SOFIA TIMES October 2022 Edition

CoverStory

In 2007, Prannoy Roy and Radhika Roy, the co-founders of New Delhi Television (NDTV), launched an offer to purchase back shares from their existing investors. Initially, it was intended to purchase a 7.73% share from GA Global Investments. This resulted in what is known as an open offer. According to the SEBI, a business that is buying shares will make an open offer to the target company's shareholders, asking them to sell their shares for a specific price. In order to complete this transaction Roys borrowed about 540 crores from Indiabulls Financial Services Limited by pledging NDTV shares as collateral. But then the global financial crisis hit, collapsing the value of NDTV shares and the collateral backing the loan lost most of its value. Due to this Indiabulls sought full repayment. In order to pay back Indiabulls Financial Services, the promoters obtained a further loan from ICICI Bank Limited for Rs 375 crores in October 2008. But this loan had an interest rate of 19%. And NDTV became increasingly frantic. During this time, Vishwapradhan Commercial Pvt (VCPL) offered a 10-year, interest-free loan to NDTV in the amount of Rs 350 crores. In return, NDTV was required to give VCPL a convertible warrant. A convertible warrant is a financial instrument that will allow you to buy shares at a fixed price if certain clauses are met. So, by owning the warrants, VCPL had a way to own a sizable portion of NDTV.

As we previously mentioned, the promoters of NDTV had few options because of the terrible circumstances. They owned 29% of NDTV through a company called RRPR (Radhika Roy Prannoy Roy). They informed VCPL that they will issue warrants for the whole RRPR stake.

Up until this past week, when Adani went ahead and paid Rs 113 crores to purchase VCPL. And shortly after announcing the deal, it made another shocking revelation. It was mentioned that VCPL was using the warrants, resulting in complete control of RRPR. and as a result, a 29% ownership position in NDTV.

If you're asking why the former owners of VCPL chose to sell to Adani, there is no clear answer. But what is certain is that this one action will now start a domino effect.

Recall how we stated, "When someone acquires a sizable portion of a publicly traded company, that triggers an open offer?"

So far Adani has made an open offer of Rs 294 per share. But NDTV is fighting back. It submitted a letter to the stock exchange that covered two crucial aspects. First, the firm claimed that VCPL could only use the warrant with the promoters' express consent. Second, the founders of NDTV are forbidden from dealing in financial securities by law, a ban put in place by SEBI in November 2020 as a result of the promoters' conviction for insider trading (the act of purchasing or selling shares based on confidential information that the general public was not privy to). However, the ban won't be lifted until November 26, 2022.

Therefore, according to NDTV, VCPL can only buy the shares by overriding the ban, which would call for regulator consent.

Adani submitted a counter, claiming that they actually bought shares of NDTV from RRPR and not the founders. Adani is yet to acquire a majority ownership position in NDTV. The open proposal is still valid. Additionally, given that they made their offer at a price lower than the going market rate, stockholders could not be enticed to sell their holdings to Adani. But Adani might have a trump card. Only time will tell who will emerge as the winner but till that time, It has given the business fraternity around the world, something to keep a constant watch at.

GradingandMonitoring

India has seen a drift in the stock market as the number of IPOs coming up past year has increased tremendously when compared to the pre covid era. Some bigger players in the market have already felt the heat of changing economic scenarios like Paytm, Zomato and LIC have been outshined by companies like Nykaa, Paras defense and space technologies, and MTAR technologies.

In present we are witnessing the Indian startup ecosystem gearing up altogether to go public. The main question which arises is why now? Why in a time when the market is highly volatile? How are they deciding that this is the most opportune moment for listing IPO in India? Seeing the vulnerability, is it the need of the hour to have a mandate for grading and monitoring the IPO?

The possible reasons for companies regressively targeting the present era are there is a lot of money that is getting circulated in the market. The central bank is extensively inducing new money into the market with the aspiration of diminishing the repercussions of the pandemic. This money gets induced goes through the banking system and in due course makes its way to the financial market mostly to NSE and BSE.

This flow clearly signifies that there is abundant money floating around with the big ticket players to use their financial muscle power for investing in IPOs This has led to an increase in confidence for the startups to go public at the very moment as they will be generating substantial interest from it. Another reason could be the startups have a command of the nature of the market. As we have seen in the past 2 years, even if a company is a loss making entity, it has been able to incentivize the investors for pouring their money This has a direct impact on the higher valuation of the company than they originally expected.

Pondering upon, the vulnerable situation of the market and the financial industry per se, the Securities and Exchange Board of India (SEBI), in January 2022, came up with a mandate for IPO monitoring and grading by the listed credit rating agencies (CRA). The purpose of the mandate is to protect the rights of the investors

IPO Grading:

The grade given to an initial public offering (IPO) of equity shares or any other securities that may later be converted into or exchanged for equity shares, by a Credit Rating Agency (CRAs) registered with SEBI is known as the IPO grading The grade is an evaluation of the issue's fundamentals in comparison to other Indian listed equity instruments. A five point scale is typically used to grade these assignments, with a higher score indicating stronger fundamentals and vice versa as shown below in the figure:

GIM

2014, IPO grading was mandatory but after that, it is optional for the issuer. The issuer cannot reject the IPO grade which has been assigned by a CRA It needs to be disclosed as per the ICDR regulations

goal of IPO grading is to offer investors an informed and unbiased

after careful consideration of various aspects which have been discussed below. Nevertheless,

of the grade the issuer received, the investor should make an independent judgment decision considering the risks aspects and

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IPO Monitoring:

SEBI on 17th January 2022, has tightened regulations for IPOs, it capped the amount of funds that can be used for unspecified future acquisitions. It has also limited the number of shares that a shareholder can offer The market regulator, SEBI, made monitoring mandatory for all the companies whose IPO are going to be listed by a CRA. This monitoring needs to be done on a quarterly basis and requires mandatory auditing. Once the monitoring report gets generated, the company needs to approve the same from their boards of directors and upload it on their website.

Needs to tighten utilization of IPO proceeds by SEBI board:

1 In the event of an unidentified acquisition, funds earmarked for such objects and general corporate purpose (GCP), have been capped at 35% of the total amount being raised (with a limit of 25% for the deployment of the amount towards an unidentified acquisition). GCP is the portion of the issuance proceeds that the issuer is free to use any way they see fit without committing to a particular use.

2. Previously, the monitoring agency registered with SEBI monitored the utilization of funds Under ICDR Amendments 2022, credit rating agencies (CRAs) registered with SEBI monitor the utilization of funds. The CRAs must now monitor the utilization of the GCP amount (previously not monitored)

Content

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Details of the arrangement made to ensure monitoring of issue price

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Conclusion:

The IPO monitoring is necessary to protect public investment in public offerings, particularly of new age technology companies with uncertain and ambiguous objects, where the deployment of funds raised is solely at the issuer's discretion.

“When the general market gets a cold, the IPO market gets pneumonia. It is that kind of a relationship”

Penned by: Amruta Ranaware

The tale of two dollars

In the current economic scenario, the USA is witnessing the highest inflation in decades. With the official CPI numbers crossing the 9% mark, the federal reserve is all set to take a hawkish stance. Recently with a rate hike of 75 basis points, the yields in the USA have risen to 2.25% indicating a good distance between a decade of approximately 0% yields. Even the official figure of 9% inflation hides a more harsh reality. The export prices in the US are up 18 2% on a year over year basis This number can’t be manipulated as it's just money paid multiplied by the number of goods. Unlike the CPI which uses a formula that can be reverse engineered to get the desired number. In the true sense inflation in the USA is just double of official CPI i.e 18%. The dollar is losing its purchasing power in domestic markets. Everyone believes that prices are going up in US markets, but it's the opposite. Prices are not going up the $ is going down because of its excessive currency in circulation Basic demand and supply hold true here. Look at picture 1. The currency supply dictates the prices of goods and services.

Now, see picture 2. When the currency pool increases, the prices rise as well. Goods and services in circulation remain the same. But the dichotomy, the US dollar is showing different colours across the globe, with $ appreciating more than 20% compared to other currencies

It is surging at a 20 year high for the euro and a 24 year high for the Japanese yen.

But, an internationally strong $ does not benefit the US consumer, it's not like one will go to Japan to have a haircut. $ is a legal tender in the USA is stripping people of their purchasing power.

But, the question is how can the dollar be domestically weak and internationally strong, both at the same time?

For this, we need to look at the 1970s first.

In the 1970s USA was a creditor nation with a trade surplus and a strong manufacturing base.

Yet, the economy witnessed an official inflation figure of 13.5% which by the way is much more honest than today’s 9% and the US economy was in the doldrums.

$ lost 70% of its value that decade with respect to other currencies such as the Deutsche mark, Swiss franc, and Japanese yen. It was then Paul Volcker shocked the markets with a 20% rate and the US dollar gained its value by 1980 81.

Today, what the US is witnessing is the same 1970s situation, with a much worse economy. The USA, a trade deficit country is not only the biggest debtor nation now but, it has more debt than all other debtor nations combined. With a national debt of $31 trillion on its sheets,

US debt is a ticking time bomb with 30 days or one year T bills. For reference, the debt didn’t even reach $1 trillion until the 1980s. So with a gargantuan amount of debt, today's real inflation should exert a much larger toll on the value of the dollar, fundamentally it should collapse but it's still climbing.

Look at the graph. It depicts a 10 year dollar index. The explanation: Rising inflation in the USA is having an opposite effect on the value of the dollar globally because the demand for dollars is coming from the speculators. It is acting as an inflation hedge outside the US. Let’s understand with an example. Consider that Euro lost 15% of its value with respect to the dollar and Europe is witnessing an 8% inflation rate In such a scenario by holding a $ I am 7% ahead of the game and not only that, with the rising yield now touching 2.25%, I have extra icing on the cake. My net gain equates to 9.25%.

It's a self perpetuating prophecy, people buy $ to hedge inflation, demand for $ rises, and it appreciates which again reinforces the idea that it is a suitable hedge.

People think $ is a hedge and thus, it becomes a hedge. $ is rising on a greater fool theory, people think that some greater fool will buy the $ in the future as they did with bitcoin and that can only go for so long until the bubble pops Eventually, people will figure out that they don’t need $ as they did with bitcoin and its value will crash. Currently, the dollar is in a massive self reinforcing bubble, where people buy $ because it's going up and because people are buying $ it is going up. It becomes a store of value internationally even though it is not storing any value domestically. A speculative mania outside the US made the dollar looks promising until people want to sell it to get their home currency to buy goods and services If people in amassing decide to get their money back in their home currency the value of the so called safe haven currency will collapse.

This decade is much more inflationary than the 1970s and attributed to the precarious nature of the US economy, it is extremely hard to do what needs to be done without triggering the biggest recession or even a depression, worst than the 1930s.

With high inflation, weaker labour markets where people are losing jobs, decreasing retail numbers, decade after decade hollowing industrial base, and last but not least the series of quantitative easing 1,2,3,4….n after the 2008 global financial crisis, the US economy is falling in the abyss. The only way out is a painful process of job losses and recession, which is next to impossible because of the bubble nature of the US economy. The war that America won in the 1970s against inflation, is much more likely to render the country bleeding this time

Thus, a fundamentally weak dollar is riding the tiger of speculative mania. Only time will tell when it will fall from the tiger and become its lunch eventually.

Penned by: Akshita Sharma

Types of Ethical Investments

1. Socially Responsible Investing

2. Environmental, Social and Governance (ESG) Investing

3 Impact Investing

People often tend to confuse these three terms as they have some factors that overlap but they are not the same thing Let’s understand the difference

Socially Responsible Investing is an investment strategy that not only considers financial returns but also an investment’s impact on the environment or society based on the moral values of the investor. For example, an investor might opt to avoid investments in companies associated with alcohol, tobacco, weapons production, environmental damage etc Socially responsible investments are designed to minimize negative impact while generating positive social/environmental impact

According to a McKinsey report, over $5.2 billion has been invested in India for creating social impact since 2010 and this number can easily grow tenfold by 2025 given the scale of untapped opportunities in the country.

ESG Investing refers to investing in companies that have a high score on environmental and societal responsibility scales. ESG Investing considers certain environmental, social and corporate governance factors that impact a company’s overall performance. Investors get a holistic view of the companies by considering these ESG factors which help them in risk mitigation and opportunity identification. An example of this would be an investment in a company that has a high ESG score or an ESG fund like SBI Magnum Equity ESG Fund, Axis ESG Equity Fund etc.

According to data provided by the Association of Mutual Funds of India the nine ESG funds in India together manage ₹10,900 crores worth of investments which shows that ESG investing has become an essential part of asset management for Indian investors

Impact Investing is a proactive investment in enterprises that position themselves as ‘impact first’ seeking maximization of social/environment returns while having financial returns. For example, investment in a company whose primary motive is to provide good quality and affordable online tuition to children belonging to an impecunious family

Here, the primary motive is to provide good quality education and generating revenue from it is a secondary factor.

Impact investing focuses on maximizing stakeholder value instead of shareholder value. According to a report by Impact Investor’s Council, there was a jump of 135% in the total investment volume for impact investments and the number of deals also increased to 345 This increase clearly shows that investors are trying to reshape their investment decisions so that there are societal as well as financial gains

Now that we have understood the differences among the types of investments. Let’s delve deeper into the need and advantages of such investments.

Need for Ethical Investments

The unprecedented rise of social inequality, carbon emissions, deforestation and climate change has made investors realise the negative impact their decisions have on earth Ethical Investments are a way to turn these into positive ones

Why such investments?

1 Ethical investments are good for the planet as well as the pocket They provide good financial returns.

2. Such investments make investors feel good about their investment decisions as investing in such companies means they use ethical practices as well as meet environmental and social goals.

3. The scope of such investments is huge as people are becoming more aware, thereby increasing their investments in ethical funds.

Investors do not have to sacrifice their principles for profits. There have been instances where ethical funds have outperformed more than traditional investments.

Drawbacks of Ethical Investments

Though ethical investments are the future of investing, there are some disadvantages.

Ethical Investing is a relatively new concept that involves a lot of research so that the investor’s value aligns with the companies’ beliefs Being an active strategy, it requires investors’ time and effort

Most companies do not follow ethical values This limits the investment options for the investors

Many financial advisors lack expertise in the social aspect of ethical investments and many philanthropic advisors lack expertise in making financial investments. Therefore, there are a smaller number of experts who could advise investors on such investments.

There are differences among the different types of investments but all cater to similar goals and needs, hence, they create confusion in the minds of people

Ethical Investing is a good but expensive strategy which involves a lot of research for the alignment of goals of both parties. One may conclude that even being an expensive strategy it is the only strategy that can keep our economic systems and social and natural ecosystems out of trouble. It is an effective strategy that provides an opportunity for investors to use their influence to deliver positive outcomes for society and the environment while gaining financial returns.

Penned by: Pratyasha Pansari

Sun Tzu, a military general and strategist, lived in ancient China and is one of East Asia's most important figures. He has written the 'Art of War, one of the most important works of East Asian literature. He wrote on warfare, strategies, troops positioning, psychological tactics, governance and supply chain management during a war. His teachings are relevant in today's world in the context of modern warfare and business operations. His teachings can be adopted in principle in today's financial and corporate dealings. From a small business owner to a large company, a CEO can apply his teachings to confront and overcome the competition. YSun Tzu says all warfare is based on deception. Mind games and deception are usually employed during difficult negotiations. Deception and mind games coy with your emotions like greed, ignorance and arrogance Sun Tzu says, if you know your enemy and know yourself, you need not fear the result of a hundred battles I can explain this by taking a situation where you invest in a company without reading the company's financial statements It means you don't know the company. If you don't fully understand the risk involved in it, which means you don't understand yourself. A person who understands neither the enemy nor yourself, will succumb in every battle, says Sun Tzu.

In a peculiar situation, different strategies can be adopted to ensure a desirable result. Sun Tzu says there are 5 primary colours, yet in combination, they produce more hues than can ever be seen

Club of GIM

There are 5 techniques of risk management; avoidance, reduction, retention, sharing and transferring and loss prevention. One can use a mix of these strategies to limit the losses and increase the gains.

One may be a highly skilled and knowledgeable person. But he/she may lack decisive decision making. He/she may be afraid of the situation or the consequence that may follow. All his/her skills and knowledge amount to a little if the situation overwhelms him/her. Business is a fight for survival. Sun Tzu says that the quality of the decision is like the well timed swoop of a falcon which enables it to strike and destroy its victim Therefore, a good manager/ fighter/ trader/ business leader will be terrible in his onset and prompt in his decision

In a war, the way is to avoid what is strong and strike what is weak A manager must focus on the organization's weaknesses If the organization is weak in execution, it must employ tools to improve the organization If the products have little market awareness but have superior products The focus should be on marketing and customer service.

Sun Tzu says tactical manoeuvring is difficult It consists of turning devious into direct and misfortune into gains If you are a manager/ leader of a company with receding market share and profit margins, what and how will you change your misfortune into gains? Sun Tzu says, he will conquer those who have learnt the art of deviation. Such is the art of manoeuvring. Successful people find value in unexpected places. This is an important part of the corporate strategy.

Sun Tzu's Art of War gives a logical way to confront the competition and find a way to subdue them without fighting them at all. Business enterprises at their core are competitive with each other. The goal? Stay ahead of the competition and emerge victorious. Lessons that survive generations and travel continents are the best lessons. Words of advice that don't muddy the waters are the best words of advice. The Art of War is a rarity in that it belongs to both categories. As a result, the work is still relevant nowadays for multiple spheres of human activity, including modern warfare, business, and marketing.

Penned by: Namita Yadav

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