Punters Cry Foul At Mega Loss In Adani Ent Demerger Fiasco & Petition SEBI For Rescue

Adani Enterprises has always been the punters’ favourite. Given the alleged closeness between its promoter, Billionaire Gautam Adani, and NAMO, any news relating to NAMO sends the stock either plunging or soaring. So, the stock is a favourite hunting ground for punters looking to make a quick buck.

Yesterday, Adani Enterprises was a bit sluggish. It opened at Rs 574 and began to drift. Given that NAMO has been receiving a bit of good press lately, Adani looked good for a couple of bucks. A few sharp punters loaded up on the stock and lay waiting in anticipation.

To the utter shock and disbelief of the punters, the stock price plunged all of a sudden to touch a low of Rs. 116, a whopping loss of 80%.

When the punters came to their senses, they realized that the reason for the plunge in the stock price was because the stock price adjusted for the demerger of the port to Adani Ports & SEZ and the demerger of the power and transmission businesses to Adani Power.

In the normal course of events, this would make no difference because investors in Adnai Enterprises as on the record date would be compensated by shares in Adani Ports & SEZ and Adani Power. The fall in the value of shares of one would be compensated by the rise in the stock price of the other.

Also, in the normal course of events, such a fiasco does not happen. The normal practice amongst stock exchanges in cases of demerger etc is to allow trading only at the price adjusted for the demerger or to have a special session for discovery of the price. There are a number of precedents for this including in the case of the demerger of Reliance Industries into the other Reliance companies.

Now, fortunately for the punters who are caught on the wrong foot, the Investors Grievances Forum (IGF) has come to their rescue. In a strongly worded letter addressed to SEBI, the IGF has alleged that the stock exchanges allowed trading in Adani Enterprises “by brushing aside and throwing all the norms” and in a “most shocking manner”. It is also alleged that the irregularity appears to be “deliberate and mala fide”.

The IGF has claimed that a “large number of gullible innocent investors” … having no knowledge of the “cunning way” in which Exchanges allowed trading of share of Adani Enterprises … have been trapped resulting into losses to them.

It is also stated that “vested interests in Exchanges with connivance of manipulators allowed trading” …. with “mala fide intentions to cause loss to large number of investors”. It is also alleged that there could be “instutionalised scams orchestrated and executed by the unethical highly qualified professionals”.

The IGF has pleaded for a time bound investigation so as to ensure that “the sanctity of the trading platform is always maintained and investors are not put to any loss by discriminatory treatments”.

Surprisingly, the IGF has not claimed that the transactions should be nullified and treated as null and void. It is a principle of contract law that anything done under a mistake is voidable.

Now, we have to see how SEBI and the stock exchanges react to this fiasco and whether the punters are able to get all or any of their losses back.

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Key Performance Indicators (KPI)

What it is:

Key performance indicators (KPIs) are written goals for companies, departments within companies and often individual employees.

How it works/Example:

Let's say John Doe is the CEO of Company XYZ, and he wants the company to "produce higher-quality products" next year. How can John tell whether that has occurred? How will he measure it?
One way is through KPIs. He might, for example, tell his vice president of customer service that her bonus next year will depend on the following things:

• Number of customer refunds for defective products decreases by 20% over last year.
• Number of complaint-letter responses decreases by 10% over last year.
• Number of repeat customers increases 5% over last year.

He might tell his vice president of production that her bonus next year will depend on the following things:

• Number of defective products decreases by 30% over last year.
• Production line stops no more than five times per year for retooling due to line problems.

And he might tell his vice president of procurement that his bonus next year will depend on the following things:

• Less than 10% of supplies are returned to vendors due to defects

Every business's KPIs are different, but the idea is to give people measurable, indisputable expectations so that they know when they are succeeding and when they are failing.

Why it Matters:

The idea behind KPIs is that you can't manage what you don't measure. By breaking down goals into measurable pieces of work, KPIs help organizations reach their goals. They also improve morale by showing employees, in writing, exactly what they have to do to receive good reviews, raises or other incentives.
KPIs cannot solve every problem, however. Often, matters of culture, morale and ethics require a softer, intangible form of management.

Best execution refers to the imperative that a broker, market maker, or other agent acting on behalf of an investor is obligated to execute the investor's order in a way that is most advantageous to the investor rather than the agent.

Municipal Securities Rulemaking Board (MSRB)

What it is:

The Municipal Securities Rulemaking Board (MSRB) regulates municipal bond underwriters and dealers in an attempt to prevent fraud and manipulation in the issuance and trading of municipal bonds.
Congress created the MSRB when it passed the Securities Acts Amendments of 1975. Before its creation, financial institutions that engaged in municipal securities transactions did not have to register with any regulator or with the Securities and Exchange Commission (SEC).

How it works/Example:

Despite its Congressional charter, the MSRB is a private entity funded and staffed by municipal bond underwriters, issuers and dealers. As a private entity, it regulates only its own members, although it delegates examination and enforcement of its rules to the National Association of Securities Dealers (NASD), the Federal Depository Insurance Corporation (FDIC), the Federal Reserve and the Comptroller of the Currency. The SEC also oversees the MSRB. All municipal bond dealers must register with the MSRB before he or she can engage in any municipal bond transactions. The MSRB does regulate issuers of or investors in municipal securities.
The MSRB has 15 directors on its board. Five of them represent bank dealers, five represent securities firms and five are members of the public who are not associated with any bank dealer or securities firm. One of these public members must represent a municipal bond issuer, and another must represent municipal bond investors. Directors serve staggered three-year terms.
When the MSRB wants to create a new rule, it publishes a proposed rule in its MSRB Reports newsletter. There is usually a 60-day comment period. The MSRB directors then adopt or drop the proposed rule, taking into account the feedback. If the MSRB adopts the rule, it passes it on to the SEC for review. If the SEC approves the rule, the MSRB publishes the rule in the Federal Register. Another comment period follows before the SEC can formally approve the rule.

Why it Matters:

The MSRB is the primary regulatory authority in the municipal bond industry. Its job is to create rules and regulations that prevent fraud or manipulative practices and promote fair trade, efficient trading operations and an open market. The MSRB also dictates professional qualification standards, recordkeeping standards, transaction standards and quotation standards. Although it is a private entity that is funded and run by the industry, the layers of federal oversight provide some backstop to any self-serving industry regulatory actions.

Mortgage Cash Flow Obligation (MCFO)

What it is:

A mortgage cash flow obligation (MCFO) is a debt security that uses payments on a series of mortgages to fund principal and interest payments to MCFO holders.

How it works/Example:

An MCFO pays interest and principal payments at a specified rate similar to a bond. Monthly payments from a pool of underlying mortgages are bundled together and then used to make principal and interest payments on the MCFO. The MCFOs are unsecured and are issued in a range of classes, or tranches, that vary in risk.

Why it Matters:

It is important not to confuse MCFOs with collateralized mortgage obligations (CMOs). The two securities function in a similar manner, but CMOs have direct liens on the underlying mortgages (meaning the underlying mortgages are collateral for the CMOs). MCFOs are simply a contract -- MCFO owners have no legal rights to the actual underlying mortgages, meaning that all else being equal, MCFOs are riskier than CMOs.

Market Cannibalization

What it is:

Market cannibalization refers to a reduction in sales volume or market share of a product as a result of the introduction of a new product made by the same company.

How it works/Example:

Market Cannibalization is also referred to as corporate cannibalism.
Market cannibalization occurs when a company's new product line crowds out the existing market for its current products, rather than expanding the company's market base as originally intended. In other words, rather than appealing to an additional segment of the market, a new product line appeals to the company's current market, reducing the demand for its established products. In this respect, market cannibalization is an instance in which a company's own two product lines compete against one another.
To illustrate, suppose a company, XYZ, reputed for its quality wristwatches, decides to introduce a line of belt-fob pocket watches in an attempt to capture a larger market segment. XYZ soon discovers that despite the successful rollout and high sales volume of its new pocket watches, its volume of wristwatch sales has taken a concurrent nosedive. The crowding-out of XYZ's wristwatch sales by its sales in pocket watches constitutes market cannibalization.

Why it Matters:

Market cannibalization can cost a corporation significant sums of money if it does not perform proper market research before a product is released. If a new version of a product is released too soon (to replace the company's existing product), or if a product is too similar to another product the corporation has released, it may end an existing product's life prematurely, hurting overall sales.

Mark-to-Market (MTM)

What it is:

Mark-to-market (MTM) is an accounting method that records the value of an asset according to its current market price.

How it works/Example:

For example, the stocks you hold in your brokerage account are marked-to-market every day. At the closing bell, the price assigned to each of your stocks is the price that the larger market of buyers and sellers decided it would be at the end of the day. No other pricing information is included.
MTM is similarly used to price futures contracts, which is very important for investors who trade commodities with margin accounts.

Why it Matters:

Most agree that MTM pricing accurately reflects the true value of an asset. However,  MTM can be problematic in times of uncertainty because the value of assets can vary wildly from second to second -- not because of changes in the underlying value of assets, but because buyers and sellers are surging in and out in unpredictable ways. It is important not to confuse mark-to-market with mark-to-management or mark-to-model.

Macroeconomics

What it is:

Macroeconomics involves the study of aggregate factors such as employment, inflation, and gross domestic product, and evaluating how they influence the economy as a whole.

How it works/Example:

The Great Depression and its resulting high unemployment rate greatly influenced the development of macroeconomics. In 1936, John Maynard Keynes published The General Theory of Employment, Interest and Money, which theorized that government spending and tax policies could be used to stabilize economies. The Keynesian school of economic thought argues that an increase in government expenditures or a reduction in taxes will stimulate an economy; likewise, a reduction in government expenditures or an increase in taxes will constrict an economy and reduce inflation.
Later, Milton Friedman developed another well-known macroeconomic school of thought, called Monetarism, which rejected Keynes's fiscal policy idea and stated instead that regulating the money supply was the key to economic stability. Although Friedman published several books on a variety of topics, his best-known work is Studies in the Quantity Theory of Money, published in 1956.
The U.S. Federal government has both fiscal and monetary tools at its disposal to help regulate the economy.
The measures and topics of study most commonly associated with macroeconomics include: gross domestic product, the rate of employment, the phases of the business cycle, the rate of inflation, the money supply, the level of government debt, and the short-term and long-term effects of trends and changes in these measures. Macroeconomics also studies the interrelationships among the factors that shape the economy.
Macroeconomics confers considerable importance to the role expectations play in an economy. It studies the effects of anticipated and unanticipated changes, as well as the impact caused when the changes are expected to be temporary versus when they are expected to be permanent.

Why it Matters:

Macroeconomists look for ways to meet economic policy goals and create economic stability. In doing so, they often attempt to predict future levels of employment, inflation, and other key economic indicators. These predictions affect decisions made today by governments, individuals, and companies.
It is important to note the distinction between macroeconomics and microeconomics. Whereas Macroeconomics looks at the "big picture," microeconomics delves into the study of supply and demand and factors that impact individual consumer decisions. However, the two are inherently interrelated, as small decisions at the microeconomic level will ultimately have an impact on larger economic factors that influence the entire economy.
In the investing world, it behooves everyone to have at least a general familiarity with macroeconomic theory and the current state of the economy. It goes without saying that broad macroeconomic changes will inevitably be felt at both the corporate and the individual level. Furthermore, the markets themselves are often moved by the release of sensitive economic data, such as the latest GDP report or recent employment figures.
Often, those most concerned with macroeconomics tend to adopt a top-down approach to investing. Rather than strictly focusing on company fundamentals, top-down investors first attempt to analyze which sectors of the economy are poised to benefit from current economic trends. Only when they have determined the areas with the most favorable economic outlooks do they begin to search for the most promising companies within those particular industries. The underlying rationale behind this philosophy is that even strong companies can struggle if the industry in which they operate is facing a stiff economic headwind. Meanwhile, the weakest firms in a booming industry can still thrive.