Rachana Ranade. Blog

In an IPO flurry, we all have heard that this stock is having an 80% GMP, the other stock has a GMP of only 15% and the likes.

But what does GMP actually mean and is it even legal?

Let’s take an example – People apply for a blockbuster IPO and know for sure that it’s going to have a super listing - but many of the times they don’t get an allotment, especially in such rockstar IPO’s.

So, what do they do to enjoy the listing gains of such IPO’s?

Here comes the answer. They deal in the Grey Market.

A Grey Market, also known as a parallel market, is one where trading takes place outside the realm of official trading channels. Since this is an unofficial market, there are no rules and regulations. Market regulators like SEBI are not involved in these transactions and they don’t endorse this either.

Now, Grey Market Premium is nothing but the price at which the shares are being traded in the grey market. For instance, let’s assume the issue price for stock XYZ is Rs. 150 and the GMP is Rs. 100, it means that people are ready to buy the shares of company XYZ for Rs. 250, which implies that they expect the IPO listing price to be even above Rs. 250 and hence they will make a gain out of this transaction.

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What is Grey Market Premium?

We all have heard about a company bringing an Offer for Sale (OFS), but don’t really understand the meaning of it, right? Let’s decode the same in today’s blog!
An OFS is a mechanism through which the promoters in listed companies offer their shares to others.
So, there is no fresh issue of shares in an OFS, rather it’s just an offer from promoters to sell their holding to others. Hence there is no increase in the share capital of the company and yes, as rightly guessed by you, the money paid by you against the shares purchased doesn’t go to the company, but goes to the selling promoters.
Now one question naturally arises in our minds being “Why do promoters sell their shares to others? Are they not confident about the shares of their own company?”
It’s not always like that!
There can be various reasons as to why promoters may be willing to sell their shares to others. Let’s see some of them:

1) To pursue other life goals:
Many a times it so happens that the promoters started a company from scratch and built it as a professional company, brought it to a certain stage - and it took them good amount of time to do so and at current stage of their personal lives, they wish to encash some money and pursue personal or professional goals.
2) Healthy profit booking on their part:
As they have built a business from scratch and have listed the company on the exchanges, doing good business and generating good cash flows, obviously they have made a decent return on their initial investments and what’s wrong with some profit booking? It doesn’t mean that they don’t believe in the fundamentals of their own company. Just assume yourself in their shoes. However strong stocks you may be holding in your portfolio, if you made a decent return, will you not want to secure some of the profits that have been made? Obviously yes!

3) Better investment opportunities:
It may also be a case where the promoters want some stake to be offloaded as they may be eyeing some better investment opportunities in some other space like say private equity, real estate etc.
So now we know as to why do promoters bring in an OFS and applying to an OFS is not always a bad proposition.

Conclusion
So that’s what an OFS is all about!

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What is an OFS?

Introduction:

If you check the financial statements of UTI Asset Management Company of Q1 of FY 2021 compared to Q1 of FY 2020, below is the position of the change in revenue.

In the above table, you may notice the revenue has increased by 11.63% for Q1 YoY. Total Revenue from Operations includes gains/ losses from fair value changes. Now, let’s understand the meaning of “Fair Value”

Meaning of Fair Value: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as on date. In simple words, it can be substituted with the word, “current market price.” Fair Values are calculated according to IND AS 113.

Now you might be wondering why are we discussing “Fair Value?”

Due to COVID-19, the equity and mutual fund markets were very volatile in Q1 of 2021 which resulted in a significant change in the fair values of such investment instruments. You might be aware of the “V shape recovery” which the market witnessed. Due to this, it’s probable that the company might have gained significantly on such investments. But since these gains are temporary but not permanent in nature, one should not consider these while analyzing the revenue from operations of the company for fundamental analysis and growth perspective along with the impact of the same on other parameters like PBT, PAT, etc.

Let’s consider the following example. You have equity shares of Company A which you have purchased at Rs. 1000. The LTP as of 31st March is Rs. 1,800. As per Ind AS, you have to value it at the market value (LTP) in your balance sheet. So, for this, you will have to increase the asset value by Rs. 800. The 2nd impact of gain of this transaction will reflect in the profit or loss account. In IND AS terms, it’s not necessary that every such gain will reflect in profit or loss account only. Some assets are recorded through Other Comprehensive Income i.e. OCI Statement which is the second part of the statement of profit or loss which is placed after the Profit after tax element. So, a lot of such factors are determinable in such cases.

Now let's assume a case that in the same company “Total Revenue from Operations” is Rs. 1,200 of which the gain due to “Fair Value changes” is Rs.800. In such a case, its “Revenue from core operations” will be Rs. 400 only. So, I hope you have understood that one should focus on “Revenue adjusted with Fair Value changes” rather than “Total Revenue from Operations.”

Coming back to UTI AMC, its Revenue after Fair Value changes is as follows:

After ignoring one item of gain due to fair value changes, the position of revenue differs significantly.

Conclusion:

Based on the above, you must have understood the result of significant change in revenue pre and post consideration of the gain due to fair value changes in the case of UTI AMC on change in revenue from operations for Q1 of FY 2021 and FY 2020.

Note: We have not covered the technical perspectives like financial assets and relevant Ind AS which deals with this concept like IND AS 32, IND AS 109, and IND AS 113. The above blog writes up is only for the purpose of basic understanding about the gain or loss due to fair value changes. There are various other factors that can be considered and dependent ones, based on accounting policies and estimates followed by the companies.

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UTI AMC

Equitas Small Finance Bank is the largest SFB in India in terms of the number of banking outlets, and the second-largest SFB in India in terms of assets under management and total deposits in Fiscal 2019. They have a market share of 16% in terms of Assets Under Management in India. It is a subsidiary of Equitas Holding Limited (EHL).

IPO season continues with the 12th IPO post lockdown this year. IPO subscription starts from Oct 20, 2020, till Oct 22, 2020. The IPO price range is from Rs. 32 to Rs. 33 per share. The minimum market lot is 450 shares and in multiples thereof. At the upper price band, the subscription amount for 1 lot is Rs. 14,850. The shares are expected to list on Nov 2, 2020.

We already had a detailed discussion regarding the IPO in our video on YouTube. Here, are some additional points that we need to know about the bank.

SWOT Analysis of the bank:

Litigations against the bank:

Although no major litigation cases are pending against the bank, we found that RBI has taken action against the Bank on multiple occasions.

1) In 2016, Bank received final approval to carry out SFB business, subject to a condition to listing the bank within 3 years as per para 6 of the SFB Licensing Guidelines. In 2019, RBI found that the Bank violated the timeline so given in the above-mentioned para and imposed regulatory actions on the Bank with immediate effect. Accordingly, Bank was not permitted to open any new branches till further advice, and the remuneration of MD and CEO stood frozen at the existing level until the listing is done.

2) In 2018, Bank had violated the SFB Licensing Guidelines and provisions of the Banking Regulation Act by distributing mutual fund units, pension products, insurance products, and other such financial products/services on a non-risk sharing basis without taking prior approval of the RBI, as required under the SFB Licensing Guidelines. RBI levied a penalty of Rs. 1.00 million on our Bank for such omission.

3) Again in 2019, Bank increased its Authorized Capital without seeking exemption from RBI. The Rule - section 12(1)(i) of Banking Regulation Act - banking company can carry on business in India subject to the condition that the subscribed capital of the company is not less than one-half of its authorized capital, and the paid-up capital of the company is not less than one-half of its subscribed capital. On January 31, 2019, the bank increased the authorized share capital from Rs. 11,550 million to Rs.25,000 million by passing a resolution, when it had a paid-up capital of Rs. 10,059.4 million. So, the Bank violated the rules. RBI through its letter to the bank noted with serious concern that the Bank had neither noticed non-compliance with the provisions nor sought exemption from the RBI. RBI further advised the bank to be more careful in the future. Finally, on Nov 07, 2019, the bank reduced its authorized capital to 17,000 million to comply with the provisions.

The point here is, this highlights a weak compliance team of the bank. In the future, it might lead to the risk of unnecessary penalties due to non-compliance with RBI norms.
If you want to know whether I am applying to the IPO or not, check my Instagram Live at 12 noon on Oct 22, 2020.

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Equitas Small Finance Bank

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Introduction:

SWOT Analysis of the bank:

Litigations against the bank:

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