Off balance

Even careful calibration of issues such as gas pricing and regulating mutual funds can spin out of control

The current market turmoil has turned topsy-turvy rules of investing. Liquid companies with proven financial track record are supposed to be stable in a market downturn. Yet these stocks have not remained immune to recent volatility due to the sizeable presence of foreign institutional investors, who dumped them to meet redemption pressure at home. Dividend paying companies still lure but also invite scrutiny for lack of growth plans to effectively use cash. Sunrise industries are facing intensifying competition and regulatory attention from here and abroad. Market heavyweights are embroiled in their own problems, be it internal issues of control or debts taken for costly acquisitions. Frontline counters’ fortunes are getting linked to the dollar and the euro, whose movements are no longer linked solely to the health of the issuing region. High beta stocks capable of giving sizzling returns start discounting forward earning in a few sessions and become victims of their own success. Corporate governance issues stalk mid- and small-caps, making them unpredictable. Retail investors looking at mutual fund to anchor their savings are finding there is hardly any port to call after Sebi decided to give investors a say in deciding brokerage of distributors. Despite the economy posting strong growth numbers, prospects of fiscal deficit getting bridged due to the successful completion of the 3G auction, and forecast of normal monsoon, the market is stuck in a groove, pinning its hopes on recovery of the US economy and sorting out of the sovereign debt problems facing many euro zone countries for foreign funds to return and pull up the market.

For a brief period, it looked liked that the intervention of the Supreme Court in the dispute on pricing of natural gas from RIL’s Krishna-Godavari block to be supplied to RNRL’s power project in Uttar Pradesh would provide the much needed boost to the market as RIL, an index heavyweight, is now free from uncertainty. The market’s return to range-bound movement subsequently was because the verdict was not merely a judgment on a private memorandum of understanding between two companies. It was a reiteration of government’s role in deciding pricing. Foreign investors in Venezuela and Russia have had unpleasant experiences of the state’s arbitrary interference including expounding of assets. Besides administered pricing of a natural commodity is at odds when downstream products of another natural commodity are proposed to be deregulated. The rise and fall in the market cap of RIL and ADAG stocks following the SC’s say, thus, was as irrational as the bounce-back in ADAG companies after the terse announcement from the Ambani brothers of scrapping the non-compete agreement entered into while carving of group assets between them. The pivot of the ADAG is the power sector. The embargo on Big Brother from making a foray into natural gas-based power generation for another six years till 2022 is huge hedge for not getting natural gas at concession. On the other side, the entry of RIL in the money business — mutual funds, finance or insurance — will not mean much for the Anil Ambani group because it is already operating in a crowded field. Telecom is no longer a lucrative arena, and RCom’s fate is no different from that of other telcos.

Would our markets have fared better if Sebi had not chosen to discipline mutual funds at this juncture? The timing was indeed unfortunate: the market was once again displaying signs of nervousness after springing back into action. This is the period when investors either choose to stay on the sidelines or invest through SIP for the law of averages to work out. Suddenly, asset management companies stopped new launches as entry load, a lucrative avenue to make money, was banned. Following the shifting of onus of commission from AMCs to investors, distributors, too, stopped hawking mutual fund schemes. The diversion of flow to unit-linked insurance plans, which invest part of the corpus in equity markets, was not enough to compensate full-throated investment of equity schemes. The comatose state of the mutual fund industry following recent reforms is one more reminder that regulations that take care of only one section of the stakeholders do not succeed. A middle path could have been linking fees to performance over a period of time or a graded system of penalizing those who seek to redeem their investments before and after one year, making it fruitful for investors as well as AMCs to seek long-term association with the markets. There is a lesson here to be learnt by government, which is introducing the direct tax code, making investment subject to personal tax rate, irrespective of the holding period.