December
2013 was a benign month for all those who subscribed to the FPO of Power Grid
Corporation Limited. There are many
reasons this FPO promised to give great returns to retail investors. Here are some:
The
Government had a program for disinvestment and a successful FPO would ensure
that retail investors participate in the disinvestment process. Power Grid was the first FPO here and its
success had to be managed.
Grapevine
had it that the Government had planned for FIIs (Foreign Institutional Investors) to buy most of the shares that
the retail investors would offload. The
target price was managed
at Rs 100/- - something that was achieved at around 1:30pm on the day of
listing.
Given
the above conditions that prevailed before and during the FPO process, brokers
here in Jamnagar had a strategy to cheat their clients. Here is how:
The
first step was to downplay the stock as the stock has underperformed the market
for five straight years. The clients
were asked to fill up their subscriptions and “sell”
their subscriptions in the grey market for Rs 3000/- per application. The application value is Rs 200000/- and a
return of Rs 3000/- on such an amount in 15 days would give a 3% return per
month and an annualized return of 36%.
Many here were comfortable with such a return.
The
next stage was to offer Rs 4000/- for such applications. All the people who sold off their
subscriptions at Rs 3000/- felt silly. Brokers
now mentioned that such a change in the rate was normal and that one should not
get too greedy in the markets (sic).
The
third stage was to offer Rs 4500/- for such applications. This amount quickly shot up to Rs 5000/- and
Rs 5500/-. The marketing strategy adopted by the brokers here at this stage highlighted
the fact that there is nothing much in
the stock and that the grey market is all wrong. One should sell such applications as the buy
rate goes up. Many people bought this idea and thought that
they now have a good amount of fixed income against their application.
The
fourth stage was a strategic move. The
buy rate for the applications was reduced to Rs 4600/-, and thereby causing a
panic in the retail investor. What you have now is that some retail investors
were feeling like fricking idiots for not being wise enough to sell their
application in the grey market at the earlier rates. These people then rushed
out to sell their applications at this rate of Rs 4600/-. Their broker would
then convey to the client that it is with great difficulty that he/she was able
to dispose of the application as the grey market has stopped buying the
applications! What you have here is a
retail investor being grateful to his broker for the rape on his investment.
It
could be a safe bet to assume that most
of the retail investors had now sold anywhere from 50% to 100% of their
applications in the grey market.
The
fifth stage was to increase the price of the application to Rs 6500/- per
application. This set the bell ringing for many. There were few sellers at this
stage. The price then went up to Rs 7000/- and Rs 7400. There were many sellers here but by this time,
the game was over. The broker community had cornered a majority of the
applications from the market.
The
stock listed at a great opening. All investors who sold their applications were
now kicking themselves for doing so. The other retail investors earned anywhere from Rs 11/- to Rs 15/- per share. For an application of Rs 200000/- an investor
made anywhere between Rs 11300/- (135% annualized) to Rs 15400/-. (185%
annualized) per share application. The grey market buyers
earned similar amounts less the cost of purchase that ranged between Rs 3000/-
to Rs 7400 per application.
Reasons
The
primary reason investors sold their applications is the hangover from the
Reliance Power IPO where retail investors lost money. Brokers love quoting this incident to their
clients in order to induce fear into them and to ensure that they can extract applications
from them.
In
many cases, the grey market is a myth. Brokers tell clients that the application
is sold in the grey market when in fact it is the broker himself/herself who is
buying these applications. The broker then asks the clients to pay the
difference as he/she has to "pay the higher ups" when in fact the broker is
laughing all the way to the bank and laughing at your sorry butt.
Managed
markets. The stock market in India is managed. Most of it. Anyone who thinks
otherwise lives in Cuckooland. There is
ample evidence for anyone who cares to observe. A little bit of primary
investigation into the FPO would have revealed that the minimum return per
application was assured at Rs 9000/- as
the government had to ensure the success of the FPO.
The Way Out
First,
if you did sell your application to your broker, close your account with
him/her. THIS IS THE FIRST STEP. Your mom asked you to stay away from bad
people, did she not?
Second,
if you did not sell your application but your broker was buying such
applications, stay away from any advice your broker gives to you about the
markets (unless you all are colluding!). He/She is nothing but a snake in a
suit. Come on! Sit up and smell the coffee !!
Third,
forget the hangover of the Reliance Power IPO.
It is over and so is its promoter. Use your own judgment based on your
risk profile.
Use
the grey market as a guide for future frauds your broker may inflict.
I
visited just about every top broker in my town. I asked them for their advice
as when in fact I was conducting my own investigation. ALL of them asked me / hinted me to sell the
application in the grey markets.
I
did not sell in the grey market. I discovered two things since then - one a pleasant unknown
and the other a terrible known :
I soon had a handsome credit to my bank account from the sale proceeds. The is the pleasant unknown discovery.
Second
- A broker can be a scumbag. No discovery here. This is the terrible known
©
Nitesh Kotecha
