Month: October 2007

One of the main objectives of a prudent investor is not only to get good returns on his/her investment, but also an ability to manage risks and exposure. That is why if you look at the portfolio of a seasoned investor, you will often find it to contain:

1) FD: one third to half of the portfolio… fixed returns, almost zero risk.
1) Blue chip shares (long term investment… medium risk, decent returns.. should constitute bulk of the equities you hold)
3) Mutual funds (unless it is an exotic, esoteric sector fund, it can be treated as a blue chip)
4) proceeds from IPOs: low returns (primarily due to high level of over-subscription and low allotments), low risks (unless you apply in all tom dicks and harry)
5) Short term investment: Any investment based on the short term market conditions.. usually made with a day/week time frame horizon… high risk but fabulous returns (it usually constitutes bulk of the portfolio for a trader)

Debentures is another exotic financial instrument which people can invest in. Unfortunately Indian debenture market is underdeveloped and hence very few people know about this low risk, moderate returns long term investment instruments. Hence I am writing this post. These are basically low interest rate unsecured bonds issued by companies which upon maturity could be optionally converted to fully paid shares.
More information about this instrument can be obtained at wiki

What does an investor gains:
1) Low risk: all said an done these can be treated as a fixed interest rate instruments. So even if the company stock price is not doing well (but the company is not bankrupt), you won’t lose your invested amount.
2) Stock linked gains: On the maturity date, you will have an option to convert them into equity (at a fixed price determined on the date of issue) In a hypothetical case, suppose the issuing company stock appreciates by 25% p.a. So potentially the stock would rise 3 folds over 5 years. So the investors can pocket the difference 🙂 for an additional gain at the time of maturity.
3) Liquidity: Although they are not very actively traded, but unlike FDs you can sell them in the stock exchange whenever you need to money without attracting any foreclosure penalty.

Risks:
1) Unlike an RBI controlled bank, you are entrusting your money with an unregulated company. So if the company goes under, you risk to lose your entire investment.
2) Low interest rate: Since most companies are bullish about their stocks, almost all of these debentures have a very low coupon rate. So if the stock is not doing very well, even though you do not lose your investment, the inflation would potentially eat into its purchasing power.
3) Long gestation period: For all practical purposes, these are like bonds.. hence are not advised for individuals looking for a quick buck.

Why companies issue them:
1) Low interest rate: Because of this, debentures usually translates as the cheapest source of capital.
2) Because of the convertibility, the company is able to move these funds from debt to equity portion of the balance sheet and hence improve the leverage (debt to equity ratio).
3) Reward the investors: In most of the cases, the debentures are issued to the existing stock holders and promoters and not through an open offer. However, outsiders are permitted to buy them from the secondary market.

Here are some warrants/debentures I could find:
Bajaj Auto Finance Ltd.
Dalmia Cement (Bharat) Ltd.
Deepak Nitrite Ltd.
Kirloskar Ferrous Industries Ltd.
Orbit Corporation Ltd.
Sardar Sarovar Narmada Nigam Ltd.
Titan Industries Ltd.
Trent Ltd.

Since I do not have any exposure to debentures, If you looking to invest in them… contact your financial adviser. I know Indian Hotels intended to issue them a month ago, but I am not sure about its status.

Lets go with the benefit that a well developed stock market brings to the country, economy, businessmen, investors and common man.

1) Helping the economy grow:
Developing nations need more capital to fund the new projects, set up plans and to grow and expand the operations. A well developed stock market like India encourages the promoters to tap the stock market for these much needed funds.
This is the reason why a lot of companies tap the primary market during the bull run.

2) Banks do not like risk:
A banker is a guy who lends you an umbrella on a fine sunny day, but takes it back the moment clouds appear on the horizon.
However investors are known to be much more patient and show overwhelming support to good enterprises which are in distress.

3) Corporate governance (Keeps businesses in check):
Stock market ruthlessly punish the rogues.
The market and analysts often demand a higher standards of efficiency and management than what the Governments can even dream of asking via laws.
These days the stock holders even force the companies to take CSR, and morals more seriously than what their B-Schools would have taught.
eg: Recently the investors of Berkshire Hathaway forced Warren Buffet to sell his stake in PetroChina because of its alleged links with the atrocities in Darfur.

4) Curb Corruption.
Stock holders wants records, audits and paper trail of every transaction. They stay away from companies which deal in grey market for these companies tend to make the promoters richer at the cost of the investors. Hence stock markets makes a friendly environment to do business in.

5) Reward Ingenuity:
Gone are the days when the revenues and profits increased by a fixed predictable percentage every year. In a knowledge based economy, the best companies do not think about capturing 1-2% more of the market share, but creating a whole new market. The only way to value these companies is the stock market… for the companies are many times more than their book value.

6) Mobilizing the savings:
It gives a common man to relax and let his investments work for him.

7) Redistribution of wealth:
Everybody knows the age old sage: Money attracts money.
A common man like you and me cannot hope to start a whole new industry and reap the benefits, but through stock markets, we can definitely become a partner 🙂

Now for every buyer, there needs to be a seller. And FII with their deep pockets and risk appetite fill exactly this void. They enhance the liquidity of the stock market, they have developed the market so much that its almost impossible for a punter/group to do large scale manipulations.
Hence, Even though I agree that government should check the PN (participatory notes) and check them for laundering, I strongly oppose those people who think FIIs should be kicked out completely.