What is green shoe option in an IPO?

A 'green shoe option' in an IPO allows the issuing company to offer more shares than the original prospectus amount if the deal is heavily over subscribed.
Its a provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option.
A greenshoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges.

Example: a company files to sell 10 million shares in an IPO with a 10% green show option; if the deal has large demand they have the option to issue an additional 1 million shares (10% of the original 10 million).
Greenshoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. However, some issuers prefer not to include greenshoe options in their underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought.

The term is derived from the fact that the Green Shoe Company was the first to issue this type of option.

All About IPO's and FPO's

What is an Initial Public Offering?
Initial Public Offering, IPO, is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public.

What is a Follow on Public Offering?A Follow on Public Offering, FPO, is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations.

What is a Fixed Price IPO?It’s an issue where issuing company defines single price per share. After subscription, company decides the basis of allotment depending upon under/over subscription. On this basis an applicant may or may not get allotment of shares.

What is a Book Building IPO?It’s an issue where issuing company defines a price range i.e floor (lower) price and Cap (Upper) price. After subscription, company decides the basis of allotment depending upon under/over subscription. On this basis an applicant may or may not get allotment of shares.

What is a Cut Off Price?In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut Off Price”. Only retail individual investors have an option of applying at Cut Off Price.

How is the Retail Investor defined as?‘Retail Individual Investor’ means an investor who applies or bids for securities of or for a value of not more than Rs.1,00,000/

What are the different kinds of issues?

Primarily, issues can be classified as a Public, Rights or preferential
issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below:Public issues can be further classified into Initial Public offerings andfurther public offerings. In a public offering, the issuer makes an offer fornew investors to enter its shareholding family. The issuer company makes detailed disclosures as per the DIP guidelines in its offerdocument and offers it for subscription.

The significant features are illustrated below:

Issues
Public Preferential Rights
Initial Public Offering Further Public Offering
Fresh Issue Offer for sale Fresh Issue Offer for sale

Initial Public Offering (IPO) is when an unlisted company makes either a
fresh issue of securities or an offer for sale of its existing securities or
both for the first time to the public. This paves way for listing and trading
of the issuer’s securities.

A follow on public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations.

Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements.

A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in Chapter pertaining to preferential allotment in SEBI (DIP)
What are the eligibility norms for making these issues?SEBI has laid down eligibility norms for entities accessing the primary market through public issues. There is no eligibility norm for a listed compaNy making a rights issue as it is an offer made to the existing shareholders who are expected to know their company. The main entry norms for companies making a public issue (IPO or FPO) are summarized as under:

Entry Norm I (EN I): The company shall meet the following
requirements:
(a) Net Tangible Assets of at least Rs. 3 crores for 3 full years.
(b) Distributable profits in atleast three years
(c) Net worth of at least Rs. 1 crore in three years
(d) If change in name, atleast 50% revenue for preceding 1 year should be from the new activity.
(e) The issue size does not exceed 5 times the pre- issue net worth
To provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters, SEBI has provided two other alternative routes to company not satisfying any of the above conditions, for accessing the primary Market, as under:

Entry Norm II (EN II):
(a) Issue shall be through book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs).
(b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years
OR
Entry Norm III (EN III):
(a) The “project” is appraised and participated to the extent of 15% by FIs/Scheduled Commercial Banks of which at least 10% comes from the appraiser(s).
(b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years.
In addition to satisfying the aforesaid eligibility norms, the company shall also satisfy the criteria of having at least 1000 prospective allotees in its issue

Nothing personal, strictly business: Anil Ambani

In an exclusive interview to ET, Anil Ambani says Mukesh “has already made it amply clear, both within the family, and externally, that he does

The RIL-RNRL row timeline
RIL' KG-D6 facility
RIL's first crude from KG basin
Decade's hottest biz feuds
not visualise any further role for my respected mother in resolving this matter or any other matter.”

There’s nothing personal, it’s strictly business, says Anil Ambani, chairman of the Anil Dhirubhai Ambani Group, a day after he lashed out at his elder brother and Reliance Industries Ltd (RIL) chairman Mukesh Ambani, and the petroleum ministry. Speaking exclusively to ET’s Soma Banerjee on what forced him to deliver that impassioned speech, Mr Ambani says his "respected elder brother’s" stand on the K-G basin gas sharing dispute subverts what all group patriarch Dhirubhai stood for. Petroleum ministry’s intervention is a throwback to the "licence-raj" era, says Mr Ambani, asking why the ministry chose to intervene in the issue only after the Bombay High Court ruled in favour of his stand. Excerpts:

What were the factors that played on your mind when you were preparing for the speech?

There was emotion, sentiment and regret...but thankfully, no anger. And above all, there was great sadness, and even greater pain.

Sadness...that to enforce the gas supply agreement in the interests of shareholders in my group, I have been left with no choice but fight a court case against my very own respected elder brother — the person who I most looked up to, loved and respected, second only to my beloved parents.

Sadness... reflecting on the proud legacy of trust and fair play on which Reliance Industries was founded by my visionary father Dhirubhai Ambani, and how far RIL appeared to have moved away from those original values.

Sadness... that today, gas produced by RIL was flowing to others, before it could be used within the group - simply because RIL, for four long years, has denied us a bankable supply agreement on the terms that my respected elder brother and I shook hands on, with the blessings of my mother Kokilaben Ambani, who is God for me.... As I prayed before the meeting and sought blessings of Lord Shiva and my father from heaven, I asked them forgiveness.

Is this entirely a corporate dispute and not at all a personal one? Was the MoU ever discussed at the company boards?

I am quite surprised by the question. If the MoU was not discussed and approved by the RIL board, how did the entire reorganisation of the Reliance Group, including the scheme of demerger, take place in the manner that it did? How did RIL's board publicly thank my respected mother for facilitating the reorganisation in that fashion? How did RIL, even in its unilaterally executed version of the Gas Supply Agreement of January 2006, incorporate every aspect of the gas supply arrangements as recorded in the MoU? And how did board minutes filed by RIL before the Bombay High Court reflect that the board was provided full and complete knowledge of the MoU? All information relating to the gas supply arrangements are in the public domain. We are not keeping anything hidden.

Are you open to putting these differences aside and starting a fresh dialogue with your brother to take both the businesses ahead?

I have already spoken to my elder brother personally and requested him in the interests of over 8 million shareholders of my companies to arrive at a fair and amicable solution. I was disappointed at the outcome. It is undoubtedly frustrating, but my respected late father, my only guru, taught me - by lesson and example - not to be daunted by adversity, but to diligently pursue my karma, and leave the results in God's hands.

How do you interpret the supreme court's notice to RIL and RNRL?

As per the legal advice received by us, RIL cannot sign any new contract. In case RIL proceeds with signing of new contracts, we will take appropriate legal steps to protect our interests.

Have you tried resolving the matter at your personal level after the Bombay High Court order? Was there any meeting with your mother who played a crucial role in the family settlement?

I have, at every stage, made sincere efforts to amicably resolve all issues, but to no avail. To give you just one example, I offered to personally appear at a time and place of the Bombay High Court's direction, at an hour's notice, and sit across a table with my respected elder brother to amicably resolve all issues. Unfortunately, RIL's counsel informed the court that it was not convenient for my brother to participate in any such discussions.

My respected elder brother has already made it amply clear, both within the family and outside, that he does not visualise any further role for my respected mother in resolving this matter or any other matter.

What is the way forward? And how do you think policy loopholes could be plugged to avoid such cases in future?

There is only one way forward: Contractual obligations have to be respected and honored. There are no policy loopholes to be plugged. What has to be curbed are attempts to subvert policy to benefit RIL. I am also concerned that the Petroleum Ministry's stance is, in effect, that it will solely decide: who should sell gas, to whom, at what price, in what quantity, and when... without any heed to commercial considerations or contractual provisions!

n a complete reversal of the entire direction of economic reforms being implemented by our respected prime minister Dr Manmohan Singh, the

The RIL-RNRL row timeline
RIL' KG-D6 facility
RIL's first crude from KG basin
Decade's hottest biz feuds
petroleum ministry is regrettably pursuing a different path, seeking perhaps a return to the command-control elements of the dismantled 'license-permit raj'!

Do you think there is any scope for a compromise settlement? Are you, for instance, ready to take a re-look at the price ($2.34) if gas assurance is committed?

As I have said before, we have, at every stage, made sincere efforts to amicably resolve all issues - including attempting to meet with RIL, in pursuance of the high court's directions. Unfortunately, RIL has refused to even come to the meeting! I still have to learn the art of clapping with one hand!

There is no question of re-looking at the gas price of $ 2.34, when it is a binding commercial obligation of RIL, and when the Bombay High Court has already upheld our claims in this regard.

Going back to the MoU, what was the basis for the division of the gas? What was the value attached to the gas while dividing the businesses between you and your brother?

There is no division of gas - it is a commercial contract for gas supply, to implement the vision of our legendary founder Dhirubhai Ambani to be present in the entire value chain "from well-head to wall-socket". Unfortunately, RIL appears to have decided to ignore the Founder's vision, too!

RIL's commitment to supply gas for our power projects at Dadri and elsewhere dates back to as early as January 2004, and much before the reorganisation in 2005. This was announced in RIL's own media release issued at the time. In October 2004, a joint board meeting of RIL and Reliance Energy was held, wherein the directors of RIL reiterated their commitment to the supply of gas from KG Basin to the Dadri project. So, this is entirely a corporate dispute, and not at all a personal one.

What has the Ministry of Power done to help you get gas to be used for electricity generation?

The Ministry of Power can play a far more proactive and constructive role in resolving the matter, which can ensure the quick capacity addition of 12,000 MW of clean, green power.

You have recently written to the prime minister alleging partisanship by the petroleum ministry...

The ministry's objectivity would have been visible if it had remained consistent with its replies given on the floor of Parliament, and with the decisions taken by the eGoM. To quote just one instance, on April 22, 2008, in specific reference to the RIL-RNRL dispute, the government told Parliament in a written answer: "As per the Production Sharing Contract, the contractor, is entitled to sell its participating share of gas in cost petroleum and profit petroleum." Despite this, the ministry is vocally taking a stand that RIL-RNRL are seeking to divide national property.

Through this entire period, the ministry was a party to, and concurred with, this decision, and did not make any attempt to question the corporate restructuring agreement between RIL and RNRL.

It is only now, after the adverse verdict of the Mumbai High Court against RIL, that the ministry has suddenly decided to intervene in this purely corporate dispute.

Apparently, the Petroleum ministry has used its discretion and not even thought it fit to take the approval, I am informed, of the Cabinet.

ADA:A bogey is being raised To bail out RIL

The legal battle between Reliance Industries Ltd (RIL) and Reliance Natural Resources Ltd (RNRL) over supply of gas from the KG basin has taken on political overtones, with Anil Ambani accusing the petroleum ministry of favouring RIL. In an interview to TOI, he speaks about the raging controversy.

Was the supply of gas from KG Basin to ADAG part of the division in the group or an added arrangement? RIL claims it was not part of the division.

This is a ludicrous claim. Supply of Gas by RIL to Reliance ADAG was an integral part of the corporate restructuring of the group, and not an “added arrangement” . This is duly reflected in RIL's board minutes (filed in the Bombay High Court), the demerger scheme, and various agreements drafted at that time. If this was not the case, it is difficult to understand why RNRL was at all formed and transferred to ADAG!

This was all done, keeping in mind the vision of our founder, late Dhirubhai Ambani , who visualized Reliance being present in the entire value chain ‘from well-head to wall-socket’ . Not surprisingly, RIL has forgotten the founder’s vision, in deciding to sell gas to others. I am truly and deeply saddened by RIL’s conduct in this matter, and its blatant refusal to honour a bonafide commercial agreement.


If it was part of the settlement, why did you agree to the clause, "subject to government approval" for gas

supply?

There is no question of the sale price between RIL and RNRL, which was based on the price arrived at through a global competitive bidding process undertaken by NTPC, being subject to government approval . What is being deliberately twisted by RIL is that as per the PSC (product sharing contract), there is a clear distinction between the sale price of gas, to be fixed by the contractor (RIL), and the price to be adopted for determining the government's royalty and share of production, which is approved by the government.

On August 30, 2007, the government told Parliament in a written answer, “As per the PSC signed by the government under the New Exploration Licensing Policy, operators have the freedom to market the gas in the domestic market on an arms length basis . The government does not fix price of gas. The role of the government is to approve the valuation of gas for the purpose of determining government take.”

Bombay High Court too has upheld this legal position, and said as long as the government gets its royalty and share of production on the basis of government-approved price for valuation, they have no concern with the sale price at which the contractor sells the gas.

The situation is similar to that of stamp duty on property transactions. If you buy a flat at a price of Rs 10 lakh, the registrar of properties may value the flat at Rs 20 lakh, and charge stamp duty on Rs 20 lakh. But the registrar does not go on to say that you must pay Rs 20 lakh to the seller — and the registrar certainly does not go and file a case in the Supreme Court to make you pay Rs 20 lakh. But this is exactly what the petroleum ministry’s stand means!

Under government's new policy, the first claim on KG Basin gas will be of fertilizer companies, and then power companies stranded for want of gas. Dadri is likely to get gas only if there is any residual supply. Do you believe this policy was made only to frustrate your claim on gas for Dadri?

The policy does not frustrate our claim in any manner. In fact, the Empowered Group of Ministers, which includes the petroleum minister, has clearly recorded that the verdict of the Bombay HC will be honoured in the RIL-RNRL and RIL-NTPC case, and allocation of gas will be made by the petroleum ministry after taking into consideration the court outcome. The EGoM has specifically approved the Dadri project for utilization of KG-D 6 gas in its meeting in January 2009.


The government has also said the KG Basin gas is national property and only it can decide who will use

it.

It is not the government which has taken any stand, it is the petroleum ministry. Facts are being distorted to suggest that the RILRNRL agreement, or the MoU, amounts to a private division of national property. This bogey of national property being divided is being raised with the sole purpose of attempting to bail out RIL and help it renege on its contractual commitments. We are not claiming any rights to ownership of the KG basin gas fields. All our claims for gas supply , initial and future, are purely from RIL’s lawful ownership and entitlement of production under the PSC.

The High Court observed that you two brothers should have worked out an arrangement to supply gas to Dadri.

I have, at every stage, made sincere efforts to amicably resolve all issues, but to no avail. During the hearings before the Bombay HC, I offered to personally meet at a time and place of the court’s direction , at an hour's notice, and sit across a table with my respected elder brother to amicably resolve all issues. Unfortunately , RIL’s counsel informed the court that it was not convenient for my brother to participate in any such discussions.

My respected elder brother has made it amply clear, both within the family, and externally , that he does not visualize any further role for my respected mother in resolving this matter or any other matter.

The Dadri project has not yet been implemented. So, what will you do with the gas if you were to get it? Trade in gas?

RIL has created a situation where our power plants stand delayed by over three years, only because of the wrongful conduct of RIL, and its refusal to execute a workable and bankable gas supply agreement. We have made our position clear that while RIL cannot be permitted to benefit in the intervening period from its own wrongful conduct we will ensure there is no disruption of gas supply to existing gas customers as decided by the government.

This is a pure commercial issue between RIL and RNRL relating to the treatment of the price differential in the intervening period , occasioned entirely by RIL’s wrongful conduct, and does not amount to trading in gas by any stretch of the imagination.

In a speech on Tuesday, you made certain comments about Reliance Gas Transportation and Infrastructure.

All pipeline networks in India are operating on a cost plus basis. End users like us, in power and fertilizers, are ultimately paying for the pipeline network, and we are naturally concerned about costs of the same. To my mind, there is a strong case to revisit the issue of transportation costs for KG-D 6 gas, probably the highest in the world, by the pipeline regulator. Presently, these are pegged at a prohibitive US$1.25, or 30% of the base gas price!

Further, with new tax breaks recently announced, the entire cost of setting up the gas pipeline network has been allowed to be written off in the very first year — a unique benefit not given to any other capital intensive sector. It is only fair that the benefits of these tax breaks be passed on, and gas transportation costs be reduced.


You've also spoken about alleged gold-plating by RIL in the KG

Basin gas.

Given the incredibly high stakes involved, and the fact that each and everyone of us is ultimately paying for RIL's capital expenditure , I have expressed the sincere hope that some of our esteemed public accountability bodies like Comptroller and Auditor General (CAG) and Central Vigilance Commission (CVC) will examine all relevant facts, and take appropriate action, if — and again, I say, if — indeed they find that the capex has been over-stated , and as a result huge losses caused to the public exchequer and all end-users of the gas produced from KG-D 6.

Shouldn't the petroleum ministry be concerned about getting higher prices for gas...

I wish it were so.

Aren't high gas prices justified in view of the demand-supply scenario?

This entire concept of scarcity of gas in India is actually a myth — in the medium to long run. Gas production in the country is set to double to over 200 million cubic meters of gas per day in the near future, based on further production from RIL's KG-D 6 fields alone.

In addition, there will be production from gas reserves already found by various other players like GSPC and ONGC. Besides, RIL has so far reportedly explored only 4% of its total fields in KG-D 6.

In a few years, India will become a gas surplus nation provided contractors are subject to an independent process of assessment and verification which prevents hoarding, under-reporting or sub-optimal production of gas.

Do you think your proximity to one particular political party —Samajwadi Party — is costing you dear?

I have relationships across the political spectrum, like several others from Indian industry. Why not take a look at certain proximities that exist in Reliance Industries . Anu Tandon, who is a Lok Sabha Congress MP, is on the board of Observer Research Foundation, a lobbying arm of RIL, disguised as an independent think tank. Parimal Nathwani, who is a Rajya Sabha MP, is a full time employee of RIL. Y P Trivedi , who is a Rajya Sabha MP, is a director serving on the board of RIL.

It's said the fact that ex NTPC chairman C P Jain joined Reliance ADAG after retirement indicated that NTPC's move to sue RIL was an attempt to block supplies to NTPC and increase ADAG's share of gas from 28 million cubic meters a day to 40 million...

I take great objection to the comment. Mr Jain is an outstanding independent professional , and I challenge anyone to make any such defamatory statement against him in print and face the consequences in the courts. We have General V P Malik, former chief of the army staff, on the board of Reliance Infrastructure. Do you think that means the Indian Army belongs to us?

Americans want to buy Indian,Chinese cars: Survey

WASHINGTON: Every fourth new car buyer in the US is now ready to buy the next vehicle from India or China, threatening to challenge the dominance

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of Japanese and Koreans in the American auto market, according to a new survey.

The "Opportunity for Chinese and Indian Brands in the USA" survey by AutoPacific shows that 15 percent of the new buyers would look at buying a car from China, while 11 percent would go for a car from India.

"As Hyundai and Kia have been on the American scene for decades now, it's surprising that consideration for Chinese and Indian brands would be about as strong as it is for the Korean brands," automotive research firm AutoPacific president George Peterson said.

"It appears that buyers in America are willing to give Chinese and Indian vehicles a chance right out of the box. Understanding these consumers will be critically important to the success of any newcomer," he said.

"Not only are a significant number of people willing to consider Chinese and Indian brands, this group consists of highly desirable buyers who would be coveted by any manufacturer," Peterson said.


The study shows those looking out for Chinese and Indian cars are likely to currently own Japanese and Korean brands, indicating that these brands may face a lot of competition from the new entrants, rather than domestic brands - Chrysler, Ford or GM.

More than 30,000 buyers across the US were interviewed for the survey.

RNRL demystified

Future of RNRL

Current scenario : RNRL top gainer on the chart with 10% rise.

This stock after lying low at around 20 levels for long time has been a high flier in recent times.
From 20 something it is now trading at 160 levels (from high of 200) much beyond comprehension.

Why is this stocks rising?
Will it continue to rise?
What does this company do?
Should you invest in this stock?

And there will be many more questions cropping up in your mind.

History of RNRL
This company was formed in year 2000 as Reliance Platforms Communications.Com Private Limited.
Later it was made a public company in the name of RNRL after the split between ambani brothers.

RNRL got the share of gas from RIL discoveries in KG basin.

Currently as I see it this company doesn't do any thing, it paper company with rights of gas.

RNRL and RIL are fighting the gas share and its price from long time.

What RIL wants : Higher price realization for its gas.

What REL wants :- Long term sustained gas supply for its power plant at low cost.

What RNRL has :- Assured gas supply from RIL at low cost which is being battled it court. Otherwise their is no real business of RNRL and no reason for its existence. No future businesses to hold other than some news of city gas distribution.

This company is only being used as a leverage. If RIL and REL has gas they can directly start business which RNRL would plan so no real benefit of this company.

Current rumours :- RIL going to buy RNRL which is being denied publicly.

If RIL buys out RNRL it can directly sell gas to REL.

REL gets much needed gas and RIL gets the money. Everyone wins RNRL loses out.

Future of RNRL depends on What Anil ambani wants to do with this company.

If RNRL has tomake profits it has to sell gas at higher price to REL or Reliance Power.

Then RNRL is profitable and REL(RPL) profit margin will reduce.

Which company he wants to keep profitable would be his decision.

Obviosly he will secure intrest of his bigger company with defined business model.

What holds out for RNRL.

1. If status quo is maintained , all the profits from gas coming into RNRL is factored in. Price hike is not possible because it is long term fixed price contract. Share price other than what trades speculate will not change much. maximum 20-30 rupees. No point in entering at this point if you don't already hold it.

2. RNRL is sold out to either company. Share price will fall or if it is delisted there will be share swap so instead of buying and RNRL and getting RIL in share swap go and directly buy RIL.

3. Unless RNRL gets new businesses like city gas distribution very little chance of appreciation.

After all being said, Reliance stocks are currently fancy of traders and almost opposite can happen.

But long terms bets are against it. You would be better of staying invested in other blue chip reliance pack companies.

Happy investing!!

Today's market

The Sensex wrapped the day on a firm note led by FMCG, oil & gas and banking stocks. Broader markets also performed well.

It opened positive with a gain of 61.51 points, at 15,449.47 on Friday tracking cues from international markets. After few minutes, the index gained momentum on the back of sustained buying interest seen in frontliners. The index touched a 52 week high and year high for the first time. Whereas Nifty breached the crucial level of 4,650 in the early trades. As the day progressed, it traded higher, touching a high of 15,732.81. In the noon trades, the index however pared most of its gains as European markets opened on a negative note. Finally, it ended on a higher note but off high`s.

The BSE Midcap and Smallcap index increased 1.17% and 0.03% respectively.

Among the sectoral indices, BSE FMCG surged 3.17%, Oil & gas gained 2.65%, Bankex, IT, Consumer durables and Metal rose over 1% each, while Realty dipped 1.36%.

Bhanshali, Uday Kotak on NHPC IPO

The NHPC initial public offer (IPO), the first one this year from the government's stable, is being flagged off in the next few days’ time. NHPC will go on to raise up to Rs 4,000 crore. Rs 2,000 crore is an offer of sale from the government and the rest is being raised by the company. It is also significant because this is not a private sector IPO. There was a lot of talk in the budget about the lack of disinvestment but a few weeks after that, this is the first off the block from the government’s stable and surely more will follow.
This is a significant move and comes close on the heels of the Adani Power IPO, which has been over-subscribed. Usually we have seen that the primary market revivals are stoked by government supply of paper and this is a very significant one that is starting of.

What is NHPC all about?

NHPC is a government of India Enterprise with an objective to plan, promote and organise an integrated and efficient development of hydroelectric power in all aspects. Later on NHPC expanded its objects to include other sources of energy like Geothermal, Tidal and Wind.


SK Garg, CMD, NHPC said that as on date NHPC’s capacity is 5,175 megawatts with 13 power stations and a huge order book, adding that the company aimed at reaching a capacity of 9,500-9,600 megawatts in four years time. “We are working on 11 projects with a capacity of 4,622 megawatt.”


ABL Srivastava, Director – Finance, NHPC said that all of NHPC’s project were well financed for and that it would therefore not require any further equity financing from the government for these projects. “We don’t need any further equity from the government. From March 7 no government equity is coming and the part of this IPO proceeds will be utilized for these projects.”

What does it hold for retail and institutional investors, and is it the starting point of a much larger disinvestment programme from the government?


Uday Kotak, Executive VC & MD, Kotak Mahindra Bank the markets would receive the disinvestment well because a company like NHPC is a solid company on the ground. “It has existing capacity, you are not necessarily looking too much into the future. You are looking at what is now and real.”
He commended the government’s efforts and said “I think disinvestment process is moving forward and the government of India is moving forward steadily on that.”


Vallabh Bhanshali, Chairman, Enam Securities said, “This disinvestment is going to be a corner stone of that policy. I think the commitment of this government was astounding.”
According to Bhanshali, one business that looks the best in this country for the next 15-20 years is the power business.

Adani IPO closes; likely to list around Aug 20

Adani Power initial public offering (IPO) witnessed huge investors' interest and was subscribed 21.63 times. The issue received bids for more than 538 crore shares as against the issue size of 30,16,52,031 shares, as per the data available on the NSE website.

Qualified institutional investors has given strong response to the issue and their portion was subscribed 36 times, till 16 hours IST.
Amit Desai, Director of Adani Power said almost all bids were at upper end of the band, Rs 100 a share. The company, he said, was likely to list its shares around August 20, 2009.
Also read: Subscribe to Adani Power IPO: Experts
The price band was fixed between Rs 90 and Rs 100 per equity share.
The net issue would constitute 13.47% of the post-issue paid-up equity share capital of the company.
The company intends to utilize the net proceeds of the issue to part finance the construction and development of Mundra Phase IV Power project for 1,980 MW and fund equity contribution in its subsidiary, Adani Power Maharashtra Limited, to part finance the construction and development cost of power project for 1,980 MW at Tiroda, Maharashtra.
Here is a verbatim transcript of the exclusive interview with Ameet Desai on CNBC-TV18. Also watch the accompanying video.
Q: Last we checked it was 14 times, what are your numbers suggesting?
A: As of 3 pm the overall number has gone close to 19 times – 18.85 times.
Q: How much of that is QIP? How much HNI and how much retail?
A: The QIP portion is oversubscribed by about 36 times. This is after the anchor investment allotment which has been done and HNI has gone past 4.5 times and retail is inching towards 2 times but of course I understand more bids will be uploaded between now and 5 pm for QIB and HNI and bankers are likely to seek little longer time for the retail bids update later in the evening.
Q: Where have most of the hits come at – the upper end of the band?
A: Almost 99% of the bids have come at Rs 100.
Q: So it seems likely that that is where you would choose to price the issue or because of this hefty subscription you will think of redoing it a little bit?
A: The bids have come at Rs 100 for most part of the issue and we would obviously now start discussing this issue with the investment banks but quite highly likely that we will go by where the bids flow has been.
Q: You placed two anchor investors at Rs 95, of course with the understanding that finally they would buy at the issue price but do you think it is likely that you may consider doing it at Rs 95 for goodwill – give Rs 5 to the investor or do you think you will make the anchor investors pay Rs 100?
A: All anchor investors have sent a separate communiqué to the banks through which they came in that they would fully desire to participate at the rate at which the issue gets done. As such the regulation is that if we price the issue at Rs 100 – they pay the difference. So the fact that they have given the confirmation of Rs 100, they are not really looking at Rs 95.
Q: While you won’t get into specifics, just give a sense of the kind of names that have come into this QIB slot?
A: Very encouraging. Obviously the names would come out later but we have got demand from some of the highly respected long only investors from different parts of the world – Asia, Europe, US and domestic. So it is an extremely healthy combination in the book that we have been able to get as demand which is actually very gratifying.
Q: Does August 20 remain the proposed listing date if all goes well?
A: Absolutely. We are working towards that. The registrars and banks have been gearing up on that ever since the issue opened. So we surely are looking forward to list this scrip on August 20.
Q: How will you choose the institutions to which you will allot because there has been some talk that may be some of the institutions have got in for that flipping game – to buy now and to sell on listing day, can make a quick 10-25%? In that, would you be stringent on who you allot the stock to, so that these are slightly longer-term investors and not out for a quick buck?
A: This is not a discretionary allotment. This is a book built and at the price at which we priced the issue at that level whatever are the bids they get allotted in proportion of their application. So this becomes quite a non discretionary and very objective process.
Q: While you did indicate in your interview with Udayan a couple of days back that you’re not looking at any other fund raising mechanism, because of the kind of oversubscription you’ve got, would you look at tapping the market again to raise some money via QIP once you’re listed?
A: For Adani Power no. We do not need equity is what we have stated earlier and I think our objective was to raise this money for largely completing the equity funding of 6,600 megawatts. Balance money beyond what we need for 6,600 – a small proportion from IPO will go towards kick starting 3,300 megawatts and then we will finish that 3,300 megawatts from internal accruals. So a short answer to your question is no, we won’t come back to the market for Adani Power’s equity requirements.

Why companies prefer GDRs to QIPs??

The last two weeks have seen many companies raise capital but not via qualified institutional placement (QIPs) which was the flavor of the last season but via global depositary receipt or GDR’s and one company even did an american depositary receipt (ADR). So why has this route become a favorite amongst companies and what is the response like from institutional investors across the world.

Sumant Sinha, COO of Suzlon Energy, which closed its GDR issue last week of a little over USD 100 million and also did almost a USD 100 million of an non-convertible debentures (NCD), spoke on the issue.

"If one looks at GDR versus QIPs, there is more broad based interest for QIP than it is for GDR. The GDR has a bit of a lock-in issue involved as well where as a QIP does not. It is really a question of which instrument the company has regulatory approvals for,” Sinha said.

Here is a verbatim transcript of the exclusive interview with Sumant Sinha on CNBC-TV18. Also watch the accompanying video.

Q: What is this new trend of GDR versus QIP and why do companies prefer to do a GDR as opposed to raising money through a QIP?

A: I can only comment as regards us, in our case we did not have enabling resolutions in order to do a QIP and so therefore we had to go forward and do a GDR, which is something that was possible from a regulatory standpoint. So it was really just that and nothing else beyond that, if you look at GDR versus QIPs you might argue that there is more broad based interest for QIP than its for GDR. So it might just be a company specific thing which is more of a regulatory issue than anything else.

Q: A lot of people who are bankers that I was speaking to also told me that, those that had QIP approvals from last year proceeding to the time when Sebi changed the pricing guidelines prefer not to use those approvals and are instead going the GDR route, so you see some rationale there?

A: To be honest, I cant, because it appears to me that the QIP instrument is a very flexible one and you can pretty much address the investors that you need to. If you were to do an ADR that’s a different matter because that is probably listed on the US stock markets and broadens the investor base to some extent. But in GDR and QIP I really cant see that much of a difference with respect to the investor base. The GDR has a bit of a lock in issue involved as well where as a QIP does not. So, on the other hand not all investors can buy into QIPs, so there is a little bit of a tradeoff between QIP and GDR, but it really is a question of which instrument the company has regulatory approvals for and there is not that much in it between the two to be honest.

Q: You said that if broad base is the investor base, so was there some sense that the appetite amongst the regular institutions that are usually part of a QIP was waning to some extent and therefore you had to reach out to investors that didn’t have access let’s see via a QIP but a GDR to invest in companies like yours?

A: I would not really say so because the difference is not that large and ultimately there are dedicated investors who invest in India and they have the facility to invest in GDR or QIP and they form the core part of the investor base. So to be honest there isn’t that much of a difference between those instruments.

NHPC IPO to open on Aug 7;price band set at Rs 30-35/sh

SK Garg, CMD, NHPC said, IPO price band set at Rs 30-36 per share. “The price band is based on 2 times price-to-book ratio," he said. The IPO issue will open on August 7 and close on August 12," Garg added.

He further said, the overall mandate from the government is 24%, but they have asked the company to go for in the first tranche with only 10% of fresh equity and plus 5% of disinvestment. “We have mandate to issue up to 24% stake,” he added. The company’s current capacity was at 5175 MW and plans to increase to 9600 MW by 2013, Garg added.

Here is a verbatim transcript of the exclusive interview with SK Garg on CNBC-TV18. Also watch the accompanying video.

Q: Share with us the price band and how did you arrive at the pricing?

A: The price band has already been decided by the board and we are going ahead with that, it is Rs 30 at the lower end and upper band is Rs 36. The valuations which we have done and then we had taken it to the government and the board, it is basically on the book value to price which we have worked out. We had taken a decision that to price it in Rs 30-36 band and we have decided to open up on August 7 and issue will be closing on to 12 August 2009.

Q: You are raising 15% out of which 5% is the government’s disinvestment which means it goes straight to the government and you get 10%, how much does that 10% translate into at the price of Rs 30 or at Rs 36 and what are you planning to do with that money?

A: The overall mandate from the government is 24% but they have asked us to go for in the first tranche only 10% of fresh equity and plus 5% of disinvestment, of the government’s own equity. So in all we are coming to the market in 15%, if we take the upper band of Rs 36, then it translates into Rs 6,000 crore, so out of Rs 6,000 crore 2/3rd will be flowing to us say Rs 4,000 crore and Rs 2,000 crore will go to government of India. Rs 4,000 crore inflow to us, which will be spending on our projects which are under construction right now, we have seven projects lined up which will be funded out of this equity inflow to the company and 1/3rd will go to the government of India.

Q: You are having the price to book value of 2, lets see one year ahead, on an expanded equity what would be your price to book, looking at 36 being the price, what would it be in the next year or the year after next because you are also adding significant capital investments, have you looked like how it looks in 2010-2012 assuming the Rs 36 price?

A: It will certainly be better if you ask me because we are on a mega expansion spree right now. We have lined up almost 11 projects which right now we are working and one by one which are coming on steam also. So with that, what we are hoping is that by the end of 2013, our capacity would be touching around 9,500 MW. So a lot of investment as you rightly mentioned it will be coming and fructifying into and giving yield on that ROE also. So there will be an impressive book value as against the current which we have around 2 plus.

Q: Could you just walk us through going into September, then December and then going into March quarter, how much new incremental capacity do you see it being added or is most of it back ended, so perhaps it is coming in 2010?

A: Right now my capacity is 5,175 MW with 13 power stations. I will be commissioning one more project this year which is 120 MW and it may come in the month of December and January this year itself, it is in Jammu and Kashmir. Apart from that, another six projects we will be delivering in 2010-11 and the total capacity will be around 2,200 MW, rest one project we are likely to give in 2011-12 and one would be coming in 2013 December. So in all by 2013 or so, the total capacity of this company is nearing 10,000 MW, that will be our capacity. So one after another, 2010 is the base year where we are going to deliver almost six projects to the nation and so as you see, huge capacity is going to be added and followed by other big projects which we have got time which is Arunachal Pradesh, which partly it will come in this plan and partly it will be just coming on the first year of the 12th Plan period and one project we are slated to give in 2013 December which is in Himachal Pradesh.

Adani Power IPO subscribes around 4 times on day 1

Initial public offering of Ahmedabad based Adani Power (APL), promoted by Adani Enterprises, has received overwhelming response on day 1. The issue managed to achieve full subscription with in hours of its opening. It has been subscribed close to around 4 times (3.96 times) on close.

A total of 985,943,010 bids were received out of which 4,285,905 bids were received at cut-off price.

issue managed to achieve full subscription with in hours of its opening.As at 1:45 p.m, the issue was subscribed 3.87 times. A total of 962,302,445 bids were received out of which 1,306,305 bids were received at cut-off price

The company has proposed a public issue of approximately 301.65 million equity shares of Rs 10 each for cash at a price to be decided through 100% book building process. The issue closes on July 31, 2009.

The price band of the issue has been fixed at Rs 90 to Rs 100 a share. It hopes to raise around Rs 30.16 billion at cap price. The net issue will constitute 13.47% of the post issue paid up capital of the company.

The issue has been graded by ICRA as IPO Grade 3, indicating average fundamentals.

The equity shares of the company are proposed to be listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

DSP Merrill Lynch, Enam Securities (P), IDFC-SSKI, Karvy Computershare (P), JM Financial Consultants (P), Morgan Stanley INDIA Company, ICICI Securities, SBI Capital Markets are helping the company in the fund raising process.

APL is the first IPO that will follow the anchor investor norms, made mandatory by SEBI. The company has completed allocation of shares to anchor investors. It allocated 52.50 million shares to the domestic and foreign institutional investors for close to Rs 5.02 billion.

Foreign institutional buyers include T Rowe Price, AIC, Ecofin, TPG and Legg Mason. Among domestic institutions, Sundaram Mutual Fund pumped in Rs 810 million in Adani Power and was allotted shares for Rs 95 each while TPG and Legg Mason were allotted shares through Credit Swice and CLSA, respectively. T Rowe Price got the highest allocation of Rs 2.20 billion for equity share of Rs 95 each. AIC, Ecofin, TPG and Legg Mason invested Rs 242 million, Rs 244 million, Rs 800 crore and Rs 72.4 crore, respectively.

The company plans to deploy the issue proceeds to part finance the construction and development of Mundra Phase IV Power Project for 1,980 MW, funding equity contribution in its subsidiary Adani Power Maharashtra to part finance the construction along with development cost of power project for 1,980 MW at Tiroda, Maharashtra. Besides this, the issue proceeds would also be deployed for general corporate purposes.

Of the total equity float at least 60% of the net issue shall be allocated on a proportionate basis to QIB bidders. 5% of the QIB portion shall be available for allocation on a proportionate basis to Mutual Funds only and the remainder of the QIB portion shall be available for allocation on a proportionate basis to all QIB bidders, including mutual funds, subject to valid Bids being received at or above the Issue Price. If at least 60% of the Net Issue cannot be allocated to QIBs, then the entire application money will be refunded forthwith. Further, not less than 10% of the net issue shall be available for allocation on a proportionate basis to non-institutional bidders and not less than 30% of the Net Issue shall be available for allocation on a proportionate basis to retail individual bidders, subject to valid bids being received at or above the issue price.

Promoted by Adani Enterprises, Adani Power (APL) is a power project development company. APL currently has two projects namely Mundra Project (in four phases of developments) and Tiroda Project (in two phases via its subsidiary Adani Power Maharashtra) with a combined installed capacity of 6,600 mega watt (MW). It is also planning to develop two thermal power projects at Dahej and Kawai with a combined installed capacity of 3,300 mega watt (MW).

The company intends to sell the power generated from these projects under a combination of long-term power purchase agreements to industrial and state-owned consumers and on merchant basis.

With the commissioning of the power projects, the Adani Group aims to be vertically integrated in power sector value chain through presence in related activities such as coal mining, coal trading, shipping, power generation, power transmission and power trading.

RIL Q1 net down 13%; experts see stock correcting on Monday

Market bellwether Reliance Industries' Q1 FY10 results have come in as a disappointment. Experts see the stock correcting on Monday. SP Tulsian of sptulsian.com sees the stock falling by Rs 175-200 on Monday, while Deepak Pareek of Angel Broking expects the stock to open 3-4% lower. The stock has a weightage of 12% on the Nifty leading to fears that it will pull the market down.

India's largest private refiner's standalone net profit declined by 11.5% to Rs 3,636 crore from Rs 4,110 crore in the same period of last year. Standalone net sales slipped 22.9% to Rs 32,055 crore versus Rs 41,579 crore year-on-year. Earning before interest, tax, depreciation and amortisation fell 3.3% to Rs 5,921 crore from Rs 6,121 crore. Operating profit stood at Rs 4,293 crore and standalone petchem revenues declined 22.4% to Rs 11,540 crore from Rs 14,871 crore last year.Gross refining margins have come in at USD 7.5 per barrel as against the street's expectations of USD 8-8.5 per barrel.

Stock market terms

Bull—a stock market operator who believes that share prices are
going to the bull, giving an upward thrust. The bull's action causes
buying pressure in the market place and pushes up the share prices.

Bull cycle—an extended period during which share price is generally
rising and the stock market indices show an upward move.

Bullion—gold, silver, or any other precious metal in bulk. Not in
the form of coins.

Bull market—continue rise in the price of stocks, sustained by
buying pressure of investors or bulls. News of favorable economic
growth, political development budgetary concession etc.can cause a
bulls market.

Bull position—buying without making a correspondence sale, hoping to
sell the shares at higher prices when market is to rise. Also known
as long position.

Bull Run—continuous uptrend of bull market.

Breakout—when shares move between support level and resistance level
for a time period and then shares moves any side either upward or
downward this is called breakout. Breakout means to break certain
levels.

Broker---A member of the stock exchange who is licensed to buy or
sell shares on his own behalf or on the behalf of his clients. He
charges commission in fix % on the gross value of deal. Brokers also
provide various financial services like dealing in bonds, commodity,
manages portfolio etc.

Bubble--- when a stock price is pushed to an abnormally high level,
not supported by any strong reason and fundamental, it is said to
have developed a bubble .

Bull—a stock market operator who believes that share prices are
going to the bull, giving an upward thrust. The bull's action causes
buying pressure in the market place and pushes up the share prices.

Bear spread—Option making strategy in which one buys a combination
of calls and puts of the same security at different strike prices to
make profit from fall of price of security .alternatively one buys a
put option of short maturity and another of long maturity to profit
from the difference between two put options as price falls.

Bear Trap----an movement of share price downwards, encouraging
investors to sell short. When market gets correct itself and prices
goes up investors get in bear trap.

Beating The Market getting a higher return on investment is higher
than the market averege possible but difficult

Bid Price—It is price which at which one is ready to buy share.

BIFR—Board for industrial and financial reconstruction.

Blue chip stock—shares of well knownand established companies which
have shown consistent growth over past many years and is expected
to repeat the same in future and have better prospectus.

Mahindra Satyam News

Mahindra Satyam, formerly Satyam Computer Services, continues to shine in the stock market. The stock, which has rallied more than 30% in the last seven days, crossed Rs 100 on July 23, and is now back among the top-five Indian IT companies’ list in terms of market capitalisation (with market cap of about Rs 12,000 crore) after Infosys, TCS, Wipro and HCL Tech.As of today, Mahindra Satyam’s market cap is greater than that of its parent company, Tech Mahindra.

Attributing the recent move up in its stock price to a bridge-up, Sanju Verma, CEO - Institution Biz, Proactive Universal Group, said the stock was still trading at a discount. “A lot of analysts are still not factoring in the 1100-1200 acres of land that Satyam holds. If they assume the company has Rs 300 crore of liabilities outstanding against that, even then, the land is still valued at something like close to Rs 11 per share. If you add this Rs 11 per share to the Rs 7 EPS you are talking of purely on the back of earnings momentum, the stock is still available at dirt cheap multiples,” she said.
On technicals, Rajat Bose, technical analyst said, "It’s a buy and it was a buy, the next target is Rs 120 and probably that target will be met sooner or later and once that level of Rs 120 is crossed then it is going to move further up. So if you ask me what are the sectors that I think in the next leg of upswing, IT is definitely one and Mahindra Satyam will definitely do well there."
In fact, the stock in back in the good books of mutual fund managers.

Today's market

The benchmark indices ended higher and continued their run-up for the second straight day. Huge upsurge in auto, realty and metal stocks helped the Nifty to end the week above the 4550 level. Power, telecom, technology and capital goods stocks were the other gainers. The markets rallied for the second straight week post the budget week.

Over 2-2.5% surge in US markets late Thursday night due to good earnings and economic data, more than 0.5% upside in European markets and 0.4-2% gains in Asian markets also helped our markets to remain on the higher side in the second half of the trade. They were volatile in the first half of the trade.

Avul Pakir Jainulabdeen Abdul Kalam

All during his five-year tenure, the 75-year-old A P J Abdul Kalam's
preferred menu at the table was idli, dosa and sambar besides curd-rice,
pickle and pappad, recalls a senior aide.

A habitual late-eater at night, the missile-man had made it clear to the
comptroller of household in Rashtrapati Bhavan to prepare all his meals
only from the general kitchen, which caters to other staff members in the
Presidential estate.

Stopping the practice of a number of attendants in waiting till the
President finished his dinner and retired for the night, Kalam insisted on
holding back only one person to warm up his meals, which he used to take
well-past midnight.

There have been occasions when Kalam required some help from other aides
during the night. Leaving aside protocol, Kalam, who has earned a
reputation of being a people's President, picked up the phone and directly
seek the information he required.

"He was a no requirement man," recalls his Press Secretary S M Khan.

During the entire tenure, the family kitchen specially meant for the
President was never operational. Not even when his 50-odd relatives had
come to the Rashtrapati Bhavan.

Kalam insisted that he make the payments for the expenditure incurred
during the stay of the relatives. The President, who skips lunch, had also
a love for fruits of any type. "Anything that was seasonal would satisfy
him. We had created a verandah garden for him in which citrus japonica
(China orange) grew.

"Though tasting very bitter, the President used to have them because of
its rich Vitamin-C content," OSD Brahma Singh said.

Defying the age-old principle of early to bed..., Kalam used to sleep
around 1-1:30 am and used to get up at around 6:30 am. He was the only
President, whose daily list of engagement was about 10.

Recounts his secretary P M Nair about his experience four years back. "It
was the morning of July 14, 2003. 8:40 am. The rax in my office rang. It
was the President at the other end."

In his usually cool and composed voice, Kalam told him "Mr Nair, last
night I could not sleep because my bedroom was leaking.

"I froze. Any other President, and my head would have rolled, though no
fault of mine," Nair said in his 'thank you' note to officials of
Rashtrapati Bhavan.

Sensing his embarrassment, the rocket-scientist spoke in a comforting
tone. "Don't worry, I know you will immediately set things right in my
bedroom but I am worried about those houses in the President's estate
where they may not have a second bedroom to shift to when the only one
that is available leaks."

Nair responded saying, "Sorry sir, I shall act just now."

Basic Terms - Must know

Asset
Anything on a company's books considered as having a posiaaative
monetary value. Assets include all things like holdings of obvious
market value (cash, real estate), (inventory,
aging equipment), and other quantities (pre-paid expenses,goodwill)
considered an asset by accounting conventions but possibly having no
market value at all.

Book value
Per-share value of shareholders' equity excluding goodwill and
other intangible assets.

Cash flow
Cash flow is essentially the movement of money into and out of your
business; it's the cycle of cash inflows and cash outflows that
determine your business' solvency.

Cash flow analysis is the study of the cycle of your business' cash
inflows and outflows, with the purpose of maintaining an adequate
cash flow for your business, and to provide the basis for cash flow
management.

Compound Annual Growth Rate - CAGR
The year-over-year growth rate of an investment over a specified
period of time.

The compound annual growth rate is calculated by taking the nth root
of the total

percentage growth rate, where n is the number of years in the period
being considered. This can be written as follows:

Debt-to-Equity Ratio
A company's debt divided by its equity . This ratio is used as a
relative measure of debt, but it

isn't always useful since equity is a complicated number. It's
sometimes better just to look at a

company's total debt per share, which you can either look up or
calculate since Debt per share =

eps/ roe x Debt/Equity:

Depreciation
Method to account for assets whose value is considered to decrease
over time.

The total amount that assets have depreciated by during a reporting
period is shown on the cash

flow statement , and also makes up part of the expenses shown on
the income statement . The

amount that assets have depreciated to by the end date of the period
is shown on the balance sheet.

EBIT
Earnings Before Interest and Taxes; intended to be a measure of the
amount of cash generated
by a company's operation

EBITDA
Earnings Before Interest, Taxes, Depreciation, and Amortization;
intended to be a measure of the

amount of cash generated by a company's operations (but leaving out
the costs of financing and

taxes - the "I" and the "T").

The danger with EBITDA is that if the "D" and "A" represent a "using
up" of an asset that will have

to be replaced in the future, then they really are operations-
related expenses, making EBITDA too liberal a number.

EVA

Economic Value Added, a measure of the superiority of the return a
company is able to realize on

invested capital above the baseline return expected by the
investment community. The formula is

EVA = NOPAT - ( C x Kc )

where C is the amount of capital a company plans to invest in a
project, and Kc is the cost of

capital, i.e. the return rate expected by investors. Positive EVA
means the project will add value

for shareholders; negative EVA means they would be better off if
management just gave them the

money as a dividend.

EVA is analogous toearnings; but where earnings expenses debt
financing only, the C x K term

c

in EVA is expensing the cost of all capital, equity as well as debt.

Equity
The portion of a company's assets that the shareholders own, as
opposed to what they've

borrowed: equal to total asset minus liabilities. Also
called "owners' equity" or "shareholders' equity".

Liability
An obligation to pay. These include accounts payable, and bond and
bank debt.

Liabilities are shown on the balance sheet Note that a liability is
not necessarily an evil thing for a

company. Technically it's just an asset that they have temporary
control over but don't own. If it's

a useful asset and if the cost of "borrowing" it is cheap, then a
liability can be a positive thing.

One example: if a retailer sells a gift certificate, they have to
show a liability for the value of the

merchandise they will be obligated to hand over when the giftee
shows up to redeem it; but in the

meantime they already have the cash the gifter paid, and they can
use it any way they want -- this

liability is really an interest-free loan

Operating Expenses
Expenses associated with running a business but not considered
directly applicable to the current

line of goods and services being sold. These include Sales and
Marketing, R & D, and General

and Administrative costs (including the salaries of people working
in these areas).

Operating Income
Operating Income is the pre-tax, pre-interest profit from the
company's operation

Operating profit margin
Ratio of operating income to sales revenue

P/E Ratio
The ratio of a stock price to its company's annual earning per share

Return on Assets
Earning divided by total assets

This number tells you "what the company can do with what it's got",
ie how many dollars of profits

they can achieve for each dollar of assets they control. It's a
useful number for comparing

competing companies in the same industry. The number will vary
widely across different

industries. Capital-intensive industries (like railroads and nuclear
power plants) will yield a low

return on assets, since they have to own such expensive assets to do
business. (And if they have

to pay a lot to maintain these assets, that will cut into the ROA
even more, since the maintenance

costs will decrease their earnings). Shoestring operations (software
companies, job placement

firms) will have a high ROA: their required assets are minimal.

Return on Equity
Earning divided by equity

The idea is that this tells you the number of dollars of profits the
company can earn for each dollar

of shareholders' equity; but return on asset is probably a better
number to look at. (After all, their

profitability is a function of all assets they control, not just of
the equity portion of assets. Note that

ROE is bigger than ROA, since equity is a subset of assets).

Balance sheet - Example

Balance sheet

The Basics

Accounting contains three financial statements:

Balance Sheet The Balance Sheet shows a snapshot of your company right now--how it is doing financially at the present time.

Income Statement The Income Statement is the camcorder that records a period of time; in accounting terms, it's to see how you received the earnings (i.e. net profits) between your beginning balance sheet to the ending balance sheet for a certain period.

Cashflow Statement The Cashflow Statement keeps track of your company's cash as it flow in and out during a time period.
Balance Sheet

The Balance Sheet is divided into two financially equal sides, so they can "balance."

Assets reside on the left column, and Liabilities + Owner's equity reside on the right (i.e. Assets = Liabilities + Owner's Equity).

The key component for the balance sheet is to connect the things (left side) to the people who own these things (right side).

Assets (i.e. "What we have") are organized on the balance sheet in descending order of liquidity (i.e. how easy it is to covert an asset into cash).

The following represents the order on the Balance Sheet:

* Cash - readily available funds you can use now
* Accounts Receivable - money owed to you
(e.g. for items you sold on store credit but haven't received money)
* Inventory - all available materials that will be sold; includes rawmaterials lemon, sugar, water) and finished goods (lemonade)
* Prepaid Expense - expense you paid beforehand, to be used in the future
* Fixed Asssets - items you use over and over, and aren't normally for sale

Liabilities + Owner's Equity (i.e. "Who owns it") are organized into the following:

* Accounts Payable (Liability) - the value of the inventory you borrowed & now owe; usually have to be paid back in 30 daysNotes Payable (L) - the loan amount in money you borrowed and must owe; payable over long-termTax Liability (L) - taxes you owe the government Original Investment (Owner's Equity) - your personal money invested in your business Retained Earnings (O) - earnings from past accounting periods; shows retained "net profit"
* Earnings [Week, Month, Year] to Date (O) - earnings from present accounting period; shows period's "net profit" (i.e. bottom line)

Income Statement

The Income Statement acts as the camcorder that illustrates how the Net Profit was gained between the beginning balance sheet and the ending balance sheet. It shows if your business was profitable in a certain period. To get Net Profit, use:

* Earnings = Sales - (Costs of Goods Sold + Expenses)Gross Profit = Sales - Cost of Goods Sold Net Profit = Gross profit - Expenses Note: We haven't deducted taxes, and dividends paid. These will subtract the earnings (i.e. Net Profit).

Cashflow Statement

When learning how to read a financial statement, remember this: The Cashflow Statement is probably the most important sheet in your small business accounting papers, as it keeps track of your cash.

Remember that you can be profitable, but without necessary cash, your business is in serious trouble. You can't spend your earnings, otherwise known as "paper profits"; you can only spend cash to fund your operating capital (e.g. fixed costs).

Good cashflow management means delaying your payables as long as you can, while speeding up your collection of accounts receivable money owed to you.

The cashflow statement accounts for collections, inventory paid, fixed asset investment, and expenses paid.

Learning how to read a financial statement is not that difficult. Most people avoid it because of this reason.

Once you understand the basic concepts on how to read a financial statement, you'll be on track to building a great company.
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