Is this a good time to enter SBI stock? - a technical update

The previous technical update to the stock chart pattern of State Bank of India (posted on Apr 2013) contained a bearish view for the following two reasons:

(1) formation of a head-and-shoulders reversal pattern with a downward target of 155 (adjusted for 10:1 stock split in Nov 2014); (2) large unreported NPAs of most PSU banks that exerted downward pressure on the prices of their stocks.

SBI's stock price had corrected down to 145.30 in Aug '13 - overshooting the downside target of the head-and-shoulders pattern. It then rose to 200, only to correct down once again to 145.60 in Feb '14 - forming a 'double bottom' reversal pattern.

The subsequent rally took the stock to a high of 283.40 on May 26 '14, but a 'reversal day' pattern (higher high, lower close) triggered a 6 months long sideways consolidation.

The stock touched a high of 296.80 on Nov 19 '14 - the day before it started trading ex-split (10:1). Such a split is often followed by selling, but the stock continued to rally and rose to touch a high of 335.90 on Jan 28 '15 - short of the lifetime high of 351.50 (touched on Nov 8 '10).

Three of the daily technical indicators - MACD, ROC, RSI - showed negative divergences by touching lower tops even as the stock closed at a 2 years closing high price of 334.45. That was just the signal bears needed.

A 13 months long correction culminated with the formation of a 'falling wedge' pattern, with the stock testing its Feb '14 low on Feb 25 '16. All four technical indicators showed positive divergences by touching higher bottoms (marked by blue arrows).

That triggered an expected upward breakout from the 'falling wedge' and started a rally that is still going strong. 

Note that the first leg of the rally took the stock above its 20 day and 50 day EMAs, followed by a correction that touched a higher bottom on May 23 '16 - a classic technical signal that the bear market was over.

A move above all three EMAs into bull territory, followed by the 'golden cross' of the 50 day EMA above the 200 day EMA (marked by dotted rectangle) on Jul 20 '16 technically confirmed a return to a bull market.

The stock has corrected below its 20 day and 50 day EMAs. All four technical indicators are looking bearish, and three of them - ROC, RSI, Slow stochastic - are looking oversold.

Though some more correction can't be ruled out, the dip is providing an entry opportunity.

Stock Chart Pattern - Canara Bank

The stock chart pattern of Canara Bank seems to indicate that market players were not particularly impressed by the 72% increase in net profits in Q2 '09 (Rs 910 Cr vs. Rs 529 Cr in Q2 '08).

Why? This article reveals the story. The increase in Net interest income (NII) was just above 14%. The increase in net profits was mainly due to huge gains made in treasury and foreign exchange operations - which are not the 'core' business of Canara Bank. If these one-off gains are removed, the comparable net profits would actually be Rs 425 Cr (lower by more than Rs 100 Cr).

The provisions were more than doubled to Rs 500 Cr, of which nearly a half was for Non-performing assets (NPAs). Net NPAs increased by 30%. Yield on advances dropped by 8%. CASA (Current account Savings account) deposit ratio dropped by 7.5%. The only silver lining was the 60% increase in infrastructural lending.

Let us have a look at the one year bar chart pattern of Canara Bank:-

After making a rounding bottom pattern with a low of 144 on Mar 17 '09, the stock more than doubled in value, hitting a high of 297 on May 20 '09. A correction took the stock down to a low of 232 on Jun 16 '09 - retracing nearly 42.5% of the rise and completely filling the 'gap' made on May18 '09.

A rectangular sideways consolidation lasted four months, after which the stock broke upwards on Sep 15 '09 on decent volumes. Another short sideways consolidation ended with a sharp upward breakout on Oct 7 '09 on good volume.

The stock quickly made a new high of 395 on Oct 17 '09 - which was just 26 points short of the bull market high of 421 made on Jan 3 '08. The new high was made on reducing volumes. A bearish rounding top was beginning to form when the Q2 '09 results hit the market.

The stock has fallen three days in a row on big volumes, and got support at the 50 day EMA today. If the support from the 50 day EMA does not hold, look for support at the previous top of 295, and at the 200 day EMA.

The MACD is positive, but has dropped below the signal line. The slow stochastic has entered the oversold zone. Both indicators are reflecting the bearishness on the chart.

Canara Bank is the second largest PSU bank behind State Bank of India, and a regular dividend payer. Readers may know of my aversion to PSU stocks because of government interference in management and lack of transparency - not to speak of shoddy customer service.

I have been a customer of the bank for nearly 30 years - the only reason being the proximity of a branch across the street from where I live. The lack of knowledge of staff members and disrespect for customers are truly unbelievable! So I have a strong bias against the bank.

Bottomline? The stock chart pattern of Canara Bank looks like there might be some more correction. If you like PSU banks, you may want to look at SBI (because it is the leader) or Bank of India. If you are really keen on Canara Bank, wait for it to fall to the 200-230 zone.

(Note: This stock chart pattern analysis was suggested by reader Mani.)

About advantages and disadvantages of mergers and acquisitions (M&A) and demergers

As a general rule, mergers and acquisitions (M&A) are value destructive for shareholders. Demergers or spin-offs are value accretive. In simple English, that means, avoid the shares of an acquiring company. But there may be money making opportunities in the companies being demerged or spun off.

There is a difference between a merger and an acquisition. Mergers are rare, as they happen between two companies that are equal in size and reach. Both companies lose their individual identities, and a third company is formed. For example, pharma companies Glaxo Wellcome merged with Smith Kline Beecham, and formed a third entity, Glaxo SmithKline.

In India, the situation was different. A much smaller but profitable and shareholder-friendly EsKayef lost its identity to the bigger but slower growing Glaxo. EsKayef shareholders were given Glaxo shares in the ratio of 1:2.

An acquisition, or a takeover, happens when a bigger company buys out a smaller company, with or without the smaller company's cooperation or willingness to be acquired. The usual motivations are economies of scale, killing a competitor, gaining market share and reach.

The biggest disadvantage of acquisitions is that they fail because of cultural mismatches. Every company is shaped over the years by the vision and background of its promoters or management. This is called 'company culture' - the way they project themselves in the market place, how they treat customers, employees, suppliers and shareholders, their social responsibilities, integrity and commitment, innovating capabilities.

No two companies do business the same way, even within the same sector. When one company acquires another, the cultural differences become very difficult to overcome. This leads to key personnel of the acquired company quitting and leaving with priceless intellectual property and customer relationships built up over many years.

Reverse takeovers, when a smaller company acquires a larger one, are even worse. Like Tata Steel buying Corus or Tata Motors buying Jaguar-Land Rover. In both cases, the the ambition was to become  global companies in quick time. But the prices paid in both cases were too high, and the timing was wrong. The shares of both companies tanked while they scrambled to raise money to cover the huge acquisition debt.

For shareholders of the company being acquired, an advantage could be a bidding war between two or more potential acquirers. This is currently happening with Great Offshore (earlier demerged from Great Eastern Shipping). Without any change in the fundamentals, the share price is going up as two likely acquirers are bidding up the offer price.

Opto Circuits is a notable example of an Indian company that has successfully used the acquisition route to grow its sales and profits quickly. Probably because they have shrewdly targetted companies with complementary products and geographical reach that were not doing well financially.

Demergers and spin-offs happen due to two main reasons:

1. Getting rid of an unwanted or less profitable division or subsidiary - like Larsen & Toubro did with its cement business, and ICI has done with its non-paint subsidiaries. Profitability and share prices of both companies increased significantly.

2. Spinning off a division or subsidiary into a stand-alone company because it has grown in size and value. Mahindra & Mahindra has done this a few times, with its financial services, information technology, holiday resorts subsidiaries.

Investors would do well to look out for companies that have 'hidden assets' in the form of profitable subsidiaries. Sooner or later, these subsidiaries will get demerged or spun off. With reforms in the financial sector a top priority of the Government, I would keep a close watch on companies with asset management (read, 'Mutual Funds') and insurance subsidiaries.

A few companies that come to mind are Reliance Capital (though I'm not particularly fond of the word 'Reliance'), Exide, HDFC, Sundaram Finance, SBI, Canara Bank.

(Interested readers can learn more about M&A from this article.)

ADVFN World Daily Markets Bulletin - Mar 13, 2009

US Stocks at a Glance

Major Averages Once Again Turn Mixed After Failing To Sustain Upward Move

Stocks have shown a lack of direction over the course of morning trading on Friday, with the major averages have difficulty sustaining any significant moves after closing higher in the three previous sessions.

The choppy trading comes as traders express some uncertainty about the near-term outlook for the markets following the recent gains. While some investors expect stocks to extend the recent upward move, others expect the markets to retest their recent lows.

In corporate news, Fitch downgraded investment firm Berkshire Hathaway, Inc.'s Issuer Default Rating, or IDR, to 'AA+' from a top-notch credit rating of AAA and lowered its senior unsecured debt ratings to 'AA' from 'AAA'. However, Fitch has affirmed its 'AAA' Insurer Financial Strength or IFS ratings on the company's insurance and reinsurance subsidiaries.
Fitch also said that the rating outlook for all entities is "Negative". Fitch cited concerns about the potential for losses on the insurer's equity and derivatives holdings.

Meanwhile, Time Warner Inc. said Thursday that it has appointed Google Inc. executive Tim Armstrong as chairman and CEO of its AOL unit. Armstrong will replace Randy Falco, who, along with president and COO Ron Grant, plans to leave the company after a transition period.

While the major averages moved firmly into positive territory in recent trading, they have moved back to the downside in the past few minutes and are currently mixed. The Nasdaq is currently down 2.65 at 1,423.45, while the Dow is up 18.47 at 7,188.53 and the S&P 500 is up 1.92 at 752.66.

Canadian Market

Toronto Stocks Continue Upward Move - Canadian Commentary

Bay Street stocks are modestly higher in early trading and are looking for a fourth straight positive close. Traders mulled over some economic reports from both sides of the border.

The S&P/TSX Composite Index is up 32.76 points or 0.39% to 8,315.03. The index has reached its highest level in more than three weeks.

Financial stocks are up 1.3%, adding to recent gains. National Bank is up 1.5% and CIBC has added 1.2%. The Energy Index is down 0.5%. Paramount Resources has dropped 3.5% and Baytex Energy Trust is down 2.2%.

Light sweet crude oil is up 37 cents at $47.40 amid choppy trading on Friday morning. Prices hit as high as $48.14 earlier in the morning. Rock Energy has surged 25% after the company announced funds from operations for the fourth quarter rose to C$5.51 million or C$0.21 per share from C$4.73 million or C$0.18 per share last year.

In other corporate news, Capital Gold Corp. has jumped 7.4% after the company reported net income for the second quarter was C$3.20 million or C$0.02 per share, compared to C$2.13 million or C$0.01 per share in the same quarter of last year.

Biovail is up 1.3% after the drug maker was initiated at Buy at UBS. Goldcorp is up 1.3%. The stock was rated at Underweight by Barclays Capital in new coverage.

Friday, gold exploration company Pacific Rim Mining Corp. is up 15.8% after the company said its third-quarter net loss was US$383,000 or break even per share, compared to a net loss of US$3.70 million or US$0.03 per share in the year ago quarter.

Statistics Canada announced a decline of 82,600 jobs in February, following a record $129,000 drop in January. The unemployment rate increased to 7.7%, up from 7.2 percent.

Meanwhile, the Canadian trade deficit widened to To C$993 million in the month of January, compared to a revised about 700,000 in the previous month. Economists were looking for a deficit of 800,000.

Across the border, the Commerce Department said that the trade deficit narrowed to $36.0 billion in January from $39.9 billion in December. Economists had been expecting a smaller decrease in the size of the trade deficit to about $38.0 billion.

Meanwhile, the Labor Department said Friday that import prices slipped 0.2 percent for February compared to the previous month. This followed a revised 1.2 percent decline in January. Economists had expected a sharper drop of 0.8 percent.

European Shares

Europe Roundup - Eurozone Retail Sales Continue To Fall

Friday, official data revealed that Eurozone retail sales decreased for the eighth consecutive month in January as consumers reduced their spending amid the economic slowdown.

In other news, new car registrations in Europe dropped 18.3% in February from the same period of the previous year, the European Automobile Manufacturers' Association reported. This follows a 27% annual fall in January. The number of passenger cars registered in February totaled 968,159. The downturn was more marked in the new EU Member States than in Western Europe, where the German market pushed total registrations upward.

Eurozone

Compared with January 2008, Eurozone retail sales dropped 2.2%, a slower pace than December's 2.4% decline, the Eurostat said. Economists were looking for an annual decrease of 2.3%.

Retail trade volume in the Euro area rose 0.1% in January from the previous month, reversing three consecutive months of decline. Sales were down 0.3% in December and 0.1% in November. However, retail sales growth in January was smaller than the consensus forecast of 0.2%.

The Eurostat also said Eurozone labor costs increased 3.8% year-over-year in the fourth quarter, smaller than a revised 4.2% growth in the previous quarter. Economists' were looking for an increase of 3.6%.

Germany's Federal Statistical Office said in a report that the real manufacturing turnover decreased a working day adjusted 20% year-over-year in January, compared with a 12.6% fall in the previous month. This was the highest annual decline since 1991.

The German statistical office also reported that the wholesale price index declined 5.7% year-over-year in February, after falling 5.9% in January.

Italy's National Institute of Statistics announced that the average labor cost per employee rose 3.5% year-over-year in the fourth quarter, smaller than the 6.2% rise in the third quarter.

Statistics Austria announced that the jobless rate stood at 4% in the fourth quarter, up from 3.7% in the previous three months. A year ago, the jobless rate was 4%.

The Netherlands' Central Bureau of Statistics announced that the trade surplus stood at EUR 2.8 billion in January, up from EUR 2.5 billion in December.

The Statistical Service Of the Republic of Cyprus said retail trade turnover increased 32.2% month-on-month in December, accelerating from 8.3% increase seen in the previous month.

Finland recorded a current account deficit of EUR 27 million in January, reversing from a surplus of EUR 287 million in December, a report by the Bank of Finland said.

Asia Markets

Indian market surges on strong global cues

Friday, the Indian market jumped on heavy buying across the board to post its best weekly rise in three weeks. Battered index heavyweights saw heavy buying as investors drew comfort from a sustained rally in the global markets.

Stocks rallied strongly in Asia and Europe, as hopes of a revival in the global economy strengthened following positive U.S. retail sales data and encouraging comments from major U.S. banks over the past few days.

Comments from the Chinese Premier Wen Jiabao that his Government is ready to unveil another stimulus package for reviving the economy and reports that Government officials in Tokyo are contemplating new stimulus package to support the world's second largest economy also added to the buoyancy.

Back home, the strengthening of the rupee against the US dollar and signs of revival in the domestic economy also bolstered investor sentiment. Rate sensitive stocks like realty and banks, metal and IT were the best performers.

The BSE Sensex opened higher at 8,481 and saw continuous buying all through the day. The index closed near the day's high at 8,757, up 413 points or 4.95% over the previous close. Meanwhile, the S&P CNX Nifty rallied 102 points or 3.89% to 2,719.

On the BSE, the market breadth was positive, with advances outnumbering decliners by 1583 to 854. The broad-based BSE 500 index rose 4.15% and the mid-cap index gained 2.96%, while the small-cap index moved up a modest 1.97% compared to the broader market.

Realty stocks soared on hopes that lower rates will spur housing demand after the inflation rate fell to a multi-year low of 2.43%, paving the way for the RBI to cut further its key policy rates to boost economy. Twenty-eight out of 30 Sensex stocks participated in the rally, while NTPC and Sun Pharma ended in the red.

DLF (up 11.47%), Tata Motors (up 10.72%), Tata Power (up 9.18%), ICICI Bank (up 8.60%), Hindalco (up 7.99%), Sterlite Industries (up 7.93%), HDFC (up 7.53%), Tata Steel (up 6.89%)and Larsen & Toubro (up 6.76%) were the major gainers.

Banking stocks extended the rally following sharp gains among their peers in the other global markets after beleaguered US banks Citigroup and Bank of America said that they were profitable in January and February.

Among the major gainers in this space, Axis Bank and ICICI Bank surged up around 8% each and Bank of Baroda jumped 7.17%, while Indian Overseas Bank, IDBI Bank, Oriental Bank of Commerce, Punjab National Bank and Union Bank of India rallied over 6% each.

Metal stocks jumped in line with a rally in commodity prices after Chinese Premier Wen Jiabao said that he had allocated 595 billion yuan in this year's budget for stimulus moves. JSW Steel, National Aluminum, Welspun Gujarat, Hindalco, Sterlite, Tata Steel, Hindustan Zinc and Steel Authority of India were some of the prominent gainers.

Among airline stocks, Kingfisher soared 8.02%, JetAirways jumped 9.69% and SpiceJet rallied 4.93% as their load factors saw a jump in February. Gateway Distriparks climbed 7.81% after Allcargo Global Logistics acquired around 6% stake in the company from the open market.

State Bank of India moved up 4.63% after the Life Insurance Corporation of India hiked its stake in the company to 9.16% from 2.12% through open market purchases between mid November '08 and early March.

Simplex Infrastructure gained 3.89% on reports that the company's sales would grow between 30-40 percent for FY10. SRF showed marginal gains after the company resumed the operations of the polymerization and spinning lines at its plant at Manali, Tamil Nadu.

Liquor manufacturer United Spirits moved up 5.29% following reports that huge cash spending ahead of general elections could boost demand for liquor. Firstsource Solutions surged up 5.76% after the company repurchased $17.9 million worth Zero Coupon convertible bonds.

Tea stocks such as Harrisons Malayalam, Warren Tea and Mcleod Russel moved up sharply amid reports that tea prices may rise 15-20% in the next fiscal year due to weather problems in India and a crop shortage in Kenya.

DCM rose 0.69% after Aggresar Leasing and Finance, a promoter group company hiked its stake in the company. Matrix Laboratories tumbled 3.01% despite receiving a U.S. drug regulator's tentative approval for antiretroviral tablets.

In the energy sector, Reliance Industries jumped 6.69%, Cairn India rallied nearly 4% and ONGC advanced 3.50% after crude oil held firm at around $47 a barrel. However, oil-marketing companies such as HPCL, BPCL and IOC ended in the red.

Metals

Gold Notably Higher For Third Straight Session

Gold rallied for a third straight session on Friday and continued to move off its monthly low. The metal is now up almost $40 in the last three days.

April gold added $10.60 to reach $934.60 per ounce. Prices hit as high as $936.60 in early trading. On the economic front Friday, the Commerce Department said that the trade deficit narrowed to $36.0 billion in January from $39.9 billion in December. Economists had been expecting a smaller decrease in the size of the trade deficit to about $38.0 billion.

Meanwhile, the Labor Department said Friday that import prices slipped 0.2 percent for February compared to the previous month. This followed a revised 1.2 percent decline in January. Economists had expected a sharper drop of 0.8 percent.

Export prices were down 0.1 percent from last month, the Labor Department said.

The Reuters/University of Michigan's preliminary report on the consumer sentiment index for March is scheduled to be released at 10 a.m. ET. Consumer confidence is expected to tick down in the month, with economists are forecasting a flat reading for the index at 56.3.

At 10.30 a.m. ET, White House National Economic Council director Lawrence Summers is set to give briefing on the government's economic program and the U.S. economic outlook.

Gold surged $13.30 on Thursday and gained nearly $30 in the last two sessions, coming off a monthly low. Before the rally, gold had dropped in 10 of 12 session since crossing above $1,000 on Feb. 20.

Lessons from the Satyam scam

What started out as an aborted acquisition deal among family members has turned out to be the worst scam in the history of corporate India.

It is no wonder that Buffett said: 'You only find out who is swimming naked when the tide goes out.' Economic and stock market downturns have a habit of revealing the naked swimmers.

Yes, the plural is intended. Satyam is unlikely to be the only one. Many companies which have been declaring bumper profits quarter on quarter during the bull run have probably been 'cooking' their accounts as well.

I would be particularly sceptical about the infrastructure and realty companies - specially those with negative operational cash flows. As the bear phase meanders along, be prepared for more skeletons tumbling out of different cupboards.

Here are a few lessons that not only need to be learned, but internalised as well, so that we can benefit from similar occurences in future.

1. "There is never just one cockroach in the kitchen". This stock market adage has been proven once again by Satyam. Management trickery is never a one-off deal. Satyam had been involved in several questionable deals over the years. The latest scam is the culmination of past transgressions. Once corporate integrity is in doubt, avoid that particular stock.

(In this blog post I had mentioned that Jagran Prakashan was my favourite among the newspaper stocks. I removed it from my 'buy' list when I found out that they had recently appointed several sons/nephews of the promoter group to top positions on fat salaries.)

2. Just because a stock looks cheap (because it has fallen a lot from its recent high) doesn't mean it can't get any cheaper. Satyam has dropped from above 400 to 180 to 40 and now 20. Quite a few small investors got excited and bought the stock when it dropped to 100 and then 40. That's throwing good money after bad.

3. Markets usually 'discount' good news and bad news in advance but have little clue about what Nassim Nicholas Taleb calls 'black swan events'. These are unexpected events that seem to happen out of the blue. But more so during distressed times. 9/11 was one such event - soon after the dot.com bust.

A good way to take advantage of such situations is to strictly follow an asset allocation discipline (discussed in this blog post).

4. As a small investor, stick to industry leaders. If you are interested in FMCG, don't look beyond HUL, ITC. If you like metals, TISCO, Hindalco should suffice. In financials, choose HDFC, SBI. Alternatively, invest in index funds. There is no point in chasing the no. 4 (like Satyam) or the no.20 in the hope of making a killing.

Which sectors should you invest in?

In an earlier post ("Market Cycles and Sectors") on Dec 1, 2008 the sectors that receive prominence during different stages of the economic and stock market cycles were discussed.

Does that mean that you, as a small investor, should look at investing in all those sectors? Probably not.

Fund managers, who are under pressure to perform in the short term, have no alternative but to move in and out of sectors depending on the particular stage of the stock market. They also have access to company managements and better research resources and larger funds than small investors.

With considerably less funds and little or no research capabilities, small investors like you and me are better off choosing only a handful of sectors to invest in.

Some industries are in an environment that helps to create substantial competitive advantage. It is easier for the companies in such industries to make money.

Four sectors that I like - based on their competitive advantage and cash generation capabilities - are :-

1.  FMCG: Strong brands built up over the years create huge competitive advantage. Companies tend to be solidly profitable, debt free and generate a ton of cash (which is distributed to investors through generous dividends). The market leaders have been around for many years, so they are slow but steady performers.

This sector is practically recession proof and should form a significant part of a small investor's core portfolio. Companies to look at are HUL, ITC, Colgate, Nestle, Brittania, Dabur, Marico.

2.  Pharmaceuticals: Like FMCG, Pharma companies are recession proof, have strong brands, are hugely profitable and good dividend payers, and long term growth is assured because of the large population. MNC Pharma companies have access to better product pipeline from their overseas parents. Domestic Pharma companies profit from generics and contract research and manufacturing.

This sector should also receive pride of place in your portfolio. Companies to look at are Glaxo Pharma, Aventis, Sun Pharma, Lupin, Glenmark.

3.  Financial Services: Banks pay less interest to depositors and lend the money at higher interests. For current account holders, banks pay nothing at all. Many make more money by selling other financial products to their customer base - such as insurance, demat accounts, credit cards, mutual funds, home loans. Home loan companies tend to be highly profitable with long term growth assured.

Companies to look at are State Bank of India, Bank of India, HDFC Bank, Axis Bank, HDFC, LIC Housing Finance, Sundaram Finance.

4.  Media: Many companies have competitive advantage through regional language and regional market domination. This sector also tends to be recession proof.

The dynamics of the media business was covered in an earlier blog post on Sept. 8, 2008.

Are these the only sectors that an investor should look at? Obviously not. But this should be a good starting point in building a long term portfolio.

Future posts will cover other sectors and criteria for individual stock selection.

How to exercise your rights

Several large rights issues from companies like Tata Motors, Hindalco, Tata Investment will be hitting the market in the near future. Recent entrants to the stock market, like my young friend Bala, may not have a clear idea about what to do with a rights issue.

Once you receive the rights issue application form and the offer booklet from the company, go through the details of the offer. Special attention should be given to the details about how much to pay, when to pay, where to pay and what to write on the cheque. Any mistakes can cause your application to be rejected.

Several options are available to the investor. These are listed below:

1.  Apply for your entire entitlement; e.g. if your entitlement is 42 shares, this figure will be clearly mentioned in the application form; just fill out the form and pay the application money for the 42 shares

2. You may apply for additional shares in the box provided in the form; e.g. apply for 8 additional shares and pay your application money for (42+8=) 50 shares; chances are you will get allotment for the 50 shares because the market is in a bear phase and many investors may not apply for additional shares. Don't get greedy and apply for 52 additional shares. You may then get an allotment of say 17 shares and be left with an odd number of 59 shares (which may be difficult to sell later in one lot)

3. You can apply for less shares than your entitlement; e.g. apply only for 25 shares and let the balance entitlement of 17 shares lapse

4. You may 'renounce' your entire entitlement in some one else's favour, like your broker or your friend. You will usually get a monetary consideration for your renouncement, say Rs 8 per share.

5. You can request the company for split forms, i.e. 25 shares in one and 17 shares in another. That way you can apply for 25 shares and 'renounce' the balance 17 for a consideration of say Rs 8 per share

6. You can decide not to do anything at all and let your entire entitlement lapse.

Why would you choose this last option? In a falling market the difference between the market price and the rights price may not be large enough. After the rights issue is over, the market price may even drop below the rights issue price. So you may be better off to buy the shares at market price after the rights issue is over if you feel the rights price is not leaving a large enough margin of safety.

Investors who participated in the recent rights issues of ICICI Bank and State Bank will know what I'm talking about.

There is a recent move by SEBI to make rights issues paperless, but as on date it remains a proposal only. If readers have any questions on rights issues, please send me an email with your specific query ( or leave a comment on the blog).