Monday, April 07, 2008

Answers to shoutbox discussions - Apr 2008

I found some of the discussions requiring quite lengthy responses. Hence I am reproducing below the discussions and my responses to them:

6 Apr 08, 23:04
neha: sir could u plz explain underwriting ..i m new to ur blogs. and also what is mandatory IPO unerwriting. i looked in wikipedia but could'nt get it. thanks.

ramkyc: I would say keep reading the blogs and do keep following the links given therein. Almost everyday I am giving links to some external sites which give us a deeper understanding of some important concept or the other. However...

Whenever any company comes out with an IPO (Initial Public Offering) of its shares, it may choose to have an underwriter. This person/entity is one which gaurantees the company that its public offer would be fully subscribed and that in the event that it remains unsubscribed, the latter would subscribe for the entire portion remaining unsubscribed by the public. This is a kind of insurance that the underwriter gives to the company. For this insurance, the company will have to pay a price to the underwriter called the underwriting fee. Normally any sensible person/entity is supposed to underwrite an IPO only when it has carried out a due diligence of the issue and is of the opinion that the issue is worth subscribing to. An underwritten IPO gives comfort to the subscribing public that the issue is vetted by experts (underwriters) and that it is worth subscribing to.

What SEBI has done now is propose this underwriting to be mandatory for every IPO. The debate is about whether or not this mandatory underwriting is good.

Hope it is clear now. ET has given its solid reasoning as to why it is not good. But we can also have our own arguments about it being investor friendly etc. Got it? Dig deeper, think and discuss. All the best.


4 Apr 08, 23:02
cvrk: @ramkyC; you have dealt this matter in detail in your discover it blog in june 07.
4 Apr 08, 23:01
cvrk: Different stock exchanges define market capitilisation. As per BSE, the market capitalisation is defined as the Price multiped by free float
4 Apr 08, 22:54
cvrk: This is in respect of market capitalisation.
4 Apr 08, 22:54

ramkyc: Yes, I know. How many of our readers are keeping track of this?


cvrk: the trade deficit resulted in devaluation of dollors. The domiance of dollars, The over expansion has created the situations and not overspending. Any comments?
4 Apr 08, 22:52
cvrk: us slowing down, the produce imported did not find takers , allowing the trade deficit to enlarge.
4 Apr 08, 22:51
cvrk: dominance in the international market. But as it happens with all traders, the expansion was so fast, the other countries such as china started dumping the goods to us. With the domestic growth in
4 Apr 08, 22:49
cvrk: will purchase the goods created out of its assistance, thus the carrot. Like a horse, the developing nations jumped into the fray, and started exporting to us, indirectly thus benefitting dollor
4 Apr 08, 22:48
cvrk: @ramkyc: It is the instinct of the market maker US was trying. It assisted other countries, to gain dominance. To keep it simple, it helped the weaker economy with a carrot, that as an importer it wil

ramkyc: The presumption that imported goods into the US did not find takers and hence its trade deficit enlarged, is incorrect. US was importing more than what it produced. It gobbled up whatever the world could offer. That's why its trade deficit grew. It thought that the deficit is sustainable. But it was a false sense of comfort that it was drawing on the back of the US dollar's strength. That strength itself is not the currecy's inherent strength growing out of trade balances. But it was one that accrued to it out of its situation; of being used as the exchange currency of the world. Sooner or later the consequences of this overspending have to be faced. It is very tough (I think that includes Nobel winning economists) to predict in what form or the time frame in which such consequences would occur. Perhaps it is equally difficult to gauze when or what would trigger the dawn of that realization. At the present moment, it is the subprime -> liquidity -> financial crisis that has made the US realize that it is time for it to pay for its past consumption. I doubt whether it is still acknowledging that it has to pay. Let us wait for a few more months. Its understanding will be clearer. But so far, its responses have been very traditionalistic and typically Keynesian. Keep more money in the hands of the people and boost consumption. I am skeptical about its solutions. Let's wait and watch like good students.