06 December,2010 07:20 AM IST | | ARUN KEJRIWAL
In spite of a strong rally last week, the market mood is indecisive and investors need to remain cautious
The markets had a spectacular week and gained more than expected. The BSE Sensex closed at 19,966.93 with a gain of 830.32 points or 4.34%. The NSE Nifty closed at 5,992.80 points with a gain of 240.85 points or 4.18%. This gain was substantially more than the previous week's loss of approximately 2.3%.
The markets have reached a stage where the future trend is more indecisive than clear. Markets seem uncertain of which way they need to move. Since Diwali the weekly trend has been very clear and decisive with a correction for the first three weeks and then the markets moving up for the fourth week. The markets fell 10% in three weeks and gained about half of the fall in the last week.
The two government IPOs one a fresh issue and one a FPO received excellent support. MOIL was subscribed over 56 times while SCI was subscribed a very respectable 4.92 times. The retail portion was subscribed 6.56 times. The controversial issue from Claris Lifesciences, which failed to garner support at the first attempt, lowered its price band by the maximum 20% and managed to just about get subscribed.
The clear message from the subscription details of IPOs shows that if investors are able to see money on the table, they are willing to invest. This is a good thing and merchant bankers and promoters must ensure that the issue is priced in a manner where returns are available.
The markets were weak last Friday post the SEBI order on a few entities for market manipulation. The broad indices fell marginally but the BSE Midcap fell 2.3% while the BSE Smallcap fell 2.99%. This clearly showed that the markets are worried about this and there is suspicion that there may be some more names and entities against which action is likely to be taken this week.
Hero Honda Motors Limited is a joint venture between the Hero group owned by the Munjal's and Honda of Japan. There is a clause in their agreement, which states that if any partner wants to exit, he has to sell the shares to the other partner and that also at a stipulated discount to the market price. To compensate this loss, there are talks of increasing the royalty payment from 2.6% of sales currently to three times or 8% and pay this amount till 2014, so that the market price loss can be made good.
This is indeed shocking and needs to be opposed by one and all. The benefit of the lower price would be to one partner and the loss to another partner, while by paying royalty at higher rates, the only loser would be the non-promoter shareholders or the minority shareholders.
This is a test case and the institutional investors need to stand up and veto such a proposal right at the beginning so that no such unfair deal is allowed to go through. The Indian promoter owns 26.21% while the foreign promoter owns 26%. Of the remaining 47.79% public holding, a staggering 37.54% is owned by institutions with FIIs owning 31.75% and domestic institutions 5.79%.
Once royalty is raised the margins of the company will fall, which will reduce the profitability of the company and the share price will fall accordingly. The regulators whether it is SEBI or the company Law Board need to look at the matter and take immediate action, as this would be a serious and gross violation of the minority shareholders rights.
Critics may always offer the simple excuse that if you don't like the company or the plan of action, to exit the company. This is no solution and the minority shareholders need to stand up, fight and oppose this move.
Coming to the markets, the BSE Sensex has support at 19,682, 19,394 and finally at 19,250. It has resistance at 20,254, 20,350 and finally at 20,625 points. The NSE Nifty has support at 5901, 5821 and finally at 5700 level. It has resistance at 6085, 6185 and finally at 6255. The markets look vulnerable at current levels and are likely to correct initially. There could be recovery towards the end of the week.
Arun Kejriwal is founder of the Mumbai-based advisory firm Kejriwal Research & Investment Services Pvt Ltd.
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