South Seas Bubble

Crisis Chronicles: The South Sea Bubble of 1720—Repackaging Debt and the Current Reach for Yield

James Narron and David Skeie

http://libertystreeteconomics.newyorkfed.org/2013/11/crisis-chronicles-the-south-sea-bubble-of-1720repackaging-debt-and-the-current-reach-for-yield.html

In 1720, the South Sea Company offered to pay the British government for the right to buy the national debt from debtholders in exchange for shares backed by dividends to be paid from the company’s debt holdings and South Sea trade profits. The Bank of England countered the proposal and the two then competed for the right to buy the debt, with South Sea ultimately winning through bribes to the government. Later that year, the government moved to divert more capital to South Sea shares by hampering investment opportunities for rival companies in what became known as the Bubble Act, and public confidence was shaken. In this edition of the Crisis Chronicles, we explore the rise and fall of the South Sea Company and offer a cautionary look at the current reach for yield.

A Rogue’s Guide to Repackaging Debt: Start with Insider Trading . . .
Two key events predate the South Sea Bubble. First, around 1710, the Sword Blade Bank offered to exchange unsecured government debt issued by army paymasters for Sword Blade shares. But it did so only after having secretly amassed large holdings of the debt, which traded at a deep discount given investor uncertainty that Britain could pay its debts. Knowing the price of the debt would rise with the announcement of the debt-to-shares exchange, the Sword Blade Bank made a significant profit on its debt holdings in what would today be called insider trading.The second key event was the formation of the South Sea Company in 1711, for the purpose of rivaling the East India Company in trade. But a unique feature included in the formation of the company was the exchange of shares for government debt, no doubt influenced by the prior Sword Blade Bank deal; five of the directors of the South Sea Company were from the Sword Blade Bank. By 1713, the peace treaty at Utrecht brought an end to war with Spain, but the British gained only limited access to trading stations in the Americas. Consequently, the trading operations never proved profitable and the South Sea Company became a financial enterprise by default. In 1715, and then again in 1719, the South Sea Company was allowed to convert additional government debt into shares. In April 1720, South Sea won approval to buy the remaining government debt and to issue stock in exchange. The once-burdensome debt had been cleverly repackaged into a valuable commodity.Then Pay Bribes . . .
Investors in South Sea shares now anticipated both a 5 percent annual dividend payment in addition to the hope of lucrative profits from trade with the Americas. But on the announcement of approval to buy the remaining government debt on April 7, 1720, the South Sea share price fell from £310 to £290 overnight. South Sea directors were eager to pump up the stock price and spread rumors of even greater riches to be earned from South Sea trade. Later that month, South Sea offered to new investors its First Money Subscription of £2 million in stock at £300 a share with 20 percent down and the remaining payments to be made every two months. So successful was the first offer that a Second Money Subscription followed later that same April with equally generous terms that allowed participants to borrow up to £3,000 each. Nearly 200 new ventures were launched that year under similar schemes, increasing the competition for investor capital. In the short term, shares soared across most companies. But South Sea stock sale proceeds were needed to pay dividends and bribes to the government for favorable treatment, as well as to buy its own shares to support its stock price. Consequently, a Third Money Subscription was launched later that year with even more generous terms at just 10 percent down with installment payments over four years and the second payment not due for a year.

. . . And Ban Rivals
Later that summer, the government moved to ban the new ventures—South Sea’s rivals for investor capital—in passing the “so-called” Bubble Act, which jolted public confidence. Companies impacted by the ban saw their stock prices plummet and leveraged investors were forced to sell South Sea shares to pay off debts, which put downward pressure on South Sea’s stock price as well. To prop up the company, South Sea launched the Fourth Money Subscription in August with a promise of a 30 percent year-end dividend and an annual dividend of 50 percent for ten years. But the market didn’t view the offer as credible and the South Sea share price continued to fall through mid-September. Liquidity constraints in London were further compounded by the concurrent Mississippi Bubble and bust in Paris, which we’ll cover in our next post. The South Sea Company was forced to turn to the Bank of England for help with the Bank ultimately agreeing to support the company but not its banker, the Sword Blade Bank.

Recall from our last post on the “not so great” re-coinage of 1696 that after the re-coinage, silver continued to flow out of Britain to Amsterdam, where bankers and merchants exchanged the silver coin in the commodity markets, issuing promissory notes in return. The promissory notes in effect served as a form of paper currency and paved the way for banknotes to circulate widely in Britain. So when panicked depositors flocked to exchange banknotes for gold coin from the Sword Blade Bank (the South Sea Company’s bank), the bank was unable to meet demand and closed its doors on September 24. The panic turned to contagion and spread to other banks, many of which also failed.

The Return of Repackaged Debt
As we’ll see in upcoming posts, financial innovation—in this case the repackaging of debt—is a recurring theme in our review of historic crises. In this case, the South Sea Company structured the national debt in a way that was initially attractive to investors, but the scheme to finance the debt-for-equity swap ultimately proved to be noncredible and the market collapsed. Now fast-forward to 2013 and the five-year anniversary in September of Lehman Brothers’ failure. As Fed Governor Jeremy Stein pointed out in a recent speech, a combination of factors such as financial innovation, regulation, and a change in the economic environment, can sometimes contribute to an overheating of credit markets. Asset-backed securitization and collateralized debt obligations have returned with a bang—or perhaps a boom—and are on pace to exceed pre-crisis levels, perhaps fueled by investors’ reach for yield. And remember from our introduction to the Crisis Chronicles series that “lessons learned often last only a lifetime and are easily forgotten.” So, will the current reach for yield lead to ever more complex, leveraged investments and the next credit market bubble? Or will the lessons from the Great Recession last at least a lifetime? Tell us what you think.

Nice piece of advice

To live content with small means;

 To seek elegance rather than luxury,

 And refinement rather than fashion;

 To be worthy, not respectable, and wealthy, not, rich;

 To study hard, think quietly,

 Talk gently,

 Act frankly;

 To listen to stars and birds, babes and sages, with open heart;

 To bear all cheerfully,

 Do all bravely,

 Await occasions,

 Hurry Never.

 In a word, to let the spiritual, unbidden and unconscious, grow up through the common.

This is my symphony.

 — William Henry Channing

merger arbitrage - key takeaways

How to Analyze a Merger Arbitrage

First you need to find a source to get ideas from.

I tend to get my information from reading books, magazines, listening to finance stations on the radio and blogs but the best description and rundown of how to get started, what to watch for, when to start considering putting money down etc came from FWallStreet. I highly recommend you take a look.

There are 4 posts that make up the arbitrage/workout series.

• Part 1
• Part 2
• Part 3
• Part 4

I personally only engage in merger arbitrage where it has been confirmed (via newspapers, press release etc) a company will be buying out another company. My investing nature is completely against “speculative buyouts”.

GDL - Value does well

Decent balance sheet but lower earnings growth led GDL to collapse to INR 100 not so long ago.
Today the stock is up 35% in about 6 months - was slow to react while rest of the market was on fire...
Value surely needs patience and catalyst (in this case snowman IPO)

High Shiller P/E in the US. Implications for Indian Investors

US Market (Source: Gurufocus.com)

Indian Market

- For Indian markets, CAPE is based on 5 year rolling returns for the last 10 years
- Interestingly, Indian market is cheap relative to historical averages. Profit margins and RoEs are at 5 year low (excluding 2009 data). In effect both margins and multiples should mean revert under the right conditions
- What if US market corrects over the next 2 years? highly likely as P/E and margin will revert lower average numbers.
Its a tricky situation for the Indian investor given that 1) both markets are highly correlated and so are the trade flows and 2) FII flows will dry up. So if we dont our GDP and Fisc. Deficit. in order over the next two years, we will get yet another opportunity to load up on quality stocks for the long term
Staying defensive always remains the only option.

Graham - Early lessons at Columbia & Books to read

http://www.wiley.com/legacy/products/subject/finance/bgraham/index.html

Books to read:

http://futile.free.fr/wbbiblious.html#2
http://www.frips.com/cst.htm#Frame: Arbitrage

If you can throw your mind, as I can, as far back as 1914, you would be struck by some extraordinary differences in Wall Street then and today. In a great number of things, the improvement has been tremendous. The ethics of Wall Street are very much better. The sources of information are much greater, and the information itself is much more dependable. There have been many advances in the art of security analysis. In all those respects we are very far ahead of the past.

In one important respect we have made practically no progress at all, and that is in human nature. Regardless of all the apparatus and all the improvements in techniques, people still want to make money very fast. They still want to be on the right side of the market. And what is most important and most dangerous, we all want to get more out of Wall Street than we deserve for the work we put in.

There is one final area in which I think there has been a very definite retrogression in Wall Street thinking. That is in the distinctions between investment and speculation, which I spoke about at the beginning of this lecture. I am sure that back in 1914 the typical person had a much clearer idea of what he meant by investing his money, and what he meant by speculating with his money. He had no exaggerated ideas of what an investment operation should bring him, and nearly all the people who speculated knew approximately what kind of risks they were taking

1929 crash

In the worst of times, which are the best of stocks?

So many readers have emailed me to warn that we are going into another Great Depression that I decided to find out which companies and sectors did best after the Crash of 1929. With the Standard & Poor's 500-stock index down 39% last year and another 8.5% this year, it can't hurt to learn what separated the winners from the losers back then.

Heath Hinegardner

The good news is that some stocks and industries did indeed do much better than average. The bad news is that the average was ghastly, and even the best stocks had three rotten years in a row.

With the help of the Center for Research in Security Prices, or CRSP, at the University of Chicago's Booth School of Business, I sought to answer this question: If you had invested on Jan. 1, 1930, after the crash already had destroyed a third of the stock market's value, where would you have gotten the greatest gains?

The short answer: In 1930, 1931 and 1932, nowhere. There was no real refuge in the storm; even Benjamin Graham, the great value investor, lost 60% over those three years.

According to CRSP, only one industry had positive returns from 1930 through 1932: logging. The two stocks in that tiny sector, Diamond Match and Mengel Co., whittled out a cumulative gain of 40% for the three-year period. Diamond turned timber into matchsticks; Mengel made trees into packing materials, primarily for daily necessities like tobacco and soap.

To find a major sector with significantly positive returns, CRSP needed to stretch our measurement period into a fourth year, 1933, when the market finally rebounded partway from its earlier losses by rising a record 54%. Even then, out of 120 industries, only 13 managed to generate gains from 1930 through 1933.

The only clear winner: cheap vices. Among the sectors with positive returns were cigarettes, cigars and tobacco, sugar and confectionery products, and fats and oils, which each gained between 1.6% and 7.5% annually. Those gains were better than they look, because deflation raised their purchasing power by an annual average of more than 6% over this period. It seems there was good money to be made investing in guilty pleasures that people could afford even in the hardest of times: sweets, smokes and fried food.

Of course, some of the industries in the CRSP sample scarcely exist today. It doesn't do us much good to learn that we could have earned a 5.9% annualized return by investing in leather tanning and finishing stocks, for example.

And the agriculture-and-commodity-based economy of the 1920s and 1930s was quite different from today's world. Barrie Wigmore is a retired investment banker at Goldman Sachs Group Inc. whose book "The Crash and Its Aftermath" is an indispensable guide to the stock market during the Depression. He says: "The truth is, we're really in no man's land. We've never been here before. It's much more important to focus on the variables that we really know today without cluttering your mind up with comparisons to the Depression."

What we do know, Mr. Wigmore says, is that consumers and corporations alike will be compelled to deleverage in the years to come. He sees three obvious opportunities. First would be the shares of great brand-name companies with manageable levels of debt, like Amazon.com, AMZN +0.48% Google, GOOG -0.16% NikeNKE +0.74% and United Parcel Service, UPS -0.03% but only when they are at least as cheap as they were last fall.

Second, you might consider the stocks of firms that enable consumers to indulge in cheap vices. Avoid tobacco companies, which often combine huge legal liabilities with too much leverage, and brewers and distillers, which also tend to carry too much debt. But companies like Costco Wholesale, COST +0.44% where consumers can buy snacks and candy by the crate, and PepsiCo, PEP -0.42% which spews out soda pop and corn chips, might fit the bill.

What if, like me, you keep most of your stock money in index funds? Mr. Wigmore has been diversifying into intermediate-term, investment-grade corporate bonds, which still offer attractive yields relative to Treasury securities. Corporate bonds returned 6.7% a year from 1930 through 1933, a return effectively doubled by deflation over the same period. Even if we dodge another Depression, today's yields on corporate bonds should make them a deal.

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Market Insider with Patti Domm

The Stocks That Survived 1929

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 Published: Monday, 27 Oct 2008 | 3:55 PM ET

 By: Patti Domm | CNBC Executive News Editor

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Coca-Cola , Archer-Daniels and Deere should like this history lesson.
Even poor students of history know it never exactly repeats itself, but we all have been scratching the past for clues to guide us though the current harrowing times. So here's a historic analysis I think you'll find particularly interesting.
Think back to 1929, and you immediately think stock market crash. Ouch. Ok, that's similar to now. Next, think ahead two years into the future (that would be 1931). By analyzing stock performance, you'll see an interesting picture of investor behavior. Michael Painchaud, Director of Research and Principal at Market Profile Theorems did just that and he thinks some of these lessons are still relevant.
Painchaud looked at stocks as they made new highs after the 1929 crash. All three of those NYSE-listed stocks mentioned above were on a list of stocks that made new highs within two years of the 1929 crash. The 1929-'31 list, attached below, contains some other names you will know -- Federated Department Stores and U.S. Steel. There are others you maybe never heard of (Raybestos-Manhattan?), and some you'll be surprised by (Exchange Buffet, a vending machine cafe).
There's a heavy representation of food companies, industrials and manufacturing. Three movie companies made it too, and some old reliable utilities. You will notice that financial companies did not make the list.
"The lesson is obviously that investors had gone very defensive. Firms which tended to provide products and services which were at the very basic level of the economy did well, and there wasn't too much room for anything else," he said. But I note they bought entertainment names, too. (Do movies then = iPods, HDTV, and videogames now?)
Also, Coke wasn't the defensive name it is now. You have to assume it was more about growth.
You'll also note that there are quite a few preferred stocks. It makes sense, Painchaud said. "It's part of a very conservative investment view, and buying yield is a hedge," he said.
There are three miners, but Painchaud points out they are not defensive gold plays as you might think. "They were producing silver. It very well could have been the world was stockpiling silver for munitions for the coming war," he said.
So what about now? There was no technology-laden Nasdaq index in 1929, and Painchaud notes the biggest tech company of the time, RCA, didn't make his list. But I wondered if — as the 1920s clearly still showed the strains of America's move to an industrialized nation from a more agrarian one — could we compare that era to our transition to the high-tech era (using the 1980s lexicon)? Could tech names be the equivalent of some of the industrial names on Painchaud's list?
He agreed with my theory, but added that the tech names that are most basic may be the ones that recover first. If you use the lesson of 1929, he says you would conclude semiconductors might be on the list. That also correlates with something else he's seeing in his research: "In terms of insider activity, the semiconductors look like a buy as a group."
History doesn't always repeat itself. Your ETF wasn't there in the 1930s, and your broker wasn't putting his orders through on a computer... but some of the same psychology seems to be at work.
Painchaud's 1929-'31 list:(divided by industry)
Construction Materials
U.S. Gypsum
Raybestos-Manhattan
Consumer Discretionary
Bulova Watch
Consumer Products - Tobacco
American Tobacco "B"
Ligget and Myers "B"
Electrical Transmission
American Superpower
Energy/Oil
Standard Oil Co. (NJ)
Entertainment
Columbia Pictures
Paramount Pictures
Loews
Food Processors
Archer-Daniels Midland
Coca-Cola
Corn Products Refining $7 prfd
International Salt
Libby, McNeill and Libby
Swift International
Industrial
American Machinery Foundry
Warren Foundry and Pipe
General Refractories
U.S. Steel
National Can
Vanadium Corp. of America
New Jersey Zinc
Novadel-Agene
Worthington Pump
Superheater
Continental Diamond Fibre
Machine Tools
Bullard Co.
Manufacturing
Foster Wheeler
Thatcher Manufacturing
Ingersoll-Rand
Deere and Co.
American Chain and Cable
Mining
Lake Shore Mines
Dome Mines
Homestake Mining
Conglomerate
Atlantic Gulf and Western Industries Pfd.
Electrical Wiring
Driver-Harris
Restaurants
Exchange Buffet
Office Equipment
Addressograph-Multigraph
Oil Field Equipment
Dresser Industries
Pharmaceuticals
Sharp and Dohme
Publishing
Curtis Publishing $7 pfd
Real Estate
Equitable Office Building
Texas Pacific Land Trust
Retail
Federated Department Stores
Transportation RR
Missouri-Kansas-Texas
Missouri-Kansas-Texas pfd
N.Y. Chicago and St. Louis pfd
Utilities
Electric Power and Light
American and Foreign Power $7 pfd
American Power and Light $5 pfd
Electric Power and Light $7 pfd
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Somewhere along the line growing up, most of us have encountered the story behind "Black Tuesday" and "The Stock Market Crash of 1929." On October 28th of 1929, the Dow Jones Index dropped 12.82%. The next day, it dropped an additional 11.73%. Here is a small glimpse into the story behind the numbers:

On Tuesday, October 29, the flood of sales continued. Historians have called this "the most devastating day in the history of markets." A gloomy quiet pervaded the trading floor. The week before, traders ran across the floor in panic, trying to submit their orders before prices dropped further. That day, however, the stock exchange was as dour as a funeral parlor. A reporter from the New York Times described the somber scene: "Orderly crowds lined up before each post, talking in subdued tones, without any pushing." In that last week of October 1929, the stock market began a momentous decline that came to be known as "The Great Crash."

During that time, $30 billion in stock value (about the same amount of money the United States had spent in World War I) evaporated completely along with people's dreams of achieving permanent prosperity.

I have no intention to understate the misery caused by this fallout or to suggest that the market crash of 1929 "just wasn't that bad." But I would like to add some context to the traditional understanding of this terrible stock market decline so that it may help you make more informed decisions about your own portfolio strategy.

Let us take a look at the price performance of four of the most legendary American stocks in the 20th century: AT&T (T), General Electric (GE), Hershey (HSY), and IBM (IBM).

If you take a narrow look at the stock performance of these four companies through the narrow lens of only 1929, then yes, things were incredibly terrible:

1. In September 1929, AT&T traded at $304 per share. By November 1929, AT&T traded at $222 per share.

2. In September 1929, General Electric traded at $396 per share. By November 1929, General Electric traded at $201 per share.

3. In September 1929, Hershey traded at $128 per share. By November 1929, Hershey traded at $68 per share.

4. In September 1929, IBM traded at $241 per share. By November 1929, IBM traded at $129 per share.

These are the statistics that you often hear bandied about in the history books. They provide an accurate read of the misery generated in 1929. But there are two important things that a singular focus on the price declines in 1929 do not tell: first, they usually do not note the crazy overvaluation of the 1929 stock market preceding the crash (the Dow Jones Index components traded at 25-30x earnings, and most large financial institutions traded at over 400% of book value). And secondly, they do not provide the broader perspective by noting the difference between, say, the 1927 stock market and the 1929 stock market.

When studying the stock market crash of 1929, the focus is always on the price of securities right before the crash happened, and then the low point after the crash happened. To get a broader perspective, let's take a look at the prices in August 1927 (before the speculative bubble occurred) and compare them with the November 1929 prices after "The Great Crash."

1. In August 1927, AT&T traded at $169 per share. In November 1929, AT&T traded at $222 per share.

2. In August 1927, General Electric traded at $142 per share. In November 1929, General Electric traded at $201 per share.

3. In August 1928 (1927 figures were not available for Hershey), Hershey traded at $53 per share. In November 1929, Hershey traded at $68 per share.

4. In August 1927, IBM traded at $93 per share. In November 1929, IBM traded at $129 per share.

What is worth noting is the fact that the AT&T, General Electric, Hershey, and IBM investors actually made a tidy profit between their August 1927 purchases and the post-crash prices in November 1929. But no one ever talks about that because it does not fit the historical narrative. Also, it would have been difficult from an emotional perspective to experience the rapid declines in paper wealth during the 1929 crash (the kind of people who would have thought "those businesses should not have been trading at such crazy high valuations" were probably not the types of folks that owned those securities during the crash).

When people want to sell you on the idea that the stock market is "rigged" or that long-term investing is a naïve pursuit, they will usually tell you that the stock market took about 25 years to recover from the Dow's pre-crash high of "300" to the next time the Dow Jones hit "300" in 1954. First of all, that view of investing completely ignores the effects of dividends (which ranged from a little under 3% annually to a little over 10% annually during the 1929 to 1954 period) which contributed significantly to total returns. And secondly, it assumes that you made a lump sum investment at the exact worst moment in the first half of the 20th century.

The best defense against stock market misery is paying a rational price for your securities. If you are evaluating a large-cap stock that is trading above its valuation multiples that it has seen over the past decade, be careful before making that purchase. When stock prices are going up, it is easy to rationalize a lot of investments (although I should note that current stock market valuations of most blue-chips are nowhere near the lofty highs of 1929). When you look at the window from 1927 to 1929, it can be helpful to keep in mind that it is not the transition from fair valuation to undervaluation that necessarily causes the extreme downward fluctuations, but rather, it is the transition from overvaluation to undervaluation that makes the declines so pronounced.

Insisting on a margin of safety in your initial purchase price is still the best defense there is. There is a reason why The Intelligent Investor is in print after all these years. That principal is timeless. If you can stick to the "margin of safety" principal as the stock markets continue to ride higher, you can hopefully look over your own investment record years from now feeling more like the guy that invested in August 1927 instead of September 1929. The folks that paid a rational price for some top-quality blue chips in 1927 actually increased their wealth and purchasing power even immediately after the Crash of 1929. Of course, none of that shows up in most historical records.

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Rights Arb - Source Ekansh

Dear Readers,

These days there’s an abundance of Risk Arbitrage opportunities in the form of de-mergers, rights issue, open offer and de-listing. Somehow most of them go un-noticed irrespective of the fact that at times many are no brainers.

They are ignored completely on the grounds of avoiding the un-chartered territories. However as they say, it’s not the hard work but the smart work that pays off and the same goes with stock markets.

While on one hand market’s been in a state of decline since early Nov’10, Risk arbitrageurs have been making decent returns. One such case which we worked upon recently is the Rights issue of Atul Auto Ltd.

Important Note: The closing date for Rights issue has been extended to 14th Oct’11 from the earlier 29th Sep’11. So, there’s still a window of opportunity for the ones who can manage to get a hold on the Rights issue offer letter either through their brokers or acquaintances, apply and make sure the same reaches the registrar by 14th Oct’11.

Some background into the Rights Issue of Atul Auto

On 6th Jan’11, the Board of Directors of the Company approved the draft Letter of Offer for the proposed Right issue of equity shares of the Company. At that time, the stock was hovering aroung Rs 115/- per share.

Meanwhile the company had been performing exceedingly well and was witnessing very high positive cash flows from its operating activities. On going through the Annual report for 2010-11, we noticed some significant changes in important figures.

As on 31st March, 2011 the Company had Rs 3.37 crore as advances from dealers against just Rs 36 lacs in the previous year, a 10 fold jump. Also the company had Rs 1.67 crore as security deposits from dealers against Rs 0.88 crore in the previous year, pointing towards an almost 100% jump in dealer network and strong demand for company’s products.

The above was also corroborated by the fact that for FY 11 Atul Auto Ltd recorded total sales of 19398 vehicles as compared to 12329 vehicles in the previous year registering a growth of 57.33%.

Then on 31st May’11, the company recommended a dividend of Rs 4.00/- per share which was a 100% increase over their last years dividend of Rs 2.00/- per share.

All the above facts got us really interested into the company and it’s proposed Rights issue.

Investment Operation in Atul Auto Ltd

Finally on 19th Aug’11, the company informed BSE that the Board of Directors of the Company approved and adopted the Letter of Offer in respect of Proposed Rights Issue of Equity Shares of the Company aggregating to an amount of Rs. 4.38 crore.

BSE Link – http://www.bseindia.com/stockinfo/anndet.aspx?newsid=56b9ce52-ed97-4da0-a760-88ab42e7fb63&param1=1

We got active with our stock purchases and luckily the massive correction of Aug’11, gave us ample opportunity to accumulate 400 shares (used for the ease of calculation) at an average of Rs 100.

Meanwhile on 24th Aug’11, Atul Auto announced 5th Sep’11 as the Record date for the Right issue of shares. The synopsis of the Rights issue is as follows:

So, even after the Rights issue there’s not much equity dilution and with expanded equity the stock is still quoting at a PE multiple of 7.5-8 on a stock price of Rs 100.

Most importantly, the issue price announced by the company i.e. Rs 30/- per share is outstanding for both the long term investors and the arbitrageurs.

On 5th Sep’11 i.e. the record date, we managed to sell off all the 400 shares at an average of Rs 102 and thus pocket a minuscule gain of 2%.

So, what’s the big deal about 2% returns?

Well, we are yet to account for our Rights entitlement. As mentioned above, we are entitled for 1 equity share at an issue price of Rs 30/- per share for every 4 shares held by us on the record date.

So, based on our holding of 400 shares on the record date, we are entitled for 100 shares of Atul Auto at Rs 30/- per share while the current market price is Rs 99.

Now, as you all must be aware that in case of Rights issue one can apply for any number of shares over and above his entitlement (Only limit being the issue size i.e. 14.62 lakh shares in this case. We have applied for total 400 shares which blocks an amount of Rs 12000), though the allotment depends on the subscription.

So, in the worst case we will get our entitled Right of 100 shares while in the best case we may end up getting alloted 400 shares at Rs 30/- per share. The details regarding allotment will be available only after the closing date of Rights issue.

Considering the valuations and the bright prospects of the company, we may continue holding all the alloted shares or sell only above Rs 100/- per share (the CMP is Rs 99).

Worst Case Scenario

One gets allotted only 100 shares at a price of Rs 30/- and meanwhile the market’s correct sharply bringing Atul Auto down to Rs 70/- per share. Still a very good return, and we would suggest you to book complete profit.

Best Case Scenario

One gets allotted 400 shares at a price of Rs 30/- and the price does not correct beyond Rs 80/-. We would suggest complete profit booking in such a case with excellent returns.

Ekansh Mittal – [ekansh@katalystwealth.com]