Don't get lured by IPO discounts

Thu, 1 Apr Pre-Open

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The government thinks it has got the formula right. Given its ambitious infrastructure outlay target that hinges on disinvestment proceeds, the success of the PSU's market offerings are paramount. Be it IPOs of unlisted PSUs or follow on offering of the listed ones. The government intends to mop up Rs 400 bn from public issues in FY11 against Rs 235 bn mobilised in FY10. The offerings of NHPC, NTPC, Oil India and REC early this year that did not offer any discount to retail investors, missed out on their favour. The result was that institutional investors like LIC had to bail out the issues.

The response was much better in the case of the NMDC issue which offered a bargain to the retail applicants of the FPO. Investors under the impression that a discount on IPO / FPO price is equal to a sale on a product in a supermarket often fall in this trap. The government plans to cash in on this hypothesis and offer up to 10% discount on every forthcoming issue of a PSU.

Well we have nothing against such "discounts". All that we would like to reiterate is that the discounts do not make the offerings substantially more attractive that the offer price. And thus cannot be the sole reason to apply for the IPO/ FPO. Also, neither are PSU IPOs bad because they are government-managed companies. Nor are they good because the government is being generous in pricing. Ignoring such misconceptions, retail investors should long for healthy long term sustainable businesses available at reasonable bargains.

Savings Accounts may not be bad investments

If you have been keeping only the minimum balance necessary for retaining your savings account so far, probably your strategy should change. From today (April 1 , 2010) Indian banks are expected to account for interest on savings accounts on daily balance rather than the earlier system of minimum balance.

Although the interest on savings accounts remains unchanged at 3.5%, depositors will earn more interest income from these accounts. Until now, banks paid interest on minimum balance between the 10th and the last day of the month and the average payout worked out to 2.9%. By paying interest on daily balances, customers will get the actual return. Further, as returns on these deposits are not subject to tax deduction at source (TDS), high net worth individuals may choose these accounts over other short-term instruments such as mutual funds and term deposits.

Most banks, PSUs and private, have been aggressively targeting low-cost deposits which comprise savings account and current account deposits. The idea is to keep interest costs low. Well, that may also not change if account holders keep larger balances in their account thus offering the banks more float for short term requirements. Thus the new interest rate regime on savings account is expected to be a win-win situation for customers as well as banks. Particularly, private sector banks like HDFC Bank and Axis Bank and PSUs like SBI and PNB may reap the larger benefit of this on their margins in the near term.