When a friend with a LIQUID net worth of Rs. 2.3 crores called me to say “I am considering this investment of Rs. 5 million can you have a look at it” I said “No, H, you cannot afford it”.

He said “You have not even heard of the scheme…how can you say that”. I said “You are 45 years of age..and have 2 growing children, a non earning wife, a shaky job, and a liquid networth of just Rs. 2.3 crores, YOU CANNOT AFFORD A SINGLE INVESTMENT OF Rs. 5 million. Simple I said.

The investment being offered by a private bank (foreign bank which does not let people sleep) involved a private placement, a kind of deal that has boomed amid a booming business environment. These days businesses use private placements to raise money for a wide range of projects. Even big difficult businesses like oil exploration, township development, etc. are funded by complex instruments. A lot more money is being raised privately now than in the public markets. Almost ALL private placements appear legitimate. For typically sophisticated investors such as institutional  funds they offer the potential for better returns than in the public markets.

However for a person with a networth of JUST Rs. 2.3 crores, putting Rs. 5 million in one fund is stupid, if not suicidal! How a relationship manager makes such an offer is something that RBI/Sebi should look into.

In recent years, however, hundreds of crores of Rupees in private placements have been sold each year by relationship managers and share brokers, often to individuals. Bankers and brokers selling such stuff are likely to push the rules and sell aggressively. You need to be careful. Do not crib after 4 years!!

In an amazingly complicated deal crafted by one bank, the ‘bakra’ for a private deal was no longer the rich and sophisticated investor, but the small – Rs. 50L per annum earning salaried individual who was being targeted.

Yes, I will write a more detailed post soon…