10.01.2008

· Look at how the retail investor never gets a good opportunity in the IPO market!

o According to capital market regulations, if promoters dilute more than 25% during an initial public offer (IPO), retail investors can be allotted 35% of the issue, while institutional category and HNI (High Networth Individual) segment commands 50% and 15%, respectively.

o However, promoters are nowadays diluting less than 25%, as this allows them to cap the retail portion at a maximum of 30%. The institutional portion in such cases goes up by 10%. For small investors, this 5% difference can be substantial when the issue size is large.

o Interestingly, this special clause — Rule 19(2)(b) — was introduced by the Securities and Exchange Board of India (Sebi) in 1999 for technology companies wherein promoters were allowed to dilute 10% if the issue size was more than Rs 100 crore.

o This also meant that QIBs could be allotted 60%, while HNI and retail portion was capped at 10% and 30% respectively. While initially the special clause was applicable only to technology companies, it was subsequently extended to all sectors.

· We have been looking at the Indian economy. It’s time to look at the Euro area.

o While the Bank of England and the US Fed are of the view that a banking crisis is turning into a more general economic slowdown, the ECB (European Central Bank) isn’t yet convinced. While it is offering liquidity to banks, it is not ready to cut interest rates to businesses or consumers. The current benchmark rate is at 4%.

o Inflation remains stubbornly high across the Euro area. At 3.1% in December, it is above the ECB’s mandated target of 2%. (What a rate? Our RBI’s target for inflation is 5 to 5.5%!). With oil at around $100 a barrel, consumer prices won’t decline anytime soon. It is hard for the bank to reduce rates when its job is to get inflation under control.

· Language lessons

o Jouissance: This French word means enjoyment, but it has a sexual connotation (i.e. orgasm) lacking in the English word "enjoyment".

o I came across this word in today’s editorial. Look at this: “As a parody of national traits, that might be a gross exaggeration, but it does divulge a certain talent for jouissance with which the French conduct their affairs.”

· In today’s op-ed, Ram Mohan argues that it is liquidity which is the issue but not solvency.

o Didn’t we hear it the other way round? But some points worth out attention from his today’s piece:

§ There are two channels through which the subprime crisis translates into a higher problem, the banking channel and the consumption channel.

o Why is there a credit crunch? In other words liquidity problem?

§ We are seeing a credit crunch of sorts at the moment because the inter-bank lending market has dried up for loans for three months’ maturity or more. Banks are not sure of the extent of the losses they will run up and they are hoarding capital for the worst scenario. No bank is sure of the risk carried by the other bank, so banks are not in a mood to lend to each other.

o Why did Northern Rock, the UK bank fail?

§ It made the mistake of using short-term funds raised in the market to finance long-term mortgages.

o How does the US housing bubble affect consumption?

§ As prices of houses fall, US consumers will feel poorer and hence they will cut back on consumption. But this effect is estimated to be not very large – around 3%, that is, for every $100 drop in wealth, consumption falls by $3.