Capitalmind with Deepak & Shray

What happens when a company goes bankrupt? Why do investors buy their stocks that are headed to zero? In this episode, we explore how the Insolvency and Bankruptcy Code (IBC) has changed the game. Deepak explains the many nuances of current regulations and how they've evolved. We dive into examples such as Bhushan Steel, Sintex and Ruchi Soya - which we hope will give you clarity. Listen in and decide. Would you stay the hell away from such stocks, or start hunting for bargains?

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Understanding Bankruptcy

Businesses are tough and the best ones survive. There are ample failure points for a business that can drive it to bankruptcy. One or a combination of factors such as economical, social, regulatory, political, geographical, etc can drive a business suddenly to the ground or induce a slow death. Such companies eventually stare at bankruptcy. We discuss -

- What is bankruptcy?

- Does everyone lose money when companies go bankrupt?

- Who gets what when the company is sold for parts?

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Learnings from the Sintex saga

Sintex Industries, the Ahmedabad-based company, that boasts of tanks covering the skyline of most cities of India, was dragged to bankruptcy courts after it defaulted on a meager payment of ~15.4 crores towards principal and interest on its NCDs. This was the final nail in the coffin for the firm that had mismanaged its finances for too long. We discuss -

- What Sintex does as a business

- How the company was re-structured (through demerger)

- How its issues snowballed to lead the company into IBC

Eventually, the IBC ( Insolvency and Bankruptcy Code) tribunal was able to keep the company running and also got a successful bidder to buy out the stressed company. That's good news for almost all of its stakeholders. Except for its shareholders who will lose all of their equity in the company. So they get nothing. Zero.

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So How does IBC work? Why do existing shareholders lose everything?

The short answer: Because existing shareholders contribute nothing to the upcoming growth of the company, they get nothing. The company that these existing shareholders bought into eventually went bankrupt. So the story for existing shareholders ends here with a big zero in their hands. Sounds unfair but that's how it is. We discuss -

- How does the IBC process work?

- Every existing stakeholder (debtors, employees, vendors) gets some part of the new entity. The current shareholders should also get a piece no?

- What actually happened to Sintex shares?

- How did things use to happen before the IBC?

There are a lot of examples discussed in this section that explain different aspects of the bankruptcy process and also highlight how each bankruptcy case is different.

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But, existing shares of Ruchi Soya went up "to the moon" while it was going through bankruptcy

All bankruptcies are different and unique. Ruchi Soya was trending on social media recently because the company came back strongly from bankruptcy and its investor (Patanjali) seems to have made a killing on its investment. There's lots more to the whole revival story. Deepak explains -

- How regulatory rules change impacted the Ruchi Soya bankruptcy process

- The bidding by Adani and Patanjali

- Interestingly, they kept 1% of the company listed. Why?

- How does Patanjali make Ruchi Soya operating cash flow positive?

- The positive impact of Covid

- Why is a company that makes only 800 Crores has a market cap of 31000 crores?

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Does investing in distressed companies work?

We all love investing at its theoretical best - buy extremely low and sell high. We also keep repeating Buffett's quotes like "Buy when there is blood on the street". Distressed companies feel like a value buy all time but they are almost always value traps or falling knives or whatever. We briefly touch upon this before we wind up the podcast -

- A quick reference to Buffett's investing in the Salomon brothers

- Brookfield & Hotel Leela deal - distress investing

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There is a lot to unpack about this new digital currency RBI is talking about. Deepak and Shray built up the discussion by pondering over successive questions. Deepak takes us through how cryptocurrencies currently work. This sets up the context to the current ways of handling digital currencies and we move on to discuss the RBI-backed digital currency - Central Bank Digital Currency (CBDC).

Key Points

• How CBDCs are not cryptocurrencies? And how are they different?
• Is CBDCs actually required or is it a response to the popularity of cryptocurrency? So basically, why now?
• Is the CBDC likely to be anonymous like cryptocurrencies?
• Can CBDCs be an alternative to the SWIFT system given how Russia has been isolated by the world right now?
• Impact of CBDC on Monetary and Fiscal policies?

As Indians, we discuss Inflation only during elections which makes it less of transient and more of seasonal!

But, as investors, we discuss inflation a little more. The latest reason for it is the hammering of growth stocks across markets which is blamed squarely on inflation.

In this podcast, we understand the practical concept of Inflation with examples, its impact on your investments, its impact on our daily lives, and how it impacts different people differently.

We promise, thinking of inflation in this podcast will be much more interesting than what you experienced in your economics class.

How do High Net Worth Investors invest SO much in IPOs? Nykaa's IPO saw Rs. 1,00,000 crores invested by the well heeled Indian investors. But not much of it is their own money - they borrow it. In this episode, Deepak and Shray unravel the dynamics of an IPO application for HNIs. From the rules of allocation, the big business of IPO funding, how HNIs can borrow 100X their money, systemic risks, how grey market premium (GMP) works, the role of regulators and the road ahead. Read more here

On today's show, Shray asks Deepak about how to make sense of the past two years in the markets, macroeconomics, and the seeming irrationality of it all. They also talk about how to look at the year ahead.

Highlights

• 2021 bad year with all the lives lost, but it happened to be good for markets with the number of IPOs at an all-time high
• NIFTY returned approximately 23% and has been positive for the 6th consecutive year
• India being top-heavy, from the income distribution standpoint caused the kid of market outcomes we saw
• Small firms got hit the most, and that may not be sustainable in the long run
• Markets don't care about death and destruction for sure. But what moves the market?
• We've normalized, letting go of our freedoms, and irrationality could be the new normal.
• Inflation could actually be a function of supply than demand
• If the market didn't go down in these pandemic years. How can we make any event-based predictions?
• The boom in startup funding. Has equity become cheaper than debt?

Read more at https://capitalmind.in

With technology comes great responsibility, says SEBI, as it attempts to regulate the algorithmic trading markets that have just started to evolve in India. The concept of "API" trading, through Application Programming Interfaces is the standard in the web and app-based world, but SEBI doesn't want you to manage your own money programmatically. Or, worse, to give it to someone else who is "unregulated" to manage your money through an algorithm either.

In this episode we discuss SEBI's recent consultation paper on algorithmic trading and how it impacts you. What roles do algorithms play in managing your money and will a program be investing on your behalf in the near future.

1. SEBI published a consultation paper on algorithmic trading by retail investors on Thu Dec 9 2021
2. The paper impacts any form of "automated" trading: through a broker provided API in general as well as Algo Trading
3. An example of an Algorithm that already exists - Good Till Traded orders offered by your broker. They place an order automatically every single day through a program.
4. Algorithms that would help retail investors- "Buy/Sell this stock if it falls 10%", or manage the extreme risk on my portfolio (insurance, of sorts).
5. The motivation for this paper is the emergence of 3rd Party platforms that make use of APIs through algorithms, where you share your API keys etc and they automatically trade on your account.
6. The Algorithm behaves like a proxy fund manager or money manager. They can trade your account whenever they want.
7. Concern: What if they make big losses and you have no idea of how much they can hurt you?
8. Concern: Can't these platforms get a lot of customers and then auto-manipulate a stock, in the name of algo trading?
9. Concern: APIs + Algorithms could be used to overwhelm/stuff the exchange or be used to manipulate a security's price. Rate limiting and cool off periods could help address this.
10. Consultation paper currently bans all APIs and places onus on brokers to regulate them and suggests that brokers take responsibility to run the algorithms on their system
11. The paper would enable the Broker to empanel someone (and do the checks/risk assessment/quality control) but would prevent an individual from setting up something themselves - but this seems unenforceable.
12. Stopping APIs altogether is like using a sledgehammer to kill a mosquito. We could achieve many of the objectives by having the algorithm pop up an approve/reject screen that the user has to click on. If you have say more than 50 lakhs or something in your account then you could potentially have fully automatic execution. This would be a useful middle ground to protect the smaller retail customers.
13. When I click a buy button on Zerodha Kite it triggers an API, when you click a buy button on Smallcase to buy on say zerodha it also triggers a bunch of API, when you place an order through a program that also triggers an API - how do you differentiate between the three? And you can't build an app without APIs
14. Even fund managers are found guilty of say front running or offloading - SEBI can come after them since they are regulated. If you're trading other people's money and earning from it - you have to be treated with the same level of compliance as a fund manager (PMS/AIF etc)
15. There aren't any fund manager rules that allow you to run strategies with the kind of leverage that these algorithms allow you to.
16. According to Nithin's twitter space only 0.5% of zerodha users use algos.If you're running your own algorithm that really should be allowed
17. Future of fund management (especially at scale) will require some levels of automation and APIs so we can't take a regressive or overly harsh stand.

Read more at https://capitalmind.in!

How does P2P lending work in India? How safe is P2P lending? Deepak and Shray explore how the industry works, the risks involved and whether the returns are enough to justify the risks.

Summary

• Banks keep a considerable spread between the interest they offer on a deposit and the interest they charge a borrower. So, some people think, why is the spread so big? Why can't I deal with the borrower directly and receive more interest on my money?
• The problem is you don't know the person you are going to be lending money to. In comes the P2P lending company, which acts as a sort of intermediary between the lender and borrower.
• When you give your money to a bank (as a deposit), the bank will guarantee that you will get your money back. But in the case of P2P lending, there is no such guarantee that you will get your money back.
• Another problem with P2P lending is, no one outside knows the actual default rates, and they are often much higher than what these companies report, even though the whole operation is legal.
• In P2P lending, you don't see one of the three Cs of lending – you don't have collateral; you have capacity and creditworthiness.
• One of the reasons why P2P companies have flourished is that banks, which should ideally lend money to people whose credit might be questionable, don't lend to them. But the answer is not to 'lend' them money. You can consider it as a form of charity, in which case, even if you don't get the money back, you don't mind losing it. And there are companies that work on this model.
• An alternative could be microfinance. But there are problems there too. Often, multiple microfinance companies want to lend to the same borrower, who uses the money for purposes other than what they were intended for, with the result that they are not able to repay.
• But microfinance companies can take this pressure because they are a company. A P2P lending firm is just an intermediary. They have no way to recover the money if a borrower refuses to pay, except send legal notices (because there is no collateral), which may not work.
• So, the gist is, if you want to give loans through a P2P lending firm, only lend so much that you won't mind even if you lose the money. Give it for charitable purposes. Give it to people who are in such bad shape, they can't afford anything else.

Read the full transcript.

Episode 41 - Deepak sits down with returning guest Ruchir Kanakia, the founder of the insurance distribution company OneAssure to discuss our favorite insurance product - term insurance.

• How term insurance works for you and the company that sells it to you
• Debt or Dependents – the two reasons to buy term insurance
• How Covid and the fact that a handful of reinsurers control everything has made your office insurance a bit less reliable – consider buying a personal one too
• How much coverage is enough and how much the insurance company will give you
• Why you should opt for the in person medical test
• You're tech or finance savvy but consider getting an agent or distributor if your dependents might not be
• Common riders and why you should ignore them
• How the claims process works and benefits of selecting a monthly or yearly premium payment

Click here for the full transcript.

Episode 40 and we're speaking to the fintech firm that just raised 40 Million dollars last week - Smallcase! Deepak sits down with co-founders Vasanth and Anugrah to talk about creating a new way to invest in stocks, investment lessons from the pandemic and what's up next from the Smallcase team.