public or private body, due to which many a times retailers are left with
wrong part of the deal. For instance, inter-state hikes that squeeze the market. In order to avoid
putting the retailers in such a situation, help of financial instruments are suggested. They can
make use of these institutions to seek advice on making appropriate investments at the right time
in profitable sectors. Retail participation lends stability to the market which is very essential for
an economy to develop. Thus, it is important to encourage retail investments.
There could be no favourable time to discuss retail investments than this, when the market is
at its peak for a large segment of the investing population. On these lines, The Economic Times
in association with HSBC InvestDirect organised ETIG Knowledge Forum on Retail Investors-
Key Sectors for Investment. It was a step forward taken to educate retail investors about the
booming sectors for investments and the challenges they need to look into before allocating their
funds into these sectors with a hope to get high returns.
Renowned panellist shared their opinions and insights, enlightening retail investors about the
market and the related aspects. The panel included James Shapiro, Head of Market Development,
Bombay Stock Exchange; Naresh Takkar, MD & CEO, ICRA; Nilesh Shah, MD & CEO,
Envision Capital Services Pvt Ltd; Ashvin Parekh, Partner & National Leader-Global Financial
Services, Ernst & Young Pvt Ltd; and Manasije Mishra, MD & CEO, HSBC InvestDirect. They
all analysed various
issues pertaining the current market conditions and shared their expert opinions with the
audience.
A fair bit of volatility still prevails in large segment of the market (retail investors). This has
made active participation at stock markets an issue. Foreign investors are fuelling the market and
this trend is here to stay.
The Indian economy has a strong foundation. It is opening up; thriving opportunities for its
people echoed the room with everyone repeating the same statement. Along with the positives,
the negative points about the current market scenario were put forth by the panel. They all agreed
on similar points such as security, safeguarding and choices made by investors in terms of stock
trading.
A major part of the debate was dedicated to Initial Public Offering (IPO). Secondary markets
are getting diminished steadily was the majority opinion. The global economy being extremely
fragile, being connected with Europe and the US, investors are scared of being decoupled.
Consumption demand is also an essential element, which is in danger because of unethical
stories spreading like wild fire making participation slack. The forum made it clear that
judgments based on assumptions are not healthy while making an investment.
A whole gamut of issues that are currently holding up this market rally and are likely to
continue its course in the coming time frames, keeping red flags and danger zones in mind were
covered. The panel believed that now it was time to consider ideas. Since India is a thematic
player in world economy the forum touched briefly upon different ideas on how to attract
investors and strategies. According to Nilesh Shah and Manasije Mishra, agriculture, rural
consumption and engineering were good sectors to invest in. Nilesh Shah spoke about a
particular theme in the market, the sectored approach and specific stocks.
The Equity market has been in demand and is for people who do not have the knowledge or
the time to study the markets, to invest and participate in the equity story. The experts believe
that on an average India can achieve a higher growth as compared to US and Europe. There is
also a threat that prevails in the equity market, the hardening interest rates which boils down to
one conclusion that India is the largest importer of inflation.
This forum was a success and helped gain many constructive ideas. The investors in the
audience were found at peace and solace while interacting with the panel. This forum provided
customised solutions for customers based on their investment needs, and suggested differentiated
services for active traders and investors. It also guided the average investor to unlock
opportunities and make their money work harder.

EVERYDAY SCAMS

The Banker
This is the third in a five-part series of tell-all accounts from
the daily work of a bunch of diverse players in the stock
market. They are hardy veterans of Dalal Street. They
know the corners of the market as well as they know its
centre.They know how to strike a deal, but not all deals
they strike are above board, writes Santosh Nair

SJ HAS been an investment banker for nearly 12 years. He started as an analyst

at a leading domestic investment-banking house, and after a few job changes,
heads the ECM (equity capital market) division at a relatively well-known firm. The
ECM team of an investment bank helps companies raise money from the stock
market through initial public offerings, follow-on public offerings and private
placements.
“My job is more about balancing the interests of my colleagues and the client,”
says SJ.
Here’s how it works. The coverage banker responsible for a particular sector in
the firm gets the mandate from a company looking to raise money, and passes on
the lead to SJ. “My boys work out the best price at which the issue can be sold,”
says SJ. “The price cannot be too low because the coverage banker has promised
the moon to his client. It cannot be too high because my colleagues in the sales
division will have trouble selling the issue to fund managers. If they push an
overpriced issue and it bombs, it spoils their relations with those fund managers,”
explains SJ.
It is a fiercely competitive business. SJ says there is little to distinguish between
the services offered by the top-10 investment banks when it comes to raising
money. “Every investment bank may know a few clients that their rivals don’t, but
then a lot depends on market conditions as well,” he says. “No matter how good the
bankers, if the market is unfavourable, a company will have to settle for the price
decided by the buyers.”
SJ has been working nearly 16 hours everyday for the past few months as the
stock market is in the throes of a bull run, and companies are rushing to raise
money when the going is good.
Before making a pitch to a prospective client, the ECM head has to tap someone
within the line-up of decision makers. It could be the promoter, or some other key
investor on that company’s board. “It helps if one of them reveals what other
bankers have quoted. We can then rework our deal accordingly,” SJ says.
The standard opening gambit of a sales pitch is a bout of rah-rah. “You always
say you are number one,” chuckles SJ. “It is another matter you use a parameter of
your choice. So, you could be the number one capital arranger for a particular
sector, or over a certain period, or in a specific role, but you are number one.”
Once you get a foot in the door, says SJ, you have to promise the best possible
valuation to the promoter. But isn’t it risky to promise a price that is hard to deliver
on? “Not really,” says SJ. After getting the mandate, it takes two months to prepare
the offer document, and 30-45 days for Sebi clearance. Then, there are road shows
to gauge investor appetite, which takes a few weeks.
That’s enough time to cite a change in market conditions — and lower the issue
price on that pretext. Even companies, exhausted by the efforts of the past few
months, are less demanding. “For them, to appoint a new set of bankers would
mean going through the entire process all over again,” says SJ. “Most of them are
reluctant to do that.”
As along as the price is not way below their expectations, promoters usually go
along with the revised price. But promoters are a savvy bunch, he adds. “Most
promoters understand the market much better than investment banks or broking
houses,” says SJ. Theirs is first-hand knowledge, he adds, and drops a bomb: “You
can count the number of mid-cap companies whose promoters don’t dabble in the
market on your fingertips.”
Once the mandate is bagged, an investment bank tries to convince the promoter
that it be made the sole lead manager to the issue, says SJ. Almost all the top
investment banks service the same set of institutional clients, with some minor
variations. The retail portion of the book is outsourced to a syndicate of brokers
anyway.
But the promoter rarely agrees to this condition. After all, he enjoys good
relations with other banks as well and may need their support at some time. Then,
there are banks that will come asking for a role in the syndicate, however small, to
improve their position in the league table. “Usually, the promoter obliges, even if he
knows it won’t make much of a difference to the issue,” says SJ. “Often, it is due to
good relations between the company and that investment bank, or
the banker himself.”
The coveted position in the syndicate is that of the left lead — the name that
appears first among the list of bankers. Technically, the left lead has a greater say
in the way the issue is managed, though its fee might not be significantly higher
than what other banks in the syndicate get. The left lead is responsible for
interacting with Sebi till the offer document is cleared. It is the face of the issue till
approvals come. For this effort, it is paid an additional fee. SJ says a greater number
of merchant banks don’t necessarily improve an issue’s prospects. “Companies
have this misconception. They think if one bank can’t get the client, another will.
But that is not always true,” he says. “In fact, the responsibility gets diffused if
there are too many (merchant) banks.”
There are promoters who are so well connected that they can be more effective
than five top investment banks put together, says SJ. He recalls an infrastructure
firm whose IPO was about to flop because of a bad market. “I was part of the
syndicate advising that company. Everybody thought the best strategy would be to
retreat and relaunch the issue when market conditions improved. The promoter
would have none of it. It just took him a few phone calls.”
A large domestic institution and the treasury of one of the most aggressive
private banks together subscribed nearly the whole issue, he recalls. There was not
a single foreign investor in the qualified institutional buyer portion. “The promoter
gave his word to the two big buyers that he would hold the price for at least the first
few weeks after listing, which he again managed, thanks to another set of phone
calls. That was something,” he says.
The biggest bone of contention among the syndicate members is the distribution
of clients. Every bank tries to keep the best clients for itself. “When it is time to
decide on the client list, and who will approach whom, a brawl invariably breaks
out,” he laughs. “The argument sometimes drags on for an hour or two and it can
be amusing to see suave bankers almost coming to blows.”
It’s settled in an old-fashioned way. Chits are drawn to decide which bank gets to
choose first. The stronger banks usually corner the best clients, and the smaller
banks are left with the dregs. At times, there are fights over trivial matters as well.
For instance, who gets to speak first at the IPO press briefing. Or, who sits where on
the dais. “Yes, that is also a matter of pride,” says SJ.
There is no shortage of upmanship among bankers and daggers are always
ready.
SJ recalls the issue of a prominent real estate firm in 2008, a few months after
the stock market crash. The company had appointed half-a-dozen bankers to sell
the issue. But two of the investment banks, who had been designated as ‘global
book running lead managers’, insisted they get the top 70% of the clients on the
list. “The company should have refused this outrageous demand, but it chose to go
with the two banks,” says SJ. “The rest of us were miffed, but there was little we
could do. The moment we began sounding out the handful of clients allocated to us,
we knew the issue was headed for trouble. There was just no demand because of
the expensive valuation and the fragile market sentiment,” he says.
Even the two ‘big boys’ had a similar experience, continues SJ, but they would
not admit it. The other four banks decided to take things easy, as they were not
managing the show. Also, an issue by a hospital chain had bombed a few weeks
ago. “So we would not be the first to fail.” In the evening conference call to assess
demand for the issue, the big boys asked the other four banks on the response they
were getting from clients. “We knew the big boys were not finding any buyers and
were afraid to admit that. So, we cornered them,” says SJ. “We told them that our
clients are willing to invest, but they would like to know the bids by some of the
bigger investors. The big boys had no answer to that. As hard as they tried, we
refused to reveal our cards.” The issue fell through. Sometimes friends, sometimes
foes, it’s all in a day’s work.